Industrial cooperation in China’s Economic and Trade Cooperation Zones in Africa: A case of paradigm maintenance
Over the past two decades, China has become Africa’s most important economic partner, prompting considerable debate on the drivers and impacts of China’s relations in the region. The majority of Chinese flows to Africa have been directed at natural resource extraction and related activities, creating commodity dependency in a number of African countries including Angola, South Africa, the Republic of Congo, the Democratic Republic of Congo. This has fuelled conceptions of China as a rising imperialist power looking to dominate African markets and resources.
But as China’s appetite for natural resources begins to wane, official Chinese discourse has sought to promote a new narrative, one that emphasises mutually beneficial cooperation as a basis for China’s ever-growing presence within and outside Africa. A key component of China’s relationship with the region is industrial cooperation. Emphasising a departure from earlier patterns, Chinese policymakers contend that Chinese outward investment (ODI) in manufacturing can potentially catalyse African industrialisation and structural transformation.
My research focuses on the dynamics of Chinese manufacturing investments in a Chinese-built economic zone in Egypt. It examines how the Chinese model of overseas industrial zones impacts the development pathway of the host region and the country’s linkages to the world market.
In this blog, I explore the broader context in which Chinese investment in the African continent has unfolded over the past two decades. In particular, I examine the specific institutions and actors involved in these investment flows and the establishment of industrial zones in Africa, and the political-economic context and motivating rationale that underpin their actions, while attempting to shed light on the type of development that zone-based industrial cooperation is capable of delivering.
Chinese manufacturing ODI to Africa: maintaining old patterns or redressing imbalances?
The stock of Chinese ODI in Africa remains modest, accounting for no more than 5% of the total stock of foreign investments on the continent[i].
It is nonetheless growing at remarkable speed relative to China’s investments elsewhere, with the stock of FDI by private Chinese enterprises in particular increasing notably in recent year. Presumably, the relocation of private Chinese manufacturing ODI offers opportunities for local producers to integrate into Chinese manufacturing networks and acquire technology and skills, facilitating the diffusion of productive activity.
And yet extensive research has shown that the participation of national African firms in Chinese productive activity remains limited. Emphasising African agency, an emerging line of scholarship has argued that a greater developmental role of the African state is needed to ensure that Chinese investments will contribute to Africa’s industrialisation and structural transformation[ii].
There are two problems with this viewpoint, however. First, it fails to take into account deeply asymmetrical contexts in which host economies adapt to the needs of offshoring capital. Second, it disregards the structural dynamics that have motivated China’s industrial cooperation initiatives, which result in both opportunities and constraints for host economies.
Chinese manufacturing firms largely tend to concentrate in economic zones, which have become a popular market entry strategy for firms looking to relocate their production and marketing operations abroad.
A close look at the strategies of China’s Africa-based manufacturing zones sheds light on the drivers and dynamics of offshoring Chinese capital. Chinese zones in Africa are designed to provide enabling institutional environments for Chinese firms, providing them with cost-advantage and removing impediments to regional trade while confining the domestic government’s role to that of market facilitator. In doing so they maintain global, free-market patterns in production organisation that have seen firms expand globally in search of markets and resources, and that determine a particular position for host economies in the international division of labour.
The background and rationale of China’s overseas Economic and Trade Cooperation Zone program
China’s overseas Economic and Trade Cooperation Zone (ETCzone) program offers a unique perspective on the dynamics and implications of Chinese development cooperation in Africa and in countries of the Global South.
Since the launch of the zone program in 2006 a series of industrial parks have been established across Asia and Africa linking Chinese manufacturers to additional markets abroad while promising to develop the export industries of host economies and increase domestic exports to China. Out of 56 overseas ETCzone projects worldwide, six are located in Africa: two in Nigeria, and one in each of Egypt, Zambia, Mauritius and Ethiopia.
The decision to establish overseas ETCzones was prompted by changing domestic conditions in China, and underpinned by the motive of providing a spatial fix for Chinese capital in response to overaccumulation and falling profits. In its initial phase the program was launched in response to significant macro-economic challenges resulting from the problems of excess capacity and capital. The zone program later gained increased significance due to a drop in demand for Chinese exports to the European Union and the United States following the 2008 crisis.
