10

positive impact of growth, whereas the opposite is expected for the inflation rate and
conflict intensity.
For Sino-African trade flows, we use two different sets of variables. Firstly, we employ
total African exports to (and imports from) China and control for respective African trade
with the rest of the world (ROW). These variables are meant to capture the effects of
total
African trade with China, though we distinguish between imports and exports, which can
have different effects. Secondly, we differentiate between natural resource exports and
imports, and non-resource exports and imports. Due to the importance of natural
resources in Sino-African trade, we are interested in the effects of trade in different
commodities. Natural resource exports comprise, among others, fuel, various mineral
products, and non-ferrous metals.6 We normalised all trade variables by the GDP of the
respective African country.
For foreign investment, we again differentiate between Chinese FDI and FDI from the
ROW to African countries, both normalized by the host country’s GDP. Chinese outward
FDI data at the country-level is available from 1991. There are two sets of Chinese FDI
data: (1) Chinese Approved Overseas Investment data for 1991-2005, and (2) Chinese
Outward FDI data reported in IMF-OECD format since 2003.7 We combine the two sets
of data by using the first set for the years 1991-2002 and the second set for the years
2003-2011. Even though the data in the two datasets could differ at a country level, the
deviations are fairly small. This allows us to exploit a longer time series since 1991. To
include as many observations as possible, we fill missing values with zero assuming
that
there was no FDI in that case (and add one before taking the log).8 To control for FDI
from the ROW, we subtract Chinese FDI flows from total FDI flows to African countries.
Finally, we test for the effects of Chinese economic cooperation projects in African
countries, again, normalized by the respective country’s GDP. Data is taken from
various
issues of the China Statistical Yearbook published by China’s National Bureau of
Statistics. Following Biggeri and Sanfilippo (2009) and Sanfilippo (2010), we use data
on
economic cooperation as a proxy for Chinese aid due to the lack of other official data.
Although there have been Chinese economic cooperation projects in Africa for several
decades, country-level data on economic cooperation has only been published since
1998.
In order to keep the time frame of our analysis as long as possible, we computed data
at a
country level for 1991-1997. More specifically, we assume that the country breakdown
of
China’s total economic cooperation before 1998 is similar to that in the period 1998-
2001. As China’s economic cooperation projects started soaring after the Going Global
Policy in 2001, we find it reasonable to assume that in the years before 2002 the level of
economic cooperation in Africa as compared to the ROW was more or less constant.
Importantly, this procedure does not affect the main results reported below. If we
exclude
the years before 1998, the results do not change much in terms of the sign and
6 See Appendix A for an exact definition of natural resource trade and all other
variables as well as data
sources. Descriptive statistics are displayed in Appendix B.
7 For a discussion of China‘s FDI data, see Cheung et al. (2012).
8 We inserted a zero in 47 out of 151 observations. While excluding the zero
observations does not affect
the results reported below, it would reduce the sample significantly.
11
significance of the main variables of interest. Besides China’s economic cooperation,
we
control for foreign aid received by African countries from the ROW.
The period under consideration is restricted by the availability of Chinese investment
and
economic cooperation data, that is, we have data from 1991 to 2011. To control for
business cycle effects, we compute five-year averages for all variables, which results to
four observations for the period 1991 to 2010. For the lagged dependent variable, we
also
use information for the previous period 1986 to 1990. In further regressions, we use
four-year averages (five observations for 1991 to 2010) and three-year averages (seven
observations for 1991 to 2011). The sample consists of 43 sub-Saharan African
countries,
that is, all 48 countries in that region apart from Liberia, Sao Tome and Principe,
Seychelles, Somalia, and South Sudan. Whereas trade figures for Liberia are highly
distorted, the last four had to be excluded due to missing data for key variables such as
GDP per capita or investment, or simply did not exist as a country for the larger part of
the period under consideration. In extensions and robustness checks, we both enlarge
the
sample by including North African countries and reduce the sample by excluding sub-
Saharan African islands.9
In terms of the methodology, we use a standard OLS fixed-effects model. This approach
allows a robust estimation of the various linkages and ensures to control for unobserved
time-invariant country fixed-effects. In a dynamic fixed-effects model, it is well known
that the inclusion of the lagged dependent variable can lead to biased estimates
(Nickell,
1981). This bias mainly affects the lagged income per capita variable, which is not the
variable of principle interest in our paper. Still, the size of the impact of the various
trade,
FDI and aid variables of main interest could be affected, for example, by using the
lagged
dependent variable to calculate the long-run effects. More worryingly, there might be
another bias due to the endogeneity of some of the explanatory variables. Depending
on
the partner country or product type, trade, FDI and aid are likely to be endogenous with
respect to economic growth. To mitigate both concerns, we also use the system
Generalized Methods of Moments (GMM) estimator, introduced by Arellano and Bover
(1995) and Blundell and Bond (1998).
9 See Appendix C for the country sample.
12
4 MAIN RESULTS
We begin by reporting fixed-effects regressions using five-year averages in Table 1.
Column 1 presents our baseline specification including only the basic Solow model
variables. The results are predominantly in line with the theoretical model predictions
suggesting that the Solow model fits well for the employed African economies’ dataset.
The lagged dependent variable has a positive and highly significant coefficient of 0.868.
Our estimate is close to other findings of Solow growth regressions where African
countries are explicitly included, for example, Hoeffler (2002). 10 As expected, the
investment variable is positive and highly significant. Contrary to the theory, the
estimate
for population growth is positive, albeit, not significant and relatively small in size.
Finally, regarding the within R-squared (which is at 0.75), we find that the regressors
explain a high portion of the within country variation in GDP per capita growth –
meaning that the model fits relatively well.
10 In order to assess the effect of the lagged GDP per capita variable on GDP per
capita growth, we have
to correct the estimated coefficient by subtracting 1 and obtain -0.132. In a
corresponding fixed-effects
regression, Hoeffler (2002, p. 147) finds a coefficient which is equal to -0.230. The
difference in
magnitude is likely to be due to the fact that her study includes 85 developing countries
including also
a set of non-African countries.
13
Table 1: Baseline Regressions (Fixed Effects)
(1) (2) (3) (4) (5) (6)
Lagged Dep. Var. 0.868***
(16.34)
0.747***
(9.495)
0.735***
(10.54)
0.756***
(11.09)
0.755***
(10.69)
0.785***
(11.51)
ln Investment 0.150***
(3.239)
0.170***
(3.235)
0.150**
(2.613)
0.135**
(2.473)
0.173***
(3.249)
0.159***
(3.243)
ln Population Growth 0.056
(0.842)
0.044
(0.477)
-0.052
(-0.619)
-0.101
(-1.158)
-0.051
(-0.622)
-0.074
(-0.847)
Terms-of-Trade Growth 0.205**
(2.361)
0.208**
(2.257)
0.176**
(2.322)
0.233**
(2.588)
0.295***
(2.935)
ln FDI China 0.0017
(0.428)
0.0016
(0.363)
0.0014
(0.285)
0.0010
(0.268)
0.0019
(0.541)
ln FDI ROW 0.0001
(0.00841)
-0.005
(-0.326)
-0.0103
(-0.554)
-0.0040
(-0.271)
0.0020
(0.131)
ln Aid China -0.0254
(-0.803)
-0.0329
(-1.179)
-0.0269
(-0.875)
-0.0278
(-1.141)
-0.0175
(-0.705)
ln Aid ROW -0.0689
(-1.574)
-0.0572
(-1.291)
-0.0703
(-1.243)
-0.0446
(-1.190)
-0.0437
(-1.127)
ln Total Exports to China 0.0170
(1.476)
0.0171
(1.483)
0.0115
(1.243)
ln Total Imports from
China
-0.0751**
(-2.376)
-0.0707**
(-2.186)
-0.0674**
(-2.311)
ln Total Exports to ROW 0.102***
(3.013)
0.0908**
(2.180)
0.0658*
(2.009)
ln Total Imports from
ROW
-0.0091
(-0.217)
-0.0116
(-0.260)
0.0081
(0.197)
ln Inflation -0.0018
(-0.0870)
-0.0077
(-0.341)
0.0034
(0.191)
0.0018
(0.0981)
ln Battle Deaths -0.0043
(-1.135)
-0.0037
(-0.828)
-0.00353
(-1.111)
-0.0027
(-0.845)
Terms-of-Trade Growth*
ln Total Exp. to China
0.0627***
(3.526)
ln Non-resource Exports
to China
0.0061
(0.785)
0.0072
(1.204)
ln Non-resource Imports
from China
-0.0612**
(-2.616)
-0.0547**
(-2.407)
ln Resource Exports to
China
0.0051
(0.658)
0.0025
(0.404)
ln Resource Imports
from China
0.00061
(0.0478)
-0.0091
(-0.723)
ln Non-resource Exports
to ROW
-0.0167
(-0.552)
-0.0192
(-0.652)
ln Non-resource Imports
from ROW
0.0498
(0.777)
0.0375
(0.718)
ln Resource Exports to
ROW
0.0082
(0.526)
0.0090
(0.537)
ln Resource Imports
from ROW
-0.0322
(-1.464)
-0.0166
(-0.761)
Terms-of-Trade Growth*
ln Res. Exp. to China
0.0557***
(3.000)
Observations 169 151 147 147 147 147
Countries 43 43 43 43 43 43
R-squared (within) 0.75 0.85 0.85 0.84 0.87 0.87
Notes: The dependent variable is always ln GDP per capita. All regressions include
period-specific dummies. t-values
obtained from robust standard errors in parentheses. * significant at the 10% level; **
significant at the 5% level; ***
significant at the 1% level.
14
In the next step, we extend our model by including the variables of principle interest in
Column 2. Namely, the specification includes the terms-of-trade growth rate of African
countries, FDI flows from China and the ROW, the presence of Chinese economic
cooperation projects, aid flows from the ROW as well as total imports from and total
exports to China and the ROW, respectively. By including these additional variables, we
lose 18 observations due to missing data for these measures. Nevertheless, the data
loss is
marginal, the sign and significance levels of the main controls do not change much and
the model fit increases to 0.85 for the within R-squared.
Both estimates for FDI have a positive sign while those for foreign aid from the ROW
and
Chinese economic cooperation have a negative sign. Yet all four coefficients are
insignificant indicating that these factors do not play a big role in explaining the within
variation of African countries growth rates. Turning towards the trade measures, we find
effects that matter for economic growth. While the coefficient of Africa’s total exports to
China is positive but insignificant, total imports from China have a significant and
negative impact on growth rates. At the same time, we analyse the trade relations with
the
ROW. The effects are somehow contrary to those with China. Again, the exports’
estimate
has a positive sign and the imports’ coefficient has a negative sign, but the statistical
significance has changed. Total African exports to the ROW are significant whereas
total
imports from the ROW are insignificant indicating that exports to the ROW might foster
economic growth in Africa. For the moment, however, these results should be treated as
correlations rather than causations.
In Column 3 we include further variables to control for macroeconomic distortions as
well as for the occurrence and intensity of conflicts. The estimates of the two measures
enter with the expected negative sign in our specification, but they are statistically
insignificant. Most notably regarding this regression, the outcome for the other
estimates
– in particular those for our variables of principle interest – are not affected by including
the inflation rate and the number of battle deaths although we lose four further
observations.
Finding evidence for potential growth effects related to our trade measures, we next
differentiate between resource and non-resource trade (Column 4). We replace the four
total trade variables by eight disaggregated imports/exports variables for resource and
non-resource trade. Only one of the eight coefficients is statistically significant indicating
a correlation with economic growth, that is, non-resource imports from China which has
a negative sign. The negative correlation between total imports from China and
economic
growth across Africa, as shown in Columns 2 and 3, seems to arise from imports in non-
resource sectors. Given the dominance of non-resource goods in total imports from
China (97 percent in 2012), this result is hardly surprising. Still it points to potential
displacement effects of African firms by their Chinese competitors. Though the findings
in Columns 2 and 3 indicate a significant positive effect of total exports to the ROW, the
disaggregated results for resource and non-resource exports to the ROW are not
significant.
The terms-of-trade growth’s estimate is positive and significant at the five percent level
(or better), indicating that African exporters of natural resources have benefited from
higher world market prices for their export products. This outcome is in line with the
results of Zafar (2007) who showed that demand from China has contributed
15
considerably to the increase in prices of raw materials, particularly for oil and metals
from
Africa, which then led to an increase in the terms-of-trade. This result is supported by
Farooki and Kaplinsky (2013), who also analysed the (positive) impact of China on
various
commodity prices. At the same time, the improvements in the terms-of-trade of African
countries could also arise from lower import prices, for example, from low-cost Chinese
manufactured goods, as imports of these goods increased significantly over the last 15
years. What matters is the positive correlation of changes in the terms-of-trade and
economic growth in African countries.11
To analyse the terms-of-trade effects in more detail, we computed interaction terms,
that
is, we multiply changes in the terms-of-trade with all respective trade variables, to
examine non-linear effects. While most interaction terms, whether at an aggregated or
disaggregated level are not significant, two exceptions stand out: the interaction terms
with total exports to China and resource exports to China, respectively, which are
positive
and highly significant at the one percent level (Columns 5 and 6). This outcome is
robust
to including all respective interaction terms at the same time (not reported) and
indicates
that exporting natural resources to China indeed is associated with higher growth rates.
But this result shows up either directly through changes in the terms-of-trade or
indirectly
through the interaction term.12
Next, we replicate all six specifications using system GMM regressions in order to
address
endogeneity concerns (and the bias due to the inclusion of the lagged dependent
variable). In these regressions we treat the lagged dependent variable, investment,
population growth, inflation, all four total import and export variables, all non-resource
import and export variables, as well as FDI and aid from the ROW as endogenous. To
reduce the number of endogenous variables (and thus the number of instruments used),
we set changes in the terms-of-trade, battle deaths, and all natural resource export
variables as exogenous. We assume that African countries are too small to have an
impact
on world market prices (that is, their terms-of-trade) and that conflicts mainly have an
impact on economic growth but not vice versa. Yet switching the status of both variables
from exogenous to endogenous hardly affects the results. Natural resource exports are
mainly driven by the fact whether a country has natural resource endowments or not.
Reverse causality is less of an issue in this case. Again, the main results are not
affected
by declaring all trade variables as endogenous.13 We also treat Chinese aid and FDI to
Africa as exogenous. As pointed out by Kolstad and Wiig (2011), Chinese FDI to Africa
is
not attracted by GDP as soon as South Africa is excluded from the sample.
Predominately, Chinese FDI (and aid) is concentrated in African countries with large
resource endowments, which is exogenous.
Using a large number of instruments may overfit endogenous variables and may
weaken
the Hansen J-test of the instruments’ joint validity. To keep the number of instruments at
a minimum, we use the collapse option in STATA in all regressions. This ensures that
11 A comprehensive analysis of the impact of Chinese demand for raw materials on
African terms-of-
trade is beyond the scope of this paper, as we focus on the growth effects.
12 Columns 5 and 6 are our preferred model specifications. As they include all controls,
the various
aggregated and disaggregated trade variables and the two interaction terms.
13 All non-reported results can be obtained from the authors upon request.
16
the number of instruments is always well below the number of countries. Overall, the
results, reported in Table 2, are broadly in line with the fixed-effects results. The lagged
dependent variable is always significant at the one percent level. Depending on the
model
specification, the estimated coefficient is slightly above or below one, implying no strong
evidence for convergence in sub-Saharan African countries. This finding is in line with
the results of McCoskey (2002), who also found no convergence for economic growth in
sub-Saharan Africa, although smaller “convergence clubs” do exist.
In five out of six model specifications, investment has a positive and significant impact
on
economic growth. In contrast to the fixed effects results, total African exports to the
ROW
are not significant. Importantly, total imports from China and non-resource imports from
China have – as before – a negative and significant impact on growth. This implies that
we do observe displacement effects of African products by Chinese imports, even if we
control for endogeneity. While changes in the terms-of-trade are no longer positively
associated with growth (apart from one model specification), both interaction terms with
terms-of-trade growth are positive and significant at the five or ten percent level. This
result underlines the importance of changes in the terms-of-trade with respect to
economic growth when looking at African exports of natural resources to China.
17
Table 2: System GMM
(1) (2) (3) (4) (5) (6)
Lagged Dep. Var. 1.060***
(18.22)
1.015***
(13.18)
0.964***
(12.01)
0.988***
(6.657)
0.960***
(11.27)
0.955***
(5.838)
ln Investment 0.313***
(3.048)
0.101
(0.841)
0.236**
(1.995)
0.230**
(2.412)
0.268***
(3.563)
0.217**
(2.440)
ln Population Growth 0.148
(0.876)
-0.129
(-1.070)
0.010
(0.0738)
0.022
(0.0915)
-0.032
(-0.256)
-0.095
(-0.534)
Terms-of-Trade Growth 0.089
(1.039)
0.050
(0.635)
0.018
(0.144)
0.151*
(1.691)
0.124
(1.064)
ln FDI China 0.0603
(1.172)
0.0347
(0.716)
0.0009
(0.0264)
0.0134
(0.425)
0.0144
(0.402)
ln FDI ROW -0.0508
(-0.783)
-0.0682
(-1.430)
-0.0872
(-0.957)
-0.0666
(-1.099)
-0.0636
(-0.618)
ln Aid China 0.0086
(0.904)
-0.0004
(-0.0250)
0.0020
(0.297)
0.0030
(0.289)
0.0037
(0.427)
ln Aid ROW 0.0361
(1.569)
0.0255
(1.614)
0.0330
(1.157)
0.0047
(0.301)
0.0222
(1.063)
ln Total Exports to China 0.0123
(0.719)
0.0069
(0.601)
-0.0005
(-0.0389)
ln Total Imports from
China
-0.162**
(-2.323)
-0.102*
(-1.745)
-0.0315
(-0.557)
ln Total Exports to ROW -0.0677
(-0.718)
0.0163
(0.209)
-0.0372
(-0.460)
ln Total Imports from
ROW
0.119
(1.553)
0.0467
(0.698)
-0.0087
(-0.158)
ln Inflation -0.0125
(-0.379)
-0.0243
(-0.700)
-0.0009
(-0.0280)
-0.0463
(-1.386)
ln Battle Deaths -0.0037
(-0.586)
0.0035
(0.252)
-0.0071
(-0.978)
-0.0015
(-0.0971)
Terms-of-Trade Growth*
ln Total Exp. to China
0.111**
(2.119)
ln Non-resource Exports
to China
0.0101
(0.285)
-0.0081
(-0.215)
ln Non-resource Imports
from China
-0.130**
(-2.019)
-0.0937*
(-1.723)
ln Resource Exports to
China
0.0020
(0.0964)
0.0074
(0.316)
ln Resource Imports
from China
0.0145
(0.620)
0.0066
(0.286)
ln Non-resource Exports
to ROW
-0.0120
(-0.195)
-0.0171
(-0.273)
ln Non-resource Imports
from ROW
0.173
(1.140)
0.147
(1.223)
ln Resource Exports to
ROW
0.0020
(0.0889)
-0.0083
(-0.302)
ln Resource Imports
from ROW
-0.0323
(-0.729)
-0.0293
(-0.595)
Terms-of-Trade Growth*
ln Res. Exp. to China
0.0383*
(1.814)
Observations 169 151 147 147 147 147
Countries 43 43 43 43 43 43
Instruments 8 21 24 24 26 24
AR (1), p-value 0.09 0.21 0.11 0.12 0.01 0.09
AR (2), p-value 0.29 0.41 0.40 0.41 0.40 0.41
Hansen J-test, p-value 0.21 0.68 0.39 0.58 0.39 0.68
Notes: The p-values reported for AR(1) and AR(2) refer to first- and second-order
autocorrelated disturbances in the
first differences equations. See Table 1 for further notes.
18
The test statistics for the system GMM estimator (Hansen J-test) indicate that the
instruments used are valid. However, we do have econometric problems regarding
autocorrelation. The system GMM estimator requires high first-order but no second-
order
autocorrelation. While the p-values for the AR(2) indicate that, indeed, we do not have
second-order autocorrelation, the corresponding p-values for the AR(1) show that we
cannot reject the null hypothesis, in three out of six model specifications, though the p-
values are only slightly above 0.10 in two model specifications. These results thus have
to
be viewed with caution. Still, all test statistics for our preferred model specifications
(Columns 5 and 6) indicate that the estimations are valid.
By using the system GMM technique, we can calculate the size of the impact of our
variables of principal interest on economic growth. For example, an increase in the
volume of non-resource imports from China divided by total GDP (Table 2, Column 6)
by
one percent is associated with a decrease in GDP per capita growth of 0.1 percent over
a
period of five years across countries. The quantitative effect of importing more non-
resource goods from China on economic growth is thus modest but by no means
negligible.
Our results for a negative impact of non-resource imports from China are at odds with
those reported by Baliamoune-Lutz (2011) who found a positive impact of imports from
China on African growth. We believe that this can be partly explained by the fact that
Baliamoune-Lutz (2011) does not distinguish between resource and non-resource
goods.
At the same time we use a longer period of time (1991-2010 instead of 1995-2008) and
a
different methodology. On the other hand, our results for displacement effects are more
in line with those of Giovannetti and Sanfilippo (2009). Yet they concentrate on
displacement effects for African exports in third markets but do not investigate these
effects in African countries’ domestic markets.
For the growth effects of foreign investment, we cannot confirm the positive effects
found
by Whalley and Weisbrod (2012). Again, this can be explained by the different
methodologies employed. Since they use Solow growth accounting methods to analyse
the impact of Chinese FDI on African economic growth, they are more likely to
investigate (and find evidence for) the short-run growth impact of Chinese investment.
Also, their methodology allows them to account for the impact of even relatively small
changes in FDI and its impact on economic growth

https://www.econstor.eu/bitstream/10419/183560/1/wp-206.pdf

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News

Africa benefits from trade with Asia and

China
02.09.2020
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Trade relations between Africa and Asia, especially China, increase the prosperity of African
countries. This is because they have been able to increase the value added of their exports and
also export more to the rest of the world. Moreover in many African countries, China is not the
most important trading partner at all, but other Asian countries, especially India.
© Liu Yuyang / Greenpeace
"The picture that China is exploiting Africa one-sidedly is wrong. Africa also benefits from trade
with Asia," said Andreas Fuchs, head of the newly founded Kiel Institute China Initiative.
The results are taken from a new working paper of the Kiel Institute China Initiative. In it, the
trade data of 46 sub-Saharan African countries in the period 2000 to 2015 were evaluated.
According to the paper, Asian countries’ economic engagement complements rather than crowds
out Sub-Saharan African countries’ exports to the rest of the world (Tang, Zeng, Zeufack:
"Assessing Asia - Sub-Saharan Africa Global Value Chain Linkages").
The authors name three reasons for this. The fixed costs are spread over a larger export volume,
which makes the individual products cheaper. African companies generate new knowledge about
technologies and markets through the exchange with their Asian trading partners. And with more
exports to Asia, imports from there also rise, which increases the productivity of African
companies.
"All in all, the attractiveness of African exports and their price competitiveness increases, also
for the rest of the world. Above all, relatively poor countries near the coast south of the Sahara,
such as Nigeria, Tanzania or Ethiopia, were able to benefit from trade with Asia and work their
way up the global value chain", said lead author Heiwai Tang, Professor of Economics at Hong
Kong University and member of the Kiel Institute China Initiative. "However, Africa's greater
integration into global value chains is not leading to an increase in the share of higher-value
activities in its export structure, so that the general population does not necessarily benefit from
development".
The study also shows that although China is still the most important trading partner for the entire
continent, it is increasingly facing competition at the country level. India, for example, received
twice as many African exports in 2015 as in 2005, and is now the most important trading partner
for Ghana, Nigeria and Tanzania
https://www.ifw-kiel.de/publications/news/africa-benefits-from-trade-with-asia-and-china/

REGIONAL

ECONOMIC

OUTLOOK

ANALYTICAL NOTES

2023

OCT

INTERNATIONAL MONETARY FUND

SUB-SAHARAN AFRICAAt a Crossroads: Sub-Saharan Africa’s

Economic Relations with China

©2023 International Monetary Fund

At a Crossroads: Sub-Saharan Africa’s Economic Relations with China

October 2023 Regional Economic Outlook: Sub-Saharan Africa Analytical Note

Hany Abdel-Latif, Michele Fornino, Henry Rawlings, under the guidance of Wenjie Chen
(AFR).1

DISCLAIMER: The IMF Analytical Notes aim to quickly disseminate succinct IMF
analysis on critical economic

issues to member countries and the broader policy community. The views expressed in
IMF Analytical Notes are

those of the author(s), although they do not necessarily represent the views of the IMF,
or its Executive Board, or

its management.

RECOMMENDED CITATION: International Monetary Fund (IMF). 2023. “At a

Crossroads: Sub-Saharan Africa’s
Economic Relations with China” In Regional Economic Outlook: Sub-Saharan Africa—
Light on the Horizon?

Washington, DC, October.

JEL Classification Numbers: F10, F21, F34, F42

Keywords: China, Trade, Debt, Foreign Direct Investment, Spillovers, Trade Integration

1 ACKNOWLEDGMENTS: The October 2023 issue of the Regional Economic Outlook:

Sub-Saharan Africa

(REO) Analytical Notes were prepared by the African Department, Regional Studies
Division staff, under the

supervision of Luc Eyraud, Annalisa Fedelino, and Catherine Pattillo.

At a Crossroads: Sub-Saharan Africa’s Economic

Relations with China

What does a slowdown of China’s economy mean

for Sub-Saharan Africa?

At risk is

China scaling down 20 years of:

TRADE INVESTMENT CREDIT

Sub-Saharan Africa has forged broadly beneficial economic ties with China over the last
two decades.

China has become the region’s largest trading partner, a major credit provider, and a
significant source of

foreign direct investment (FDI). However, China’s support to Africa has also faced some
criticisms. Recently,

China has retrenched its financing activities in sub-Saharan Africa amid a growth
slowdown and reduced

risk appetite. The projected future deceleration in China’s growth is likely to affect
African trading partners

negatively over the medium term, mainly through reduced trade. Therefore, it is crucial
that countries in
the region strengthen their resilience and implement structural reforms to foster
economic diversification,

deepen intraregional trade, enhance competitiveness, and catalyze domestic growth.

Sub-Saharan Africa and China have forged strong economic ties…

China has emerged as sub-Saharan Africa’s largest individual country trading partner in
the last 20 years. Today,

one-fifth of the region’s total goods exports go to China (Figure 1, panels 1 and 2).
Metals, mineral products,

and fuel represent about three fifths of the region’s exports to China. Meanwhile, China
has also emerged as the

single largest source of imports for African countries, supplying manufactured goods
and machinery. Following

its accession to the World Trade Organization in 2001, China’s rapid economic growth
and large appetite for

raw materials have spurred African exports of goods, which more than quadrupled in
nominal US dollar terms

between 2000 and 2022.1 Trade has raised the region’s incomes, mostly through higher
export revenues.

China has also become a major funding source for African

governments since the early 2000s after initiating its

official “go out” policy.2 Chinese loans—mostly directed

at financing public infrastructure projects—have risen

rapidly in the region in the late 2000s. Consequently,

China’s share of total sub-Saharan African external public

debt rose from less than 2 percent before 2005 to about

17 percent in 2021. This has provided African countries

with a new source of infrastructure financing, and China

is now the largest bilateral official lender to countries in

the region.

However, China’s share in sub-Saharan Africa’s overall

sovereign debt is still relatively small, at only about

6 percent of the total (Figure 2).3 The region’s official

debt to China is highly concentrated, according to the

1 According to IMF, World Economic Outlook data, total goods exports increased by
about 60 percent in this period in volume terms.

The large difference stems not only from the cumulative inflation since 2000 but also
from the positive evolution of terms of trade for

the region’s exports.

2 For more details on China’s “go out” policy, see China Ministry of Foreign Affairs
(2021).

3 This figure includes sub-Saharan African countries’ general government debt owed
both domestically and to foreign actors

(external debt), as reported in the World Bank’s International Debt Statistics database,
accessed on August 10, 2023.

