The implications of Joining the COMESA-EAC- SADC Tripartite FTA on The Ethiopian Economy
Economic integration is a common mechanism countries are pursuing as a means of maintaining stability, developing their economies and maximizing their mutual economic benefits. We see, for example, this trend taking place among European countries in the form of the European Union. Africa has scheduled itself to form the African Economic Community (AEC) by 2037. As a strategy leading to that ultimate continental integration, it is encouraging the creation of regional economic integrations. As a result, we have regional economic integrations like: the Arab Maghreb Union (AMU), the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of Central African States (ECCAS), the Economic Community of West African States (ECOWAS), the Southern African Development Community (SADC), East African Community (EAC) and the Intergovernmental Authority on Development (IGAD) in operation. Regional economic communities (RECs) like these would serve as the building blocks for the creation of the envisioned continental economic community.
The focus of this study is on the main eastern and southern Africa’s regional economic communities, namely: COMESA, SADC and EAC. Ethiopia is a founding member of COMESA. The three RECs have agreed to form a COMESA-SADC-EAC tri-partite Free Trade Area (FTA). On the other hand, it must be recalled that members of this proposed tri-partite, as well as other African countries, are part of the on-going European Partners Group (EPA) negotiations with the European Union
Client: FDRE Ministry of Trade
Objective of study: The main objective of the study was twofold, namely to evaluate, both qualitatively and quantitatively, the likely implications of joining the COMESA-EAC-SADC tripartite FTA on the Ethiopian Economy and to assess the implications of the on-going EPA negotiations between countries in the COMESA- EAC-SADC region with the EU in the formation of the Tripartite FTA.
The study used different approaches, including the Global Trade Analysis Project (GTAP) model (computable general equilibrium model), the gravity model, the sensitive product identification technique, and review of policy documents and relevant literature. The study relied mainly on secondary data sources such as the Ethiopian Customs and Revenue data, the national income account statistics, etc.
Methodology of study
The study used different approaches including the Global Trade Analysis Project (GTAP) model (computable general equilibrium model), the gravity model, the sensitive product identification technique, and review of policy documents and relevant literature. The study relied mainly on secondary data sources such as the Ethiopian Customs and Revenue data, the national income account statistics, etc.
Conclusion: The Computable General Equilibrium (CGE) simulation results highlight the fact that joining the COMESA-EAC-SADC FTA tripartite and the resulting unilateral and reciprocal trade liberalizations could have both positive and negative impacts on Ethiopia’s economy. In the short-run, the Ethiopian economy could experience a positive impact on its GDP as liberalization could cut the cost of doing business in Ethiopia and induce investment from abroad.
The CGE reciprocal tariff liberalization scenario would have a positive effect on household welfare as the price of consumer goods would decline. On the other hand, tariff liberalization will have a negative effect on domestic economies. The output of most of the productive sectors included in the model is likely to decline. Particularly, the manufacturing industry would be negatively affected due to the influx of cheap imports in the local market. The CGE model results also suggest that COMESA-EAC-SADC tripartite could increase exports in some sectors. However, this benefit will be wiped out by the huge influx of imports to Ethiopia, ending up with a huge deficit and trade imbalance of the country implying the depreciation of the local currency.
Joining FTA will have implications on Ethiopia’s legal and institutional arrangements. The FTA requires harmonization of rules and regulation of the member countries so that it may serve as a common framework for all. This effort of harmonization may pose a problem as it is difficult for member states to agree on issues of concern, sometime even on terminologies, due to different legal contexts and cultures. It would be a complex matter to change domestic laws once international laws are agreed upon. This would require careful evaluation by the joining member states as the community law would prevail over the national law. Institutions and laws shall take precedence over similar national ones on matters pertaining to the implementation of the Treaty. Therefore, before endorsing the dispute settlement mechanisms of the tripartite, Ethiopia has to evaluate how courts of justice are formed, the jurisdiction of the court, the appeal and the decision making process and the like to ensure that its national interests are protected.
