Free Trade Agreement Between China and Djibouti

China and Djibouti have developed a strong and strategic economic relationship, driven by Djibouti’s critical geographical location at the crossroads of major international shipping routes and China’s growing influence in Africa. While there is no formal Free Trade Agreement (FTA) between China and Djibouti, the two countries have engaged in multiple bilateral agreements aimed at promoting trade, investment, and development cooperation. Djibouti, as a key partner in China’s Belt and Road Initiative (BRI), plays a vital role in China’s ambitions to enhance global trade connectivity.

In recent years, bilateral trade between China and Djibouti has expanded significantly. In 2022, trade volume between the two countries was valued at around $3 billion. China is Djibouti’s largest trading partner, with exports from China primarily consisting of machinery, electronics, textiles, and construction materials. On the other hand, Djibouti’s exports to China are relatively limited, mainly involving re-exported goods due to Djibouti’s status as a major logistics hub. Djibouti’s largest trading partner is China, while for China, Djibouti represents a strategic partner rather than a major trading hub in terms of volume, due to its key position in the Horn of Africa.

Bilateral Trade Agreements Between China and Djibouti

Framework Agreement on Economic and Trade Cooperation

Signed Date

The Framework Agreement on Economic and Trade Cooperation between China and Djibouti was signed in 2010, laying the foundation for future economic collaboration.

Effective Date

The agreement became effective immediately upon signing in 2010.

Scope

The agreement encompasses broad areas of economic cooperation, including:

• Bilateral trade in goods and services
• Investment in infrastructure and development projects
• Technical cooperation in sectors such as education, healthcare, and agriculture

Key Provisions

• Trade Promotion: Both countries agreed to increase trade volume through measures that facilitate the import and export of goods and services. This includes the reduction of trade barriers and enhanced cooperation between customs authorities.
• Investment Facilitation: China and Djibouti committed to creating a favorable environment for mutual investment. This involves simplifying procedures for Chinese companies seeking to invest in Djibouti’s infrastructure projects.
• Technical Assistance: The agreement also emphasizes cooperation in technical and vocational training, with China offering support to Djibouti in capacity building, education, and technology transfer.

Bilateral Investment Promotion and Protection Agreement (BIPA)

Signed Date

The Bilateral Investment Promotion and Protection Agreement between China and Djibouti was signed in 2013 to promote and protect investments between the two nations.

Effective Date

The agreement became effective in 2014, shortly after its signing.

Scope

The BIPA focuses on:

• Encouraging investment from both countries
• Protecting investments against expropriation and unfair treatment
• Providing mechanisms for resolving investment-related disputes

Key Provisions

• Investment Security: The agreement ensures that investments made by Chinese companies in Djibouti and vice versa are protected from nationalization or unfair government actions. This provides a stable legal framework for long-term investments.
• Dispute Resolution: The agreement includes provisions for resolving disputes through international arbitration, ensuring that investors have access to impartial mechanisms for settling conflicts.
• Profit Repatriation: Investors are guaranteed the ability to repatriate profits and returns on investments without excessive restrictions, enhancing confidence in cross-border investments.

Agreement on Maritime Cooperation and Logistics Development

Signed Date

This agreement was signed in 2016 as part of China’s Belt and Road Initiative, recognizing Djibouti’s strategic position in global maritime trade routes.

Effective Date

The agreement became effective in 2016, immediately following its signing.

Scope

This agreement focuses on:

• Cooperation in maritime trade and logistics
• Development of Djibouti’s port infrastructure
• Enhancing shipping and freight services between the two countries

Key Provisions

• Port Development: China committed to investing in the expansion and modernization of Djibouti’s port infrastructure, including the Doraleh Multipurpose Port and the Doraleh Container Terminal. These projects are crucial for boosting Djibouti’s capacity as a major shipping hub in the Horn of Africa.
• Maritime Silk Road: Djibouti’s participation in China’s Maritime Silk Road enhances its connectivity with major shipping lanes, benefiting both countries through increased trade volume and efficiency.
• Logistics Hub Development: The agreement includes plans for developing Djibouti as a major logistics hub for Chinese goods destined for African markets, with Chinese companies playing a leading role in the construction of logistics centers and transportation infrastructure.

