Ethiopia s Trade Relation with the EAC and Sudan

Ethiopia s Trade Relation with the EAC and Sudan Ethiopian Economic Association Lead Researcher Kibre Moges Sponsored by Friedrich Ebert Stiftung May 2008 Addis Ababa

Table of Contents List of Tables List of Figures Abbreviations Executive Summary Page iv v v vi 1. Introduction 1 2. Challenges and Opportunities of South-South Trade 2 2.1 Configuration of the current international trade integration 2 2.2 Policy initiated South-South trade integration 3 2.3 Opportunities and Challenges of trade Integration in East Africa 6 3. Economic Structure and Market Networks 8 3.1 Economic structure 8 3.2 Potential market size 9 3.3 Creating market access opportunities 10 4. The Trade Policy Regime in Ethiopia 14 4.1 Trade agreements 14 4.2 Export trade incentive schemes 18 4.3 The Tariff Regimes 21 4.4 Non-tariff barriers 29 5. Trade Flows 30 5.1 Export trade structure 30 5.2 Import structure 35 5.3 Ethiopia s trade balance with the EAC and Sudan 41 ii

6. Intensity of Trade Integration between Ethiopia, the EAC & Sudan 42 7. Trade Complementarities between Ethiopia, the EAC & Sudan 46 8. Trade Competitiveness 48 8.1 Export diversification 49 8.2 Revealed Comparative Advantage 51 8.3 Trade restrictiveness 53 8.4 Other trade costs influencing competitiveness 58 9. Summary and Recommendations 62 References 67 Annex Table 1a 69 Annex Table 1b 73 Annex Table 2 78 iii

List of Tables Page Table 1: South-South Exports 2005 5 Table 2: Economic Structure of East African Countries 8 Table 3: Market size indicators 9 Table 4: Access to telecommunication services 13 Table 5: Eligibility for EU and USA GSP access 14 Table 6: Summary of MFN applied tariffs rates 22 Table 7: MFN applied duty rates by product group 24 Table 8: Frequency distribution 25 Table 9: Share of duty free imports in each product category 27 Table 10: Implicit import duty rates 28 Table 11: Annual growth of Ethiopia s export to the EAC and Sudan 34 Table 12: Import share of EAC and Sudan from Ethiopia by broad product category 35 Table 13: Major imported product categories from Kenya and Sudan 41 Table 14: Ethiopia s trade balance with the EAC and Sudan 42 Table 15: Bilateral Trade Intensity Indices 44 Table 16: Trade Intensity Mutual Indices 45 Table 17: Export structure: share of leasing export products 47 Table 18: Export Diversification/Concentration 50 Table 19: Reveled Comparative Advantage Indices 53 Table 20: Trade Restrictiveness Indices 55 Table 21: Partial indicators of external trade costs 59 iv

List of Figures Page Figure 1: Partial portray of East African economic cooperation galaxy 4 Figure 2: Regional export markets 30 Figure 3: Ethiopia s major export markets 31 Figure 4: African market s share of Ethiopia s export 32 Figure 5: Import growth and export capacity t finance imports 36 Figure 6: Regional import structure 37 Figure 7: Import by specific country of origin 38 Figure 8: Share of major African exports to Ethiopia 39 Figure 9: Share of Ethiopia s export to the EAC and Sudan 42 Figure 10: Number of days required to export/import 60 Abbreviations ACP African, Caribbean and the Pacific GSP General System of Preference MFN Most Favored Nations EAC East African Community COMESA Common Market for Eastern and Southern Africa SADC South African Development Cooperation WTO World Trade Organization EPA Economic Partnership Agreement EBA Everything But Arms AGOA African Growth Opportunity Act NTBs Non-tariff barriers SSA Sub-Saharan Africa LDCs Least developed countires FTA Free trade agreement GATT General Agreement on Tariff and Trade DTIS Diagnostic Trade Integration Study NBE National Bank of Ethiopia v

Executive Summary 1. Introduction The structure of production of an economy determines not only the composition but also the direction of trade. The current pattern of trade is dominated by transactions among advanced countries, and to some extent, between advanced and newly industrializing economies. Trade relations among poor countries is least developed. Despite the obvious advantages of geographical proximity, and historical and cultural ties, trade between bordering least developed countries is quite rudimentary. In Africa, for instance, in spite of the proliferation of regional trade and monetary blocs/cooperation, formal trade among neighboring countries is largely insignificant. This also holds for Ethiopia and its neighbors. The purpose of this study is to show trade relations between Ethiopia and its neighboring countries, namely Sudan and the EAC (Kenya, Uganda and Tanzania). 2. Challenges and Opportunities of South-South Trade The same advanced economies that dominate world industry also dominate world trade. Over the past decade and a half the EU (15), North America (NAFTA), and East Asia (Japan, South Korea and China (including Taiwan) together had a share of nearly threefourth of world trade. They also accounted for 82.1 percent of world manufactured value added and 80 percent of world manufactured trade, nearly half of which constitutes intraregional trade among countries within these regional blocs. Not only the volume, but the direction of trade too is highly skewed in favor of the same advanced economies. In Africa actual share of world trade and also intra-africa trade remain too small. The marginalization effect has led to the proliferation of South-South regional trade agreements. In Africa alone there are over 14 intra-regional trade agreements. Considering East Africa, Tanzania is, at the same time, a member of the EAC and SADC, where as other EAC members, Kenya and Uganda, are COMESA members but not of SADC. Tanzania is also a member of the Indian Ocean Rim (IOR), while Uganda is a vi

member of the Organization of Islamic Countries (OIC). Moreover, EAC members are also members of the Cross Boarder Initiative (CBI) group. Only Ethiopia belongs to a single regional group COMESA. The immediate objective of such grouping is to expand trade among members of a group. Over time South-South trade has been increasing. In 2005, South-South exports accounted for about 45.7 percent of total developing countries exports. But this is largely due to the Asian factor. Of the total South-South export, Asia accounted for about 85 percent while the remaining smaller proportion accrued to L. America and Africa with the respective shares of 10 and 5 percent. Intraregional trade has also been increasing, though marginally in general, and poorly in Africa, in particular. Over the past decade and a half, intraregional trade in East and South Asia increased to more than 40 percent of total trade of the region; but in Latin America and Africa the corresponding figures were only 25 and 10 percent respectively. Intraregional trade variation across regions is, therefore, a reflection of the level of economic development. Despite the proliferation of policy driven intraregional and South-South trade agreements in general, no corresponding level of trade has been recorded, particularly in Africa. The same holds for East Africa; irrespective of geographical proximity, cultural and linguistic ties among communities living in each side of the borders of countries, the challenge of trade integration is paramount, primarily because of poverty. 3. Economic Structure and Market Networks Except Kenya to some extent, the economic base of all East African countries is predominantly agrarian. All, but Kenya, are least developed. The share of the modern manufacturing sector and mechanized agriculture together is not more than 20 percent of the respective national income of each of these countries. As such, the role of modern economic activities in merchandize export (except oil in Sudan) is insignificant. vii

Moreover, with a per capita income much lower than one thousand dollars, the import capacity of these economies is highly limited. Despite this trade limiting economic backwardness, there are a number potentially encouraging factors for trade among these East African neighbors. First, these countries together account for more than one-fourth of the total population in Africa, hence quite a large potential market. Second, over the past decade and a half, nevertheless all countries have substantially liberalized their economy, particularly so in the area of external trade. Third, given that transportation accounts for a significant proportion of trade costs (at least one-fifth of ad valorem equivalent) the recently completed Addis-Khartoum highway which now links to the already existing Addis-Nairobi motorway, creates a significant comparative advantage in terms of transport cost reduction and promoting intraregional trade among these countries. Finally, except Ethiopia, these countries have made remarkable progress in introducing modern state of the art information and communication infrastructure, a critical factor for promoting trade. 4. The Trade Policy Regimes in Ethiopia 4.1. Trade agreements Ethiopia has made a number of preferential trade agreements with many countries. Under the various Generalized System of Preference (GSP) schemes, Ethiopia is one of the beneficiaries of preferential trade access for a wide spectrum of commodities from a number of developed countries, including, among others, Australia, Canada, the European Union (EU), Japan, Norway, and the United States of America (USA). The two most important duty free market access opportunities that Ethiopia currently enjoys are the EBA and AGOA schemes. Except Kenya, which is not categorized as a least developed economy, all other neighboring countries in East Africa are beneficiaries of the EBA, and many other GSP schemes. Moreover, Ethiopia is currently negotiating to join the multilateral trading system. Except Sudan and Ethiopia, members of the EAC have already joined the WTO. Also these viii

countries have jointly signed an interim agreement on EPA with the EU. Ethiopia (and Sudan too, for that matter) has the opportunity to and the challenge of coming up with a consistent negotiating agenda with respect to EPA, which has to weigh the gains and pains of EPA with that of membership to the multilateral trading system. 4.2. Export trade incentive schemes Ethiopia has given greater attention to external trade policies than any other prevailing economic policy. Accordingly, a number of incentives have been put in place. Duties on all exports are now removed; a financial credit support system (Export Guarantee Credit Scheme) to the export sector for pre and post shipments is structured; an export trade duty incentive scheme: duty draw back scheme, voucher scheme, and bonded manufacturing warehouse scheme are made operational; and the foreign credit scheme allows foreign suppliers to extend trade credit to Ethiopian partners. 4.3. The tariff regimes Ethiopia has substantially reduced tariff rates across the board. The negative list used to determine eligibility for imports through the foreign exchange access has been reduced significantly. Currently, quantitative import restrictions are applied only to used clothes, harmful drugs and armaments for security reasons. Both tariff levels and dispersions have been reduced substantially. Specific tariffs have been converted into ad valorem equivalents. There are no preferential tariff offers except to Sudan. A marginal, 10 percent, reduction of the MFN rates is also offered to COMESA member countries. The tariff structure involves an average rate of 16.8 percent, and a maximum of 35 percent. While 4 percent of the tariff lines are duty free there is no any protective rate for so called sensitive products. The tariff structure also reveals that both for agricultural and nonagricultural products, just over 50 percent of the tariff lines fall below the 10 percent duty rate, while the balance fall under the 15 to 35 percent duty rate. As it stands, the tariff lines, for both agricultural and non-agricultural products, are nevertheless evenly distributed across the tariff rates with a margin towards the lower end of the tariff bracket. ix

The picture, however, is quite different for the EAC and Sudan. EAC maintains lower average rate and high duty free rates (36.6 percent of tariff lines). But however it imposes as high as 100 percent protective rates on some products. Also the EAC imposes relatively high duty rates on most agricultural commodities and low rate on nonagricultural products. Similarly, Sudan imposes relatively high rates, between 15 and 40 percent) on 85 percent of agricultural products, while non-agricultural products are evenly distributed across the tariff rates. This has some implication to trade among these countries: in general agricultural commodities are less traded than manufactures. And agriculture being relatively Ethiopia s only natural resource endowment, hence export, heavy tariffs in Sudan and Kenya on agricultural commodities implies relatively low trade with these economies, though this requires further investigation of the specific commodities and corresponding rates. 5. Trade Flows As noted earlier, Ethiopia s trade balance has always been heavily in the negative. What is more the structure of both exports and imports are highly skewed. The EU is Ethiopia s favorable export market. Accordingly, for over half a decade or so, on average, over onethird of the total export was destined to this market, followed by Asia (18 percent) and the Middle East (16 percent). But considering the dynamics, the shares of Asia and the Middle East are fast increasing at the expense of the EU. Considering individual markets, Germany is by far the major destination markets for Ethiopia s export, followed by Japan, Saudi Arabia, Italy and China. The structure of imports, however, differs from that of exports. In this regard, Asia has a share of one-third of Ethiopia s import; EU over one-fourth; and the Middle East about one-fifth. In the context of individual countries, China and Saudi Arabia together accounted for nearly one-third of total import (for about 15 percent each), followed by United States and India. x

The commodity structure of exports is also quite skewed. A handful of mainly raw agricultural products make up for the bulk of exports, including coffee, oilseeds, edible vegetables and vegetable products, hides and skins and to a smaller extent gold. These account for over 80 percent of the total export. Similarly, few largely manufactured products including petroleum oil and oil products, machinery and equipment, electrical appliances, vehicles and cereals account for over half of the total import. African countries are not Ethiopia s major trading partners, though there has been some improvement recently. Over the last five years Ethiopia s export to Africa figured about 14 percent of total. Of course, this is quite a significant share. However, this is due to some opportunistic activities by business individuals in Djibouti and Somalia that are engaged in re-exporting (mainly edible vegetables and vegetable products) from Ethiopia to the Middle East as they incur lower cost than Ethiopia for port services. Take away Djibouti and Somalia, what is left for other African s share is a small proportion 4.8 percent of total merchandize exports. As for imports, Africa share is only 5 percent of total. As for other East African neighbors, Sudan accounts for 2.4 percent of Ethiopia s total export while the rest Kenya, Tanzania and Uganda have an insignificant share (0.3 percent). Similarly, Ethiopia s import share from these countries is marginal; 1.1 and 0.8 percent of its total import value from Sudan and Kenya respectively. But note that in terms of absolute values, imports from these neighboring countries are much higher than exports. Hence, in general, trade integration between Ethiopia, on the one hand, and Sudan and the EAC, on the other, is quite rudimentary. Within this context, based on trade intensity indices, and as it stands today, for Ethiopia, Sudan is a much more important export market than the EAC. xi

6. Trade Complementarities and Competitiveness Why is trade integration among East African countries so weak? The prime factor is the lack of complementarities between the export bundles of one country and import bundles of another. The higher the degree of industrialization, the greater the complementarities between imports and exports of different economies. Export bundles of least developed economies are based on their respective natural resource endowments such as coffee, cotton, coco, oil, copper, etc. The type of such endowments in a given area/country is largely limited. Moreover, different countries may have similar natural resource endowments. This is typical of most East African countries. Except Sudan, whose main export commodity is petroleum oil, others Ethiopia, Kenya, Uganda and Tanzania largely export few (undiversified) and similar agricultural products and import manufactured goods. This is a typical case of absence of complementarities; there is little to trade among themselves. Complementarity is a necessary criterion for trade, but not a sufficient one. Another factor influencing trade integration is competitiveness in this context referring to cost efficiency, i.e., productivity and marketing efficiency. This is largely determined by technology, use of economies of scale, production and marketing organizational structure/skill, etc. But these factors clearly favor industrialized economies. Hence a least developed economy inevitably prefers to trade with advanced economies than otherwise. Still another element influencing trade integration is the restrictiveness of prevailing trade policy, particularly tariff and non-tariff barriers, in a given economy. Non-tariff barriers include quota, price and quantity control measures, non-automatic (discriminatory) licensing, anti-dumping, technical regulations, monopolistic measures, subsidies, etc. Based on trade restrictiveness indices, among the five East African neighbors, Sudan s tariff regime is the most restrictive on imports and also imposes strong adverse impact on domestic welfare, while that of Uganda is the least import restrictive and the lowest adverse impact imposing on domestic welfare. The rest, i.e., Ethiopia, Kenya and xii

Tanzania have, nevertheless, equal and moderate restrictiveness on imports as well as on domestic welfare. What is perhaps more interesting, however, is the conspicuously high margin reflected by the indices estimated using both tariffs and non-tariff barriers. With the exception of Uganda, import restrictiveness imposed by non-tariff measures in all countries is considerable. In Tanzania and Sudan in particular, the contributions of non-tariff measures to the overall level of restrictiveness are higher than the contributions of tariffs. Note also that trade restrictiveness imposed by non-tariff barriers is substantially high in advanced economies. Note that, as it stands, trade restrictiveness is not exclusive. It is equally applicable to all trading partners. For instance, Sudan s high restrictiveness may create deterrence to imports not only from East African neighbors but also from all its trading partners around the world. Hence it is a common factor. It should also be underlined that the restrictiveness factor applies where trade agreements do not exist. But Sudan and Ethiopia have free trade agreements; so have EAC members. Hence the implication of the trade restrictiveness relevant to tariff would not hold in these two cases. However, excessive restrictions due to non-tariff measures will inevitably create trade diversion. Summary and Recommendations The bulk of world trade constitutes manufactured products. As such, industrialized economies that dominate world industry also dominate world trade. Moreover, poor countries whose exports are highly concentrated in a small number of primary commodities generally find limited markets in their own and other developing countries. For both reasons, developing countries that are still dependent on primary products can benefit less from regional trade integration with partners at similar stages of development than those that have already achieved a more diversified production structure. As such, the share of South-South trade, particularly among least developed and between developing and least developed countries is marginal. xiii

