In a ceremony last week attended by heads of state from across East Africa, Djibouti inaugurated what it says will become the largest free-trade zone on the continent.

The project will take 10 years to complete and will occupy more than 48 square kilometers when finished. In the pilot phase, it will increase the size of Djibouti’s economy by 11 percent, Prime Minister Abdoulkader Kamil Mohamed told VOA’s French-to-Africa service.

But the $3.5 billion project will also add to what some experts consider to be an extreme reliance on Chinese financing and could raise the small desert nation’s debt to alarming levels.

Debt distress

Scott Morris is a senior fellow at the Center for Global Development and the director of the U.S. Development Policy Initiative. He co-wrote a report in March that highlights the debt implications of the Belt and Road Initiative.

Morris and his colleagues considered the debt vulnerability of 68 countries involved in the BRI, including China. They concluded that most countries have a low risk, but for eight countries, the risk is high.

Djibouti is the only high-risk African country. It stands out because its debt represents a large portion of its gross domestic product, which economists consider to be a good indicator of a country’s overall economic strength and size. By the end of 2016, Djibouti’s debt had reached more than 86 percent of its GDP, and it owed nearly all of that money to China.

Combined, these factors make Djibouti susceptible to debt distress, a condition that can hurt economic growth or even cause an economic crisis.

The new free-trade zone will add significantly to Djibouti’s Chinese debt, possibly elevating Djibouti’s risk to “an alarming state,” Morris said.

‘We are well-situated’

Djibouti is optimistic its investments will pay off.

“We don’t have natural resources, but God has placed us in a strategic zone where about 30 percent of the maritime commerce in the world passes through,” Mohamed said. “So, we are well-situated, and we plan to take advantage of this placement to have the maximum profit for our country and our people.”

Morris agrees that Djibouti’s infrastructure deals could generate significant economic activity and growth, and that helps keep the risks of debt in check.

The catch, according to Morris, is big infrastructure projects pay dividends over the long haul, but debt obligations kick in much sooner. “With deals like this continuing to stack up, it does seem to me that Djibouti is facing a real debt problem,” Morris said.

If Djibouti were to default on its loans, it might find itself handing full control of projects such as the free-trade zone or Chinese-built ports over to China. That precedent was set late last year, when Sri Lanka, burdened with $8 billion in loans to Chinese firms, transferred the Port of Hambantota to China on a 99-year lease. 

If China were to take control over a Djibouti-based infrastructure project, the geopolitical implications could extend far beyond finances. But a handover wouldn’t be necessary for China to sway politics in the region and beyond.

“There’s no doubt that the Chinese government as a creditor also makes its political will known on issues that matter to it,” Morris said.

Those stipulations aren’t unique to China, Morris added, citing the United States as one example of a country that ties economics to politics. President Donald Trump’s administration, Morris said, has made clear that countries would be eligible for financial assistance depending on their votes in the United Nations.

The additional challenge with Chinese loans, according to Morris, is a lack of transparency. “It’s really hard to judge the degree to which they are extracting political concessions.”

Risks and rewards

An opaque approach to financing makes Chinese loans more risky overall, Morris said.

“There’s not a consistent reporting principle on the part of China as a creditor,” he added. And because China hasn’t agreed to be governed by globally accepted financing rules, the risk for countries that accept Chinese loans goes up.

African countries need to vet Chinese-financed projects carefully, Morris said, being sure the terms adhere to accepted financing standards. But that doesn’t mean all BRI projects should be taken off the table.

“If there is a viable infrastructure project that an entity like the China Development Bank wants to finance, and the terms look reasonable, there’s no reason not to proceed with that,” Morris said. “But one has to evaluate each project on its own merits.”

In Djibouti, the government is confident its strategy is paying off. “Chinese interests are Djiboutian interests also,” Mohamed said. “We are happy to profit from our position so we can develop our country.”

Idrissa Fall and Anasthasie Tudieshe contributed to this report.
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The Trump administration’s 25 percent tariff on imported steel has been welcomed by U.S. producers of the material but slammed by American manufacturers that rely on a global steel supply chain to make everything from cars to razor blades. VOA’s Michael Bowman visited a can company that is being squeezed by the new tariff and has this report, which was produced by Elizabeth Cherneff.
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As the trade war between the world’s two largest economies nears the end of its first week, its most unsettling fact may be this: No one seems to foresee any clear path to peace.

