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As the showcase for potential international and
domestic trade partners at the Exhibition Centre
closed last week, the government is assessing the
degree to which it desires to provide a policy
regime conducive to this sector of the economy. The
large contingent of European companies is surely
paying close attention to and probably doing a
little lobbying for Ethiopia’s controversial process
of entering into an Economic Partnership Agreement
(EPA) with the European Union (EU) countries.
A government that is constantly re-evaluating to
what extent opening trade barriers falls in line
with its Agricultural Development Led
Industrialisation (ADLI) strategy must be weighing
the pros and cons of a monumental policy choice that
would significantly alter many aspects of the
economy and its often burdensome controls over it.
At the most basic and immediate level, lowering or
completely abandoning tariffs on European imports
comes down to evaluating the loss in revenue from
these taxes against the benefits to consumers of
lower prices.
The immediate winner, judging from current import
trends, would be consumers of vehicles and household
materials such as furniture. Lower prices on these
top imports from Europe would increase volumes
purchased and would ease some of the inflationary
pressure on those able to afford the luxury items,
though this is not the segment hit hardest by
current trends government efforts seem unable or
unwilling to address.
However, this most basic first-degree effect is
neither the real impetus nor impact for opening to
trade with Europe. Lowering tariffs would also open
the gates for new products that were previously
uncompetitive due to taxes to enter the market to
the benefit of consumers as well as create linkages
and business relationships with fresh partners and
possibilities.
The difficult to quantify second-degree effects that
economists struggle to incorporate into nuanced
econometric models that can explain volumes of trade
increasing for reasons other than comparative
advantages of production processes can be counted on
as opportunities are exposed through increased ties.
These types of increased exposure effects could even
give a slight boost to Ethiopia’s exports it values
so dearly.
While Ethiopia probably would not see a dramatic
shift in the structure of its agricultural markets
as it remains fairly dependent on its products that
are supplied at comparatively lower prices,
especially as world basic food commodities
skyrocket, the light and agro-industry imports would
experience a shift. This has implications for where
policy goals lie.
The immediate losers in this industrial respect
would be the other African countries, especially the
East African countries like Kenya that currently
enjoy a privileged trade position, as well as the
north and south powerhouses of Egypt and South
Africa, both continental leaders in the light
industry sector. Albeit rhetoric of African union,
it is questionable how much of a concern trade
diversion away from these nations due to the EPA
should be.
The consideration of loyalty to the continent is
more of a long-term question as Ethiopia considers
the extent to which it would benefit from free
movement of goods through national borders and the
complicated political deliberations that can help it
gain support for important integration projects in
infrastructure and immediately, power exports it
hopes to become a leader in. Keeping an eye squarely
on the links that would have important development
implications is crucial.
But most importantly for this government that, like
many developing nations to a lesser extent, have low
tax collection capacity, the loss of tariff revenue
would deal a huge blow to a budget already in the
red, a fiscal choice that negatively impacts the
harmful inflation. If Ethiopia is to sign an EPA, it
badly needs to address its tax administration in
order not for its fiscal deficit to reach dangerous
levels.
The government must also push hard, particularly
with its top trade partners, to get the European
governments to compensate in the form of development
assistance the gains that will accrue from freer
access to the markets here. Aiding in the massive
infrastructure projects will not only bring new
prosperity to Ethiopia, but will also mean even
greater access for European products.
The decision for an EPA will also create the need
for responsible and stalwart governance in economic
management in another arena. The industrial
component of ADLI will experience a minor shock as
infant industries lose a little protection and are
opened to competition with the highly developed
European countries.
If tariffs are dropped some sectors will no doubt be
knocking on the government’s door for help in other
ways such as subsidies. Though it is important for
the government to give some of these producers a
boost at first, it must not fall into the temptation
to replace tariff protection with some other form
non-competitive guard, especially when its budget
capacity to do so will be diminished.
An Ethiopian EPA would present some challenging
transitions to a more open approach to the
globalised world. Structural adjustments can often
be challenging and the detailed studies to be
prepared to lighten the blow should be
comprehensive.
But in the end, a move to open to free trade would
give Ethiopia a taste of the rocky but usually
beneficial road to competitive markets. With the
World Trade Organisation (WTO) accession process
underway, an EPA would be a lighter test of how to
deal with what is to come.
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