Is the United States Prepared for China to be Africa’s Main Business Partner?
January 31, 2018
Our competitors prioritize commercial diplomacy and offer upfront financing, speed, and intense intergovernmental facilitation and coordination, and we better draw a page from our economic competitors’ playbooks. The United States must leverage all the tools at its disposal in order to compete with its rivals on the continent. Since 2012, bilateral assistance to sub-Saharan Africa has represented over 30 percent of the United States’ total official development assistance (ODA) every year. U.S. agencies, both those focused on commercial and economic issues and those focused on development, must better coordinate with each other on the ground in Africa and help U.S. businesses compete more effectively with Chinese ones.
This is not your grandparents’ Africa. It is richer, freer, lucrative, and more capable than ever before. Because of its wealth and potential, Africa has an increasing number of economic and diplomatic partners. While the United States has made some significant steps to reframe its relationship with Africa, through legislations like the Africa Growth and Opportunity Act (AGOA) and the Millennium Challenge Account, we continue to operate from an outdated set of assumptions about Africa. Africa’s middle class includes nearly 350 million people today. Africa is changing and our partnership with them needs to change. The United States needs to convert its development partnership into a win-win trade and investment partnership.
China has recognized the economic benefits of increased partnership with Africa for years. In 2016, Chinese exports to African countries were $82.5 billion, while U.S. exports to African countries were one-quarter of that at $21.8 billion. China is not the only country that recognizes the growing markets in Africa. Japan, Brazil, India, Turkey, the Netherlands, and Germany all see Africa as a business opportunity and are capitalizing on it. The United States needs to recognize and respond to the competitive dynamic of these countries to prevent losing market opportunities for American businesses.
Many U.S. companies hesitate to invest in African countries because of corruption, rule-of-law deficiencies, and other concerns. American business leaders must always consider the Foreign Corrupt Practices Act (FCPA) and are less inclined to move into markets with higher risks. Chinese companies do not face the same legal concerns and are thus freer to engage in Africa. The U.S. government must strengthen the dialogue with the American private sector to lower these risks for American businesses.
The United States’ competitors in Africa do a much better job of using foreign assistance and their development agencies to promote their exports abroad. China, Japan, and many European countries all consistently provide concessional financing to Africa tied to their exports. From 2009 to 2012, China provided $10 billion in concessional loans to Africa. African countries are increasingly asking for concessional loans as their debts grow and their ability to borrow from nonconcessional sources gets more limited. For example, Ethiopia’s public debt as a percentage of gross domestic product (GDP) was estimated to be 60.2 percent in 2017.
In the last 10 years, the United States has given almost $90 billion of foreign aid to Africa. During this time, China has become the number one exporter of goods to 19 out of the 48 sub-Saharan African countries as listed by the World Bank. Back in 2001, China was number one exporter to only one sub-Saharan African country. Is the United States willing to spend over $9 billion a year in sub-Saharan Africa and then allow countries like China and India take all the emerging business opportunities?
The question has changed from “what Africa needs from the United States?” to “how can the United States create win-win opportunities with Africa?” The concern is: can the United States change its approach to Africa and compete for business opportunities there? If not, then China will end up as Africa’s partner of choice and will continue to be the “go to” commercial partner for the future unless we make some drastic changes in our approach. Strong partnerships between African countries and China have major geostrategic and national security implications for the United States and the Trump administration. We need to leverage and expand on our current assets, including our traditional foreign assistance as well innovations such as Power Africa, and leverage our trade and financial institutions like the Overseas Private Investment Corporation (OPIC), Export-Import Bank (EXIM), and the U.S. Trade and Development Agency (USTDA) to help level the playing field for American businesses in Africa.
A “New” Africa
The population of Africa is growing at a very high rate, and most of it is urbanizing. In Africa, 80 additional people per minute are being born. According to the United Nations, by the year 2050, the total population of Africa will have doubled to 2.5 billion. By 2050, half of the world’s population will be concentrated in just nine countries, including Nigeria, the Democratic Republic of Congo, Ethiopia, Tanzania, and Uganda. These five African countries will hold 20 percent of the world’s population by 2050.
Africa’s growing population is going to need skills and jobs. 15 to 20 million young people will enter the work force each year for the next decade, and 60 percent of the population in sub-Saharan Africa is under the age of 25. Every country needs high levels of economic growth and job creation on the continent in order to avoid civil unrest, additional economic migration, and additional “Arab Springs.” Every politician in Africa knows this, and so they are looking for solutions and opportunities for change from the status quo. Now is the best time for the United States to engage African countries for potential solutions beyond what our competitors are offering. The United States out competes all other economies in the world in education and skills development and in high-capital goods that the African middle class are now yearning for.
Thankfully, Africa is the second fastest-growing region economically. Cellular and broadband usage has increased significantly, driving faster services and logistical demand. As of 2016, more than 19 percent of the population in Africa used the internet and more than 73 percent of the population used cellphones. Since 2005, a net 8 million people have moved above the poverty line. This population growth is coupled with an expanding middle class who will spend $2 trillion by 2025. The United States has the opportunity to create a new customer base from this increasingly wealthy and growing population.
Africa’s emerging markets present growing business opportunities and increased economic activity with the GDP growing at about 3.5 percent in 2017. Africa’s urban population is expected to reach nearly 50 percent in 2030 and will have a larger working-age population than that of India and China. It is estimated that 85 million new jobs could readily move to Africa from China as wages start to rise and skills pick up.