The contribution of consciously initiated Regional trade agreements to South-South trade cannot address the fundamental cause for lack of trade integration, namely lack of industrialization, though it can manage to overcome some minor obstacles to trade. The same reason holds for lack of trade integration between Ethiopia on the one hand, and Sudan and the EAC on the other. Today, though both tariffs and non-tariff components of the external trade regimes require further measures, such as downward adjustment of tariffs and removing certain non-tariff barriers, the former can hardly be regarded as prohibitive for trade among these East African neighbors. Moreover, the EAC is already implementing its customs union protocol; Sudan and the EAC are both members of the COMESA FTA; and Ethiopia and Sudan have also signed an agreement to conduct trade on a duty free basis for all industrial and agricultural goods originating from the respective countries. Hence, the role of tariffs as barrier to trade has no impact except on trade between Ethiopia and the EAC. Despite these measures, however, trade flows between Ethiopia and the rest is quite marginal. Particularly, Ethiopia s export to these countries is quite small, though increasing fast with Sudan in recent years. Rather, these countries conduct trade in bulk with their traditional trade partners: mainly the EU, Japan, Saudi Arabia, USA and recently emerging Asian countries China, India and South Korea. A number of factors account for this. First, the NTBs are still regarded as restrictive compared to those prevailing in other countries, including trading partners. This implies that the costs of trade among these East African neighbors are higher than the corresponding costs of trade with major trading partners. As such, it is logical for each of these East African countries to trade closely with low cost partners rather than among themselves. But, even more important than these are the benefits of trade agreements between each of these East African neighbors and their major trading partners, which allow exports of the former to enter xiv

duty free into the latter markets under various Generalized System of Preferences (GSP) schemes. Ethiopia is one of the beneficiaries of preferential trade access for a wide spectrum of commodities from a number of developed and newly industrializing countries. As such, the benefits of trade among these East African neighboring countries weigh much less than those with advanced economies. But, the fundamental factor limiting trade integration is the lack of trade complementarities. Ethiopia, the EAC and Sudan export largely homogenous products, except petroleum fuel from Sudan and some low technology manufactures from Kenya. Except for leather and leather products, Ethiopia has little natural resource advantage on which its export depends over the EAC and Sudan. As such, Ethiopia s export to these countries is highly limited and would remain so for a long time to come, until significant diversification takes place. For the same reasons, these countries import similar goods manufactured products from advanced economies. Natural resource endowments of these East African countries are largely closely similar. Therefore, the degree of trade complementarities is quite low. Ethiopia s import from Kenya largely constitutes simple and low technology manufactures. But note that even these products are competitively exported by other countries. In fact, further trade expansion between Kenya and Ethiopia could be challenging due to other competitive exports from advanced economies, particularly from the EU, come EPA. What clearly emerged from the Reveled Comparative Advantage Index is that nevertheless all these East African neighbors have comparative advantage and disadvantage in similar groups of products with few exceptions. Except in fuel and simple manufactured products where Sudan and Kenya respectively enjoy relative advantages, in all other groups of products all countries together have either a comparative advantage or disadvantage. For instance, nevertheless, all countries have comparative advantage in food and agricultural raw materials and disadvantage in chemical products, machinery and transport equipment. xv

As such these facts provide a clear picture regarding the lack of trade complementarities, implying the challenge for further trade integration among these economies. Greater trade complementarities, hence, higher level of trade integration, come only with industrialization. However, to improve trade integration to some extent and to promote Ethiopia s export interest and the pace of industrial development, certain further measures, which includes the following could be undertaken. Though tariffs and non-tariff measures in developing countries are part and parcel of industrialization strategies and should be considered in that context, the level of tariffs could still be reduced, at least selectively, and most non-tariff barriers safely removed in all these countries, particularly in Sudan, in order to further promote trade integration. Currently Ethiopia incurs high trade deficit with both Sudan and the EAC. Though the volume of import from these countries is quite small compared to total, the deficits as proportion of imports from the respective counties are quite large, and should not be maintained for long. To sustain a reasonable trade balance, Ethiopia should make vigorous export drive into these countries, particularly into Sudan. A number of issues need to be clearly addressed before going for EPA. Ethiopia is aspiring to join the WTO in the near future, and signing the interim agreement (if Ethiopia decides to do so) is expected to come earlier than the former. However, experiences have shown that large countries may use their bargaining power in regional agreements to obtain concessions from small countries that they might not obtain in more balanced multilateral negotiations. It should, therefore, be underlined that as reciprocity is likely to disarm small economies of the development oriented policy space currently at their disposal (at xvi

least theoretically), Ethiopia has to make sure that the EPA with the EU should at least provide same degree of benefits, if not more, that could be granted by the WTO for LDCs. Moreover, the development element of EPA should go beyond the so called aid for trade to address the supply side constraints without which Ethiopia s trade status would make little change. EPA has to be taken for what it is worth. Ethiopia has the choice to proceed signing the interim agreement (if it did) either with other countries as a group perhaps with Sudan or Djibouti or both, or on its own. However, approaching EPA as a group (with one or two countries) might not deliver any extra benefit than going for it individually. The major benefits often argued for, such as stronger bargaining power, cost sharing/reduction, technical assistance, etc, don t seem to have much significance in this particular case. Two or three less developed countries as a group make little difference from negotiating individually. In fact the costs could even outweigh the possible benefits. Sudan and Ethiopia may not have converging interest with respect to commodity preference, timetable and speed of tariff reduction, etc, thereby creating trade-offs and loss of benefits either for one or both countries. Moreover, the political economy context of these two countries, at least currently, is quite different. xvii

1. Introduction A given stage of development of an economy corresponds to a specific production structure and composition of trade. But the importance of trade increases with economic development. At an early stage (pre-industrialization), trade plays a key role as a source of acquiring mainly manufactured finished products and also less sophisticated capital goods and intermediate inputs; during industrialization trade is a vital source of acquiring technologically advanced capital goods and instruments, and intellectual properties; at a higher stage its critical role is to provide markets for high tech finished products thereby facilitating economies of scale and specialization, and hence accumulation of wealth. Moreover, the structure of production determines not only the composition but also the direction of trade. The current pattern of trade is dominated by transactions among advanced countries and between advanced and newly industrializing economies. Trade relations among developing countries is least developed. Despite the obvious advantages that geographical proximity and historical and cultural ties provide, trade between bordering developing countries (perhaps with the exception of East and South-East Asian countries) is quite rudimentary. In Africa, for instance, in spite of the proliferation of regional trade and monetary blocs/cooperation, formal trade among neighboring countries is largely insignificant. In this regard, Ethiopia is not different from others. Its trade relation with neighboring countries, such as Sudan, Kenya, Tanzania and Uganda is very weak. Similar to all other least developed countries, its major trading partners for long have been those remotely located advanced economies, particularly the EU, Japan and USA, and recently China. The purpose of this study is to show trade relations between Ethiopia, on the one hand, and Sudan, Kenya, Uganda and Tanzania, on the other. It also attempts to identify the comparative trade advantage of the former vis-à-vis the latter five, which could serve as a basis for designing a strategy to promote trade among these neighboring countries.

2. Challenges and Opportunities of South-South Trade 2.1 Configuration of the current international trade integration The same advanced economies that dominate world industry also dominate world trade. Over the past decade and a half (1991-2005), the EU (15), North America (NAFTA), and East Asia (Japan, South Korea and China (including Taiwan) accounted, on average, for 35.2, 17.8 and 19.1 percent of World trade respectively (UNCTAD, p42, 2007). Thus these regional blocs together had a share of nearly three-fourth of world trade. They also accounted for 82.1 percent of world manufactured value added and 80 percent of world manufactured trade, nearly half of which (40.2 percent) constitutes intraregional trade among countries within these regional blocs. Trade within these regional blocs is driven mainly by growth dynamics and supported by the respective trade agreements. Hence, given that manufactured goods constitutes the bulk of world trade whose production is dominated by advanced economies, not only that the share of trade of developing countries is quite marginal, but the direction of world trade is also highly skewed configured largely among advanced economies and between advanced and newly industrializing countries. Moreover, this is reinforced by the traditional trade theory, which is the basis for the theoretical justification of the existing international economic order: economic welfare is maximized under global free trade, which ensures that production is located according to comparative advantage and inline with the most efficient use of global resources (hence liberalization), based on the underlying assumptions, particularly those of fully employed resources, diminishing returns, perfect information and competition and instantaneous production. But these analyses of regional trade agreements in the context of comparative advantage, which have been extensively propagated for over a quarter of a century, were not able to prove that they lead to an overall improvement in the welfare of developing countries. And this is the legacy of the colonial division of labor which maintains the vertical dependence of developing countries on the North. 2

2.2. Policy-initiated South-South trade integration As of July 2007, there are about 380 trade agreements, including PTAs, notified to the WTO regardless of whether they are bilateral, sub-regional or regional (UNCTAD, 2008). Currently Africa alone has 14 intraregional trade agreements, largely overlapping (Oliva, M. 2008). Of the 53 African states only six belong to a single regional economic community; 26 to two; another 20 to three and one to four. Considering East Africa alone there are a number of multiple and overlapping trade agreements. As shown in Figure 1, for instance, Tanzania is at the same time a member of the EAC and SADC, where as other EAC members, Kenya and Uganda are COMESA members but not of SADC. Tanzania is also a member of the Indian Ocean Rim (IOR), while Uganda is a member of the Organization of Islamic Countries OIC). Moreover, EAC members are also members of the Cross Boarder Initiative (CBI) group. Only Ethiopia is a member of a single regional economic bloc COMESA. The driving force behind this sudden acceleration may have been due to the slow progress in the multilateral trade negotiations in the previous Uruguay (1986-1994) and the current Doha round which led more countries to pursue Regional trade agreements in order to promote trade through trade liberalization. It seems that the current multilateral negotiations demand a much larger number of countries to reach consensus than was the case under the GATT. Consequently many countries find it more reasonable and/or beneficial to pursue the bilateral/regional Regional trade agreements, which can be concluded with a more limited number of counterparts, in a relatively shorter period of time and at less cost. Also, the shift of the United States toward Regional trade agreements might have spurred others to follow suit. 3

Fig. 1: Partial portray of East African economic cooperation galaxy ECCAS SADC EAC Tanzania Burundi Rwanda Kenya Uganda Sudan IGAD Somalia COMESA Ethiopia However, though currently not a major barrier, such overlapping intraregional membership status may, in the future, create some constraint with respect to satisfying commitments to (regulations of) different regional blocs. Such overlapping membership may involve challenges such as weak implementation of commitments, incompatibility of agreed trading schemes, duplication of efforts, and lack of transparency, credibility and predictability of the trade regime in place. The initial objective of such a grouping is to expand trade among members of a group. Over the past decade and a half, the share of intraregional trade in total trade of regional blocs has been increasing, though not significantly. For instance, intraregional trade in Latin America accounted for about 25 percent, in Africa for about 10 percent, and in East and South-East Asia for more than 40 percent of total trade (UNCTAD, p93, 2007). The latter, however, is largely due to Japan, China and South Korea that are not members of 4

any regional group. However, intraregional trade significantly varies for different groups and countries within a group. In the case of Africa, for instance, between 2000 and 2006, intraregional trade of some groups such as SADC, UEMOA and ECOWAS was between 7 to 10 percent; for COMESA it was about 5 percent; and for CEMAC, less than 2 percent (Ibid, p95). Moreover, these figures conceal wide differences in the share of trade among countries within each group. South-South trade has been increasing over time. As shown in Table 1, in 2005, South- South exports (row wise) amounted to about $ 1699.7 billion, and accounted for about 45.7 percent of total developing countries exports. But this is largely due to the Asian factor. South-South trade varies across regions. In the case of developing Asia, just over half (51 percent) of its exports went to the South; as for Africa and developing Americas, exports to the South accounted for 30 and 27 percent of their total exports, respectively. Table 1: South-South exports 2005 ($ billion) Export/import South South Trade Total export Asia Africa Americas Total to World Asia 1343 56.1 61.4 1460.5 2863.7 Africa 50.21 27.13 9.3 86.64 288.8 Americas 48.9 9.4 94.27 152.57 565.2 Total 1442.11 92.63 164.97 16.71 3717.7 Source: UNCTAD, South-South trade in Asia, 2008, p2. Of the total South-South export, Asia accounted for about 85 percent while the remaining smaller proportion accrued to L. America and Africa with a respective share of 10 and 5 percent. In 2005 Asia received 58 percent of South-South exports from Africa, and 32 percent from the Americas. Trade between Africa and the America s only accounted for a minor share (just over 1 percent) of total South-South export. Hence, with Asia accounting for the largest shares of South-South exports and imports, South-South geographical trade 5

flows exhibits a hub-and-spoke pattern with Asia being an incontestably most important trade hub among developing countries. Also, the bulk of South-South trade occurs among countries within the same region Asia. Intra-Asian South-South exports in the same year amounted to $1.3 trillion, which is 79 percent of total South-South trade exports. This amount is also equivalent to 47 percent of its total export and 92 percent of its export to developing countries. Similarly, intraregional trade in L. America accounted for 16.7 percent of total exports or 61.7 percent of South-South exports of the region. In Africa, intraregional trade is least developed accounting in the same year for only 9.4 percent of the region s total export or 31.3 percent of exports to developing countries, largely to Asia. Therefore, intraregional trade variation across regions is a reflection of the level of economic development. Similar to the case for a single economy, the higher the level of economic development of a region, the higher is the intensity of intraregional trade. Hence, despite the proliferation of intraregional trade agreements in Africa, no corresponding level of trade has been recorded. This implies that while policy-driven trade agreements may increase trade among members, it may not significantly do so on its own. Trade agreements per se, whether bilateral or plurilateral, do not automatically lead to increased trade among the parties. A static view of the effects of intraregional agreements could be misleading. 2.3. Opportunities and challenges of trade integration in East Africa Sharing same geographical location and closer historical and cultural ties create additional potential advantages to strengthen trade relations among neighboring countries. Of course, according to conventional economic analyses, based on its underlying assumptions, particularly those of fully employed resources, diminishing returns and perfect competition, countries can be modeled as dimensionless points, where factors of production are instantly moved without costs, geographical, historical and cultural factors bear little relevance to trade relations among countries. However, in the 6

real world where increasing returns, external economies and variable transaction costs associated with transportation and tariff barriers, proximity does provide some real economic advantages, such as (transaction) cost savings, availability of specialized inputs (both capital and intermediate goods) and skills, tacit knowledge which is built up (and disseminated) through repeated interaction and spillover of various kinds. It is also a fact that most countries trade relatively more with their neighbors than with more distant trading partners, of similar socio-economic development level. At the national level, the influence of historical and geographical forces leads to a home bias, which shows that national boarders continue to exert a strong hold on the location of economic activity (Rose, A. and Engel, C., 2002). 1 As those relations extend abroad, there is a strong neighborhood bias. On another level, the influence of historical and geographical forces is manifested through the variety and mixture of institutional responses, including by the state, consistent with growing cross-boarder exchanges or increasing economic interdependence (Greenway, D. and Milner, C., 2002). 2 Form this perspective, not only because of the advantages of proximity but also because of communities having similar cultural and linguistic ties residing on both sides of the borders, the prospect of greater trade relations and eventual economic integration between Ethiopia and its neighboring countries, such as Sudan, Kenya, etc, is, in the distant future, inevitable. However, as noted in the preceding section, and similar to all other developing economies, East African countries at their existing stage of economic development, 3 encounter formidable challenges that tend to limit the extent of trade among themselves. 1 Quoted in UNCTAD 2007. 2 Quoted in UNCTAD 2007. 3 It is also important to recognize the critical role of peace in the region for trade flows. 7

3. Economic Structure and Market Networks 3.1. Economic structure The volume of trade of an economy at a given period of time, as noted above, could be determined by many factors, at the center of which is, however, the overall level of development or industrialization. This can be partly captured by the per capita income and prevailing economic structure. Table 2: Economic structure of East African countries (% of GDP) Ethiopia Kenya Sudan Tanzania Uganda Agriculture 42.0 16 39 45 32 Industry 11.0 20 18 16 21 Mining Manufacturing 0.6 3.1* 14 9 7 9 Services 47.0 65+ 43 39 46 Trade Other services 12.0** 35.0 Source: World Bank, World Development Indicator; National Bank of Ethiopia, Vol. 23, No 3, 2007/08; * manufacturing employing more than 10 workers and operating with some form of machinery ** includes both domestic and external trade + Impact of of Kenya s Tourism Sector Table 2 reflects the economic structure of Ethiopia and neighboring countries. The majority share of traditional agriculture (including handicrafts and other traditional services (though not indicated in the Table due to lack of data) for all economies, except Kenya whose structure is heavily influenced by tourism and relatively better industrial capacity, indicates the prevalence of an agrarian economy. In the case of Ethiopia oer 40 percent of the national income is generated in the rural areas, where the dominant activity is agriculture, mainly, farming and livestock breeding. In fact, traditional activities, i.e, activities employing unskilled manual labor, which also prevail in many other sectors outside agriculture, account for a considerable share of the national income. As a result 8

modern real sectors, mining and manufacturing, account for a marginal share of GDP 0.6 and 3.1 percent respectively. Hence, the role of the modern sector, in merchandize export is inevitably insignificant (see also section on Trade Flows). This also holds for other countries listed in the Table, with the exception of Kenya, to some extent. Moreover, as shown in Table 3, per capita incomes of all countries are quite low most of them much below US $1000. Hence, their capacity to import in general is highly limited. These facts imply, not only that the volume of trade would inevitably be quite small, but also as a country exports what it produces, exports would be dominated by agricultural commodities and imports by manufactures. This defines, to a large extent, the trade relationship that would exist among these countries for long time to come. 3.2. Potential market size The size of a country s population matters to trade and investment. Other things being equal the larger the population, the larger the market size. With about 79 million consumers in 2007, Ethiopia creates one of the largest domestic markets in Africa (Table 3). Among its East African neighbors, its population is nearly double of the next largest population, Tanzania, with a total of about 40.4 millions. Ethiopia, Kenya, Sudan, Tanzania and Uganda together constitute quite a large market potential with a total of about 227 million consumers, which is about one-fourth of total African population. Table 3: Market size indicators (2007) Indicators Ethiopia Kenya Sudan Tanzania Uganda Total Population (millions) 79.1 37.53 38.56 40.43 30.93 226.55 GDP ($ billions) 19.39 29.51 47.63 16.18 11.21 123.92 Per capita income 245 786 1235 400 362 547 (GDP $) Poverty head count ratio (% of population) 44.2* --- --- ---- 33.8* ---- Source: World Development Indicators database, September 2008 * for 2000 9

