Impact of Chinas Joining the WTO for SSA Countries

Impact of Chinas Joining the WTO for SSA Countries INTRODUCTION 1. INTRODUCTION For China, the worlds 7th largest and most populous economy, November 2001 was a momentous period when it made a giant leap into the much quested free market by becoming a member of the world trade organisation (W.T.O). Although, China had embarked on market liberalization policies since the 1970s membership into the W.T.O. was a compelling opportunity to standardise its trade principles and practices in accordance with those of other free market economies and assimilate into the new era of globalization. The implication of this great milestone is remarkable not only for China itself, but also for the global market system. However, for Sub-Saharan Africa (SSA), the accession of China into the W.T.O. marked a new era of economic milieu, due to the fact that, conventionally, the western powers were the countries with substantial interest in trade, aid and economic partnership and, unfortunately, due to recent domestic challenges facing these western nations, or what some policy analysts would call the marginalization of Africa, the attention given to SSA has been fast declining. However, the last ten years have brought China closer to the need of African countries. As observers would note; this increasing role does single-handedly invalidate the growing marginalization of Africa by the much traditional European and American powers (Mandy, 2005). In contrast to the western powers, by offering aid with fewer preconditions, China has presented a more attractive alternative to conditional W estern aid and debt cancellation together with a boom in Sino-African trade, while gaining valuable diplomatic support to defend its international interests. It should be noted that in 2001, China was the 7th largest economy in the world, although, this status has presently changed, however it is pertinent to state that the researcher takes into account Chinas status when it became a W.T.O member in 2001 (See: UNCTAD, Global Investment Report 2002). While the continuous engagement of China with SSA has continued to spawn important policy implications for growth and investment distribution, there are growing concerns about its adverse effects on key developmental areas such as manufacturing, inward foreign direct investments, production and other key sectors. In fact, its much advertised benefits for commodity boom for African countries is ambiguous since this apparent benefit is inextricably linked with erratic exchange rates and institutional corruption. Thus, the aim of this study is to contribute to literature on the implication of Chinas accession into the WTO for Sub-Saharan African countries. This study assesses both its positive impacts and negative implication for trade, manufacturing and FDI, while it also explores the underlying factors behind the growing involvement of China in SSA. In order to achieve these aims; this research has identified a number objectives which will inform its scopes and direction. 1.1 Research Aims and Objectives The overarching aim of this study is to critically explore the impact of Chinas accession into the WTO for SSA countries and identify the specific channels through which this impact manifests. Objectives: Identify andanalyse the specific vector channels through which the impact of Chinas accession into the WTO is transmitted to SSA countries. Examine the overall impact of Chinas accession into the WTO on Sub-Saharan SSA countries Investigate into the primary drivers of Chinas increasing interest in SSA Conduct a case study analysis of two SSA countries aimed at illustrating and understanding the extensive influence of China on SSA 1.2 Background There is mounting evidence in literature to suggest that while Sub-Saharan African economies are economic winners on one hand. They are losers on the other, from Angola, to Nigeria; SSA countries have been reaping the enormous gains of commodity boom during the past ten years. In fact Chinas demands for these commodities have in many cases been less fulfilled and thus its growing interest for more and more imports. Stevens and Kennan (2005) noted that economies which are endowed with natural resources demanded by China will continuously record an exponential growth in their export and consequently earn more money. While countries that produce what china produces like (apparels and garments) will see a huge decline in exports and consequently earn less money. This concept from both perspectives points to the SSA example: while on one hand, individual countries in Sub-Saharan Africa have enjoyed huge financial gains from commodity exports. On the other, these huge gains are in turn use d to purchase manufactured goods from China, thus, killing the local industries and genuine small scale manufacturers. Stevens and Kennan (2006) in their further examination of the impact of China on developing economies