 

The United States insists that China abandon the brass-knuckles tactics it’s used to try to supplant America’s technological dominance. Yet Beijing isn’t about to drop its zeal to acquire the technology it sees as crucial to its prosperity.

 

Having run for the White House on a vow to force China to reform its trade policies, President Donald Trump won’t likely yield to vague promises by Beijing to improve its behavior — or to pledges to buy more American soybeans or liquefied natural gas.

 

“It certainly feels like we’re in for a protracted fight,” said Timothy Keeler of the law firm Mayer Brown and a former chief of staff at the Office of the U.S. Trade Representative. “Truthfully, I don’t know what the off-ramp is.”

 

The first shots sounded July 6: The United States slapped 25 percent taxes on $34 billion in Chinese imports. Most of them are industrial goods that the Trump administration says receive subsidies or other unfair support from Beijing. China quickly lashed back with tariffs on $34 billion in U.S. products.

The two countries have targeted an additional $16 billion worth of each other’s products for a second round of25 percent tariffs. On Tuesday, the Office of the U.S. Trade Representative proposed 10 percent tariffs on another $200 billion in Chinese imports, ranging from fish sticks to burglar alarms.

 

All told, Trump has threatened eventually to slap tariffs on up to $550 billion in Chinese imports — more than China actually exported to the United States last year — if Beijing won’t relent to U.S. pressure and continues to retaliate.

 

At the heart of the dispute: The Trump administration’s complaints that China has used predatory practices in a relentless push to grant Chinese companies an unfair advantage in the industries of the future, including robotics, electric cars and biopharmaceuticals. These tactics include the outright theft of trade secrets, government subsidies to homegrown tech firms and demands that U.S. and other foreign companies hand over technology if they want access to China’s vast market.

 

Eliminating the new tariffs will prove a lot harder than it was to raise them in the first place, said Wendy Cutler, a former U.S. trade negotiator who is a vice president at the Asia Society Policy Institute. “Both sides have too much at stake and don’t want to back down.”

 

So how does the trade war end? Analysts offer several potential scenarios:

 

China Blinks

 

The Trump administration boasts that China has more to lose in a trade war. After all, Beijing sold $524 billion worth of goods and services to the United States last year and bought far less — $188 billion. So China has far fewer goods to tax than the United States does.

 

And China’s benchmark stock index — the Shanghai Composite — has dropped 15 percent this year, at least partly on fears about damage from the trade conflict with Washington.

 

“It’s a dicey time for the Chinese economy,” said Claude Barfield, a resident scholar at the conservative American Enterprise Institute and former consultant to the U.S. Trade Representative.

Beijing is trying to contain a run-up in corporate debt and manage a difficult transition away from fast but unsustainable export-driven growth based on exports and often-wasteful investment toward steadier growth built on consumer spending. The International Monetary Fund expects Chinese economic growth to decelerate to 6.6 percent this year from 6.9 percent in 2017.

 

So it’s possible that economic pressure could persuade Beijing to cave. Yet many analysts are skeptical. Eswar Prasad, an economist at Cornell University, said the economic damage from U.S. tariffs is “likely to be muted since China has enough room to forestall a growth slowdown” by increasing government spending or adopting easy-money policies that put more cash into the economy.

 

Mary Lovely, an economist and trade expert at Syracuse University, says it’s unclear how China could appease Trump, even if it wanted to. China has pledged in the past to police cyber-theft and end coerced technology transfers. So any negotiations, Lovely said, would raise more questions: Would the Trump administration accept another promise? How would any promise be verified? How long would it take to determine whether Beijing has actually reformed its ways?

 

And China’s leaders might prove reluctant to back down and risk a backlash from the public.

 

“They have nothing to gain internally by kowtowing to President Trump, and that’s exactly what it would be,” Lovely said.

 

Trump Blinks

 

Trump faces pressures, too. The Chinese designed their tariffs to inflict political pain in the United States. They have, for example, targeted soybeans and other farm products in a shot at Trump supporters in the American heartland. And U.S. farmers are represented by trade groups and congressional delegations who aren’t shy about attacking U.S. policies that threaten farm incomes.