But admittedly, this is a neighborhood with a highly limited purchasing power. In these countries the majority of the population earn their livelihood from less monetized subsistence sector. In Ethiopia about 84 percent of the population lives on subsistence agriculture. As shown in Table 1, the per capita incomes (GDP) of even the relatively better-off countries, Sudan and Kenya, are only $1235 and $786 respectively quite low by any standard. Ethiopia with a per capita income of only $245 is the poorest. Moreover, income distribution is highly skewed. 4 Where as a relatively large potential market size exists, much has to be done to realize it in practice. 3.3. Creating market access opportunities 3.3.1. Market liberalization: The structural adjustment program which has been extensively practiced by African countries since the second half of the 1980s, mainly forced these East African countries to open up their economy for external trade. The economic reform program launched in Ethiopia in the early 1990s has gone a considerable distance towards building a market economy. A major emphasis of the liberalization measure was on external trade, exchange rate, and reinstating private actors into the modern sector of the economy lifting investment barriers and privatization. Accordingly significant reduction in tariff rates, and removal of some non-tariff barriers, deep devaluation of the domestic currency (Birr), opening up the financial sector for domestic private investment, and privatization programs were initiated. Over the years, most East African countries have shown significant improvement in customs procedures, investment codes, etc. Such liberalization measures, therefore, have already created a better conducive environment for trade than had been before, though much more need to be done in these countries, particularly in Ethiopia and Sudan 3.3.2. Market infrastructure physical access: A growing literature has gathered empirical evidence of the negative impact of trade costs on a country s trade performance. High trade costs adversely affect the competitiveness of exports and lower 4 For Ethiopia and Uganda for which data is available head poverty count in 2000 were as high as 44 and 33 percent respectively. In terms of poverty alleviation very little improvement has been recorded in Ethiopia since then. 10

consumer welfare of importing countries as they increase the price of imported goods. Transport cost is one of major trade costs that limit trade competitiveness. Obviously, transport costs rise with distance, as each mile traveled requires additional fuel, manning and capital expense. A rough estimate of trade costs for industrial countries in 2004 figures 170 percent (in terms of ad-valorem equivalent), of which transport cost accounts for a 21 percent advalorem equivalent freight costs and time value (Anderson, E. and Wincoop, V. 2004). 5 Costs for developing countries would understandably be much higher than for advanced economies. For instance, SSA countries have the highest costs for both imports and exports about twice as high as in OECD countries (Portugal-Perez, A. et al, p5, 2008). Despite the contribution of technical improvements lowering trade costs, such as introduction of containerization in maritime transport, shipping costs from African countries to main world markets can be considerably higher compared to other regions. Indeed, maritime transport exhibit important economies of scale. Larger trade flows are conducive to scale economies in shipping, thereby lowering transport costs. However, for small exporters, Africa for instance, shipping costs are relatively very high. A study estimates that doubling trade quantities leads to a 12 percent reduction in shipping cost (Hummels, D. and Skiba, A. 2004). 6 Moreover, the presumably low-value export from developing countries, especially from Africa, inflates transport costs to a container when expressed in ad-valorem terms, i.e. as a proportion of the value of exports. Hence, in light of the significance of transport costs, the recently completed Addis- Khartoum highway which now links to the already existing Addis-Nairobi (and further to Uganda and Tanzania) motorway creates a significant comparative advantage in terms of transport cost reduction and promoting intraregional trade among these East African neighbors. This is of particular interest for landlocked Ethiopia and Uganda. Expansion 5 Quoted in Portugal-Perez, et al, p4, 2008 6 Quoted in Portugal-Perez, et al, p6, 2008 11

of trade may further motivate this community to extend the railway running through the EAC member countries to Ethiopia and Sudan. It should also be noted that the proposed African highway network which links 83 major cities at a length of about 100,000 km would significantly reduce transport costs and increase intraregional trade three fold: from the current US $10 billion to about $30 billion per year, while initial investment costs would be moderate over the course of the investment cycle (Portugal-Perez, et al, p13, 2008). 3.3.3. Information and Communication infrastructure: The role of telecommunication as an essential instrument to facilitate international trade is widely acknowledged. Telecommunication service does more than just connecting people, business, or markets efficiently. It facilitates the transfer of technology and knowledge by expanding the range of tradable services and the ability to export those services. Modern means of telecommunication such as mobile, internet, etc, will enable trading partners to participate fully and efficiently in international trade, particularly if implemented by increased liberalization of cross-border supply of many electronically deliverable services. Number of mainlines, mobile telephone, internet access, and quality of operation are found to be important components of trade communication infrastructure and determinants of trade costs. It is now much easier and cheaper than ever before to obtain information on foreign market conditions, product standards, and consumer preferences. This should lower the costs of entering foreign markets, and promote trade at the margin. An empirical evidence estimates that a 10 percent increase in the number of a country s web hosts is associated with an export gain of around 0.2 percent (Freud and Weinhold, 2004). The internet also significantly reduces the fixed costs of market entry, such as obtaining information on product requirements or preferences. Ethiopia is one of the very few countries in Sub-Saharan Africa in which all telecommunications networks are operated by a state monopoly and virtually all telecommunications services are provided by the same. The state is the exclusive provider of local, domestic, and international voice services, cellular mobile, internet, and 12

telex and telegraph services. The only services opened to private operators so far are down stream services which include sale of customer premises equipment, the distribution of SIM cards, the installation and maintenance of outside plant, virtual internet services, call center services and the provisioning of Global Mobile Personal Communications by Satellite (Self, R. et al, 2007, p12). As a result, Ethiopia is not only least equipped with modern telecom technology and service provisions are quite rudimentary, prices too are quite high. While prices for fixed line local and national long distance telephone calls are kept low to make them affordable, prices for international calls and mobile calls, including high speed internet access are quite expensive (ibid, p13). Most countries, including neighboring Sudan, Kenya, Tanzania and Uganda have liberalized markets at least for cellular mobile and internet service provisions. Table 4: Access to telecommunication services Indicators Ethiopia Kenya Sudan Tanzania Uganda Fixed line and mobile phone 3 31 20 21 14 subscribers (per 100 people) Internet users (per 100 people) 0.4 8 9.9 1 6.5 Source: World Bank, World Development Indicators database, September 2008 Still, however, telecommunication services in East African countries are, in general, poor, and in Ethiopia, in particular, very rudimentary. As shown in Table 4, In Kenya, where service delivery is relatively better, only one-third of the population has fixed or mobile telephone; In Sudan and Tanzania, the corresponding figure is only one-fourth. In Ethiopia it is not better than nothing. Internet access is less than 10 percent in Kenya and Sudan. In Ethiopia, it is indeed appalling. Obviously, these countries are not benefiting from the significant cost reduction that could have been gained from a better infrastructure access. 13

4. The Trade Policy Regimes in Ethiopia 4.1. Trade agreements 4.1.1. Bilateral trade agreements: Ethiopia has made preferential trade agreements with a number of countries. Under the various Generalized System of Preferences schemes (GSP), Ethiopia is one of the beneficiaries of preferential trade access for a wide spectrum of commodities from a number of advanced countries, including, among others, Australia, Canada, the European Union (EU), Japan, Norway, and the United States of America (USA). 7 While such preferential trade access is quite beneficial, there is a need to compete with all the beneficiaries (over 200 developing countries) for such markets. In other words, the GSP system is not an exclusive offer; both developing and least developed countries, including all East African countries, are beneficiaries of the system. The two most important preferential market accesses that Ethiopia currently enjoys are the EBA and AGOA. Being a least developed economy, Ethiopia is one of the 42 LDCs currently benefiting from the full quota and duty free privilege to the EU market. As shown in Table 5, except Kenya, which is not categorized as a least developed economy, all other neighboring countries in East Africa are beneficiaries of the EBA scheme. Given Ethiopia s relative proximity and the large size of the EU market, the EBA is, perhaps, the most important foreign market for its exports. Table 5: Eligibility for EU and USA GSP schemes. EU USA GSP LDCs EBA AGOA Ethiopia Kenya Sudan Tanzania Uganda Source: www.unctad.org/gsp; Victor, 2008. 7 See WWW.UNCTAD.ORG/GSP 14

African Growth Opportunity Act (AGOA) is the other major quota and duty free privilege granted to exports from SSA countries to the US market. It is considered as an improvement over the pre-existing GSP scheme as it focuses only on SSA and the number of products eligible for quota and duty free treatment is significantly higher. Ethiopia is currently among the 36 SSA countries having access to AGOA. Ethiopia also have additional preferential access opportunities to other markets. It is one of the 48 LDCs granted quota and duty free export of a large number of commodities to Canada. Similarly, Japan, Australia and China have granted Ethiopia preferential export access for a large basket of goods. It should, however, be noted that quota and duty free market access, despite its undeniable demand side advantage, has little to do with the supply side issues. Witness the lack of capacity of Ethiopia in the past to exploit the largest and richest markets of the EU and the USA despite the opportunities made available under EBA and AGOA schemes. Ethiopia and Sudan have also agreed to conduct trade on a duty free basis for all industrial and agricultural goods originating from the respective countries. 8 it should, however be noted that while Sudan is a member of COMESA FTA, Ethiopia is not. As such while Sudan will face no problem of inconsistency from this action from COMESA members, Ethiopia might be under pressure to respect the COMESA MFN provisions, i.e., grant same treatment to similar goods imported from all COMESA member countries, including the EAC. 4.1.2. Forthcoming economic partnership agreement with the EU: In the context of wanting to put in place WTO consistent agreement when the Cotonu agreement with the ACP countries expired, the EU designed the EPA in 2007 to define an interim agreement with separate regional blocs of African countries that focus primarily on the principle of 8 The COMESA rule of origin is to serve for identifying the origin of the goods traded. 15

reciprocity in line with GATT Article XXIV. 9 However, as the original EU proposed blocs for the negotiation is not holding (at least for the interim agreement), a number of African countries signed interim agreements either collectively (as with the EAC) or individually. While some other countries, including Ethiopia, are expected to sign in the foreseeable future, still others such as Senegal and Nigeria have been critical of the interim agreement and have expressed reluctance to signing it, on the ground that such isolated agreement goes against the mutual interest of African countries (Brenton, P, et al. 2008) It is perhaps unlikely that Ethiopia would join those countries reluctance to sign the Agreement. For one thing, the EU is Ethiopia s major export market, at least to date, though this is fast changing; for another the Agreement may have some development element (financial and technical support), perhaps in the form of aid for trade. Moreover, there is no guarantee that EBA would continue indefinitely. Now that many least developed countries are joining the WTO and preferences are diminishing because of further liberalization measures, it is likely that EBA could phase out in a reasonably short period of time, thereby reducing Ethiopia s market access opportunities, though this may not be a strong constraint after it joined the WTO. It should however, be underlined that EPA would not avail any additional market access privilege than what already exists the EBA. In fact, it carries some costs as reciprocity, at least theoretically, implies loosing the now available policy space for Ethiopia to protect its faltering industries that rely only on the domestic market. As a number of African countries have already signed the interim agreement, both Ethiopia and Sudan have the late comer advantage of capitalizing on those agreements to maximize their respective specific interest individually. Perhaps, what would have been more advantageous for Africa was to negotiate EPA as a single regional bloc, at least on the general framework, and individually or as a sub-group on commodity specific issues. 9 It requires that the parties to a free trade agreement remove tariffs on substantially all trade (interpreted by the EU to mean 80% of mutual trade) within a reasonable timetable (Brenton, P. et al, 2008) 16

4.1.3. Regional and multilateral agreements COMESA is one of the largest regional blocs in Africa for preferential trade and eventual economic integration. Currently it has 20 members, 15 of which, including Sudan, Kenya and Uganda, are COMESA FTA members, 10 while the rest are still pondering on available options. By virtue of its membership to the COMESA market, Ethiopia has the opportunity to export to these countries. However, to date, it has offered only a 10 percent tariff reduction on its MFN rate for goods imported from COMESA members; hence not yet eligible for FTA membership. It is reported that the government is contemplating of taking measures such as significant reduction in the tariff level for goods originating from COMESA countries. The WTO forum: Ethiopia submitted to the WTO its memorandum of the foreign trade regime in 2006 and is currently negotiating with the working party established to investigate whether the country fulfils the requirements for accession. 11 Accession is a lengthy process that scans over wide socio-economic areas, as such will take some time perhaps not less than three years from now to wind up. Negotiations include issues on other trade relations, such as, for instance, EU-ACP and COMESA agreements. In this context, according to GATT Article XXIV, Ethiopia has to make explicit when to join the COMESA FTA. Terms and conditions of regional agreements have to be consistent with the relevant WTO rules and regulations. Many studies have shown that from the perspective of trade, Ethiopia has little to benefit from joining the WTO in the short to medium term. 12 In fact despite the various privileges granted to the LDCs, Ethiopia may face, as did others, various economic hardships, primarily due to the loss of policy space to mange the economy. Hence, the multilateral trade relationship/agreement is not expected to improve the export 10 Tanzania has left COMESA and joined SADC. 11 Sudan too is not yet a member of WTO. However, all members of the EAC bloc have been WTO members since 1995. 12 See, for instance, World Bank, 2003, and Bienen, D. et al, (ed), 2005. 17

performance of Ethiopia in the foreseeable future. Perhaps, a major return for prescribing to all demands of International institutions, such as the IMF, WB, WTO, etc, is, as always, generous aid. 4.2. Export trade incentive schemes The external trade strategy of the 1970s, which heavily focused on import substitution at the expense of export promotion, and the recent (1980s & 1990s) wholesale market liberalization model, expected to improve current account deficits by boosting exports, both stopped short of developing sustainable balance of payments position in developing economies. 13 Despite the politically motivated debt cancellation by advanced countries, the debt-burden still remains of great concern for developing countries in general and least developed ones in particular. After years of liberalization experience, Ethiopia s trade deficit today is higher than ever. So is its indebtedness. Despite this, however, export earnings have been on average, increasing. The export trade policy focused not only on removing export duties and taxes but also introducing incentives. 4.2.1. Abolishing duties on exports: Primarily, duties on all exports, other than raw hides and skins, are now removed. As for raw hides and skins, the total ban which had been imposed is recently replaced by export duty. It is all meant to encourage local processing, which has the advantage of not only moving to a higher value added manufacturing leather tanning, but also encouraging footwear and other leather products activities. A number of across the board export incentives meant to encourage and enhance the competitive status of exports in the country are in place. Among these the following are the major ones. 4.2.2. Export guarantee credit scheme: This is a financial credit support system to the export sector for pre and post shipments. Government guarantee protects banks credit in 13 It is recalled that the East Asian successful external trade strategy focused on the complementarities of import substitution and export promotion, hence an integrated approach. 18

case of default, thereby encouraging banks to extend credits for the sector on priority basis. Guarantees are provided for a maximum of 180 days. The credit is equivalent to the total value of the previous year export proceeds without any collateral requirement for existing exporters and with 20%, and 30% collateral for new producer exporters and new exporters respectively (Bienen, D. et al, 2005). The export credit scheme may, however, encounter some resistance from members in the WTO negotiations, and may also be in the EPA negotiation. In line with the spirit of GATT/WTO rules, many member countries, in the WTO negotiations, tend to control the tendency of accessing countries to circumvent, in on way or another, the rules against export subsidies. Currently, two approaches seem to have emerged: one is rule based. Export credit and insurance would have to be on commercial terms which would be defined according to criteria, such as duration of credit, benchmarks for interest rates, etc. Anything else would be classified as export subsidies and would have to be reduced or eliminated. The alternative is to treat such schemes as credits, insurance and credit guarantees as regular credit subsidies and, as such, to have reduction commitments by calculating the subsidy component (Beinen, D. et al, 2005). 4.2.3. Export trade duty incentive scheme: The scheme is meant to enable exporters to have access to inputs at world market prices, implying that local import duties and taxes are relatively higher than other countries, mainly advanced and newly industrializing countries, so that they will be able to compete on equal footing with their competitors. It has three components: (i) Duty drawback scheme: Exporters are refunded 100 percent of the duty paid on raw materials used in the production of commodities upon exportation of the commodity processed. And the duty includes all indirect taxes and duties paid on raw materials and semi-processed commodities imported and produced locally. (ii) Voucher scheme: A voucher is a document having monetary value prepared by the Ministry of Finance and Economic Development to be used as deposits for duties and taxes payable on imported raw materials. The voucher is issued by the 19

