Trade Dependence For Commodity Exporters Remains Risky
Nearly two decades after the launch of the first Forum on China-Africa Cooperation, relations between the two remain unbalanced, according to Ruben Nizard, and economist with global credit insurer Coface and author of the study, China-Africa: Will the Marriage of Convenience Last?
Bilateral trade, according to Coface, topped $123 billion in 2016 and has soared over the past decade mainly driven by sub-Saharan African exports until 2014. Today, the region now has a trade deficit with China. While 90 percent of exports to China are concentrated on natural resources, imports are more diversified–manufactured goods, transport equipment, and machinery, to name a few.
The slowdown in China‘s economy and its re-orientation towards private consumption are evident in a weakening of demand for commodities from Africa. This, Nizard notes, will have inevitable consequences for exporters. According to the credit insurers calculations, sub-Saharan Africa had a higher export dependency ratio, on a 0-to-1 scale, than other emerging countries in 2016, at 0.24 compared to 0.16 for Southeast Asia and 0.19 for Russia, Brazil, and India. Data shows the differential is even greater with the European Union (0.07) and the United States (0.12).
“To no surprise, the countries that have benefited the most from China’s expansion and those with a less diversified economy are likely to feel the effects of lower demand more acutely.”–Ruben Nizard
The strongest trade dependency remains concentrated around crude oil exports. According to the index established by Coface, South Sudan has topped the charts since its independence was declared in 2011, followed by Angola and Congo. The Gambia, which is a notable producer of wood, is not far behind. Eritrea, Guinea, and Mauritania are also among the most dependent countries due to their exports of metal ores including iron, copper, and aluminum.
Diversification Is Key
Despite this strong dependence on exports to China, the China-Africa relationship could turn into a win-win cooperation. Africa’s export basket is gradually diversifying, incorporating higher value-added processed raw materials, raw wood, and, to a lesser extent, agricultural products such as tobacco, citrus, seeds, and oleaginous fruit. This could increase local incomes and foster employment and technology transfers even if it makes commodity-rich countries vulnerable to international price fluctuations.
Diversification also includes foreign direct investment (FDI) flows and loans from China. Chinese investments in Africa are no longer extractive in nature and now extend to services, processing industries, transportation, and utilities. Existing initiatives such as the One Belt, One Road should ultimately boost regional connectivity and cut export costs.
Given FDI and financing levels are lower than those of trade, African countries that are heavily dependent on China remain highly vulnerable to weakening demand or a further decline in the prices of raw materials. These countries would also be vulnerable to changes in China’s foreign policy because Chinese interests in the region are, firstly, based on a complex network of political and economic objectives.
“The latest developments seem to be moving in the right direction but efforts are still needed to move from a marriage of unbalanced convenience to a partnership based on win-win cooperation,” said Nizard.