With mounting and interactive development challenges, the priorities for African economies should be the fostering of economywide productive capacities and kick-starting structural economic transformation anchored on diversification and value addition. This should be undertaken in parallel with proactively engaging in knowledge-based and strategic integration in the global economy. This is because the changing global trade and investment environments have put the structurally weak and vulnerable economies of Africa in jeopardy. In the case of Ethiopia, while the country’s economy remains under continued macroeconomic distress with stubborn inflation, rising external indebtedness, and challenges related to political instability, rapidly changing global trade environments are further compounding the economic well-being of citizens and the continued marginalization of the economy in the worldwide trade and investment relations.
Currently, Ethiopia is not a major trading nation, even by African standards, accounting for a negligible 0.01% share of global exports. In 2023 (the latest internationally data), Ethiopia exported a total of $3.88 billion, making it the number 135 exporter in the world (out of 195 economies). In 2024, with the lowest trade-to-GDP ratio (hovering around 20%) against the average of 58% of sub-Saharan Africa (SSA), Ethiopia’s openness to trade has a long way to go, despite a series of domestic policy reforms. Ethiopia’s export of goods and services accounts for an average of 7.4% of GDP from 2018/19 to 2023/24, far below the average for Sub-Saharan African countries and the least developed countries, which achieved 22.1 per cent and 19.6 per cent, respectively, during the same period. Such a dismally low performance of the country on international trade in general and exports in particular is due largely to the structural rigidity of the economy and its persistent vulnerability to shocks – be it economic, financial, environmental or political. Consequently, the country relies on a few agricultural commodities and minerals for exports. The top ten export goods account for an average of 92.5% of total merchandise exports over the same period, against an average of 250 export items of developing economies. Over 72.9% of export earnings come from just five export commodities (coffee, flowers, oilseeds, gold, chat, and pulses) indicating a heavy concentration of exports on a few products (little or no diversification), posing systemic risks and persistent vulnerability of the country’s trade and its economy.
At the backdrop of such a dismal performance in exports, recent policy changes concerning international trade and unilateral measures adopted by major trading partners of Ethiopia (notably the EU and the U.S.), the socioeconomic revival, growth and sustainability of progress of the country (if any) will be seriously comprised with sever long-term consequences.
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The European Union (EU) has introduced the “EU Deforestation Regulation” (EUDR), a policy that will directly impact Ethiopia’s coffee exports. This is particularly significant as the EU is Ethiopia’s largest trading partner for coffee, accounting for an average of 32% of total coffee exports and generating approximately US$ 379 million in annual earnings between 2018 and 2022, according to the International Trade Centre’s 2023 Trade Briefs. The EUDR has emerged as an additional non-trade measure (NTM) of the EU with colossal potential impact on exports and rural livelihoods, according to a major study by the United Nations Conference on Trade and Development (UNCTAD) to be published soon. EUDR will expand beyond the already stringent requirements of EU markets, ranging from quality and safety to social and environmental standards, which have historically been cumbersome and costly for poorer economies such as Ethiopia’s to fully comply with ever-mushrooming international standards and to become a competitor in the EU markets.
Another major trading partner of Ethiopia that introduced new tariffication is the United States of America. The U. S’s new tariffs range from a minimum of 10% cent to 50% on imports from 185 countries, including 48 African countries, including Ethiopia. Although Ethiopia faces relatively lower tariff spikes (10%) on its exports to the U.S., this will have much bigger shock on the country’s export earnings than expected. In this regard, four economists[1] undertook comprehensive study on the impact of new tariffication measures of the U.S. on Ethiopia’s export competitiveness, economic growth and development. The study titled “Initial assessment of the likely effects of recent U.S. tariff measures on Ethiopian exports” provides comprehensive analysis with policy conclusions and recommendations. A few years prior to the introduction of the new tariffs, Ethiopia was ejected out from the U.S Africa Growth and Opportunity Act (AGOA), in January 2022 due to the alleged “human rights violations and actions by the Ethiopian Government during the Tigray war”[2]. The study gives insights into and sheds light on the adverse impacts of the combination of these two incidences on Ethiopia’s export competitiveness, with devastating consequences to the country’s socioeconomic growth and development, while severely harming smaller exporters. The study also refutes the claim that the new U.S. tariffs were aimed to reduce trade deficits, because, in the case of Ethiopia, the United States has consistently maintained a trade surplus with Ethiopia. The study also evokes not only systemic imbalances in trade relations between the U.S. and Ethiopia but also it highlights unfairness given that U.S.’s export to Ethiopia including high-tech and complex industrial goods such as aircrafts and components as well as machinery enter the county on zero duty.