proposed a method which was subsequently termed as the typology of â€Å"winners† and â€Å"losers† (Goldein et al, 2006). â€Å"winners† are those economies for which the number of sectors recording trade gains are associated with lower costs of imports or where higher prices for exports is greater than the number of sectors incurring losses due to increased competition from China or higher import prices resulting from higher Chinese demand for a given product. Regarding the winners, Stevens and Kennan assess the gains from trade to check whether the gains arise primarily from lower import costs, from greater export revenue, or from both; and conclude that all the SSA countries (except South Africa) gain primarily from lower import costs. Other empirical studies (see e.g. Razmi, 2006; Qureshi and Wan, 2006) have explored the phenomenon of lower import costs and interestingly, their results shows that SSA countries have indeed enjoyed importing more products from China due to the lower import costs involved and even if SSA countries do not import from China, their local industries will not be as competitive as it should be because of stiff competition from china. 1.3 Problem Discussion Africas quest for a more cordial relationship with China is grounded in its depth of poverty and genuine need for foreign direct investment as an incentive to accelerate economic development and consolidate recent democratization efforts. However, the increasing interest of China in Africa is questionable and in fact has been the focus of several policy and research studies during recent years. The possibility that the biggest economy of the 21st Century will not be a democratic or western state serves to challenge conventional â€Å"international relation theories† that have emanated since the culmination of the World War II through the pre-eminence of the western economies in global affairs. Chinas current friendship with Africa are not traditionally restrained to the post Cold-War era, but China admits, it is more dynamic and influential to international politics and indicate a new background for South-South collaboration. China insistently advocates, that its considered af fairs with African economies has stemmed from a common history and is based on bilateral understanding and fairness in a climate that ensures fair-play and mutual benefits. The EU, US and an array of important observers, voice concerns about the real objective of China in Africa. London and Washington however, considers Chinas new affairs with Africa as a long term obstruction to their interest and a threat to their strategic-partnership with African countries. On top of these growing opposition and concerns, there are more worries that the risk-adverse keenness of China to parley with corrupt African governments can undercut democratic reforms and conflict resolution on the continent where the west have keen interest. The questions remain, whose claims have more validity and legitimacy and how can the truth be substantiated? Should the neo-realists proposition which is well grounded in empirical positivism be relied upon in coming to terms with the corrupt leaders of Africa? Or do we rely on the theories of the west whose well grounded postulation provides a combination of free-market experience, albeit with little self-interest. Or do we simply put forward unconventional epistemologies that will provide an expanded collection of truth possibilities about Sino-African engagement? This study theoretically explores these extant perspectives and seeks to bridge existing gaps in literature within the context of the current study. 1.4 Motivation During the last ten years, policy observers have noted that China and Sub-Saharan Africa have become more cordial such that Beijings interaction with Africa has significantly increased and as such spawned impressive growth in bilateral trade. This relationship has been demonstrated by the establishment of 700 Chinese firms with an investment of around  £1 billion in SSA over the last ten years, (Bejing Times, 16. December, 2003). As evidence to this growing relationship, the UNCTAD investment report of 2008 shows that Chinese FDI stock in Africa has grown from under  £35 million in 1990 to over  £1.5 billion in 2006. This translates to 30% growth in annual trade and investment since the late 1990s between Africa and China. However, in spite of this growing and impressive development, there is consensus amongst policy makers in SSA that key sectors of the economy have been declining since the engagement of China. These sectors usually include the manufacturing, the textile indus try, productive sectors and the Small business sectors (UNCTAD, 2004; ANIP, 2005). Notwithstanding the negative implications, Chinas engagement with SSA have been growing exponentially and by 2010, China is forecast to be the number one trading partner of SSA, ahead of the United States, France and the United Kingdom. This study therefore, seeks to examine why in spite of the adverse implication for SSA, the Sino- African relationship is still growing, in addition to the investigation of what specifically underlies Chinas continuous interest in Africa. The Non-Aligned movement gave meaning to the concept of south-south cooperation as a concerted effort by developing states (often newly independent) to avoid being sucked into the dichotomy of the Cold War power struggle (Murray, 2008). 