Beginning with the earlier phase, the launch of the ETCzone program coincided with a phase of ‘moving out’ of Chinese surplus capital following decades of attracting FDI to facilitate domestic industrialisation. This period also marked the beginning of a shift in the structure of the Chinese economy from resource, labour and export-intensive manufacturing to knowledge intensive production and high value services. The overseas economic zone program would help boost plans of economic restructuring, encouraging the transfer of China’s industrial capacity offshore while allowing domestic Chinese firms to move up the value chain at home.
To facilitate the relocation of its manufacturing sectors, China embarked on a new phase of industrial cooperation with African and Southeast Asian countries selected to host Chinese zones. Expressing the new motivation for Chinese ODI to Africa, the majority of the African zones were geared towards facilitating the relocation of labour-intensive industries, though some African ETCzones also host resource-driven investments (oil in Nigeria, copper in Zambia).
Following the 2008 financial crisis, internationalising China’s industrial capital become an even more pressing concern due to falling demand for Chinese exports and the subsequent need to enlarge Chinese markets beyond the United States and European Union. Chinese investments in Africa increased significantly during this period, accelerating a trend of exporting spare capacity as a strategy of economic rebalancing[iii]. The launch of the Belt and Road Initiative (BRI) in 2013 consolidated a Chinese growth model of using economic zones to channel excess capacity into overseas manufacturing operations and infrastructure construction.
Industrial cooperation in Africa’s ETCzones
Advocates have argued that ETCzones could potentially have a profound impact if exploited by African governments towards structural transformation and reconstruction. They would enable African nations to replicate the Chinese developmental experience of using Special Economic Zones to build up industries in the same value chains, promote initial industrialization and gradually ‘climb up the development ladder’ into high tech manufacturing.
Nevertheless, case studies have shown that ETCzones implemented in Africa are different from the domestic Chinese model of economic and trade cooperation zones[iv]. Far more likely, as the empirical evidence suggests, is that ETCzones engender a form of development that is consistent with traditional terms for managing development partnerships imposed by leading international agencies and development institutions.
Contrary to China’s developmental approach, which attached importance to the role of central state institutions in supporting industry and the export capacity of local firms, African ETCzones promote a form of development cooperation that is more sympathetic to role of free enterprise, foreign investment, and market forces as a means to facilitate the internationalisation of Chinese firms. Meanwhile domestic governments step in by providing infrastructure and services that strengthen the enabling environment for offshoring (Chinese) firms.
Implicit in this design is the assumption that firm coordination is sufficient as a mechanism for developing supplier linkages, that the economic benefits of firm activity will trickle down to communities once the enabling conditions are provided for transnational firm activity. Rather than traditional industrial policy instruments employed in domestic Chinese firms, including sectoral targeting and directed credit, ETCzones employ a demand-driven industrial policy which makes domestic governments responsible for enhancing lead-firm governance. This logic is grounded in traditional firm theory and rooted in the orthodox economic thinking that is at the centre of international development.
It is important to note that such projects do not unfold unproblematically or deterministically, nor can they exist without the agencies, inputs, technical means and work mobilised to construct and maintain them. Rather than broad assertions around the reproduction of free-market ideas in Chinese development projects therefore, it is important to draw attention to who the specific actors involved in Chinese overseas projects are and to identify the spatial strategies and development practices they mobilise to achieve their aims.
The networks and strategies of Africa’s ETCzones
ETCzones mediate and translate a variety of interests, including but not limited to those of market-seeking Chinese capital driven by traditional FDI motives. It is true therefore that their performance is partially dependent on domestic government policies and institutional context to overcome value capture challenges and generate linkages (government-led strategic reforms implemented in Ethiopia’s Eastern Industrial Park for example have achieved a measure of success in diversifying the local economic base and moving domestically produced goods to local, regional, and global markets[v]).
On the other hand, rather than a diffuse set of strategies, zone implementation demonstrates strong links to the Chinese national level of policymaking. In planning the ETCzone program central state agencies used financial and political resources to align multiple actors around strategic objectives situated at the national level, and driven by political-economic concerns of rebalancing China’s economy outwards and solving its crisis of overaccumulation.
