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RUEHCN/AMCONSUL CHENGDU 0013
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RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 NAIROBI 000075 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPT FOR AF/E AND AF/EPS 
LONDON AND PARIS FOR AFRICA WATCHERS 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD KIPR KE CH
SUBJECT: Kenya and China: Stronger Economic Ties Driven by Growing 
Chinese Exports to Kenya 
 
Refs: A. 06 Nairobi 5374, B. 05 Nairobi 3600 
 
NAIROBI 00000075  001.2 OF 003 
 
 
¶1.  (SBU) Summary: Economic ties between Kenya and China are growing 
stronger, a trend being driven primarily by greater bilateral trade 
and, more precisely, by a rapid increase in Chinese exports to 
Kenya.  While trade with China is increasingly important to Kenya, 
it still accounts for only 3% of total trade, a share dwarfed by 
Kenya's trade with the rest of Africa, the EU, and even the United 
States.  The trade relationship is overwhelmingly in China's favor, 
and inherent structural weaknesses in Kenya's economy make it 
unlikely Kenya will ever be capable of closing the gap.  For the 
moment at least, the continuing surge in Chinese imports into Kenya 
is benefiting consumers, without major damage yet to the country's 
manufacturing sector.  However, Kenya's apparel industry is 
threatened globally by Chinese competition, and anyone competing 
with Chinese-made knock-offs is also having a hard time.  End 
summary. 
 
¶2.  (U) This cable updates ref B's analysis of the burgeoning 
economic relationship between Kenya and the Peoples Republic of 
China (PRC), with an emphasis on the trade relationship.  Septel(s) 
will touch on other aspects of the economic relationship, put it 
into a broader political perspective, and examine how it impacts 
U.S. interests in Kenya and in East Africa. 
 
------------------------------------------ 
It's All About Trade, and Trade is Growing 
------------------------------------------ 
 
¶3.  (SBU) In public remarks at the November 8 launch in Nairobi of 
the World Bank publication "The Silk Road: China and India's New 
Frontier," Mukhisa Kituyi, Kenya's Minister for Trade and Industry, 
said that the story of China's recent economic penetration into 
Africa is "overwhelmingly about the expansion of Chinese exports" to 
the continent.  This is certainly the case for Kenya. 
 
¶4.  (U) According to the same Government of Kenya (GOK) dataset used 
in ref B, total two-way trade between Kenya and the PRC expanded by 
53.5% in 2005 to a total of $300 million.  This followed a 60% 
increase in bilateral trade in 2004, and a near 33% increase in 
¶2003.  (Note: GOK trade data for 2006 will not be available for 
several months.  End note).  This growth outpaced the 16.5% overall 
growth rate for Kenya's total external trade in 2005.  In further 
contrast, Kenya's trade with the rest of Africa grew 17.8% in 2006, 
but by only 8.1% with the EU.  Bilateral Kenya-U.S. trade increased 
by a walloping 148%, but this should be seen as an aberration caused 
by the delivery in 2005 of big-ticket Boeing aircraft to Kenya. 
(Note: Additional Boeing deliveries may also skew trade trends 
greatly in the U.S. favor in 2006 and 2007.  End note). 
 
--------------------------------- 
Chinese Share Small - But Growing 
--------------------------------- 
 
¶5.  (SBU) Perspective is in order, however.  Kenya's trade with 
China still accounts for only 3.1% of its total trade with the rest 
of the world.  In comparison, the rest of Africa accounted for 27% 
of everything Kenya bought and sold globally in 2005.  The EU 
accounted for another 23%, and the United States 6.9%.  But in light 
of the strong year-to-year growth rates in Kenya-PRC trade, China's 
share of Kenya's total trade pie is steadily growing: from 1.5% in 
2002, to 1.8% in 2003, 2.4% in 2004, and 3.1% in 2005. 
 
--------------------------------------------- - 
Trade Relationship A Two-Edged Sword for Kenya 
--------------------------------------------- - 
 
¶6.  (SBU) For Kenya, greater trade with China is a two-edged sword. 
True to the remarks of Trade Minister Kituyi, the balance of trade 
remains overwhelmingly in China's favor: Kenya's exports to the PRC 
totaled just $18.1 million in 2005; Chinese exports to Kenya were 
more than six times greater at $283 million.  Although Kenya's 
exports to China are growing (up 40% in 2005), Chinese imports into 
Kenya are growing faster, and off of a larger base.  Moreover, there 
are hard constraints on expansion of Kenyan exports to China. 
Indeed, absent future oil or gas discoveries and exports, there is 
 
NAIROBI 00000075  002.2 OF 003 
 
 
little hope that Kenya can ever come close to meaningfully narrowing 
its large trade deficit with China. 
 
¶7.  (SBU) First, Kenya, like countries everywhere, has found the 
Chinese market less than fully open.  In his November 8 remarks, 
Trade Minister Kituyi complained that "China is a very difficult 
place to export agricultural products to", despite the recent 
expansion by the PRC government of the list of products from Africa 
granted duty-free import into China.  But, second, Kituyi 
acknowledged that the problem also lies with Kenya, which like most 
African countries, lacks "supply elasticity." These "supply capacity 
problems" render Kenya's small producer market unable to rapidly 
ramp up production and exports to exploit a surge in demand from 
China (or elsewhere for that matter) for any given product. When a 
nation's companies are relatively small, overseas market share is 
hard to win, and hard to keep. 
 
