Djibouti has broken ground on the pilot phase of a $3.5bn special economic zone slated to be the biggest in Africa.

This is but the latest venture designed to position the small country in the Horn of Africa as a regional logistics and shipping hub, capitalising on its position on the Straits of Bab el-Mandeb, a shipping choke point that connects the Indian Ocean to the Mediterranean Sea via the Suez Canal.

Once completed, the Djibouti International Free Trade Zone will cover some 4800 hectares. The first phase of the 10-year project, launched on 4 July, will cover an area of 240 hectares with a $370m price tag.

The Djiboutian state says it will retain 60% ownership of the project. Foreign workers will be capped at 70% of the total employed in the free zone in the first five years, dropping to 30% thereafter.

Djibouti’s government is keen to position the country as a logistics and trade hub between Africa, Asia and Europe. Officials also want to promote Djibouti as a key country for the China-led Belt and Road infrastructure development initiative, which seeks to link the Far East with Europe through large-scale infrastructure investment.

Three Chinese companies – Dalian Ports Group, big data and digital logistics firm IZP, and China Merchants Group – are the main partners in the zone.

“[This project] reflects the willingness of China to invest in our continent, and to do so on a large scale and over the long term,” Djibouti’s president Ismail Omar Guelleh said at the launch.

So far, 21 companies have already signed on to operate in the free zone, which offers zero tax incentives to investors.

Port activities and related maritime and transhipment sectors currently account for some 70% of Djibouti’s GDP. A quarter of the population lives in extreme poverty.

Given its strategic location, Djibouti is already the site of great power struggles between China and the US, both of whom have key military bases in the country which are only miles apart. France, the UK, Japan and Saudi Arabia also have military installations there.

US lawmakers are growing increasingly concerned about Chinese influence in Djibouti. In March, the Djiboutian government stripped Dubai’s DP World, one the world’s biggest port managers, of its concession to manage the Dolareh Container Terminal.

US officials believe management rights will be granted to China, though the government says it will remain under state control. DP World is fighting the seizure in arbitration in a London court.