By Brian Muloni
Africa has a trade deficit problem with China, and the outlook does not appear particularly optimistic. The trade imbalance between the continent and China stood at $61.3 billion last year, and according to Bloomberg, the import of Chinese goods into Africa is expected to top $200 billion for the first time this year.
Typically, a trade deficit occurs when a country exports less to a country than it imports from it. A country that imports goods from another country, but exports a much smaller amount to that country, has a trade deficit. This is usually not a problem unless that deficit is significant and widening.
The trade imbalance with China has been caused by a range of factors, such as China’s relative economic heft compared to that of African nations and its dominance in African infrastructure, which drives demand for its equipment.
Perhaps the most important factor giving rise to this unequal trade relationship is that Africa’s exports to China are mainly raw materials and primary goods, whilst imports from China are mainly finished or manufactured products.
Per unit, finished and manufactured goods are more valuable because they have had value added to them during the process of refinement or manufacturing. An unrefined lump of cobalt from Eastern Congo is worth considerably less than a cobalt-based car battery from China for instance.
Africa’s lack of industrialised processing power, one which could turn its rich natural bounty into finished products, has been holding the continent back. With her vast resources, Africa should be setting the terms to help obtain fair prices for its goods.
Instead, its reliance on the export of unrefined goods creates a race to sell these products quickly and a race to the bottom in pricing, as well as a dependency on imports. This leaves African governments holding none of the economic leverage cards.
It is frustrating that a lack of processing capacity can lead to situations where African countries sometimes rely on countries like China to provide them with goods they already have in abundance, for example, beef and oil.
Stella Agara, a governance and youth development specialist, speaking on the Panel 54 Podcast, recently summarised this issue, commenting, “Africa has everything we need, but we keep looking outside instead of building within.”
Africa’s lagging processing power is not a new phenomenon, and plans to improve it have been discussed for decades. Change is coming, and foreign importers are waking up to the shifting landscape.
An effective tool to improve processing power and close the trade imbalance with China is to more closely control the supply and export of certain raw materials. Malawi has just taken a huge stride towards achieving this, banning all exports of raw minerals in its quest to promote industrialisation and reduce rising dependency on raw exports for dollar inflows.
Clearly, challenges will lie ahead, especially in enforcing the ban and focusing investment on the efficient development of refining capacity. However, Malawi has set out its store and provided leadership that will encourage others to follow.
Taken alone, Malawi’s actions are commendable and brave. However, if African countries can work together to increase processing power and then sell refined and value-added goods to foreign markets, they will be in a form of a unified front and be in a better position to set the terms on which to trade.
If African countries can achieve this and improve the export environment for all, then resource-hungry powers such as China will need to do more to this drive to industrialise African manufacturing. If they want a competitive edge over rivals for Africa’s resources, then perhaps contributing to the development of domestic processing power might be a route to achieving this goal.
Overall, international partners on the hunt in Africa for minerals and resources to power their electric cars, manufacture lithium batteries, and feed their populations should play a greater role in improving processing power.
As major consumers of these goods, there should be a more formal responsibility to invest in the development of Africa’s refining and processing power. Current export models extract raw materials and raw value, and leave little in the way of long-term benefits.
Only when domestic industrialisation happens at scale can African nations start to reap the full potential of their raw materials and benefit from their trade relationships, especially with China, which is currently skewed against African nations.
The writer is a senior Finance Business Partner based in Nairobi.