1.5 Research Questions The research question for this study was inspired by the definition of (Rea and Parker, 2005) who defined it as a question or set of questions that can help in bringing out evidence based facts which provide answers to research problems. As they further suggest, it not only provide answers to research problems but also helps in the development process of new research ideas (Rea and Parker, 2005). Primary Research Question RQ1: What are the inherent economic implications of Chinas increasing engagement with Sub-Saharan Africa? Secondary research questions RQ2: What are the channels through which the impact of Chinas accession into the W.T.O transmits into SSA countries? RQ3: What specific sector(s) does the Sino-African relationship play the highest positive role? RQ4: What is the underlying factor behind the interest of China in Africa? RQ5: Is there a significant relationship between economic development and Chinese investment in SSA countries? 1.6 Research Outline Following the first chapter where the objectives and research problems have been rightly identified, the subsequent chapters are ordered with the following sequential arrangement. Table 4: Chapter Mapping Source: Researchers Conception Chapter 2 is the review of extant literature relating to the present investigation and conceptualization of empirical framework with an identification of theoretical support for the previously established facts. This chapter is followed by Chapter 3, which is the research methodology where the research approach, strategy and data collection methods were discussed and explained. In this section, the researcher provides an explanation for the case study approach and introduced the Complimentary-Competitive impact framework. This was followed by Chapter 4, where the case studies presented were analyzed. This chapter further considers the impact of China on SSA countries using the earlier introduced Complimentary-Competitive framework; this was followed by a critical discussion of the impact. Chapter 5 is the conclusive part where the researcher considers the implications of the result for SSA countries and the future of Sino-African relationship.. LITERATURE REVIEW 2. INTRODUCTION Existing literature offers a reasonable amount of information about the scale and size of bilateral-trade between China and SSA. We learn for example that trade between these two regions have increased tremendously, particularlyfollowing the years after2001. Available data-records can be explored to give us more information as to what is traded and by whom. The literature, nonetheless, is ambiguous about how this bilateral trade and relationship actually affects Africa or how the impacts of FDI manifest. Which particular SSA economies benefit and in what particular sectors? Who are the winners and who are the losers? Why? It is so apparent that trade is not the only vector channel between China and SSA, and that other channels may also create positive or negative implications. The aim of this chapter is to identify and explore other vector channels through which the impact of Beijings interaction with Sub-Saharan Africa manifests. Following this identification is a conceptual framewo rk developed by the researcher in order to deeply understand the inherent research issues and broad problems with the Sino-African relationship. 2.1 Previous Research The accession of china into the WTO and its rise as a great economic power-house is one of the defining events of the 21st century. Consequently, there has been a rising interest of literature studying its impact on various factors. But notwithstanding this considerable attention, there is relative dearth of systematic research on the Sino-African relationship impact especially relating to Chinas accession into the WTO (Geda, 2006). Notable exceptions of this trend are the IMF qualitative research of (Wang 2006) which finds that Africas needs for trade, road and rail networks including foreign direct investment are the prominent factors drawing the continuous interest of china. Another study by World Bank (2004) examined the limitations and policy restraints for increasing Sino-African trade and investment. Since these two prominent studies, more and more studies have been investigating how Chinas engagement affects Africa in one way or the other. The study of Mayer and Fajarnes (200 5) conducts a comprehensive analysis of the advantages that Africa can anticipate from Chinas increasing trade engagement and finds