But the president would also find it hard to back down. He’s already considered one possible solution only to back away from it. In May, Treasury Secretary Steven Mnuchin announced after a meeting with the Chinese that the trade war was “on hold” and the tariffs suspended after Beijing agreed to reduce the U.S. trade deficit by buying more American energy and farm products.

 

Yet the cease-fire quickly collapsed once critics complained that the Trump administration was letting China buy its way out of the impasse.

 

“The president felt the sting of that and didn’t like that,” Keeler said. So the administration decided to “drive a harder bargain,” and it revived — and ramped up — its tariff threat.

 

A Win-Win Resolution

 

Taiya Smith, a former Treasury official who handled negotiations with China, says it’s possible a deal could be reached in which Beijing ends its predatory practices but can still keep itself competitive in advanced industries. The key, she says, is persuading China that its tech companies don’t need massive assistance from the state.

 

“Their companies are becoming very powerful,” Smith said. “They have to be willing to compete on a level playing field. They no longer need a leg up.”

 

But she said the U.S. would have to make concessions, too, perhaps by agreeing to let China play a bigger role in global economic policymaking.

 

“The Chinese have to have a political win somewhere in there, too,” Smith said. “You can’t design something where we get what we want and China gets nothing. They have their own politics.”

 

The War Drags On

 

Scott Paul, president of the Alliance for American Manufacturing and a sharp critic of Beijing’s trade practices, wants to see the tariffs remain until either U.S. companies leave China or Beijing opens its market wider to American goods and investment.

 

“They should stay on for long enough that they manifest some change,” he said. “I don’t see the tariffs coming off anytime soon.”

 

Paul notes that China has repeatedly made empty promises to reform its practices.

“We have waste cans full of promises by the Chinese government to reform its anti-competitive practices that are completely ignored,” he said. “The tariffs are the best and only leverage that we have with China, and we would be foolish to squander them without major gains.”
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Tesla Inc Chief Executive Officer Elon Musk on Tuesday landed a deal with Chinese authorities to build a new auto plant in Shanghai, its first factory outside the United States, that would double the size of the electric car maker’s global manufacturing.

The deal was announced as Tesla raised prices on U.S.-made vehicles it sells in China to offset the cost of new tariffs imposed by the Chinese government in retaliation for U.S. President Donald Trump’s move to slap heavier duties on Chinese goods.

Musk was in Shanghai Tuesday, and the Shanghai government in a statement said it welcomed Tesla’s move to invest not only in a new factory in the city, a center of the Chinese auto industry, but in research and development, as well. China has long pushed to capture more of the talent and capital invested by global automakers in advanced electric vehicle technology.

Tesla plans to producing the first cars about two years after construction begins on its Shanghai factory, ramping up to as many as 500,000 vehicles a year about two to three years after that, the company said.

That would make Tesla’s Shanghai plant large by auto industry standards, where most factories are tooled to build 200,000 to 300,000 vehicles a year, and roughly equivalent to the planned annual production at Tesla’s plant in Fremont, California.

Tesla shares rose 1.5 percent in early U.S. trading, even as some analysts questioned where the money-losing company will get the capital required to build and staff such a large plant.

Musk has said Tesla will be cash-flow positive this year.

Analysts have predicted the company will raise capital to fund a list of new projects, including launching an electric semi truck, a pickup truck, a compact SUV and new battery and vehicle production facilities that Musk has proposed for China and Europe.

“I am sure that Tesla needs fresh money at the latest next year,” said Frank Schwope, an analyst with NORD/LB.

In its statement, the Shanghai government suggested it could help with some of the capital costs. “The Shanghai municipal government will fully support the construction of the Tesla factory,” the statement said.

Tuesday’s announcement will not impact U.S. manufacturing operations, which continue to grow, Tesla said.

Musk was talking about building a Chinese factory long before the Trump administration proposed punitive tariffs on Chinese goods. China until recently levied 25-percent tariffs on imported cars, and for decades automakers have been moving to build more vehicles in the markets where they will be sold to neutralize the risk of currency shifts and trade policy

reversals.

China is the largest market for electric vehicles, and most forecasters predict that electric vehicle sales in the country will accelerate rapidly as government regulation drives toward a goal of 100 percent electric vehicles by 2030.

China is the world’s largest auto market overall, with more than 28 million vehicles sold last year, and annual sales are forecast to top 35 million by 2025. That level would be more than double the current U.S. market, where new light vehicle sales run at about 17 million vehicles a year.

