WORLD BANK GROUP AFRICA REGION, PRIVATE SECTOR UNIT 33671 Summary of 2005 Patterns of Africa-Asia Trade and Investment Current Pattern of Africa's Exports to Asia Over the same period, Asia's developing economies EPTEMBER S have increased their imports from African countries sig- Traditionally, African economies have strong trade rela- nificantly. In fact, Asia's imports from Africa outpaced its 1 tions with European countries (Figure 1). In contrast, ex- imports from other regions except from Asia itself (Figure ports to Asia are a small but increasing market for Africa 3). Economies such as India, China, and Taiwan (China) in recent years.Africa's exports to Asia grew significantly in have significantly increased the overall volume of their Af- UMBER N both relative and absolute terms during the past 12 years. rican imports (Figure 4). E OT Of Africa's total export earnings, which are estimated at N about US$134 billion per year (2001­2003 average), 15 percent derive from sales to Asia. Figure 3: Growth Rates of Asian Imports by Origin (1991­2003 annual average) 7.9% Figure 1: Destinations of African Exports (2001­2003) 7.5% Others 13.2% EU 44.6% 6.3% Africa 9.3% 4.7% 2.9% Percentage Asia 15.8% US 17.1% EU US Asia Africa Overall Source: IMF Direction of Trade Source: IMF Direction of Trade e rate of increase in export values to Asia (10 per- cent per year) has been higher than the comparable rates Figure 4: Trend in Africa's Exports to Asian Economies for the European Union (EU) or United States (Figure 2). ASEAN 5 China India Japan Korea Taiwan 9 billion Figure 2: Growth Rates of African Exports by Destination 8 $ (1991-2003 annual average) 7 6 10.3% 5 7.0% 4 6.1% 5.3% 5.3% 3 Percentage 2 1 0 EU US ASIA AFRICA OVERALL 1989 1991 1993 1995 1997 1999 2001 2003 ASEAN 5 includes: Indonesia, Malasya, Philippines, Singapore and Thailand Source: IMF Direction of Trade ASEAN 5 includes Indonesia, Malaysia, Philippines, and nuts are experiencing stronger demand in Asia than in Singapore, and ailand. the already saturated markets of developed countries.Figure 6 illustrates how coffee imports of Asian economies expand Africa's exports to Asia are mainly driven by primary rapidly with growth in per capita income when the income commodities and related products. As with Africa's EU level is low. and U.S. exports, oil and oil-related products account for a large share of the continent's exports to Asia. However, other primary commodities, such as agricultural and fishery Figure 6: Coffee Imports and Per Capita Income products and minerals and crude materials, are increasingly of Asian Economies being exported to Asia. African exports to Asia of mineral ASEAN 5 China India Japan Korea Taiwan (China) fuels and other raw materials such as mineral and mining products have experienced strong growth because of rising 18 manufacturing sectors in Asia, particularly in China, India, 16 Korea, Taiwan, and the Southeast Asian countries such as 14 Indonesia, Malaysia, the Philippines, Singapore, and ai- 12 land. Although only a limited number of African countries Coffee 10 are endowed with mineral and mining resources, a wide Capitar 8 range of non-oil-producing countries also benefit from oth- Pe 6 er types of raw materials and processed raw materials, such LN 4 as cotton, wood, and leather, as well as food and agricultural 2 commodities, for expanding their export potentials. e 0 growth in African exports of food and agricultural com- 0 2 4 6 8 10 12 modities to Asia can be explained by the large populations LN Per Capita GDP with growing income levels in Asian countries. ASEAN 5 includes: Indonesia, Malasya, Philippines, Singapore and Thailand Source: UN COMTRADE, World Bank WDI, IMF Commodity Price Statistics Figure 5: Africa's Food Exports to Asian Economies: Note: Data points are the respective countries' figures from 1980 to 2001. ASEAN Historical Trend consists of Indonesia, Malaysia, Philippines, Singapore, and Thailand. ASEAN 5 China India Korea Japan 800 Sub-Saharan Africa's share of exports, excluding ex- 1400 ports from South Africa and exports of oil, is around 17 700 1200 )n percent of total African exports to Asia. Albeit at a smaller 600 1000 )n scale,this segment of Africa's exports--which is mostly agri- millio 500 cultural commodities--has shown a similar growth pattern ($ 800 millio sr 400 ($ to that of minerals and mining products. ese agricultural n 600 Othe300 commodities tend to have dominant shares in each non- Japa 200 400 oil-exporting country. us, the significance of commod- ity demands in Asia is also applicable to non-oil-producing 100 200 Sub-Saharan Africa countries, which are not necessarily 0 0 1989 1991 1993 1995 1997 1999 2001 2003 strong in