Tuesday, August 26, 2014

Translation Tuesday: China’s Follow-Up Strategy for the Prospective African Free Trade Zone

By Laiyin Yuan

Author: Shao Zhiyuan
Translator: Laiyin Yuan
Published on: 08/18/2014
Source: China Industrial Economy News
Original text (in Chinese): http://www.cien.com.cn/html/report/14081882-1.htm

A strong and united Africa has always been a dream for many Africans, and the upcoming African Free Trade Zone would be a milestone for its regional integration. However, how would it influence African countries and their Chinese investors? Would Africa still be a “fairytale land” for Chinese companies under a multilateral economic framework? The Chinese say: of course there would be risks, but we should focus more on potential opportunities.
--- Laiyin Yuan (translator)

On August 16, Stergomena Lawrence Tax, executive secretary of the Southern African Development Community (SADC), said that if everything goes well, the African Free Trade Zone (AFTZ) will be established in 2015, a year earlier than originally planned.

Meanwhile, on August 17 and 18 the 34th SADC Summit was also held in Victoria Falls, Zimbabwe. During the conference, national leaders from 15 member countries discussed SADC’s economic restructuring strategy with the AFTZ-related negotiations in particular.
The Development of the AFTZ

According to the plan, the establishment of the AFTZ has been in discussion for years, and is expected to complete by 2016.

In 2011, many African leaders decided to accelerate the regional economic integration process and establish a free trade zone to facilitate free flow of goods in Africa. The AFTZ is expected to cover the 26 members of SADC, the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC).

“With 26 member countries, almost half of the total 54 on this continent, SADC, COMESA and EAC have a population of nearly 600 million, accounting for approximately 60% of Africa's population. They also have the combined gross domestic product (GDP) of nearly $1 trillion dollars, which is 58% of the African economy. The AFTZ between these three major regional organizations would enhance their international competitiveness, and set up a groundbreaking model for the cooperation between similar organizations as well as the comprehensive market integration of the continent,” said Yang Fan, associate professor at China Foreign Affairs University’s Department of Diplomacy and Foreign Affairs, to our journalist during the interview.

“Africa is a huge market with most of goods currently being imported from China. The establishment of the AFTZ would accelerate import and export speeds, and create better opportunities for Africa’s overall economic development. I think now is the right time to establish the AFTZ,” said Zhou Dewen, deputy director of the China Association for Promoting Democracy (CAPD) Central Economic Committee and president of the Zhejiang Private Investment Enterprise Association, who often leads Chinese corporate delegations to investigate market opportunities in Africa.

However, there are still enduring problems impeding the establishment of the AFTZ, which include uneven levels of economic development between countries, outdated infrastructures, insufficient human capital, high tariffs, weak supply chains, and homogeneous competition among industries, to name a few.

“African countries are usually small and have uneven development, so the AFTZ may unavoidably harm some countries under the current state of a huge wealth gap. Nonetheless, it is also a cause for seeking common interest. I think a win-win situation can be achieved with cooperation and negotiation to balance the benefits among stakeholders,” Zhou declared.

Now, the AFTZ is growing gradually. A Southern African Research and Documentation Center’s report states that the phase-one AFTZ discussion will soon wrap-up, involving core issues such as removing tariffs, as well as creating common rules and customs procedures. Subsequent phase-two negotiations will focus on service industries, intellectual property rights, competition policies, trade development, and more.

South African President Jacob Zuma once said that the establishment of a trilateral FTZ would create a huge market worth $875 billion dollars, which will have significant impact on speeding up Africa’s economic integration, boosting international trade, and promoting comparative advantages among countries.

Boitumelo Gofhamodimo, SADC director of Trade, Industry, Finance and Investment (TIFI) pronounced that southern African countries are ready to achieve the above goals. The SADC negotiations are expected to complete by the end of this year, which will promote trade and regional integration.

Chinese Follow-Up Strategy

China and Africa have had a close relationship all the time from the consistent aid since the founding of People’s Republic of China to current large-scale investment after China’s “reform and opening.” At the same time, more and more Chinese entrepreneurs view Africa as a “fairytale land.”