There are various mechanisms employed by the central government to assemble stakeholders whose motives vary (including subcontracted developers, municipal governments, relocating firms, ministries, national banks, technicians, managers and migrant workers, not to mention a range of actors within the host economies) around its objective of creating free-trade environments in host economies.
Chinese ministries are one of the channels through which the central government exerts control. The ETCzone programme, was initiated by the Chinese Ministry of Commerce (MOFCOM) (bidding was organised at the national level, and zone projects selected for implementation were approved by the national government). MOFCOM, the Ministry of Foreign Affairs and various other government agencies played key roles in mobilising resources toward specific zones, subsidising zone developers and providing vital material, networking and information support for Chinese companies. MOFCOM further provided assistance to relocating enterprises through its Special fund for Economic and Technological Cooperation
Another way the Chinese state practiced is ‘steering’ role over the planning and development of ETCzones is through relevant institutions that have been set up to enable China’s global market integration and manage financial risk. Chinese policy banks (China Development Bank (CDB) and Eximbank) provided low-cost finance and equity participation for zone developers based on a government (MOFCOM) seal of approval. In 2006 CDB established the China Africa Development Fund (CADF), a venture capital instrument tasked with the role of investing in Chinese companies, Chinese-African joint ventures and African companies (it later obtained equity shares in some zone projects).
Other channels of central government influence include embassies offering diplomatic support in negotiations with host government over land use policies, tax incentives and work permits; state-directed municipal government support for developers; and special regional authorities commissioned by the central government to set up investment companies that were tasked with establishing overseas zones.
Paradigm maintenance in ETCzone policy and practice
Centrally coordinated action helped to consolidate and stabilise an arrangement of actors in and through which a predetermined overseas zone model was put into practice. And while there is no single policy framework for overseas ETCzones (sectoral specialisation, end-markets, and preferential policies differ on a zone by zone basis), evidence suggests a common model of engagement. Various aspects of this model suggest that ETCzones mobilise mainstream ideas of market integration, free trade and state-facilitated (rather than directed) development, indicating the reproduction of traditional development discourse and practice in China’s overseas initiatives.
First is a relative absence of domestic political ownership over the development process in African ETCzones. China’s own export oriented economic zones were state-led projects that benefited from strong domestic leadership, central government allocation of investments and regulatory and legal frameworks that aimed to lay the foundation for sustained industrial upgrading, deepening and development.
In contrast, all of the African ETCzones are Chinese financed and operated, and fully or partially Chinese owned. The performance of zones is therefore subject to strong Chinese influence and uneven power relations. Masterplans and development strategies are provided by the Chinese partner with limited local participation in zone planning and high-level management.
The logic for the design and planning of ETCzones is consistent with contemporary trends of externally built and operated export-oriented zone development. As a way to ensure the provision of tailored facilities for accelerating cross-border production and trade, and to finance the ‘infrastructure gap’ present in the world economy, the current consensus in international development is on partnerships between public and external (private sector or state) actors to deliver zone-based projects.
Based on both their function and mode of delivery therefore, contemporary zones prioritise the needs of mobile capital while limiting the regulatory capacity of the host state to direct the market towards national development priorities.
Similarly, while the initial ETCzone action plan proposed a cooperative approach to facilitating the development of domestic industry, neither zone managers nor MOFCOM, which oversees the zone programme, put forward plans to connect African firms with the zones. The policy space available to domestic actors to promote such cooperation is limited, particularly when developers and firms on one hand and local actors on the other have conflicting interests.
This leads to a second aspect of overseas ETCzone that is consistent with a liberal-market approach to zone development, the role of state institutions.
In both domestic and overseas Chinese zones there is an emphasis on removing impediments to international trade and enabling the operation of foreign firms through the provision of legal, fiscal and other benefits. However, the policy design of early domestic Chinese zones went beyond market facilitation to include active state participation in markets. Chinese zones featured a strong role for domestic institutions and government policy in promoting indigenous capabilities and hence in driving the structural transformation agenda.
