Africa and China – and a grave misunderstanding of real world free trade

An African political leader criticising China for its engagement in Africa is a rare event. What Mallam Sanusi, the Nigerian central bank president has done in the Financial Times is bold and would be highly welcome as a contribution to open and frank debate of a hot matter if his main point would be valid. Unfortunately, it is not. Bashing China for swamping other developing countries with manufactured goods means to miss the wrongdoer and to misunderstand the role of foreign direct investment (FDI) in shaping new patterns of international trade for some decades already.

Surprisingly enough, despite a long history of FDI and the increasing role of a certain type of FDI its implications for international trade flows and for the edifice of the free trade dogma are not well understood. A huge amount of FDI in developing countries, in particular so-called greenfield investment in fixed capital, is searching for cheap factors of production (cheap labour in particular). This kind of FDI moves technologies with a rather high capital intensity, at least a capital intensity much higher than hitherto applied in the low-wage countries, to a low wage location. If labour in the receiving country is rather mobile or wages are following the productivity trend of the country as a whole, the overall level of wages in the country of destination is influenced by the import of this kind of FDI only marginally, namely to the extent that the individual investment improves the overall level of productivity a tiny little bit.