Supply Chains, and China's Interests in Africa

JULIA KENNEDY: Welcome to Just Business. I'm Julia Taylor Kennedy.

Last time on the podcast we learned about ways U.S. companies can oversee the labor practices of their suppliers, especially in China. This week we'll continue our look at supply chains, starting with China's burgeoning relationships with African nations.

As a manufacturing hub, China sees Africa both as a source of raw materials and as a market for Chinese products. Today we'll hear from authors of a new book, called China and Africa: A Century of Engagement.

Carnegie Council Senior Fellow Devin Stewart interviewed Ambassador David Shinn and NYU professor Joshua Eisenman about the reason China has such strong economic interest in Africa and the ethical questions this interest raises on both sides of the relationship.

Let's start with Devin's conversation with Eisenman.

JOSHUA EISENMAN: Mostly China is in Africa for raw materials. China is producing its products, it wants customers for those products, and it needs raw materials to make those products. So it's largely an economic reason.

DEVIN STEWART: How would you describe the economic relationship between the two places, China and Africa?

JOSHUA EISENMAN: I think the largest component of the economic relationship is the trade relationship. In terms of what China purchases from Africa, it's very specialized. Four goods types, all of them resources, make up 90 percent of China's purchases.

DEVIN STEWART: What are those goods?

JOSHUA EISENMAN: Mostly oil, oil is the number one component; minerals; metals; hardwoods used to be more important than they are now, but they are still somewhat on the list. What's important is 90 percent is raw materials of one sort of another.

But what China sells to Africa is highly diversified. The top five Chinese products are all either machinery or consumer goods. They only make up 18 percent of China's total trade, the top five. So it is a highly diversified set of goods that China is trading in Africa and a highly specialized set that it's buying from Africa.

DEVIN STEWART: Some people have described that very characteristic of the relationship as colonial or neocolonial or exploitative. Would you agree with that description, or is that going too far?

JOSHUA EISENMAN: I think it's important to define what is a neocolonial trade pattern and what is neocolonialism.

China does not control African governments. They are sovereign states. They make their own decisions. That divides this in very important ways from colonialism. This is not colonialism.

But the trade pattern—if you put the two next to each other, you would say yes, this is a neocolonial trade pattern. But again, I would stay away from calling this neocolonialism.

I think that the market mechanisms here are important. China has, in many ways, through investments in its own infrastructure and policies at home, some of which are mercantilistic by nature, created advantages for itself in consumer goods and capital goods. Those comparative advantages mean that the market itself is largely driving China-Africa trade. And of course, a certain grouping of African countries have a comparative advantage in resources.

So, in a lot of ways, we are seeing the market mechanism at play here. But comparative advantage is created in many ways by governments through their investments, and China has created comparative advantages in consumer products in historic ways. We see that here in the United States, and that is also the case on the African continent.

DEVIN STEWART: So is it a mutually beneficial relationship?

JOSHUA EISENMAN: Well, as the Chinese like to call it, a win/win relationship. I think it depends on who you are, right? On the elite level, it very much is a win/win relationship, and the Chinese are excellent at this level, reaching out to elites in a variety of different sectors, too.

But I think that, like any relationship, there are losers, there are people who are not going to win, and those people are often those who are in competition with Chinese consumer goods and Chinese capital goods. People are being put out of work in their own country by foreigners.

In fact, Nigeria arrested 100 Chinese traders. The Chinese government protested. They released about 60 of them. But 40 of them, they said no. They were described as "economic scavengers," a Nigerian government official called them. It portrays a very negative view, and I think that negative view and perception of this trader community is growing. The question is, how is China going to deal with that?

DEVIN STEWART: This book is a product of a lot of on-the-ground study in both regions. What are some of the big ethical issues that came up during your study?

JOSHUA EISENMAN: There is a perception among Chinese experts that study Africa that Africa is behind China on the development ladder, if you will, and, thus, law in Africa is just not important. "Law in China is not important. We're more developed than them, so law in Africa is not that important."

But what often happens is Africans, although they lack capacity and institutions, have the laws, and often they do their best to enforce them. So if a violation occurs, they may within the law come with a document which outlines the violations. An American or a British or a foreign Western company may within the context of that document say, "Okay, well, we agree with this, and we can't pay this compensation but we'll negotiate within the framework provided by the Africans."