Customs Authority equal in the amount of taxes and duties payable on raw materials upon request of eligible exporters. (iii) Bonded manufacturing warehouse scheme: The beneficiaries of this scheme are producers wholly engaged in exporting their products and who are not eligible to use the voucher scheme. However, despite the intention to promote exports using incentives, these schemes are virtually inactive because of administrative bottlenecks and some opaque operational rules. Exporters of manufactured goods are currently relying largely on an import voucher scheme to obtain duty exemption on imported input (Kune, B. et al, 2004). These Export Trade Incentive Schemes allow for drawback of payments, according to which the duties and taxes collected on imports incorporated in the manufacturing of an exported product can be refunded to the manufacturer/exporter. Generally in the agreements containing a Free Trade Area (FTA), concluded with the EU, the community requested the non-application of this option for bilateral trade, for the drawback option gives an advantage to the partner s producers (DTIS, 2003). The idea is to force countries to move to tariff reduction on imported inputs, which of course is more beneficial to external exporters. 4.2.4. Foreign credit scheme: Suppliers or foreign partners credit is an interim financing provided by suppliers or foreign partners, largely for short term, but which could as well be for medium-to long-term. Foreign credit should be registered and authorized by the NBE. These credits can be used to finance capital goods, raw materials, semi-finished goods, spare parts, and other inputs that may be used for the production of exportable goods. Foreign credits are to be paid from the export proceeds of the project or transaction financed by the credit (from exporters retention account), but not from the NBE. 4.2.5. Other export oriented support services: An Agency, the Ethiopian Export Promotion Agency (EEPA) has been established to provide additional export oriented 20

support services. Such services may include, conducting market research and disseminating market information, and facilitating participation of exporters in trade affairs, exhibitions and trade missions. However, the only market service that the Agency managed to provide the exporters with, is the publication of a bi-monthly news letter Trade Point, which lists few addresses of importers and exporters and itemizes certain tradable goods (World Bank, 2003). Moreover, commercial attaches in foreign diplomatic missions are also attempting to gather information about trade fairs, facilitating trade missions, organizing discussions among business communities, etc, though with little tangible impact. In general, such across the board incentive schemes are not meant to develop a specific comparative advantage (commodity, activity, etc). As such, benefits or gains from these incentives, in terms of competitiveness, can hardly be drawn for any specific export sector. Hence it is a blunt instrument only meant to create a locally positive attitude towards exports. 4.3. The tariff regimes At the center of an external trade policy and also a prime obsession of international organization, is the tariff regime of a country. Reducing tariffs to the bare minimum and eventual elimination (zero tariff) is regarded as a panacea for all distortions to and weaknesses of external trade. 4.3.1. Tariff structures: Following the structural adjustment program spearheaded by the IMF and the Bank, a number of African countries, including Ethiopia and its neighboring countries have undertaken a comprehensive trade reform program aimed at dismantling quantitative restrictions and gradually reducing the level and dispersion of the tariff rates. Ethiopia has substantially reduced tariff rates across the board. The negative list used to determine eligibility for imports through the foreign exchange access was reduced significantly. Currently, quantitative import restrictions are applied only to used clothes, harmful drugs and armaments for security reasons (DTIS, Vol 3, P20). Both tariff levels 21

and dispersions have been reduced significantly under tariff reforms. Specific tariffs have been converted into ad valorem equivalents. There are no preferential (zero tariff) offers, except to Sudan. For imports from COMESA members, a marginal, 10 percent, reduction of the MFN rates apply. Table 6 provides a summary of MFN applied rates during 2007 in Ethiopia, Sudan and the EAC members. 14 The EAC has relatively the lowest average (simple average) tariff rate than Ethiopia and Sudan. In the latter two, the averages exceed by 25 and 58 percent respectively. The low average rate in the EAC is mainly due to the relatively high proportion of the duty free rates (36.6 percent) in the total tariff lines. Table 6: Summary of MFN applied tariffs rates (2007) Country AVG DF (%) MAX D>15% CV No TL Ethiopia 16.8 4.0 35 46.5 69 5580 EAC 12.7 36.6 100 40.8 93 5429 Sudan* 20.1 6.5 40 51.9 74 5462 Source: WTO/UNCTAD, World Tariff Profile, 2008 * For 2006 However, unlike Ethiopia and Sudan, the EAC imposes protective rates, as high as 100 percent, on some commodities. Protective rates on sensitive products is complicated. The CET exemptions schedule applies to a large number of products (56) and 8 different rates are applicable: 35, 40, 45, 50, 55, 60, 75, and 100 percent. The top rate of 100 percent applies to most varieties of sugar; high rates also apply to rice (75 percent), wheat (60 percent), milk and various milk products (60 percent) and maize (50 percent) (Victor Ogalo, 2008). This is also shown in Table 7, which portrays summary of the MFN applied rates by product group for the same countries. Some commodities in product groups, such as Dairy products, cereals, sugar and sugar confectionary, minerals and metals, textile, closing, and manufactures n.e.s. bear 60 to 100 percent duty rates. 14 The data for Sudan refers to 2006 22

Ethiopia and Sudan also imposes high rates (close to and/or the maximum rates, i.e., 35 and 40 percent respectively) on some product groups including dairy products, coffee & tea, beverages and tobacco, closing, etc. Sudan s rate is also high for animal products, fruit & vegetables, and fish & fish products. Hence, though the degree varies, all countries attempt to protect products in activities where they seem to have some natural resource advantage either for welfare reason or because not yet competitive enough to stand up to external pressure, i.e., imports. As a result of the high rate of protection on the one hand, and a large proportion of the tariff lines being duty free, on the other, the dispersion rate in the EAC, as indicated by the coefficient of variation, is relatively high, about 93 (Table 6). Variability of dispersion of tariff rates is associated with inefficiencies and large dead weight losses. Uniform tariff schemes, by contrast tend to be more transparent, simple to administer and more immune to interest group pressures. Hence, on these accounts, the EAC tariff structure could be regarded as relatively more distortive. But note that the degree of protection observed above is by no means high compared to that maintained by well developed economies, such as the EU for instance where the maximum duty rate is as high as 231 percent with a coefficient of variation of 192 (WTO/UNCTAD, 2008). 23

Table 7: MFN applied duties by product group Ethiopia EAC Sudan AVG DF Max AVG DF Max AVG DF Max Product group (%) (%) (%) Animal products 11.2 0.0 30 23.7 5.4 25 36.0 3.2 40 Dairy Products 27.5 0.0 30 39.0 0.0 60 38.9 0.0 40 Fruit, vegetable, plants 14.9 5.8 30 21.4 10.2 25 35.3 1.6 40 Coffee, tea 28.8 0.0 35 19.6 16.7 25 28.8 0.0 40 Cereals and preparations 20.9 0.0 35 21.6 7.0 60 24.6 7.6 40 Oilseeds, fats & oils 16.1 10.4 30 11.6 21.7 25 27.1 0.0 40 Sugar and confectionery 8.8 0.0 35 32.2 0.0 100 23.5 0.0 40 Beverages & tobacco 32.2 0.0 35 25.1 0.0 35 39.7 0.0 40 Cotton 10.0 0.0 10 0.0 100 0 25.0 0.0 25 Other agricultural products 15.2 7.7 30 9.8 43.1 25 23.5 1.7 40 Fish and fish products 12.9 0.0 30 24.5 0.0 25 38.9 0.0 40 Minerals and metals 13.3 3.6 35 10.8 34.4 55 21.8 0.1 40 Petroleum 7.7 13.3 10 5.2 53.3 25 9.4 5.7 10 Chemicals 10.8 1.2 35 4.0 77.5 25 8.1 0.1 40 Wood, paper, etc 12.0 18.1 35 16.7 23.9 25 22.5 2.6 40 Textile 28.2 0.2 35 19.7 7.2 50 21.84 0.9 40 Closing 35.0 0.0 35 25.2 0.0 50 40.0 0.0 40 Leather, footwear, etc 21.3 2.1 35 12.8 20.3 25 26.1 0.0 40 Non-electrical machinery 8.1 4.1 30 3.3 74.8 25 7.6 46.7 40 Electrical machinery 17.9 2.5 30 11.2 31.3 35 16.0 1.7 40 Transport equipment 11.3 36.5 35 6.7 58.2 25 12.3 14.5 40 Manufactures, n.e.s 23.1 2.4 35 15.4 27.0 50 21.6 10.0 40 Source: WTO/UNCTAD, World Tariff Profile, 2008 The tariff structure can further be investigated using Table 8, which depicts the frequency distribution of the tariff lines over the MFN tariff rates. In the case of Ethiopia, both for agricultural and non-agricultural products, just over 50 percent of the tariff lines fall below the 10 percent duty rate, while the balance fall under the 15 to 35 percent duty rate. As it stands, the tariff lines for both agriculture and non-agriculture, are nevertheless 24

evenly distributed across the tariff rates with a margin towards the lower end of the tariff bracket. Table 8: Frequency distribution Country Sector 0 0<5 5<10 15<25 25<50 50<100 NAV Agriculture 4.3 12.8 37.7 11.1 33.8 0.0 0.3 Ethiopia Non-agriculture 3.9 26.2 23.0 18.5 28.3 0.0 0.1 Agriculture 28.3 0.0 17.0 62.5 0.6 1.7 1.2 EAC Non-agriculture 16.9 0.0 23.3 36.6 0.4 0.0 0.1 Agriculture 2.1 5.3 8.2 27.2 56.9 0.0 0.3 Sudan Non-agriculture 7.2 21.5 24.3 22.6 24.4 0.0 0.0 Source: WTO/UNCTAD, World Tariff Profile, 2008 The picture, however, is quite different for the EAC and Sudan. The EAC imposes relatively high duty rates on most agricultural commodities and low rate on nonagricultural products. In the case of the former about 65 percent of the tariff lines bear rates greater 15 percent, while a smaller proportion (about 45 percent) claim below 10 percent duty rate. It is quite the reverse when it comes to non-agricultural goods. Similarly, Sudan imposes relatively high rates (between 15 and 40 percent) on 85 percent of agricultural products, while non-agricultural products are evenly distributed across the tariff rates. This has some implication to trade among these countries: in general agricultural commodities are less traded than manufactures. And agriculture being relatively Ethiopia s only natural resource advantage, hence export, heavy tariffs in Sudan and Kenya on agricultural commodities implies relatively low trade with these economies, though this requires further investigation of the specific commodities and corresponding rates. In general the tariff rates in these neighboring countries are on the high side, particularly when compared to other countries. For instance, in 2007 the simple average of MFN 25

applied rates in major trading partners, such as China, the EU, Saudi Arabia and the USA are respectively 9.9, 5.2, 5.0 and 3.5. Obviously these significantly low rates are outcomes of industrialization, and developing countries may not be expected to lower their rates to this level. However, particularly Sudan and Ethiopia may be pressurized to lower their rates further, come EPA. 4.3.2. Para-tariffs (additional taxes): Apart from tariffs identified by the tariff structure, there are also other additional import taxes, so called para-tariffs, and surcharges introduced in many countries which could render tariff regimes less transparent and restrictive. In Ethiopia there is a 10 percent surtax levied on selected but a wide range of imports. It is primarily meant to generate additional revenue for unspecified period of time. Such additional surtaxes, as opposed to other taxes such as VAT and excise taxes imposed on both domestic and imported commodities may, in principle, distort prices and hence, resource allocation. In a way, it renders imports to be less competitive in the domestic market, hence acting as a protective mechanism and thereby restricting trade. However, in the case of Ethiopia the magnitude of surtaxes on imports is not large. For instance, in 2006/07 it was only about US $54 million, equivalent to 6 percent of total international trade tax revenue (NBE, 2007/08). 4.3.3. The rationale for minimum (zero) tariffs and tariff exemptions: In Ethiopia zero tariff applies largely for public sector imports, mainly transportation such as railway, air transport, vehicles for armed forces and related manufactured goods. Railway and air transport activities are the exclusive domains of the public sector. As can be seen from Table 9, over 24 percent of the tariff lines related to transportation are imported duty free. Other areas of application include wood and wood products (16.5 percent), which are largely less tradable, and chemicals (3.9 percent). The specific commodities in the latter group include some pharmaceuticals, fertilizer and petroleum. In all cases it is part of a mechanism to regulate prices. Duty free import for public sector use is also common in EAC member countries and Sudan (Tables 7 & 8). 26

Table 9: Share of duty free imports in each product category No Tariff categories HS classification 0% 5% 10% 20% 30% 35% 1 Live animals, fish & prots 0.0 11.6 74.7 2.5 11.1 0.0 2 Vegetable products 0.0 6.3 89.8 0.0 3.9 0.0 3 Foodstuffs 0.0 20.5 6.8 11.0 51.0 10.6 4 Mineral products 1.3 79.2 18.8 0.0 0.0 0.6 5 Chemical products 3.9 23.9 55.4 10.7 4.0 2.0 6 Plastics and rubber 1.8 42.5 14.9 22.6 10.4 7.7 7 Hides/skins, leather & prodts 0.0 1.1 18.4 21.8 17.2 41.4 8 Wood & wood products 16.5 13.9 43.3 16.5 6.1 3.9 9 Textiles 0.0 7.3 2.0 19.0 2.0 69.7 10 Footwear & headgears 2.4 2.4 2.4 12.2 24.4 56.1 11 Stones & glasses 2.0 9.2 16.3 45.1 5.2 22.2 12 Metals 1.1 34.8 21.5 28.4 4.3 9.8 13 Machinery 3.2 47.9 15.0 20.7 13.0 0.1 14 Transportation 24.2 11.4 27.3 14.4 9.8 12.9 15 Instruments/apparatus 0.4 26.8 1.6 19.3 50.0 2.0 16 Miscellaneous (luxury) items 3.5 1.2 6.4 21.4 40.5 27.2 Source: Ethiopian Customs Authority, 2008 As noted earlier, duty exemption in Ethiopia is meant to encourage investment and export. Such incentive schemes are also applied in EAC member countries and Sudan. The issue in this context is how effective such schemes would be in light of other important constraints involved in both investment and export. In both cases however there is a trade-off in terms of revenue forgone and its contribution to the high dispersion rate of the tariff structure. 4.3.4. Implicit import duty rates: Perhaps another indicator, though an indirect one, of the overall level of the rate of import duty is the implicit import duty rate, i.e, the proportion of total revenue from custom duty to the CIF value of imports. Table 10 shows implicit rates for Ethiopia. 15 15 Information for the EAC and Sudan not Available 27

Table 10: Implicit import duty rates (%) Ethiopia EAC Sudan 2003 9.6 2004 10.7 2005 7.6 2006 7.7 2007 7.0 Source: National Bank of Ethiopia, 2007/08; Ethiopian Customs Authority, 2008 An implicit duty rate closely corresponds to a trade weighted average tariff rate, rather than a simple average. Though there is no information on the dynamics of the trade weighted average tariff rates for the EAC and Sudan, in 2007 the rates were respectively 6.4 and 15.6 percent (WTO/UNCTAD, 2008). Hence, for the same year, the implicit rate for Ethiopia is nearly equal to that of Kenya s trade weighted average, which is quite moderate, while the average in Sudan is twice larger than the two. Moreover, the rate has been declining overtime, perhaps indicating the policy intention of further trimming the tariff rates downwards. In general, therefore, the tariff structure prevailing in Ethiopia and the EAC can hardly be regarded as prohibitive for expanding trade among these countries, at least, from the point of view of the level of tariffs. In the case of Sudan, however, the tariff rates call for further liberalization. But what should be underlined in this context is that trade policy of a country is primarily and mainly designed to serve the industrialization strategy in place and not just for its own sake. As such it should not be expected to be identical in all countries. As shown in the next section, trade among these neighbouring countries is, however, marginal. Hence the underlying factor for such low volume of trade lies not strictly in the tariff structure but in the structure of production, and hence export (see also sections below). 28

4.4. Non-tariff barriers Non-tariff barriers refer to non-monetary restrictions on trade. Such barriers are diverse and multiple. The commonly used ones are quantitative restrictions such as quotas and restrictive licensing requirements and procedures. However broadly defined, it also includes prohibitions to qualitative measures like technical specifications, or restrictions derived from poor physical infrastructure, lack of access to financing sources, price control and monopolistic measures, and other measures raising barriers to the free movement of goods and services. Non-tariff barriers are less transparent than tariff barriers and also more distortive and difficult to account for. In Africa non-tariff barriers are held as one of the culprits for the lack of development of intra-regional trade. A number of non-tariff restrictions prevail in Ethiopia and other East African countries, though in varying forms. In Ethiopia direct quantitative import restrictions are no more practiced except on few products such as used cloth, harmful drugs and armaments. However there are still in efficient rules for the issue of import permits, requirement to provide a clearance certificate from the central bank to obtain import permits, etc. Import of petroleum and tobacco, as well as tobacco export is public sector s monopoly. While certain enterprises are allowed to import cement on Franco Valuta basis only for their own enterprise consumption without obtaining an import license, others have to secure licenses for Franco-Valuta import for sale. Also, currently, as there are no private sugar producing enterprises, export of sugar is dominated by the public sector. In Kenya import quota is applied on sugar; delays due to road blocks for check up on merchandize for import-export is common; unfair additional demurrage charges on imports only after short time warehouse storage at ports is common (Victor, 2008). The latter two are also common in Tanzania and Uganda. Moreover, although many of the restrictions may not be clear cut policy-driven, in practice, in many LDCs casual and oral guidelines are often used to impose restrictions. For instance in Ethiopia importing cement is not allowed below a certain volume, which implies that a floor level to the required minimum capital is set to allow only few importers to practice oligopolistic status. Also an implicit pressure on exporters/importers 29

to use Ethiopian shipping lines cargo exists. Many other discouraging practices exist for instance in the case of fertilizer and sugar importing activities. Such restrictions, however, are not noted in regulatory documents. Therefore, it is obvious that inefficient practices in these countries tend to deter trade among themselves, as it makes both imports and exports less competitive (see also section on competitiveness). 5. Trade Flows 5.1. Export trade structure 5.1.1 Significance of regional export markets and of major trading partners Ethiopia s export is destined to a large number of markets. Over the last five years, 2003-2007, Ethiopia has been exporting regularly to over 65 countries, which have provided a sort of stable markets for its exports. Over the years, Ethiopia has also attempted to diversify its export destination across all regions. Figure 2, charts out regional export markets. Though exports are shipped to all regions, the EU (27) remains the most dominant market for Ethiopia. Figure 2: Regional export markets North America, 6.1 Africa, 14.0 Middle East, 16.3 Oceania, 0.3 Asia(E&S), 18.3 Other Europe, 9.1 Latin America, 0.1 EU, 35.8 Source: Annex Table 1a. 30

Of the total export, the EU accounts for over one-third (36 percent), followed by the emerging Asian market, with a share of half of the EU s 18 percent. The Middle East and Africa provide for another 16 and 14 percent of the export markets respectively. Though, over the last few years, growth of exports to the latter three have been relatively faster, the EU still remains Ethiopia s single most important regional export market. The degree of export skewness is also conspicuous when considered from the point of view of specific countries of destination. Over the same period, three countries alone: Germany, Japan and Saudi Arabia account for over one-fourth of total export; with additional four: Switzerland, Italy, China and United States (the seven countries) account for over half-of the total export markets (Figure 3). For long, Germany has been the single most dominant export market of Ethiopia. Figure 3: Ethiopia s major export markets 14 12 12.31 10 8.16 % 8 7.03 6.51 6.48 6 5.79 5.38 4 2 0 Germany Japan Saudi Switzerland Italy China USA Source: Annex Table 1a 31

A couple of points need to be underlined. All major export destinations belong to industrialized economies. Also to date, Africa is relatively less important as Ethiopia s export market. 16 As such, proximity on its own may not be a prime determinant of trade. 5.1.2. African markets share of Ethiopia s export: This can be more explained by focusing on Ethiopia s export to its neighbors and Africa at large. As noted above, over the five years period, Africa absorbed a relatively small proportion (14 percent) of Ethiopia s total merchandise export. In fact, even this small proportion is largely due to Djibouti and Somalia, which together account for 9.16 percent of total export. In the African context, these two bordering countries have a massive two-third share of Ethiopia s export to African markets (Figure 4). With Sudan included, the three neighboring countries have an overwhelming share of over 82 percent of Ethiopia s intraregional export. Figure 4: African markets share of Ethiopia s export (2003-2007) Others, 5.8 Uganda, 0.1 Egypt, 6.4 South Africa, 2.4 Djibouti, 36.8 Sudan, 17.0 Kenya, 2.2 Tanzania, 0.5 Somalia, 28.8 Source: Annex Table 1a 16 By implication it is also less important as a destination for African exports. 32

