Is Kenya getting a raw deal from trade ties with China?

When China first whizzed past India as the largest supplier of goods to Kenya in 2015, the change in the trade matrix did not go unnoticed.

The ascendancy of Beijing to the top of Nairobi’s import table quickly generated debate on whether Kenya’s dalliance with the Dragon economy was mutually beneficial.

Ever since, the country has maintained an East-ward view, as a casual look at major infrastructural projects shows.

By looking East, President Uhuru Kenyatta’s policy of economic diplomacy in the initial years of his presidency mirrored that of his predecessor Mwai Kibaki.

It is, however, not hard to see who is reaping the most from this relationship. Official data shows that Chinese imports to Kenya peaked at Sh320.8 billion in 2015, while the Asian nation took in a paltry Sh8.4 billion worth of goods from Nairobi, highlighting the depth of the imbalance.

Analysts reckon that the influx of Beijing imports has largely been fuelled by construction materials being brought in for the ongoing Chinese-funded standard gauge railway connecting Mombasa port city to Nairobi.

Conspicuously missing
While China boasts a huge market of about 1.3 billion consumers, it is conspicuously missing from top 10 markets for Kenya’s exports.

Experts and local manufacturers now say there is an urgent need for a rethink in the bilateral trade relations.

“This is one of the most lop-sided trade relationships in the world. In fact if you stripped out titanium, the Kenya export pipe to China would read close to zero. Clearly both governments need to energise their responses to this problem,” said Mr Aly-Khan Satchu, chief executive of Nairobi-based investment advisory firm Rich Management.

“Agoa (the African Growth and Opportunity Act) was a US silver bullet for exactly the same problem and China will surely have to look at something similar.”

Mr Satchu said countries such as Ethiopia had managed to create policies that protect local industries and Kenya should take a similar route.

“The solution to this problem is being seen in Ethiopia. CS Adan Mohamed is trying to level this by trying to create a Kenya Inc, which is investor and manufacturing friendly. We need to win in the shift of low-cost manufacturing from China into cheaper destinations,” he said.

Chinese import growth is also being driven by local traders’ preference for the Asian country’s fast-moving cheaper stock, including those that can be made here, giving local factories sleepless nights.

This has fanned fears that the widening of Kenya’s import bill compared with the narrow export receipt could spell doom for the country’s quest to industrialise as spelled out in the Vision 2030 blueprint.

Lock out imports
At this point, there is need for a policy rethink to lock out imports that can be produced here, says Dr XN Iraki, a lecturer of economics at the University of Nairobi.

The Kenya Association of Manufacturers (KAM) Chief Executive Officer Phyllis Wakiaga said there is need for reforms to enhance the fortunes of local factories.

READ: How China contractors drove Kenyan firms out of mega projects

“The relationship between China and Kenya is more complex than the present narrative depicts. China has demonstrated that it is a development partner in terms of providing quality infrastructure to our country,” Ms Wakiaga told the Smart Company.
She said infrastructure projects being executed by the Chinese will stimulate development in the country which would eventually lead to a win-win situation for both nations.

“China has made investments based on Kenya’s geography, which makes it a huge business hub for East Africa and an avenue to access Central African countries. This access will not benefit just the Chinese,” she said.
“There is definitely alarm over the trade deficit, and whilst this is a concern, we have to remember that there are other countries that have a huge trade deficit with China such as Germany and those economies are still afloat.”
Even then, she noted that manufacturers would like to see deliberate steps by the government to devise measures that will protect local manufacturers and Kenyan jobs.
“Regulatory and tax measures that would prevent dumping from foreign markets (dumping which lowers the value and capacity for local manufacturers) are very critical in ensuring that local manufacturing and subsequently the economy thrives, despite the existing trade imbalance,” said Ms Wakiaga.
“We would also like to see measures against counterfeits which seem to double every year and irregular tender practices by foreign contractors. We have seen an increase in unhealthy competition due to the latter and this has led to local companies shutting down because they are unable to compete on fair grounds; these include SMEs that are in the auto repair business.”
She said Kenya’s net loss from counterfeit products amount to approximately $368 million (Sh37.9 billion).
She added that the solution to this menace lies in legal redress.
“This is why it is important that the government hastens the passing of the Trade Remedies Bill to protect local manufacturers from some of these avoidable menaces. However, the move by government to introduce additional duties to imported steel last year has gone a long way in promoting the local steel industry,” said the KAM boss.
A look at the latest basket of Kenya’s exports to Beijing underscores a trend that has for long been associated with the most populous nation.