oil and other mineral exports. ASEAN 5 includes: Indonesia, Malasya, Philippines, Singapore and Thailand Implications of Growing Africa's Exports to Asia Note: ASEAN 5 include Indonesia, Malaysia, Philippines, Singapore, and Thailand. Source: UN COMTRADE Asia could thus become a strategic target in diversifying the markets of African products. Demand from Asian mar- Figure 5 shows strong growth of food exports from Af- kets is a potentially good fit with the existing supply base rica to developing Asian economies such as China, India, of traditional primary commodities in Africa. Such linkages and the Association of Southeast Asian Nations (ASEAN) have been revealed on a country-to-country basis from the countries. Primary commodities such as coffee, cocoa, tea, analysis of complementarity between the respective export and import profiles of individual African and Asian coun- African countries. Still, it should be noted that these pref- tries. e scope of value-added processing in Africa is still erential measures are often time-bound and redundant with limited, but by recognizing these linkages and developing the existing Generalized Systems of Preference (GSP). Al- consumer relations with Asian countries, African produc- though continuation and expansion of well-targeted pref- ers and exporters could significantly benefit from expansion erential treatment is desirable for many African countries, of traditional primary commodities, which are Africa's stag- these measures alone do not guarantee the full benefits nated core business. of sustainable export expansion. e response of African Market diversification is not the only benefit of deep- countries is critical. Successful African exporters must work ened trade relations between the two regions. Asia can also proactively to improve their business environment in terms contribute to Africa's quest for product diversification in its of governance, infrastructure, and industrial capacity and to export structure. South Africa has recently shown strong strengthen their supply-response capacity to seize on such growth in its manufacturing exports to Asian countries. opportunities arising from the external environment as pref- Although only a few African countries export manufac- erential trade agreements. Successful countries tend to have tured goods to Asia, a wider range of countries have bene- consolidated and carefully targeted initiatives for providing fited from manufacturing-related imports from Asia. Asian an enabling environment for potential industries. countries are providing essential inputs to Africa's growing Tariff rates for processed commodities tend to stay manufacturing sector, most notably its textile and apparel higher than rates for raw materials, which typically is a dis- sectors, and, in some cases, its automobile sector. As Figure couraging factor for the value-added activities in the coun- 7 clearly indicates, there is a positive relationship between tries producing the raw materials. In Asia, this issue of tariff Africa's growth in manufacturing exports to the EU and escalation on resource-based products is generally more vis- United States and growth in imports from Asia. ible within low and middle income countries where higher growth of raw material demand has been observed. With the expansion of global trade and with more links in sup- Figure 7: Growth in Manufacturing Exports to EU ply chains, tariff escalation has become an issue not only in and US and Imports from Asia North­South trade but in South­South trade as well. US 10 & Integration of Trade and Investment 8 EU to 6 tsr Sectoral analysis of the foreign direct investment (FDI) of 4 expo log) several Asian countries in Africa shows that relations be- gni ni 2 n tween Asian investors and host countries in Africa are deep- ur 0 ly motivated by trade. Asian investment in Africa takes the fact millio -2 nu ($ following three forms: ma -4 ni -6 · e first type is investment targeted to products to be easercnI -8 sold in Asia; this typically involves natural resources 0 2 4 6 8 10 and processed raw materials (such as food), both of Increase in imports from Asia ($ million in log) which are in high demand by Asian manufacturers and consumers. Macroinstabilities in African host countries Source: UN COMTRADE have often hampered this kind of investment in the past, but, driven by growing demand from Asia, there Trade Regimes and Market Access are signs that such investment may gain momentum. · e second type of investment targets Africa's domes- Some developed countries have pursued various preferential tic markets. Such investment has been constrained by trade initiatives with Africa, such as tariff- and quota-free the small size of local