Conclusion and way forward
The changing global trading policies and regimes of developed nations are increasingly becoming cumbersome, costly, and anti-developmental for many developing countries, particularly those in Africa. The confluences of Africa’s weak productive capacities, the lack of export diversification, low value addition, and unfavorable global trade and investment policies will further compound the growth and development challenges facing them. The hardest hit economies could be those that are structurally weak and vulnerable ones such as Ethiopia’s. Addressing such complex and intricate challenges requires multipronged approaches.
With regard to the EU Deforestation-free Regulation, it is vital to form a regional collaboration. Africa’s economies that rely heavily on EU markets for exports of commodities such as coffee, cocoa, soybeans, wood, palm oil, etc., need to collectively negotiate (conveniently under the ECA-AU umbrella) or in the context of their negotiation with the EU on the Economic Partnership Agreement (EPA). This is important at least for two important reasons. On the one hand collective voice will have more impact than negotiating on a singular basis. On the other hand, the EU is a major export destination for commodities impacted by EUDR. For instance, in 2022, 41.5% of coffee from East African producers (Ethiopia, Uganda, Tanzania, and Kenya) was exported to the EU.
The U.S.’s new tariffication, irrespective of quantitative percentages, will have adverse impacts and ramifications on the trade and development prospects of affected nations, including Ethiopia. In this context, export diversification remains more persuasive today than ever before. Exports and economic diversification cannot be realized with a severe weakness in the current level of economy-wide productive capacities. According to the most recent studies by UNCTAD, Ethiopia’s global ranking on the Productive Capacities Index (PCI) was 169th out of 194 economies in 2023. Although there have been modest improvements in the last two decades, the country’s score on the PCI was dragged down, particularly by weak institutions, low human capital formation, weak energy (electricity) and ICT infrastructure and services, as well as declining manufacturing value added in GDP. Therefore, policies centered on the fostering of productive capacities and kick-starting structural economic transformation by increasing the value addition and technological sophistication of exports in sectors where Ethiopia holds a comparative advantage should be pursued as a matter of priority.
In parallel with pragmatic and forward-looking policies and strategies to build productive capacities and harness comparative advantages, Ethiopia needs to engage in evidence-based trade negotiations with the United States. This should include efforts to reinsert Ethiopia in the AGOA coverage while simultaneously advocating for a review of current tariff measures on Ethiopian exports. These negotiations should be supported by clear evidence, including the persistent U.S. trade surplus with Ethiopia and the fact that key U.S. exports—such as aviation products—enter Ethiopia duty-free.
By implementing these measures, Ethiopia can reduce its trade vulnerability, diversify its export base, and position itself as a resilient and competitive player in global markets, supporting inclusive and sustainable economic growth. Otherwise, a small decline in international prices, including in sectors that Ethiopia has comparative advantages, may cause greater vulnerability to the country’s socioeconomic progress.
Tadele Ferede(PhD) is an associate Professor of Economics at the College of Business and Economics at Addis Ababa University. The research was originally conducted by Mussie Delelegn, Mussie Mindaye, Tadele Ferede, and Yetsedaw Emagne. The views expressed in the article do not necessarily represent the views of the magazine. He can be reached at [email protected]
