Into Sub-Saharan Africa: Spillover Effects of China’s Economic Boom Through Trade

Well-bonded by increasingly large volumes of trade, investment, and aid, China and Africa have become intertwined and interdependent like never before. Both regions have maintained significantly more rapid economic growth than advanced economies in recent years. As a major development partner of Sub-Saharan Africa (SSA), China’s real GDP has grown by an annual average of 10 percent in the past decade, accompanied by mounting import demand for various products to support its fast-paced domestic investment.

Though much has been discussed about the benefits and distresses of China’s greater participation in Africa for the SSA region, including arguments of trade boosting the African economies, and warnings on greater exposure to commodity price fluctuations and Chinese competitors, few studies shed light on quantifying the impact of the country’s domestic economic activities on Africa’s trade and economic development.In “Africa’s Rising Exposure to China: How Large Are Spillovers Through Trade?,” Paulo Drummond and Extelle Xue Liu attempt to analyze how China’s domestic investment affects Africa’s export growth and economic development, and have identified a significant association of one percentage point increase in China’s domestic investment growth with an average 0.6 percentage point increase in SSA countries’ export growth.

According to Drummond and Liu, higher domestic investment growth in China tends to exhibit spillover effects, leading to greater demand for foreign commodities. The authors undertake panel regressions to analyze the impact of China’s fixed asset investment (FAI) on 174 sample countries’ exports to China as a share of each country’s GDP. China’s trade with Sub-Saharan Africa is heavily concentrated in a few countries, with five countries—Angola, South Africa, the Democratic Republic of the Congo, the Republic of Congo, and Equatorial Guinea—accounting for approximately three quarters of SSA’s exports to China, and six countries—South Africa, Nigeria, Liberia, Ghana, Benin, and Angola—taking up more than 80 percent of SSA’s total imports from China.

In addition, the trading partnership is highly centered on a limited range of products. While the main drivers of SSA’s imports from China are machinery, chemicals, and manufactured goods, China buys mostly primary products from Africa, mainly oil. Therefore, the impact of China’s domestic economic growth is especially evident for resource-rich countries in SSA, in particular, oil exporters. For the top five resource-rich SSA countries ranked by exports to China as a share of GDP—Angola, South Africa, the Republic of Congo, Equatorial Guinea, and the Democratic Republic of the Congo—a one percentage point increase in China’s domestic investment growth is accompanied by a 0.8 percentage point increase in their export growth rate.

In the last decade, many countries in SSA have seen a rising number of exports to China as a share of GDP. The contribution of China to SSA’s export growth has become even more important in recent years, explaining about 30 percent of total export growth in 2005-2012. Strong growth in trade between China and SSA has greatly benefited the two regions, and the economic interdependence has led to China placing more attention on its collaboration with Africa.

It is proven true by Drummond and Liu that not only has China’s economic growth induced greater investment and aid volumes to the Sub-Saharan African region, its domestic investment activities also act as a stimulus to catalyze direct trade expansion for its partners in Africa. In the event of China’s economic slowdown, the SSA countries may be able to mitigate these spillover effects by redirecting their trade.

Article Source: Africa’s Rising Exposure to China: How Large Are Spillovers Through Trade?Paulo Drummond & Estelle Xue Liu, IMF Working Paper, November 2013

Feature Photo: cc/(Twenke)'
Danyi Yang
Danyi Yang is a staff writer for the Chicago Policy Review and is an MPP student at the Harris School of Public Policy. She is interested in international trade, economic development issues, and urban affairs.

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