Figure 2. Sub-Saharan Africa’s Public Debt,

End of 2021

(Percent of total public debt)

Domestic

60.9

China official

bilateral 5.8

Other

official

bilateral

2.1
Multilateral

13.7

Other commercial

16.4

China

commercial

1.1

Figure 2

Sources: World Bank, International Debt Statistics; IMF, World

Economic Outlook database; and IMF staff calculations.

Note: Multilateral includes regional development banks.

China Development Bank is included in China bilateral debt

but not in China commercial debt.

1.1. Exports of Goods

(Percent of total exports, period average)

1.2. Imports of Goods

(Percent of total imports, period average)

Figure 1. Sub-Saharan Africa: International Trade Partners, 2000–22

Sources: IMF Direction of Trade Statistics database; and IMF staff calculations.

Note: The chart depicts five-year averages of the share of exports from and imports to
sub-Saharan Africa for the top five destinations

and origins, with the remainder combined in a residual category. Regions are listed from
the largest (top) to the smallest (bottom).

Euro area’s definition excludes Croatia.02550751002000–042005–092010–142015–

192020–22(Percent of total imports, period average)Figure 1.2: Imports of
Goods02550751002000–042005–092010–142015–192020–22(Percent of total exports,
period average)1.1: Exports of Goods
Rest of the worldChina

Euro area Sub-Saharan Africa

India

United States02550751002000–042005–092010–142015–192020–22(Percent of total

imports, period average)Figure 1.2: Imports of Goods02550751002000–042005–
092010–142015–192020–22(Percent of total exports, period average)1.1: Exports of
Goods Rest of the worldChina

Euro area Sub-Saharan Africa

India

United States02550751002000–042005–092010–142015–192020–22(Percent of total

imports, period average)Figure 1.2: Imports of Goods02550751002000–042005–
092010–142015–192020–22(Percent of total exports, period average)1.1: Exports of
Goods

Figure 1. Sub-Saharan Africa: International Trade Partners, 2000-22

Rest of the worldChina

Euro area Sub-Saharan Africa

India

United States

REGIONAL ECONOMIC OUTLOOK—SUB-SAHARAN AFRICA ANALYTICAL NOTE

INTERNATIONAL MONETARY FUND • OCTOBER 2023

World Bank International Debt Statistics. Five countries (Angola, Kenya, Zambia,
Cameroon, and Nigeria, mostly

resource intensive) account for 55 percent of official bilateral debt to China. There is a
correlation between

the prevalence of bilateral trade and lending disbursements between China and the
region’s countries, after

controlling for GDP. But it is noteworthy that the debt

owed to China has not been the principal contributor to

the region’s public debt surge in the past 15 years. About

half the region’s public debt is now domestic commercial

borrowing with higher interest rates and shorter maturity.

China’s FDI to sub-Saharan Africa has also increased

significantly since 2006. The rise of China’s FDI flows

was impressive, reaching about 23 percent of annual

FDI inflows (or about $3 billion) to the region in 2021.

However, when compared with the size of investments

from other parts of the world, the stock of Chinese

investments as a share of the region’s total FDI is still

relatively small, given its more recent accumulation—at

about 4.4 percent in 2021 (Figure 3).4 Nonetheless, some

resource-rich countries have seen relatively large inflows

of Chinese FDI directed primarily toward construction

and mining. Mounting evidence points to broadly positive

effects of Chinese investments on the recipient country’s

economic outcomes (Mandon and Woldemichael, 2022).

...but recently, China’s economic engagements have cooled down…

Following years of expansion, sub-Saharan Africa has seen a retrenchment of Chinese

investment and lending

since 2017. At the 2021 China-Africa Cooperation Forum, China announced its first
cutback in financial support

to Africa, from $60 billion to $40 billion over three years. Half of this reduction was due
to a shift away from

direct infrastructure financing toward more trade credit,

possibly because of China’s political priorities and many

African countries’ increased debt vulnerabilities.5

Chinese official total loan disbursements to sub-

Saharan Africa have fallen precipitously, now repre-

senting about one-eighth of their peak value of

1.2 percent of the region’s GDP in 2016 (Figure 4).

Similarly, total loan commitments (promised lending

arrangements), which rose from 0.2 percent of the

region’s GDP in 2005 to a peak of 1.7 percent in 2016,

have also contracted dramatically to about 4 percent

of their peak value.

The decline is also evident in Chinese companies’ African

construction gross revenues, which fell 30 percent

from the peak of $53 billion in 2015, based on China-

Africa Research Initiative data. Additionally, at the third

4 Data on FDI are sourced from the United Nations Conference on Trade and
Development.

5 In contrast to the long-standing “go out” policy, the Chinese government announced
plans to reduce overseas capital outflows in 2021.

Figure 3. Stock of Foreign Direct Investment

from Selected Regions to Sub-Saharan Africa,

2000–21

(Billions of US dollars)

Figure 30200400600200005101520

United Kingdom

China Euro areaSub-Saharan Africa

India United States

Sources: United Nations Conference on Trade and

Development; and IMF staff calculations.

Note: Euro area’s definition excludes Croatia.

Figure 4. Lending from China to Sub-Saharan

Africa, 2000–21

(Percent of GDP)

0.5

1.5

2001 03 05 07 09 11 13 15 17 19 21

Commitments

Disbursements

Sources: Boston University, Chinese Loans to Africa

database; World Bank, International Debt Statistics

database; and IMF, World Economic Outlook database.

Note: Aggregate GDP for sub-Saharan Africa excludes

South Sudan.

AT A CROSSROADS: SUB-SAHARAN AFRICA’S ECONOMIC RELATIONS WITH

CHINA

OCTOBER 2023 • INTERNATIONAL MONETARY FUND

China-Africa Economic and Trade Expo in June 2023, about $10 billion of projects were
signed (Africanews,
2023)—a 50 percent drop compared with 2019’s event, despite high-profile
attendance.6

Chinese lending to sub-Saharan Africa has drawn considerable attention and criticism
for imposing relatively

harsh terms on debtors and using natural resources as collateral (Bräutigam, Huang,
and Acker, 2020). Other

concerns include the lack of standardization and transparency in public debt because
Chinese lenders do not

systematically document loans to individual overseas borrowers, leading to significant

data gaps.

In this context, China provides some official loans on concessional terms, accounting for
less than 10 percent of

total bilateral loans received by sub-Saharan Africa from China at the end of 2020,
based on the World Bank’s

International Debt Statistics data. The share of the region’s total external debt-service
cost attributable to

China’s official bilateral loans is 12 percent as of 2019, based on International Debt

Statistics data. Moreover,

sub-Saharan African countries that are either in debt distress or at high risk of debt
distress account for about

40 percent of the total public debt stock to China at the end of 2020. China has been a
key player in recent

debt restructuring and negotiations (unlike in negotiations leading to the Heavily

Indebted Poor Countries

Initiative, during which Chinese lending to low-income countries was minimal). It also
contributed to the

Debt Service Suspension Initiative, providing 63 percent of suspensions in 2020 and

2021, though owning

just 30 percent of the claims (Bräutigam and others, 2023). But so far, however, debt
restructuring for some
countries (including under the Group of Twenty Common Framework) has been slow
and challenging because

of several factors, such as many different debt instruments and a more diverse creditor
base (including China),

which requires adaptation and coordination. The recent preliminary agreement between
Zambia and its official

creditors (notably including China) to restructure its external debt is a promising sign for
future resolutions in

other countries.

...and the region could face spillovers from China’s continued slowdown.

China has been experiencing a deceleration in economic

growth since the early 2010s. This is due to a confluence

of factors: slowdown in the real estate sector; demo-

graphic trends from an aging population; and more

recently, volatility in the external environment, including

trade tensions, geoeconomic fragmentation, and the

COVID-19 pandemic. Although China’s annual growth

rate averaged about 10 percent in the 2000s, it grew

by less than 8 percent per year on average in the 2010s.

China’s growth has declined even further since the

pandemic, and the latest IMF projections show average

annual growth of only about 4 percent in the next five

years, with notable trends toward reduced investment

and greener technologies.

Given the deep economic ties, a further slowdown in

China’s growth in the medium to long term is likely

to affect economic activity negatively in sub-Saharan

Africa. Negative spillovers would emerge primarily from

trade links, both from a deceleration in export volumes

and from commodity price declines. Empirical analysis,

detailed in Figure 5, shows that a 1 percentage point

6 Data from China-Africa Research Initiative, “Chinese Contract Revenues in Africa,”

accessed on August 10, 2023.

Figure 5. Sub-Saharan Africa: GDP Response

to China’s Growth Slowdown

(Percent of GDP)-1.00-0.75-0.50-0.250.000.25

Other resource-intensive

countries

Non-resource-intensive

countries

Oil exporters

Source: Abdel-Latif and El-Gamal, forthcoming.

Note: Dots denote individual countries. Box plots portray

the median country effect as the thick horizontal line and the

first and third quartiles as hinges. Whiskers extend in both

directions by the closest of the maximum or minimum value

and 1.5 times the interquartile range. Country groupings are

detailed in the October 2023 Regional Economic Outlook:

Sub-Saharan Africa.

REGIONAL ECONOMIC OUTLOOK—SUB-SAHARAN AFRICA ANALYTICAL NOTE

INTERNATIONAL MONETARY FUND • OCTOBER 2023

4
decline in China’s real GDP growth rate leads to about 0.25 percentage points decline
in sub-Saharan Africa’s

total GDP growth within a year. When considering the effect on oil-exporting countries,
the growth shortfall rises

to more than 0.5 percentage points. For non-oil-exporting countries, the growth loss
averages 0.2 percentage

points (Figure 5).7 Therefore, countries that export relatively more to China are more
likely to be affected

negatively by a slowdown in China. This model focuses mainly on the spillovers through
global commodity

prices, trade linkages, and financial conditions, but there are potentially more complex
feedback effects or

supply-side reactions that are not captured. In particular, geoeconomic fragmentation

could be detrimental to

low-income countries, especially those in sub-Saharan Africa as shown in the analyses

in the April 2023 Regional

Economic Outlook: Sub-Saharan Africa and in the October 2023 World Economic
Outlook, Chapter 3. These

studies also highlight that strategic decoupling, in which countries in the region manage
to maintain trade ties

with all blocs, may present mild upside risks.

Sub-Saharan Africa has to adapt to evolving economic ties.

Sub-Saharan Africa has benefited from China’s growth takeoff, but the region needs to
adapt to China’s

growth slowdown and declining economic engagements. Navigating these new realities
in a context of

global uncertainty and amid increasing geoeconomic fragmentation will require building
resilience and

implementing structural reforms that foster alternative sources of growth, including

through diversification and
enhancing competitiveness.

Building resilience will help cushion against the negative spillovers from China’s growth
decline.

y Increasing regional trade integration offers African countries the opportunity to

diversify export desti-

nations and import sources. The African Continental Free Trade Area is particularly
promising, but its

implementation will require substantial reduction of trade barriers and improvements in

the broader

trade environment, including reduction of non-tariff trade barriers. If all are realized, the
median goods

trade within Africa could increase by 53 percent and with the rest of the world by 15
percent. This has

the potential to raise the real per capita GDP of the median African country by more
than 10 percent

and lift an estimated 30–50 million people out of extreme poverty (El-Ganainy and
others, 2023).

y Rebuilding buffers and strengthening policy frameworks will help reduce

macroeconomic vulnerabilities

and external reliance. This includes reviving efforts to boost domestic revenue
mobilization to reduce

dependence on external revenue and financing while strengthening spending efficiency

and generating

alternative and sustainable sources of funding for development priorities. Measures

include improving

revenue administration and tax policy reforms.

To offset China’s declining economic engagement in the region, structural reforms are
necessary to foster

alternative sources of strong, sustainable, and inclusive growth, such as:

y Promoting economic diversification, which is vital for forging new trade relationships
beyond China and can

mitigate the repercussions from changing global trade patterns. Oil-exporting countries
need to gradually

manage the transition away from a heavy reliance on Chinese demand. Moreover, as
the world embraces

the green energy transition, the region can seize opportunities in the strong demand for
critical mineral

exports that support renewable energy development. Countries can strive to develop
more local processing

capabilities while moving up higher value chain segments. Essential reforms—including

adopting best

practices in mining laws and enhancing public financial management—are crucial to

capturing the potential

windfalls and optimizing economic benefits.

7 The regional or group average of the response of GDP growth to the shock to
Chinese GDP growth was calculated using the share

of each country’s cumulative GDP between 2018 and 2022 as weighting factor. See
Abdel-Latif and El-Gamal (forthcoming) for more

details on the methodology.

AT A CROSSROADS: SUB-SAHARAN AFRICA’S ECONOMIC RELATIONS WITH

CHINA

OCTOBER 2023 • INTERNATIONAL MONETARY FUND

y Reforms to create a favorable business environment (including by lowering entry,

regulatory, and tax

barriers) will help catalyze private sector growth and enhance the region’s
competitiveness. It is also

important to deepen domestic financial markets and improve access to finance,

particularly for small and
medium enterprises and entrepreneurs. Prioritizing human capital development and
providing better

access to quality education will contribute to developing a skilled workforce and

enhancing domestic

productivity. Combining these efforts with infrastructure development—including both

traditional physical

infrastructure (roads, railways, airports, and so on) and essential digital infrastructure—
will expand economic

reach beyond traditional markets and geographic boundaries.

References

Abdel-Latif, Hany, and Mahmoud El-Gamal. Forthcoming. “Chinese Economic

Deceleration and Sub-Saharan

Africa.”

Africanews. 2023. “The China-Africa Trade Biennale Bears Fruitful Results.” July 3,
2023.

https://www.africanews.com/2023/07/03/the-china-africa-trade-biennale-bears-fruitful-
results/.

Bräutigam, Deborah, and Yufan Huang. 2023. “Integrating China into Multilateral Debt
Relief: Progress and

Problems in the G20 DSSI.” School of Advance International Studies-China-Africa

Research Initiative

Briefing Paper No. 9, Johns Hopkins University, Washington, DC.

Bräutigam, Deborah, Yufan Huang, and Kevin Acker. 2020. “Risky Business: New Data
on Chinese Loans and

Africa’s Debt Problem.” School of Advance International Studies-China-Africa Research

Initiative Briefing

Paper 03/2020, Johns Hopkins University, Washington, DC.

China Ministry of Foreign Affairs. 2021. “China and Africa in the New Era: A Partnership
of Equals.”
November 26, 2021.
https://www.fmprc.gov.cn/mfa_eng/wjdt_665385/2649_665393/202111/

t20211126_10453904.html.

El-Ganainy, Asmaa, Shushanik Hakobyan, Fei Liu, Hans Weisfeld, Ali Abbas, Celine
Allard, Hippolyte Balima,

and others. 2023. “Trade Integration in Africa: Unleashing the Continent’s Potential in a
Changing World.”

Departmental Paper 2023/003, International Monetary Fund, Washington, DC.

Mandon, Pierre, and Martha Tesfaye Woldemichael. 2022. “Has Chinese Aid Benefited
Recipient Countries?

Evidence from a Meta-Regression Analysis.” IMF Working Paper 22/46, International

Monetary Fund,

Washington, DC.

REGIONAL ECONOMIC OUTLOOK—SUB-SAHARAN AFRICA ANALYTICAL NOTE

INTERNATIONAL MONETARY FUND • OCTOBER 2023

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China in Africa: The Role of Trade,

Investments, and Loans Amidst Shifting
Geopolitical Ambitions
Authors : Peter Stein | Emil Uddhammar
Occasional PapersPublished on Aug 14, 2023 PDF Download
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
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
China in Africa: The Role of Trade,
Investments, and Loans Amidst Shifting
Geopolitical Ambitions
 Peter Stein
 Emil Uddhammar
Chinese influence in Africa is high on the global agenda, as China within just a few
decades has become a key political and economic power in the continent. Indeed, its
emergence as a dominant economic and political actor might be the most important
development in Africa since the end of the Cold War. This paper analyses China's
economic and political relations with Africa beginning in the 1990s. It argues that the
concern is not that China has expanded its economic and political presence in the African
continent; rather, that the other stakeholders have ignored it for long.
Attribution:
Peter Stein and Emil Uddhammar, “China in Africa: The Role of Trade, Investments, and Loans
Amidst Shifting Geopolitical Ambitions,” ORF Occasional Paper No. 327, August 2021,
Observer Research Foundation.
Introduction
China’s relations with the African continent[a] date back to the 15th century. In the Ming Imperial
Tomb in Beijing is a wall painting of a giraffe—it was the famous Chinese admiral and seafarer
Zheng He who brought it to the court in Nanjing during one of several expeditions to the Arab
world and the east coast of Africa between 1413 and 1419.
In modern times, official relations were established with South Africa after Sun Yat-sen was
elected Provisional President of the Young Republic of China in 1911. As the communist
leadership consolidated its hold on power in the early 1950s, China launched a more active
policy of establishing contacts in Africa. Under the shadow of the Cold War, 29 leaders from
political movements in Africa and Asia assembled in Bandung, Indonesia, in April 1955. They
discussed peace, economic development, and decolonisation, and agreed to increase cooperation
between the peoples of the “third world”, a term coined by China’s then leader Mao Zedong.
Although China at the time was relatively underdeveloped, it provided extensive assistance to
emerging African countries. A well-known example from the early 1970s is the Tanzam railway
project, which connected the copper belts in Zambia with the port of Dar Es Salaam. This
enabled Zambia to export copper without having to pass through South Africa or Rhodesia.
This analysis focuses on the period beginning in the 1990s, when China first pondered a “grander
strategy” for Africa. The paper makes an assessment of the implications of increased economic,
political and military exchanges between China and Africa.
To be sure, there is no dearth in literature on China’s activities in Africa. Some authors are
critical and use the term “neo-colonialism” to describe the relationship. Dan Blumenthal, a US-
based expert on China, for instance, has written: ”The Chinese Communist Party’s long-term
strategic objective is to displace the United States as the world’s most powerful country and
create a new world order favorable to China’s authoritarian brand of politics, or its “socialist
market economy.”[1] Others argue that loans and aid from China have an underlying agenda: to
make African states dependent on China and make them more compliant in international
contexts, where China is dependent on the voices of these states, such as within the UN, or in
issues such as Taiwan and Hong Kong. A third group sees China’s operations in Africa as rather
favourable, with infrastructure being expanded and modernised.
The rest of the paper attempts to answer the question of whether China-Africa relations have
further, strategic objectives, and in particular, if China views its economic relations with Africa
as a means for pursuing wider political purposes. The paper outlines the political and normative
differences between the West’s[b] and China’s relations with Africa, and gives an account of
China’s military and strategic initiatives on the continent. Finally, it asks: How should African
states and the wider international community respond to China’s increased presence in Africa?
China’s Economic Relations with Africa
Until the late 1970s the People’s Republic of China’s economic relations with Africa were driven
by ideological imperatives. Today, China’s political leadership view economic relations with the
continent as a means to achieve the country’s development goals. Within a few decades, China
has emerged as Africa’s biggest bilateral trading partner, Africa’s biggest bilateral lender, as well
as one of the biggest foreign investors in the continent.[c]
Chinese companies have entered almost all African markets. Today there are more than 1,000 of
them operating in Africa; some one million people of Chinese descent reside in the continent.
[2]
Many of these Chinese companies in Africa are privately owned, while others are wholly or
partly state-owned. Within this framework, Chinese companies have great degrees of freedom to
operate in Africa on market terms, in addition to being backed by Chinese investment capital on
favourable terms.
Trade in goods and services
China’s trade with Africa was limited in the 1990s and began increasing substantially around
2005 (see Figure 1). Chinese exports to Africa[3] amounted to USD 113 billion in 2019, while
imports from Africa[4] reached USD 78 billion; the volumes have been steadily increasing for the
past 16 years. To be sure, weak commodity prices in the period 2014-2017 had a massive impact
on the value of African exports to China, even while Chinese exports to Africa remained steady.
With a total trade of USD 200 billion in 2019, China is Africa’s biggest bilateral trade partner.
Figure 1. China’s trade in goods and services with Africa (1992-2019, in USD billion,
current prices)
Source: UN Comtrade and the SAIS China Africa Research Initiative (SAIS-CARI)[5]
In 2019, Chinese exports to North Africa (Algeria, Egypt, Libya, Morocco, and Tunisia)
amounted to USD 27 billion, or 23.8 percent of the total to the entire continent, while imports
from North Africa reached USD 7 billion. More than two-thirds of Chinese trade with Africa
thus takes place with the countries located in Sub-Saharan Africa.
China trades with almost all 53 countries in Africa. Table 1 shows, however, that China’s six
biggest export destinations absorb over half of its total exports to the continent. South Africa is
China’s principal export market, followed by Nigeria and Egypt.
Table 1. China’s largest export markets in Africa (2019)

Source: China-Africa Research Initiative[6]

Table 2 shows similar geographical patterns in Chinese imports. Six countries make up 68
percent of total exports, with Angola accounting for almost one-third. From Angola and Libya,
China mainly imports oil; from Gabon come oil and manganese. The Republic of Congo mainly
provides oil and minerals, and the DRC, cobalt and copper. South Africa mostly exports
chemical products, platinum, iron, and steel to China.
Table 2. China’s key import destinations in Africa (2019)

Source: China-Africa Research Initiative[7]

Figure 2 shows that while China´s trade with Africa has increased substantially in absolute
numbers, it still amounts to only around four percent of Chinese foreign trade across the globe.
Figure 2. Chinese trade with Africa as percent of China’s foreign trade (2000-2018)
Source: UN Comtrade[8]
Figure 3. Share in African exports of goods (2019)
Sources: UN Comtrade and Eurostat[9]
Figure 4. Share in total African imports (2019)

Sources: UN Comtrade and Eurostat. [10]

Comparing figures 3 and 4 with figure 2, one can see that from an African perspective, trade
with China represents a much higher share of Africa’s foreign trade. Figure 3 shows that China
absorbs around 11 percent of Africa’s global export of goods. As a trading bloc, the European
Union (EU) is Africa’s biggest export market, making up 31 percent of total African exports;
India is the destination for 8 percent of all African exports, the US, 5 percent, and UAE, 4
percent.
Figure 4 shows a similar geographical pattern regarding African imports of goods. While India’s
trade with Africa does not match that of China, India has nevertheless established itself as one of
Africa’s main bilateral trading partners. For some African countries, trade with China is a
cornerstone of the economy. For example, exports to China amount to over 60 percent of total
exports for Angola, the Republic of Congo, and Zambia.
Africa accounts for 3 percent of global GDP and global trade. Within the EU, France is Africa’s
biggest trading partner. In comparison with China, France’s trade with Africa amounts to 2.5
percent of its global foreign trade, and in the case of UK, the share is 2 percent. While China’s
trade with Africa make up a larger share of its total foreign trade than the share for France and
UK, these differences are marginal.
Chinese investments in Africa
In 2019, total Chinese Foreign Direct Investment (FDI) to Africa amounted to USD 44 billion,
which corresponded to 2 percent of global Chinese FDI. Total FDI from the US to Africa was
USD 78 billion, making it the top investor in the continent. American FDI to Africa, however,
amounted to only 0.7 percent of its total outward FDI. The UK was the second largest investor to
Africa, with USD 65 billion, followed by France with USD 53 billion. For the UK and France,
FDI to Africa account for 3 percent of their global investment. Therefore, while Chinese
investments have increased over a few years, the totality cannot be said to be extraordinary.
Table 3 shows that in addition to being China’s biggest African trading partner, South Africa is
the top destination for Chinese investments, followed by the DRC, Angola, and Zambia. Ethiopia
– while potentially rich in geothermal energy and with recent developments in hydropower – is
the only country listed in the table that cannot be said to be rich in raw materials. Chinese
ventures in Ethiopia are mainly in infrastructure and light manufacturing. Around 30 percent of
Chinese FDI in Africa is channelled to infrastructure and construction, while 25 percent goes to
mining and extraction of raw materials.
While Chinese FDI to Africa may not seem unusually large, it is worth mentioning that Chinese
contract revenues in Africa are substantial. According to data provided by Johns Hopkins
University, approximately 30 percent of Chinese overseas construction contract revenue derives
from African markets.[11]
In 2019, the gross annual revenues of Chinese companies’ engineering and construction projects
in Africa totalled USD 46 billion, dropping by six percent from 2018. About 20 percent is
covered by loans from Chinese financiers.[12] 2018 was, however, the fourth consecutive year that
gross annual revenues of Chinese companies’ construction projects in Africa declined.
Table 3. Main recipients of Chinese FDI (2019, in USD billion)
Sources: UNCTAD and China-Africa Research Initiative[d]
Analysis
One can identify three more or less explicitly stated Chinese goals when it comes to economic
relations with Africa:[13] access to the continent’s natural resources; export markets for Chinese
manufactured goods; and sufficient economic and political stability for China to safeguard its
citizens and pursue its economic and commercial interests.
As shown earlier, while China has become Africa’s biggest trade partner, its trade with Africa as
a share of total foreign trade is not remarkably bigger than those of other big trade partners with
Africa, such as France or UK. It is hardly surprising that China has emerged as Africa´s biggest
bilateral trade partner, as it is today the biggest bilateral trade partner for many countries.
China’s economic growth has increased its need for raw materials, particularly industrial metals,
and fuels. Africa has vast natural resources and, owing to low levels of industrialisation, a huge
export potential. China’s economic growth has made it the global industrial hub, and this has
been fuelled largely by exports of low-cost manufactured goods. Demand for such products has
surged across Africa over the last decades.
China trades with almost all countries in Africa and does not discriminate between regions. On
the surface it might seem that China’s economic relations with Africa follow an opportunistic
market-based logic. It is partly true, and Chinese corporations operating in Africa are guided by
commercial opportunities. However, such an observation does not provide a complete picture.
Chinese political decision-makers consider economic relations with Africa as means to satisfy
goals for its own economy, and they also facilitate the country’s wider geopolitical aims. This
means that commercial relations with some big countries that are rich in raw materials or have
other assets that China considers vital—such as Angola and its oil, Zambia and copper, or DRC
and cobalt—are buttressed by close political relations that China has ambitiously pursued.
One relevant question is whether Chinese exports and investments grow to the detriment of
others. There is little empirical research on this so far, but the data in Figure 5 provides some
indications. China surpassed the US as Africa’s top trade partner in 2008. As a trading bloc, EU
is a bigger trade partner to Africa than China or the US. Indeed, the trends for American, Chinese
and EU-trade with Africa display certain similarities. When Chinese trade with Africa increases,
so does African trade with the US or EU. It thus need not be the case that higher levels of
Chinese trade with Africa automatically translates to lower levels for the US or EU; it could very
well be the reverse. It is not clear from this data whether any substitution occurs.[e]
Figure 5. Africa’s trade with the US, China, and the EU (2002-2019, in USD billion, current
prices)

Sources: SAIS-CARI and Eurostat.

