Great Trade Expectations Behind the US-Ethiopia Trade Relations



Ethiopia is abuzz with the pending historic visit of US President Barack Obama. This is easily understood in light of a relationship between both countries that is more than a century old. However, unsatisfactory trade relations and limited US investment prevail in spite of initiatives such as the African Growth Opportunity Act. This theme is explored by FORTUNE STAFF WRITER, BROOK ABDU as he engages private investors and development partners in the conversation about possible outcomes of President Obama’s visit.


 

In 1903, the United States and one of the world’s oldest nations, Ethiopia,   established a relationship. Emperor Menelik II described the day as “… beginnings of a relationship which will have some place in history”, as quoted in a paper presented by Professor Negussay Ayele of Cornell University, to mark the 100th anniversary of that occasion. The historic relationship is, in this week, to witness a rare event with the first visit of a sitting president of the United States paying a visit to Ethiopia. President Barack Hussein Obama’s visit to Ethiopia follows what happens to be his first visit as President, to his father’s homeland, Kenya.

Ethio-American relations started at the insistence of Robert P. Skinner, an American diplomat in France, who urged the US State Department to establish an official American presence in Ethiopia. The policy initiative was based on the strategic location of Ethiopia to the Red Sea route and the disadvantaged start-line position of the US compared to the colonial European presence in the region. President Theodore Roosevelt appointed Skinner as the first Commissioner Plenipotentiary for a commercial/diplomatic mission to the court of Emperor Menelik II.

In the following years, the two countries’ trade partnership focused on the military, including arms inflow and the Kagnew military base at the Red sea, leased to the US.

More than a century later, the United States, a major donor and strategic partner in the war against terrorism, is yet to have a major investment relationship in Ethiopia despite the African Growth Opportunity Act (AGOA).

America’s Overseas Private Investment Corporation (OPIC) has been instrumental in helping its citizens, including those of Ethiopian origin, to establish business in Ethiopia through loans.

One early beneficiary is Tamirat Bekele, who opened the International Clinical Laboratories (ICL), the first internationally accredited medical laboratory in the country in 1997, a year before the Ethio-Eritrean border war began.

The process took from 1997 to 2004, as Ethiopian investment law did not allow a private company to get a loan from abroad. It was finally established with 580,000 dollars in 2004, of which 480,000 dollars was a loan from OPIC after the border war ended.

In 2015, the challenges of doing business between the two countries remain and the trade volume between the two countries is low, and significantly in favour of the US.

In the first six months of 2015, the trade volume between the two countries totalled 834 million dollars with the trade balance being 623 million dollars inclined towards US. The 2014 volume of trade was 1.8 billion dollars with the balance being 1.4 billion dollars also inclined to the US. The 2013 data from the US Census Bureau indicates the total trade volume between the two countries was 881 million dollars, with a trade balance of 194 million dollars in favour of the US.

The 2013 figure had a significant fall from the preceding year whose volume was 1.5 billion dollars with the trade balance still 1.1 billion dollars inclined towards US.

By the first six months of the 2014/15 fiscal year, the United States stood at the eighth spot in terms of export destinations of Ethiopian items as data from the Ministry of Trade (MoT) indicates, with a total of 51,718 dollars. Exports showed improvement by 10,815 million dollars from the preceding year when the US ranked ninth place for exports.

The first through fifth rank of the Ethiopia’s export destinations is seized by Somalia, China, Saudi Arabia, the Netherlands and Germany with export earnings from these destinations being 170,534 dollars, 152,746 dollars, 91, 794 dollars, 78,183 and 78,866 dollars respectively.

In terms of investment, only 210 United States-based companies are licensed to operate in Ethiopia, dwarfed by 934 from China, 578 from Sudan, 408 from India, 230 from Turkey and 119 from Saudi Arabia

For Solomon Gizaw, the Managing Partner of Deloitte, a consulting firm, the expansion strategies of firms determine their investment, but it is the benefit that the economy offers that determines the investment flow.

“If they do not believe in the current growth of the country, they will not come,” he explained. “As they are big, they need bigger markets.”

