The US-Africa Business Relationship: Catching Up to China

May 24, 2024

The US-Africa Business Forum 2024, held in Dallas, was a significant event, reflecting the United States’ (renewed) interest in strengthening economic ties with Africa. As a participant, I observed firsthand the dynamics at play, particularly how the US is trying to catch up to China’s more entrenched presence on the continent. This newsletter will delve into the nuances of the US-Africa business relationship, the strategic differences between the US and China, and the implications for Africa’s future.

US vs. China: Differing Perspectives on Africa

One of the most striking differences between the US and China is how each views Africa. The US tends to see Africa as a continent in need of aid and development assistance, often highlighting the risks involved in doing business there. This perspective was evident at the forum, where donor funds and aid organizations were prominently featured, infiltrating their way into the private sector. This approach underscores a risk-averse mentality, focusing on humanitarian aid rather than direct business investments.

In contrast, China views Africa as a land of vast opportunities. For China, Africa is a critical market for its products and services and a source of essential raw materials. Chinese investments in infrastructure, mining, and telecommunications have transformed parts of the continent, driven by a strategy that emphasizes business and trade rather than aid.

However, not all that glitters is gold and certainly not everything is black and white. Let’s look at the advantage and disadvantages in association with China or the US.

Advantages and Disadvantages: Associating with China or the US

Both the US and China offer distinct advantages and disadvantages for Africa.

Advantages of Associating with China:

1. Infrastructure Development: China has heavily invested in African infrastructure, including roads, railways, and ports, which are crucial for economic development.

 Example: The Nairobi-Mombasa Standard Gauge Railway in Kenya, funded by China, has significantly reduced travel time and boosted trade between the port city of Mombasa and the capital, Nairobi. This project exemplifies how Chinese investment can lead to substantial improvements in infrastructure, facilitating economic growth.

 Benefit:  Enhanced infrastructure improves connectivity, reduces transportation costs, and opens up new markets for local businesses.

• Quick Implementation: Chinese projects often get off the ground quickly due to streamlined decision-making processes and less stringent regulatory requirements.

Example: The Addis Ababa-Djibouti Railway was completed in just a few years, showcasing China’s ability to rapidly execute large-scale infrastructure projects. This speed of implementation is critical for meeting urgent developmental needs. Benefit: Quick project completion ensures that the economic benefits of infrastructure investments are realized sooner, boosting local economies and improving living standards.

• Economic Growth: Chinese investments have stimulated economic growth, creating jobs and improving local economies.

 Example: China’s investment in Zambia’s mining sector has revitalized the industry, leading to increased copper production and export revenues. This influx of capital has created jobs and spurred economic growth in Zambia.

Benefit: Direct foreign investments create employment opportunities, increase local revenues, and contribute to overall economic development.

Disadvantages of Associating with China:

1. Debt Dependency: Many African countries have accumulated significant debt due to Chinese loans, leading to concerns about long-term financial sustainability.

Example: Sri Lanka’s Hambantota Port, although not in Africa, is a cautionary example of the “debt trap” risk, where high levels of debt led to a 99-year lease of the port to China after Sri Lanka failed to repay loans. Similar concerns have been raised in African countries like Kenya and Zambia.

Risk: Heavy borrowing can lead to unsustainable debt levels, making countries vulnerable to losing control over critical assets.

• Quality Concerns: Some Chinese projects have faced criticism for poor quality and lack of durability.

Example: In Angola, some Chinese-built infrastructure projects, including roads and buildings, have faced criticism for poor quality and construction defects. This has led to additional costs for repairs and maintenance.

 Risk: Poor quality infrastructure can undermine the long-term benefits of investments and impose additional financial burdens on local governments.

• Labor Issues: Chinese companies often bring their own labor, which can limit job opportunities for local populations.

 Example: In Zambia, Chinese mining companies have been criticized for employing predominantly Chinese workers, limiting job opportunities for locals and leading to tensions and labour disputes.

Risk: Importing labour can lead to social unrest and reduce the positive impact of investments on local employment.

Advantages of Associating with the US:

1. Development Aid: The US provides substantial development aid, which supports health, education, and governance initiatives.

Example: The President’s Emergency Plan for AIDS Relief (PEPFAR) has provided billions of dollars in aid to combat HIV/AIDS in Africa, significantly improving healthcare outcomes in countries like South Africa and Uganda.

Benefit: Development aid supports essential services, improves health and education, and can lay the foundation for sustainable development.

• Military Support: US military aid helps improve security and stability in volatile regions.

Example: The US Africa Command (AFRICOM) provides military training and support to African nations to combat terrorism and enhance security, as seen in partnerships with countries like Nigeria and Somalia.

Benefit: Enhanced security promotes stability, which is a prerequisite for economic development and attracts foreign investment.