Agreement on the Construction of Djibouti’s Free Trade Zone

Signed Date

The agreement for the construction of the Djibouti Free Trade Zone (FTZ) was signed in 2017 as part of China’s broader Belt and Road Initiative.

Effective Date

The agreement came into effect immediately after its signing in 2017.

Scope

This agreement focuses on:

• The construction and development of the Djibouti International Free Trade Zone
• Promotion of foreign investment, particularly from Chinese companies
• Enhancing Djibouti’s role as a regional trade hub

Key Provisions

• Development of Free Trade Zone: China agreed to finance and construct the Djibouti International Free Trade Zone, which aims to attract foreign investment and serve as a regional hub for trade and logistics. The zone is designed to support manufacturing, warehousing, and re-exporting activities.
• Investment Incentives: The agreement provides incentives for Chinese companies to invest in the FTZ, including tax breaks, streamlined customs procedures, and simplified regulations for business operations.
• Employment Creation: The construction and operation of the FTZ are expected to create thousands of jobs for Djiboutian workers, contributing to the country’s economic development.

Other Members Involved

The agreements between China and Djibouti are primarily bilateral. However, Djibouti’s strategic location as part of China’s Belt and Road Initiative connects it to a larger network of countries participating in the BRI. Additionally, Djibouti is a member of the Common Market for Eastern and Southern Africa (COMESA), a regional economic bloc that promotes trade and economic integration across the region. China’s economic engagements with Djibouti are thus indirectly influenced by Djibouti’s participation in COMESA and other African regional initiatives.

Other Forms of Economic Cooperation

Infrastructure Development

One of the key pillars of China’s cooperation with Djibouti is infrastructure development, particularly in sectors critical to Djibouti’s role as a logistics and shipping hub. Key projects include:

• Railway Projects: China has financed and built the Ethiopia-Djibouti railway, a key transportation link that connects the landlocked economy of Ethiopia to the port of Djibouti. This railway is essential for facilitating trade between Ethiopia and international markets via Djibouti.
• Port Expansion: China has invested heavily in Djibouti’s port infrastructure, with projects such as the Doraleh Multipurpose Port and the Doraleh Container Terminal. These investments aim to transform Djibouti into a major maritime gateway for goods traveling to and from East Africa and beyond.
• Energy Projects: China has supported the construction of energy infrastructure in Djibouti, including the Doraleh Power Station. These projects are critical for ensuring that Djibouti has the energy capacity to support its growing economy and industrial sectors.

Financial Cooperation

China has extended significant financial support to Djibouti through concessional loans and grants:

• Concessional Loans: China has provided concessional loans to finance large-scale infrastructure projects, such as ports, railways, and power plants. These loans are typically offered at favorable interest rates, allowing Djibouti to finance its development needs without incurring excessive debt.
• Debt Relief: In 2020, China agreed to forgive a portion of Djibouti’s debt as part of its broader efforts to support African countries during the COVID-19 pandemic. This debt relief provided Djibouti with much-needed financial breathing room to focus on economic recovery and development.

Maritime and Logistics Cooperation

Djibouti’s strategic location at the entrance to the Red Sea makes it a vital partner in China’s maritime ambitions:

• Maritime Silk Road: Djibouti plays a key role in China’s Maritime Silk Road initiative, serving as a critical stop along one of the busiest shipping routes in the world. Djibouti’s ports are essential for Chinese goods entering and leaving African markets.
• Logistics Centers: China has established logistics centers in Djibouti to facilitate the storage and re-export of goods to other African countries. These centers serve as key nodes in the global supply chain, ensuring that goods move efficiently between China, Africa, and other regions.

Military Cooperation

In addition to economic cooperation, China and Djibouti have also engaged in limited military cooperation. In 2017, China opened its first overseas military base in Djibouti, marking a significant development in China’s strategic interests in the region. This base serves as a logistical hub for Chinese naval operations, ensuring the protection of Chinese maritime interests and trade routes in the region.

Educational and Technical Cooperation

China has also provided educational and technical support to Djibouti, particularly in the form of scholarships and vocational training programs:

• Scholarships: China offers scholarships to Djiboutian students to study in Chinese universities, helping to build the country’s human capital and technical expertise.
• Technical Training: Chinese experts have provided vocational training to Djiboutian workers in key sectors such as construction, logistics, and energy, contributing to the development of the country’s workforce.

