Building the New Silk Road

18 November 2008

The new Silk Road is not a mere trade route, even though much of its development is driven by trade and investment. There is already much evidence to support the premise that the new Silk Road is as much a technology and finance highway, a political road map, a social and development construct and a demographic access route, as it is a space for the flow of trade and investment. The future of the new Silk Road is driven by four major trends; continuing growth in trade, increased bargaining power of African nations, rising Chinese foreign direct investment in Africa and the potential consequences of China's aid engagement policy in Africa.

The relative scarcity of raw materials means that the new Silk Road is an economic growth lifeline for China. Despite the current global financial crisis and falling oil and commodity prices, the major trend of trade along the new Silk Road will continue to be a growth in commodity exports, to a China that must by necessity continue to grow its domestic economy through exporting manufactured goods. A pause in the Chinese demand for oil, gas and mineral resources - while China catches its breath - in the short term, should therefore not translate into a long term loss of appetite for African raw materials.

Over the last decade the flow of trade and investment between China and Africa has grown to significance in the African context, albeit off a low base. However, Africa's position in a world of scarcer natural resources will increase competition for its custom and the ability of its leaders to frame and negotiate new deals.[1] Fifteen years ago, the two-way trade was dominated by bureaucrats--today free trade has replaced that to a very large extent. Africa desperately needs infrastructural development, while China needs Africa's resources. But China is no longer regarded simply as another donor country. It helps to finance projects, it has sizeable investments on the continent and of course it is a huge source of consumer and other goods.

Trade between China and Africa has been growing rapidly in recent years. According to the IMF, between 2001 and 2006, Africa's exports to and imports from China rose on average by more than 40% and 35%, respectively. This is significantly higher than the growth rate of world trade (14%) or commodities prices (18 percent). In dollar terms, for both imports and exports, the increase in that period was from about $10bn to more than $55bn. China is now Africa's third largest trading partner after the US and the EU. Its share in Africa's annual export growth has almost doubled since 2000.

Africa's exports to China have been mainly oil, gas, metal and minerals, which collectively account for about 75% of the continent's exports to China. Imports from China have mainly been manufactured goods, machinery and transport. Total trade in 2006 was worth around $55bn, with terms of trade being slightly in Africa�s favour. Foreign direct investment in each other was about the same, at around $1bn, but Chinese projects in Africa increased significantly between 2001 (around $1,8bn) and 2006 (almost $10bn).

After the US, China is now firmly the second-largest single-country trading partner of Africa. This year two-way trade between Africa and China is expected to reach well over US$117 billion, an increase of 60% over the total of US$73 billion recorded in 2007 and in excess of the US$100 billion target for 2010 which was set up by the African and Chinese leaders during the Beijing Summit and the Third Ministerial Conference of the Forum on China Africa Cooperation in November 2006, according to Business Unity South Africa (BUSA).

Twenty-two percent of China's exports to Africa go to South Africa. The next country imports half this figure. While Angola tops the list of African exports to China at 37%, South Africa boasts the second-highest exports to China at 14%. However, African exports to China are dominated by oil and mineral products.

The new Silk Road is also an investment highway, where China is increasing its Foreign Direct Investment into Africa as it is doing elsewhere in the world. While European and North American companies may yet come to regret being last movers in African Foreign Direct Investment, they could capitalize on China's aid engagement of Africa.

BUSA has called for a new partnership for economic cooperation between Chinese and South African business in Africa. South Africa is a potential hub for future beneficiation and value-added products in the continent and BUSA believes the time is opportune for Chinese companies to partner with South African companies through joint ventures and strategic investments in Africa. Addressing the third session of the World Industrial and Commercial Organisations Forum[2] at the end of October 2008 in Beijing, BUSA CEO Jerry Vilakazi said the new partnership should be premised on the strengths and experiences of South African companies in the continent. "We need a new partnership between our two economies, one that recognises the potential and benefits for local beneficiation in South Africa." He called for a partnership that sees investments in infrastructure development in Africa as a vehicle for development and essential foundation for enhanced future trade and economic cooperation.

However, in future there may very well have to be a change in the content of the trade, investment and development flow between China and Africa, as well as an adjustment in the nature of the social and political relationship, if the growth of traffic on the new Silk Road is to be maintained. China's "no strings attached" aid policy holds risks. The growth of democracy and access to information in Africa adds a measure of unpredictability that may cause China to pause and consider the nature of its social and political relationship with Africa in relation to the long term sustainability of mutually beneficial trade and investment. The focus may have to trend away from the current pattern of government to government flows, towards business-to-business and eventually, stronger business-to-consumer relationships, where more mature and responsible developmental, social and political relationships will become key determinants of sustainability. Although evidence of the business-to-business and business-to-consumer trade is already growing, compared to the value of trade of commodities and government to government development projects, the impact of these two trends is still small.

