_ IfW Kiel. 2 September 2020.
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.
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.
Assessing Asia – Sub-Saharan Africa Global Value Chain Linkages (2020). IfW Kiel.
While overall exports from Africa to Asia are still highly concentrated in resource-intensive sectors, a few African countries have exploited the emerging opportunities to diversify export portfolios through exporting to Asia. Each African nation has a distinct main trade partner in Asia, in contrast to the common view that China has become the dominant trade partner of most African nations. Using a panel data set for 46 African countries over 16 years from 2000 and 2015, we find that exports to Asia are positively correlated with exports to the rest of the world, suggesting that in contrast to trade diversion, trade with Asia complements exports to other countries. Asian economic engagement in the continent is associated with countries’ exports “moving up the value chain”, as measured by the upstreamness index proposed by Antras et al. (2012). However, such a process was accompanied by a reduction in the length of their production chains, implying that fewer stages and countries are now involved in the production of exported goods.
Using a panel data set of trade for 46 Sub-Saharan African countries over 16 years from 2000 and 2015, the regression analyses show that Asian countries’ economic engagement complements rather than crowds out Sub-Saharan African countries’ exports to the rest of the world. Using panel data on trade at the country-industry level, the analysis finds that Asian economic engagement in the continent is associated with an increase in upstreamness. Proportionally more imports from Asia are associated with shortening of the production chains of a Sub-Saharan African nation’s exports. Trade with Asia has no effect on the domestic content in Sub-Saharan Africa’s exports. Engagement with Asian GVCs resulted in capital deepening of Sub-Saharan African exports, but no enhancement in the skill content of exports. Such capital deepening of exports is mostly driven by more exports of capital-intensive goods to Asia, rather than exports of such goods to the rest of the world.
The regression results show that proportionally more exports to but not imports from Asia can help SubSaharan African nations move up the value chains. The effects are particularly strong among SubSaharan African countries that have access to the sea but are relatively poorer than their Sub-Saharan African peers. Corruption appears to impede not only trade, but also the benefits from participation in GVCs. This result helps explain why anti-corruption policies can enhance economic efficiency. Surprisingly, the general measure of a country’s rule of law does not affect the relation between countries’ trade with Asia or their GVC outcomes.
On identifying which value chains in Asia, if any, promise the largest potential for Sub-Saharan African nations to diversify their exports or move up the value chains, based on the assessment in this paper, it is not easy to come up with a definite list of products or countries. The study does reveal that countries that are more dependent on natural resources, like Nigeria, seem to have diversified successfully away from primary goods, thanks to trade with Asia. Also, based on the finding, governments of Sub-Saharan African countries, especially those that are along the coast of the continent, could consider policies to promote more participation in Asian value chains as a vehicle for poverty reduction.