Solomon also believes that the existence of businesses like Deloitte in the country is an opportunity, as big companies that are coming to invest in the country will need services such as his firm provides.

Though Ethiopia offers tax incentives, land, and cheap labour, there are many companies that want to invest in fields from which private sector participation is restricted, he elaborated.

In 2000, AGOA came into effect making Ethiopia the 18th beneficiary of 39 countries eligible for the duty-free and quota-free American market, aimed at improving the trade and investment between Sub-Saharan Africa and the United States.

Ethiopia was made eligible for the export of 1,800 products to the United States Market. The products include textiles, leather products and footwear, home furnishings and cut flowers. But Ethiopia exported only 132 items of which 85pc are textiles.

Chad stands number one with 99.4pc of utilisation followed by Nigeria, which utilised 90.6pc of its market opportunity. Kenya, which is also eligible for AGOA, has utilised 77.9pc of the market.

U.S. imports from AGOA beneficiary countries represent a small share, one percent of total United States imports and are largely concentrated in energy-related products. Oil is consistently the top duty – free United States import from AGOA countries, accounting for 68pc of such imports in 2014, according to the United States International Trade Centre’s (ITC) 2014 Trade and Investment Performance Overview, report released in April of this year.

The 2015 Ethiopia Investment Climate Statement from the United States Embassy in Addis Abeba indicated the suitability of the country for investments, especially in the manufacturing sector.

“Tax incentives for investment in the high priority sectors of heavy and light manufacturing, textiles, sugar, chemicals, and pharmaceuticals and mineral and metal processing underscore the government’s focus and openness to FDI,” states the report.

The report also indicates that state and ruling party-owned entities dominate the market and the existence of state monopoly in sectors such as telecommunications, power, banking, insurance, air transport, shipping, and sugar.

For Tamirat, the current stability of the country for an extended period of time will attract more investment from the United States.

The report by the United States Embassy also acknowledges this. The report states “Ethiopia has been relatively stable and secure for investors.”

The major interest of the American people is in the power sector, according to Solomon.

“They want public-private partnership for the investment in the power sector,” he said.

For the development of the Power sector in Ethiopia, the Government of America has launched Power Africa, which aims to add 30,000MW of electricity generation capacity and 60 million new home and business connections across sub-Saharan Africa.

“Power Africa is supporting Ethiopia’s energy development strategy through technical assistance to the government of Ethiopia in negotiating its initial landmark Power Purchase Agreement (PPA) and facilitating financing of private-sector led geothermal, solar and wind projects. The 1,000 MW Corbetti geothermal Power Purchase Agreement (PPA) is in the last stage of negotiations for its first 500 megawatts,” states the United States Agency for International Development website.

Other than the power sector, Fitsum Arega, commissioner for the Ethiopian Investment Commission, sees opportunities for American investors in the fields of processing of meat and dairy production.

“What we expect mainly from the American investors is to engage in food processing and agro-processing; not in the manufacturing as much of the manufacturing is located in the eastern part of the world,” Fitsum told Fortune.

Fitsum sees a growing flow of investors from the United States following the visit by President Barack Obama.

“This creates suitable opportunity for investors to see the opportunities here and engage in their preferences,” he said.

The extension of AGOA for the next 10 years starting from September 2015 also gives Fitsum hope of exploiting the large market in the US.

Yirgalem Textile Plc, based in Addis Abeba, plans to join the American market by exporting five million dollars worth of textiles through AGOA this year.

“We have recruited 10 experts from Sri Lanka that will stay with us for six months and help us with quality maintenance and productivity,”

The factory currently produces 25,000 pieces of garment a day and is expanding to double production. For the start of exportation by October, they have finished a deal with a buyer in New York, who will place orders after inspecting the company’s capacity, said Nahom Aron, Commercial Manager of the textile factory.

President Obama’s arrival in Ethiopia has been preceded by the extension of the AGOA, and the White House says that his visit is about strengthening economic relationships. But security and human rights issues are expected to dominate his dialogue with Ethiopian officials.



By BROOK ABDU
FORTUNE STAFF WRITER

Published on Jul 26,2015 [ Vol 16 ,No 795]


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