Economic Impact of These Agreements

Impact on Djibouti’s Economy

Infrastructure Modernization

• Enhanced Port Capacity: China’s investments in Djibouti’s ports have significantly increased the country’s capacity to handle cargo, making it one of the most important logistics hubs in East Africa. The expanded port infrastructure has positioned Djibouti as a key gateway for goods traveling to and from Africa, Europe, and Asia.
• Improved Connectivity: The construction of the Ethiopia-Djibouti railway has improved connectivity between the landlocked economy of Ethiopia and international markets, boosting trade flows and reducing transportation costs for both countries. This railway has made Djibouti the primary transit hub for Ethiopia’s imports and exports, further cementing its role as a regional logistics center.

Job Creation and Economic Growth

• Employment Opportunities: The construction and operation of key infrastructure projects, including ports, railways, and the free trade zone, have created thousands of jobs for Djiboutian workers. These projects have provided much-needed employment opportunities in a country with high unemployment rates, contributing to economic growth and poverty reduction.
• Boost to GDP: The increase in trade volume and foreign investment, driven by China’s involvement in Djibouti’s economy, has had a positive impact on Djibouti’s GDP growth. The development of the free trade zone and logistics infrastructure has attracted foreign companies and investors, contributing to the diversification of Djibouti’s economy.

Debt Burden and Sustainability

• Debt Concerns: While Chinese investments and loans have driven much of Djibouti’s infrastructure development, concerns have been raised about the country’s growing debt burden. As of 2022, Djibouti owed a significant portion of its national debt to China, leading to concerns about the sustainability of this debt and the risk of dependency on Chinese financing.
• Debt Relief Measures: China’s decision to forgive a portion of Djibouti’s debt in 2020 provided some relief, but long-term strategies for managing debt and ensuring economic sustainability will be critical for Djibouti’s future economic stability.

Impact on China’s Economy

Strategic Influence and Geopolitical Positioning

• Access to Key Maritime Routes: Djibouti’s location at the entrance to the Red Sea and its proximity to key maritime chokepoints, such as the Bab-el-Mandeb Strait, gives China strategic access to some of the busiest shipping lanes in the world. This is critical for protecting China’s maritime trade routes and ensuring the smooth flow of goods to and from Africa, Europe, and the Middle East.
• Expansion of Belt and Road Initiative: Djibouti’s participation in the Belt and Road Initiative is a key element of China’s broader strategy to expand its influence in Africa and enhance global trade connectivity. China’s investments in Djibouti’s infrastructure are part of a larger effort to build a network of trade routes that facilitate the movement of goods between Asia, Africa, and Europe.

Economic Benefits

• Increased Trade Opportunities: China’s investments in Djibouti’s ports and logistics infrastructure have facilitated increased trade between China and Africa, providing Chinese companies with easier access to African markets. This has opened up new opportunities for Chinese businesses to export goods and services to the continent and import raw materials from Africa.
• Return on Investment: Chinese companies involved in the construction and operation of infrastructure projects in Djibouti have benefited from contracts and investment returns. These projects have provided Chinese companies with new business opportunities and long-term economic gains from their investments in the region.

Long-Term Prospects

Sustainable Development for Djibouti

• Economic Diversification: Djibouti’s economic relationship with China has the potential to contribute to the diversification of its economy, particularly through the development of the free trade zone and the expansion of the logistics sector. However, long-term sustainability will depend on how Djibouti manages its debt and balances foreign investment with domestic economic priorities.
• Infrastructure as a Growth Driver: If Djibouti can effectively manage and maintain the infrastructure built with Chinese support, it could position itself as a key player in global trade and logistics, driving long-term economic growth and development.

China’s Strategic Interests

• Enhanced Regional Influence: China’s investments in Djibouti are part of a broader strategy to expand its influence in Africa and the Middle East. Djibouti’s strategic location provides China with a critical foothold in the region, enhancing its geopolitical position and ensuring the security of its maritime trade routes.
• Long-Term Economic Gains: The continued development of infrastructure in Djibouti, particularly through the Belt and Road Initiative, offers China long-term economic benefits, including increased trade volume, better access to African markets, and returns on investment from infrastructure projects.