Hunting spree

It’s an open secret that China has for years been on a hunting spree for minerals on the continent. Titanium, used as an alloy with other metals to produce lightweight metals for jet engines, tops the list of China’s imports from Kenya, accounting for over 95 per cent of what it buys from the local market.

The Kenya National Bureau of Statistics (KNBS) data shows that the Asian economy swallowed titanium shipment from Kenya valued at Sh5.3 billion in the first 10 months of last year.

Kenyan tea came at a distant second in Chinese imports at Sh139 million in the review period, followed by coffee (Sh73 million) and fresh vegetables (Sh2.3 million).

The statistics bureau is yet to make public the data for the last two months of 2016.

Beijing is a resource-hungry economy and has in recent years made in-roads in African nations for minerals and oil to feed the rising appetite.

“It’s no secret that world-class oil deposits lie under and off the coast of East Africa,” says a report by US-based research firm Casey.

The study titled "The Global Race for African Oil says East Africa" will emerge as a crucial oil and gas province, raking in trillions of dollars as energy-thirsty economies like China race in to buy the resource.

“During the next few decades, trillions of dollars will flood into East Africa in exchange for its resource riches – and right now, most of that is set to come from China,” the study says.

To address the trade imbalance, Dr Iraki says a bit of protectionism would not hurt Kenya.
“We can become more efficient, reduce labour costs, create local demand by improving on the quality and in the spirit of ‘Trumponomics’, become more patriotic,” he says in reference to the protectionist policy adopted by newly elected US President Donald Trump.

According to the Kenya Institute for Public Policy Research and Analysis (Kippra) the huge trade imbalance between Kenya and China in favour of China is not surprising.

Kippra analysts Prof Joseph Kieyah and Simon Githuku noted that the trade imbalance cannot be blamed on China as the Asian country is not only the second largest economy in the world after the United States but that it is the largest producer of manufactured products globally.

Factory of the world
“That is why it (China) is sometimes referred to as the ‘factory of the world’. Thus, China has a much bigger economy and therefore a greater ability to produce goods and services to export,” they say.
Kippra, however, adds that it has not been all gloom, noting that Kenya has been getting concessional loans from China to build physical infrastructure, the main one being the SGR.
“Kenya has a huge infrastructure deficit not to mention financial and human capital constraints. Development of infrastructure will improve flexibility of the supply-side sector of the economy such as industrial manufacturing.

"Therefore, Kenya should take advantage of such infrastructure to develop agriculture and manufacturing sectors especially targeting the export sector,” they say.

The researchers say to reduce the trade imbalance, Kenya should strategize on getting more tourists from China using appropriate strategies.

“Kenya could explore China’s market and determine new products or existing ones that Kenya can export to China. Nairobi can, then, negotiate with Beijing on how to ease the entry of these new Kenya’s export to Chinese market,” they add.

Transfer of technology from China to Kenya could also play a role in the development of special economic zones (SEZs) that Kenya intends to implement in line with the Vision 2030, says Kippra.

“The successful establishment of SEZs will boost Kenya’s industrialisation efforts hence enabling the country to produce several goods locally. This can lead to decline of China’s exports to Kenya. Kenya could also explore the potential of creative

industry/economy and find out how entrepreneurs in the industry could exploit Chinese market as Beijing has been very aggressive in the promotion of cultural diplomacy and exchange programmes,” adds Kippra. 

The policy think tank also wants Kenya to seek more concessions when negotiating on loans to build infrastructure, it should where some of the raw materials can be sourced locally.

Both the Kenya Government and the Chinese Embassy failed to respond to queries on the matter despite several requests for interview.

Dr Iraki recommended that Kenya could ride on its tourism offerings to balance trade with China through increased marketing campaigns.

China is Kenya’s fifth source market for tourists at 41,459 arrivals in the first 10 months of last year, behind the US in the first position, UK, India and Uganda.

READ: Uhuru ends India visit with call on its companies to invest in Kenya

bnjoroge@ke.nationmedia.com; notuki@ke.nationmedia.com

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