One can identify a number of benefits of increased trade with China for Africa. The emergence
of China as an additional trade partner was a key factor behind the high economic growth rates in
Africa from the late 1990s to 2014. Higher Chinese demand for African exports improved terms
of trade in the continent, providing the countries with additional financial revenues. With China
as a new important trading partner, African countries were provided with an additional market
for exports and imports. It enabled African nations to diversify foreign trade and become less
dependent on trade with the US or EU. Growing trade with China increased Africa’s overall
global trade, implying that trade creation outpaced trade diversion.
Both gain, when China provides African countries with capital goods and cheap consumer
goods, and African countries supply China with the commodities required to fuel its economic
expansion. Moreover, when African consumers are given choices in, for instance, mobile
phones, they are empowered.
The other side to trade
At the same time, international trade comes with indirect impacts that provide challenges to
African countries that are more difficult to quantify. For example, if Chinese demand for raw
materials rises too steeply that it triggers an increase in world market prices, it may bring harm to
African nations, such as Morocco or Ethiopia, that are net importers of raw materials.
Furthermore, imports of Chinese manufactured goods can displace local workers and enterprises.
In the long run—and this area requires more empirical research—Chinese penetration of African
markets could hinder the emergence of a nascent African manufacturing sector. Already, some
recent findings indicate that Chinese exports to Africa may be crowding out exports from the
more industrialised economies of Africa, notably South Africa.[14] These are, however, still
relative declines; the absolute values of South African exports to the continent continues to
increase, despite market penetration by China.
It is not surprising that a lot of Chinese investment capital is allocated to infrastructure and
extraction of African raw materials. These are areas where Africa has a lot of undercapitalised
assets.
African nations have huge investment needs that cannot be met by their small domestic capital
markets. Chinese investments provide African nations with modern know-how and technology.
Chinese investments in African infrastructure—such as airports, railways, ports, roads, and
sewage—increase the overall productive capacity of African economies. At the same time, this
may create dependencies with strategic implications.
Chinese FDI in Africa tends to differ from those coming from Europe, Japan, or the US. FDI
from these countries is usually carried out by independent profit-maximising private companies;
meanwhile, FDI from China is mostly carried out by companies that are dependent on the
Chinese state and backed up by cheap Chinese investment capital. This makes it possible for
them to have longer time horizons. Furthermore, companies from the West must take into
consideration domestic pressure to ensure sustainability, ESG[f] and related factors when they
venture abroad. Chinese investors do consider such factors, but find less pressure implementing
them. This might give them an “advantage”, if that term maybe used in this context.
One challenge with foreign direct investments allocated to large-scale extractive ventures is that
they are capital-intensive but seldom create a lot of jobs for less skilled domestic labour. At the
same time, they provide substantial tax revenues. As a result of such dynamics, African elites
have generally welcomed Chinese trade and investment, while ordinary Africans sometimes
perceive Chinese investments as less benefiting to them.
Focus on Lending
In addition to trade and FDI, loans comprise an increasingly important component of China’s
economic relations with Africa.
A decade of rock-bottom interest rates has triggered a global search for yield, yet not enough
private capital has been flowing to Africa. African countries often cannot afford to build the
infrastructure they need to support their growing populations. Moreover, many of them lack
access to international capital markets and banks. In this vacuum, China has emerged as Africa’s
largest bilateral lender. Indeed, the Chinese government and its state-owned banks have lent
record amounts to governments in low- and middle-income countries since the early 2000s,
making China the world’s largest official creditor.
It is estimated that 62 percent of African bilateral debt is owed to Chinese creditors. [15] Research
by scholars at the University of Sussex shows that since 2015, China has accounted for 13
percent of bilateral lending to Africa; the next biggest creditor is the US at a much lower 4
percent.[16] According to estimates provided by the SAIS China Africa Research Initiative,
Chinese credits to Africa amounted to USD 148 billion in 2019. Of this, USD 44 billion (29.7
percent) is allocated to investments in infrastructure, USD 36 billion to energy, and USD 18
billion to mining and extraction.
Chinese loans to Africa have helped finance large-scale investments with potentially significant
positive effects for growth. At the same time, large lending flows have resulted in the build-up of
debt-service burdens. In all, Chinese lending to Africa has covered over 1,000 projects. Figure 6
shows that most of this has accrued to a limited number of countries in the continent, with
Angola being by far the biggest debtor. If one looks at the debt burden to China as percent of
GDP,[17] Djibouti ranks first with 100 percent of GDP, followed by the Republic of Congo
(Brazzaville) (28 percent), Niger (23 percent), Zambia (20 percent), Ethiopia and Zimbabwe (13
percent each) and Angola (12 percent).
Figure 6. Biggest African debtors to China (in USD billion, total stock as per 2019)

Source: SAIS-CARI and IMF.

While China’s dominant footprint in African trade is well documented, its lending to Africa is
less understood.[18] Analysts point out that unlike other major economies, almost all of China’s
external lending and portfolio investments are official, meaning that they are undertaken by the
Chinese government, state-owned companies, or state-owned banks. [19] Two banks dominated
Chinese overseas lending: the Chinese Export-Import Bank and the China Development Bank
(CDB). The same study further underlines that China does not fully disclose its official
international lending and there is limited standardised data on Chinese overseas stocks and flows.
[20]
Adding to such paucity, commercial providers such as Bloomberg or Thomson Reuters do
not keep track of China’s overseas loans. It is therefore difficult to obtain precise information
about not only the magnitude of Chinese lending to Africa, but also the rates of interest and
terms of maturity, and the kind of collaterals involved. The situation is thus such that most of
China’s bilateral lending is carried out by so-called policy banks and state-owned commercial
banks, which may be controlled by the Chinese state, but operate as legally independent entities,
not as sovereign lenders.
A 2021 research paper by Anna Gelpern, professor of Law at Georgetown University, has
analysed the structure of Chinese loans to Africa and other developing nations.[21] The authors
find that overall, China is a muscular and commercially-savvy lender to developing countries.
Chinese contracts contain more elaborate repayment safeguards than their peers in the official
credit market, alongside elements that give Chinese lenders an advantage over other creditors. At
the same time, many of the terms and conditions the authors of this present paper reviewed,
exhibit a difference in degree, not in kind, from commercial and other official bilateral lenders.
According to Gelpern, Chinese contracts contain confidentiality clauses that bar borrowers from
revealing the terms or even the existence of the debt. Second, Chinese lenders seek advantage
over other creditors by using collateral arrangements such as lender-controlled revenue accounts,
and committing to keep the debt out of collective restructuring (“no Paris Club” clauses [g]).
Third, cancellation, acceleration, and stabilisation clauses in Chinese contracts potentially allow
the lenders to influence debtors’ domestic and foreign policies.
Unlike the members of the Paris Club of the biggest sovereign creditors, Chinese loans often
require collateral for development loans. Since Chinese loans are backed by collateral, they often
enjoy a high degree of seniority. If an African country wants to apply for debt relief, its Chinese
creditors can claim the rights to assets held in escrow. This is another possible inroad for China
to claim assets in African countries, often mentioned by critics that claim that the country has
“neo-colonial” ambitions and methods.
When a country’s debt service burden is not transparent, debt sustainability analyses are
hampered. For private investors this makes asset pricing difficult. Furthermore, a lack of
transparency may be an obstacle to crisis resolution, since information on the size and
composition of a country’s debt is essential to assure fair burden sharing and orderly crisis
management. Chinese banks often tend to renegotiate sovereign loans bilaterally and without
transparency.
This is among the reasons why Chinese lending to Africa has been the subject of debate and
controversy. Some have suggested that Beijing is deliberately pursuing “debt trap diplomacy,”
imposing harsh terms on its government counterparties and writing contracts that allow it to seize
strategic assets when debtor countries run into financial problems. Others argue, meanwhile, for
the benefits of China’s lending and suggest that concerns about harsh terms and a loss of
sovereignty are greatly exaggerated. Still others suggest that the debate is largely based on
conjecture, as neither policymakers nor scholars know if Chinese loan contracts would help or
hobble borrowers as few independent observers have seen them. They argue that existing
research and policy debate rests upon anecdotal accounts in media reports, cherry-picked cases,
and isolated excerpts from a small number of contracts.[22]
If there is anything that is more certain, it is that Chinese lenders are willing to extend loans to
poor African countries without demanding much in terms of governance reforms and anti-
corruption measures. The result has been projects that are bound by draconian lending
conditions, are expensive to operate, and unlikely ever to produce decent returns.
Over the years, China has embarked on a massive lending spree to developing countries, mainly
as a way of promoting its flagship Belt and Road Initiative (BRI). The BRI, however, has faced
growing criticism for flaws such as lending to low-income countries with unstable finances, lack
of transparency, and not considering social and environmental impact studies on the projects they
are financing. Bearing in mind that many developing nations, in Africa and in other parts of the
world, have become heavily indebted because of the Covid-19 pandemic, China as creditor may
have to confront a situation where several of its foreign borrowers will have difficulties living up
to contractual undertakings. This could lead to a situation where future Chinese international
lending will be more risk-averse and restrictive.
Chinese foreign lending to developing countries already seems to have been reduced in the last
few years. From a record figure of USD 75 billion in 2016, Chinese lending in 2019 shrunk to
USD 4 billion.[23] Such a massive decline cannot be explained only by a general global economic
downturn; it is most certain that this is due to specifically Chinese circumstances.
Future Chinese investments abroad will likely apply far more stringent criteria on the
commercial viability of projects. In the past, a substantial proportion of Chinese foreign
investment had been more about using financial resources to extend the country’s political
influence. Putting its reputation on the line for the BRI, China will likely put more emphasis on
commercial gains from its future investments. It is reasonable to assume that, in the future, China
will no longer be as big of a lender to Africa. As African nations will continue to have
substantial needs for foreign capital, reduced Chinese lending could open possibilities for others,
such as the European Union and India.
Over the past decade, many African nations have accumulated higher debt-burdens. Each
country profile is unique and a lot of this began before China became a big lender. Debt relief for
African countries is becoming an important topic on the international agenda. Being a large
creditor, China will have a significant role in the process. While China does not participate in the
Paris Club—used by Western governments to negotiate sovereign debt relief—Chinese creditors
have restructured loans in the past and appear willing to renegotiate arrangements and allow
borrowers to defer payments. Chinese creditors, however, prefer such negotiations to take place
on a strictly bilateral basis.
China as a Political Factor in Africa
The Forum on China-Africa Cooperation (FOCAC) held its first ministerial conference in
Beijing in October 2000. The forum’s objectives include the promotion of political cooperation,
and creating a favourable environment for China-Africa business and trade. Other commitments
from China are providing special funds to support well-established Chinese enterprises to invest
in African countries, to cancel debts, send extra medical teams, and develop student exchanges.
[24]

However, the literature on China’s political activities in Africa often mention other goals, which
are considered to guide the Chinese government.[25] One such example is to diplomatically isolate
the democratic Republic of China (Taiwan) by persuading African countries to sever diplomatic
relations with this nation. Another is to influence attitudes towards Hong Kong. These are
examples of China’s underlying goals in cooperating with African countries, which would aim to
achieve compliance with China’s further geopolitical aspirations.
The question has been raised as to whether China, as part of its efforts to achieve these official
and unofficial goals, wants to export a specific Chinese model for development, which can be
replicated in other countries, in this case, those in Africa. Current research points in different
directions here, and many believe that this should be studied primarily in relation to the African
political elites who are regularly invited to China and courted by Chinese diplomats and
businesses.[26]
A well-known Chinese political scientist, Zhang Weiwei, has argued that the specific
developments that have taken place in China over the past 40 years are not transferable to other
countries. In the book The China Wave: Rise of a Civilizational State, published in 2011, Weiwei
highlights eight different factors that contribute to China being a unique civilisational state. The
first are the four “superfactors”: a super-large population; a super-large territory; a super-long
tradition; and a super-rich culture. Then follow the four “unique factors”: a unique language;
unique politics; a unique society; and a unique economy.
This interpretation of China’s uniqueness undoubtedly displays a level of pride and self-
confidence in relation to one’s own culture. It is not unlike imperialist Europe during the latter
part of the 19th century, with its self-image of being the most developed part of the world and
carrying the responsibility to civilise the rest.
About the Communist Party, Weiwei says:
The Chinese Communist Party (CPC) is not a party as the term “party” is understood in the
West. At its core, the CPC continues a long tradition of a unifying Confucian ruling entity, which
represents or seeks to represent the interests of the whole of society, rather than a Western
political party that openly represents certain group interests. [27]
To the extent that this view is shared among the leading political classes in China, it could
explain why the country today, unlike the Soviet Union during the Cold War, does not actively
incite revolutionary movements that aim to install Marxism-Leninism in “third world” countries.
Such activism would also not be in line with Chinese business interests, as these operate
predominantly within the Western capitalist logic and the framework of the World Trade
Organization (WTO). It would also run counter to China’s official policy of non-interference in
the affairs of other countries.
On the other hand, China seems to have a clear will to influence political leaders in Africa and
other developing countries, regardless of whether or not it involves copying its own development
model. The authoritarian interpretation of the CPC has also gained ground, since Xi Jinping in
2018 received a de facto indefinite mandate as president.
China’s principle of non-interference in the domestic affairs of other countries has met with
some criticism, as it can be argued that it risks weakening the principle of “Responsibility to
Protect” or R2P adopted by the United Nations (UN) in 2005—with the support of China. The
purpose of R2P was to give the international community a greater opportunity to intervene to
protect civilian populations from genocide, ethnic cleansing, war crimes, and other crimes
against humanity. This principle is seen as a tool to prevent these abuses from being committed,
and also to provide a basis for a mandate to intervene, if the preventive work fails.
Arthur Waldron, professor of International Relations at the University of Pennsylvania, believes
that the notion of a Chinese policy in Africa based on non-interference in the affairs of other
countries needs to be dissected and argues that the Chinese have had few qualms about
interfering if judged to be in their own interest.[28] According to Waldron, China’s interpretation
of the non-interference policy is that foreign policy should not be enslaved by abstract principles
but rather guided by pragmatic considerations.
Such policy seems to have the support of Africa’s elites. From the West’s viewpoint, it has been
argued that this gives China an advantage in business relations with African countries, as the
political elites there prefer loans, aid and business agreements from a great power that does not
demand certain liberal rights, corruption-free governance, sustainability, transparency, nor
democracy. Others argue that these trends are exaggerated, mainly because there is no single
model for development that China seeks to promote.[29] Still others claim that engagement with
China tends to lead countries in a less democratic direction.[30] At the same time, the West has in
several occasions favoured non-democratic regimes as long as they have worked for other
normative goals that were in line with the West’s development agenda—such as poverty
reduction, and improved healthcare and education.[31] Moreover, it has been done when the West
saw a need for access to crucial raw materials, or a “buffer” vis-à-vis political enemies or
possible military bases.
Normative similarities and differences
The political scientist Stein Ringen has characterised China as a “sophisticated dictatorship”, one
that stands between the authoritarian model and the totalitarian one—or a “controlocracy”.
[32]
There are mock trials and sudden disappearances, of which the entrepreneur Jack Ma is one of
the latest high-profile people to have been affected, just like in Stalin’s Soviet Union or Hitler’s
Germany.
Ringen discusses what motivates the dictatorial power of the Chinese Communist Party, or
its raison d´être. He considers the constant rise in the material standard of living and the
eradication of poverty as the main legitimising factor after Deng Xiaoping’s takeover. At the end
of 2020, China declared that it had completely eradicated extreme poverty in the country over an
eight-year period.[33] President Xi Jinping emphasised at an official ceremony in Beijing in
February 2021 that this “miracle is a complete victory that will go down in history.”[34]
At the same time, this shows that China has achieved goals 1 and 2 of the UN Agenda 2030—
i.e., no poverty or hunger—for a massive one-fifth of the world’s population. This, together with
the continued and accelerating economic exchange between the West and China, means that in
terms of material goals such as prosperity and poverty reduction, standards between West and
China are running in parallel. Furthermore, these material objectives are in line with officially
stated development and poverty reduction policies in most African countries.
There may be another factor that motivates the power of the Communist Party. China experts
point out that there are “three ghosts” chasing China’s political leadership: the century of
humiliation of 1842 – 1949, when foreign powers ruled the “Middle Kingdom”; the destructive
excesses of violence during the Mao Zedong era; and the fall of the Soviet Union. Another way
of expressing this is the fear of weakening or undermining the peace-making Leviathan, the
central power. Unfortunately, this also tends to favour authoritarian leadership and the incumbent
regime. At the same time, peace and stability remain fundamental values.
As discussed briefly earlier, China in Africa often acts bilaterally. Although there is a common
forum for contacts with Africa through the FOCAC and other arenas, agreements are mostly
bilateral. When China acts in African countries, it often does so outside the various platforms for
development established by other donors, where common normative requirements for issues like
procurement and sustainability are monitored. China often abstains from such cooperation.
In the tourism sector, for example, there are Chinese entrepreneurs that act outside the
organisations that exist for ecotourism and for sustainability requirements—this despite China’s
high-profile assurances at world summits as being “protectors” of climate agreements and
sustainability goals. Thus, in terms of common demands for sustainable development, anti-
corruption and common social rights requirements within donor organisations, there is no
normative agreement between the West and China in Africa.
Meritocracy is a traditionally strong value in China.[35] The administrative apparatus has
historically been built on a Confucian basis. From the 17th century it included a rigorous
countrywide system for screening prospective civil servants every three years, which remained in
various forms until 1962.[36] After the chaos of the Cultural Revolution and Deng Xiaoping’s
return to power, one of the first steps he took was to reintroduce national examinations as a basis
for admission to higher education.
Meritocracy in this sense is largely in line with norms in the West, but not insofar as it provides a
basis for recruitment to political leadership within the Communist Party. It is hardly possible to
claim that recruitment to the political classes in the West or in Africa today takes place on
strictly meritocratic grounds. Nevertheless, the lack of transparency in China’s political system
creates opportunities for corruption, which undermines the meritocratic norm.
In China, land cannot be owned by private individuals. However, there are possession rights that
can be valid for up to 70 years. Since 2015, registers for possession rights have been established
in municipalities.[37] In addition, individuals can own real estate, but not the land they stand upon.
In Africa, Western countries and NGOs have initiated formalisation of property rights in several
countries. In this there is no normative agreement with China.
In recent years, the Communist Party has further tightened its grip on the educational sector by
forcing private schools to hand over ownership to the state without compensation.[38] Together
with other recent moves, this puts China’s governance system closer to the totalitarian model,
based upon a Leninist power structure and with the Communist Party and the president as the
main players. Thus there is, using Ringen’s framework, a strong tendency towards
“controlocracy”. It is not likely that this will result in the promotion of liberal democracy,
division of powers, and the rule of law as governance models when engaging with African
countries.
China’s Diplomatic Offensive
The FOCAC has been active for many years and provides political and diplomatic backing for
Chinese companies and investments in the continent.
A 2020 analysis of China’s active diplomacy to influence African leaders, military, and senior
officials observes: [39]
Beijing’s investment in professional training for senior cadres from African countries means that
three synergistic goals can be achieved: (1) the dissemination of a Chinese model for
development and governance (2) the development of a professional network involving Chinese
senior officials, politicians and specialists counterparts in various African countries and other
developing countries within the BRIC, as well as (3) a socialization of African senior officials
and politicians into China’s views on Chinese culture, Chinese diplomacy and interpretations of
history.
Another aspect of China’s “charm offensive” is the so-called Covid vaccine diplomacy.
Donations of relatively modest doses of Chinese vaccine make headlines in African newspapers,
while the West is perceived to be prioritising its own citizens.
An example of Chinese diplomacy in Africa is an official visit by Chinese Foreign Minister
Wang Yi to the Seychelles that took place on 31 January 2021. He underlined that China’s
diplomacy has always been based on equality between small and large countries. China
advocates multilateralism, he said, and opposes power politics; it supports “democracy in
international relations” and supports the UN in its legitimate role in international relations. Large
countries should be the first to follow the basic norms that govern international relations, Wang
Yi emphasised, adding that they should also be the first to “follow the principle of non-
interference in other countries’ internal relations.” They should also be the first to shoulder their
international commitments on climate change and sustainable development.[40]
One aspect of the “propaganda war” is China’s growing media presence. From ownership of
local radio stations to the establishment of a China Central Television station in Nairobi, Kenya,
China is becoming a major influence in the daily discourses in these countries.[41] According
to Afrobarometer survey data in 36 African countries, 23 percent believe that China is the most
influential foreign power in their country, close behind “the former colonial power” (28 percent)
and slightly ahead of the US (22 percent).[42]
Cultural factors and attitudes
A report from the Afrobarometer research project in 2016 states that the US development model
is preferred by most Africans, while a majority view the Chinese presence in Africa favourably.
[43]

A drawback is that Chinese business people have been accused of being condescending towards
Black Africans. In part, this can be attributed to the idea of cultural superiority, as suggested by
the notion of what Weiwei referred to as the four Chinese “superfactors” and the four “unique”
Chinese factors, discussed in an earlier section of this paper.
In Kenya, a Chinese restaurant owner was arrested in 2015 after denying Black Africans entry.
[44]
Sometime in the same year, a Chinese businessman was expelled after calling a Kenyan
employee and the country’s president “baboons”. The 26-year-old employee said he had not
encountered outright racism until the incident.[45] The Chinese embassy apologised, saying that
this did not represent the attitude of the Chinese people.
Zambia has had several incidents of unfair labour practice, some involving violence. During a
2010 strike over working conditions in a Chinese-owned coal mine in the south of the country,
two Chinese managers opened fire and 11 workers were seriously injured. The two were brought
to justice, but the indictment was later dropped.[46] In 2012, a Chinese foreman was murdered at
the same mine.[47]
In 2020, three Chinese supervisors at a textile department store in Lusaka in Zambia were
murdered and their corpses burned, after they were accused of keeping Black workers locked in a
container to avoid being infected by Covid-19, while Chinese customers were allowed to move
freely within the premises. The press said that “the waves of racial antagonism went high.” [48] A
few weeks earlier, a restaurant and a hair salon that had barred Zambians were ordered closed by
authorities.[49]
Such tensions have been exploited by the country’s political leaders. In 2007, the then opposition
leader Michael Sata issued a statement saying, “We want the Chinese to leave the continent and
the former colonial powers to return. Of course, they also exploited our raw materials, but at
least they took care of us.”[50] Sata won the 2011 presidential election in a high-profile anti-China
campaign. Conversely, the government of Edward Lungu (president, 2015-2021) leaned heavily
towards China, which also is the country’s single largest lender.
The Western response
Signs are emerging that the West and its allies, such as Japan and India, are aiming to counter the
economic and diplomatic initiatives from China. One example is the EllaLink, a transatlantic
optic data cable launched with funding from the European Investment Bank and others. The aim
is to be an alternative to the BRI, and to boost high-quality projects in middle- and low-income
countries, including Africa.[51] In 2021 the EU and India launched a global infrastructure
partnership, although both sides are careful not to brand it as any sort of anti-Beijing alliance.
[52]
The India Africa Trade Council, inaugurated in January 2021, is yet another example: it aims
to open 13 trade offices in each of India’s major cities, assisting businesses that could be
interested in conducting trade with African countries.
China’s Strategic and Military Interests in Africa
Economic globalisation has meant that Chinese business interests also benefit from long-term
economic rules and the prevention of conflicts and wars. Thus, in 2008, Chinese warships
arrived on the coast of Africa in the Indian Ocean, to take part in international operations against
piracy, as those activities have also affected Chinese ships. It was the first time China’s navy
operated in these waters since the 15th century.
Soon it was clear, however, that the Chinese presence was not aimed at only fighting pirate
attacks. When piracy subsided around 2012, the Chinese warships remained, and China declared
that its naval presence is part of an ambition to protect its economic interests in the Middle East,
North Africa, and East Africa. It can also be seen as part of the “Maritime Silk Road”, a major
infrastructure project proposed by President Xi Jinping in 2013, which would primarily involve
Chinese investment in ports.[53] The Chinese naval presence was further expanded by a naval
base in Djibouti. On 1 August 2017, the 90th anniversary of the founding of the People’s
Liberation Army, the base was inaugurated. It is the country’s first naval military base outside
China, and is leased for ten years, for which China pays USD 20 million annually.
China’s military presence in Africa goes back to the 1970s, when it supported guerrilla groups
such as Unita in Angola and Frelimo in Mozambique with financing, weapons, and logistics.
Today, China sells weapons to many countries in the region and offers training for African
officer aspirants.[54] There are extensive contacts between China’s military leaders and their
African counterparts. For one, China is training on-site African armies, police forces and soldiers
involved in multilateral peacekeeping operations. China also provides financial support to the
African Union’s military operations, conducts military exercises with African countries, and
plays an active role in UN peacekeeping operations in the continent.
At the same time, the United States, like erstwhile colonial powers such as Britain and France,
have extensive military cooperation in the continent going far back in time. France is estimated
to house about 9,000 people in its military operations, mainly in West Africa and the Sahel. The
UK has significantly fewer permanent staff but trains up to 10,000 each year in Kenya through a
mutual defence cooperation agreement. The United States is considered to hold about 7,200
personnel in the continent, but this commitment will face cutbacks in the coming years. The
Chinese naval force in Djibouti is today estimated to comprise 300 military personnel and 1,700
civilians.[55]
Russia has also expanded its presence in Africa in recent years, through the training of military
personnel and arms exports to some 20 countries. Japan, for its part, opened a military base in
Djibouti in 2011, with the aim of protecting shipping and raw material supplies, but also in view
of supporting access to African markets and balancing the presence of China.[56] Turkey and the
United Arab Emirates have also expanded their military activities in recent years but have no
fixed bases.
Since 1989, about 40,000 Chinese soldiers have been involved in a total of 24 UN peacekeeping
operations in Africa. Today, about 2,400 Chinese soldiers participate in seven of these
operations. In 2019, China contributed USD 7 billion to the UN peacekeeping forces, equivalent
to 15 percent of the UN budget.[57] Among the permanent members of the Security Council,
China today contributes the largest contingent of personnel in UN peacekeeping operations.[58]
Over the years, China has signed bilateral agreements on arms deliveries to Namibia, Botswana,
Angola, Sudan, Eritrea, Zimbabwe, and Sierra Leone, among others. Helicopters have been
delivered to Ghana, Mali, and Angola, as well as tanks to Zimbabwe. In Sudan and Zimbabwe,
the Chinese military has had factories to produce small arms.[59]
In 2014, the Chinese People’s Liberation Army conducted its first joint military exercise with an
African country in Tanzania. In 2018, units from the Chinese Navy visited naval bases in
Cameroon, Gabon, Ghana, and Nigeria and conducted bilateral exercises there.
The Horn of Africa consists of Ethiopia, Eritrea, Djibouti, and Somalia. With the completion of
the Suez Canal in 1896, the area became an important transit route for international trade, by
significantly shortening the transport routes for trade between Asia and Europe. It is through the
Horn of Africa that Africa is linked to the Arab world. Djibouti has become something of a
commercial hub, where ships from all corners of the world reload goods and refuel their ships.
Important commercial transit routes run outside the Horn of Africa, and the area is close to
current conflict areas such as Yemen. Even before the civil war broke out in the region, it had
undergone extensive militarisation. France, Italy, Egypt, Israel, the United States, Japan,
Germany, and Spain are a selection of countries with a military presence in the area.
China’s military presence in Djibouti has several purposes. Owing to its military presence there,
China can take part in military operations to combat terrorism and protect Chinese ships from
piracy.
During the conflict in Libya in 2011, the Chinese military evacuated 35,000 Chinese citizens
stranded in the country. From Djibouti, in 2015, the Chinese military was able to evacuate 800
Chinese from the civil war in Yemen. In view of its major economic interests in Africa, it is
inevitable that China will take an active interest in dealing with the continent’s political
emergencies. An important purpose of the military presence is to protect Chinese factories,
transport routes, and personnel in Africa. Another purpose is to use military hardware as a means
of projecting Chinese soft power.
Through large-scale economic and personnel engagement in the UN’s military operations, China
hopes to be seen as a responsible actor for maintaining order in the region. In times when other
countries have reduced such support, China’s increased involvement has mainly been viewed
positively in Africa. Of course, the continent also offers an arena where China is given the
opportunity to test weapons systems and other military skills. By nurturing ties with military
leaders in African countries, China seeks to incorporate Africa into the country’s wider
geopolitical strategy. China has long been a key political and economic player in Africa; in
recent years, it has become a significant military player.
Conclusion
How should other stakeholders interpret China’s increased activity in Africa?
First, it should be said that this is a matter for the states and people of Africa. Africans rightly
react negatively when representatives of world powers mostly regard the continent as an arena
for their own strategic or economic interests, as was largely the case during the Cold War.
Second, there are few obstacles for other countries to go on a diplomatic offensive in Africa,
should they so decide. The concern is not that China has an increased economic and political
presence in Africa, but that others have ignored it for long. The surrounding world, i.e., the EU
and US, does not seem to have a strategy for how to face the Chinese offensive or to increase its
own presence and confidence in Africa.
Some initiatives are emerging to give alternatives to the Chinese economic offensive, involving
the EU, US, Japan, and India. It would be wise to consider reducing the bureaucracy and the lists
of requirements surrounding such investments, to be able to act in a more pragmatic way without
giving up the most fundamental values.
Third, African countries should be wary of becoming heavily indebted to China. They must
consider the involved political risks of dependency.
Fourth, the EU, US and allies should work more systematically and consistently to incorporate
China into common diplomatic, commercial and NGO forums in African countries, where
mutually beneficial norms and practical solutions can be identified.
Although Africa still makes up a small part of the world economy, population forecasts by the
International Monetary Fund (IMF) show that in 20 years, sub-Saharan Africa will have more
people of working age than the rest of the world. Over the next 40 years, one billion potential
consumers and producers will be added to the region. With better institutions and greater
investment in human capital, Africa can add considerable dynamism to the world and the world
economy. The future of this continent may well hold important tipping points for the world’s
development, including climate change and terrorism.
Geopolitical tensions between China on the one hand, and the West and its allies on the other,
have increased, but Africa is hardly the primary arena for this. The world community should be
alert to any signs of antagonistic or expansionist ambitions that China may have in the continent.
It would be wise for African countries as well as for the West and its allies to prepare for how
such developments should be handled.
Peter Stein is an economist and a noted expert on the economies of Sub-Saharan Africa. Emil
Uddhammar is a professor of political science at Linnaeus University, Sweden
https://www.orfonline.org/research/china-in-africa

