Ethiopia: Withstanding the U.S. Harsh Economic Measures
By Abebe Woldegiorgis
Ethiopia and the US have a century old diplomatic relation and passed through upside down. In his formative years Emperor Haile Selassie I, established good attachment with the west particularly with the US.
After the end of the second World War when the US became a leading world power Ethiopia made a dramatic shift in its relations from the then European Powers such as Great Britain and France to the US.
When the cold war began in the 1950s, in order to counterbalance its’ rival the Soviet communism and to protect its strategic interest the intrusion of the US to the red sea and the horn of Africa was enhanced. On its part Ethiopia also signed several agreements with the US to cooperate in the aspect of military, education and other aspects. Since the 1950s Ethiopia could enjoy the support of Military hardware and training from the US and each year the number of students securing scholarship to learn in the US was growing upwardly.
However, the downfall of the Emperor Haile Selassie I and the coming to power of the Dergue in 1974 strained the two countries’ relations.
When the EPRDF regime came to power in 1991, the two countries’ relations in terms of politics, economic and social affairs reinvigorated.
The cooperation of the Ethiopian government with the US to fight terrorism in the horn further strengthen their bond.
In 2000 the President Clinton Administration introduced the American Growth Opportunity Act for Africa AGOA which benefits countries including Ethiopia through selling their textile products in the US market free of tax.
The growth opportunity created conducting environment for the flourishing of textile manufacturing industries. Particularly, Asian investors come here to exploit the opportunity so that their products can penetrate the US markets with comparative advantages.
It also created jobs for thousands and enabled the nation to raise foreign currency earning capacity.
However, after the broke out of war induced by the Junta provocation in the northern part of Ethiopia a year ago, without clearly assessing the case and consequence of the war, the US warned to lift the growth and opportunity and recently based on the executive order of the US president Biden announced that Ethiopia and other two African countries are banned from the AGOA which is going to be enacted in the coming January.
The African Growth and Opportunity Act (AGOA) was signed based on the US law.
According to Aaditya Mattoo, Devesh Roy, and Arvind Subramanian on IMF Working Paper, “The Act aims at broadly improving economic policymaking in Africa; enabling countries to embrace globalization and securing durable political and economic stability. As an incentive for Africa to adopt these policy changes, AGOA offers increased preferential access for African exports to the United States markets tax free.” It creates opportunities for some Sub-Saharan African countries which are labeled as ‘undeveloped’. AGOA provides a prudent chance for those countries to benefit from the opportunity.
On the other hand, Ethiopia and its neighbors have regional trade integrity. This kind of regional trade agreements, as to Chiza Charles N Chiumya, will be either trade-creator or trade-diverting.
It may create trade opportunities among the nations, or the trade might be diverted to low-cost imports from external trade agreements. Currently, Africans have around eight regional economic communities and its main objective is bringing regional and continental integrations.
Ethiopia has been a great beneficiary from the AGOA to export its commodities to the US. However, recently, the US government warned Ethiopia to end the conflict in the northern part of the country. If not, sanctions that include canceling from AGOA will be applied. Therefore, Ethiopia has to work hard to cope up the pressure. Therefore, it needs a spare plan to defend itself from such external pressures as the nation might be in grave danger from the upcoming sanctions. The Ethiopian government along with experts should come to the point on how the country can cope up with the pressures and sustain its development for the coming years.
Jemal Mohammed (PhD), an economist, said that the US led trade agreement, AGOA, has tremendous benefits to countries like Ethiopia. With the benefits of the Act, the specific sub-Saharan African countries can attract both international and multinational companies to invest in Africa. The regional trade integrity gives the investors a double chance to export their products to the US without paying taxes. In fact, except for South Africa, almost all African economies are small so that countries like Ethiopia should use such opportunities to expand its economies.
The other economist, Haileyesus Mane highlighted the prospect of the major opportunities towards AGOA. He said that the Act paves a way to new market destinations in the USA for countries like Ethiopia with limited resources. This kind of agreement has also a great impact on the nation’s GDP. In addition, the Act has brought benefits like a source of foreign currency generation, a marvelous way for job creation because many investors from local and abroad are interested to be involved in this kind of venture. He also added that this kind of agreement is vital to create a bilateral relation with such countries like the United States that uses the Act as a support to third world countries.
Contrary to its objective, the USA uses the AGOA to threaten countries whenever it wants to interfere in the internal affairs of a sovereign nation. Ethiopia faces such a challenge and pressure from the USA. In order to tackle the pressure, the nation needs to have a spare plan.
It is obvious that the USA cannot avoid importing products from Ethiopia such as coffee and textile with taxing. Therefore, the government needs to compensate these products to get what they lose when taxation is imposed. Therefore, it will be better to subsidize these companies here in the country and help them continue exporting their products to get foreign currency.
Haileyesus indicated that losing AGOA has a great impact on the Ethiopian economy. He believes that one of the solutions for not missing the chance is to create close relations with the US government. Previously, Biden’s administration promised that the administration will never use sanctions to hurt civilians. So that it will be better to have good diplomatic relations with the country. Besides, Ethiopia needs to follow an export-led home-grown economy to produce and export products with standardized quality both for the local and international consumptions.
Yared Hilemeskel is a financial economist and works as consultant for various firms. As to him, Ethiopia can withstand the economic pressure due to the consequence of leaving AGOA. The government has various options to support the textile industries and among others, freeing them from tax when they import inputs for their manufacturing, reducing shade renting and subsidizing their logistic cost when they transport their products to the port of Djibouti. When this happens, their products can compete in the US market even if they are denied the AGOA opportunity.
Nevertheless, it should be understood that the USA is not a major trade partner to Ethiopia. As an agricultural economy our country exports coffee and textile products to the US market. And other agricultural and mineral products find their way to European, Asian and the Middle East markets. Hence, Ethiopia can boost its export earnings by targeting these countries so that it can overcome the sanction. In many ways the USA knows that Ethiopia is a global partner to the west.