Africa's untapped potential to "remake" key European supply chains

A recent paper published by three researchers of the Kiel Institute for the World Economy titled “Diversifying European Supply Chains: Can Africa Play a Role?”, examines the prospective role that African nations could play in the European Union's strategic objective of reducing reliance on specific supply chains, particularly those linked to China. The study assesses Africa's potential as a sourcing alternative, with a focus on critical minerals and the textile and clothing sector.

According to the study, while empirical evidence of European enterprises moving production to Africa ("nearshoring") is currently absent, the continent has several promising features that could make it an attractive option in future. First, Africa possesses large reserves of natural resources like cobalt and lithium, which are essential for green transition, a shift that European businesses are actively pursuing, driven by ambitious EU policy frameworks such as the European Green Deal 2019 (a comprehensive growth strategy with the overarching aim of making the EU climate-neutral by 2050), and a growing global focus on sustainability. Second, Africa’s labor costs are competitive, making it a potentially appealing alternative to current major manufacturing hubs worldwide. Third, Africa's geographical closeness to Europe presents a significant advantage for EU businesses. Economic analyses employing gravity model frameworks consistently demonstrate a robust positive correlation between geographical proximity and bilateral trade flows. Last but not least, existing language and cultural ties, stemming in part from historical colonial ties, can make it easier for European businesses to move parts of their production processes to Africa.

However, the study also cautions that a significant shift in European value chains towards Africa necessitates a substantial improvement in the continent's investment climate. In this regard, the African Continental Free Trade Area (AfCFTA) is flagged as a crucial tool to overcome the fragmentation of African markets and foster regional supply chains. However, this could not be enough. The study's message is unequivocal: more action is required. To improve their investment climate, African nations must urgently prioritize three essential areas if they wish to truly capitalize on the shifting global supply chain landscape and forge a deeper economic integration with Europe. These areas are: 1) a reliable infrastructure, 2) a skilled and well-trained workforce, and 3) stable (government) institutions. Failure to achieve progress in these fundamental areas risks missing a significant opportunity for Africa’s transformative economic development.

In our opinion, it is also imperative to recognize that overcoming Africa's historical position as a supplier of raw materials for Europe demands more than just a mere increase in investment. It will also require a deliberate and significant redirection of capital towards establishing and strengthening value-added processing and manufacturing industries. Achieving this hinges on streamlining business licensing and permit procedures, deploying tax and financial incentives to attract investment in these transformative activities, and on developing programs to help local businesses to meet the quality and standards required to become suppliers to larger manufacturing firms. Such a focused approach is indispensable for African nations to participate on more equitable terms to EU value chains, achieving economic diversification and a more robust and self-sustaining economic future.