Tricks of the trade: Strengthening EU-

African cooperation on trade in services

Iza Lejarraga
ECFR Alumni · Visiting Fellow
 Policy Brief
 9 March 2023
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Table of contents
Go to top
1. Summary
2. Introduction
3. Trade in services: From oxymoron to opportunity
4. Africa’s services trade
1. The potential of trade in services for African countries
2. Leveraging services trade for Africa’s economic transformation
5. EU-Africa trade in services
1. Mutually beneficial trade
2. Existing obstacles
3. Breaking down the barriers
6. Liberalising services through the AfCFTA
7. Conclusions and recommendations
1. Strengthen the data on Africa’s services trade
2. Promote regulatory transparency and cooperation between Africa and the EU
3. Exploit synergies between the AfCFTA and multilateral initiatives on services
4. Experiment with non-traditional, light institutional structures
8. About the author
9. Acknowledgments
Summary
 Services are increasingly important for international trade, accounting for about half of
global trade flows. Trade in services is growing more rapidly than trade in goods.
 Trade in services is critical for improving the competitiveness of African economies,
increasing their participation in regional and global value chains, and promoting inclusive
growth.
 Improved trade in services with African countries could help the EU diversify its supply
chains, strengthening resilience and reducing dependencies on China and other Asian
countries.
 The cooperation on domestic regulatory frameworks required for trade in services can
promote a shared understanding of regulatory goals and standards between the EU and
Africa across many sectors.
 None of the trade agreements between the EU and African countries currently covers
services, and only one African country is part of the WTO Joint Initiative on Domestic
Services Regulation. There is therefore no dedicated platform for cooperation on services
regulations.
 The African Continental Free Trade Area agreement provides an unprecedented
opportunity for African countries to improve domestic services regulations and could be a
new basis for cooperation with the EU.
Introduction
Despite the growing importance of services in the global economy, Europe’s trade cooperation
with Africa is almost exclusively focused on commodities and other primary goods. Services –
which range from banking and insurance to transport – are largely missing from Europe’s trade
and development cooperation agenda with Africa. Yet the services sector has outstripped the
primary and secondary sectors in their contribution to African output, making up more than half
of the continent’s gross domestic product (GDP). The rapid expansion of information and
communication technology (ICT) and the digital economy, the ‘servicification’ of
manufacturing, and the cross-border fragmentation of production processes make trade in
services more important than ever before for industrialisation and integration processes.
Services not only enhance participation in trade and global supply chains, they also contribute to
more equal and diversified growth. More women, young people, and micro enterprises operate in
the services sector than in agriculture or manufacturing. Expanding opportunities in services is
therefore particularly important for creating more inclusive employment. The high costs of
energy, transport, logistics, and other backbone services across Africa make the production of
goods and services expensive, impeding the competitiveness of firms across all sectors. Trade in
services is a powerful tool to increase the efficiency and reliability of services, which in turn
brings down production costs across the economy and facilitates diversification – and its
importance goes beyond trade to offer possibilities for structural transformation.
A stronger services trade between the European Union and Africa would allow European
multinationals to near-shore their production processes and diversify away from Asia-focused
supply networks. As barriers to trade in services are embedded in domestic regulations, trade
agreements covering services entail a degree of cooperation and shared understanding. Improved
trade in services would also allow the EU to influence regulatory models across various sectors.
China and other non-Western powers wield significant economic influence in Africa, which they
can use to shape regulatory processes and influence standards in their favour. Faced with
geopolitical competition with China, the EU should be wary of this influence. In this regard,
trade cooperation on services could be a powerful means for the EU to nurture a shared
understanding with African countries on economic, environmental, digital, and social goals.
No modern trade partnership can exclude services, which are central to the value of what
businesses trade. While the so-called first-generation free trade agreements reached in the 1970s
and 1980s only liberalised and addressed standards in the goods trade, services became an
integral part of the ‘new generation’ agreements that emerged in the mid-1990s. These new
agreements included goals for so-called deep integration, which covers a variety of issues
beyond tariffs, including services, investment, competition, intellectual property rights,
environmental standards, and other domestic policies that affect international competitiveness.
More than 90 per cent of all free trade agreements signed in the 21st century cover services,
making it the most widespread area of deep integration.
The 2018 African Continental Free Trade Area (AfCFTA) agreement includes a protocol on
trade in services, which aims to liberalise services markets and improve their domestic
regulation. The agreement provides an unprecedented opportunity for African countries to
strengthen their domestic regulations to support more open and efficient services markets. It also
offers an occasion for the EU to encourage intra-regional trade by supporting the AfCFTA
negotiations, and to build on the agreement to create new opportunities for diversifying EU-
Africa trade.
This paper explores the implications of cooperation on trade in services for the Europe-Africa
relationship. The first section sets out the complex nature of the services trade and addresses
misconceptions around it. The second section analyses the importance of the services trade for
the industrialisation and integration objectives set out in the African Union’s (AU) Agenda 2063.
The third section discusses the EU-Africa trade relationship, including the benefits for Europe of
a more efficient African services sector and the existing obstacles and policy frameworks that
govern services trade between the EU and Africa. The fourth section explains how the AfCFTA
offers new opportunities for promoting more open and effective regulation of services markets.
The paper concludes with recommendations for how Europe and Africa can enhance their
cooperation on trade in services.
Trade in services: From oxymoron to opportunity
Traditionally, policymakers did not consider services as something that could be traded across
international borders. As a result, governments have often focused their foreign trade strategies
on agricultural and industrial goods. Yet the world has changed enormously, and technological
and regulatory developments have made a growing range of services tradable across the world.
From call centre operators to cloud computing, internationally traded services continue to
emerge and expand.
For many years, services accounted for a small but stable share of global trade. But in the past
decade, data that measures services in value-added terms have shown that they account for over
50 per cent of the value added in gross exports. This data only covers cross-border supply trade,
and does not fully account for digitally enabled services, which are difficult to capture.
Meanwhile, services account for over two-thirds of global foreign direct investment (FDI).
Services are also critical for the production of all goods in the economy, including in agriculture
and manufacturing. The role of services as an input into consumer and capital goods is
substantial, both in developed and in developing countries. A study by the OECD found that
between 25 per cent and 60 per cent of employment in manufacturing firms is attributed to
service functions, including research and development (R&D), engineering, transport, and
logistics. The OECD database on trade in value added shows that services represent 30 per cent
of the value added in exports of manufacturing goods. The total value added has been growing
over time, as manufacturing companies increase the use, production, and exports of services.
Given that goods and services are intertwined, increasing the efficiency of services improves the
competitiveness of the overall economy.
In modern manufactured goods, much of the value added is created in the early stages of R&D,
design, and commercialisation as the product is being conceived, and in the late stages of
marketing, logistics, and after-sales services once production is complete. Countries that do not
offer high-quality services relevant to the international production process are often confined to
the assembly of goods, in which productivity growth tends to be lower. By improving the
competitiveness of these services, a country can increase its prospects to improve its position in a
regional or global value chain and capture activities with greater value added in the international
production chain.
Services only appeared in international trade policy when the World Trade Organization (WTO)
was established in 1995. Before that, countries’ trade relations were governed by the 1947
General Agreement on Tariffs and Trade, which only covered trade in industrial goods. The
Uruguay round of multilateral talks on trade liberalisation (1986-1994) – which established the
WTO – also led to the creation of an analogous instrument for trade in services: the General
Agreement on Trade in Services (GATS). This agreement was part of the so-called great bargain
of the negotiations, in which developing countries accepted the agreements on services and
intellectual property rights – in which they saw few benefits for themselves – in exchange for
ones covering two sectors of interest to them: agriculture and textiles.
The GATS classifies trade in services by the way they are delivered, known as “modes of
supply”:
  Cross-border supply: The consumer and the service supplier remain in their respective
countries. The service is transmitted online, or by telephone, email, or post. This mode
includes digitally enabled services.
 Consumption abroad: The consumer travels to another country to obtain a service.
Classic examples are tourism and courses for foreign students.
 Commercial presence:A company establishes a presence in another country to provide
services to foreign consumers. This mode essentially refers to FDI in sectors such as
banking, transport, and energy.
 Presence of natural persons: A supplier, such as an architect, nurse, or musician, travels
to a foreign country to provide a service. The supplier remains temporarily (for a number
of months or years) in the country, and does not obtain residency, citizenship, or
permanent employment.
Unlike trade in goods, trade in services does not have tariffs, but is instead restricted by domestic
regulations, which often apply equally to domestic and foreign actors. Services markets tend to
be highly regulated, much more so than those for goods, hampering the potential for trade. Trade
partnerships on services therefore require regulatory cooperation mechanisms that promote
greater convergence or compatibility across domestic regulatory frameworks, from licensing
procedures to mutual recognition of professionals.
These regulations are intertwined with a broad range of domestic policies that, though not
motivated by trade protectionism, significantly affect trade. For example, regulations related to
shipping and port services are often deeply rooted in national security, territorial, and other
geopolitical factors, but they have become critical in modern services trade negotiations due to
their importance for facilitating global value chains. Similarly, trade in services depends on the
movement of service providers across borders, which is limited by migration and labour policies.
The geopolitics around issues such as climate change and clean energy, technology and
digitalisation, and cultural or indigenous promotion have also been acquiring growing
importance in services trade negotiations. This complicates trade negotiations, which necessitate
agreements around other policies. Yet it also means that the commitments made on these issues
with regards to trade in services can significantly shape broader geopolitical relations.
Cooperation between the EU and Africa in services trade negotiations could therefore promote
understanding on a wide range of policies, deepening EU-Africa relations more broadly.
Africa’s services trade
The potential of trade in services for African countries
Many policymakers still see trade in services as the preserve of high-income countries and do not
consider developing countries as having a comparative advantage in exporting services beyond
tourism. But the trading landscape has changed significantly over the past two and a half
decades, providing more opportunities to participate in trade in services. The increasing
fragmentation of production processes – with different stages carried out in different countries –
has generated fresh opportunities for countries to specialise in and export particular tasks, for
example, marketing, logistics, or legal services, making it easier for companies in developing
countries that cannot produce an entire product to participate in trade.
African countries should have a special interest in promoting an agenda for services trade. The
sector provides opportunities for international research collaboration, and for young people to
pursue education and work abroad – both of which are key for knowledge-oriented societies.
Trade in services also offers possibilities to improve the reliability of transport and logistics; to
expand the digital economy; and to exploit Africa’s comparative advantage in renewable energy.
These sectors are key to African economies, and African governments should therefore not
overlook the role of trade in services in strengthening them.
Trade in services also promotes inclusive economic growth. Unlike trade in commodities or
manufacturing – which entails significant transport costs and cumbersome customs procedures –
services can be traded across borders at lower costs. Services are also increasingly traded
digitally, removing the need for transport and its complexities altogether. This enables smaller-
scale traders, including micro enterprises and entrepreneurs, to import and export services from
distant markets. Given that the services sector has a particularly high concentration of small and
medium-sized enterprises, boosting their trade can induce economic growth at all levels.
African countries have untapped opportunities to trade services. Although data show that
Africa’s exports of cross-border services make up just 2 per cent of the global total, this does not
account for the value added to goods by services, which, as mentioned above, is substantial.
Moreover, the fact that Africa’s exports of services have been growing relatively quickly in
recent years suggests that the continent has a growing comparative advantage in trading services.
Case study evidence also suggests that a significant part of the dynamism in Africa’s services
exports is due to intra-regional trade.
Leveraging services trade for Africa’s economic transformation
The AU’s Agenda 2063 sets out a number of goals to transform Africa into a dominant global
player, prioritising inclusive social and economic development, continental and regional
integration, and democratic and security goals. The AfCFTA aims to boost the levels of intra-
regional trade in Africa, and further diversify and increase the sophistication of traded products.
This prioritisation of regional and continental integration above global trade is driven by the fact
that African countries already trade an increasingly diversified and high value-added set of goods
with one another.
Meanwhile, African exports to the EU remain largely concentrated in primary goods, including
food and drink, raw materials, and energy, with most processing and value addition performed
abroad. African countries are also not well integrated into global value chains, where they
generally perform lower value-added tasks, such as the assembly of different parts. Services are
high value-added activities, so making them more competitive and increasing their trade will
help improve the position of African countries in both regional and global value chains. In
addition, the lower sunk costs of intra-African trade – in part due to lower standards and greater
knowledge of neighbouring markets – means that a greater number of African companies can
export processed goods within the region, whereas only the most productive can export to the
EU.
However, in the long run, Africa’s growth can best be supported by trade beyond the continent.
New types of exports need to acquire scale, which would be challenging to achieve solely within
African markets. Furthermore, the opportunities for technology transfers from trade, FDI, and
strategic partnerships are typically greater with firms located in more advanced economies, such
as those in the EU. African countries experience several common challenges in their efforts to
boost trade with the region and beyond, which trade in services can either alleviate or avoid.
 Distance to markets and border friction: High transport costs in the region, especially
between Regional Economic Communities, and customs ‘red tape’ are key impediments
to Africa’s trade competitiveness. These costs are largely reduced or eliminated in
services trade.
  Supply chain constraints: Many African companies and countries are not able to take
full advantage of new market access opportunities, intra- or extra-regionally, due to
supply side constraints. Improved services would lessen these supply bottlenecks, both in
terms of human and physical capital. Services trade notably addresses ‘soft’ infrastructure
– the regulation of services that operate on the ‘hard’ physical infrastructure platforms.
For example, the economic activity that a port or airport generates is not solely
determined by the physical infrastructure, but by open regulations that allow private and
foreign shipping, logistics, and airline service providers to operate. This is less
straightforward to address than hard infrastructure issues, but equally important.
 Lack of value addition: Many African agricultural exports – from cocoa to cotton to
cashews – are exported raw to global markets. The domestic processing industries that do
exist are often hampered by costly and ineffective services and high subsidies, create
little employment, and struggle to add value. Services make up a significant share of the
value added by processing primary goods, making the end product more competitive.
 Limited expansion of regional value chains: Africa is the region with the lowest degree
of integration in global value chains, with integration largely limited to South Africa, and
a few countries in North Africa. Governments have promoted the creation and expansion
of regional value chains, but these remain short, with difficulties scaling up. The
operation of cross-border value chains is highly sensitive to the cost and reliability of
transport, logistics, distribution, and a range of other services. Regional value chains
suffer even more from these factors, as companies are typically smaller than in global
networks and less able to absorb costs related to inefficient and unreliable services.
Improving these services would allow regional and global value chains to scale up.
Trade in services can therefore play an important role in improving the integration of African
countries, regionally and with external partners. The growing middle class, increasing use of
technology, and rapid urbanisation all contribute to the rising importance of service sectors. As
African countries develop, and a growing share of their GDP is driven by services,
diversification into service exports, particularly those that can be traded digitally, will be critical
to maintain growth rates.
EU-Africa trade in services
Despite the rising importance of services, the EU and Africa have not been able to integrate
services in any of their bilateral trade relationships. Similarly, the Aid-for-Trade initiative – a
WTO scheme through which the EU and others channel trade-related technical assistance and
capacity building to developing countries – focuses largely on the goods trade. Globally, nine out
of ten bilateral or regional trade agreements (RTAs) signed since 2000 address the liberalisation
of services and domestic regulations. The EU covers services in its bilateral arrangements with
other trading partners, as well as in a number of trade agreements with developing regions,
including the Economic Partnership Agreements with the Caribbean and with Central America.
Although most recent bilateral agreements between the EU and African countries include
provisions to negotiate services in the future, this has been difficult to put into practice. The two
regions need fresh approaches to cooperation in order to modernise and diversify their trade
relationship and increase its economic impact.
Mutually beneficial trade
Enhanced trade in services with Africa would also benefit the EU. Many European countries are
net exporters of services, and European companies want to expand their presence in Africa in
sectors that currently have high barriers to trade and FDI, such as commercial banking.
Addressing Africa’s deficiencies in services such as transport, logistics, and distribution could
help European multinationals to diversify their trade strategies, making them more competitive
and resilient.
Trade in services does not carry the same risks for trading partners as trade in goods. Liberalising
the goods trade in a bilateral or regional agreement often diverts trade away from more efficient
third-party suppliers. By deepening their trade relationship in agriculture and primary goods,
both the EU and Africa risk reducing trade with more efficient suppliers in other regions, such as
Asia, north America, or Latin America. In contrast, trade liberalisation in services entails
domestic regulatory reform, which often applies to all trading partners as it is not practical to
maintain different domestic regulations for different partners. This limits the risks of diverting
trade away from other partners and allows countries to maintain beneficial trading relationships
with various partners. Trade in services therefore provides an opportunity for the EU to deepen
its trade relationship with Africa, without jeopardising trade with other partners.
Trade agreements that include services not only have greater trade-boosting effects than those
that only liberalise goods, they also affect the location of global value chains. The covid-19 crisis
has intensified efforts from businesses and policymakers in the EU to diversify and near-shore
global value chains, and to balance efficiency with resilience. Supply security vulnerabilities and
dependencies on particular trading partners also have geopolitical ramifications, weakening the
EU’s ability to act autonomously. Intensified geopolitical competition with China has also
increased the EU’s desire to diversify away from its traditional partners in Asia. Open services
markets in Africa would help Europe support both the security of its key supply chains and its
autonomy. European companies would benefit from locating value chains in African countries
too, given the geographical proximity of and lower production costs in Africa.
The EU and Africa have the potential to be natural trading partners in direct services. Trade in
services is highly sensitive to factors that impede people-to-people contact, such as language
barriers; differences in time zones; and cultural, historical, and institutional divides. Conversely,
trade in services largely avoids the costs of distance and crossing borders, such as transport,
customs, and complex rules of origin. Africa and the EU share similar time zones and some of
the same languages. In addition, some of the regulatory frameworks and institutions in African
countries have been modelled on European legal and institutional systems. The two continents
therefore have relatively few of the common obstacles to trading services to contend with.
Existing obstacles
There is a lack of systematic and comprehensive information on barriers to trade in services
across Africa, but the available data suggest that these are high. For example, an OECD index
(covering 38 OECD countries and seven emerging economies) that measures policy restrictions
in services finds that South Africa – the only African country covered – is more restrictive than
the average EU, OECD, and emerging market economy covered in 15 of 22 service sectors. Over
the years, new legislation passed in South Africa – where services represent 60 per cent of GDP
and 70 per cent of employment – has increased the regulatory restrictions. Key sectors such as
commercial banking, cargo-handling, and courier services have higher than average policy
restrictions. On the other hand, South African policies in a few sectors, such as road freight
transport, legal, and accounting services are closely aligned with those in advanced OECD
countries and large emerging economies.
A 2010 World Bank index for 27 African countries, based on 2008 information, found great
variation in the barriers to trade in services across African countries, ranging from Mauritius as
the most liberal to Ethiopia as the most restrictive. However, the index only tracks regulations on
services that explicitly discriminate against foreign services suppliers, while the problem for
trade in services in many African countries is the absence of a regulatory framework. As a result,
some countries that appear relatively liberal in this area in fact lack regulation, leaving decisions
on whether foreigners can operate in the country to ministerial discretion.
Breaking down the barriers
In the absence of a bilateral agreement covering services, the trade relationship between the EU
and African countries is governed by the GATS. However, when the GATS was concluded, most
African countries were not interested in committing to comprehensive liberalisation in service
sectors. There has been little substantive global liberalisation in services since, with the
exceptions of financial services and ICT – for which WTO members concluded negotiations
after finalising the GATS. In 2010, 70 countries attempted to conduct wider services
liberalisation through an agreement on trade in services, but only one African country –
Mauritius – participated in these negotiations, which were never concluded.
In December 2021, 70 countries – including all EU and other major European countries –
concluded the first successful global services trade cooperation pact since the GATS: the Joint
Initiative on Domestic Regulation. The agreement does not address market access, but
participants commit to improving domestic regulation of services and to streamlining procedures
such as certification and licensing. Only two African countries – Nigeria and Mauritius – are
currently parties to the agreement. But, because participants have agreed to implement these
commitments for all their trading partners, there will be export benefits for all African countries.
In particular, they will benefit from more transparent and streamlined procedures for exporting
services. Moreover, African countries can join the agreement if they wish, and there is a
mechanism for least-developed countries (LDCs) to modify their commitments according to their
capacities.
In June 2022, WTO members committed to reinvigorating efforts to operationalise a waiver that
allows governments to grant more favourable services market access to LDCs. The LDCs
‘services waiver’, created in 2015, is similar to the duty-free and quota-free market access for
goods given to LDCs under the WTO enabling clause. Unfortunately, implementation has been
limited and ineffective. The waiver also has limitations: trade-related restrictions are higher on
services than on goods in EU and other OECD countries, and have been rising in recent years in
many sectors, including digital-related sectors. Moreover, because the liberalisation that is taking
place multilaterally and in RTAs on services has been limited, the potential for trade preferences
is more significant. In the case of goods, tariff preferences obtained in RTAs have been largely
eroded as the level of tariffs has come down through WTO negotiations and more RTAs
liberalising goods have been concluded. The waiver is also limited to LDCs, and so would only
apply to 32 African countries. A similar waiver on goods has been in place for LDCs for
decades, and it has arguably failed to substantially increase their participation in world trade.
Many of the impediments to trade in services are embedded in non-discriminatory domestic
regulations. In practice, it is difficult to convince regulators to accord preferential waivers. In
addition, trade in a service often requires several different modes of supply, which may face
different degrees of regulation. For example, granting market access to allow a business to
establish a commercial presence in a country without granting market access on the movement of
persons means that a business would be allowed to invest abroad but would not be able to move
its personnel. Given that multiple modes often co-exist, waivers are ineffective if they are limited
to certain modes.
Liberalising services through the AfCFTA
EU and African policymakers should engage in renewed efforts to facilitate trade in services
between the EU and Africa. The AfCFTA provides a unique opportunity for them to do so. The
agreement is often hailed for its size and far-reaching tariff-free regime, but the liberalisation of
trade in services is one of its most important features. Its protocol on trade in services is the
continent’s first broad effort to liberalise trade in services and improve the domestic regulation of
key services sectors. The protocol provides a framework, and actual liberalisation is taking place
through subsequent negotiations.
The 54 countries that have ratified the AfCFTA to date have agreed on liberalising five priority
services – financial, communication, transport, tourism, and business services – and are currently
engaging in negotiations to make specific-sector commitments. This process was supposed to be
completed by June 2022, but at the time of writing (January 2023) negotiations had not
concluded, and the schedules of specific commitments were not publicly available. As a result, it
is impossible to assess the extent of liberalisation to trade in services under the AfCFTA.
However, the AfCFTA agreement has several advantages which can aid the process of
liberalisation.
The negotiations are using a positive list approach (the so-called GATS approach), which is
sometimes perceived as a less effective means of liberalisation than a negative list (the so-called
North American Free-Trade Agreement approach). A positive list indicates all the sectors and
measures that are being liberalised, whereas a negative list indicates the sectors and measures
that are exempted from liberalisation (thereby liberalising all sectors or measures that are not
listed). The same degree of liberalisation can be achieved through either approach. It is
understandable and perhaps advisable that countries with limited administrative capacities adopt
a positive list approach, which does not require internal consultation concerning all service
sectors of the economy – just those in which there is a decision to liberalise. Moreover, the
GATS followed a positive list approach, and using the same approach facilitates synergies
between regional and multilateral negotiations.
A key difference between the AfCFTA services protocol and the GATS is the treatment of
commitments by LDCs. Unlike the GATS framework and LDCs waiver – in which LDCs are not
required to make any substantive liberalisation commitments – in the AfCFTA, any differential
treatment is considered on a case-by-case basis. This encourages all countries regardless of their
level of development to liberalise services and strengthen their domestic regulatory frameworks,
which in turn allows them to be more competitive in exports. This departure from an LDC-
centred form of special and differential treatment can provide inspiration for new approaches of
engagement in the WTO and other trade partnerships between developed and developing
countries.
There are open questions about the effectiveness of the AfCFTA in facilitating domestic reforms.
Yet, given the difficulty of passing reforms at the domestic level, it is hard to imagine that such
reforms would more readily take place without an external anchor. It is very difficult to change
shipping, ports, and logistics regulations that are embedded in maritime and ports laws which
often date back to or predate countries’ independence, and which are grounded in national
security motives. A major RTA such as the AfCFTA provides governments with an external
mandate to review and modernise these laws and generates peer pressure as other African
countries pass reforms and gain the benefits from doing so. It also provides incentives for the
less appealing measures (for example, visas for temporary study and work abroad in exchange
for resisted changes in transport services or warehousing regulations) and avoids policy reversals
when governments or regulators change. Furthermore, it often brings external technical
assistance and capacity building to implement reforms. With sustai
https://ecfr.eu/publication/tricks-of-the-trade-strengthening-eu-african-cooperation-on-
trade-in-services/

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Cover Story
Trade between two unequal partners
Africa and Europe search for an elusive agreement

From Africa Renewal:

August 2014
By:
Kingsley Ighobor
Photo: European External Action Service
Participants at a ministerial meeting on the margins of the EU-Africa Summit in Brussels. Photo:
European External Action Service
As Africa confronts the challenges of a global economy, it is being forced to make tough choices
in negotiating new trade agreements with its major trading partners, particularly the European
Union and the US. Meanwhile, intra-Africa trade still cries for solutions.
Sixty-one heads of government and other top-level officials from African and European
countries converged last March in Brussels, the de facto European Union capital, to discuss
mutual relations. After two days of deliberations, they issued a 63-point agreement laced with
customary platitudes such as “We take particular pride in the breadth and depth of our
partnership” and “We are convinced that the growth of our two continents will be mutually
beneficial.”
Although the leaders discussed such issues as the ongoing fighting in the Central African
Republic, democracy, regional integration, immigration, and development assistance, the
elephant in the room was the flagging trade relations between Africa and Europe. South African
President Jacob Zuma, whose country is one of the EU’s most important trading partners in
Africa, did not attend the summit, in solidarity with Zimbabwean President Robert Mugabe, who
refused to fly to Belgium because his wife, Grace, was denied a visa. “I think that time must pass
wherein we are looked at as subjects, we are told who must come and who must not come,” said
President Zuma. His boycott is one of many incidents in the seemingly endless trade talks
between
Africa and Europe.
European Commission President José Manuel Barroso reiterated Europe’s preference for dealing
with African countries as equal partners, but in reality only South Africa, the continent’s most
sophisticated economy, could be considered as such, says Christoph Hasselbach, editor of
Deutsche Welle, a German
broadcasting organization.
Trade agreement talks began actively in 2000 after Europe and 79 countries from Africa, the
Caribbean and the Pacific (ACP) signed the Cotonou Agreement on trade, aid and political
relations. That agreement stipulated that Economic Partnership Agreements (EPAs) had to be
signed by 2008. But while the EPAs require both sides to lower tariffs on imports and exports,
the negotiators cannot agree on the terms. Nevertheless, 14 countries have accepted interim
EPAs, with Mauritius, Madagascar, the Seychelles and Zimbabwe the first to do so. Interim
EPAs permit countries to export to the EU market duty-free while gradually allowing EU
imports over 15 to 25 years. For example, Mauritius agreed to open its market to EU products
over a 15-year period. To protect local industries, EPA signatories can exclude certain products.
For instance, Madagascar excludes EU exports of meat, tobacco, sugar, chemicals and other
products.
Before the Cotonou Agreement was the 1975 Lomé Convention, under which the EU granted
“non-reciprocal” trade preferences to ACP countries for the export of agricultural and mineral
materials duty-free to Europe. Now the EU wants these agreements to be replaced with the
EPAs, which are “reciprocal” instead of the Lomé Convention’s “non-reciprocal” trade
preferences, so that ACP countries can equally open their markets to EU exports. But Africa is in
no hurry to liberalize its markets.
Bone of contention
“African countries typically have quite high protection, so liberalizing in favour of Europe would
hand Europe a terms of trade gain,” writes Paul Collier, the director of the Centre for the Study
of African Economics at Oxford University, United Kingdom. Africa is not embracing the EPAs
because of fears that bigger EU companies could flood the continent with cheaper products,
destroying nascent local industries. Also, cutting tariffs will lower government revenues that
Africa needs to invest in areas including agriculture, health and education.
James Asare-Adjei, the president of the Association of Ghana Industries, says that Ghana relies
heavily on tariff revenues to fund development, and that with an EPA, the country could lose up
to $300 million per year in revenues. Aliyu Modibo Umar, a former Nigerian commerce
minister, says, “If 30 years of nonreciprocal free market access into the EU did not improve the
economic situation of the ACP, how can a reciprocal trading arrangement achieve anything
better?” Bingu wa Mutharika, the late Malawian president, once dismissed the EPAs as “a
divide-and-rule tactic being advanced by Europe for selfish interests.”
The EU admits that the EPAs will create more jobs in Europe. But it also notes that Africa stands
to benefit from improved economic stability, training opportunities and knowledge transfer, and
higher export sales. It states on its website, “For over 30 years, exports from ACP countries were
given generous access to the European market. Preferential access failed to boost local
economies and stimulate growth.”
But provisional implementation is allowed
The EU is also promoting the World Trade Organization’s Trade Facilitation (TF) agreement,
reached in Bali, Indonesia, last year. Trade facilitation focuses on lowering the cost of doing
business by minimizing regulations and procedures required to move goods and services across
borders. The Bali TF agreement—an offshoot of the inconclusive 2001 Doha Round of talks—
urges countries to adopt fast and efficient customs procedures.
Africa is not convinced of the purported benefits of the TF agreement. The continent’s trade
ministers have agreed to implement the TF agreement provisionally, which is allowed by a
clause in the Bali deal. But the EU would prefer a full—not tentative—implementation and is
determined to twist arms to have its way.
EU trade negotiators who were in Malabo, Equatorial Guinea, during the African Union (AU)
summit in June mounted pressure on African leaders to change their stance. An AU official was
quoted as calling their approach “an unprecedented power game rarely witnessed at an African
heads of nations meeting.” Angered by such arm-twisting, Nigeria, Africa’s biggest economy,
and Mauritius, one of its fastest-growing economies, announced they might renege on their
provisional acceptance of the TF agreement.
But Africa may not hold the line for long, facing both EU threats to cut off aid and the US’s
warning that it could allow the expiration of the Africa Growth and Opportunity Act (AGOA), a
US law enacted in 2000 under which Africa can export certain goods to the US duty-free. Unless
renewed, AGOA expires in 2015.
Cracks in Africa’s position
The WTO is also pushing for total implementation of the TF agreement. Director-General
Roberto Azevêdo has warned that provisional implementation could mean less development aid.
“All of the Bali decisions—every single one of them—would be compromised.” And Angelos
Pangratis, the EU envoy to the WTO, says, “The credibility of the negotiating function of this
organization [WTO] is once again at stake.” But Nelson Ndirangu, director for economics and
external trade in the Kenyan foreign ministry, questions why the EU opposes Africa’s proposal
“to implement the trade facilitation agreement on a provisional basis” as allowed under the Doha
Declaration, adding, “Clearly there are double standards.”
At the end of the Malabo summit, divisions appeared in Africa’s position. “We never said we
will not implement the TF agreement, but we don’t know how to implement this agreement,”
says Mr. Ndirangu, bouncing the ball back to EU’s court. But South Africa, Uganda, Tanzania
and Zimbabwe have urged Africa to implement the TF agreement only after Europe
demonstrates its commitment to providing development aid through action, not just words. The
snag is, under the Bali TF agreement, a commitment to provide aid is not binding.
Asia’s trade surge
Africa’s growing trade with Asia, especially China, is of concern to Europe, says Mr.
Hasselbach. Africa’s share of global trade has increased steadily, from $277 billion (2.3%) in
2001 to about $1 trillion (4.6%) in 2011, according to the UN Conference on Trade and
Development. While Europe is still Africa’s largest trading partner, Africa’s trade with Asia
grew by 22% during that time, while trade with Europe grew by only 15%. In addition, Europe’s
contribution to Africa’s manufactured imports declined from 32% in 2002 to 23% in 2011, while
Asia’s share increased from 13% to 22% during the same period.
Some African trade experts have said that fears surrounding the TF agreement may be
exaggerated. Patrick Kanyimbo and Calvin Manduna, trade experts with the African
Development Bank, argue that a TF agreement will improve burdensome border operations and
complement “a lot of the infrastructure investments that are being undertaken across the
continent, particularly in the transport sector.”
More twists and turns are likely to take place in EU-Africa trade relations before 2015, when TF
agreement implementation should commence. Big economies like Nigeria and South Africa are
talking tough, but others are more circumspect. Rashid Pelpuo, Ghana’s minister of state for
public-private partnerships, warns that trade agreements are always tied to “aid, technical and
political assistance… It will be too costly not to sign.” Only time will tell if—or when—Africa
will accept the trade deals
https://www.un.org/africarenewal/magazine/august-2014/trade-between-two-unequal-
partners


Trade Integration in Africa: Unleashing the Continent's Potential in a Changing World
Author:
Ms. Asmaa A ElGanainy

,
Shushanik Hakobyan

,
Fei Liu
,
Hans Weisfeld

,
Céline Allard

,
Hippolyte W. Balima

,
Celine Bteish

,
Rahul Giri

,
Mr. Daniel S Kanda

,
Sergii Meleshchuk
,
Mr. Gustavo Ramirez

,
Robert Zymek

,
Mr. Vivek B. Arora

,
Mr. Subir Lall

,
Benjamin R Kett

, and
Miss Megan M Pohl

Publication Date:
05 May 2023
eISBN:
9798400232794
Language:
English
Keywords:
trade centrality index; trade openness; improvements in the trade environment; trade cost;
infrastructure indicator; trade environment elasticity; trade infrastructure indicator
Download PDF (1 MB)
  Abstract
 Full Text
 Related Publications
Abstract
Since the 1960s, several initiatives have been undertaken to enhance trade integration in Africa.
However, substantial tariff and nontariff barriers remain in place. In recent years, African leaders
have shown a renewed push for regional integration by signing the agreement on the African
Continental Free Trade Area (AfCFTA). The AfCFTA has the potential to transform regional
trade and thereby lift growth and support livelihoods across the continent. This paper lays out the
benefits that successful AfCFTA implementation could unlock for Africa in terms of income,
jobs, and other benefits. It is based on an empirical analysis of the obstacles to trade in goods and
services and regional value chain integration along with a discussion of how regional trade
integration and supporting policies could help African countries cope with ongoing global and
domestic trends. The empirical analysis investigates the role of trade policy and the broader
trade-enabling environment in determining the bilateral goods trade flows and country-level
trade in services. It sheds light on how the implementation of AfCFTA and supporting policies
could boost trade and income as well as help African countries integrate into regional value
chains. The findings suggest that plausible reductions in tariffs and nontariff barriers under
AfCFTA, along with improvements in broader trade-enabling environment (trade infrastructure,
financial development, and domestic security), would substantially boost intra-African trade in
goods and services, and support integration into regional value chains. Further, regional trade
integration could be an important element of a strategy for African countries to cope with rapid
population growth, climate change, and emerging geopolitical fragmentation.
1. Overview-Unlocking the Benefits of Regional Trade
Integration in Africa
Initiatives to foster greater economic integration in Africa over several decades culminated in the
creation of the African Continental Free Trade Area (AfCFTA) in 2018, with the goal of
expanding intra-African trade and promoting economic diversification and industrialization of its
member countries. The AfCFTA aims to achieve this through the liberalization of goods and
services trade across the continent, trade facilitation by enhancing border processes, and
implementation of certain “behind the border” measures (Box 1). This paper discusses how
implementation of the AfCFTA, when complemented with other reforms, could catalyze deeper
trade integration both within the African continent and with the rest of the world, thereby
embracing the opportunities offered by technological change, a growing working-age population,
and a changing global environment. By facilitating specialization, exploitation of scale
economies in production, productivity growth and strengthening of cross-border value chains,
closer regional trade integration would raise growth rates and living standards in African
countries and enhance their resilience to shocks.
The experience of globalization in past decades suggests there is a large unrealized potential for
African economies to enhance trade with each other and the rest of the world in terms of both
volume and share of value added. The growth in the continent’s overall trade has been modest,
reflecting limited growth of merchandise trade and an unchanged share of services trade in GDP.
The evolution of intra-African trade in particular reflects two main considerations: the trade
policy landscape is fragmented with multiple regional economic communities (RECs) that
generally have provided limited within-bloc integration and little between-bloc integration, with
still substantial tariff and nontariff measures (NTMs);4 and a trade environment (structural
factors that affect trade such as transport networks and border processes) that is more challenging
than elsewhere. As detailed in the 2021 World Trade Organization (WTO) report, while global
trade has had positive effects for African industrialization and development, efforts must
continue to help Africa build capacity and take fuller advantage of the benefits offered by trade.5
Implementing AfCFTA provides such an opportunity to enhance trade capacity and reap the
benefits from trade. This paper examines the potential impact of implementing AfCFTA on
Africa’s intraregional and overall trade and recommends policies that are needed to ensure
sustained gains from trade integration.
This paper’s analysis suggests that AfCFTA goals to lower tariffs and NTMs across the
continent, if combined with reforms to the trade environment, could significantly boost Africa’s
trade in goods and services both within the region and with the rest of the world, raising income
levels and supporting integration into crossborder value chains:
 Regarding merchandise trade, a lowering of tariffs and NTMs between African countries
as planned under the AfCFTA would lead to notable increases in trade and incomes.
These gains would be amplified considerably if complemented with improvements in the
trade environment, for example, transport and telecommunications infrastructure, access
to finance, and domestic security, to bring them to levels comparable to those in other
regional free trade agreements (FTAs). More concretely, a cut in tariffs on intra-African
trade by 90 percent and NTMs by half could increase the median merchandise trade flow
between African countries by 15 percent and real per capita GDP in the median country
by 1.25 percent. However, if accompanied by complementary improvements in the trade
environment, the median merchandise trade flow between African economies would rise
by 53 percent and with the rest of the world by 15 percent, raising real GDP per capita in
the median country by more than 10 percent. World Bank estimates of a broadly similar
growth scenario suggest that this would help 30-50 million people in Africa emerge from
extreme poverty.
 Under a scenario of broad-based trade reforms combining AfCFTA implementation with
improvements in the trade environment, the composition of trade would also change to
include more sophisticated products. This would support integration into regional and
global value chains, opening up opportunities for diversification of sectors and expansion
of manufacturing industries. Improvements in the trade environment would boost
services exports by about 50 percent.
 Importantly, increasing the role of trade in Africa would allow countries to embrace the
opportunities provided to Africa by the continent’s rising working-age population against
the backdrop of ongoing technological progress to raise incomes and living standards for
all. An improved trade environment would also provide diversification benefits in terms
of food availability and affordability, resilience to shocks such as from natural disasters
including due to climate change, and the ability to navigate and adapt to dislocations or
shifts in global trade patterns.
In addition to policies that directly facilitate trade expansion, complementary policies are needed
to ensure gains from trade integration can be sustained and that the benefits are shared as widely
as possible across the population. For the growing workforce to take advantage of the
opportunities that trade integration brings, it will be important to invest in their education and
skills. Protecting those that are adversely affected during the transition will require upgrading
social safety nets to be able to efficiently target the most vulnerable in a fiscally sustainable way.
More broadly, for comprehensive reforms to be sustained and generate the largest possible
benefits in terms of income and employment creation, they need to be embedded in policy and
institutional frameworks that safeguard macroeconomic stability and promote a favorable
business environment
https://www.elibrary.imf.org/view/journals/087/2023/003/article-A001-en.xml

May 2020

Robert Kappel

AFRICA-EUROPE

ECONOMIC

COOPERATION

Using the Opportunities for Reorientation

The paper examines the

current status of EU-African

economic relations and the

EU’s Joint Communication

»Towards a Comprehensive

Strategy with Africa« (CSA)

in this pivotal year 2020.

The renewal between the

European Union and the Afri-

can continent has been over-

shadowed by the global coro-

navirus crisis. The consequen-

ces of the pandemic for the

African continent are so far-

reaching that economic coop-

eration between Africa and

the EU must be readjusted.

The CSA needs to be funda-

mentally revised above all to

overcome the asymmetrical

dependence and power rela-

tions between Africa and the

European Union.

AFRICA-EUROPE

ECONOMIC

COOPERATION

Using the Opportunities for Reorientation

ThE EU’S ECONOMIC RElATIONS wITh AFRICA

The European Union’s relations with the African continent

face particular challenges. Unexpectedly, the negotiations

between the partners are now being put through a special

rehearsal. The global spread of COVID-19 has led to eco-

nomic crises in Europe, China and the USA, as well as on

the African continent. This economic crisis also affects the

EU’s external trade relations with Africa. The EU-African

Union Summit, scheduled for October 2020, will be over-

shadowed by the global coronavirus crisis. Both EU and Af-

rican institutions consider the economic and health crisis to

be more serious than the 2008/2009 financial crisis. The

consequences of the crisis for the African continent are so

far-reaching that cooperation between Africa and the EU

must also be readjusted.

The EU and African countries are in the process of negotiat-

ing two major strategic partnerships. One is the Towards a

Comprehensive Strategy with Africa (CSA) document pre-

sented by the EU Commission for the negotiations with Af-

rican countries. The other is what is referred to as the

»post-Cotonou process«. It is not yet known when the ne-

gotiations between the ACP (African, Caribbean and Pacif-

ic Group of States) and the European Union will be conclud-

ed. Originally, it was planned that the Cotonou Agreement

would be transformed into a revised accord by mid-2020.

THE EU’S ECONOMIC RELATIONS

WITH AFRICA

The EU and African countries are at different stages of eco-

nomic development, with European GDP more than ten

times the size of sub-Saharan Africa’s. Africa’s average an-

nual GDP growth rate for the last 20 years has been 4.6 per

cent, but growth has been uneven across the African con-

tinent. Nigeria and South Africa have been languishing for

a long time and as a result are depressing the continent’s

average economic growth. Other countries such as Ethio-

pia or Rwanda, on the other hand, showed very high

growth. Although average per capita income has been on

the increase for the last 15 years, the current trends sug-

gest that by 2030, there will still be more than 400 million

poor Africans. Most African countries do not converge.

One consequence of these factors is that the problem of

unemployment cannot be solved by higher economic

growth, but only by focusing economic policy measures on

endogenous development. This is the only way of creating

the required 20 million jobs a year.

Africa’s exports have remained below three per cent of

global trade and been dominated by low value-added

commodities. The continent’s poor trade performance is

both a consequence and a cause of its persistent low level

of development. Growth remains volatile, informality is

widespread, most enterprises are small and informal,

high-quality jobs are scarce, and productivity and digitali-

sation lag behind other regions.

The EU is Africa’s largest trade and investment partner. In

2018, trade in goods between the 27 EU Member States

and Africa reached a total value of 235 billion euros (32 per

cent of Africa’s total trade). Trade relations between the EU

and African countries, while very close, remain extremely

asymmetric: almost 30 per cent of all African exports go to

the EU, while Africa is a relatively insignificant market for

the EU. The share of imports from Europe has stagnated at

around 0.5 per cent, depending on the African region.

Moreover, the structure of exports and imports is unequal:

Africa mostly exports unprocessed raw materials and agri-

cultural products, while EU exports to Africa mainly com-

prise capital and consumer goods. European foreign direct

investment (FDI) in 2017 stood at 222 billion euros, more

than five times the figure for either of the other two major

world powers China and the US. Companies from the UK,

France, the Netherlands and Italy are the most important

European investors on the African continent. Chinese FDI

has surged and ranks fourth in terms of inflows, behind

the US, UK and France. But China’s FDI stock in Africa, ac-

counting for just five per cent of the total, remains low

compared to that of European countries.

EUROPEAN COOPERATION WITH AFRICA:

FROM COTONOU TOWARDS A COM

PREHENSIVE STRATEGY WITH AFRICA

European-African relations are facing serious challenges.

The aim in 2020 is to transform the existing cooperation in-

to a strategic partnership. For this to happen, fundamental

decisions must be taken. The EU political leadership claim

that 2020 will be a »pivotal year« for EU-Africa relations.

European Commission President von der leyen called for a

»partnership of equals« that would move away from the

donor-recipient relationship that has long characterised

EU-Africa relations.

In recent years, the European Union and the EU member

states have developed numerous new strategies for Africa.

with the Cotonou Agreement of 2000 and, in particular,

the Joint Africa-EU Strategy of 2007, a change in EU-Africa

relations gradually began to take place. There were four

main reasons for this development. Firstly, China’s strategic

approach made it a major competitor for the EU in terms of

trade and investment. The second reason was that, for

some 15 years now, African countries have been enjoying

relatively high economic growth. The third reason was the

increase in migration due to crises and conflicts. Fourthly,

numerous new African initiatives, such as the African Un-

ion’s Agenda 2063 or the African Continental Free Trade

Area (AfCFTA), which was adopted in 2019, show that Af-

rican states are increasingly acting strategically and explor-

ing the opportunities for cooperation with all actors.

Over many years, African and European countries negotiat-

ed what were referred to Economic Partnership Agree-

ments (EPAs) without ever reaching a comprehensive

agreement with all African regions. The Eastern / Southern

Africa EPA, and the EU-Southern African Development

Community EPA are the only regional trade agreements to

be fully in force. For some years after the EPAs, measures

2FRIEDRICh-EBERT-STIFTUNG – AFRICA-EUROPE ECONOMIC COOPERATION

focused on the containment of migration and flight. Be-

cause emerging powers were gaining increasing influence

on the continent, the EU and its member states also began

to consider the geostrategic role of Europe on the African

continent. The Africa-Europe Alliance for Sustainable In-

vestment and Jobs (AEA) presented by European Commis-

sion President Jean-Claude Juncker in 2018 was intended

to reposition African cooperation. The AEA contained ten

actions, including increasing and diversifying trade be-

tween the EU and Africa, lending support to the AfCFTA

via more Aid for Trade (AfT), and enhancing intra- and in-

ter-regional connectivity. The AEA disappeared from the

discussion very quickly, but came back on the agenda in a

somewhat vaguer form as it was eventually replaced by the

EU Commission’s Joint Communication Towards a Com-

prehensive Strategy with Africa (CSA) in March 2020. It is

interesting to note that the AEA document with an eco-

nomic focus develops much clearer ideas for Africa-Europe

cooperation than the CSA does.

EVAlUATION OF ThE CSA—

»SUSTAINABlE INVESTMENTS AND JOBS«

The EU’s CSA is a strategy document that summarises the

various challenges facing the African continent. In doing

so, it also makes the interests of the EU more explicit. These

include a green growth model; improving the business en-

vironment and investment climate; boosting education, re-

search and innovation, the creation of decent jobs and val-

ue addition through sustainable investments; maximising

the benefits of regional economic integration and trade;

ensuring food security and rural development; and com-

batting climate change.

The EU Commission further states that the CSA is built on

five partnerships, including: partnerships for green transi-

tion and energy access, for digital transformation, for sus-

tainable growth and employment. This covers many as-

pects, from recycling, sustainable value chains and food

systems, to the promotion of renewable energies, the re-

duction of emissions, the protection of ecosystems and

fostering green and sustainable urbanisation models. The

CSA envisages boosting trade and sustainable investment

in Africa, promoting reforms to improve the business envi-

ronment and investment climate, improving access to

high-quality education, skills, research, innovation, health

and social rights, and advancing economic integration. In

doing so, the EU Commission explicitly refers to the AEA.

The AEA had the goal of creating ten million jobs within

five years.

The CSA formulates its goals for the development of eco-

nomic opportunities and decent job creation in Africa. Pro-

posed actions include substantially increasing environmen-

tally, socially and financially sustainable investments that

are resilient to the impacts of climate change and promot-

ing investment opportunities by scaling up the use of inno-

vative financing mechanisms. A further aspect deals with

regional and continental economic integration, particular-

ly through the AfCFTA. The CSA also intends to help in-

crease the number of European investors by supporting

African states in adopting policies and regulatory reforms

that improve the business environment and investment cli-

mate. It also considers training and research and innova-

tion capacities to be important, particularly for women

and youth.

Despite this collection of laudable objectives, the lasting

impression is that it is more of a selection of desirable

measures, many of which we have already seen in the nu-

merous documents from the world Bank, the G20 (Com-

pact with Africa) and other institutions. It is, however, evi-

dent that the CSA raises several questions 1. Due to the

lack of focused conceptual criteria, it is not clear through

which channels the CSA intends to make contributions to

alleviating unemployment and poverty. Should this be

done by fostering agricultural development, industrial pro-

motion, industrial clusters, the start-up scene or special

economic zones? Nor is the role of local entrepreneurship

and foreign companies adequately analysed. here the CSA

remains rather vague. 2. A second question that arises is

what role should institutions, including joint European-Af-

rican ones, play? Should they simply serve to guarantee a

good business environment or should they actively imple-

ment targeted support measures? 3. The final question to

be addressed is what financial resources the EU wants to

make available in order to achieve the stated employment

effects. Since the aim is to create two million additional

jobs per year, the funding is just as important a component

of the measures as their quality.

It is apparent that the EU Commission has developed many

plans in recent years, which sound good on paper but

show clear weaknesses in their implementation. The Exter-

nal Investment Plan (EIP), set up in 2017, is no exception

here. By offering investors various risk-sharing products, in-

cluding subsidies and guarantees, the EIP aims to mobilise

44 billion euros in additional project finance by 2020. The

capital is complemented by technical assistance and policy

dialogue aimed at improving the business environment in

African countries. The EU Commission is fully aware that

projects in poor and fragile African countries are chronical-

ly underfinanced by European Development Finance Insti-

tutions (DFI). The shortfall of finance is particularly acute in

low-income countries and fragile African states, where the

demographics are challenging, environmental degradation

is rapid, financial markets are nascent and institutions are

weak.

The EIP has two important components: (1) a guarantee

mechanism to European and non-European DFIs and pri-

vate investors; and (2) a unique »three pillar« approach to

investment support which complements financial tools (pil-

lar 1) with non-financial technical assistance aimed at

building a project pipeline (pillar 2) and improving the busi-

ness environment in partner countries through policy dia-

logue (pillar 3). The EIP’s financial arm, the European Fund

for Sustainable Development (EFSD), comprises a guaran-

tee fund and blended finance facilities.

EFFECTS OF ThE COVID-19 PANDEMIC

The EIP seeks to leverage private finance, focus on jobs and

growth, reach the poorest and most vulnerable, improve

the investment climate, encourage innovation and demon-

strate impact to foster sustainable and inclusive economic

and social development and growth. Further EIP objectives

are to create decent jobs, to eradicate poverty and to foster

entrepreneurship. The objectives pursued by the EIP partial-

ly dovetail with the current EU Strategy towards Africa. The

EIP has a high level of funding, and this alone could mean a

fundamental change in cooperation with Africa. Some pro-

jects, such as the Women in Business Programme, Boost

Africa, Climate Investor One, Resilient City Development

and the Sanad Fund have been launched with budgets of

several million euros to support SMEs, for example. These

measures correspond to the concepts of the world Bank or

the G20. what must be made clear, however, is that not

only more financial resources and a better economic envi-

ronment are needed for Africa’s development, but also a

proactive policy.

The challenge of the COVID-19 pandemic requires a sig-

nificant readjustment of measures. This is because Africa’s

social and economic situation has deteriorated considera-

bly—not least as a result of the economic crises in the EU,

China and the US. The crisis in Africa also reveals the

shortcomings of Europe’s cooperation with Africa in the

past. And it also highlights Africa’s great burden of re-

sponsibility.

The readjustment of the CSA measures should above all

take the following into account: 1. FDI from Europe must be

employment-intensive and guarantee decent work. It must

also strengthen the link with local businesses. 2. Green

transformation should be an essential part of the CSA and

EIP.

In this respect, a revision of the EIP and the CSA is need-

ed. Readjusting the two concepts in this way would pro-

vide a more viable basis for negotiations with the African

states.

EFFECTS OF THE COVID 19 PANDEMIC

ON THE AFRICAN ECONOMIES AND THE

IMPLICATIONS FOR EU COOPERATION

WITH AFRICA

The pandemic and the global recession are affecting every

sector of every African economy. A year ago, the world

Bank’s Africa’s Pulse report forecast that sub-Saharan econ-

omies would grow by around 2.8 per cent in 2019 and

2020. Now, however, the United Nations Economic Com-

mission for Africa (UNECA) expects the growth of African

economies to drop significantly from a possible 3.2 per cent

to 1.8 per cent in 2020, which is below population growth.

Depending on the duration of the pandemic and related

policy measures, the socio-economic situation too will de-

teriorate to a greater or lesser extent. In the worst-case sce-

nario, Africa will face negative growth of minus four per

cent (or even minus five per cent).

The IlO anticipates a loss of 19–22 million jobs. This is par-

ticularly worrying, because only 18 per cent of African

workers are covered by social protection schemes. UNECA

further estimates that the impact on African economies will

result in up to 110 million people being pushed into pover-

ty (living on less than 1.90 US dollars a day), a 25 per cent

increase, cancelling out the gains made in reducing poverty

over many years. The situation is further exacerbated by the

fact that 17 per cent of households affected by COVID-19

in Africa will face at least transient poverty. Informal work-

ers are at greater risk of falling into poverty. Millions of

women’s jobs have already disappeared.

The changes brought about by the pandemic have led to a

reduction in economic activity within countries and the

emergence of trade barriers. The demand for raw materials

and agricultural products has fallen significantly. Tourism

has come to a standstill. The crisis mode currently prevail-

ing in Europe, the US and China is affecting Africa’s eco-

nomic development in various ways: the impact is being

felt when it comes to exports of oil, garments, flowers,

fruits and vegetables, textiles, tea and tourism. According

to the world Bank, COVID-19 has reduced foreign financ-

ing flows and encouraged more capital flight from African

countries. Remittances remain the single most important

source of external finance in Africa with 64 billion US dol-

lars coming from this in 2015. Remittances too will now be

down significantly. low-income and fragile countries will

be hard hit as many of them depend on this source of fi-

nance. The global crisis is also affecting Africa’s tax reve-

nues. The lockdown and economic crisis are threatening

food security by disrupting access to food and further re-

ducing agricultural production. Corona-related lockdowns

will also slow down infrastructure and construction works,

and many of the promising start-ups and small and medi-

um-sized enterprises across Africa will be confronted with

closures of business and loss of jobs.

MEASURES FOR A STRATEGIC

PARTNERSHIP REQUIRED.