markets and the high transac- access. Notably, the textile benefits afforded under the U.S. tion costs resulting from a lack of efficient infrastruc- African Growth and Opportunity Act (AGOA), combined ture. With lowered tariffs, foreign investors in African with the Multi-Fiber Arrangement (MFA) quota system, production have found it difficult to compete against have triggered visible changes in the apparel exports of some low-cost imports from other regions. Effective regional integration and adequate infrastructure services are es- African countries is desired. In this context, the tariff sential in promoting this type of investment. escalation in many Asian countries should be reviewed, · e third investment type is targeted to the global mar- which would give more motivation for Asian businesses ket, typically third party countries such as the EU or to invest in such areas. Also, good governance and the United States. is type of investment effectively inte- honoring of codes of conduct in extractive/commodity grates production activities in Africa with global supply industries are critical. chains. Investment in less developed countries tends to · For the African market, intraregional integration must focus on the textile and apparel sectors,motivated large- be enacted to provide a minimum market size to capture ly by the low labor costs and favorable trade regimes economies of scale. Realistic and substantive regional provided by the host country. e notable development integration schemes must be implemented. Efficient in countries such as South Africa has attracted more intraregional transportation and other logistics systems sophisticated manufacturing and service investment; are necessary to promote dynamic commercial flows. such investment is genuinely attracted to the produc- e creation of merchant networks in intraregional tivity increase in these countries. business activities is also essential. Fostering alternative arrangements such as franchising and licensing could Compared with the synergies that emerged among be the key to success in building credible and mutually Asian countries in the course of trade expansion, intrare- beneficial business relationships, along with trade in ac- gional dynamism in Africa is still weak. African countries tual products. could better benefit from export opportunities by improving · For the global market, a continuation of preferential the intraregional mobility of goods and services. Improve- measures for manufactured imports from Africa, such ment of the regional transportation and telecommunication as textiles and apparel as well as automobiles, needs to systems must also be addressed to enhance the supply-re- be considered in order to foster industrial development sponse capacity of African countries. in African countries. Development of local and regional backward and forward linkages in such industries is Next Steps instrumental in achieving this goal. Improvement of local and intraregional logistics systems is also essen- e trade data indicate the existence of a significant poten- tial. Sectoral capacity building is vital in facilitating the tial for expanding trade relations between Africa and Asia. transfer of knowledge and skills that accompany invest- To realize the full benefits of such trade expansion, initia- ment flows. Asian businesses could provide effective re- tives must be strengthened in the following three directions: sources in this area. the Asian market, the African market, and the international market. Based on the above analyses and discussions, next steps for public and private players to take are listed below, each categorized by its main targeted markets as explained is note is part of a series of summaries of analytical work of the in the key findings: Africa Private Sector Unit. e note is authored by Yutaka Yoshi- no based on a report entitled Pattern of Africa-Asia Trade and · For the Asian market, potential products are natural re- Investment (October 2004). e report was written by a led by sources, agricultural, and other commodities in which Toshihiro Toyoshima, and including Yutaka Yoshino and Chad African countries already have a solid supply basis.Afri- Leechor, and funded by the Japan Consultant Trust Fund and the Japan Policy and Human Resource Development (PHRD) can commodity exports toAsia could accelerate on their Fund. For more information, contact Yutaka Yoshino via email current trends if transaction costs could be reduced and at yyoshino@worldbank.org or via telephone on 202 458 8308. the business information gap between Africa and Asia A copy of the report is also available from www.worldbank.org/ could be narrowed. Stronger processing capacity in afr/aftps