In the short term therefore, Africa is a mere commodities trader on the new Silk Road, while China trades manufactured goods and supplies more and more infrastructure development. Also, more Chinese people, culture and goods are flowing into Africa, than the other way around. The fact is that Africa overwhelmingly exports raw materials to China in return for manufactured goods and development assistance without political strings attached, but with marked migration of Chinese people to Africa. Due to the one-sided demographic flow on the new Silk Road--more Chinese are settling in Africa than Africans settling in China--xenophobia will inevitably raise its ugly head. Both the Chinese and the African leaders of government and civil society should do more to prevent this happening.

There will thus be unintended consequences of trade along the new Silk Road. Trade trends are impacted by the social impact of trade, because trade does not happen in isolation, or without a flow of people, culture, ideas and technology. While the virtual world impact of trade is largely regarded as facilitating the fast flow of financial transactions, it should be remembered that the virtual silk road is a mere shadow of the actual Silk Road, where real people engage. This interaction undoubtedly brings benefits in terms of cultural and ideas exchange, but the fact is that it also exposes populations along the Silk Road to the effects of disease and disaster, able to spread beyond the domestic geography. For instance, South Africans who have never been to Zambia recently died of a new strain of the Arena virus hitherto unknown, carried to South Africa by the very mercy flight aimed at saving the life of a woman who had contracted the disease in Zambia.

In addition, the online Silk Road in Africa may still be slow and clogged up with traffic, but it is unregulated. Chinese travelers on the new Silk Road may discover more than mineral resources in Africa, but may also indulge in the unregulated flow of ideas and information on the Africa virtual Silk Road. A middle class Indian lawyer named Gandhi, began his journey to becoming a Mahatma, thanks to his exposure to the effects of oppression and apartheid in South Africa and went on to free a billion Indians in Asia. Might there be a Chinese Mahatma being shaped in Africa, as we speak?

The new Silk Road brings opportunities for more than only Africa and China because it will continue to facilitate expanding trade and investment into the foreseeable future, despite the current global financial contraction crisis. That said, right now there are big opportunities for Africa to become more assertive and smarter about opening up more opportunities for African companies and professionals in the Chinese market and to improve the skills and technology transfers between Africa and China to mutual benefit, so that Africa becomes more than a commodities play on the New Silk Road. For instance, China's $3bn line of credit to Angola for the reconstruction of much of that country's infrastructure has not seen a great leap forward in participation by manufacturers of most inputs in that country--rather the machinery, infrastructure, technology and even the workers are brought in from China. This pattern is repeated in case after case across the continent.

Europe and North America could benefit from the Chinese-built infra-structure in Africa. There is no need for paranoia about the level of Chinese trade and investment traffic to Africa on the new Silk Road, but China has the opportunity to improve its reputation by adjusting its policies regarding development aid and socio-cultural political engagement.

According to Gallup's World Poll[3], the US leadership has higher approval ratings than China's leadership, in Sub-Saharan Africa (SSA). More SSA adults have no opinion of China's leadership than of US leadership and there is a large group of SSA adults that don't have an opinion about either's leadership. Right now US leadership is seen as more favorable than China's leadership but both countries have an opportunity to influence their approval ratings in SSA, if they so desire.

The same logic applies to the findings on product perceptions. Nigerians for instance, have a fairly positive outlook on Chinese (and to a lesser extent on Indian) products, but there are large numbers with no opinions.

2009 and 2010 may be years of much slower growth in trade between China and Africa. Beyond then, the future seems much brighter.

Four trends will have an impact: The growth in trade between China and Africa is expected to continue, but the challenge is for Africa to penetrate the Chinese market with more than a mere commodity play. To achieve this outcome, Africa should use its increasing bargaining power to induce increasing skill and technology transfer from China. The Chinese emphasis is shifting from export-led growth to outward Foreign Direct Investment (FDI), but the policy base of the significant development Aid and concessional loans that still form an important part of China's engagement with Africa[4], holds political and social risks in the longer term that need to be solved. The unintended consequences of the continued increase of trade and investment flows into the foreseeable future will pose new management challenges to all the travellers on the New Silk Road.

[1] C Gilmour, Absa Group

[2] The World Industrial and Commercial Organisations' Forum is hosted by the China Federation of Industrial Economics, United Nations Industrial Development Organization (UNIDO) and World Intellectual Property Organisation (WIPO) and seeks to promote economic cooperation between countries of the world and China. It is attended by business leaders from all major economies of the world with only South Africa participating from the continent.

[3] Courtesy of Dr. B Tortora: Gallup World Poll, 2007

[4] Source: The Guardian, 08/02/2007 www.guardian.co.uk; (DFID, 2006--the Impact of China on Sub-Saharan Africa; China's African Policy from http://www.cabc.org.cn/news/2006-2-16/2006216214510.html; He (2006) quoted in Wang (2007), IMF Working Paper; Donovan & McGovern (2007); http://news.bbc.co.uk/2/hi/africa/7086777.stm#map