RECOMMENDATIONS FOR ACTION

In view of the major challenges faced by the African conti-

nent, challenges that have been exacerbated or created by

the pandemic, the question arises as to how a future part-

nership should be structured and how this can contribute

to growth and structural change, industrial and agricultur-

al development, economic diversification, job generation

and poverty reduction. Are the measures envisaged by the

AEA and CSA appropriate to meet the challenges and con-

tribute to inclusive and sustainable development?

It must be acknowledged that European investment on the

African continent is declining and trade between the EU

and Africa has collapsed. European capital has withdrawn

from Africa. The remittances to Africa from Africans living

in Europe have also fallen, which means that Africa’s em-

ployment situation will deteriorate even further. In view of

these challenges, we must ask ourselves how significantly

4FRIEDRICh-EBERT-STIFTUNG – AFRICA-EUROPE ECONOMIC COOPERATION

the measures envisaged in the CSA need to be revised. A

fundamental change of direction is needed to address the

problem.

Europe needs to find the courage to adopt a substantially

new Africa policy, which is also self-critical of the agendas

since the Cotonou Agreement of 2000. A change of course

is urgently needed. In making this change, it is essential to

take into account a) that African countries are undergoing

a major transformation, b) that African countries and their

institutions are pursuing their own agenda, c) that the dy-

namics on the continent, the global power shifts, are rec-

ognised and d) that the age of post-colonial cooperation

has come to an end.

In other words, it is not only about financial flows. It is not

just about restructuring trade. Nor is it only about resolving

crises and pandemics, or ensuring good governance and

good institutions. It is about a fundamental change of di-

rection, to which the Africa-EU Cooperation Pact must

contribute. On the one hand, it should help to facilitate

joint implementation of multilateral decisions (as is also

provided for by the AEA), and, on the other, it should help

to balance the respective interests. It is about moving in a

different direction, i. e. putting an end to the traditional Eu-

rope-Africa dependency beyond aid-driven arrangements.

Europe is called upon to anticipate the great transforma-

tion on the African continent. If it manages to do this, Eu-

rope can continue to play a major role. however, this role

must no longer be characterised by dominance and asym-

metry. Successful European involvement would also be

clearly distinguished from geostrategic action by the US,

China, Russia and other emerging countries.

COMBATING ThE PANDEMIC

The EU and its member states have taken various initiatives

to help Africa face the outbreak of the coronavirus. These

involve immediate aid measures such as procuring tests and

laboratory equipment, followed by longer-term pandemic

prevention through the development of a laboratory infra-

structure, financing of training measures, information cam-

paigns and national pandemic response plans. It is essential

to support Africa’s health systems in order that they can

tackle the unprecedented challenges of the coronavirus.

The global pandemic could add to the existing economic

and social crisis. however, this should also be long-term

support that helps to strengthen the public health sector.

NEw AGRICUlTURAl POlICY

A common agricultural policy involving the main African

and European players must be developed in cooperation

with the African countries. One area of focus should com-

prise measures to ensure »food security«.

The European agricultural sector is superior to African agri-

culture in every respect, thanks to its extremely high pro-

ductivity and billions in subsidies. The EU’s Common Agri-

cultural Policy operates through what is known as the ex-

port and import mechanism: if the EU, as the world’s larg-

est agricultural exporter, increases its exports, world mar-

ket prices fall. They may also fall in developing countries,

undermining their competitiveness and displacing local

products. Not least because of the high compensation pay-

ments to farmers, the EU has become the largest food ex-

porter. African farmers suffer a clear competitive disadvan-

tage in every respect. In addition, the non-tariff trade bar-

riers of the EU (and also of other OECD countries and Chi-

na) and high trade and transport costs constrain African

agricultural exports. The consequence of these two condi-

tions is Africa’s longstanding high dependence on food im-

ports. It is therefore crucial for trade and agricultural issues

be discussed together in the forthcoming EU-Africa nego-

tiations. The ultimate aim must be to ensure that African

agriculture is not further disadvantaged. The European

Commission should accelerate plans to eliminate the EU’s

harmful agricultural subsidies.

SUPPORTING TRANSFORMATION PROCESSES

what is needed is a proactive policy for economic and so-

cial transformation. Creating more productive jobs for the

rapidly growing population in Africa is of central impor-

tance. Investment in urban agglomerations can be an im-

portant driver of structural change. Especially in the cities,

actors in the informal sector are the key basis for the sur-

vival of the majority of the population.

Many African countries are pursuing structural change

with industrial concepts. Policies that deepen the comple-

mentarity between infrastructure development, foreign

and domestic investment should be promoted to ensure in-

clusive growth. In addition, agriculture and small and me-

dium-sized enterprises (SMEs) should be at the centre of

strategic cooperation, because this is where millions of fu-

ture jobs will be created. It is the modernisation of agricul-

ture that can induce employment-intensive growth and im-

prove the food supply. The removal of market entry barri-

ers for SMEs can stimulate economic growth and thus in-

crease employment and income.

COMBINING FOREIGN DIRECT INVESTMENT

wITh lOCAl ENTREPRENEURShIP

Africa’s economic development can be promoted through

FDI, provided this does not merely constitute exploiting

raw materials. Investment in agriculture and the manufac-

turing industry, but also in the service sector, can contrib-

ute to creating highly qualified jobs, technology and knowl-

edge transfer and thus boost Africa’s productivity. African

large and medium-sized enterprises are developing—but

only slowly, so that they are hardly in a position to drive

forward the transformation of the continent on their own.

FDI can generate economies of scale and specialisation.

however, the decisive changes must take place within Afri-

EFFECTS OF ThE COVID-19 PANDEMIC

ca. The contributions of FDI to reducing poverty and high

youth unemployment are at best small. For example, all

foreign investment over the past ten years has created an

average of just 100,000 new jobs per year. Jobs for 20 mil-

lion people a year will have to be created largely by local

businesses and farmers. It is the task of national govern-

ments to promote rather than hinder local entrepreneur-

ship. European support measures can help, as can employ-

ment-intensive FDI.

The CSA stresses the importance of SMEs but does not

indicate how they can be helped to flourish. It also lacks

a concept for linking FDI with companies in industrial

clusters and special economic zones. like the Compact

with Africa (CwA), the CSA focuses on the business envi-

ronment and subsidies for FDI, but how linkages can be

created remains unclear. One possibility would be to

grant tax relief if FDI were to carry out targeted subcon-

tracting with SMEs in Africa in order to transfer technol-

ogy, ensure decent work and carry out training measures.

A programme that also involves research institutions and

universities could give a boost to knowledge transfer and

the development of start-up entrepreneurs and African

SMEs. These local companies could, in turn, provide a

new stimulus to industrialisation, empower local and re-

gional value chains in agriculture and industry, and create

jobs.

Europe could make a useful contribution to this ambition by

supporting the development of a sustainable endogenous

economy in Africa. Endogenous development through in-

dustrialisation and the empowerment of entrepreneurship,

which also creates jobs, is not only useful for Africa’s devel-

opment but ultimately in Europe’s interests too.

RE-ESTABlIShING TRADE RElATIONS

Since 1997, the EU has concluded agreements with North

African countries and five Economic Partnership Agree-

ments with regional groupings of sub-Saharan countries.

Critics argue that these agreements may hold back the

continent’s structural transformation by undermining in-

tra-regional trade and integration. lowering tariffs on EU

imports to African markets is predicted to divert the re-

gion’s trade in favour of European producers and away

from local or more efficient suppliers. Moreover, because

EU free trade agreements have been negotiated with re-

gional blocs rather than the continent as a whole, they

have increased the heterogeneity of African countries’ lib-

eralisation commitments, adding to the challenge of ra-

tionalising the continent’s trade regimes under AfCFTA.

The limited anticipated benefits of free trade agreements is

one reason why many, particularly low-income African

countries have refused to join them.

The EU should help improve the regulatory environment

for African producers and exporters. Although the EU has

facilitated access to European markets under the Everything

but Arms scheme, there are still numerous restrictions im-

posed by the EU. Non-tariff trade barriers limit Africa’s ex-

port options. The EU’s rules of origin are widely criticised

for being overly complex and restrictive, especially rules on

minimum domestic content and cumulation. To be eligible

for reduced tariffs, a developing country export must have

a minimum domestic content of 30 per cent. Moreover, ex-

porters cannot easily »cumulate« inputs from other coun-

tries. There is evidence that these restrictions have limited

African exporters’ use of tariff preferences and may also

have undermined regional value chain creation.

To what extent should the CSA be complemented by trade

measures? In view of the developments described above, it

is useful to focus on the following aspects:

– The EU should continue to liberalise its remaining tar-

iffs on imports from Africa and improve the impact of

these preferences by reforming the rules of origin. The

European Commission should work towards providing

duty-free access to EU markets for all African coun-

tries, irrespective of geography or income level.

– The EU should also reform its rules of origin in line

with the wTO Ministerial Declaration for least Devel-

oped Countries. This would involve lowering mini-

mum domestic content requirements from 30 to 25

per cent and providing for extended cumulation. As a

minimum, the EU should allow African country ex-

porters to cumulate inputs from other countries in the

region.

– Improve the effectiveness and impact of EU Aid for

Trade in Africa.

– Support of AfCFTA, expertise, capacity building, sup-

port for infrastructural measures, customs etc.

PUSh DIGITAlISATION

The digital transformation of Africa is an important goal of

African countries. The EU made a strong plea in its Africa

strategy »to support the African aspirations to build a sin-

gle African digital market«, as a way to boost growth

across all economic sectors. however, the digital agenda

could also be a double-edged sword, as it could create

more inequalities if the poor populations are not given ac-

cess. Issues like taxation, already a challenge in the real

economy, would require renewed efforts to adapt to the

digital economy. It should become a key priority for the

EU-Africa partnership to tackle these types of threats by

developing appropriate regulatory and legal frameworks.

By calling for further expansion of the digital economy, the

EU’s Africa strategy raises some important points. But the

individual measures are not adequately linked to the needs

of African development agenda: One of the most impor-

tant prerequisites for participating in the digital transfor-

mation is having a reliable energy supply, something which

is not guaranteed for 60 per cent of the African popula-

tion.

6FRIEDRICh-EBERT-STIFTUNG – AFRICA-EUROPE ECONOMIC COOPERATION

OThER IMPORTANT ISSUES

Some other key considerations that should not be neglect-

ed are:

– Economies should be rebuilt in a climate-friendly man-

ner: The economic crisis provides an opportunity to

make a giant leap towards a low-carbon and cli-

mate-resilient future across both continents. The en-

visaged stimulus measures for economic recovery

should be »equitable and environmentally sustaina-

ble«. The EU has made a »low-carbon, resource-effi-

cient and climate-resilient future« the key priority in its

strategy proposal. It also intends to support African

efforts on climate change mitigation and resilience as

well as adequate adaptation measures, while carefully

monitoring the social implications.

– Debt reductions for some African countries must be

supported.

– Illicit trade issues must be addressed.

– Tax evasion by multinational corporations must be

tackled, which the UN Economic Commission for Afri-

ca puts at 100 billion US dollars annually.

CONCLUSION: TOWARDS A

NEW PARTNERSHIP BETWEEN

AFRICA AND EUROPE

Europe has its interests and so too do the individual coun-

tries on the European continent. Also, African countries,

African institutions (such as the AU and AfDB) have inter-

ests that they have clearly formulated in recent years. Afri-

can countries are no longer in a post-colonial phase but

have increasingly distanced themselves from the donor-re-

cipient model. They have started to establish the AfCFTA;

they are strengthening cooperation among themselves

and with others in order to pursue their own development

trajectory. They have developed industrialisation and agri-

cultural strategies. while their development process is not

straightforward and there are always challenges, there is

also progress. Globalisation has given the African conti-

nent opportunities to play a role in the international divi-

sion of labour. But the concept of pure world market inte-

gration has not brought the expected success. Poverty and

unemployment remain widespread. The climate catastro-

phe is hitting Africa particularly hard, although the causes

are largely rooted in the US, the EU and China with their

unsustainable economic model. The strategies pursued by

African countries in recent years are less reliant on external

support and foreign investment. They are more focused

on local and regional development. It is time for the EU to

move away from the post-colonial model and also from

outdated paternalistic behaviour. The EU must develop

new modes of engagement that better reflect the African

continent’s changing reality.

The Corona crisis could be a unique incentive for Africa to

present its own proactive strategic vision on the partner-

ship with the EU and its other global partners. A prosper-

ous African continent is in the EU’s interest. Future cooper-

ation is based on the respective interests of both sides and

should therefore be fair, equal, supportive, environmental-

ly friendly and civil. The comprehensive strategy with Afri-

ca seems to be a step forward and to herald a new era of

relations, but it does not meet the challenges in all re-

spects. The EU has presented a plan to the African states,

which will be discussed jointly with a view to producing a

final concept. however, the plan needs to be fundamental-

ly revised—not only because of the consequences of the

pandemic, but above all to reduce asymmetrical depend-

ence and power relations. The concept is a continuation of

many well-known ideas but does not pave the way for ad-

equate cooperation. This plan does not overcome the ex-

isting asymmetries. This will lead to more countries turning

away from Europe. As the European Think Tanks Group

(ETTP) declares in a statement of May 2020: »Put an end to

traditional North-South dependency relations. This crisis

provides a unique incentive for Africa and Europe to break

with the power imbalances of the past.«

The views expressed in this publication are not necessarily those of the

Friedrich-Ebert-Stiftung. ISBN 978 3 96250580 6

IMPRINT

ABOUT ThE AUThOR IMPRINT

Professor Robert Kappel, economist and political scien-

tist. From 1994 to 2004, Professor Kappel headed the MBA

programme Small Enterprise Promotion and Training (SEPT).

he was a senior lecturer at the University of Bremen (1989–

1996), a professor at the Universities of leipzig (1996–2004)

and hamburg (2004–2011), and president of the German

Institute for Global and Areas Studies (GIGA) in hamburg

from 2004 to 2011. he is now professor emeritus at the Uni-

versity of leipzig. his research activities focus mainly on

small and medium-sized enterprises in Africa, the informal

sector, development economics, German Africa policy and

global power shifts. he has published widely on SMEs, inno-

vation, value chains and poverty.

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Rue du Taciturne 38 | BE-1000 Brussels

Friedrich-Ebert-Stiftung | Africa Department

hiroshimastr. 17 | 10785 Berlin | Germany

Responsible:

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Phone: + 32 22 34 62 90

Renate.Tenbusch@fes europe.eu

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[email protected]

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Commercial use of all media published by the Friedrich-

Ebert-Stiftung (FES) is not permitted without the written

consent of the FES.

The European Union‘s relations with the

African continent face particular chal-

lenges. Unexpectedly, the negotiations

between the partners are being put

through a special rehearsal. The global

spread of COVID-19 has led to econom-

ic crises in Europe, China and the USA,

as well as on the African continent. The

EU-African Union Summit, scheduled for

October 2020, will be overshadowed by

the global coronavirus crisis. Both EU

and African institutions consider the

economic and health crisis to be more

serious than the 2008/2009 financial

crisis. The consequences of the crisis for

the African continent are so far-reaching

that cooperation between Africa and

the EU must also be readjusted.

Further information on the topic can be found here:

https://www.fes.de/en/together towards justainability

The aim in 2020 is to transform the exist-

ing cooperation into a strategic partner-

ship. For this to happen, fundamental

decisions must be taken. The EU’s politi-

cal leadership claims that 2020 will be a

»pivotal year« for EU-Africa relations. Eu-

ropean Commission President von der

leyen called for a »partnership of equals«

that would move away from the do-

nor-recipient relationship that has long

characterised EU-Africa relations. with

its communication »Towards a Compre-

hensive Strategy with Africa« (CSA), the

EU has presented a plan to the African

states, which will be discussed jointly

with a view to producing a final concept.

The CSA is a continuation of many well-

known ideas but it does not pave the

way for adequate cooperation. One part

of the CSA is the External Investment

Plan (EIP), an instrument used by the EU

to foster investment and improve busi-

ness environments. while the EIP’s sub-

stantial financial resources are remarka-

ble, it cannot replace the proactive poli-

cy that contributes to Africa‘s develop-

ment.

The Corona crisis could be a unique in-

centive for Africa to present its own pro-

active strategic vision on the partnership

with the EU and its other global part-

ners. A prosperous African continent is

in the EU‘s interest. Future cooperation

is based on the interests of both sides

and should therefore be fair, equal, sup-

portive, environmentally friendly and

civil. The comprehensive strategy with

Africa seems to be a step forward and to

herald a new era of relations, but it does

not meet the challenges in all respects.

The strategy needs to be fundamentally

revised—not only because of the conse-

quences of the pandemic, but above all

to reduce asymmetrical dependence

and power relations. As declared by the

European Think Tanks Group (ETTP) in a

statement of May 2020 »Put an end to

traditional North-South dependency re-

lations. This crisis provides a unique in-

centive for Africa and Europe to break

with the power imbalances of the past.«

AFRICA-EUROPE ECONOMIC COOPERATION

Using the Opportunities for Reorientation

https://library.fes.de/pdf-files/iez/16251.pdf

Abendin, Simon; Duan, Pingfang

Article

International trade and economic growth in Africa:

The role of the digital economy

Cogent Economics & Finance

Provided in Cooperation with:

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2332-2039, Taylor & Francis, Abingdon, Vol. 9, Iss. 1, pp. 1-25,

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International trade and economic growth in Africa:

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GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE

International trade and economic growth in

Africa: The role of the digital economy

Simon Abendin1* and Pingfang Duan1

Abstract: This paper examines the role the digital economy plays in international

trade impacts on Africa’s economic growth based on 53 countries’ sample from

2000–2018. We further divided the sample into five sub-regions, and the results are

estimated by POLS, random and fixed effects, and the GMM models. The findings

showed that (1) trade only has positive effects on economic growth when inter-

acted with the digital economy in the POLS estimations, (2) Trade has a significantly

positive impact on economic prosperity without and with the interactive term in the

RE, FE, and the sys-GMM estimations, (3) the output elasticities of capital and labor

have positive and negative impacts on economic growth, respectively, (4) the

regressions for the sub-sample yielded statistically significant differences in the

output elasticities for the indicators. The study recommends that concentrated

efforts be directed towards developing the digital economy to ensure international

trade’s full economic effect in Africa.

Subjects: Development Policy; Economics; International Economics

Keywords: International trade; Africa; POLS; random effects; fixed effects; economic
growth and digital economy

1. Introduction

The economic growth effect of trade has been the subject of much debate among
academic

researchers and practitioners, particularly in developing countries. Trade openness is

generally

believed to create a favorable atmosphere that results in quality products contributing to

economic

development (Aradhyula et al., 2007). Therefore, international trade is considered a

significant source

of economic growth worldwide. While international trade flows have often been volatile
and prone to

ABOUT THE AUTHOR

Simon Abendin holds a master of finance. He is

currently a Ph.D. candidate at the Department of

International Economics and Trade, Zhengzhou

University (ZZU) Business School, China. His

research interest includes international trade,

international finance, digital economics, eco-

nomic growth, and corporate reporting.

Prof. Duan Pingfang is the head of the

Department of International Economics and

Trade at Zhengzhou University (ZZU) Business

School, China. His primary research interest

covers International economics and trade.

PUBLIC INTEREST STATEMENT

This paper examines the role the digital economy

plays in international trade impacts on Africa’s

economic growth based on 53 countries’ sample

from 2000–2018. We further divided the sample

into five sub-regions, and the results are esti-

mated by POLS, random and fixed effects, and

the GMM models.

The study used secondary data from the World

Bank Development Indicators (WDI). This study

has shown that the digital economy facilitates

economic growth. However, international trade

facilitates economic growth after interacting with

the digital economy. It was recommended that

African governments direct efforts towards

developing the digital economy to ensure inter-

national trade’s full economic growth effect.

Abendin & Duan, Cogent Economics & Finance (2021), 9: 1911767

https://doi.org/10.1080/23322039.2021.1911767

Page 1 of 25

Received: 22 October 2020

Accepted: 29 March 2021

*Corresponding author: Simon

Abendin, Zhengzhou University

Business School, Department of

International Economics and Trade

Zhengzhou City, Zhengzhou, Henan,

China

E-mail: [email protected]

Reviewing editor:

Christian Nsiah, School of Business,

Baldwin Wallace University, Berea,

USA

Additional information is available at

the end of the article

© 2021 The Author(s). This open access article is distributed under a Creative
Commons

Attribution (CC-BY) 4.0 license.

recurring trade barriers, many countries still seek international trade because of the
large, favorable

externalities associated with the trade. Trade’s position as a driver of economic growth
is fast

becoming crucial, particularly in African countries, since the region is endowed with
natural resources

with low industries to process these resources into consumable goods and other
intermediate

products. Therefore, external trade in these resources is necessary to complement the

local proces-

sing industries to promote economic growth (Asiedu, 2013). Governments in developing

countries,

especially in Africa, have adopted trade policies, including import substitution strategies,
exchange

rates, tariffs, and quantitative controls, to promote international trade in the region.
These trade

policies are motivated by international trade’s economic spillover effects, such as

productivity gains,
intellectual capital, advanced economic management, efficient allocation and better
utilization of

resources, reduction in trade fluctuations, and technology diffusion (Manwa &

Wijeweera, 2016).

Conventional trade theory has assumed that trade encourages economic prosperity as
trade leads to

the reallocation of capital, and countries engaging in trade tend to have a comparative
edge as they

specialize in manufacturing and exporting to their trading partners, which increases

economic growth.

Despite various initiatives taken by developing countries to liberalize trade with the rest
of the world,

economic growth remains a major challenge for developing economies worldwide, of

which Africa is

a part (Asiedu, 2013; Doan, 2019; Haddad et al., 2013). This has given rise to an
intense debate among

development economists and other academics about whether international trade boosts
economic

growth. As a result, several empirical studies have been undertaken by researchers to

determine the

effect of international trade on economic progress in Africa and the rest of the
continents. On the one

hand, some of the empirical studies have shown positive effects of international trade
on economic

growth (Ades & Glaeser, 1999; Badinger & Breuss, 2008; Brini et al., 2017; Doan, 2019;
Frankel & Romer,

1999; Gokmenoglu et al., 2015; Grossman & Helpman, 1990; Kumar, 2012; Le, 2020;
Manwa &

Wijeweera, 2016; Nkikabahizi et al., 2018; Van Den Berg, 1997; Zahonogo, 2017). On
the other hand,
some scholars reported negative or inconclusive impact of international trade on
economic growth in

Africa and the rest of the world (Cerdeira Bento & Moutinho, 2016; Manwa et al., 2019;
Menyah et al.,

2014; Mullings & Mahabir, 2018; Polat et al., 2015; Rahman & Mamun, 2016; Zheng &
Walsh, 2019).

These contradictory (inconclusive) findings continue to exist and call for more study to
fill the knowl-

edge gap.

In recent years, the digital economy has usually been credited with contributing to
sustainable

economic growth. Undoubtedly, the digitalization of the economy is projected to fuel

economic

growth. Digitalization promotes economic development through the proper use of

human capital

and natural resources; and the accumulation of productive capacity in the extractive
industries. The

digital economy-growth nexus has been theoretically well established in the literature,
followed by

country-level empirical evidence in studies such as (Cronin et al., 1991; Erumban &
Das, 2016; Ghosh,

2016; Saidi et al., 2017) indicating the crucial role of the digital economy in productivity,
growth, and

development. Empirical studies like (Bahrini & Qaffas, 2019; Ghosh, 2016; Hofman et
al., 2016; Njoh,

2018; Petersen, 2019) reported that the economy’s digitalization is improving economic
growth.

Theoretically, it is argued that the digital economy encourages trade as trade leads to
the

reallocation of capital, and countries engaging in trade tend to have a comparative edge
as they
specialize in development and exports to their trading partners, which boosts economic
growth

(Lwoga & Sangeda, 2019; Sassi & Goaied, 2013). For example, some scholars
(Abeliansky et al.,

2020; Freund & Weinhold, 2004; Lin, 2015; Ozcan, 2018; Rodríguez-Crespo &
Martínez-Zarzoso,

2019; Vemuri & Siddiqi, 2009) document that the digitization of the economy has had a
substantial

positive effect on foreign trade. It is necessary to note that international trade’s growth
effects will

depend on the digital economy’s role. Therefore, it is argued that a well-functioning

digital

economy guarantees low transaction costs, effective delivery of capital, quick access to
foreign

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Page 2 of 25

markets, the quicker transmission of business information and data, and thus boosts
economic

growth (Freund & Weinhold, 2002, 2004; Petersen, 2019).

Despite the massive role that the digital economy plays in trade, this appears to be
disregarded by

the existing literature on the impact international trade has on economic growth.
Empirical surveys

have centered on the economic development effect of the digital economy, suggesting a
clear

correlation. These studies indicate that digital infrastructure improves economic growth
(Czernich

et al., 2011; David, 2013). In brief, theoretical literature suggests that foreign trade has a
favorable
impact on economic growth, although empiric literature reports mixed findings.
Simultaneously, the

digital economy’s position has been developed to positively contribute to international

trade’s

economic growth impact. Thus, countries with a well-functioning digital economy are
projected to

correlate favorably with foreign trade and global growth rates (Abeliansky & Hilbert,
2017).

Our motive is to investigate the extent to which foreign trade facilitates economic growth
in Africa,

taking into account the digital economy’s advancement. Specifically, we examine

whether African

economies’ digitization is necessary for foreign trade to positively affect economic

growth. This paper

is focused on the fact that, to the best of our knowledge, no longitudinal studies were
performed at

the time of this study on the crucial role of digitalization in influencing the growth effects
of foreign

trade. The non-existence of studies on the economic growth effects of the interaction
between

international trade and the digital economy made this study stand uniquely from the
related

literature; hence its novelty sources. The study contributes to the existing literature in
that earlier

studies (Doan, 2019; Manwa & Wijeweera, 2016; Manwa et al., 2019; Zahonogo, 2017)
trying to figure

out the effect of international trade on economic growth seems to have ignored the role
the digital

economy in influencing the effect of trade on the economic growth, particularly in Africa.
Therefore,
the study contributes to the literature by incorporating the digital economy’s effects on
Africa’s trade-

led growth. Another gap in the literature that this study fills in is the weak measurement
of

digitalization. For instance, studies such as (Kouton, 2019; Myovella et al., 2019)
measured the digital

economy using a single variable or two variables, including mobile subscriptions,

internet subscribers,

and broadband subscriptions. The inadequate digital economy proxies are insufficient to
assess the

digital economy’s interactive effect and international trade on economic growth. Poor
and inade-

quate digital economy measures may yield results that are misleading and meaningless
to policy-

makers. Our research aims to fill this void by utilizing three dimensions of the digital
economy, the

access, use, and skills aspect, to create a digital economy index. We employed the
principal compo-

nent analysis to create the digitalization index called the DIGICONOMY.

Moreover, we show whether the contribution of international trade and the combined
effects of the

digital economy and trade on economic growth differs from Africa’s five regions: Central,
East, North,

South, and West. The rest of the article is structured as follows: first, we provide
theoretical and empirical

international trade issues in Africa. Second, we describe the data and overview the
digital development

and international trade in the countries under study. Next, we include the empirical
methods and

a discussion of the results. Summary and concluding remarks are made in the final
section.
2. Literature review

This section is dedicated to the review of literature relevant to international trade and
economic

growth. We first reviewed the theoretical literature on international trade and economic
growth,

followed by empirical literature on international trade and economic growth.

2.1. Theories on trade and economic growth

The relation between international trade and economic growth has drawn a great deal of
interest

in international economics, theoretically and empirically. Based on this perspective, we

have

reviewed three theories below related to international trade and economic prosperity.

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The mercantilist theory of trade argued that the only means a country or nation can
become

wealthy and powerful is by maintaining less import of goods and services but instead
encourages

more export of goods and services to other countries. The mercantilist claimed that
growing

exports and keeping imports at a minimum level would allow countries to achieve a
favorable

balance of trade, which, in turn, would contribute to national prosperity and, thus,
economic

development. Based on this notion, one can conclude that the mercantilist believes in a
one-way

transaction leading to self-seeking trade.