Whereas in the China case, they want a handout, so "Who cares what's on this piece of paper? What can I do to make this go away?" Of course that doesn't make the problem go away if a new person comes and sits in that chair.

So there is a perception that African laws are unimportant or that they are somehow not enforceable, simply because Chinese bring that from home with them, because they see that on the ground in their own life. So they expect that to be the case. So this is a question of respecting the law.

Maybe the Chinese will pay a bribe even higher than the fines that the American company would pay. But when the American company deals with the problem, it's dealt with within the framework of the law, and thus it goes away.

This is a problem going forward in terms of the respecting of the legal frameworks within African countries.

I should also say that this doesn't mean the Chinese are willy-nilly disrespecting African law. In a lot of places, they have to at least adhere to the letter of the law. But I think it's a problem in terms of perception of the law.

DEVIN STEWART: Joshua, a final question. You've produced two ambitious books on China's impact on the developing world and the world in general here. You have a lot of data to look at. From this data, how would you characterize China's impact on the world? Both good and bad? And does the public "get" China? Are there stereotypes that you would like to address?

JOSHUA EISENMAN: You know, we've seen over the last 10 or 20 years, the rise of China. But I think that in this willingness to look at GDP perhaps over everything else, there are huge problems that are happening.

I have been over the last 10 months to 13 Chinese provinces. The environmental degradation is beyond anything I've ever seen. The economic challenges brought on by growth based largely on construction—when you've built all the bridges, when you've built all the high-speed trains, what next? And when you've built all the apartment blocks and the prices are out of the capacity of an average Chinese to afford?

I think one thing Washington is always concerned about is how is China eating our lunch, what is China doing that hurts us. But I think one thing that Washington and others just don't think about enough is the down-side risk assessments that are very possible.

I'm not predicting the coming collapse of China, as others have, but I'm saying these down-side risks are important and they often get short shrift because it doesn't stimulate the same kind of response from the reader when you talk about problems than to talk about successes.

We all want to hear about what China is doing right and what can we learn from China. This is what is going on now. What we hear less of is what is China doing wrong and how is that going to affect them and us going forward.

But, generally speaking, in terms of Africa at least, China's construction of infrastructure has been a critical, important component to their presence there. We're not doing it and others aren't doing it. It inhibits our ability to distribute food aid, for instance, when there is no road to get it there. The Chinese building of critical infrastructure, bridges and roads and trains, is something that is a great contribution to Africa and to the world.

DEVIN STEWART: Josh, thanks very much. This is a great interview. Thank you.

JOSHUA EISENMAN: Thank you.

JULIA KENNEDY: That was Carnegie Council Senior Fellow Devin Stewart interviewing NYU Professor Joshua Eisenman about his recent book, China and Africa.

Eisenman is an expert on China, and he wrote the book with a counterpart who has extensive experience in Africa. Ambassador David Shinn has been the U.S. ambassador to Ethiopia and Burkina Faso and currently teaches international affairs at George Washington University.

In his conversation with Devin Stewart, he highlighted the enormous role China plays in African economies.

DAVID SHINN: When it comes to investment, I think it's safe to say that China is more engaged in investment in Africa today, certainly than any other single nation. Maybe collectively the European Union has greater investment going into Africa today than China, but no other single country has more going in.

In the area of infrastructure development and building, they are ahead of everyone. No one can even come close to their activity in Africa today, using in large part Chinese companies, Chinese equipment, and to some extent even Chinese labor.

DEVIN STEWART: How would you characterize this economic relationship?

DAVID SHINN: It's one of China doing what other countries do, and that's looking out after its own interests. They clearly have that first and foremost. As a result, the trade links between Africa and China are largely based on extracting raw materials from Africa—not exclusively, but that is, I think, the single most important interest.

It's an effort to develop business opportunities, activities in Africa that make money for either Chinese state-owned companies or private companies. There are a surprising number of private Chinese companies that are now doing business in Africa.

DEVIN STEWART: Now, you're a specialist of Africa. Clearly, Africa comprises a lot of countries.

DAVID SHINN: Right.

DEVIN STEWART: How would you characterize the reception by Africans of the Chinese coming to Africa?

DAVID SHINN: You properly make a very good point, that when you start generalizing about anyone's engagement in Africa, you do so at your own risk, because with 54 different countries, there obviously is an enormous amount of variation. But having said that, I think it is useful to try to generalize.