As the global economy gradually recovers, Sino-Africa trade has maintained its strong momentum. In 2013, bilateral trade volume between the two regions reached a historical peak of $210.2 billion, with a year-on-year growth of 5.9%. Chinese exports to and imports from Africa were $92.8 billion and $117.4 billion respectively, an increase of 8.8% and 3.8% over the last year.

Stephen Priestley, regional head of Origination and Client Coverage of Standard Chartered Bank’s Corporate and Institutional Banking in Africa, said that there would be great business opportunities in African retail and food industries with increasing household disposable income and changing consumption patterns over the next decade. Meanwhile, there would also be opportunities in fixed-asset investment. Compared the more than $90 billion dollars that is required to be invested annually in the continent, currently African governments only invest less than $20 billion. There is a huge gap to be filled.

However, China must also consider some challenges if the AFTZ is to be established as predicted. China used to trade and communicate bilaterally with individual African countries, but it would face the entire AFTZ in future dealings. Would this impact China negatively?

“We are not familiar with specific AFTZ policies, but there may be some minor impact on us in the beginning,” explained Zhou. He further clarified that the Chinese government would also make some adjustments in Sino-Africa policies at the initial stage after the AFTZ’s establishment in order to pursue Chinese interests and avoid risks.

He also stated that China was very optimistic about the African market. China used to export mainly to Europe and the U.S., but those markets are becoming unfavorable. Not only are they already saturated, but a number of countries are more protectionist and erected trade barriers, which all negatively impact on Chinese exports.

As Yang pointed out, “China has been supporting regional integration and the cause of the African Union since African independence movements. Whether the construction of the TAZARA Railway (Tanzania-Zambia railway) in the past or current assistance of ‘three-dimensional transportation networks (high-speed railway, highway and regional aviation)’ carried out recently by Premier Li Keqiang, these are all Chinese contributions to Africa.”

Yang also said that African integration would not only benefit its own economic development, but also provide opportunities for Chinese aid and economic ties with the continent. For example, the primary bottleneck to developing trade and promoting investment in African countries is interdependent infrastructure – highway, railway, bridge, airport, telecom, etc., but the AFTZ’s establishment is required to build said infrastructure. The free flow of goods, services, and investment in the AFTZ will reduce commercial cost and boost regional industrial development, which will eventually create a large regional market, increase investment, and develop cross-border infrastructure. China can also benefit from this process in both the short and long-term.

In addition, there is another highlight to Sino-African friendship – more attention devoted to private enterprises.

Besides Chinese state-owned enterprises’ (SOEs) continuous investment in infrastructure and energy, private enterprises are becoming the major driver of tapping into the African market. They can be found in all of 54 countries and six regions of Africa, including a few countries that have not established official diplomatic relations with China.

According to Ministry of Commerce (MOFCOM) statistics, there is sustained growth in Chinese investment in Africa. As of now, there are cumulatively more than 2000 Chinese ventures covering sectors ranging from agriculture, infrastructure, processing, manufacturing, resource extraction, finance, trade, logistics, and mores. By the end of 2012, Chinese cumulative direct investment in Africa reached $17 billion dollars, a far cry from the less than $500 million cumulatively invested a decade ago. Chinese investments account for one-tenth of total foreign investment in Africa.

“Due to conflicting interests, the European Union and the United States have been criticizing Chinese investment and seizing African market share from China. In the past, Chinese investment in Africa was mainly initiated by government and SOEs, which was heavily criticized as government intervention. Now that investment is mostly led by private enterprises. I think in the future, the government should pay more attention to private companies, providing them with more favorable policies and financial support,” Zhou explained.

He said that in order to protect themselves and reduce unnecessary conflict, SOEs are adapting and tend to do business like private enterprises.

According to a number of experts, Africa presents both opportunities and risks for Chinese companies, which both should be carefully analyzed. In order to realize the mutual development of Chinese investors and their African investees, Chinese enterprises also need to improve their understanding of African business environment, establish effective overseas investment security mechanisms, and strengthen their awareness of social responsibility.

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