This is partly because of the comparative advantage in agricultural resource endowment that Ethiopia has over Djibouti and Somali, and to some extent Sudan. However, the importance of Djibouti and Somali as Ethiopia s largest export markets in Africa should not be over-exaggerated. In fact these countries are not only least developed but also very small economies with very low consumption capacity, and can hardly provide large markets for Ethiopia s export. What is actually happening is that these countries are directly re-exporting the export-capture from Ethiopia with literally no added value, and perhaps with less cost because of port advantage. The volume of export to these countries has been quite insignificant while Ethiopia had been using its own port Assab. Hence, today s apparent large volume of export to Djibouti and Somalia is a derivative of Ethiopia s dependence on Djibouti, and to some extent Somali, for sea ports, which created a lucrative business for these two countries re-exporting the exportcapture. In fact, in terms of both economy size and resources, Sudan and Kenya are by far more important than Djibouti and Somalia. For the last five years, Sudan had a share of about 2.37 percent of Ethiopia s export to the rest of the world, and 17 percent to Africa (Annex Table 1a; Figure 4). Primarily, this is due to the oil factor, i.e., Sudan s emergence as an oil exporting economy created more trade complementarities effect between the two countries. Perhaps, the recent free trade agreement and the new road-link across the boarder, along with the current favorable political-tie between the two governments, might have also helped the rise in Ethiopia s export. EAC member countries Kenya, Tanzania and Uganda however, have little importance as Ethiopia s export market. In the past, export to Tanzania and Uganda was literally nonexistent. Even the share of Kenya was a petty 2.2 percent of total export to Africa. This is so irrespective of the existence of the long serving rod-link and long-standing stable political and trade relationship between Ethiopia and Kenya; and also despite the advantage of proximity. 33

Moreover, apart from the small volume of goods shipped to the EAC (and also to Sudan), these countries don t seem to offer a stable market. For instance, in 2003, export to Tanzania was too small to consider and there was none to Uganda. In 2006, export to Kenya declined by 1.4 percent over the previous year (Table 11). Similarly, export to Sudan fell by 32.3 percent in 2005. Hence, over the years export to these economies has been subjected to large variations. Such a trend does not encourage trade integration. Table 11: Annual growth of Ethiopia s export to the EAC and Sudan (%) Country 2004 2005 2006 2007 Kenya 79.5 104.5-1.4 52.6 Sudan 118.3-32.3 62.5 162 Tanzania ---- 26.8-77.6-46.3 Uganda ----- - 76.1 362.5-92.3 Source: Annex Table 1a 5.1.3. Commodity composition of export to the EAC and Sudan: Another aspect of Ethiopia s export to the neighboring countries is the commodity composition. It is obvious that, by and large, the commodity structure of export depends on what a country produces, competitive or otherwise. Irrespective of countries of destination, Ethiopia s export is composed of largely raw agricultural commodities. Over the past five years major specific commodities exported to the EAC and Sudan include, live animals; edible vegetable, roots & tubers; vegetable products; coffee, tea and spices; cereals; pulses & oil seeds (Table 12). Literally, there is no product of manufactured goods only an insignificant proportion of aluminum scrap & waste, molasses, and footwear is shipped to the EAC and Sudan. Except relatively to Sudan, only a handful of commodities are exported to the EAC member countries. 34

Table 12: Import share of EAC and Sudan from Ethiopia by broad commodity groups 2003-07 (percent) HS Code Commodity description Kenya Sudan Tanzania Uganda 0101-0102 Live animals 11.7 0602-0604 Cut flower and ornamental foliage; 3.6 0703-07135 Edible vegetables, roots and tubers 4.8 44.6 52.9 0901-0902 Coffee (raw) & tea 10.1 15.0 80.6 0904-0910 Ginger, pepper, and other spices 10.7 10.0 1001-1008 Cereals 5.8 30.3 1201-1207 Oil seeds and pulses 2.3 14041-14049 Vegetable products, nes 65.0 4.1 3002 Vaccines for veterinary medicine 12.9 5.0 6402 Footwear 7.5 7602 Aluminum scraps and waste 2.8 All others 6.0 10.6 1.1 2.8 Total 100 100 100 100 Source: Based on data from Ethiopian Customs Authority, Softcopy release, October 2008 5.2. Import structure 5.2.1. Share of regional markets to Ethiopia s import: Over the same period (2003-07), Ethiopia imported goods worth $18.1 billion, on average, about $3.6 billion per year, increasing at a rate of 28 percent annually, though the rate sharply declined in the last two years (Figure 5; Annex Table 1). This rapid increase created a wide trade gap, to the tune of $13.9 billion for the period, equivalent to 77 percent of import. Hence the country s capacity of export has been able to finance only one-third of its import demand (Fig. 5). 35

Figure 5: Import growth and export capacity to finance imports (percent) 50.0 45.0 44.3 40.0 35.0 35.3 30.0 28.4 25.0 23.7 23.2 23.7 22.8 22.6 20.0 15.0 15.7 18.2 10.0 5.0 0.0 2003 2004 2005 2006 2007 Imort-financing capacity of export earning Import growth Source: Annex Tables 1a and 1b. By and large, a country s import origins closely correlate with its export destination. To some extent, this holds for Ethiopia too. Broadly, the regional structure of import remains the same to that of export. Similar, to the latter, East and South Asia, the EU and Middle East are the major markets for Ethiopia s import (Figure 6). These tree regions are the major trading partners to Ethiopia. However, unlike export, Asia is by far emerging as the most important market for imports; implying that the region is becoming exceedingly competitive, compared to earlier industrialized regions such as Europe and North America. As noted earlier, during the same period, while one-third of Ethiopia s export had been shipped to the EU, only a quarter (24 percent) of the import came from the same region. On the other hand, Asia, 36

which accounted for only 18 percent of Ethiopia s export, had a share of one-third of its total import. Emerging Asia is fast becoming dominant in the Ethiopian market (Fig. 6). Figure 6: Regional import structure North America, 7.7 Africa, 5.1 Middle East, 20.4 Asia(E&S), 34.2 Latin America, 1.8 Europe (other), 6.4 Oceania, 0.3 EU (27), 24.0 Source: Annex Table 1b Also, being relatively better industrialized, and with close proximity to East Africa; as well as promoting a free-trade-port policy regime, the Middle East is turning up to be one of the major contenders for Ethiopia s market (Figure 6). The same regional concentration is also revealed when considering imports by specific country of origin (Figure 7). Though major countries of Ethiopia s export destination, still remain to be major origins of import, a significant change is emerging with respect to their relative importance as Ethiopia s import market. 37

Figure 7: Import by specific country of origin 16 15.14 15.06 14 12 10 8 7.33 7.22 6.49 6 4 3.73 3.55 2 0 China Saudi Arabia United States India Italy Japan Germany Source: Annex Table 1b Unlike exports, not only that China had the largest share 15 percent of total import for the past five years, but India too, with a share of 7.2 percent, was one of the major four important contenders for the Ethiopian market. Together, the two large Asian economies, accounted for nearly one-quarter of Ethiopia s import. Given the recently emerging scenario, where imports from Asia are fast increasing; and noting that Ethiopia being beneficiary of GSP scheme from both economies; and also accounting for the rising South-South link to counter act the unfair terms of trade and long dominance of world trade and trade laws by advanced economies, the two Asian giants may soon turnout to be, not only of Ethiopia s, but also Africa s most dominant trading partners. The other single and most important trading partner, both for Ethiopia s export and import, is Saudi Arabia. Currently, with a share of 15 percent of import, it is the other (along with China) most dominant import market for Ethiopia (Figure 7). In addition to its geographical close proximity to Ethiopia, and considering its unique resource 38

endowment (oil) and relative industrial capacity on the one hand, and large agricultural import demand on the other, Saudi will continue to be a central market for Ethiopia. On the other hand, Germany, Ethiopia s largest export market, supplied only 3.5 percent of Ethiopia s import over the five years period. It should, however, be underlined that despite the apparent low share, it still maintains a positive trade balance with Ethiopia. 5.2.2. Imports form the EAC and Sudan: Ethiopia trades with most African countries, but only with about 20 countries regularly though at very low capacity or trade volume. Unlike export, Ethiopia imported from Africa a marginal proportion only 5 percent of total import, i.e, about $931 million over the 5 years period. As elsewhere, in Africa too, Ethiopia s major trading partners are relatively better industrialized and/or specific resource endowed economies. Accordingly, Africa s neighboring and relatively better-off economies, including Egypt, South Africa, Kenya, and Sudan (because of the oil factor) are the major suppliers to Ethiopia. Figure 8: Share of major African exports to Ethiopia (percent) Other Africa, 10.1 Tanzania, 0.8 Kenya, 15.6 Egypt, 33.1 South Africa, 17.4 Uganda, 0.6 Sudan, 22.4 Source: Annex Table 1b 39

These four countries supplied nearly 90 percent of Ethiopia s import from Africa (Figure 8). Despite proximity advantage, however, Ethiopia s import from Tanzania and Uganda was insignificant. 5.2.3. Commodity structure of import from Kenya and Sudan: A country s degree of industrialization and natural resource endowment influences the production, and resulting export-import structure. Ethiopia s lack of industrialization and dependence on agricultural resources inevitably demand mineral and manufactured products to be acquired through imports. As listed in Table 13, Ethiopia s import from Kenya constitutes largely manufactures. Most imports constitute simple and low technology manufactures such as flat and rolled iron and steel; bars, rods and other articles of iron and steel; chemicals for dying, fixing, etc, in leather, textile, paper, and other manufacturing processes; chemical products such as soaps, detergents, etc; pencils and ball pens; pharmaceutical products, etc. 17 Though some of these products are not produced locally, most imports were largely meant to make up for the domestic production shortfall. Import from Sudan is entirely dominated by a single commodity, petroleum and other oil products, which accounted for 83 percent of total (Table 13). In this regard, the single factor for trade creation is resource endowment rather than a difference in degree of industrialization or specialization between these two economies. To date, there is little trade creation outside this single product. To a small extent salt is imported but irregularly; and maize and sorghum was once imported during the 2003 drought in Ethiopia. Hence, goods either not produced locally, such as petroleum, other oil products, chemicals & some chemical products, or not produced in adequate quantity constitutes major imports from neighboring countries. Also, imported goods are largely simple manufactures, but not high tech products. 17 Cut flowers are for plant seeds and/or re-exporting, 40

Table 13: Major imported product groups from Kenya and Sudan-2003-07 Import Share (%) HS code Commodity category Kenya Sudan 0601-0604 Plants, bulbs, roots and the like; cut-flowers and ornamental foliage 12.0 1001-1007 Cereals (maize & sorghum) 3.6 1702-1704 Sugar and sugar confectionary 3.6 2402 Cigarettes 4.7 2501 Salt 7.4 2707-2712 Petroleum and other oil products 4.0 82.9 3002-3005 Pharmaceutical products 2.5 3401-3406 Soap, detergents, and the like 5.7 3805-3825 Miscellaneous chemical products for dying, fixing, etc 4.4 3901-3926 Plastic, rubber and articles thereof (not natural rubber) 2.6 2.2 4801-4826 Paper and paperboard; and articles thereof 3.7 7210-7216 Flat and rolled iron and steel; other bars and rods of iron & steel 11.4 7301-7326 Articles of iron and steel 3.1 7602-7616 Aluminum and articles thereof 7.3 8402-8485 Machinery & mechanical appliances; electrical equipment & 2.5 products 9602-9617 Miscellaneous manufactured articles; mainly pencil and ball pens. 17.2 All other products 15.3 4.3 Total 100 100 Source: Ethiopian Customs Authority, 2008 5.3. Ethiopia s trade balance with the EAC and Sudan In spite of the low capacity of trade between Ethiopia and the neighboring countries, the former incurred a trade deficit with all countries and for all years. As shown in Table 14, for the five years period, Ethiopia s trade deficit with Kenya, Sudan, Tanzania and Uganda figured 91, 52, 59 and 92 percent of imports respectively. The deficit, at least as a proportion of import, is significant. Ethiopia s export to each of these can hardly finance even half of the import demand from the respective countries. 41

Table 14: Ethiopia s Trade Balance with the EAC and Sudan ( 000 USD) Kenya Sudan Tanzania Uganda Export 12771.2 99349.0 2908.5 423.2 Import 145384.7 208312.8 7145.3 5602.4 Trade balance -132613.5-108963.8-4236.8-5179.2 Trade balance/import (%) 91.2 52.3 59.3 92.4 Source: Annex Tables 1a and 1b 6. Intensity of Trade Integration between Ethiopia and the EAC & Sudan A number of ways can be used to show the extent of Ethiopia s trade integration. In light of the prime importance of export in external trade, perhaps, the simplest way is to observe overtime the share of Ethiopia s export to the EAC and Sudan in total export. As shown in Figure 9, the share of Ethiopia s export to the EAC members was not only insignificant, but also stagnant and declining overtime. Figure 9: Share of Ethiopia s export to the EAC and Sudan 4.00 3.50 Sudan 3.00 2.50 Export share (%) 2.00 1.50 1.00 0.50 Kenya 0.00 Tanzania Uganda 2003 2004 2005 2006 2007 Source: Annex Table 1a 42

Relatively, export to Sudan, however, has been gaining momentum over a short period of time, though there was a sharp fall in 2005. In 2007, the value of export increased to an all time high 3.4 percent of total export. Hence from the point of view of Ethiopia s export interest, trade integration with Sudan seems promising. A more structured approach to investigate the intensity of trade integration is through the use of Trade Intensity Index (TII). The TII compares the relative importance of trade partners to a country vis a vis their importance to world trade. In the case of Ethiopia, for instance, the TII compares the share of Ethiopia s export to, say, Kenya or Sudan with the share of world export to these countries. It is defined as: TII = (X ij / X j ) / (X wj / X w ) where, X ij and X i are Country i s export to country j and country i s total export, where as X wj and X w are world s export to country j and total world s export respectively (Aminian, et al, 2008). Hence the numerator indicates the share of country i s export to country j in its total export, and the denominator shows the share of world s export to country j in its total export. If the bilateral intensity index has a value greater than one, then the export of country i outperforms or is relatively significant in country j, implying that country j is relatively important to country i s export. The bilateral Trade Intensity Index for Ethiopia, vis a vis Kenya and Sudan is shown in Table 15. 18 Accordingly, all the values of the indices (rows 1 & 2) are greater than one, except with Kenya in 2007. Hence in general, both countries are relatively important as Ethiopia s export markets. 19 18 There is little point to calculate the TII for Tanzania and Uganda due to the small volume of trade. 19 The application of the TII for developing and small economies involves some shortcomings. As such economies are less important for world trade, the denominator is obviously very low, making the index exaggeratedly high. Thus very low figures, even though greater than one, need to be interpreted cautiously. 43

Table 15: Bilateral Trade Intensity Indices 2003 2004 2005 2006 2007 Ethiopia Ken 3.3 4.4 5.7 4.7 0.5 Ethiopia Sud 39.0 54.5 17.3 25.5 59.7 Kenya Eth 32.1 24.1 18.7 30.8 22.5 Sudan Eth 19.5 10.1 13.5 26.4 5.4 Source: UNCTAD, Hand Book of Statistics, 2008; Annex Table 1. However, given the magnitude of the indices, Sudan was by far a more important market for Ethiopia than was Kenya, at least during the given period of analysis. The index with Sudan increased to a high value of about 60, in 2007, while with Kenya the comparable figure was 0.5, implying that Kenya was irrelevant as Ethiopia s export market. In fact in light of the weakness that the index involves (see footnote above) for developing countries, the low values of Ethiopia s TII with Kenya, not only in 2007 but even for all other years, indicates that Kenya was, as such, not much important for Ethiopia s export, at least in relative terms. Moreover, unlike Kenya where the index declined over the last 3 years, the index with Sudan had been increasing over the corresponding years, indicating that its importance is gaining further momentum. What is also interesting is to see the other side of the picture. How important is Ethiopia for Kenya and Sudan as export destination? The last two rows of Table 1, provides the TII for Kenya and Sudan vis a vis Ethiopia over the same period of time. Again as the indices for all the years were greater than one, Ethiopia was an important market for both Kenya and Sudan. In fact, considering the high value of the indices Ethiopia was relatively a very important market for both. Moreover, as shown in the same Table, for all the years, the indices for Kenya was by far greater than that for Sudan, implying that Ethiopia was relatively more important for the former than for the latter. Hence, while the importance of trade among these economies is apparent, the relative importance varies. A further rearrangement of the indices can provide a more meaningful 44

comparison regarding the degree of mutual importance. This can be shown using the Trade Intensity Mutual Index (TIMI). TIMU = ((X ij / X j ) / (X wj / X w )) / ((X ji / Xi) / (X wi / X w )) The numerator indicates the TII for country i with respect to country j, while the denominator provides the TII for country j with respect to country i. Again a value greater than unity implies that country j is relatively more important to country i, rather than other wise. Table 16 lists the TIMI of Ethiopia with respect to Kenya and Sudan. The mutual indices in the Table indicates whether Kenya s market was relatively more important to Ethiopia than the latter was for the former (first row), and whether Ethiopia s market was relatively more important to Sudan or vice versa (second row). Table 16: Trade Intensity Mutual Indices 2003 2004 2005 2006 2007 TII Eth / TII Ken 0.1 0.2 0.3 0.2 0.01 TII Eth / TII Sud 2.0 5.4 1.3 1.0 11.0 Source: Table 1a Accordingly, the values of the mutual indices in the first row, are much smaller than one, clearly indicating that for those years Ethiopia was by far much important for Kenya, than Kenya was for Ethiopia. In other words, Ethiopia s import from Kenya was much more significant than its export to the latter. Similarly, but interestingly, Sudan was relatively more important to Ethiopia than Ethiopia was for Sudan, though not for all the years. Nevertheless, in 2005 and 2006, the values of the indices were about unity, implying that Ethiopia and Sudan have reciprocal importance as export markets. 45

