A New Opening for US - Africa Trade & Investment Ties

BOTTOM LINE UP FRONT:

Africa has experienced very strong economic growth recently and is poised to continue this trend, making it an increasingly important  and potent region for  American trade and investment. The US should seize this opportunity now and not surrender it to other international actors.

BECAUSE:

China in particular has greatly expanded its presence in African countries, and its economic interactions with the continent over the last decade, positioning themselves to benefit from the continued growth of African economies in a diplomatic situation largely devoid of meaningful US competition with its companies, investment strategy or state-driven economic model.

THEREFORE:

Even given its anti-trade rhetoric, the Trump administration has an opportunity to  utilize the existing African Growth and Opportunity Act (AGOA) to deepen economic ties with Africa. This will achieve three interlocking US diplomatic and economic aims without direct confrontation:  (1) US influence is not lost to China and its state-driven, autocratic economic model, ; (2) the US can maintain access to the supply of important primary commodities produced in Africa, and; (3) the US can maintain access to increasingly important consumer markets in Africa as a growing destination for US exports.

Executive Viewpoint

Africa remains the poorest continent in the world and has traditionally been the most closed to free trade and globalization, but that is beginning to change. China was ahead of the curve on these trends and greatly expanded its relationships with African countries, and is now poised to benefit from them.. Although the US has lagged, the framework to increase economic ties is already in place in the form of the African Growth and Opportunity Act, which provides bi-lateral trade preferences with most countries in Africa. The US should continue to use AGOA to promote trade and deepen ties, to help offset Chinese influence and provide an alternative model of development, and, maintain market access for US exports, and access to imports of commodities and other goods from Africa.

Background

The African continent has experienced very strong economic growth recently.Growth more than doubled from 2.4% in the 90s to 5.7% in the 00s, and 19 countries had growth higher than 5%.[1] According to McKinsey, the rate of return on investment is higher in Africa than in any other region and the business climate has been steadily improving by their central measures. The consumer class is also growing at an incredible rate – consumption is up more than 50% over the last five years with over 300mm people in the middle class according to the African Development Bank. The number of households with discretionary income is expected to continue its strong upward trend, rising 50% to 128mm in the next 10 years,[2] with the 18 leading cities projected to have a combined spending power of $1.3tr in 2030.

Additionally, if African countries can reduce their fertility rates, they will be well positioned to benefit from the demographic dividend, as young people enter the workforce and support fewer dependents. Currently, 40% of the population is under 40 years old and the working age population is projected to grow to 1.1bn by 2034. There have been over 21mm jobs created in the last 5 years and 53mm in the past 15.

China has anticipated these trends and positioned itself well to take advantage. Between 2000 and 2008, trade between China and Africa grew by 33.5% on average.[3] Despite having two-way trade with Africa totaling roughly 1/3 of that of the US and Africa in 2000, China overtook the US as Africa’s largest trading partner by 2009 and has continued to expand in the years since, reaching as estimated $310bn in 2015.[4] While data is not readily available, it is estimated that Chinese companies (both state-owned and private) have made investments in 49 African countries, and have negotiated bilateral trade agreements with 33 different countries. China has also established the China-Africa Development Fund, which supports Chinese companies’ investment in Africa, and has signed 10’s of billions of dollars of construction contracts providing vital infrastructure.

The current and potential US economic relationship with Africa is centered on AGOA. First passed in 2000 and recently extended until 2025, AGOA provides trade preferences for quota and duty-free trade for nearly 6,400 product lines, including apparel and textiles (although there are restrictions on many agricultural products). Since passage of AGOA, US trade with Africa has increased significantly, with imports from Africa rising over 500% from $8bn to $54bn from 2000-2011 and exports to Africa over the same time frame tripling from $7bn to $21bn,[5] although trade has shown a downward trend since 2011. Natural resources comprise almost 90% of imports from Africa – non-petroleum imports have grown significantly but still represent just $4.5bn with the largest portions made up of apparel & textiles and transportation equipment, mostly automobiles from South Africa.[6] African countries are eligible for AGOA benefits if they meet certain criteria based on improving labor rights and moving towards a market-economy, with the US president having the power to decide which countries are eligible (40 were eligible as of this year).[7]

Argument

As Africa continues to grow and becomes increasingly open to trade, it is important that the US expands its relationship with the continent in order to partake in the benefits afforded by trade by continuing to develop and deepen ties through AGOA. This will ensure that the US maintains access to products from Africa, most critically the abundant natural resources produced on the continent. This lowers costs of non-resource related imports, whether final goods or intermediate products, lowering costs for both companies, who may choose to hire more, and consumers. Freer trade will allow US companies to access to larger export markets, providing opportunities to produce more and increase hiring to meet the additional production. This benefit could be especially important with regards to Africa as its middle class grows by leaps and bounds; in fact, there are projections that stimulating exports through the Increasing Jobs Through Greater Exports to Africa Act could increase exports to $60bn within 10 years, supporting more than 310k jobs.[8] Increased economic cooperation can improve relations in other areas as well, such as increasing cooperation on other development or security issues.

While there are certainly some costs to free trade in addition to the benefits outlined above, AGOA is well-structured to mitigate these and ensure that the net benefits to the US are positive, while positioning US businesses for a new era and region. The AGOA provides discretion for the US to leverage conditions against individual national participants. Furthermore, since 90% of US imports from Africa are natural resources, the threat to American jobs in certain sectors is minimal. With manufacturing jobs representing a small portion of goods imported to the US from Africa, this factor should be mitigated relative to other trade agreements and could make AGOA an easier sell to the Trump administration, despite its rhetoric.

RECAP

Given recent events, it is important to act sooner rather than later. With the US withdrawing from TPP and very likely losing out economically in Asia as a consequence, a repeat in Africa would be double harmful, especially with Xi’s strong defense of trade and globalization at Davos and China’s aggressive expansion into Africa. China’s African involvement is still characterized as largely  extractive. But this is changing somewhat, as China has been investing more in the infrastructure sector, while hiring more local African workers. Without concomitant involvement by the US in Africa soon, the previous narrative of an exploitative and extractive China will be harder to counter by the mere presence of US organizations. A window of opportunity exists now to explore a deeper, more potent trade and investment relationship with African countries, and the United States should act on it.