Targeting Business Opportunities in Africa
Senior officials from the Trump administration should become more involved in commercial diplomacy to help American businesses. Heads of state in Germany, India, China, France, and Japan have been involved in directly supporting their country’s companies in Africa. Chancellor Angela Merkel of Germany has visited Egypt, Tunisia, Mali, Niger, and Ethiopia in the last two years, meeting with African leaders and discussing business opportunities in each country along with migration issues. Prime Minister Shinzo Abe of Japan hosted a business summit in 2017 that brought together 39 heads of state from Africa and 70 Japanese businesses. President Emmanuel Macron of France recently visited multiple countries in Francophone West Africa to strengthen trade and economic ties with former French colonies.
The U.S. government needs to make more of an effort to meet with business leaders and foreign officials from Africa. In 2018, the National Governors Association is planning a trade mission to Africa in partnership with the Corporate Council for Africa (CCA), and the U.S. Chamber of Commerce is organizing a national campaign to educate its 3 million members on export opportunities to Africa. The Trump administration should bring African business leaders to U.S. financial centers, using USTDA’s reverse trade missions. The administration should also consider hosting African leaders for a business summit on the continent or in the United States and discuss mutual interests including business and national security. It is time to foster better relations between the United States and Africa, not the reverse.
The United States should reallocate additional U.S. foreign assistance to development agencies that promote U.S. exports, like the USTDA, OPIC, EXIM. For every dollar invested in 2016, USTDA generated $95 in U.S. exports. Once U.S. businesses are convinced to target African markets, U.S. development agencies should support them by directing them to sectors best suited for U.S. goods. 60.5 percent of China’s total development finance in Africa went to the transportation and energy sectors. As a result, U.S. companies rarely win road and construction contracts but have much more success in the water, communications, and energy sectors.
Better Collaboration among U.S. Agencies in Africa
It is important that the U.S. government leverages information, knowledge, and relationships across all its agencies and converts that into business intelligence and deals. Sharing market intelligence could help U.S. companies to better target African sectors where they have comparative advantage.
The Power Africa initiative of the Obama administration is a case study in how U.S. agencies can work together, and the lessons learned from it should be applied to other sectors such as infrastructure, information technology, and water. Power Africa was launched in 2013 as a public-private partnership with the aim of increasing access to power in sub-Saharan Africa. Some of the practices that make Power Africa a success were the on-the-ground operations, combined public and private investments to fill the funding gap, transaction-focused mission, and African-led reforms.
Approximately 53 million additional people have access to electricity today as a result of the Power Africa initiative. Through successful collaboration among its development agencies, the United States was also able to leverage the expertise and financing instruments of the private sector to make Power Africa a success. It has incentivized African governments to adopt market-based energy policies and acquire accountable and transparent regulatory frameworks. The Power Africa model could be adjusted to favor export deals for U.S. companies.
The United States has a unique value proposition that aligns business objectives and interests with partner countries’ needs. U.S. businesses promote social responsibility and economic development through democratic values, human rights, transparency, free market principles, and more. The competitive self-interest of countries like China do not provide reliable frameworks and support to combat corruption, terrorism, and other political or economic threats. The United States can add to its portfolio business competitiveness and skills development, which Africa desperately needs.
Recommendations for the White House and Congress:
- Vice President Mike Pence should lead a trade and investment delegation with Commerce Secretary Wilbur Ross to five or six African countries (not a foreign assistance or security delegation).
- USTDA’s Africa budget should be increased. The USTDA budget in Africa has nearly tripled since 2002, from around $9 million to over $25 million in 2017, and in the coming years in order to capitalize on the business growth potential, USTDA should double its budget for Africa over the next five years to $50 million.
- The Trump administration should increase the “credit card limit” on OPIC. OPIC has tripled its investment activity in Africa since 2003 from $1.1 billion to nearly $6.3 billion in 2017. This should be doubled yet again in the coming years, and OPIC should seek to place three to five investment officers in strategic African countries to achieve that level of activity.
- The Trump administration and Congress should ensure that the Export-Import Bank is fully operational by approving a new board chair and other board members.
- President Trump should host an African Leaders Summit in 2019 as a follow-on summit to the one President Obama hosted in 2014.
- Congressional delegations and U.S. governors should make more frequent trade missions to Africa and encourage African small and medium-sized enterprises to visit their U.S. counterparts in different states.
Recommendations for Business Leaders and U.S. Agencies:
- U.S. CEOs should meet with President Trump to talk about African business opportunities.
- The U.S. Agency for International Development’s trade investment hub activities should be expanded and accelerated.
- The African Development Foundation should use catalytic investments to enable business opportunities for the United States.
- The Department of Commerce should place more foreign commercial service officers on the continent.
- Power Africa should be improved, replicated, and scaled, and Millennium Challenge Corporation compacts should be leveraged for business growth.
Daniel F. Runde holds the William A. Schreyer Chair in Global Analysis and directs the Project on Prosperity and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Christopher Metzger is the program coordinator for the CSIS Project on Prosperity and Development, and MacKenzie Hammond is a researcher for the Project on Prosperity and Development.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).© 2018 by the Center for Strategic and International Studies. All rights reserved.