• High Standards: A higher percentage of US investments tend to come with high standards for labor, environmental protection, and corporate governance

Example: The US Millennium Challenge Corporation (MCC) funds projects that adhere to strict environmental and social safeguards, such as the compact with Ghana that focuses on power sector development.

Benefit: Investments that comply with high standards ensure sustainable development and protect local communities and the environment.

Disadvantages of Associating with the US:

1. Slow Implementation: US projects can be slow to start due to complex regulatory and bureaucratic processes.

Example: The implementation of the Power Africa initiative, aimed at increasing access to electricity, has faced delays due to regulatory and bureaucratic hurdles, slowing down the delivery of promised benefits.

 Risk: Slow project rollout can delay the economic benefits of investments, potentially leading to frustration and missed opportunities.

• Aid Dependency: Heavy reliance on aid can create dependency, undermining local initiatives and self-sufficiency.

Example: In countries like Malawi, heavy reliance on US food aid has sometimes hindered the development of local agricultural industries, creating dependency rather than fostering self-sufficiency.

Risk: Over-reliance on aid can stifle local innovation and entrepreneurship, leading to long-term dependency and limiting economic growth.

• Perceived Risk:The US often perceives Africa as a high-risk environment, which can deter significant private sector investment.

Example: The US often categorizes African markets as high-risk for investment, which can deter American businesses from entering these markets.

Risk: Perception of high risk can lead to underinvestment, depriving African economies of potential capital and technological advancements.

Let us not get it twisted. There are high-quality investments from China, just like there are Chinese companies that adhere to high standards. For example, Huawei and ZTE have implemented telecommunications projects across Africa that meet global standards and significantly enhance digital connectivity. Likewise, US aid has often been criticized for being ineffective. Reports have indicated that a significant portion of aid does not reach the intended beneficiaries or fails to create sustainable development. Moreover, the US has been accused of using its military bases to destabilize countries rather than promoting stability. In Libya, the aftermath of US military intervention has led to ongoing conflict and instability, highlighting the potential negative consequences of military involvement.

Current Agreements and Initiatives

To date, there are numerous agreements and treaties between both the US and Africa, and China and Africa, aimed at fostering economic relations.

China-Africa Agreements:

1. Forum on China-Africa Cooperation (FOCAC): Established in 2000, FOCAC has led to various trade and investment agreements, resulting in billions of dollars in Chinese investments across Africa.
2. Belt and Road Initiative (BRI): Several African countries are part of China’s BRI, which focuses on developing infrastructure and enhancing trade connectivity.

US-Africa Agreements:

1. African Growth and Opportunity Act (AGOA):** AGOA provides duty-free access to the US market for eligible African countries, promoting trade and investment. This Agreement is due to be renewed for another decade. Although this Agreement benefits African countries, it benefits more US trade in Africa but also is used as a tool to force policy adoption or changes, with countries that refuse to sing to the tune of the US are unceremoniously kicked out of the eligibility list for example Rwanda as recently revealed by President Kagame at the Africa CEO Forum 2024, and Uganda, who adopted an anti- LGBTQ+ stance which upset the US.
2. Prosper Africa: Launched in 2018, Prosper Africa aims to increase trade and investment between the US and Africa through a government to government approach.

Despite these initiatives, the US presence at the forum was noticeably lacking in corporate representation. This absence underscores a broader issue: Africa is still not seen as a relevant market by many US businesses. However, this perception does not necessarily reflect Africa’s actual potential, but rather the perception of Africa as being “high risk”.

The African Continental Free Trade Area (AfCFTA): A Game Changer

The AfCFTA, which came into effect in 2021, is a landmark agreement that aims to create a single market for goods and services across 54 African countries. This agreement has the potential to significantly boost intra-African trade, reduce tariffs, and create a more attractive environment for investment. With the current intra-Africa trade standing at a low rate of 16%, AfCFTA promises to unlock opportunities significantly.

The real question is whether Africa needs the US or China to realize this opportunity?

While both countries can offer valuable resources and expertise, the AfCFTA represents a unique opportunity for Africa to drive its own economic destiny. By fostering greater regional integration and cooperation, Africa can build a more resilient and self-sufficient economy.

Conclusion

The US-Africa Business Forum 2024 highlighted the challenges and opportunities in the US-Africa business relationship, namely the complex and multifaceted nature of the US-Africa business relationship. While the US is playing catch up to China, there is a growing recognition of Africa’s potential as a business partner. The key difference in perspectives—seeing Africa as a risk versus an opportunity—shapes the strategies and outcomes of these relationships.

However, Africa stands at a crossroads, with the AfCFTA providing a unique chance to shape its own economic future. While partnerships with both the US and China can offer significant benefits, it is ultimately up to African countries to leverage these relationships in a way that promotes sustainable development and economic growth. As the continent continues to evolve, it will be interesting to see how these dynamics play out and what role the US and China will ultimately play in Africa’s economic journey.