Still, the Chinese authorities’ decision to grant Tesla permission to move forward lands as President Trump is fighting to stop U.S. manufacturers from responding to his trade policy by shifting production overseas, as U.S. motorcycle maker Harley-Davidson said it would do last month.

Tesla did not immediately respond to requests for comment.

The signing was held at Shanghai’s Fairmont Peace Hotel but media attendance was limited, a Shanghai government official who declined to give his name told Reuters. Tesla’s Chief Executive Elon Musk attended the signing, according to a Reuters witness.

Bloomberg reported on Monday that Musk will visit Beijing on Wednesday and Thursday.

Tesla has been in protracted negotiations to open its own factory in China to help bolster its position in the country’s fast-growing market for electric cars and to avoid high import tariffs.

Tesla hiked prices in China over the weekend to a level more than 70 percent higher than in the United States amid mounting trade frictions between Washington and Beijing that have seen several U.S. imports, including cars, become subjected to retaliatory tariffs of 25 percent.

Musk had previously criticized China’s tough auto rules for foreign businesses, which would have required it to cede a 50-percent share in the factory. The company was keen to maintain control of its plant and protect its technology.

It registered a new electric car firm in Shanghai in May after China announced that it planned to scrap rules on capping foreign ownership of new-energy vehicle (NEV) ventures by 2022.
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The Cuban government will allow new restaurants, bed-and-breakfasts and transportation businesses by the end of the year, reopening the most vibrant sectors of the private economy after freezing growth for more than a year.

The government is unveiling a set of new regulations Tuesday meant to control the growth of tourism-related private businesses and collect more tax revenue from them. Private restaurants and bed-and-breakfasts boomed after U.S.-Cuba normalization in 2014 prompted rapid growth in tourism to Cuba.

 

Tax evasion and purchase of stolen state materials also boomed in the mostly cash-based private hospitality sector. Among other measures, the new regulations announced Tuesday require private businesses to move all their revenue through state-run bank accounts. Cuba froze new licenses for restaurants, bed-and-breakfasts and other key business in August 2017.
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BMW Group and the biggest Chinese SUV brand, Great Wall Motor, announced a partnership Tuesday to produce electric MINI vehicles in China as global automakers ramp up development under pressure from Beijing.

The companies said they signed an agreement Monday during an event in Berlin attended by Chinese Premier Li Keqiang and German Chancellor Angela Merkel.

BMW and Great Wall said their venture, Spotlight Automotive Ltd., also will make electrics for the Chinese partner’s brand. Great Wall put total investment in the venture at 5.1 billion yuan ($770 million) and said it is aiming for annual production of 160,000 vehicles.

Automakers are pouring billions of dollars into creating electric models for China, the biggest market for the technology.

Beijing is using access to its market as leverage to induce global automakers to help Chinese brands develop battery and other technology.

Auto brands in China are required to make electric vehicles at least 10 percent of their sales starting next year or buy credits from competitors that exceed their quotas. Later, they face pressure to raise those sales in order to satisfy fuel efficiency requirements that increase annually.

Sales of pure-electric passenger vehicles in China rose 82 percent last year to 468,000, according to an industry group, the China Association of Automobile Manufacturers. That was more than double the U.S. level of just under 200,000.

Other automakers including General Motors Co., Volkswagen AG and Nissan Motor Co. have announced similar plans with Chinese partners to produce dozens of electric models.

Great Wall, headquartered in Baoding, southwest of Beijing, sells more than 1 million SUVs a year.

“With our joint approach, we can quickly scale up production and increase efficiency,” said Klaus Frolich, a BMW board member, in a statement.

MINI’s first battery electric model is due to be produced at its main British factory in Oxford in 2019, according to BMW.

China is BMW’s biggest market. The Munich-based automaker said about 560,000 BMW brand vehicles were delivered to Chinese customers in 2017, more than its next two markets – the United States and Germany – combined.

China was MINI’s fourth-largest market in 2017, with 35,000 vehicles delivered, the company said.

The electrics venture with BMW is an important boost for Great Wall, which industry analysts warned would struggle to satisfy Beijing’s sales quotas due to its fuel-guzzling vehicle lineup and had yet to announce any significant electric plans.
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Behind a row of sealed red incubator doors in a new facility in northern China, about 400,000 chicks are hatched every day, part of the rapidly modernizing supply chain in China’s $37 billion egg industry, the world’s biggest.