7. Trade Complementarities between Ethiopia, the EAC and Sudan Why is trade integration between Ethiopia, on the one hand, and the EAC and Sudan, on the other least developed? Irrespective of the variations in the relative importance of one country for the other as an export market, overall trade integration among these neighboring countries is least developed, at least as evidenced by the insignificance of the regional share in total export. A number of specific factors (both economic and noneconomic) influence the degree of trade integration. As a matter of convenience for discussion, the economic elements can be generalized into two broad and interrelated factors: complementarities and competitiveness. Trade complementarities provide information on the extent how the export bundles of one country/region match with import bundles of the other. In the framework of our interest, for instance, it addresses how exports of Ethiopia match with imports of Sudan, or Kenya, or both, and vice versa. Complementarities can be investigated from two angles: type of natural resource endowments (for developing economies) and degree of industrialization (for advanced ones). The latter is the prime factor for competitiveness; and it is discussed as a factor on its own in the next section. At low level of economic development, which developing countries are categorized into, the type of resources that countries endowed with affects the degree of their trade integration. Countries with similar natural resource endowments, be it agriculture or mining, hence similar export structure, face challenges to expand trade among themselves. On the other hand economies with dissimilar resource endowments, hence dissimilar export commodity structures, such as for instance, oil in one and agriculture/mining in the other, could have some degree of trade integration, in spite of the fact that most or all of their exports are primary commodities. Table 17, portrays the export structure of Ethiopia, Kenya and Sudan by broad commodity group (SITC Revision 3 (3 digits) for 2005/06. Though such commodity grouping is less disaggregated and provides no detailed information to assess trade 46

complementarities among these countries, it can still be shown that the export structures of these economies largely involve similar commodities. 20 Table 17: Export structure: share of leading export products 2005-06 Commodity export share in total (%) SITC3 Commodity description Ethiopia Kenya Sudan 001 Live animals excl. fish & crustacean 2.9 2.2 012 Meat nes, fresh chilled frozen 1.7 0.3 054 Vegetable & vegetable products 4.8 5.5 0.4 061 Sugar, molasses, & honey 0.5 071 Coffee & coffee substitutes 38.7 3.7 074 Tea and mates 17.1 122 Manufactured tobacco 2.1 211 Raw hides & skins, excl. fur-skins 3.2 222 Oil seed etc for soft oil 17.4 2.5 223 Oil seed for non-soft oil 1.4 263 Cotton 1.8 292 Crude vegetable materials nes 11.9 9.4 1.6 334 Heavy petroleum & bituminous oil 11.8 85.4 523 Inorganic acid metal salt peroxy 2.1 611 Leather 3.9 674 Flat plated iron non-alloy steel 2.3 786 Trailer caravan transport container 1.0 842 Female clothing woven 2.7 893 Articles of plastic nes 1.9 971 Gold non-monetary excl ores 5.5 2.6 Others 8.5 41.5 2.0 Total 100 100 100 Source: UNCTAD, Hand Book of Statistics, 2008 Considering Ethiopia and Kenya, same types of commodities account for over 72 and 35 percent of exports in Ethiopia and Kenya, respectively. In fact, except non-monetary gold, all other commodities exported by Ethiopia are nevertheless produced in Kenya, hence not imported, even though not exported. Natural resource endowments of these two countries are closely similar. Therefore, the degree of complementarities resulting from natural resource endowments is quite marginal. Some degree of import-export 20 To fully investigate trade complementarities even at qualitative level disaggregated information on both exports and imports for each economy is required. However, such information is not available. UNCTAD s 2008 HBS provides only for exports at an aggregate level (SITC 3 digits). 47

complementarities, therefore, arises largely from differences in industrial capacity. Today, Ethiopia imports a relatively significant amount of iron and steel and plastic products. But further expanding this aspect of trade complementarities between Kenya and Ethiopia would be challenging due to other competitive exports from advanced economies, particularly from the EU, come EPA. The structure of exports of Ethiopia and Sudan, however, imply some natural resource complementarities, though for a narrow rage of commodities, mainly Sudan s petroleum on the one hand and Ethiopia s leather, vegetables, coffee, tea, etc, on the other. Apart from these, most products are exportable by both countries. The rest of the products, for instance those recorded as exports of Sudan, such as sugar, cotton, trailer, etc, are also produced in Ethiopia, hence not imported in substantial volume. Hence, a limited degree of complementarities arising from natural resource endowments exists between Sudan and Ethiopia (and Sudan and Kenya). 21 8. Trade Competitiveness 22 Trade integration is mainly a product of industrial capacity. The need for enhanced trade became critically important at a stage of economic development when industrialization in today s advanced economies picked up and industries begun to turn out goods beyond the domestic consumption capacity of the respective countries. Hence, trade integration is a derivative of industrialization. The higher the level of industrialization, the more the capacity to exploit economies of scale, the deeper the level of specialization, the greater the degree of competitiveness, hence, the more the capacity to export. Today, two-third of world trade is conducted within advanced economies (UNCTAD, 2007). Hence, investigating the competitive status of the three economies could reflect additional 21 With detailed information on all imports and exports for individual countries a trade complementariry index can be calculated: TC ij = 100 sum ( M ik X ij /2); where, X ij refers to the share of good i in global exports of country j, and M ik is the share of good i in all imports of country k. It provides a quantitative reference to draw useful comparison of complementary goods among countries 22 As shown above trade flows between Ethiopia on the one hand and Uganda and Tanzania on the other is rather petty, hence excluded. 48

reasons for the lack of trade integration. Note that trade complementarities is a necessary, but not a sufficient condition for conducting trade between countries. 8.1. Export diversification One way of measuring competitiveness is the extent of export diversification and/or product concentration. It is argued that countries with more diversified export base are candidates for a successful trade integration. This is so for a couple of reasons. First countries with more diversified exports are more likely to produce a greater range of products that can be exchanged with partners. The existence of limited number of products, such as prevailing in developing economies today, constrains the capacity to expand trade. Second, countries would become more vulnerable to export instability, such as unstable prices, leading to terms of trade shocks. Sub-Saharan African countries exports tend to be highly concentrated in a few products, many of which are not important in other African countries imports, which limit the potential import of countries from within. Export diversification, therefore, is held to be important for developing countries because many are often highly dependent on relatively few primary commodities for their export earnings. Diversification into new products, primary or otherwise, is generally viewed as a positive development. The strongest positive effects are normally associated with diversification into manufactured goods. The export diversification index for a country can be defined as: DX j = ( i X ij X i ) 2 Where, X ij is the share of Commodity i in the total export of country j, and X i is the share of the same commodity in world export. Hence the export diversification index indicates the extent of the difference between the structure of trade of the country and the world average. The index value ranges between 0 and 1; an index closer to one indicates high diversion from world average. 49

The product concentration index is a measure of market concentration. It is defined as: CX j = ( n i=1 (x i X) 2 (1/n)) / (1 (1/n)) Where, x i is the value of export i, and X total export of country j. n is the number of products exported. Table 18: Export diversification/concentration 1995 2006 No prod DX index CX index No prod DX index CX index Ethiopia 25 0.535 0.647 62 0.714 0.432 Kenya 185 0.708 0.232 216 0.697 0.203 Sudan 19 0.559 0.351 57 0.747 0.872 Relatively more diversified comparator economies S. Africa 252 0.570 0.124 253 0.569 0.156 China 254 0.472 0.070 255 0.442 0.110 Germany 256 0.276 0.078 256 0.291 0.090 Source: UNCTAD, Hand Book of Statistics, 2008 Table 18, lists diversification and concentration indices for Ethiopia, Kenya and Sudan, and also for a sample of relatively more diversified comparator countries for 1995 and 2006. 23 Perhaps, the simplest and most straight forward indicator of export diversification, at lest for countries of comparable population size, is the number of products exported. Among the East African neighbors, Kenya is relatively a more diversified economy. The number of export products in 2006 is over 3 times greater than that of Ethiopia or Sudan. This is also supported by the product concentration index which measures the extent of export concentration on few products. The larger the index, 23 The 2008 UNCTAD Hand Book of Statistics provide for two years only. Both diversification and concentration indices can be calculated for Ethiopia as disaggregated data is available for 2007, but not for Kenya and Sudan. However, to make comparison among the three countries, all indices are taken form the same UNCTAD publication. 50

the higher the concentration. In 2006, the export concentration index of Kenya (0.203) is only half of that of Ethiopia (0.432) and a quarter of that of Sudan (0.872). 24 Over the decade, Ethiopia and Sudan have increased their export basket. The former has also reduced the degree of concentration, though marginally. The degree of concentration is still high; it still relies on a limited number of important commodities such as coffee, which accounted for about 40 percent of export earning. Sudan heavily relies on oil for over 85% of its export proceeds (Table 17). Compared to a sample of relatively more diversified economies, the three East African countries are least diversified. The export diversification indices, about 0.7 and above, compare much larger than Germany (0.29), the most diversified economy, and China (0.44). Hence the lack of diversification, therefore the lack of competitiveness, constrains the degree of trade integration among these developing economies. It also implies that, unlike Asia, there is no country with a well diversified economy that can serve as a hub for trade integration in East Africa. 8.2 Revealed comparative advantage (RCA) Yet another way to evaluate the performance of trade flows among economies is to examine the competitiveness of countries in specific products using the Revealed Comparative Advantage (RCA). Measures of RCA are used to help assess a country s export potential. The RCA indicates whether a country is in the process of extending the products in which it has a trade potential, as opposed to situations in which the number of products that can be competitively exported is static. It can also provide useful information about potential trade prospects with new partners. 24 The case of Sudan is a reflection of the oil price. The large increase in the concentration index over the decade, while at the same time the number of commodities exported increased substantially, is the effect of the rise of oil prices, which correspondingly increased the importance of oil in the export basket of Sudan, hence apparently reflecting high concentration index. 51

Countries with similar RCA profiles are unlikely to have high bilateral trade intensities unless intra-industry trade is involved. If estimated at high levels of product disaggregation, RCA measures can focus attention on other non-traditional products that might be successfully exported. The RCA index is defined as: RCA ij = (X ij /X j ) / (X iw /X w ) Where, X ij and X iw refer to country s j and world exports of product i, and X j and X w are total exports of county j and world. A value of less than one implies that the country has a revealed comparative disadvantage in the product at issue. Similarly, if the index exceeds one, the country is said to have a revealed comparative advantage in the product. Table 19 shows revealed comparative indices of Ethiopia, Kenya, Sudan, Tanzania and Uganda for broadly aggregated products. 25 What clearly emerges is that nevertheless all the countries have comparative advantage and disadvantage in similar groups of products with few exceptions. Except in fuel and simple manufactured products where Sudan and Kenya respectively enjoy relative advantages, in all other groups of products all countries together have either a comparative advantage or disadvantage. For instance, nevertheless, all countries have comparative advantage in food and agricultural raw materials and disadvantage in chemical products, and machinery and transport equipment. Even in the case of minerals, in all the three countries having comparative advantage, the commodities exported are quite few. It constitutes only non-monetary gold and precious and non-precious stones. Moreover Sudan, though it does not emerge with clear comparative advantage, exports non-monetary gold. It should also be noted that, given the low magnitude of the RCA coefficient of Kenya for other manufactures, its comparative advantage in processing is quite marginal. Moreover, other manufactures 25 Again, as noted earlier, disaggregated data by specific products is available only for Ethiopia. lack of corresponding information for Kenya and Sudan constrains the level of trade flow analysis among these economies. The only comparable data easily accessable for the three countries is that of UNCTAD s Handbook of statistics. But the information is highly aggregated and provides little room for detail comparative assessment of countries comparative advantages. 52

constitute simple final consumption goods and does not involve high tech product processing. Table 19: Revealed Comparative Advantage Indices (2005/06) Country All food Agr row materials Fuels Mineral products Chemical products Mach & transport Other manuf. Ethiopia 11.0 10.6 0.0 1.2 0.0 0.0 0.3 Kenya 6.0 7.6 0.5 0.5 0.7 0.1 1.1 Sudan 0.9 1.5 5.9 0.5 0.0 0.0 0.0 Tanzania 5.4 4.5 0.0 8.5 0.3 0.0 0.3 Uganda 8.5 5.0 0.3 2.6 0.1 0.2 0.3 Source: Annex Table 2. Therefore, even though further commodity disaggregation would have given detailed information regarding specific comparative advantages and disadvantages of the respective countries, these coefficients provide a general picture regarding the lack of trade competitiveness (and also the lack of complementarities), implying the challenge for further trade integration among these economies. 8.3. Trade restrictiveness As noted above Ethiopia is not yet a member of COMESA FTA, while Sudan and EAC are. Moreover, members of the EAC have joined the WTO but not Ethiopia. Recently, Ethiopia and Sudan have signed a duty free trade agreement. As such, there is no any single trade agreement binding all the countries as a trade block. Ethiopia and the EAC encounter different sets of tariff and non-tariff regimes from one another. Even within the EAC, despite the move towards a customs union, each country s trade regime still involves different non-tariff barriers (Victor, 2008). The question in this context is how restrictive are the trade regimes of the respective countries? 53

To answer this question, at least partially, the trade restrictiveness indices developed by Kee, et al for a number of countries, including for the countries of our interest, is considered (Kee, etal, Jan 2008). Trade restrictiveness indices show the extent to which countries trade policies (tariffs, and non-tariff barriers such as quotas, price and quantity control measures, nonautomatic (discriminatory) licensing, antidumping, technical regulations, monopolistic measures, subsidies, etc, impose restrictions on the welfare of consumers; on imports from the rest of the world; and on exports of the country by the rest of the world. As such, indicators of trade restrictiveness can be used further to study the effects of trade policy on growth, or firm productivity. Trade restrictiveness indicators are also essential inputs to trade negotiators, and to any study attempting to understand the institutional and political determinants of trade protection. Indicators of trade restrictiveness are also needed when trade reforms are part of the conditionality associated with World Bank and IMF loans, or used as a determinant of aid allocation (Kee, et al, p1, 2008). It should also be added that such trade restrictiveness indicators are also useful for EPA negotiations by both partners. These indices can be used to compare countries and group of countries on the extent of their trade restrictions, hence trade costs and thereby level of trade competitiveness. The first one, the Trade Restrictiveness Index (TRI) captures the extent to which trade policies at home affect domestic welfare. It reflects the impact of trade distortions imposed by a country s trade policies on itself. The second one, the Overall Trade Restrictiveness Index (OTRI) measures the impact of each country s trade polices on its aggregate import. So OTRI captures the effect of the distortions imposed by each country s trade policy on its import bundle. While the TRI is an effective indicator of the degree of domestic inefficiency caused by the domestic trade regime, it provides little information regarding the trade restrictiveness faced by exporters in the rest of the world. The third one focuses on market access and summarizes the impact of other countries trade policies on each countries export; that is it focuses on the barriers faced by each countries exporters when selling in other countries. In a way, it is the mirror image of the OTRI, hence MA-OTRI. So, by definition, the MA-OTRI faced by country X on its 54

exports to country M will be equal to the OTRI imposed by country M on its imports from country X. Table 20: Trade Restrictiveness Indices Tariffs only Tariffs and Non-tariffs Impact of NTB TRI OTRI MA-OTRI TRI OTRI MA-OTRI restrictiveness Country 0.185 0.139 0.036 0.222 0.151 0.490 8.6 % Ethiopia (0.005) (0.004) (0.012) (0.025) (0.010) (0.089) 0.189 0.122 0.031 0.213 0.131 0.340 7.4 % Kenya (0.006) (0.007) (0.003) (0.009) (0.006) (0.062) 0.206 0.167 0.066 0.627 0.458 0.093 174.3 % Sudan (0.004) (0.004) (0.002) (0.040) (0.037) (0.005) 0.154 0.130 0.038 0.671 0.533 0.251 310.0 % Tanzania (0.002) (0.002) (0.013) (0.024) (0.025) (0.036) 0.084 0.067 0.015 0.087 0.068 0.377 1.5 % Uganda (0.001) (0.001) (0.001) (0.002) (0.001) (0.055) 0.078 0.017 0.028 0.406 0.079 0.086 364.7 % EU (0.006) (0.001) (0.002) (0.036) (0.011) (0.014) 0.211 0.140 0.024 0.343 0.204 0.066 45.7 % China (0.011) (0.005) (0.000) (0.028) (0.020) (0.010) Saudi 0.353 0.141 0.014 0.371 0.158 0.016 12.1 % Arabia (0.011) (0.001) (0.000) (0.017) (0.009) (0.001) United 0.051 0.026 0.064 0.294 0.104 0.130 300.0 % States (0.001) (0.001) (0.012) (0.025) (0.016) (0.020) Source: Kee, H.L., Nicita,A., Olarreaga, M., JEL, January 2008 N.B. The last column, the additional restrictiveness of NTBs over Tariff based restrictiveness is calculated as (OTRI Tar+NTB OTRI Tariff ) / OTRI Tariff *100. * Figures in Parentheses are standard deviations But there is more into these indices. Goods entering a country are subject to a variety of trade policy-related barriers that raise the costs of trade. Such barriers are not only tariffs (ad-valorem and specific) but also non-tariff barriers, noted above. But to find a single measure of trade restrictiveness for all categories of trade policy barriers is a daunting 55