¶8.  (SBU) In a similar vein, Kenyan trading firms are mostly 
small-scale and are hobbled by the geographic, cultural, and 
linguistic distances between the two countries.  They simply lack 
the financial wherewithal and sophistication to successfully tap 
into a market as large, as complex, as competitive, and as distant 
as China's.  On top of this, they have relatively little to sell to 
a rapidly industrializing China.  At the moment, Kenya's exports are 
primarily raw materials and agricultural products (nuts, hides, 
skins, fiber, tea, and coffee).  Value-added agro-processing holds 
some potential for increased Kenyan exports to China.  Another 
potentially major boost could come with greater tourist flows from 
China to Kenya.  But the same factors that undermine Kenya's 
competitiveness in all other regional and overseas markets make it 
all the more difficult to compete with or in China.  These include 
the usual deep-seated culprits: corruption/poor governance, decrepit 
and expensive infrastructure, costly and unreliable power, 
insecurity, and excessive government red tape. Even growth in the 
tourist sector is constrained at the moment by poor roads and 
limited capacity. 
 
------------------- 
But Does it Matter? 
------------------- 
 
¶9.  (SBU) No definitive studies have been done yet on the impact of 
the China-Kenya trade imbalance on Kenya's economy, and given the 
relatively small share of total Kenyan imports that come from China 
(4.6%), such an investigation might not yield firm conclusions. 
Trade Minister Kituyi claimed on November 8 that Chinese imports are 
not adversely affecting Kenyan producers at this time, but are 
instead displacing traditional third country suppliers.  Where Kenya 
once bought motorcycles from Japan, it is now doing so from China, 
for example. In this way, argued Kituyi, countries like Kenya are 
benefiting from the surge in Chinese imports because they are 
pushing down consumer prices for goods of comparable quality. 
 
¶10.  (SBU) This tune is beginning to change, particularly in light 
of the surge in "substandard" (read "counterfeit") products entering 
Kenya and the rest of the region, primarily from China and South 
Asia.  As noted ref A, while estimates vary, the GOK believes Kenyan 
companies lose between $850 million and $1.1 billion per year to 
counterfeit goods - no small change for an economy of Kenya's size. 
 
¶11.  (SBU) The recently-established American Chamber of Commerce in 
Kenya has made IPR protection and combating counterfeit products its 
highest priority, and Minister Kituyi himself appears increasingly 
aware of the damage that counterfeiting is causing to Kenya's 
investment climate and economy.  A number of multinational 
operations in Kenya have apparently finally convinced him and others 
in the GOK that they will scale down their operations or pull out of 
Kenya altogether if nothing is done to stop the onslaught of Chinese 
and other country fakes.  As reported ref A, Kenyan authorities 
seized and destroyed a large shipment of counterfeited Bic pens from 
China in December.  The fakes incorporated a credible forgery of the 
GOK's own quality mark meant to prevent counterfeiting.  Kituyi and 
others were incensed and have vowed to tighten inspections of 
imports.  Counterpart GOK and PRC authorities also signed an 
agreement in October under which the PRC undertook to improve 
pre-shipment checks on goods being exported to Kenya.  It is unclear 
 
NAIROBI 00000075  003.2 OF 003 
 
 
whether the agreement has had any impact on stemming the flow of 
counterfeits coming into Kenya. 
 
---------------------------------------- 
Will Chinese Imports Kill Manufacturing? 
---------------------------------------- 
 
¶12. (SBU) Ultimately, even in the theoretical absence of cheap 
counterfeit competition, it seems logical that Chinese exports to 
Kenya will harm indigenous Kenyan industry.  As noted ref B, Chinese 
apparel exports have to some extent displaced Kenyan products in the 
U.S. and other markets following the expiration of quotas under the 
Multi-Fiber Arrangement at the end of 2005.  With this loss of 
market share, Kenya has lost between 5,000 and 10,000 of the jobs 
created after the apparel industry sprang to life following passage 
of the Africa Growth and Opportunity Act (AGOA) by the U.S. in 2000. 
 
 
¶13.  (SBU) But the evidence otherwise is inconclusive.  At home, 
there is grumbling on the streets about aggressive Chinese traders 
undercutting Kenyan merchants.  For now, however, public opinion 
continues to see the increasing availability of Chinese goods as on 
balance a good thing because it makes more products available at 
lower prices to more consumers than would otherwise be the case. 
Moreover, apart from apparel, for the moment there is no evidence 
that Kenya's manufacturing sector is under any serious or broad 
threat from Chinese imports per se.  The sector, nascent by 
developed country standards, is relatively advanced and diversified 
in the regional context.  It accounted for 11% of Kenya's GDP and 
grew by 5.0% in 2005.  This was better than 2004's growth of 4.5%, 
but lower than the overall GDP growth rate in 2005 of 5.8%. 
Ranneberger