China has done a surprisingly good job of engaging effectively at the government-to-government level. That has been the strength of their relationship.

Where the problems sometimes arise are in the nongovernmental areas of the interaction, particularly when you're talking in Africa about those countries that have fairly strong multiparty organizations, viable opposition parties, strong labor unions (there aren't too many in Africa that do have strong labor unions, but some do), strong civil society, a free and open press. There are growing numbers of African countries that fit one or more of those groupings.

China, I think, is finding that because it doesn't excel in any of those areas, other than the government-to-government relationship, it is struggling a bit in terms of how to cope with an opposition political party or a strong civil society or a free African press that sometimes is critical of China's activity in that particular country. They get very cranky when they see criticism of their activities or what they are doing in that particular country.

The Chinese also do very well, I should say, on the commercial relationships. That is, the African business sector, whether it be totally private or whether it have an element of government control in it, they interact quite effectively with their Chinese counterparts.

DEVIN STEWART: Can you give some specific country or company examples of successes or problems?

DAVID SHINN: There are two Chinese companies, both of which profess to be private. One is Huawei, which used to have very strong links with the People's Liberation Army and whose actual ownership is very much open to question, I think. But nevertheless it claims to be a private company.

Another one that's involved in telecommunications, and a strong competitor of Huawei in Africa, is ZTE, which is a private company in that it is listed on stock exchanges, although the Chinese government has a 10 percent ownership in ZTE, so that may determine to some extent how it operates in Africa.

But they have done an amazing job of breaking into the African market, to the extent that they—and other companies, not just those two, but I would say principally those two—have largely expelled companies like Motorola from the African market—they're just not really there in any major way anymore—and they are really giving companies like Ericsson and Siemens a run for their money and taking a lot of the market share that those companies used to have.

Another area where the Chinese have come in in a major and effective way and are pretty much supplanting most of their competitors in the West are all of the big construction companies. Most of these are state-owned—not all of them, but I think a majority certainly are. They have come in in this package-deal arrangement that China arranges with the African countries for offering loans, usually in exchange for raw materials like oil or minerals, and then the African country uses this loan for a big infrastructure project which a Chinese company comes in to build, sometimes using Chinese labor, or at least a component of Chinese labor.

They have done so much of this now in so many African countries that they are well established throughout much of Africa. So they are the ones who are often just called upon when new projects come along because they have the presence on the ground, they have the experience, and they have a track record of doing a pretty decent job. They are essentially running a lot of the other construction companies from around the world out of business.

There still are a few that are making a go of it. The Brazilians are able to compete occasionally. Every now and again, an American company will get a contract, or a German company. But it's a pretty tough slog.

DEVIN STEWART: You mentioned that a lack of free press in China makes them cranky when they're in Africa, this problem of lack of free speech and press in China, and also the use of Chinese workers in Africa when they are doing projects. Do these two issues raise ethical questions in your view?

DAVID SHINN: I'm going to separate the Chinese communities into two categories. You're talking about the laborers who come in. There's another group that is, frankly, a more important group in terms of its impact on African society, and these are the Chinese traders and small businesspeople who come in and compete with Africans.

In the context of the laborers, who don't for the most part stay—very few of them remain in Africa; they come and do their job and leave—the one ethical question would arise in those cases is where China brings in laborers where clearly Africans could do the job and should do the job, because unemployment rates are so high throughout Africa that to bring Chinese in to lay bricks, for example, just doesn't make sense. There are enough Africans around who can learn how to stack bricks up. So that would be an ethical question on the laborer side.

The more interesting area, though, is probably with the Chinese traders and small businesspeople. Clearly, ethical issues come into that.

Now, this is a realm that's largely out of the control of the Chinese government. These are people who are private individuals, they come on their own. They don't even necessarily come from China. They might come from South East Asia, they might come from any part of the world, because they hear money is to be made in Africa and "let's go there and try that, we're not doing so well in" wherever they're coming from.

They come in and they often out-compete their African trader counterpart and, in effect, force them out of their way of life, because the Chinese, for a whole variety of reasons, are more competitive, even in an African market situation, than the Africans themselves. Part of it, quite frankly, is due to the fact they just work harder and longer.