that, while the advantages are liable to be modest, the predilections have been considerately adapted to African export capabilities. The quantitative study of Eichengreen et al(2008) analysed the competitive issue between China and some African countries using a gravity model. Their results indicate that countries at different level of development are affected very differently. Whereas an increase in Chinas output positively affects the exports of high-income African countries. However, it negatively affects those of the less-developed countries in the East African region of SSA. In another study, Stevens (2005) identified possible winners and losers among African countries as China becomes more prominent in world trade; they found that while African countries are winning on one hand, they are losing on the other. Shafaeddin (2002) studied the impact o f Chinas accession into the WTO on exports of developing countries. He found that Chinas accession into the WTO will increasingly give its industries a better domestic value leading to more competitive advantage over other exporters and this could be a threat to the local industries of those developing economies. In 2008 another study exploring the growing relationship between China and Africa observed that â€Å"A key factor underlying Chinas recent rapid expansion in Africa is Beijings desire to gain secure access to supplies of oil, gas, and key minerals. As a late entrant to the global oil market, Africa perhaps represents the last major sources of oil reserves that are not primarily managed by major Western energy companies, and hence available for Chinese corporations to invest in, and ultimately resulting in partial control† (Besada et al, 2008). (Kaplinsky, McCormick and Morris, 2006) studied the impact in four vector areas; Aid flows, trade flows, FDI flows, technolo gy transfer and integration. Other recent studies have also explored the specific vector areas through which the impact of Chinas accession into the WTO manifests on SSA using GDP growth, income distribution, governance, competition, diversification and many others. (Geda, 2006; Tull, 2006; Goldstein et al, 2006; Palley, 2003) 2.2 Assessing the Impact of China on Sub-Saharan Africa As aforementioned, there is a growing body of evidence in literature to suggest that the Sino-African relationship is manifesting through different specific channels. Within each of these channels, it is possible for the Sino-SSA relationship to either be competitive or complementary (Geda, 2006; Kaplinsky et al, 2008). Looking at the trade channel, for instance, China may provide SSA with appropriate capital goods and cheap consumer products and SSA may in turn provide China with the commodities it requires to fuel its continued economic expansion. Both economies gain from this relationship. On the other hand, Chinas export of consumer goods to SSA may displace local producers leading to competitive impacts on workers and entrepreneurs in these sectors. (Kaplinsky et al, 2006) The impact of these relationships for Africa has been both significant and positive. Growth rates have been elevated, with a positive impact on poverty alleviation. These flows provide substantial and largely untied development finance for Africa (in contrast to present conditional OECD flows). The continent may therefore present only a small part of a rapidly changing global economic structure in which China is centrally involved, but for Africa this will likely prove to be of high significance (Besada et al, 2008). What lies behind this development are a number of factors and motivated by chinas need to secure natural resources to sustain its economic boom at home. More so, there are little doubts that natural resources are at the core of Chinas economic interests in Africa and also Chinas share in the increase in global demand for some mineral resources such as aluminum, Nickel, copper and mostly oil consumption (Besada et al, 2008). This increasing development also reflects a high-level Chinese decision to contribute to South-South cooperation via mutually beneficial commercial relationships with the African continent. But at the same time, it also reflects commercial decisions made by individual Chinese enterprises (ibid). One claim that is supporting this theory is that Chinese firms have been successful in delivering comparable infrastructure projects at prices in the range of 25 percent and 50 percent less than those which other foreign investors charge (Besada et al, 2008). In assessing the impact of China on SSA, various studies have employed several empirical measures. However, prominent amongst this is the method devised by Kaplinsky (2008) who integrated a three vector channel of this impact into one synthetic framework; called the complementary-competitive and direct-indirect impacts. As shown in the (table 1) this framework shows that complementarity and competitiveness is easily understood. By contrast the