On the other hand, classical theorists such as Adam Smith (credit with the Absolute
Cost

Advantage theory) and David Ricardo (also credited with the Comparative Cost
Advantage theory)

positioned that both countries engage in international trade stand a chance to benefit
from the

trade even though some countries will gain more than others. Both Adam Smith and
David Ricardo

concluded that countries prosper from foreign trade if they specialize and export
commodities

(goods) with notably lower cost advantages and import goods with a significantly higher
cost

disadvantage. In this view, the classical theory’s primary implication is that a country
benefits from

international trade through specialization and effective distribution of resources. The

classical

theorists further suggest that trading with other nations will bring in new technology and
skills

to contribute to higher efficiency and economic development. They also positioned that
engaging

in foreign trade leads to economic growth since each country would share trade
benefits.

The Heckscher-Ohlin theory (H-O model) of trade suggests that the differences in
countries’

resources are the driving force of international trade. The theory states that the
comparative

advantage comes from the difference in the abundance of factor production and the
factor intensity

of the products (Morrow, 2010). It is also referred to as the 2x2x2 model, two countries,
two goods,
and two production factors. The theory emphasizes that a country should export
products that

require production factors that it has in abundance. It also emphasizes the importation
of goods

which cannot be produced as easily by a region. It is of the view that countries should
ideally export

surplus materials and energy while importing goods that they need proportionately.
Heckscher (1919)

and Ohlin (1933) concludes that a country with sufficient factor endowment would
increase growth if

it produces products on a larger scale and exchanges with other countries.

2.2. International trade, digital economy, economic growth, and hypotheses

development

Aside from the theoretical view of the economic growth effect of international trade, a
large number

of empirical studies have been conducted at the macro-level on the link between
international trade

and economic growth with contrary views, which has been attributed to the varying
econometric

methodologies used and the scope of the studies. Some of the earlier studies
conducted analyze

international trade concerning economic growth, financial development, inclusive

growth, CO2 emis-

sions, energy consumption, environmental degradation, to mention a few. For instance,

Cerdeira

Bento and Moutinho (2016) used data from Italy and the autoregressive distributed lag
bound test

approach of cointegration and confirm no evidence supporting the trade-led economic

growth

hypothesis. However, they revealed positive CO2 emission effects of international trade
in Italy.
Polat et al. (2015) reveal that the well-developed financial sector boosts economic
growth while

providing evidence that foreign trade is counterproductive to the South African

economy’s develop-

ment. Sun and Heshmati (2010) conducted a six-year study on the economic growth
effects of

international trade in China. The results suggest that international trade stimulates
national eco-

nomic growth. Similarly, Zheng and Walsh (2019) analyzed the effect of energy
consumption on

China’s economic development. By expanding existing literature to include international

trade and

urbanization in the production model in the 2001–2012 provincial panel of evidence, the
findings

show that urbanization is a key determinant of economic growth, although not having
exact results

to support the hypothesis that international trade encourages economic growth in China.

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In the same vein, Mitsek (2015) modeled the relationship between trade inflation and
economic

growth using Russia’s data for the next 2–3 years starting in 2015. The findings of the
model

revealed an adverse economic growth effect of foreign trade on the Russian economy.
The

equations suggest that a percentage rise in import and export rates leads to a 1.5%
decline in

the Russian economy’s economic growth rate. Gokmenoglu et al. (2015) confirmed that
trade and
well-functioning capital markets drive Pakistan’s economic progress. Also, the findings
further

revealed a long-term relationship between trade, financial sector development, and

growth.

Similarly, Shahbaz et al. (2013) applied the ARDL model to examine the link between
financial

sector development, energy use, economic growth, and trade in China. The authors
also identified

positive economic growth impacts of energy use, financial development, and trade.

Moreover, the results also revealed a bi-directional causality between international and
economic

growth. Using panel data from the pooled average group estimator (PMG) of six Gulf
Cooperation

Councils from 1980–2010, Jouini (2015) confirms that international trade positively
impacts economic

growth in both the short-and long-term. Yenokyan et al. (2014) conclude that trade
affects economic

activities in two ways: the overall impact of size and technologies’ transition. It also
clarified that the

scale effect is accomplished by trade liberalization, which increases companies’ size

and results in lower

average costs and higher productivity per firm. The transfer of the technology medium is
the product of

the spread of information developed as countries establish infrastructure, such as

communications, to

encourage more substantial foreign exchange. Another study by Rahman and Mamun
(2016) looked at

Australia’s energy-led development and trade-led growth over 1960–2012. Using the
ARDL estimation

process (Rahman & Mamun, 2016) provided data supporting the trade-led growth
hypothesis while they
do not find evidence to support the Australian economy’s energy-led growth. From the
theories and the

existing literature propositions, the authors deduced the following: trade brings in new
technology and

skills to contribute to higher efficiency and economic development. Exporting more and
import less

promotes economic prosperity, and that many empirical studies find support for the
theoretical views.

Therefore, empirically examining the impact of international trade on economic growth

in a region

touted with low economic growth is essential. We, therefore, hypothesis that:

H1: International trade enhances economic growth in

Africa

Many empirical studies have argued for a positive relationship between digital
development

and economic growth in developed and developing countries. For instance, Adeleye
and Eboagu

(2019) report that internet usage, mobile penetration, and fixed telephone increase
economic

growth by 0.22%, 0.86%, and 0.68%, respectively, in Africa. Similarly, (Chavula, 2013)
hypothesized

that telecommunication development enhances Africa’s living standards. The general

conclusions

in the existing literature are that information and communication technology promotes
economic

growth. Accordingly, we hypothesize that:

H2: The digital economy enhances economic growth in

Africa

Previous studies on the relationship between the digital economy and international trade
(Abeliansky et al., 2020; Freund & Weinhold, 2004; Lin, 2015; Ozcan, 2018; Rodríguez-
Crespo &

Martínez-Zarzoso, 2019; Wang & Choi, 2019) but not limited to documented positive
results.

Freund and Weinhold (2004) conclude that internet use positively influences
international trade.

Lin (2015) reported a shred of evidence that indicates international trade positive effects
of

internet use. Ozcan (2018) documented positive international trade effects of ICT.
Rodríguez-

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Crespo and Martínez-Zarzoso (2019) examined the link between ICT and international
trade and

provided evidence that ICT enhances international trade.

Similarly, Wang and Choi (2019) investigated the effects of ICT on trade for BRICS
countries,

covering 2000 to 2016 panel data. The results of their study suggest that ICT usage
promotes

international trade. They points out that the digital economy promotes international trade
as

lower cost of information search and technological advancement improve production

efficiency. It

revealed that the digital economy positively impacts trade. Bankole et al. (2015) argued
that

Africa’s sustainable socio-economic development could be attained through

digitalization-led

trade flows. Given the existing literature’s positions, we hypothesized that:

H3: the digital economy enhances Africa’s ability to absorb international trade’s positive
economic

growth effects.

Studies linked to trade-led growth in Africa Chang and Mendy (2012) reported evidence
supporting

the international trade-led growth hypothesis for 36 African countries observed from
1980 to 2009.

Hossain and Mitra (2013) used the dynamic panel study methodology to examine
economic growth

determinants for 33 African countries and presented evidence to support trade’s positive
economic

growth impact. This means that international trade stimulates economic prosperity in
Africa. Caleb

et al. (2014) look at the relationship between international trade and Zimbabwe’s
economic growth

from 1975 to 2005. The analysts used a cointegration analysis and reported that trade
enhances

economic growth in Zimbabwe. Similarly, Ajmi et al. (2015) established a significant bi-
directional

causality link between exports and growth in the South African economy.

Likewise, Ehigiamusoe and Lean (2018) found evidence to support the trade-led
economic growth

in Ghana, Nigeria, and South Africa. The authors also revealed a tripartite causality
amongst financial

development, trade, and economic growth. Thus, trade and financial sector
development could be

deployed to enhance economic growth, while financial development and economic

growth can also

accelerate international trade. Moreover, international trade spurs financial

development. In the
same vein, Kumar et al. (2015) applied the autoregressive distributed lag model to study
the relation-

ship between energy consumption, financial development, trade, and economic growth
in South

Africa. The study results suggest that trade has both short and long-run positive impacts
on economic

growth, while financial development hurts the South African economy. The results’
coefficients

indicate that a shock in international trade and energy consumption corresponds to a

0.07% and

0.24% rise in economic growth, respectively. On the other hand, a shock in financial
development

growth rates reduces the economic growth rates by 0.04%.

Oyebowale and Algarhi (2020) investigated using the pooled mean group estimation on
panel data

from 21 African countries, the macroeconomic determinants of economic growth. The

pooled esti-

mations indicate that a shock in exports, gross fixed capital formation, and government
expenditures

produce positive economic growth in Africa, while a shock in broad money produces an
insignificant

growth impact. Nkikabahizi et al. (2018) examined similar relations employing data from
five East

African Community (EAC) countries and found a positive economic growth rate
measured as real

gross domestic product impact of exports. Asiedu (2013) have applied the ARDL
analysis to investi-

gate the relationship between trade liberalization and economic growth in Ghana.
Asiedu (2013)

produced evidence of positive economic growth of trade liberalization in Ghana. Their

analysis further
suggests a positive impact of capital and population on economic growth, and foreign
direct invest-

ment hurts growth while insignificant positive growth affects the inflation rate.

https://www.econstor.eu/bitstream/
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Policy Department, Directorate-General for External Policies

7
However, EPAs provide other advantages, in particular regarding ‘variables’ other than
custom duties, in
particular clauses to support regional integration, development funds to facilitate the
transition, and
simplified rules of origin, which are more flexible under the EPAs than under the EBA
regime (and also
under the GSP) (see section 2.4). More flexible RoO play an important role in the choice
of entering an EPA;
the EBA initiative and the GSP share the same RoO, which are more stringent than
those in EPAs. For
example, a textile product can enter the EU duty-free if at least one stage in its
production – such as
weaving or knitting – took place in an EPA country, while EBA requires double-stage
transformation for the
same sector. This might explain why some LDCs such as Mozambique and Lesotho
(members of the SADC
group) signed an interim EPA with the EU. Angola (the other LDC in the SADC EPA
configuration) instead
has chosen to continue trading under EBA as its main exports to the EU are oil and
diamonds which enjoy
duty and quota-free entry under the EBA rules of origin since they are considered
'wholly obtained'
originating products.
Non-LDC African economies can access the EU market using the GSP scheme, which
grants partial or full
removal of custom duties on two-thirds of the tariff lines. A more attractive alternative
would be the GSP+
scheme, which provides improved market access (full removal of custom duties on the
same tariff lines as
those targeted by the standard GSP) for ‘vulnerable’ developing economies that show
commitment to a
sustainable approach to development by ratifying and implementing a series of
international conventions.
Overall, the differences between GSP and GSP+ are not significant except for Eastern
Africa, where several
countries, especially Mauritius, are large exporters in the textiles and apparel sector,
where GSP+ eliminates
protection and GSP provides only limited advantages. However, both the GSP and
GSP+ provide for less
favourable treatment than the original Cotonou preferences or the free access granted
through signing
the EPAs (see page 187 in Fontagné et al., 2011).
While these unilateral preferential schemes can permit ACP countries to protect their
domestic production
and minimise fiscal losses, they also prevent ACP countries from opening up their
markets to cheaper
inputs, foregoing the efficiency gains that could be achieved in the context of EPAs.
Moreover, GSP schemes are often (unilaterally) revised, excluding countries and goods
according to certain
criteria, while EPAs mean more stable trade measures, which might bring benefits in
terms of domestic or
foreign investment in ACP markets (the so-called lock-in effect; see Collier, 2015).
2.3 Status of negotiations
Negotiations for EPAs began in September 2002 and were due to be completed by
2007. In reality, the
situation is more complex, with some agreements already concluded and applied while
negotiations are
still ongoing with other ACP countries. More precisely, 48 out of the 79 ACP countries
signed an EPA with
the EU, and only 32 of them have started implementing the EPA, 14 of which are in
Africa (see Table 1).
Below, we provide detailed information about the status of negotiations for each of the
African groups.
Table 1: Implementation of EPAs
ACP group
Number of countries
implementing EPA
or interim EPA
Countries and first year of
implementation
Central Africa 1 out of 8 Cameroon (2014)
EAC None out of 6
ESA 5 out of 12
Comoros (2019), Madagascar,
Mauritius, Seychelles and
Zimbabwe (2012)
In-depth assessment on EPAs and intra-regional African trade
8
SADC 6 out of 7
Botswana , Eswatini, Lesotho,
Mozambique, Namibia and South
Africa (2018)
West Africa 2 out of 16 Côte d’Ivoire (2019), Ghana(2021)
Caribbean 14 out of 15
Antigua and Barbuda, Bahamas,
Barbados, Belize, Dominica,
Dominican Republic, Grenada,
Guyana, Jamaica, St Lucia, St
Vincent, St Kitts and Nevis,
Suriname, Trinidad and Tobago
(2010)
Pacific 4 out of 15
Fiji (2014), Papua New Guinea
(2011), Samoa (2018) and Solomon
Islands (2020)
Source: Information available on the European Commission website
(https://trade.ec.europa.eu/access-to-markets/
en/content/economic-partnership-agreements-epas).
Central Africa Group
As already mentioned, in Central Africa only Cameroon concluded an interim EPA with
the EU, in 2007. The
European Parliament approved it in June 2013 and it was ratified by Cameroon in July
2014. This agreement
allows all goods from Cameroon to enter the EU duty and quota-free, and gradually
removes duties and
quotas over 15 years on 80 % of EU exports to Cameroon. It covers trade in goods, aid
for trade, institutional
issues and dispute settlement.
Other countries of the region have not yet signed the EPA. Some countries in the group,
such as the
Democratic Republic of Congo, have flagged their interest in acceding. Chad, the
Central African Republic,
the Democratic Republic of Congo and São Tomé and Principe benefit from duty-free,
quota-free EU access
under the EU’s EBA scheme. Congo (Brazzaville) trades with the EU under the EU’s
GSP. As upper-middle-
income countries according to the World Bank classification, Gabon and Equatorial
Guinea are no longer
eligible for the GSP or any other preferential EU import regime (since 2014 for Gabon
and 2021 for
Equatorial Guinea); they export to the EU under the MFN regime.
EAC
The negotiations for the regional EPA were successfully concluded on 16 October 2014.
On 1 September
2016, Kenya and Rwanda signed the EPA between the East African Community and
the EU. All EU Member
States have also signed the agreement. None of the EAC members has yet
implemented the EPA.
ESA
Six ESA countries – Comoros, Madagascar, Mauritius, the Seychelles, Zambia and
Zimbabwe – concluded
an interim EPA with the EU at the end of 2007. In August 2009, four of those countries
signed it
(Madagascar, Mauritius, Seychelles and Zimbabwe). They have provisionally applied it
since 14 May 2012.
Comoros signed the agreement in July 2017. It ratified and started applying it in
February 2019.
In January 2013, the European Parliament gave its consent to the agreement. The deal
remains open to
other countries that want to join later.
SADC
The EU signed an EPA on 10 June 2016 with the SADC group. The agreement became
the first regional EPA
in Africa to be fully operational after Mozambique started applying it in February 2018.
Angola (the other
LDC in the SADC EPA configuration) has chosen to continue trading under EBA.
Policy Department, Directorate-General for External Policies
9
West Africa
Negotiations of the regional EPA covering 16 countries in West Africa were concluded
on 30 June 2014. All
EU Member States and 13 West African countries signed the EPA in December 2014,
except Nigeria,
Mauritania and the Gambia. The Gambia signed on 9 August 2018 and Mauritania on
21 September 20186,
leaving Nigeria the only country of West Africa that has not signed the EPA. The
agreement is the first
Economic Partnership that brings together not only the 16 countries of the region but
also their two
regional organisations: the Economic Community of West African States (ECOWAS)
and the West African
Economic and Monetary Union (UEMOA).
2.4 Rules of origin
Under EPAs, as usual in any trade agreement, exported products need to satisfy
negotiated RoO in order
to qualify for preferential treatment. In other words, RoO are the criteria, set by each
trade partner, to
determine the national source of each exported product. Then, preferences are granted
depending on the
geographic origin of imports. They often require that the exporting country has
performed a substantial
transformation of the product for it to be eligible for preferences. Other criteria can be
added, such as a
change of tariff classification or an ad valorem percentage of value added generated by
the exporting
country.
A significant increase in the number and the complexity of RoO has accompanied the
spread of Preferential
Trade Agreements (PTAs) around the world. RoO also apply to non-reciprocal
preferences like GSP
(Generalised System of Preferences), AGOA (African Growth and Opportunity Act),
EBA (Everything But
Arms) and all the reciprocal FTAs.
RoO are perceived by some as non-tariff barriers (NTBs) for exporters. Complying with
RoO requirements
entails costs for producers, exporters and customs officials. Firms and policy-makers
have advocated
simplification and, in the case of large-membership FTAs like the African Continental
Free Trade Area
(AfCFTA), harmonisation as well (de Melo et al., 2022).
Concerning EPAs, flexible RoO enable African countries to export products produced
with inputs from
other countries, especially in key sectors such as agriculture, fisheries, textiles and
clothing. For example, a
textile product can enter the EU duty-free if at least one stage in its production – such
as weaving or knitting
– took place in an EPA country, while EBA requires double-stage transformation for the
same sector.
Product-specific RoO are included in Annex II of the Protocol of each EPA. Provisions
on RoO cover products
in the following sectors: fruit, fisheries, essential oils, handicraft, gum, cocoa, clothing,
electrical equipment,
leather, meat and wood. Nevertheless, for some EPAs, some more relaxed rules are
included in Annex II A.
Further to these provisions, various EPAs grant derogations for some specific products.
For instance, the
ESA EPA granted a derogation on canned tuna; the signatories of the SADC EPA
benefit from derogations
for several products, including tuna and lobster (see the case of Namibia with a specific
rule for Albacore
tuna and of Mozambique with specific rules for shrimps, prawns and lobster).
The general provisions in EPAs also provide for very favourable cumulation
mechanisms, with the aim of
increasing economic integration between the EPA countries and beyond, and optimising
their
complementarities. Cumulation of origin is a relaxation designed to facilitate the
acquisition of preferential
origin: it allows materials (or components) used in the manufacture of a good and
originating in a partner
country to be considered as originating in the partner country where this use takes
place.
6 Mauritania and ECOWAS signed an Association Agreement on 9 August 2017 to
define the country’s participation in ECOWAS’s
trade policy, including the EPA.
In-depth assessment on EPAs and intra-regional African trade
10
While provisions may vary between EPAs, in general each EPA provides for four types
of cumulation rules.
We explain them from the point of view of African countries:
1. Bilateral cumulation with the EU
The basic cumulation rule allows for goods originating in country A and further
processed or added to
products originating in country B to be considered as originating in country B. All
preferential agreements
concluded by the EU include this rule, where A and B are the EU and its trade partner
involved in the
agreement. Here, they allow for a good originating in the EU to be added for further
processing (or added
to a product originating) in an African country having signed an EPA to be considered
as originating in this
African country. It therefore benefits from preferential access to the EU.
2. Diagonal cumulation within an EPA group and (ACP) African countries
This rule applies to an area comprising at least three countries. Diagonal cumulation
means that materials
originating in one of the countries (supplying country) can be processed in a second
country (processing
country) and acquire the preferential origin of that second country for export to a third
country (country
of destination), provided that the processing carried out in the second country goes
beyond what is called
‘an insufficient operation’7, as defined in the EPA protocol. For instance, for an African
country benefiting
from diagonal cumulation, when it processes beyond an insufficient operation a good
originating fromany
other ACP, this good is allowed to enjoy preferential access to the EU market.
3. Full cumulation between an EPA group and (ACP) African countries
Through total cumulation (cumulation of transformations), the origin rule is satisfied if all
the cumulated
transformations, carried out successively in two or more countries of a zone, and not
only the last one
before exporting, constitute a sufficient transformation. The operation carried out in the
last country of
processing must go beyond an insufficient operation as defined in the original protocol.
4. Cumulation with neighbouring developing countries
In this case, materials originating in a neighbouring developing country (belonging to a
coherent
geographical entity) other than an African country may be considered as materials
originating in the EPA
countries when incorporated into a product obtained there8.
In most implemented EPAs, cumulation with other (ACP) African countries outside the
group of the country
exporting to the EU will only apply if two conditions are fulfilled: the countries
participating in the
acquisition of the originating status have concluded administrative cooperation
agreements, and the
inputs and final products have acquired originating status through the application of
identical rules of
origin.
7 The examples of insufficient/minimal operations typically found include ‘preserving
operations to ensure that the products
remain in good condition during transport and storage', simple addition of water or
dilution or dehydration or denaturation of
products, ‘simple mixing’...
8 The list of what is considered a neighbouring country is annexed to each protocol. For
such cumulation to apply, it must be
requested by the EPA countries; in any case, the rules of origin applicable to inputs
from neighbouring countries are defined in
each EPA.
Policy Department, Directorate-General for External Policies
11
To understand how wide in scope these rules are, we highlight that, for the Pan-Euro-
Mediterranean zone9,
only the first three cumulation rules apply: bilateral and diagonal rules that are adopted
in the whole zone10
and the full cumulation which applies only partially11.
3 Trade relations
In what follows, we begin by presenting some structural indicators for African countries,
in order to
understand why the role of these countries in world trade is primarily a function of their
economic size and
commodity specialisation (section 3.1). Then we look at the at the European Union’s
trade relations with
ACP African groups (section 3.2) and at intra-regional trade in Africa (section 3.3). We
finally discuss the
issues at stake and the predicted impacts of EPAs according to relevant literature
(section 3.4) and possible
impacts of EPAs on gender equality (section 3.5).
In this section we present some statistics, in line with several EPA monitoring reports,
produced after five
years of implementation. However, descriptive statistics cannot identify any causal
relationship between
the entry into force of EPAs and their impact on trade. The causal ex post assessment
of EPAs is daring given
the recent implementation dates, the long lead times of their implementation (15 to 25
years) and the
limited availability of recent data on African countries. It is no coincidence that all of the
existing literature
on the impacts of EPAs agreements consist of ex ante analyses, which we examine in
section 3.4. If recent
data on African countries existed, it might be possible to make an assessment on some
countries such as
Madagascar, Mauritius, Seychelles and Zimbabwe, which implemented EPAs in 2012,
or Cameroon,
implementing its EPA since 2014.
3.1 Structural economic indicators
African countries engaged in EPAs largely belong to the two poorest categories of
development, according
to the World Bank classification. That is, 23 low-income and 19 lower-middle-income
countries, just 5
countries in the upper-middle-income category (Equatorial Guinea and Gabon in Central
Africa, and
Botswana, Namibia and South Africa in SADC) and only two high-income countries
(Seychelles and
Mauritius in ESA) (see Table 2 and Table A5).
Due to the region’s significant economic growth (see Table 3), we observe an economic
transition of many
countries between 2010 and 2020, especially from the low to the lower-middle category.
Mauritius and
Seychelles upgrade from upper-middle to high-income. Only two countries downgrade:
Sudan from lower-
middle to low and Equatorial Guinea from high to upper-middle (see Table A5).
Between 2010 and 2020, the average growth of most African regions potentially
engaged in EPAs was
higher than the world average (see Table 3). The exception is the SADC group, with a
decline in GDP due
particularly to South Africa and Angola. Despite economic growth, (ACP) African groups
continue to
amount to only 2 % of world GDP (3 % if we include North Africa).
9 The pan-Euro-Mediterranean cumulation zone of origin concerns the EU 27, Turkey,
members of the European Economic area
(Iceland, Liechtenstein and Norway) and all the signatory countries of the Barcelona
Declaration, namely Algeria, Egypt, Israel,
Jordan, Lebanon, Morocco, Syria, Tunisia and the Palestinian Authority of the West
Bank and Gaza Strip.
10 In the pan-Euro-Mediterranean zone, diagonal cumulation is only possible between
partner countries that apply identical rules
of origin among themselves. It operates according to the principle of ‘variable geometry’
since not all the countries in the zone
have yet included a pan-Euro-Mediterranean origin protocol in their bilateral
agreements.
11 Between partners in the European Economic Area (EU, Iceland, Liechtenstein and
Norway), between the EU, Morocco and Tunisia
and between EU and Algeria.
In-depth assessment on EPAs and intra-regional African trade
12
Table 2: ACP countries by development category (2010-2020)
L LM UM H
2010 GNI per capita in USD <=1005 1006–3975 3976–12 275 >12 275
Central Africa 4 2 1 1
EAC 6
ESA 7 3 2
SADC 1 3 3
West Africa 14 2
Africa ACP 32 10 6 1
2020 GNI per capita in USD <=1045 1046–4095 4096–12 695 >12 695
Central Africa 3 3 2
EAC 4 2
ESA 6 4 2
SADC 1 3 3
West Africa 9 7
Africa ACP 23 19 5 2
Source: Authors’ calculations from WDI World Bank Database.
L = low income, LM = lower-middle income, UM = upper-middle income and H = high
income
Table 3: ACP countries, GDP level and growth rates (2010-2020)
GDP (USD billions) % growth (2010-2020)
2010 2020
Central Africa 105.9 138.9 31.2
EAC 126.8 213.7 68.5
ESA 168.0 219.8 30.8
SADC 541.0 434.8 –19.6
West Africa 507.4 694.6 36.9
Africa ACP 1 449.1 1 701.8 17.4
World 66 596.1 84 906.8 27.5
Source: Authors’ calculations, from WDI World Bank Database.
It is precisely because Africa represents 2.8 % of global GDP that it represents only 3 %
of world exports in
2019 (Figure 1).
African countries are open to international trade, indeed. Their trade to GDP ratio (54 %
in 2019, according
to the World Bank’s WDI data) is in line with the world average (56 %) and much higher,
for example, than
that of China (36 %) (see Fontagné et al., 2022).
The structure of value added by sector for the entire region is close to that of the whole
lower-middle-
income-countries category in 2020 (see Table 4). African countries are highly
specialised in agriculture and
in raw materials, while manufacturing is under-developed, in particular in the Central
Africa group. The
service sector is also underdeveloped, with the exception of the SADC group.
Policy Department, Directorate-General for External Policies
13
Figure 1: Africa weighs little in world exports because its economic size is limited –
Shares in world GDP and world
merchandise exports (2019)
Source: Authors’ calculations, from WDI World Bank Database for GDP and BACI
database (Gaulier and Zignago, 2010,
updated in February 2022) for exports.
Table 4: Structure of value added by sectors (% on value added), 2020
Agriculture Industry Manufacturing Services
Africa ACP 18.4 26.3 10.9 48.9
Central Africa 18.1 34.3 15.2 43.9
EAC 24.3 22.3 9.3 46.3
ESA 24.0 23.6 6.7 42.2
SADC 4.3 26.4 10.9 61.2
West Africa 23.7 26.8 11.8 45.2
World 4.4 26.3 16.0 65.7
L 26.8 25.9 10.7 39.1
LM 16.1 27.8 14.9 48.1
UM 7.0 34.1 22.1 55.9
H 1.3 22.4 13.4 71.8
Source: Authors’ calculations, from WDI World Bank Database.
L = low income, LM = lower-middle income, UM = upper-middle income and H = high
income
3.2 EU27 and African countries trade relations
Considering trade patterns between the EU and the African countries, it is clear that the
stakes in the EPA
negotiations are much higher for the ACP than for the EU.
Despite the important preferences accorded to these African countries by the EU as
part of a long-standing
partnership12, only 4.3 %13 of EU imports, excluding intra-EU, came from African
countries in 2007, with
SADC and West Africa accounting for 44 % and 30 % of this amount, respectively.
During the period
12 Nevertheless, some African countries faced some high tariff rates, sometimes higher
than that applied by the EU to imports from
the Rest of the World (see Table A2) due to the concentration of some agricultural
products that are heavily protected in the EU
(e.g. tobacco, rice and milk).
13 Or 1.7 % if we include intra-EU trade. These figures are calculated from the BACI
database.
0
10
20
30
40
50
ACP Africa Africa Asia Europe North America
Per cent %
GDP Exports
In-depth assessment on EPAs and intra-regional African trade
14
2007-2019, African countries increased their exports to the EU by 8.6 %, and during
2007-2013 by 38 % (see
Table A3). Nevertheless, in 2019 African countries accounted for only 4.6 % of total
extra-EU imports (see
Table A3 in Appendix 2).
In contrast, the EU in 2019 remains Africa’s main trading partner, accounting for 23.3 %
of Africa’s total
exports and imports (see Table A4)14. During the period 2007-2019 African countries
slightly reduced the
tariff barriers imposed on imports from the EU, from an initial high level (see Table A1).
Despite the resulting increase in imports from the EU, the shift of the centre of gravity of
the world
economy towards Asia has led to a relative decline of the EU as a trading partner.
Nearly 26.9 % of African
exports went to the EU in 2007, and 31.2 % of African imports came from the EU. In
2007 China accounted
for only 8.7 % of ACP exports and 10 % of ACP imports; in 2019 its shares are close to
those of the EU (21.8 %
for ACP African imports and 19 % of ACP exports) (see Table A4).
The role of Africa15 mainly as an exporter of commodities to the EU remained constant
for decades,
mirroring its poor industrial development. The EU imports from Africa are mainly made
up of commodities
with low value-added content (55.2 %) – natural resources (45 %) and unprocessed
agricultural products
(10.2 %) – similarly to the composition of total African exports (see Table 5 and Figure
3). Africa on the other
hand imported mostly manufacturing goods from the EU (72.8 %).
Such trade patterns illustrate the highly asymmetrical level of development between the
two partners.
Table 5: EU-African trade pattern, by sector 2019 (shares in percentage points)
EU imports from Africa Africa imports from EU
Agricultural goods 10.2 7.6
Vegetable products 10.1 5.8
Livestock and animal products 0.0 1.9
Processed food 4.9 4.1
Agr. food 4.9 4.1
Natural resources 45.5 15.4
Primary 45.5 15.4
Manufacturing 39.4 72.8
Electronics and machinery 17.9 40.6
Metallurgy 10.7 8.6
Textile and apparel 6.0 3.6
Other industries 4.8 20.0
Total 100 100
Source: Authors’ calculations, from BACI database (Gaulier and Zignago, 2010,
updated in February 2022).
3.3 Intra-African regional trade
State of play and specificities
While African countries are open, they trade too little with themselves, too little relative
to their economic
size and to other regions of the world (Figure 2).
14 Wide heterogeneity exists, not only among the different regional groups but also
within them. Countries such as Cameroon
(Central Africa group) for which the EU is the major trading partner, contrast with
countries in the Caribbean and Pacific areas, for
which the EU is a more marginal trading partner, mainly because of geographical
distance.
15 Africa here includes also North African countries. However the picture does not
change much when considering only ACP African
countries.
Policy Department, Directorate-General for External Policies
https://www.europarl.europa.eu/RegData/etudes/STUD/2022/702567/
EXPO_STU(2022)702567_EN.pdf