As China overhauls production of everything from pork to milk and vegetables, farmers raising hens for eggs are also shifting from backyards to factory farms, where modern standardized processes are expected to raise quality and safety.

That’s an important step in a country where melamine-tainted eggs and eggs with high antibiotic residues have featured in a series of food safety scandals in recent years. It is also spurring demand for higher priced branded eggs over those sold loose in fresh produce markets.

“These days if you’re a small farmer, your eggs won’t get into the supermarkets,” said Yuan Song, analyst with China-America Commodity Data Analytics.

Tough new regulations on treating manure and reducing the environmental impact from farms have also pushed many small farmers out.

Most egg producers now have between 20,000 and 50,000 hens, said Yuan, a significant change even from two years ago. The remainder with less than 10,000 birds are likely to be shut down soon as local governments favor larger producers that can be more easily scrutinized.

High-tech hatchery

Those rapid changes are driving investments like the 150 million yuan ($22.60 million) hatchery in Handan, about 400km (250 miles) southwest of Beijing.

The highly automated plant, owned by a joint venture between China’s Huayu Agricultural Science and Technology Co. Ltd. and EW Group’s genetics business Hy-Line International, is the world’s biggest hatchery of layer chicks, or birds raised to produce eggs rather than meat.

By producing 200,000 females a day, or around 60 million layers a year (one day a week is for cleaning), it can meet demand from larger farms who want to buy day-old-chicks in one batch, said Jonathan Cade, president of Hy-Line International, based in West Des Moines, Iowa.

“That’s the best way to start off with good biosecurity,” he said. When the birds on one farm are the same age, they are less likely to spread disease.

Imported, latest-generation equipment helps speed up the throughput of the hatchery. An automatic grading machine, which can handle 60,000 eggs an hour, sorts eggs into two acceptable sizes before they enter incubators — uniform eggs produce similar sized chicks that will have the same feeding ability.

Once hatched, female chicks go to automated beak-clipping machines that process around 3,500 an hour.

Only 20 staff will be needed in the new plant, compared with around 100 in Huayu’s older hatchery, said Huayu chairman Wang Lianzeng.

Fierce competition, disease

Efficiency is important in an industry which is not expected to see much volume growth. The Chinese already eat more eggs per capita than almost everyone else, about 280 a year or almost one billion a day across the country, so consumption is unlikely to rise much.

Breeders like Huayu are trying to grow by taking market share from others. In addition to the new Handan hatchery, it is building another in Chongqing, which will bring annual production to 180 million chicks.

Layer inventory last year was around 1.2 billion, according to the China Animal Agriculture Association.

Huayu is also looking into breeding layers and building hatcheries in South-East Asia and Africa, said Wang, the chairman.

Key to industrial-scale facilities will be managing the risks of disease. Prices and demand for eggs and poultry plunged last year, after hundreds of people died from contracting bird flu, even though the disease left flocks largely unscathed.

Although that has created new opportunities for large players to expand after others were forced to exit, the impact of a disease outbreak on intensive operations is significantly higher.

Huayu itself has recently suffered from outbreaks, with high rates of poultry disease Mycoplasma synoviae (MS) in China’s breeding flocks last year, said Wang. The disease can reduce egg production in layers.

Wang said biosecurity is the major advantage in the new hatchery, which uses advanced ventilation and environmental controls to keep new chicks healthy.

“When you enter the hatchery, you wouldn’t know you’re in a hatchery,” he said, referring to the smell typical in older facilities.

Disinfection is used at every step along the chain and workers follow strict procedures on hygiene, he added.

A safe environment with very high standards of biosecurity is important in raising chicks, said Wang.

With such pressures on production, improving animal welfare is unsurprisingly not a priority, said Jeff Zhou, China representative for Compassion in World Farming (CIWF), a nonprofit.

China has no animal welfare regulations, although some companies have begun voluntarily to phase out the painful beak-trimming practice, including Huayu rival Ningxia Xiaoming Farming and Animal Husbandry Co. Ltd.

Xiaoming is also supplying male chicks from its hatcheries to local farmers to rear for meat in free-range environments, according to CIWF. Huayu sells its male chicks as food for snakes, which are farmed in China for traditional medicine.
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