Building capacity to help Africa trade better

Time for Ethiopia to enhance regional economic integration


Time for Ethiopia to enhance regional economic integration

Time for Ethiopia to enhance regional economic integration
Photo credit: Counter Culture Coffee | Flickr

International trade never used to be an issue, at least, not one borne out of apathy or misrepresentation. Ancient civilisations seldom traded with outsiders, but rarely because they did not want to.

The malefactor was inconvenience, owing to the fact that transporting anything from point to point used to be such a headache. But as technology caught up with traders’ ambitions, as mail services, shipping, road and air travel became simple, and in some cases, informal, trade between whole countries and continents became the sensible way to go.

But international trade, or free trade as it came to be known, was never without its flaws, and the phenomenon was never lost on world leaders. A point of contention for the last 70 years, since most of the civilised world came to embrace the term fully, has been the manner in which free trade, while benefiting some, could hurt others. It has been argued that free trade in itself is not enough and should gear towards fairness instead of freeness.

Ethiopia has been on the flip side of “free” when it comes to free trade for some time. Ever since the Provisional Military Administrative Council, known simply as Dergue, took over the country in 1974, the bias towards international trade has never clichéd, although the Dergue itself has long abdicated or been made to.

The subsequent government, inundated with the Ethiopian People’s Revolutionary Democratic Front (EPDRF), promised a more pro-liberal sensibility – rekindling past predilections for the United States, Europe and their ways – once favoured by the nation’s last Emperor.

More than two decades have elapsed, and the country still reeks of protectionism and high tariffs. Internally, prospects appear to be better. Although the government still dominates the commanding heights of the economy, like finance, energy, transportation and telecommunications, it has been successful at privatising most other commercial companies and businesses. But privatisation is only the starting block to what every reasonable country in the world, in one form or another, is striving to be a part of – the globalised economy. Privatisation is very much the right step forward, but the term is too basic an economic statement for such an ambitious nation to still be making.

A Preferential Trade Area (PTA) was formed between some Eastern and Southern African countries in 1981, including Ethiopia. As the first stage of economic integration, a PTA is always formed with the aim of shortly establishing a Free Trade Agreement (FTA). But do not tell this to Ethiopia.

The Common Market for Eastern and Southern Africa (COMESA) was formed in 1994 to replace the PTA, but Ethiopia never amended the new agreement, leaving COMESA with only nine FTA members at the time.

The nation has never been completely turned off by the idea of trade liberalisation. Although not a full member of COMESA, the nation has some bilateral economic relationships with its neighbours such as South Sudan and Kenya. Major avenues of regional cooperation include transportation corridors and energy projects, worth usually millions of dollars.

Investments of this kind show that the country has no intentions of becoming a hermit kingdom. The government seems to fully realise that the COMESA free trade area is unique and important. But it has been stuck with a policy that has never been adequately justified – trade protectionism.

In 2015, reports came out that Ethiopia was finalising its accession into the COMESA FTA. Certain industry areas were selected by the Ministry of Finance & Economic Cooperation (MoFEC) as sections of the national economy that would get to join the trade agreement. The goodwill was reciprocated by members of the trade bloc. Addis Abeba was chosen to hold the 18th COMESA summit, and the nation’s Prime Minister selected to chair the top diplomatic conference.

A couple of years have elapsed since then, and Ethiopia has not come any closer to signing the agreement. It appears the Revolutionary Democrats with their leftist bent have reservations about the benefits, weighing whether or not the pros outstrip the cons.

Granted, similar to any free trade agreement, the COMESA FTA poses the same, rather legitimate, threat anti-globalists lament – job losses and outsourcing, unfair competition and reduced tax revenue. The last bit is of special concern to the Ethiopian government since some believe revenues collected from duties is too important an asset in the nation’s coffers to trade off for a trade agreement.

But the argument lacks substance. Tax revenue from COMESA member states is comparatively small, as it only makes up about three percent of the total income. The loss in revenues from duties imposed on imports from these countries is not anywhere as devastating as it would be from, say, China.

Detractors of the COMESA FTA also forget that a lowered tax revenue, although a grungy idea to pitch to the government, is good news for local consumers. More goods and services can, therefore, be attainable to the public at a lower price, aiding household welfare. It would also be the perfect anecdote to locally monopolised goods that are expensive.

The benefits do not end here. As trade between countries of the world increases, more nations are looking towards boosting commerce with their neighbours. All the largest free trade agreements, from the European Union (EU) down to the North American Free Trade Agreement (NAFTA), are signed between countries that share borders or are at least on the same continent. The key word here is distance. The farther a nation is from that of another, the pricier the goods when they finally reach their destinations. In addition to import taxes and the merchandise’s price, consumers are also expected to cover transport fees. An item from anywhere overseas, for this reason, is pricier and a burden on consumers.

The equation adds up both ways. If prices of goods imported from COMESA member states decrease, then so would the prices on the receiving end. Export market to these countries will be open for business from Ethiopian companies. Such circumstances should bode well for what the government is trying to achieve with the manufacturing industry.

The Ethiopian government has launched a number of industrial parks around the country, headed by the Industrial Park Development Corporation, to attract foreign investments. These massive projects were initiated bearing in mind the growing cost of labour in countries such as China and India, and eyeing overseas market as their destinations. They are part of the Revolutionary Democrats’ drive for an economy anchored on export-led industrialisation.

Foreign direct investment (FDI) is already shifting towards other low-labour cost countries such as Ethiopia. Although Ethiopia enjoys quota and duty free access to major markets in the United States and EU, products from the parks will be subjected to quotas and high tariffs to many other developing but important markets.

The COMESA FTA only satisfies the second level of economic integration between multilateral countries. Such trade blocs, in addition to their economic benefits, also have far-reaching social and political benefits.

Membership of the COMESA FTA, therefore, would give the nation geographically close customers.

The manufacturing industry, owing to its relative weakness, has always been a burden on the country. But studies have shown, time and again, that foreign investment flows towards nations with the cheapest labour cost, thereby boosting the manufacturing sector.

Tariffs may help fend off job losses in these fields, but only in the short term. The COMESA FTA, on the other hand, realised the right way, is more than capable of enhancing exports without significantly affecting job growth.

It is impossible to deny that some sectors could be negatively affected, but the consequences could be slackened by making good use of negotiating terms. The COMESA FTA contains provisions to help countries identify sensitive products and businesses. An agreement that ends up being signed should be carefully drafted to minimise possible shocks to the economy. Fewer tariffs and quotas could lead to porous borders and cultural transfers, which in turn could lead to better understanding. Regional trade empowers individual nations; the fruits of the EU should be a lesson to us all.

Ethiopia is a country that once dreamed of a strong and united Africa, and to realise the desire, helped found the African Union (AU). It seems bizarre that the FTA agreement has not yet been amended, that Ethiopia is missing an opportunity to help neighbouring nations become better integrated. Its leaders cannot afford to look like they are spoilers of a regional initiative.


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