task. To overcome this hurdle, the trade restrictiveness indices have two categories: the first one considers tariffs only, while the second one includes both tariffs and non-tariff costs. The non-tariff measures broadly include price control measures, quantitative restrictions, monopolistic measures and technical regulations. such non-tariff barriers are transformed into Ad-Valorem equivalents. Table 20 shows trade restrictiveness indices for Ethiopia, Kenya, Sudan, Tanzania and Uganda. For comparison, it also includes major trading partners of Ethiopia. The restrictiveness indices constructed have two categories. The first one is estimated using tariff data only, while the second includes NTBs. 26 Both categories show estimates of TRI, OTRI, and MA-OTRI. The tariff data is for 2006. 27 Consider the restrictiveness indices estimated using the MFN tariffs data only. Among the five East African neighbors, Sudan s tariff regime is the most restrictive on imports (OTRI, 0.167) and also imposes strong adverse impact on domestic welfare (TRI, 0.206), while that of Uganda is the least import restrictive (0.067) and the lowest adverse impact imposing on domestic welfare (0.084). The rest, i.e., Ethiopia, Kenya and Tanzania have, nevertheless, equal and moderate restrictiveness on imports as well as on domestic welfare, though Kenya s tariff restrictions on imports (0.122) is marginally lower than Ethiopia (0.139). But it should also be noted that Kenya has the highest tariff variance compared to others, which may create instability for trade, particularly imports. Note that as it stands, the restrictiveness indices of Sudan in particular, and to some extent of other East African countries, with the exception of Uganda, may be regarded, in general, as trade deterring. However, it should also be noted that these indices do not consider zero tariff trade agreements, for instance, between Sudan and Ethiopia, and among EAC members. Moreover, as noted above the EAC members have moved into the 26 Generating restrictiveness indices for NTB is an involved exercise. It requires transforming all policies regarded as NTBs into an Ad-Valorem Equivalents (EVE) so that it can be comparable to tariffs. For the details see Kee, eta al, 2008. 27 Note that for the EAC, which is now implementing the CU protocol, the restrictiveness indices could be different than what is shown in Table 20. 56

new CU tariff structure, which is expected to be less trade restrictive. Hence the implication of the restrictiveness indices would not hold in these two cases. What is also noteworthy is the degree of restrictiveness these countries face for their exports from their trading partners. It is logical to assume that a country with low tariff restrictiveness on imports from its trading partners may face a corresponding low tariff restriction for its exports. The trade restrictiveness indices for imports (OTRI) and those imposed on exports by trading partners (MA_OTRI) seem to reflect this fact. While on the one hand, Uganda with the lowest tariff restrictions on its imports (0.067) faces relatively less restrictions on its exports by its trading partners (0.015), Sudan with the highest restrictiveness index on imports also encounters correspondingly high restrictions on its exports (0.66). What is perhaps more interesting, however, is the conspicuously high margin reflected by the indices estimated using both tariffs and non-tariff barriers. Again, with the exception of Uganda, import restrictiveness imposed by NTBS (OTRI) in all countries is considerable. In 4 of the countries listed in the same Table, namely Tanzania, Sudan, the EU, and the United States the contributions of NTBs to the overall level of restrictiveness are higher than the contributions of tariffs. 28 The last column of the Table provides the additional restrictiveness of NTBs as a proportion of Tariff restrictiveness indices for each country. Accordingly, the above 4 countries impose additional restrictions to the tune of 174, 310, 365, and 300 percent respectively. Also restrictions imposed by NTBs in China is also high, nearly half of that imposed by tariffs. Therefore, though Free trade agreements, such as that between Ethiopia and Sudan, among EAC members, and duty free access to the EU, etc., might tend to induce trade expansion, such excessive restrictions due to non-tariff measures will inevitably create trade diversion. Similarly, preferential trade access based on tariffs granted to LDCs by industrializing economies such as China, India, S. Korea, etc, may not effectively create trade so long as strong NTBs prevail. 28 See also Portugal-Perez and Wilson regarding the high NTBs prevailing the EU and USA. 57

Further, trade creation among the East African neighbors requires not only removing tariff barriers but also NTBs as underlined by COMESA protocol. 8.4. Other trade costs influencing competitiveness In addition to boarder related costs noted above, i.e., involving tariffs and non-tariff barriers, a number of other factors are incurred in the process of getting goods from a producer in one country to the final user in another, starting with obtaining information about markets ending with final payments. Some of such costs include, those related with customs procedures, transport logistics, costs related to rules of origin associated with preferential trade agreements, costs associated with the business environment: governance, transparency, corruption, etc (Portugal-Perez, 2008). While the former two are direct costs, others incur indirect costs. Complex and time consuming customs procedures raise the cost of trade, thereby reducing trade competitiveness and also tending to deter trade. So does less conducive business environment. In addition, apart from distance related costs, poor infrastructure of inland haulage and transport logistics bear significant proportion of transport costs. Also, the transport logistics perception index (LPI) is a measure of perceptions of the logistics environment of countries (World Bank 2007). The LPI is a weighted average of several dimensions of transport related issues, including efficiency of the clearance process by customs and other border agencies, quality of transport and information technology infrastructure logistics, ease and affordability of arranging international shipments, competence of the local logistics industry, ability to track and trace international shipments, domestic logistics costs, and timeliness of shipment in reaching destination. 58

The LPI allows comparison across countries and regions. 29 Table 21 provides partial measures of trade costs. It shows total costs incurred by countries in exporting and importing a standard cargo of goods by ocean transport as provided by World Bank Doing Business survey (World Bank, 2008). The Table also lists the general ranking of countries with respect to the ease of doing business. It is a summary of the efficiency of catering a number of business services including, licensing procedures, contractual enforcement, getting credit, registering property, etc. As shown in the Table, transaction costs in East Africa is quite high. Even the relatively less cost incurring country, Tanzania, with own port, incurs $1200 and $1400. Kenya and Sudan, with own ports, incur much higher costs than Tanzania. It is no surprise that costs for the two landlocked countries, Ethiopia and Uganda, are the highest. Table 21: Partial indicators of external trade costs Rank (out of Cost of exporting Cost of importing Country 178 (US$ per (US$ per countries) container) container) LPI Ethiopia 102 1617 2793 2.33 Kenya 72 1955 1995 2.52 Sudan 143 1700 2300 2.71 Tanzania 130 1212 1425 2.08 Uganda 118 2940 2990 2.49 Germany 20 740 765 China 83 390 430 S. Arabia 23 1008 758 Source: World Bank, Doing Business, 2008; Portugal-Perez, et al, 2008. 29 It is based on a yearly survey of international freight forwarders. The survey uses an anonymous, webbased questionnaire which asks professionals in several logistic service companies world wide to evaluate their country of residence on seven logistic dimensions (ibid). 59

In fact, in the last few years Ethiopia has made considerable improvement with respect to customs and other export/import related procedures. However, further progress also needs substantial improvement of port administration on the part of Djibouti. As for Uganda, the major improvement has to come from Kenya, which itself is incurring nearly $2000 either to import or export, which is even much higher than the cost of exporting in landlocked Ethiopia. Compared to the major trading partners, such as Germany, Saudi Arabia, and China, costs in East Africa are significantly high. For instance, even in the relatively efficient Tanzania, costs are 3 times greater than in Saudi Arabia, and 2 times than in Germany. Another dimension of the measure of trade efficiency surveyed by the World Bank is the export/import procedural requirements, such as the number of documents required to process and time taken to export import. Figure 10 portrays the number of days required to import/export in East African countries and in relatively efficient trade partners. Figure 10: Number of days required to export/import 60 54 50 46 42 40 37 39 39 37 30 29 30 24 24 20 21 19 20 10 7 7 0 Ethiopia Kenya Sudan Tanzania Uganda Germany China S. Arabia Export Import Source: World Bank, Doing Business 2008 60

East African countries require much more time both to import and export. Ethiopia requires the longest time required to export (46 days) while Sudan takes 54 days to import (Figure 10). Ethiopia also requires more time to import than all other countries, except Sudan. While inefficiency in Ethiopia could be partly attributed to landlockedness, this may not be the case for Sudan which is using its own port. Moreover, unlike all other countries under consideration, Ethiopia and Uganda takes more days to export than to import. Again while this may be due to landlockedness, it is inevitable that this may adversely impact on their competitiveness in foreign markets. Compared to East African counties, relatively efficient trading partners require much less time both to export and import. For instance, on average, Germany requires less than a quarter, Saudi Arabia about half and China less than two-third of the time needed to export or import by East African countries. The last column, the logistic perception index (LPI), compares the efficiency of countries with respect to transport quality. The minimum and maximum scores are 1 and 5 respectively. While Sudan and Kenya have a score of about half of the maximum, the rest scores less than the average. It is argued that while in advanced countries there exist an inverse relationship between transport quality (LPI) and transport price, i.e., the higher the LPI, the better the transport quality and the lower the cost of transportation, this is not the case in Africa. East Africa in general is no different from this. What needs to be noted with respect to other aspects of trade costs, discussed in the above paragraphs is that East African countries incur high trade costs, much higher than their trading partners. This is likely to have some degree of deterrence on the prospect of higher trade integration. As a result it is natural that each of these countries tends to trade with efficient partners (EU, Asia, etc) than with inefficient neighbouring countries. 61

9. Summary and recommendations The bulk of world trade constitutes manufactured products. Hence, the overwhelming majority of world trade is conducted within advanced economies and between advanced and newly emerging economies. Developing countries whose exports are highly concentrated in a small number of primary commodities generally find limited markets in their own country and other developing countries. For both reasons, developing countries that are still dependent on primary production can benefit less from regional trade integration with partners at similar stages of development than those that have already achieved a more diversified production structure. As such, the share of South-South trade, particularly between least developed countries is marginal. The contribution of consciously initiated Regional trade agreements to South-South trade cannot address the fundamental cause for lack of trade integration, namely: economic backwardness, though it can manage to overcome some minor obstacles to trade. It is this same underlying factor that constrains trade integration between Ethiopia, on the one hand, and the EAC and Sudan, on the other. Today, though both tariffs and non-tariff components of the external trade regimes require further liberalization, such as downward adjustment of tariffs and removing certain non-tariff barriers, tariff rates cannot be regarded as prohibitive for trade among these East African neighbors. Moreover, the EAC is already implementing its customs union protocol; Sudan and the EAC are both members of the COMESA FTA; Ethiopia and Sudan have also signed an agreement to conduct trade on a duty free basis for all industrial and agricultural goods originating from the respective countries. Hence, the role of tariffs as barrier to trade has no impact except on trade between Ethiopia and the EAC. It should also be noted that these neighboring countries have now the basic road infrastructure linking these countries, thereby significantly reducing trade costs. In spite of considerable effort towards trade liberalization, however, trade flows between Ethiopia and the EAC and also between Ethiopia and Sudan is quite marginal. 62

Particularly, Ethiopia s export to these countries is petty, though it is recently increasing with Sudan. Rather, these countries conduct the bulk of their import/export with their traditional trade partners, mainly the EU, Japan, USA and recently emerging Asian countries China, India and South Korea. While Ethiopia s export to these countries is highly limited, it imports a narrow range of products from Sudan and the EAC. Import from Sudan is entirely dominated by a single commodity, petroleum and other oil products. In this regard, the single factor for trade creation is a mono-product resource endowment. To date, there is little trade creation of any significance outside this single product. Ethiopia s import from Kenya largely constitutes simple and low technology manufactures. In this context trade is driven by a difference in industrial capacity between these two economies. But note that even these products are competitively exported by other countries. In fact, if Ethiopia decides to sign the EPA, then it is likely that Kenya s export to Ethiopia could be more challenged, thereby further limiting trade integration between these two countries. A number of factors account for the lack of trade integration between Ethiopia and the rest. But the most fundamental factor limiting trade integration is the lack of trade complementarities. Ethiopia, the EAC and Sudan export largely homogenous products, i.e., primary goods agricultural and or mining, based on their natural resource endowments. As a result, the bulk of their respective imports constitute similar manufactured goods. As their endowments are largely identical, the degree of trade complementarities among these countries is quite marginal. What clearly emerged from the Reveled Comparative Advantage Index is that nevertheless all the countries have comparative advantage and disadvantage in similar groups of products with few exceptions. Except petroleum oil and simple manufactured products that Sudan and Kenya respectively enjoy relative advantages, in all other groups of products all countries together have either a comparative advantage or disadvantage. 63

For instance, nevertheless, all countries have comparative advantage in food and agricultural raw materials and disadvantage in chemical products, machinery and transport equipment. Also, as noted earlier, though appreciable measures have been taken to improve the tariff regimes, NTBs are still regarded restrictive compared to those prevailing in other countries, including in their trading partners. This implies that the costs of trade among these East African neighbors are higher than the corresponding costs of trade with major trading partners. As such, it is logical for each of these East African countries to trade with low cost partners rather than among themselves. Even more important than these are the benefits of trade agreements between each of these East African neighbors and their major trading partners, which allow exports of the former to enter duty free into the latter markets. For instance, under the various Generalized System of Preferences schemes (GSP), Ethiopia is one of the beneficiaries of preferential trade access for a wide spectrum of commodities from a number of developed and newly industrializing countries, as such, it has little market access constraint Therefore, the benefits of trade with Sudan and the EAC weigh much less than those with advanced economies. In general, these facts provide a clear picture regarding the lack of trade complementarities, between Ethiopia and the rest, implying the challenge for further trade integration among these economies. Further trade complementarities, hence higher level of trade integration, only comes with industrialization. It should be underlined that high level of trade integration in South East Asia was initiated and driven by industrialized Japan, which as a result of significant wage rise at home, and thereby low profit, began to relocate industries to other countries in the region, including China, Indonesia and South Korea. This stimulated intra-industry trade with Japan being the trade and Industry Hub of the region, which latter has been followed by China and the rest. Hence trade integration was not driven by Regional trade agreements, as the major economic houses of the region, i.e., Japan, China and South Korea are not member of any regional block. 64

The South East Asia model does not easily avail itself for East Africa, where neighboring countries are all developing economies. Hence it is inevitable that trade integration would be gradual and evolutionary. Recommendations Though tariffs and non-tariff measures in developing countries are part and parcel of industrialization strategies and should be considered in that context, the level of tariffs could still be reduced, at least selectively, and most non-tariff barriers safely removed in all these countries, particularly in Sudan, in order to further promote trade integration. Currently Ethiopia incurs high trade deficit with both Sudan and the EAC. Though the volume of import from these countries is quite small compared to total, the deficits as proportion of imports from the respective counties are quite large, and should not be maintained for long. To sustain a reasonable trade balance, Ethiopia should make vigorous export drive into these countries, particularly into Sudan. A number of issues need to be clearly addressed before going for EPA. Why reciprocity agreement with the EU only, after all Ethiopia s trade structure is changing in favor of Asia and the Middle East? What if the Agreement created the precedence thereby other major trading partners demand similar agreements? As Ethiopia is aspiring to join the WTO in the near future, and as signing the interim agreement (if Ethiopia decides to do so) is expected to come earlier than the former, what if the expected agreement with the EU preempts the possible benefits that could be gained from ongoing multilateral negotiation? As experiences have shown, large countries may use their bargaining power in regional agreements to obtain concessions from small countries that they might not obtain in more balanced multilateral negotiations. It should, therefore, be underlined that as reciprocity is likely to disarm small economies of the development oriented policy space currently at their disposal (at 65

least theoretically), Ethiopia has to make sure that the EPA with the EU should at least provide same degree of benefits, if not more, that could be granted by the WTO for LDCs. Moreover, the development element of EPA should go beyond the so called aid for trade to address the supply side constraints without which Ethiopia s trade status would make little change. EPA has to be taken for what it is worth. Now that the initial proposed ESA bloc, supposed to negotiate the EPA as a single entity, does not seem to be practical (as already some countries have signed the interim agreement, such as the EAC), Ethiopia might proceed signing the interim agreement (if it did) either with other countries as a group perhaps with Sudan, or Djibouti, or both, or on its own. However, approaching EPA as a group (with one or two LDCs) might not deliver any extra benefit than going for it individually. The major benefits often argued for, such as stronger bargaining power, cost sharing/reduction, and technical assistance, etc, don t seem to have much significance in this particular case. Two or three less developed countries as a group make little difference from negotiating individually. In fact the costs could even outweigh the possible benefits. Sudan and Ethiopia may not have converging interest with respect to commodity preference, timetable and speed of tariff reduction, etc, thereby creating trade-offs and loss of benefits either for one or both countries. Moreover, the political economy context of these two countries is quite different, at least currently. 66

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13. Rose, A. and Engel, C. (2002) Currency Unions and International Integration, Journal of Money, Credit and Banking 34(4), 1067-414. 14. Self, R., et al, (2007) Impact of WTO Accession on Ethopia s Telecommunication Services Sector, (Draft Report), Nathan. 15. Tumbarello, P. (2005) Regional Trade Integration and WTO Accession: Which is the Right Sequencing? An Application to the CIS, IMF, WP/05/94. 16. UNCTAD, Trade and Development Report 2007 17. UNCTD, (2008) South-South Trade in Asia: The Role of Regional Trade Agreements. 18. UNCTAD, Hand Book of Statistics 2008 19. Victor Ogalo (May 2008) Trade Integration in East Africa: Assessing the Impact of the Customs Union and Challenges for the Common Market, Paper presented at a conference on Joining Forces in the Global Trading Arena: Formulating Africa s Trade strategy Kenya, Nairobi. 20. World Bank (2003) Ethiopia: Trade and Transformation Challenges. Diagnostic Trade Integration Study, Addis Ababa 21. World Bank, World Development Indicators 2005 22. World Bank (2007) Logistics Performance Index database. http://web.worldbank.org/ 23. World Bank (2008) Doing Business database. 24. World Bank, World Development Indicators, (September 2008), www.worldbank.org/ 25. WTO/UNCTAD, World Trade Profile, 2008 68