The formation of the tripartite FTA will definitely have implications on the social welfare and employment as well. With respect to Ethiopia, FTA is found to increase the flow of import and reduce revenue, resulting in de-industrialization and all together ending up with social impacts such as job loss. The job loss would be high in manufacturing industries that are affected most by the liberalization measures. The loss in revenue, in turn, could be translated into reduced public spending on poverty reducing social sectors such as education, health, water, rural roads etc, thereby facing poverty aggravating effects. Unemployment may be created due to the closing down of domestic manufacturing industries caused by their inability to survive the stiff competitions.
Joining any FTAs could also result in the loss of national sovereignty in the design and implementation of trade policies and strategies that promote growth and development. According to Asante (2000), African governments’ inability to take bold measures for changes in their national policies, legislations, rules and regulations on trade and market
integration has been due to their fear of their diminishing national sovereignty and independence.
Recommendations To benefit from joining the FTA, Ethiopia has to undertake a set of complementary reforms both to strengthen its domestic industries and increase its export capacity. Key intervention areas include:
• Building the capacity of existing manufacturers and improving their efficiency and productivity.
• Intensifying privatization of state owned industries, as private ownership has been proved to be the best mechanism to improve profitability of a business.
• Encouraging and promoting modern and hygienic animal processing methods for this would increase the supply and quality of hides and skin for the tanning and dressing of leather.
• Promoting possible mechanisms for establishing joint venture businesses in other countries, which would benefit local firms from technical know-how and technology transfer.
• Promoting and establishing linkage between research institutions and universities and manufacturers that will aid the latter in designing, styling and marketing skills.
• Strengthening relevant institutions. Equally important is the need to strengthen the Ethiopian Investment Authority and the Quality and Standards enforcing institutions like the Ministry of Trade (import and export inspections directorate), Ministry of Science and Technology both in terms of skilled manpower and technology as these are major players in the international trade.
• Devising efficient government policies. The impacts of FTA will mainly depend on the efficiencies of the government policies and of the co-operation between Ethiopia and the international donors which will be associated with the liberalization process itself. Feasible adjustment measurements will have to be elaborated in the partnership between the Ethiopian government and other FTA members in order to compensate the negative effects of the trade liberalization. The government should set a convincing programme and call for an international assistance for modernizing the private sector, especially in the manufacturing industry and agriculture as the tripartite
FTA is a move towards integration into the global economy. Modernizing the public sector, improving tax collection and playing the regulator role in order to attract local and foreign investment by incentive measures in favor of exporting companies is a major challenge for the Ethiopian authorities.
• There is also a need for establishing social safety nets that compensate displaced workers, i.e. provide adequate income support for displaced workers through social safety nets as a necessary complement to active labour market and poverty-reduction policies. To ease the cash constraint, the importance of credit markets cannot be over emphasized.
• Moreover, apart from tariff liberalization measures, it is important to boost Ethiopia’s capacity to improve the non-tariff barriers and remove the supply side constraints of regional integration. These are for instance, physical infrastructure and logistical capacity to efficiently move goods and services to markets abroad, including transport and Information & munication Technology (ICT) capabilities to expand the number of
firms that can enter foreign markets. Specifically, negotiations of trade partnerships should focus on removing supply constraints which are more important than tariff liberalization for the export sector.
• Expanding investment in capital equipment and technological innovation is crucial. This requires establishing and promoting industry- based Research and Development (R&D). Investment in the right kind of technological capabilities is critical to creating and sustaining competitive advantage.
• Infrastructural facilities such as electricity, water, telecommunication, etc, must be improved It is important to build the legal and institutional capacity that enables Ethiopia to harmonize the domestic rules and regulations with the ongoing tripartite agreements. Institutional support is required to help firms surmount the entry barriers in the foreign markets by reducing the up- front sunk costs of such entry.