The policy environment in African ETCzones on the other hand is designed to enhance trade liberalisation and investment facilitation, seeming to replicate the Chinese strategy of creating experimental sites for market-based reform as a way of integrating into the global economy. And yet the majority of these zones appear to emphasise dependency on FDI to provide opportunities for local firm development rather than firm or cluster-level interventions directed by the government institutions. More accurately, there appear to be differing state-market hierarchy for Chinese firms than there is for domestic firms. The latter do not benefit from proactive government policies, subsidies, or other investment promotion measures.
Thirdly, and in keeping with an approach that relies on firm coordination to provide opportunities for national development, overseas ETCzones prioritise increasing employment opportunities and exports versus the strategy of developing domestic linkages adopted in domestic Chinese ETCzones. Much like the overseas variant, early-stages of domestic Chinese zones were marked by labour-intensive manufacturing, and were expected to play a similar role of achieving the larger economic goals of expanding foreign trade and increasing employment as well as generating rents and contributing to overall growth.
However, early Chinese zones were underpinned by a staged vision for development based on shifting comparative advantage, with regional economies transitioning from export-oriented manufacturing to knowledge-intensive innovative manufacturing. An approach that prioritised cultivating both strategically beneficial global connections and backward linkages allowed Chinese firms to increase value-added in the manufacturing sector, enhancing capabilities and achieve extraordinary structural impacts.
Conversely, African ETCzones have developed as exclusionary nodes for value creation in China’s increasingly unbundled value chains. Investment promotion measures exclusively target Chinese firms and entry requirements are often restrictive for local forms. As a result, none of the zones have developed any significant linkages to the domestic economies in which they are located - there are no local manufacturers or suppliers in the Ethiopian, Mauritian, and Nigeria- Ogun zones, and with the exception of two joint ventures between Chinese and Egyptian SOEs all of the firms that have located in the Egyptian ETCzone are Chinese invested. Zambia’s Chambishi MFEZ developers announced that the zone would be open to local firms but the minimum investment size of $500,000 disqualified local firms from applying.
The evidence from Africa’s 6 ETCzones casts doubt on the claim that host governments will be able to replicate the Chinese experience of economic zone-based development to ‘climb up the development ladder’ into high tech manufacturing.
Instead, the operational framework of overseas ETCzones appears to maintain a global free market paradigm focused on creating open trading environments in domestic economies for the free flow of Chinese goods and capital. Paradigm maintenance in Chinese ETCzones has implications for understanding the opportunities and outcomes of Chinese development initiatives, with all indications pointing to the reproduction of the hierarchies, exclusions and differentiations of global free market-based development in Africa’s zone program.
Finally, the early design and planning framework of the ETCzone programme may have sought to remove impediments to trade and provide enabling environments to Chinese firms, but without explicitly adopting liberal-market discourse. In recent years China-Africa economic zone-based cooperation has increasingly been framed in the context of the BRI, which has come to represent the overarching framework for China’s international cooperation. The BRI framework takes a stronger position in support of reforms that prioritise global free trade over state-centred solution for integration into Chinese networks of logistics, trade and production.
The launch of the BRI established the central role of open business environments in related countries by calling on governments to open “free trade areas so as to unleash the potential for expanded cooperation”[vi]. The Initiative, as its vision document declares, will “give play to the decisive role of the market in resource allocation and the primary role of enterprises, and let the governments perform their due functions”, consolidating, as it appears, a Chinese international development approach based on the idea that the private sector will deliver on development targets more effectively than state-led programmes.
[i] Dollar, D., 2016. China’s engagement with Africa. From natural resources to human resources: p x.
[ii] See Cheru, F. and Oqubay, A., 2019. Catalysing China-Africa ties for Africa’s structural transformation: lessons from Ethiopia. China-Africa and an economic transformation, pp.282-309. See also: Mohan, G. and Lampert, B., 2013. Negotiating china: reinserting African agency into china–Africa relations. African Affairs, 112(446), pp.92-110.
[iii] Liu, Z., Schindler, S. and Liu, W., 2020. Demystifying Chinese overseas investment in infrastructure: Port development, the Belt and Road Initiative and regional development. Journal of Transport Geography, 87, p.102812.
[iv] Pairault, T., 2019. China in Africa: Phoenix nests versus special economic zones.
[v] Cheru, F. and Oqubay, A., 2019
[vi] National Development and Reform Commission, 2015. Vision and actions on jointly building Belt and Road.
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