But it still raises some ethical considerations when you have clearly foreigners coming in and displacing Africans, where again unemployment is a huge, huge problem. Probably the single greatest social problem in Africa today is unemployment. So that I would say is an ethical problem.

Another component of that is what happens on the industrial side. You do have African small industry that produces things like batteries and radios and car tires, the kinds of things that they should be producing and they should be selling locally and they should be making a profit on. But if you have a Chinese small trader coming in, bringing in Chinese imports, and, even with the transportation costs, is underselling the African producer of those same pieces of equipment, you, in effect, are shutting down certain African businesses.

Now, this happened big time with African textiles. They lost about a third of their market—not due just to the Chinese; the Indians and the Pakistanis and a whole bunch of other countries were involved in that, so the blame is widespread. But those are ethical considerations too. For an area of the world that is clearly the least-developed still, is it ethical for countries like China and India and others to come in and displace both local labor and local products?

DEVIN STEWART: Are you referring to the production of traditional African textiles?

DAVID SHINN: That's almost a separate case and an interesting question. It's not only the production of it.

But there's another problem here, a much smaller one but an interesting one, where you have the designs that are developed by Africans in Africa that are gorgeous designs—I mean the Africans are just terrific at these things. The Chinese and others, other nationalities, will come in and buy one copy of these designs. They'll have literally an African agent go out to the craft shops and wherever these things are produced, buy one copy, take it back to China, manufacture the exact same design there, sometimes slap a label on it "Made in Swaziland" or "Made in South Africa" or "Made in [wherever]," and the thing will then show up in the African market as an African product, whereas in fact it was designed by an African, taken to China and counterfeited, and then brought back to Africa and sold as an African product. The whole thing is bogus.

DEVIN STEWART: It sounds like transparency and accountability are problems in some of the stories you have been talking about today. Doesn't that make the scrutiny of supply chains a problem as well?

DAVID SHINN: Yes, of course it's a problem. It's also a problem on the African side because they don't have the capacity to deal with this. They simply do not have the institutions in place to monitor this stuff. And even if they did, there's a good chance that, because of corruption, you could find a way around it.

That's often what happens with these materials. It's often known what their origin is and that the designs have been reproduced elsewhere and the labels are phony and everything else, but if you have neither the institution that is capable of stopping it or the will to stop it, it is going to happen, and it is.

Even worse, you have this problem with pharmaceuticals that come in that do not have active ingredients in them, or you have toothpaste, as we had in the United States, that has some ingredient in it that shouldn't be there. We have the institution in the United States to deal with that, at least after a short period of time. The African countries do not. So who knows what's coming in to Africa that is a problem?

DEVIN STEWART: Ambassador Shinn, you have written a fascinating piece for us in the past about Chinese ethics in Africa and the interaction between two ethical systems. Do you see these same dynamics playing out today, and how do you see the meshing of those two value systems?

DAVID SHINN: Africans probably find themselves—and again, generalizing is very dangerous here—somewhere between the ethic systems of what we are used to in the United States and those that you might find in a country like China. Maybe they lean a little bit more one way than the other, but I'd be hesitant even to say which way they lean in a greater direction.

One of the big differences with China is that the Africans are very religious people.

DEVIN STEWART: Ambassador Shinn, thank you very much.

DAVID SHINN: You're welcome.

JULIA KENNEDY: That was Carnegie Council Senior Fellow Devin Stewart interviewing Ambassador David Shinn about the economic relationship between China and Africa and the ethical questions that relationship raises.

Over the past couple of weeks we've talked about a variety of ethical issues that global supply chains and global manufacturing can raise—from labor, to raw material extraction for export, to competition of cheap international products with locally produced products.

Well, in this commentary Philippe Burke proposes one possible end-run around these issues. Burke founded and manages the hedge fund Apache Capital Management, and he's also active in Occupy Wall Street. Burke says there is a silver bullet to create ethical consumers and rescue the U.S. middle class: Bring back "Made in the USA."

PHILIPPE BURKE: People say there's no silver bullet to get the U.S. economy out of its woes. In fact there is. To get back to 4 percent growth and less than 7 percent unemployment in a matter of months, while reducing our national debt to foreigners, all we have to do is buy American.

Using very rough numbers, we have a $15 trillion economy. Two-thirds of that is consumption. More than a fifth of that consumption is imported. That's more than $2 trillion. Imagine if every American decided to buy "Made in America" products for the next year out of enlightened patriotism. "Not going to happen," you say. Okay.

