The Dragon’s “Going Out” Policy in Africa and What the U.S. Must Do To Stay Relevant

[caption id="attachment_8606" align="aligncenter" width="600"] Sunset over Addis Ababa, Ethiopia, which is today booming with new construction thanks in part to Chinese investment and trade.
Photo by Jean Rebiffé, via Flickr. Creative Commons.[/caption]

China's engagement with Sub-Saharan Africa, characterized by a long and rocky history of trade and investment, is entering a new and often-overlooked phase: the growing relocation of both China's matured and entry-level industries to the continent. Necessitated by increasing bottlenecks in the Chinese economy, including overcapacity, falling profits, shrinking demand in traditional export markets in the West, scarcity of raw materials, and erosion of competitiveness in low skilled labor production, China's zou chuqu or "going out" policy has seen Chinese firms move overseas, particularly to Africa, in search of new opportunities. China sees its path to continued global competitiveness and relevancy in "going out," which will reshape Chinese engagement with Africa.

China's booming economy has reached a transition point, as its further growth is limited by many factors. For example, insufficient domestic consumption has resulted in companies with excess production capacity in light industry, electronic appliances, and machinery, leading many firms to look towards Africa's less challenging markets. With increasing labor costs making China less competitive in low-technology sectors like garment manufacturing, in addition to a determination to move beyond entry-level industries, entire industrial sectors are moving to developing countries, particularly in Africa. According to Justin Yifu Lin, former World Bank chief economist, China is expected to export 80 million manufacturing jobs and Africa stands to benefit substantially.

African countries are well-positioned to profit from China's rising production costs: a relatively young population, low labor costs, abundant raw materials, demand for affordable Chinese goods, and a platform to export to international markets through favorable trade agreements such as the African Growth and Opportunity Act (AGOA) all make Africa an attractive location for Chinese firms specifically. AGOA has resulted in Chinese apparel manufacturers establishing factories in Africa to circumvent U.S. and EU trade restrictions.

Although China's involvement in Africa has often been greeted with considerable skepticism, especially in relation to the extractive industry — to the extent that the continent has attracted the moniker the "new Sinosphere" — this new wave of investment and trade could be highly beneficial for the continent. Development of value-added manufacturing is essential to transforming Africa's economy with technology transfers; inculcating production, management, distribution, and marketing skills; and solving the continent's persistent problems with poverty and unemployment. This is crucial at a time when aid alone is unable to meet Africa's shortfalls and advance its economies to the next level.

Chinese manufacturers are already expanding across Africa in industries including agriculture, food processing, fishing, furniture manufacturing, footwear, textiles, garment making, and pharmaceuticals. In Ethiopia, the Chinese-owned Huajian shoe factory has revived the local footwear industry from almost nothing. The company employs over 3,000 workers and generates about $20 million exporting shoes made for international brands such as Guess, Toms, and Neutralizer. In Nigeria, the Yuemei Group invested $50 million to create a textile industrial park that now has more than 15 Chinese companies employing more than 3,000 workers. Manufacturing represents 44% of the investment in six (Ethiopia, Ghana, Liberia, Nigeria, Rwanda, and Zambia) of the leading countries that receive Chinese investment in Africa, save South Africa.

How should the U.S. react?

In the face of deep, mutually-beneficial Chinese engagement in Africa, the U.S. must work to expand the presence of U.S. businesses on the continent. The U.S. has done important work with aid and other development assistance programs such as the President's Emergency Plan for Aids Relief (PEPFAR), Feed the Future, and Power Africa, among others; however, it must begin to focus on economic treaties that create jobs and deepen economic engagement in order to match an increasing Chinese presence on the continent. In this regard, the U.S. must strengthen its economic diplomacy with African countries. Clearly, the U.S.-Africa Leadership Summit in 2014 was a crucial first step. The initiative has reinvigorated relations between the U.S. and Africa in the areas of trade and investment, security, and democratic development — to which China has paid little attention, but which remains a priority for most Africans living under authoritarian democrats. Many analysts believe the summit also brought clearer focus to President Obama's policy towards Africa. Nonetheless, the U.S. should also explore the following options:

U.S. companies should consider shifting some of the manufacturing operations that are heavily concentrated in other parts of the world to Africa, especially for low-cost apparel and footwear. Likewise, they should explore Africa's potential for low-level service industries such as call center jobs, which are currently located in India and elsewhere. African host country governments must leverage this interest with proactive development policies for the benefit of their own economies.

The U.S. must move beyond aid to expand and improve treaties with African countries: It is estimated that all existing U.S. treaties with Africa cover just 7% of the region's GDP, while China's bilateral investment treaties cover 80%. A useful trade initiative such as AGOA is commendable, and its reauthorization is a positive development both for the U.S. and African countries. To gain business visibility on the continent, the U.S. government must consider establishing a position that promotes U.S. businesses in Africa. Of course this does not mean neglecting other policy priorities such as aid or other regions of the world. Rather such a move could provide reliable data which would enable U.S. companies to sufficiently explore the growing business opportunities on the continent.

To echo the recommendation of Richard Sezibera, Secretary General of the East African Community, who spoke at a recent Wilson Center event, businesses must be encouraged to look beyond present challenges — a lack of basic infrastructure and inconsistent power supply — to the continent's vast potential, which Chinese businesses are taking advantage of. With the highest population growth and fastest growing economies in the world, Africa could be a major source of growth for the global economy over the next 50 years. To quote Solomon Asamoah, a Vice President at the African Development Bank, "can you be a global company today without an Africa strategy?"

The U.S. will need a comprehensive economic strategy towards Africa sooner rather than later. Investment in manufacturing on the continent has the potential to deliver both profits for businesses that take the risk, as well as the jobs that will improve African economies and the livelihood of African workers. Most Western firms still see Africa as a risky place to do business, but the Chinese see the opportunities available, and are taking full advantage of them. This is doubly true with the second wave of Chinese investment, which promises to bring manufacturing and other value-added jobs to the continent. Enormous opportunities abound, and the U.S. must not miss out on them.

Isaac Debrah is a Southern Voices Network Scholar with the Wilson Center Africa Program September–November 2015. He is Assistant Project Manager for Anglophone West Africa at the Ghana Center for Democratic Development, an SVN partner organization.