Annex Table 1a: Ethiopia: Export by Destination (2003-2007) Value in '000 USD Country 2003 2004 2005 2006 2007 Afghanistan 0 0 11 0 0 Albania 76 254 0 39 0 Algeria 436 898 335 1163 1689 American Samoa 0 68 0 0 0 Andorra 32 0 0 4 81 Angola 0 0 154 10 92 Antigua & 0 0 0 0 27 Barbuda Anguilla 0 115 0 0 0 Argentina 43 14 0 6 0 Armenia 0 0 4 5 0 Australia 1277 1505 2021 3561 4008 Austria 6 35 27 123 35 Azerbaijan 0 0 0 0 0 Bahrain 2 4 8 313 64 Bangladesh 279 461 0 43 11089 Belarus 0 7 0 0 0 Belgium 15032 20140 21453 34837 45644 Benin 0 9 0 0 0 Bosnia & 0 0 0 3 0 Herzegovina Botswana 0 0 4 0 0 Bouvet Island 0 0 0 2 0 Bhutan 0 80 0 0 0 Brazil 99 592 240 58 217 Br. Indian Ocean 19 0 163 0 0 Territory Br. Virgin Islands 0 0 0 0 0 Bulgaria 234 609 399 332 1092 Burma 1 12 0 0 0 Burundi 0 0 0 0 27 Cameroon 0 0 0 2 0 Canada 1692 2655 9077 6414 6592 Cayman Islands 1 0 0 1 10 Chad 0 25 0 0 101 Chile 0 19 287 0 0 China 7124 14987 79852 72544 67885 Colombia 5 10 0 0 2 Comoros 0 0 0 0 0 Congo 623 410 186 302 100 Costa Rica 0 0 0 7 45 Cote D'ivoire 37 0 0 0 0 Croatia 39 0 0 1 55 Cuba 85 0 69 56 0 Cyprus 28 185 49 117 110 Czechoslovakia 163 416 497 340 524 69

Denmark 500 302 165 365 376 Djibouti 18459 21657 58264 60482 56124 East Timor 0 0 0 0 102 Ecuador 0 0 17 0 0 Egypt 2378 2540 16081 8930 7307 El Salvador 0 0 0 2 2 Eritrea 0 0 3 2 0 Estonia 0 0 0 0 0 Finland 393 464 462 1458 2052 France 8812 11722 17402 26810 17717 Gabon 0 0 140 0 0 Gambia 0 33 0 0 0 Georgia 13 0 302 0 172 Germany 58326 77798 128101 131199 119585 Ghana 0 9 119 0 47 Gibraltar 0 0 0 141 0 Greece 3281 4995 6334 5155 8096 Grenada 0 0 0 0 0 Guadeloupe 0 0 0 2 0 Guatemala 282 143 357 357 204 Guinea 1 39 0 0 0 Guyana 0 12 10 0 0 Haiti 0 0 0 3 0 Honduras 51 61 0 0 51 Hong Kong 2417 2669 2963 3305 4592 Hungary 439 473 184 177 923 Iceland 257 231 996 980 219 India 8029 9591 8097 9635 15600 Indonesia 2025 3654 1778 2069 1103 Iran 0 715 598 115 503 Iraq 0 194 0 0 3 Ireland 0 30 0 0 228 Israel 14794 22444 21435 21523 29559 Italy 36338 38768 51859 63188 80857 Jamaica 20 0 4 0 0 Japan 44215 63119 69475 87972 76431 Jordan 4966 4667 5679 7504 9320 Kenya 818 1468 3003 2961 4520 Kiribati 0 0 0 10 0 KDPR 33 30 2759 1165 1015 Korea, Republic 786 1019 1514 1409 1656 Of Kuwait 53 40 116 125 159 Kyrgyzstan 0 0 10 0 0 Lao PDR 0 0 0 3 0 Lebanon 3 387 22 81 567 Liberia 0 0 241 0 0 Libya 0 203 159 0 329 Liechtenstein 1 22 12 0 0 Lithuania 0 0 12 19 244 Luxembourg 0 27655 0 0 22 Macau 0 110 0 0 55 70

Madagascar 0 556 0 0 0 Malawi 0 0 0 0 3 Malaysia 2707 3452 6515 3886 4823 Maldives 0 0 4 0 0 Mali 124 0 11 98 0 Malta 1 0 0 0 0 Mauritania 0 0 24 0 79 Mauritius 7 0 0 12 214 Mexico 160 547 411 224 289 Monaco 0 0 0 33 0 Montserrat 0 0 0 0 0 Morocco 1156 761 467 1379 1082 Mozambique 0 70 5 0 0 Myanmar 0 164 489 0 0 Namibia 0 10 0 94 3 Nauru 146 3 0 104 0 Nepal 0 441 0 42 112 Netherlands 5725 19162 35735 45203 78330 Neutral Zone 0 93 0 0 0 New Caledonia 0 0 5 0 0 New Zealand 239 123 218 342 1022 Nicaragua 0 0 25 0 0 Niger 1 134 84 369 5 Nigeria 0 1 1 0 197 Niue 0 16 0 0 0 Norway 1454 922 1597 1427 1547 Oman 2069 0 0 0 18 Pakistan 1339 3291 3115 8120 12592 Palestine 0 0 63 0 0 Panama 190 210 0 0 1 Papua New 0 0 0 0 0 Guinea Paraguay 20 0 0 0 0 Peru 642 45 0 0 37 Philippines 53 220 0 86 179 Poland 1659 594 593 919 2267 Portugal 9918 895 7327 10055 16140 Puerto Rico 173 0 8 140 0 Qatar 0 42 0 11 47 Republic of 0 0 117 0 0 Moldova Reunion Islands 0 0 0 4 0 Romania 1297 1932 1428 1516 1520 Russian 536 1672 2475 2381 3806 Federation Rwanda 0 0 163 134 0 Saint Helena 0 0 152 0 0 San Marino 0 0 0 247 0 Sao Tome & 0 0 20 0 0 Principe Saudi Arabia 35864 42475 59284 70923 85770 Senegal 31 0 450 485 133 Sierra Leone 0 335 0 36 32 71

Singapore 1150 2484 5460 2170 5248 Slovakia 41 0 6 4 318 Sloviena 32 0 90 28 82 Somalia 5812 48 35456 54609 72381 South Africa 2806 2244 1477 3129 4183 Spain 1887 2537 2596 2787 4677 Sri Lanka 20 31 130 189 23 St. Helena 0 0 0 0 0 Sudan 7434 16230 10994 17870 46820 Suriname 0 40 119 0 0 Svalbard and Jan 0 4 0 0 0 Mayen Islands Swaziland 1289 4767 3259 1447 893 Sweden 2056 4070 6059 8553 12306 Switzerland 41740 54459 61523 57227 57611 Syria 175 49 166 51 925 Taiwan 1729 799 750 2193 931 Tanzania 0 1075 1363 306 164 Thailand 1201 1868 1557 1973 128 Togo 0 0 0 0 101 Tokelau 0 74 0 197 0 Trinidad and 0 0 0 0 0 Tobago Tunisia 724 936 550 1078 933 Turkey 11152 15713 14404 13321 27903 Turks And Caicos 346 188 0 159 365 Islands Uganda 0 174 42 192 15 Ukrain 11 1560 635 0 170 UAEm 23617 10513 31142 30934 32664 United Kingdom 18526 23607 29383 29120 29882 United States 23511 37314 44349 51898 67964 Venezuela 0 0 0 0 3 Viet Nam 7 0 0 123 903 Yemen 19142 16009 21038 25825 26640 Yugoslavia 0 0 0 42 24 Zaire 0 0 197 0 0 Zambia 13 159 19 12 3 Zimbabwe 0 709 52 38 19 464952 616596 907111 1011176 1183762 Source: Ethiopian Customs Authority 2008 (Soft Copy Release) 72

Annex Table 1b: Import by Country of Origin CIF Value in '000USD Country 2003 2004 2005 2006 2007 Afganistan 80 7 59 38 38 Albania 8 159 259 1 5 Algeria 0 21 23 41 3 American Samoa 622 1055 74 96 0 Andorra 8 14 458 505 143 Angola 27 0 5 0 0 Anguilla 0 144 0 0 0 Antarctica 0 0 0 0 0 Antigua And 220 17 27 8 13 Barbuda Argentina 125 219 937 473 1611 Armenia 0 0 3 0 0 Aruba 0 0 5 3 0 Australia 6638 12597 9504 12967 10082 Austria 6159 10216 6885 7941 14713 Azerbaijan 0 1 0 0 342 Bahamas 299 153 0 19 21 Bahrain 352 154 22 111 10287 Bangladesh 1610 1808 2296 2781 1490 Barbados 0 15 0 1 0 Belarus 783 502 1534 2696 8029 Belgium 46455 42121 91842 119924 70259 Belize 0 131 150 602 49 Benin 1 0 0 1 0 Bermuda 0 0 0 4 0 Bhutan 0 0 0 3 0 Bolivia 2 0 40 26 0 Bosnia and 0 822 115 361 1514 Herzegovina Botswana 41 900 0 7 0 Brazil 17791 26860 47617 78671 109096 British Indian 0 24 0 0 0 Ocean Territory British Virgin 0 49 8 152 0 Islands Brunei 4 7 0 29 10 Darussalam Bulgaria 3444 1577 1134 647 3784 Burkina Faso 0 10 0 0 0 Burma 30 6 0 0 0 Burundi 0 5 0 6418 0 Cambodia 10 0 3 7 0 Cameroon 97 54 13 71 620 Canada 15873 8752 27218 5889 8673 Cape Verde 0 0 1 0 3 Cayman Islands 11 1098 0 19 0 73

Central African 139 6 0 0 0 Republic Chad 791 9 27 5 160 Chile 791 106 39 201 594 China 228661 291069 514989 636390 1068002 Cocos (Keeling) 0 0 9 9 0 Islands Colombia 4 24 201 216 391 Comoros 0 0 0 1 0 Congo 1 0 0 0 0 Cook Islands 3 16 0 0 0 Costa Rica 0 0 69 133 42 Cote D'ivoire 25 200 4 25 0 Croatia 92 300 119 310 307 Cuba 148 896 14 17 12 Cyprus 1682 1656 2387 1771 3765 Czech Republic 3163 3233 3788 4253 11148 Denmark 19495 21797 34814 23548 43861 Djibouti 21 20 1228 464 59 Dominica 0 0 619 6 0 East Timor 0 8 0 0 0 Ecuador 905 5434 2056 2204 4163 Egypt 32442 39877 52919 68178 115215 Elsalvador 708 478 35 18 2 Equatorial 2 2 0 0 0 Guinea Eritrea 4 15 49 89 13 Estonia 325 486 0 0 6 Faeroe Islands 0 0 0 0 0 Falkland Islands 2 258 0 13 0 (Malvinas) Fiji 0 44 0 0 0 Finland 8954 55588 35819 15525 25104 France 42274 38374 68123 105350 172796 Gabon 11 15 0 0 14 Gambia 7 0 2 0 0 Georgia 0 1 154 193 1172 Germany 82840 106141 151955 128451 172690 Ghana 16 13 32 7 286 Gibraltar 9 52 0 0 0 Greece 7624 7653 5340 5813 8934 Greenland 0 0 0 0 0 Grenada 134 70 3 17 12 Guadeloupe 11 83 8 0 34 Guam 5 3 5 0 7 Guatemala 41 61 65 83 129 Guinea 4 43 2 24 0 Guinea-Bissau 0 0 0 25 0 Haiti 50 58 0 0 0 Heard And 1 0 0 0 0 Mcdonald Islands Holy See (Vatican) 1 17 6 13 0 74

Honduras 12 5 97 6 1 Hong Kong 1010 4536 1293 1447 1878 Hungary 2388 3414 2229 1943 4420 Iceland 1906 1598 1197 311 229 India 141740 150215 274508 317931 421957 Indonesia 41665 48853 76195 86320 65602 Iran 20119 12473 23223 21112 45897 Iraq 9002 81 0 17342 1 Ireland 9573 10502 13073 0 15240 Isle of Man 0 0 2 0 0 Isreal 7190 14016 56581 47673 33998 Italy 163233 126467 186473 325771 371684 Jamaica 103 2314 7 123 131 Japan 78852 111584 135604 169327 179668 Johnston Island 0 0 61 131 0 Jordan 13451 81989 37190 4063 29857 Kazakstan 0 777 2021 8549 8288 Kenya 23060 21750 24303 41204 35067 Kiribati 0 0 2 1 0 KDPR 1485 184 5653 4170 9763 Korea, Republic 44744 46160 60904 74634 100853 Of Kuwait 363 413 1356 1900 4975 Kyrgyzstan 0 0 1 2 1 Lao PDR 14 1 3 0 0 Latvia 24 140 314 489 0 Lebanon 455 461 204 291 490 Lesotho 0 12 23 0 0 Liberia 0 0 0 0 0 Liechtenstein 198 0 0 12 0 Lithuania 0 0 34 17155 30317 Luxembourg 9 5 1 1321 584 Lybia 18 0 5 91 205 Macau 311 0 17 121 0 Madagascar 137 53 19 0 4 Malawi 6 1 198 18 0 Malaysia 29096 28184 39770 53081 85007 Maldives 161 300 281 114 0 Mali 255 250 1011 665 360 Malta 196 91 104 448 592 Marshall Islands 0 0 0 0 0 Mauritania 5 21 1 0 0 Mauritius 553 72 574 394 18 Mexico 1570 949 1609 983 877 Micronesia 0 0 22 0 0 Midway Islands 0 0 0 5 0 Monaco 9 0 10 3 0 Mongolia 0 0 0 2 0 Montserrat 6 303 0 0 0 Morocco 215 287 683 1325 1130 Mozambique 13 52 0 0 3 Namibia 67 23 5 3 129 75

Nauru 48 124 3 1 0 Nepal 16 35 0 8 0 Netherlands 60610 37421 60616 53312 57088 Neutral Zone 0 17 0 0 0 New Calidonia 29 3 13 42 0 New Zealand 1465 341 418 1660 2014 Nicaragua 45 69 0 0 0 Niger 543 68 100 156 45 Nigeria 73 99 47 4 62 Niue 0 14 0 0 0 Norfolk Island 2 0 0 0 0 Northern Mariana 5 1 0 0 0 Islands Norway 4569 4299 6292 1172 3565 Oman 3898 2674 2573 4628 8544 Pakistan 4927 4538 5467 8088 72803 Palau 0 0 0 0 2 Panama 3 62 502 675 2109 Papua New 23 0 0 0 0 Guinea Paraguay 78 0 0 0 0 Peru 0 45 1576 42 0 Philippines 623 1358 1314 5929 3042 Pitcairn 0 0 1 21 0 Poland 3914 3650 4671 5408 4890 Portugal 7966 1000 711 454 2990 Puerto Rico 75 13 27 49 136 Qatar 6147 1874 11922 8358 25407 Republic of 0 0 2096 754 0 Moldova Reunion 30 4579 0 0 4 Romania 2357 1335 1284 1897 751 Russian 30028 13772 25238 71872 35131 Federation Rwanda 33 147 0 2 21 St. Helena 10 43 153 59 0 Saint Kitts And 320 5 13 70 0 Nevis San Marino 0 8 0 0 8 Sao Tome and 0 0 0 10 2 Principe Saudi Arabia 132537 406359 595778 933642 657141 Senegal 418 209 138 152 56 Serbia and 0 0 1271 92 63 Montenegro Seychelles 212 124 48 13 0 Sierra Leone 232 281 52 68 2 Singapore 12173 12124 12640 9132 6117 Slovakia 732 2932 9663 4829 2745 Sloviena 1070 2222 6775 2002 393 Solomon Islands 0 20 0 0 0 Somalia 1 0 5252 12 10 South Africa 14437 39993 31450 36862 39762 76

Spain 13321 12036 17358 33708 25740 Sri Lanka 483 597 429 376 359 St. Pierre Et 0 1 0 0 0 Miquelon Sudan 19026 16734 45789 99852 26911 Suriname 167 6 812 95 83 Swaziland 2340 5451 5758 7002 12791 Sweden 32467 40356 98451 64212 50746 Switzerland 13935 14386 18142 34532 19775 Syria 721 1011 1082 1441 1430 Taiwan Province 25047 20333 15049 22089 23238 of China Tajikistan 0 0 0 0 3 Tanzania 839 1860 2105 1170 1171 Thailand 22083 23795 35729 45913 71589 Togo 14 0 0 0 0 Tokelau 477 391 62 862 32 Tonga 3 0 0 43 0 Trinidad & 2 0 0 0 0 Tobago Tunisia 1387 271 2412 9072 788 Turkey 62240 94270 124044 103288 147749 Turkmenistan 0 0 29 0 3 Turks And 868 265 246 21 332 Caicos Islands Tuvalu 1 2 0 2 0 Uganda 1252 1898 1004 668 780 Ukrain 28183 33890 80304 63807 71280 United Arab 40676 48570 44152 50585 157907 Emirates United Kingdom 85651 87653 94728 90038 104055 United States 185591 336398 420908 153150 230012 Uruguay 7 4 0 55 52 Uzbekistan 0 0 0 0 4 Vanuatu 0 0 0 29 0 Venezuela 55 8 177 4457 6217 Viet Nam 337 3634 4333 40564 20052 Wake Island 0 0 0 5 0 Western Sahara 95 1 0 0 0 Yemen 5797 6548 8991 11506 12674 Yugoslavia 87 65 520 11 965 Zaire 79 42 30 0 0 Zambia 427 571 502 119 152 Zimbabwe 516 6082 2208 1107 51 1959108 2651139 3825431 4425600 5230780 Source: Ethiopian Customs Authority 2008 (Soft Copy Release) 77

Annex Table 2: Export by broad product groups (US $ millions) Country All food items Agr raw materials Fuels Mineral Products Chemical Products Mach & Transp Other Manuf Total export Ethiopia 735 173 0 71 1 1 59 1041 Kenya 1482 414 254 97 254 136 839 3477 Sudan 301 126 4794 170 5 60 0 5457 Tanzania 585 118 2 818 52 19 95 1688 Uganda 522 75 42 144 15 89 72 961 World 753986 184589 1744434 670908 1260940 4501109 2634027 11749993 Source: UNCTAD, Hand Book of Statistics 2008 78