To be a bit more realistic, suppose every American decided that he would cut his consumption of imported goods in half and instead seek to buy goods or service stamped "Made in America." We could generate more than $1 trillion extra in goods and services made right here at home. Think of the millions of new jobs created in the U.S.

Think of that neighbor down the street who is about to lose his job to a factory in China and now keeps his job, pays his mortgage, and stays in his house instead of seeing it end up in foreclosure. Your community, your neighborhood, is more stable now. The crime rate probably goes down. And your house no longer goes down in value by sitting close to a foreclosed home.

There are, of course, many impacts and ripples to this decision. Let's follow one of the trails of consequences.

An 11-year-old Chinese kid is no longer being pulled out of a classroom in Guangdong Province to go work in a factory filled with asbestos and running on dirty coal to produce that "Made in China" good sold at Walmart—which, incidentally, was engineered probably using intellectual property stolen in cyberspace from the U.S. and made competitive in the U.S. thanks to a deliberately undervalued currency managed with Chinese Central Bank intervention.

So that little Chinese kid will now have a chance to complete school, and perhaps live a longer life instead of facing the prospect of lung cancer. And since that Chinese factory now needs less dirty coal to operate, fewer trees in Canada and Montana will perish of acid rain chemicals carried by wind from China. More salmon in the Snake River in Oregon will have a chance to spawn and contribute to the ecosystem in the Pacific Northwest.

And there are, of course, so many other positive impacts to this "Buy America" decision.

Now, there's a simple reason why you buy so many "Made in China" goods at Walmart: they have a lower ticket price than U.S.-made goods. But that ticket price does not account for the huge negative cost on the U.S. associated with this trade decision.

So here's the ethical question: If properly informed of these costs, should an ordinary U.S. consumer be willing to make the personal sacrifice and spend an extra dollar to buy a U.S.-made good in order to potentially save $2 in societal and environmental costs to his country?

We no longer buy soccer balls made by slave-labor children in Pakistan, or figurines made of elephant tusks, now that we have become better informed of the costs that these purchases create. Would it not be ethical for U.S. consumers to change their buying patterns and demand "Made in America" goods if they knew the enormous negative consequences of their current purchasing habits?

Some will tell you that even if we wanted to do so, we could no longer find "Made in America" goods to meet most of our needs today because so much of our manufacturing capability has already been exported overseas. Well, even if that is true, think of how flexible U.S. labor laws are. Think of all the access to capital, the businesses eager to find new opportunities in an otherwise sluggish economy.

After the U.S. entered World War II, it took us just a few months for the U.S. business sector to become the largest producer in the world of lorries, tanks, and war equipment. I suspect businesses today would also adjust to such a change in consumer demand with a speed that would make our heads spin.

In the end, it is an ethical choice that each of us makes daily. The next time you go to the store you will have a choice: You can buy a good made in China to save a dollar or two now and, in the process, contribute to weakening the economic pillars of this country, encourage Chinese intellectual property theft, and acquiesce to their wholesale environmental destruction. Or you could spend an extra dollar to buy a good stamped "Proudly Made in the United States" and help create jobs for your neighbors, say "Enough!" to mass environmental degradation, and tell the Chinese that we will no longer stand by and subsidize their piracy of intellectual property. It's really that simple.

So ask yourself this: How does the personal sacrifice of spending an extra dollar on something made in the United States compare to the sacrifice that our grandparents made in risking their lives on Omaha Beach in the 1940s? How does that sacrifice compare to the personal cost borne by our children fighting for us in Iraq and Afghanistan today? Is spending an extra dollar to favor a U.S.-made good just too much to ask of you and me? And, if so, how will future generations judge our stewardship of this great nation while the reins were in our hands?

JULIA KENNEDY: That was a commentary from Philippe Burke. He runs the hedge fund Apache Capital Management and is active in Occupy Wall Street.

That wraps up our look at supply chains in manufacturing.

I'm Julia Taylor Kennedy. Thanks to Devin Stewart, Philippe Burke, and Terrence Hurley for their contributions to this week's podcast. Thanks to Tony Higgins and the African group Bread and Grease for this week's music.

And thanks to you, our listeners, for joining us. We're happy to hear from you. Please send questions and comments to [email protected].