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In search of an antidote to the impact of the AGOA ban

Avatar: Nigist Berta
Nigist Berta December 4, 2021
City: Addis AbabaCurrent AffairsBusiness
In search of an antidote to the impact of the AGOA ban

Ethiopia is under increasing pressure from the west due to the ongoing conflict, especially from the United States. As the conflict escalated into a full-fledged war, the US imposed some sanctionative measures in an effort of pressing the Ethiopian government to comply with its stands. It has so far enforced visa restrictions on current and former officials of the government and arms embargo. 

The US was repeatedly saying that its measures are not directed to the people, but the belligerents. “These measures are not directed at the people of Eritrea, Ethiopia, or the greater Horn of Africa Region; they are calibrated to impose costs on those prolonging the crisis,” reads the press release of the Department of State on Nov 12.

Nevertheless, the decision Biden’s administration passed on Nov 2 is completely contrasting to the government’s stance of not affecting the people. The US suspended Ethiopia from the duty-free trade access, African Growth, and Opportunity Act (AGOA), from which a significant number of people are beneficiaries. 

Given the evident fact that the ban would have a notable impact on Ethiopia’s economy, the wisdom of surviving the pressure became a greater concern, as the ban is days away to be implemented. In this regard, turning towards consuming local products and looking for alternative markets happens to be the immediate solution. 

AGOA was launched in May 1999 to enable African countries with duty-free export access of African products to support the growing economies.

While many African countries have taken advantage of this opportunity to improve their economies, Ethiopia is said to have earned more than $200 million last year in addition to creating jobs for many citizens. It has also been able to attract $4 billion in foreign direct investment. However, the exclusion of Ethiopia from the AGOA market by the United States is feared of its heavy impacts, since it will make many citizens lose their jobs as their companies lose access to the free market.

Although the ban will be a hard hit on job losses and foreign exchange earnings, experts say the impact will be minimal and, conversely, even positive. 

Dr. Befkadu Degfe, an Associate Professor and Economist at Addis Ababa University's Department of Economics, says Ethiopia will not suffer if it can improve the quality of its products and services or sell them at the price they were previously sold. AGOA provides an average of 15% assistance for Ethiopia to be competitive in the market. To put it simply, if a non-AGOA country sells an item for 115 Br, a producer under AGOA can sell the item for 100 Br. This will make it easier for Ethiopia to find a buyer. If Ethiopia is excluded from AGOA, it will lose15% of this market share. Thus if the country’s local product is delivered on quality, producers can reduce their profits, and the government can grant subsidies, then other market options can be accessible and the effect can thus be avoided.

Dr. Befikadu also highlights that the ban on AGOA just brings propaganda/ diplomatic pressure, not an economic one. Ethiopia exports more than 90% of its textile products to the United States through AGOA, and that makes up only 6% of its total foreign exchange earnings. AGOA's exports; mainly textiles, leather goods, grains, and coffee, bring about $260 million a year. This is a negligible sum compared to the average annual revenue of $3 billion. 

“Instead, the country would suffer more if the coffee, sesame, and khat exports that make up the bulk of the country's foreign exchange earnings, fail” he elaborates. 

On the other hand, some claim that the embargo may not be enforced because the USA is the biggest beneficiary of the African raw material obtained from AGOA. Dr. Befekadu doesn’t agree with this argument. A country with an annual capital of $20 trillion wouldn’t have an inflated interest as such to get $260 million worth of products and raw materials from Ethiopia. “The other way round, it might be plausible to surmise that the US won’t rush to enforce the ban, sinceAGOA is the biggest foreign policy implementation tool,” he says.

“It is estimated that 40,000 to 50,000 people will lose their jobs as a result of the suspension of AGOA. If the domestic and continental market can be tapped well, as discussed, and if the quality of products and services can be made competitive in the market, the workers can be saved. The pressure on the workers would not be as severe as Covid_19’s impact.”

According to Dr. Befikadu, Ethiopia's annual imports are about $17 billion. Revenue from exports and services is, on average, about $3 billion. As a result, the remaining $14 billion will be received from grants and loans to buy the goods the country needs. Out of the $14 billion, about $5 billion is provided by foreign donors and $1.5 billion comes from charities. Of the remaining $7.5 billion, 30% comes from China and 12% from the World Bank and the IMF. 

The economist underlines that the United States wants to create a government that will abide by its profit-driven foreign policy with threats. The Ethiopian people, especially the young people, used to have a good feeling for the United States, but now they know that it is a country that does not want friends but benefits. “Next, like Agowa, they can create something unexpected to intimidate and frighten us. Thus, learning from the present helps us to think carefully and prepare for the risk. The benefit we get from the ban is greater than the income we get from bowing down to the wicked policy.”

Yirgalem Asfaw, owner and Managing Director of Yirgalem Addis Garment and Textile Factory, says that she had been exporting textile extensively before the Covid-19 outbreak. “Starting from the beginning, the AGOA free market had been harmful, not beneficial. I know in fact that our products are sold at the AGOA market at a lower price than at home and abroad," she argues. “Those who became rich with the AGOA market are not Africans but their own foreign companies. And that is why I have always objected to African leaders crying and begging them.”

Though our product size is small our product quality is well recognized.  We can make a lot of money by exporting our products to African countries," she says, adding that Ethiopia can play a significant role in Africa's textile industry. 

“Thus, if we can create a huge African market together, we can create a safe Africa,” she suggests.

AGOA was also a pull factor that the government used to attract potential investors to the country. It's expected that the ban would affect this foreign investment too. Temesgen Tilahun, Public Relations Officer of the Ethiopian Investment Commission says “Ethiopia's investment attraction will focus on attracting large and well-established investment companies. And the closure of the AGOA market will not have a huge pressure.”

“AGOA might be one of the five market opportunities that Ethiopia is promoting to attract investors, but the commission’s focus is on attracting investors in Ethiopia's priority sectors. The textile and apparel industries may want to use the AGOA market as they are one of the major sectors. However, they are not the only ones in the manufacturing industry. It is not possible to conclude that Ethiopia's investment activity will be deterred by the AGOA ban, except for a few sectors.”

Following the ban on the duty-free trade opportunity, the international media reported that Ethiopia is hit hard by the decision and that many young people in the leather and apparel industry will lose their jobs.

According to AGOA’s official website, Ethiopia's annual revenue from exports to the United States is $ 523 million. Out of this, the revenue from AGOA is estimated to be $ 238 million.

"Our investment attraction and promotion strategy mainly focus on attracting large industries, not those who seek to take advantage of market opportunities like AGOA," Temesgen underlines.

"Ethiopia caters several investment opportunities with a large workforce capable of producing with motivating incentives and convenient policies. Moreover, the country is close to the biggest global markets and has a large market. Thus, the potential impact of AGOA's closure on investment is small.” 

African Growth and Opportunity Act (AGOA) is a United States Trade Act, enacted on 18 May 2000 as Public Law 106 of the 200th Congress. The legislation significantly enhances market access to the US for qualifying Sub-Saharan African (SSA) countries.

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A PIECE BYNigist Berta

Nigist works at Addis Zeybe as a reporter while exploring her passion for storytelling and content creation.