Africa > East Africa > Ethiopia > Great Trade Expectations Behind U.S.-Ethiopia Trade Relations

Ethiopia: Great Trade Expectations Behind U.S.-Ethiopia Trade Relations

2015/07/29

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 initial 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 initial 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 National 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 initial Commissioner Plenipotentiary for a commercial/diplomatic mission to the court of Emperor Menelik II.

In the following years, the two nations' trade partnership focused on the military, inclunding arms inflow and the Kagnew military base at the Red sea, leased to the US.

Additional than a century later, the United States, a major donor and strategic partner in the war against terrorism, is from presently on to have a major investment relationship in Ethiopia despite the African Increase Opportunity Act (AGOA).

America's Overseas Private Investment Corporation (OPIC) has been instrumental in helping its citizens, inclunding 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 initial 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 next the border war ended.

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

In the initial six months of 2015, the trade volume between the two nations 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 as well inclined to the US. The 2013 data from the US Census Bureau indicates the total trade volume between the two nations 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 initial 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 development by 10,815 million dollars from the preceding year at the same time as the US ranked ninth place for exports.

The initial 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 increase of the country, they will not come," he explained. "As they are large, they need bigger markets."

Solomon as well believes that the existence of businesses like Deloitte in the country is an opportunity, as large 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 a lot of companies that want to invest in fields from which private sector participation is restricted, he elaborated.

In 2000, AGOA came into result making Ethiopia the 18th beneficiary of 39 nations eligible for the business-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 as well eligible for AGOA, has utilised 77.9pc of the market.

U.S. imports from AGOA beneficiary nations represent a small share, one % of total United States imports and are largely concentrated in energy-related products. Oil is consistently the top business - free United States import from AGOA nations, accounting for 68pc of such imports in 2014, according to the United States International Trade Centre's (ITC) 2014 Trade and Investment Performance Overview, statement 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, particularly 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 statement.

The statement as well indicates that national and ruling party-owned entities dominate the market and the existence of national 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 additional investment from the United States.

The statement by the United States Embassy as well acknowledges this. The statement states "Ethiopia has been relatively stable and fasten 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 initial 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 as well 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 remain 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 transaction with a buyer in New York, who will place orders next 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 Home says that his visit is about strengthening economic relationships. But security and human rights issues are expected to dominate his dialogue with Ethiopian officials.

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