China Boosts Investment in Africa

As the Continent Prepares First Free Trade Zone

June 26, 2014

Asia Briefing

This Monday, the African Union (AU)’s Commissioner for Trade and Industry Fatima Haram Acyl announced the organization was on schedule to establish Africa’s first free trade zone during the AU Council of Ministers Summit in Malabo, Equatorial Guinea. As Africa’s largest trading partner, the new free trade zone is likely to benefit China, who has been investing heavily into infrastructures, natural resources and trade in Africa.

During Chinese Premier Li Keqiang’s visit to Ethiopia, Kenya, Nigeria and Angola in May, China promised another US$10 billion investment into projects in Africa, as well as an additional US$2 billion to the China-Africa Investment Fund (CADFund), which will be used to invest in Sino-African joint ventures.

China has been involved in various industrial sectors in Africa, such as telecommunications, transport, construction and power plants. According to data in 2009, 29 percent of investment from China went into the mining sector. In return, China has enjoyed a series of trade benefits, including having zero-tariff treatment on 60 percent of their exported products to Africa.

The free trade zone in Africa is intended for attracting more foreign investments by making it easier for business to establish and operate in the region. Given that China is already a major player in trade, as well as building key infrastructures necessary for growth in international trade, it will greatly benefit from Africa’s trade liberalization.

China also has many incentives to increase economic cooperation with Africa. Former Chief Economist of the World Bank Justin Lin suggests that rising labor and production costs in China’s light manufacturing sector would force China to turn to higher-value products. This means that firms are likely to relocate their labor-intensive production facilities to lower-costs developing countries, such as those in Africa or Southeast Asia.

The planned free trade zone is part of the Agenda 2063 set out by AU member states in consultation with various stakeholders in 2013. The Agenda outlines the vision of the AU for Africa’s economy, politics and trade for the next fifty years. Fostering continental trade is one of the key priorities at the beginning of the implementation of the Agenda, according to Acyl.

Total trade between Africa and China reached US$198.5 billion in 2012, an increase of 19.3 percent from the prior year, and surpassed the US$210 billion mark in 2013. As of this year, there are over 2,000 Chinese companies operating throughout Africa across several sectors, including agriculture, infrastructure development, resource exploration and trade, according to the China Chamber of International Commerce.

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Tags: asia, china, global, investment, trad
Posted in Asia, Consulting