distinction between the direct and indirect impacts is less obvious, and its significance is less widely recognized. The direct impacts are relatively simple and clear. Both complementary and competitive impacts occur as a result of direct bilateral relations between China and SSA. These impacts can be measured, by charting the direct trade flows between China and SSA, breaking these down by sectors and countries, and over time. The indirect impacts occur as a result of Chinas relations with third countries, working their way indirectly through to SSA. Staying with the trade example, Chinas demand for commodities may raise their prices at a global level, and even though a country like Ethiopia does not export animal feed to China (a direct relationship), it sells animal feeds into a global market in which prices have been raised by Chinas growing imports (indirect impact). As we shall see below, and particularly in the case of trade, the indirect impacts of China on SSA are sometimes much more substantial than the direct impacts. However, almost all of the analysis of the impact of China on SSA focuses on direct, bilateral relations, and hence tends to miss some important issues. Table 5: Complimentary-Competitive Framework Source: (Kaplinsky et al, 2006) Since this study is focusing on other vector channels as the one seen above, it might be pertinent therefore to have a specific framework in analyzing the impact China on SSA. Thus, the need for the next section 2.3 Conceptual Framework Figure: 3 Conceptual Framework Source: Authors conception This conceptual model shows the four conceptualized vector channels through which the impact of china transmits on SSA. Theoretical explanation is further given in support of each of these vectors channels. 2.3 TRADECHANNEL There is evidence to suggest that trade between China and SSA since 2001 is a small percentage of each regions total trade. However, its rapid growth suggests that the trade channel is a momentous source of impact (Kaplinsky et al, 2008). The volumes of Trade more than quintupled from over  £5 billion in 2002 to over  £25 billion in 2005 and more than  £50 billion as at 2006 (ibid). The basis for Chinas rising trade links with SSA has been its particular impressive growth since its accession into the WTO. One of the main features of this growth has been its deepening trade orientation, with the trade-GDP ratio in excess of 70 percent, well above the â€Å"norm† for large countries. Within this, China has become a major exporter of manufactures and a significant importer of commodities (Zafar, 2007). In 1990, SSAs total imports from China were less than 1.1% of its imports from industrialized economies, but by 2006, it had risen to over 8 %. In the same vein, SSA exports to China were less than 1% of its total exports to industrialized economies, but by 2006 the proportion had risen to eleven percent. However, Since 2002 after china joined the WTO, imports from China have been expanding more slowly than exports, allowing SSAs trade balance with China to turn from negative to positive ( Kaplinsky et al, 2008) Figure 4: Sino-SSA: Balance of Trade Source: (IMF Dots: Kaplinsky et al, 2008) For some SSA economies, the importance of China as a direct destination of exports grew particularly rapidly. In the case of oil, for example, exports to China account for almost around 86 and 100 percent of all oil exports for Angola, Sudan, Nigeria, and Congo. A similar picture is true for the DRC, which sends 99.6 percent of its basic metal exports to China. On the import side, only seven SSA countries source a significant share of their total imports from China. Sudan, which has growing and policy-related energy links with China stands out, with 14.2 percent of its imports coming from China, followed by Ghana and Tanzania (9.1 percent), Nigeria (7.1 percent), Ethiopia and Kenya (6.4 percent) and Uganda (5.1 percent) (Jenkins and Edwards, 2005). Almost all of these imports were manufactured products. With that historic picture as background, we look forward to areas of potential bilateral trade between China and SSA. 2.4 EXPORT CHANNEL Positive impact for SSA is sufficiently provided in the literature assessing when assessing export links between China and Sub-Saharan Africa. However, unlike this present study, most authors have assessed this vector as an indirect trade channel. Several studies has however, attempted to explore the impact of this indirect trade channel. For example, the study of (Kaplinsky and Santos-Paulino 2006) investigated the similarity between China and SSA exports (Jenkins and Edwards 2006) classified losers and winners and from exports with China, The losers are those economies which export products which China exports or import products which China imports (Stevens and Kennan (2006). All these empirical investigations have provided constructive insights into the export impacts of Chinas trade on SSA. Kaplinsky, McCormick and Morris (2008) noted however that, the fact is apparent that only a small amount of engagement exists between China and SSA in intermediate products thus, it appears th at there exists little Sino-African integration in coordinated global value chains. More so, owing to the reason that most if not all of the previous analysis have been conducted at fairly high levels of trade aggregation they have tended to impede the severity of Chinas indirect trade impact on SSA exports. Thus, it is better if the real impacts are examined sectorally or through particular products (Kaplinsky, McCormick and Morris, 2008). Table 9 Share of particular commodities in exports to China Sources: IMF, Direction of Trade Statistics Each of this graphs shows how Chinas trade has grown over the years, figure 9 shows the share of exports to China by particular natural resources while figure 10 shows how the exports of Africa has grown notably since 2001 at the inception of China into the WTO. Figure 11, shows that Sino-SSA trade, although is increasing but relatively small in the global perspective: 16% of total African exports is accounted for by china (19 percent of exports from SSA) in 2006, a proportion well less than that of the U.S.A and the E.U. The graph also shows that while U.S.A. and the E.U have persistently contributed significantly to the growth of Africas export, China is playing a fast catch. 2.5 FDI CHANNEL FDI is one of the notable channels through which many extant researchers have assessed the impact of China on SSA. Interestingly, this channel has proven positive for SSA from the perspective of many studies. See e.g. (Kaplinsky, McCormick and Morris, 2008; Zafar, 2007; World Bank, 2007). This is so because FDI inward into SSA has apparently increased considerably in the last 10 years since Chinas accession into the WTO. According to Morris (2009): â€Å"As China began to emerge in the international global scene, its outward FDI flows remained small; equivalent to just $916mIn 2000, not much higher than the $830m registered in 1990. However, post 2001; FDI outflows have been rising, reaching $17.8bn in 2006. The flows are expected to continue to increase and to reach $72bn by 2011 (Morris, 2009) According to Kaplinsky, McCormick and Morris (2008) there literally exists little FDI inflow from China into SSA before the 1990s. Then from less than  £15 million per annum for Africa as a whole, FDI from China climbed to over  £200 million in 2002 and reached  £1 billion in 2008 (Zafar, 2007). According to UNCTAD (2007) this growth represents higher FDI inflow into SSA than anywhere in the world. More so, it is a notable FDI stock in contrast with inflows from Europe and America particularly because it has come from fully or in some measures state owned corporations who have more access to very low-cost capital, and hence can operate with much longer time-horizons. According to UNCTAD (2007) most FDI from China usually comes in the variety of equity joint ventures with local business partners of SSA or state and national government agencies. The most recent and instances are those of the big energy and transport investment in Angola, Nigeria, Zimbabwe, Sudan and Mali amongst many. Other areas of Chinese interest driving FDI growth is the import of oil, manufacturing and investment in other local businesses. For example: China have made Investments valued at $757m in Sudanese Oil and $2.7bn in Nigerian oilfields in the past few years (Africa Frontier Advisory March, 2008) Table 7: FDI Flows to Africa, 2002-05 and the Top five FDI spots The World Bank (2004) observed that in spite of the usual picture of China as a resource hunger and raw material driven investor in SSA. The reality is that almost 48% of the amount invested in SSA since the 1980s till 2001 was in the productive and manufacturing sector. Slightly over (18%) of investments went into services and construction business. Agriculture (7.1%), Resource development accounts for just over one quarter of the investments, slightly over (27 %), though and other (.9%) claimed the balance. Although, this figures has slightly increased, (ibid). According to UNCTAD (2007), by 2005, chinas investment had grown into 48 African nations. Table 8: Distribution of Chinas Outward FDI Stock in Africa, 1990, 2005 (%) Source: UNCTAD (2007a) Consistent with several empirical perspectives, Kaplinsky, McCormick and Morris (2008) also suggest that the increasing account of FDI into SSA is due to its involvement four major economic areas: Although, this study will be looking at only two of these areas, the first and second as they tend to have more significant impact on FDI Increasing investments in the energy and resource sectors Participation in infrastructural projects Integration to production systems globally Small scale entrepreneurial investments 2.7 Investments in the energy and resource sectors Owing to the increasing energy quest of China to fuel its own economic growth, inter