23
23
differed extensively from year to year. It is possible that there are other factors which may
explain the decrease. The declining import does imply that these countries have reduced their
own export to South Africa since the EU-SA FTA was implemented. The import from Angola
has increased with remarkable 756 percent and import from Tanzania and Zambia has also
increased substantially. These figures prove that these three countries have not been affected
negatively by the agreement. South Africa has also increased its import from Botswana and
Lesotho. Their import from Lesotho has increased considerably (3365 percent) but the total
value of the purchased goods is only 1074 thousand Rands in 2004. South Africa purchases
mainly natural and cultured pearls from this country.56
Figure 5.2 demonstrates South Africa’s total exports and imports with the African countries. It
shows that exports have declined since 2002. It is possible that this negative trend is due to
the declining exports to the SACU countries. The total imports have nevertheless increased
since the implementation of the EU-SA FTA. It means that these countries have increased
their exports to South Africa.
FIGURE 5.2: South Africa’s Total Export and Import with African Countries in Billion Rands
0
5
10
15
20
25
30
35
1998 1999 2000 2001 2002 2003 2004
Export Import
Source: The South African Department of Trade and Industry
56 The South African Department of Trade and Industry:
http://www.thedti.gov.za/econdb/raportt/rapmenu1.html (050517)
24
24
5.3.2 America, Asia and the Pacific
The empirical evidence of America, Asia and the Pacific is limited to several countries, which
are in some respects important for South Africa. The selected Asian countries are China,
Japan, India, Indonesia, Malaysia and Thailand. The three last mentioned countries represent
the most developed countries in the AFTA 57 agreement. America is represented by the
NAFTA 58 countries which are Canada, Mexico and USA. South Africa’s trade with these
countries is relatively large and therefore important to investigate. Australia represents the
Pacific and it illustrates trade with this part of the world. Table 5.4 demonstrates South
Africa’s export to and import from these countries between 1999 and 2004.
TABLE 5.4: The Percentage Change of South Africa’s Trade with Asia, America and the
Pacific in Thousand Rands
Country Export Import
1999 2004 %-
increase59
1999 2004 %-
increase60
Australia 2.677.484 7.157.620 167 3.277.803 7.247.278 121
Cananda 1.282.885 2.345.792 83 1.149.838 2.021.875 76
China 1.657.646 6.580.392 297 5.010.606 23.021.153 359
India 2.362.443 3.713.043 57 1.512.306 4.547.261 201
Indonesia 781.310 1.070.972 37 1.164.790 1.986.812 71
Japan 11.236.396 26.601.871 138 11.434.740 20.942.096 83
Malaysia 749.960 1.749.677 133 1.781.860 3.793.912 113
Mexico 625.961 824.759 32 296.387 708.251 139
Thailand 1.176.422 2.577.869 119 1.494.548 4.261.537 185
USA 16.947.665 29.990.930 77 20.228.213 25.970.404 28
Source: The South African Department of Trade and Industry
Table 5.4 demonstrates that South Africa has increased its export to all listed countries.
Exports to China have increased by 297 percent and exports to Australia, Japan, Malaysia,
and Thailand have each increased over 100 percent. The export to the Asian countries has
57 AFTA stands for the “ASEAN Free Trade Area”. AFTA constitutes of ten Asian countries
and they have
eliminated tariffs, quantitative restrictions and other non-tariff barriers towards each other.
ASEAN:http://www.aseansec.org/viewpdf.asp?file=/pdf/afta.pdf (050506)
58 NAFTA stands for the “North American Free Trade Agreement”. The agreement was
implemented in January
1994 and the object is to eliminate tariffs towards each other.
Anne O. Krueger (1999) p. 3
59 (Export2004 ⁄ Export1999 ─ 1) × 100 = percentage export change
60 (Import2004 ⁄ Import1999 ─ 1) × 100 = percentage import change
25
25
improved more than the export to the NAFTA countries. South Africa’s imports from this part
of the world have also increased which is illustrated in table 5.4. They mainly import products
from the United States and the percentage increase between 1999 and 2004 is 28 percent. This
increase is small compared to the increase of China which is 359 percent. South Africa’s
export from and import to China, Australia, Malaysia, and Thailand has each increased by
over 100 percent. Only two European countries experienced this (Austria and Spain). The
positive export and import trend indicates that this part of the world has not been negatively
affected by the free trade agreement.61
Figure 5.3 and 5.4 illustrates South Africa’s export and import with Asia, Australia, and
NAFTA between 1998 and 2004.
FIGURE 5.3: South Africa’s Export to Asia, Australia and NAFTA
0
5
10
15
20
25
30
35
40
45
1998 1999 2000 2001 2002 2003 2004
Asia Australia NAFTA
Source: The South African Department of Trade and Industry
61 The South African Department of Trade and Industry:
http://www.thedti.gov.za/econdb/raportt/rapmenu1.html (050517)
26
26
FIGURE 5.4: South Africa’s Import from Asia, Australia and NAFTA
0
10
20
30
40
50
60
70
1998 1999 2000 2001 2002 2003 2004
Asia Australia NAFTA
Source: The South African Department of Trade and Industry
27
27
5.4 European Union’s Trade with South Africa and the Rest of the World
It is interesting to investigate whether the European Union’s trade with South Africa and the
rest of the world has changed since the implementation of the free trade agreement. However,
this discussion will be brief since the main focus in the paper is put on South Africa’s trade
and its changes. Figure 5.5 below illustrates how the export from and import to South Africa
has changed between 2000 and 2004. From this figure it is possible to argue that the export to
South Africa has increased.
FIGURE 5.5: European Union’s Export and Import with South Africa in Billion Euros62
0
2
4
6
8
10
12
14
16
18
2000 2001 2002 2003 2004
Export Import
Source: European Union 63
Figure 5.6 and 5.7 illustrates the European Union’s export to and import from Asia64 ,
Africa,65 and the United States. Exports to Africa have increased by about 27 percent between
1999 and 2003. During the same time exports to Asia have increased by about 31 percent. The
export to the United States has increased since 1999 but it started to decline again in 2002.66
62 The European Union’s trade with South Africa constitutes of all twenty five member states.
Statistics only for
the fifth teen member states are unavailable.
63 EUROPEAN UNION: http://trade-info.cec.eu.int/doclib/docs/2005/july/tradoc_113447.pdf
(050628)
64 Asia comprises: China, Japan, Korea, Malaysia, Singapore, Thailand and Taiwan. Further
information is
unavailable.
65 Africa also includes the Caribbean and the Pacific countries. Detailed information about each
African;
Caribbean and Pacific countries are not available.
66 EUROSTAT:
http://epp.eurostat.cec.eu.int/portal/page?
_pageid=1996,39140985&_dad=portal&_schema=PORTAL&screen=d
etailref&language=en&product=Yearlies_new_external_trade&root=Yearlies_new_external_tra
de/F/F3/dcb192
16 (050627)
28
28
FIGURE 5.6: European Union’s Export to the Rest of the World in Billion Euros
0
50
100
150
200
250
300
1998 1999 2000 2001 2002 2003
Africa Asia USA
Source: Eurostat
Imports from Africa have increased by 33 percent between 1999 and 2003. This result is
preferential for this part of the world because it suggests that their exports to the European
Union have increased. Figure 5.7 demonstrates that the import from the United States has
decreased by 6 percent between 1999 and 2003 and the import from Asia has neither
increased nor decreased during this time period. However, the import has at some stages
varied from both Asia and America.67
FIGURE 5.7: European Union’s Import from the Rest of the World in Billion Euros
0
50
100
150
200
250
300
1998 1999 2000 2001 2002 2003
Africa Asia USA
Source: Eurostat
67 EUROSTAT:
http://epp.eurostat.cec.eu.int/portal/page?
_pageid=1996,39140985&_dad=portal&_schema=PORTAL&screen=d
etailref&language=en&product=Yearlies_new_external_trade&root=Yearlies_new_external_tra
de/F/F3/dcb192
16 (050627)
29
29
Conclusion
The empirical evidence suggests that South Africa’s exports to the European Union have
increased by 75 percent and their imports have increased by 93 percent between 1999 and
2004. These positive figures imply that South Africa has benefited from the agreement. This
increase also suggests that trade creation has taken place. This argument is in line with the
results from Lewis, Robinson, and Thierfelder (2000) and Jachia and Teljeur (1999) studies.
Nevertheless, it is not possible through this paper to state the value of the trade creation. In
their study, Jachia and Teljeur (1999) also argues that the impact of the agreement leads to
uneven figures in exports and imports for South Africa where imports are expected to be
bigger than the exports. Their result agrees with the outcome of this paper’s empirical
evidence.
On the basis of the results from the empirical evidence it is possible to conclude that there has
been improved trade between the European Union and South Africa. The founders of the free
trade agreement were aiming for this positive outcome. However, it is important to remember
that trade does improve even if there are no free trade agreements implemented. An
interesting angle to the discussion is if the trade between South Africa and the European
Union would have increased even if the two parties never had signed the agreement. I argue
that the trade would have increased between the two parties in the absent of an agreement but
not as much as it has with the agreement. I argue this because of the natural rate of the trade’s
development. The tariff liberalization has in my point of view given the two parties a further
reason to trade more with each other because of the new and improved trade conditions.
South Africa’s trade with the SACU countries fluctuates a great deal from year to year. This
event complicates the possibilities to conclude the impacts of the agreement for the SACU
countries. It is possible to argue that these countries have been negatively affected by the
agreement when considering the negative percentage changes between 1999 and 2004. In the
article by Lewis, Robinson, and Thierfelder (2003) it is argued that some SADC countries are
hurt by the agreement while others benefit from it (the SACU countries are included in the
SADC region). There might be a possibility that the SACU countries represent the countries
that are negatively affected by the agreement. For instance, the percentage changes in exports
to and imports from Namibia and Swaziland have both been negative. This may indicate trade
diversion at their expense. However, it seems that the EU-SA FTA may explain some parts of
30
30
the negative trend for these countries but since no linear negative trend exists there might be
other factors that can explain this event. For most of the Southern African countries (Angola,
Congo, Mauritius, Seychelles, Tanzania, Zambia and Zimbabwe) both the exports and the
imports have been positive. This is a sign of that trade diversion has not been at their expense.
South Africa’s trade with America, Asia and Australia does not provide any negative
percentage changes. However, these positive changes might have been greater if the EU-SA
FTA had never been imposed.
The European Union’s trade with Africa, Asia and the United States has increased since the
free trade agreement was implemented. However, the European Union’s imports from the
United States have decreased by 6 percent. In their article, Jachia and Teljeur (1999) write
that trade diversion towards the European Union mostly takes place at the expense of Japan
and the United States. This decrease in imports may be a sign of that trade diversion. The
European Union’s trade with Africa has shown a slightly positive trend in both imports and
exports. For instance Thurlow and Holden (2002) concluded that the impact of the EU-SA
FTA on COMESA’s export to the European Union would be small. Since the European
Union’s exports to and import from South Africa only consists of respectively 0.5 and 0.6
percent, it is difficult to imagine that the EU-SA FTA affects the European Union’s trade
pattern to a great extend.
The tariff liberalization does imply that the government of South Africa and the European
Union receive less revenue from tariffs. It also implies that the producer surplus for both
parties has decreased and that the consumer surplus has increased. This is good for the
inhabitants in South Africa and the European Union. Even with the loss of tariff revenues and
the fall in producer surplus, I consider that the liberalization is preferential for South Africa. It
gives them, for example, a greater opportunity to take advantage of the European Union’s
more advanced technology. It is good if South Africa purchases these commodities from the
European Union since they experience comparative advantages in this area.
The impact of the EU-SA Free Trade Agreement has so far been beneficial for South Africa
in terms of improved trade. The trade with the rest of the world has not been affected by the
agreement to a great extent. Nevertheless, some SACU countries have shown negative signs.
The trade agreement is so far not fully implemented and the trade pattern might differ from
the one today at the end of the transitional period.

https://www.diva-portal.org/smash/get/diva2:130505/FULLTEXT01.pdf

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Economics, Race Equity

Understanding African trade is key to

helping its development
Remarkably little is known about African trade outside
specialist circles although annual revenues from trade are
more than foreign aid, remittances, and investment flows
combined. A new book edited by David Luke aims to
address this gap, examining what Africa trades, with whom,
and setting out how policymakers could forge more positive,
development-focused trade partnerships in the future.
24 Jan 2023•12 min read
Featured researchers

Professor David Luke

Professor in Practice and Strategic Director, Firoz Lalji Institute for Africa, LSE

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Africa is currently home to 1.3 billion people, a figure projected to rise to 2.75 billion by 2060
when the continent is forecast to have a combined annual output of $16 trillion and an
increasingly middle-class market. And yet, although the continent will, in just 40 years, have a
market with more people than India and China combined, there is little mainstream discussion of
its trading practices and partnerships.
It is this gap that Professor David Luke, Professor in Practice and Strategic Director of the Firoz
Lalji Institute for Africa at LSE, aims to address in his new book, How Africa Trades, published
by LSE Press in Spring 2023.
Is African trade underperforming?
How can we boost trade flows inside and outside the continent to create more jobs and further
development? This film explores the recent history of African trade and what needs to change.
A specialist in African trade policy, and former head of the African Trade Policy Centre at the
UN Economic Commission for Africa, Professor Luke’s aim is three-fold. “First, to demystify
African trade policy and promote a deeper and broader understanding of how trade impacts the
lives of ordinary Africans and the continent’s development aspirations. Second, to provide up-to-
date information that is easily reachable through open access publication on Africa’s trade data,
trade negotiations, trade agreements and policy priorities, with analysis for clarity. And third, to
empower policymakers, stakeholders, scholars, and others to interrogate the effectiveness of
trade agreements and policy choices including the implementation dimensions from a normative
perspective that is pro-development, inclusive and gives precedence to overcoming pervasive
poverty on the continent”.
“My experience in the UN”, he continues, “was that people in development seem reluctant to
talk about trade, which is seen as too technical, something of an esoteric specialisation. I found
this to be strange, because at the same time, policymakers in Africa and development partners
are talking about private sector reform, competitiveness, investment, jobs, livelihoods, the
wellbeing of people, and so on. But trade - what makes it all happen - is somewhat left out of the
picture.”
One reason for this, Professor Luke believes, is that development in the sense of the inclusive,
sustained transformation of economies is marginalised in the traditional academic disciplines that
focus on trade policy such as international economics, international relations and international
law, while development studies disciplines marginalise trade policy. “Expertise at the moment is
very siloed - looking at different aspects of trade, but not really pulling it all together to get a
coherent picture on trade and development,” he explains. “But if you're looking at the poorest
continent – Africa - you need to understand all these different aspects - the trade agreements, the
border and behind the border issues, the economics of trade, political dynamics, formal and
informal trade and how trade interacts with development – and so that was the motivation behind
the book.”
To understand “how Africa trades”, the researchers first looked at what Africa trades, accessing
data from a range of sources including the IMF, UNCTAD, the World Bank, and sources of
usually unrecorded informal cross-border trade to uncover the composition of Africa’s trade in
goods and services within and outside the continent. Interrogating what that trade means in turn
took the work to the voices of African diplomats, ambassadors at the World Trade Organization
(WTO), negotiators, civil society activists, lobbyists and policymakers.
What Africa trades is as important as who it trades with
Analysis of the data revealed a detailed picture of trading relationships with African countries,
both between themselves and the rest of the world. While the EU is Africa’s biggest trading
partner, followed by China and then intra-African trade, the researchers also examined Africa’s
trade with the US, UK and emerging economies such as India, Brazil and Turkey. The findings
are instructive for those seeking to develop trading partnerships with the continent.
“We first looked at what Africa trades and found a clear difference in the type of trade being
carried out between African countries and with the rest of the world,” explains Professor Luke.
“Trade with the rest of the world in goods is mainly commodities, and in services, mainly
tourism, while intra-African trade - the trade between African countries - is more diversified in
value-added goods such as manufactures and processed food and services such as transport
services, financial services, business services etc. But intra-African trade is small accounting for
only 18 per cent of Africa’s total trade. We found that over 60 per cent of this trade, although
small, is diversified while Africa’s trade with the rest of the world is about 80 per cent
commodities, with a heavy concentration in minerals and fossil fuels.”
“In fact, manufactures”, he continues, “are the largest type of export between African countries –
accounting for 45 per cent of all formal intra-African trade. Foodstuff exports are also more
significant, amounting to a fifth of trade between African countries. These 'formal' figures miss
some of Africa’s trade which flows across contiguous borders informally and unrecorded. Recent
estimates are that such informal trade flows account for the equivalent of between 7 and 16 per
cent of formal intra-African trade flows. Much of that comprises foods and basic consumer
goods. Informal trade is an expression of pervasive poverty and tends to be skewed towards
women.”
The problem with this type of partnership is one of trade diversion - it can potentially displace
goods that Africa can produce itself, which is something we’re already seeing

Investment data were also found to be a mirror of the trade statistics. The investment stock of the
three largest economies, the US, China and the EU revealed an excessive concentration in
mining and extractive sectors associated with fuels and metals that is not representative of their
investments elsewhere in the world. This matters, Professor Luke explains, because commodities
tend to be subjected to extreme price volatility, liable to rent seeking and elite capture, and the
extraction of value through illicit financial flows. “Commodities create less jobs,” he adds.
“Mining, for example, uses a lot of capital equipment, but doesn’t need that many people.
Whereas, when you are producing things, agriculture, processing agriculture, and so on, you are
creating more jobs. This has huge implications for development and the workforce. In agriculture
in particular, we find that there are more women involved in processing food, while
manufacturing can create jobs for African youth”.
“It's important to link jobs to trade, especially in the African case,” he adds “because the
demographics suggest that, currently, Africa has around 252 million youth (aged 15-24 years)
that need to be absorbed in productive activities. The demographic issue is very important to
relate, both to development, and in terms of how trade impacts the economy, creates jobs,
incomes, and so on.”
Further, the trading relationships between Africa and the rest of the world were found to be
asymmetrical – with Africa exporting basic commodities and importing mainly manufactured
goods. “The problem with this type of partnership is one of trade diversion - it can potentially
displace goods that Africa can produce itself, which is something we’re already seeing,”
continues Professor Luke.
These asymmetrical trading partnerships therefore leave Africa at a disadvantage, Professor Luke
argues, with countries with a stronger manufacturing base trading with Africa with its own
weaker manufacturing base and displacing what they can produce.
On top of this, some major trading partners, especially the EU, have different trade agreements
with African countries depending on whether they are north of the Sahara or south of the Sahara,
developing or least developed. This creates a hard border for trade with the EU between African
countries, which undermines Africa’s own efforts to establish common trade rules across the
continent, and disincentivises the emergence of supply chains between African countries. The
UK, by copying the EU’s approach after Brexit, has not made this problem any easier, says
Professor Luke, who last year submitted evidence to the UK’s All-Party Parliamentary Group on
Africa.
Intra-Africa trade is more diverse and can drive Africa’s
transformation
Common trade rules across the continent is key for tapping into the enormous size of the
collective African market, building upon its potential for further diversification, attracting
investors in non-traditional sectors, and achieving competitive economies of scale. This is part of
the rationale of the African Continental Free Trade Area (AfCFTA) Agreement that entered into
force under African Union auspices in 2019. “You always trade with your neighbours because
trade costs are lower, so this is a principle that has existed throughout time,” says Professor
Luke.
“If fully implemented,” he adds, “liberalised trade on the African continent offers an incentive
for the restructuring of African economies through diversification, agricultural and industrial
development. The trade deal offers a framework for continent-wide reforms to bring trade costs
down, undertake border reforms and foster institutions and practices of modern trade
governance.” Economic modelling suggests the deal could be worth as much as $450 billion for
the continent by 2045. The biggest prize, he explains, is that the trade deal offers African
countries a credible pathway to follow the play book of successful development experiences in
countries that attained rapid transformation and diminished levels of poverty within a few
decades through carefully designed trade policy interventions, effective institutions and other
economic and social policy reforms.
External and internal hurdles
Professor Luke foresees two hurdles that need to be addressed for the trade deal to be successful:
one external to Africa and the other internal. The external hurdle is the need for Africa’s trade
partners to offer a trade deal that minimises the risk of trade diversion – the displacement of
good and services that can be produced in Africa. The internal hurdle is for African policymakers
and stakeholders to ensure implementation of the AfCFTA, to sustain border and behind the
border reforms, and for Africa to speak with one voice when negotiating with bilateral partners
or at a global forum such as the WTO.
“In the book we argue that the United States Growth and Opportunity Act (AGOA), a trade
concession to sub-Saharan African countries that was enacted during the Clinton Administration
and has since provided a policy framework for Africa’s trade with the US – with bipartisan
support that transcends the dysfunctionality of US politics - is the model to follow. AGOA is not
perfect and even the US recognises the need to overcome its bureaucratic division between North
Africa and sub-Saharan Africa and to buttress it with complementary investment and trade
facilitation initiatives. We suggest ways in which AGOA could be reformed. But AGOA
provides African countries with breathing space as it does not require reciprocal market access as
the EU (and UK) trade agreements do or China which offers minimal trade concessions. What is
more, the US successfully obtained a waiver from the WTO to discriminate in this way in favour
of African countries.”
He argues that if external market access is secured for Africa’s exports without the need for
reciprocity, it incentivises African countries to seek trade opportunities with each other and
mitigates the risks of trade diversion. Economic modelling evidence is cited in the book to show
that after full implementation of the AfCFTA, gains for Africa would essentially be concentrated
in intra-African trade which could see an increase of up to 33.8 per cent by 2045, as compared to
a baseline without the AfCFTA. Yet what is most significant is where these gains would be, with
manufacturing and Africa’s long-overdue industrialisation benefiting most. “This data-driven
projection may be considered to be a judicious timeframe for a transitional period that allows a
sequencing of AfCFTA implementation followed by reciprocal market access,” he suggests.
“This will help African countries to build productive capacities and achieve their potential for
strong and diversified growth in intra-African trade with inclusive and transformational
consequences.”
...African countries should work together in their bilateral partnerships and at the WTO.

As regards the internal hurdles, the key, Professor Luke argues, will be to build and sustain
political coalitions for implementation of the AfCFTA and trade reforms. There is already strong
political momentum behind the deal with all but one (Eritrea) of the members of the African
Union being signatories. COVID-19 threw unprecedented economic difficulties upon the
continent, yet despite this the AfCFTA has retained and even built upon attention as a tool for
transforming Africa. But implementation remains a hurdle. In recognition of this, the African
Union decided to name the year 2023 the year of accelerated AfCFTA implementation.
When it comes to speaking with one voice, experience has shown that African countries are
vulnerable to being outmanoeuvred in trade negotiations and in their engagement with their
better resourced trade partners. In geo-economics and geo-politics, individual African countries
lack influence on their own to achieve meaningful outcomes that impact their development
prospects.
“When we looked at the WTO,” Professor Luke continues, “we found that African countries are
somewhat disadvantaged, because, altogether, their share of world trade is only about 2 per cent
– which is another reason why in there is a need to rethink these current asymmetrical
relationships.”
Because African trade shares are so small and so highly concentrated in commodities, they tend
not to use the WTO for dispute settlement, he explains: “However, even if they did, the result
would be like shooting themselves in the foot, because although WTO rules would allow them to
reciprocate - to inflict some trade-related pain on the other country – their trade is so small that
this would have no impact.”
He continues: “so, we analysed the data to show that for all the disputes at the WTO, the African
countries really have been bystanders. We are also able to show that, and even on the
negotiations side, many of the proposals that the Africans bring forward as ways to rebalance
some of the rules to make them more development-friendly have not gone anywhere.”
“A major internal hurdle to overcome,” he notes “is that the African countries should work
together in their bilateral partnerships and at the WTO. The African Union Commission has no
mandate to negotiate on behalf of African countries. The book recommends that this should
change”. Looking to the future, one of the emerging issues that will impact how Africa trades
concerns initiatives to decarbonise economies and the role that border adjustment measures can
play in reducing the risk of carbon leakage. “It is essential that from this early stage, African
countries are able to shape new global rules on trade and climate. They will only be able to do so
if they act together,” he says.
“The stakes are high,” he concludes. A reliable revenue stream from trade is critical for
development finance and sustainable debt management. Transforming how Africa trades will
unlock structural changes in African economies that have proved elusive so far.
Professor David Luke was speaking to Jess Winterstein, Deputy Head of Media Relations at LSE
How Africa Trades edited by Professor David Luke is published by LSE Press. Read a review on
the LSE Review of Books.
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 Topics
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Professor David Luke

Professor in Practice and Strategic Director, Firoz Lalji Institute for Africa, LSE
David Luke is Professor in Practice and Strategic Director at the Firoz Lalji Institute for Africa,
LSE. Specialising in African trade policy and trade negotiations, Professor Luke has decades of
experience in policy advisory services, managing and catalysing research, building partnerships,
training and capacity development for private sector and government.

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