In-depth: China Opens Doors Wide: Ethiopia set to tap massive consumer market as second-biggest economy introduces zero-tariff policy

By Abdi Biyenssa @ABiyenssa

Addis Abeba – In a landmark decision announced at the recently held 2024 Summit of the Forum on China-Africa Cooperation (FOCAC), China unveiled a zero-tariff policy for 33 African nations, including Ethiopia, opening its vast market to 100 percent of goods from these countries.

This move positions China among the very few industrialized countries to offer such a concession, turning its vast market into a golden opportunity for African economies like Ethiopia.

“This is a voluntary and unilateral opening of our market,” declared Chinese President Xi Jinping during his keynote speech, signaling a historic shift in global trade dynamics.

For exporters in Ethiopia, the policy eliminates customs duties across all product categories, offering a significant opportunity to tap into one of the world’s largest consumer markets.

Officials anticipate that this measure will also contribute to addressing the existing trade imbalance between the two nations.

In 2022, Ethiopia’s exports to China amounted to $175 million, whereas China’s exports to Ethiopia totaled $2.9 billion, highlighting a substantial trade deficit.

Given this disparity, experts believe that China’s decision to grant Ethiopia zero-tariff access on all tariff lines has the potential to enhance the nation’s export capabilities by diversifying and expanding its exports to the East Asian country.

Merid Tullu, a macroeconomist currently employed in the private sector, explains that China’s decision to grant African countries, including Ethiopia, zero-tariff access on all tariff lines is an integral component of a more comprehensive policy package aimed at strengthening trade relations with Africa.

He noted that this policy is intended to foster trade competitiveness and provide consumers in both countries with a wider range of options.

According to Merid, this initiative could be particularly transformative for Ethiopia.

“Given China’s status as a key trading partner, fortifying this relationship is indispensable for Ethiopia’s long-term economic strategy,” he emphasized. “The zero-tariff policy could lead to increased exports, job creation, and overall economic growth, aligning with Ethiopia’s objective of becoming a more diversified and competitive economy.”

By capitalizing on such opportunities, Merid believes that Ethiopia can diversify and expand its exports, thereby reducing its reliance on a limited range of goods and markets, potentially leading to more sustainable growth.

“This diversification can also stimulate the development of new industries and create more jobs, contributing to the country’s overall economic development,” he stated. “Furthermore, considering Ethiopia’s current dependency on Chinese-made products, this policy has the potential to be mutually beneficial, creating a win-win situation.”

In a recent interview with state media, Tefere Derbew, Ethiopia’s Ambassador to China, revealed that the country is actively working to expand both the volume and variety of its exports to China.

The ambassador emphasized Ethiopia’s efforts to diversify its export portfolio, particularly noting that the zero-tariff offer is advantageous for Ethiopian coffee, which he stated is highly sought after in China.

In addition to products like coffee, sesame, soybeans, and other agricultural goods that Ethiopia already exports to China, Tefere expressed the country’s keen interest in exporting a wider range of agricultural products, including cashews, and introducing Ethiopian-grown avocados to the Chinese market.

This is not the first instance of China opening its market to African countries by offering zero-tariff opportunities.

Following the second FOCAC ministerial conference held in Ethiopia in 2003, the former Chinese Premier, Wen Jiabao, officially announced the implementation tariff reduction treatment for Least Developed Countries (LDCs) in Africa, including Ethiopia.

Although the current proposal represents a more comprehensive approach, the previous offer, which was limited to selected countries, was initially granted in 2005 and concluded in 2018.

A study assessing the effects of China’s previous policy found that tariff reductions were beneficial for countries like Ethiopia in promoting export diversification.

The progress observed in Ethiopia’s sesame exports, a commodity that benefited from earlier tariff cuts, was highlighted as a case study.

Although Ethiopia was a major sesame producer in Africa, it had not exported any sesame to China by 2002. However, after China implemented its zero-tariff policy, the study revealed a substantial increase in Ethiopia’s sesame exports to China.

The zero-tariff policy could lead to increased exports, job creation, and overall economic growth.”

Merid Tullu, a macroeconomist

By 2005, sesame made up nearly 78% of Ethiopia’s total exports to China, peaking at 87% in 2009.

While the volume of sesame exports continued to rise, its share of total exports gradually declined, reaching 63% in 2017.

According to the study, this trend suggests that Ethiopia’s export base had diversified partly due to China’s tariff reduction policy.

Ethiopian coffee eyes a golden brew

Gizat Worku, the General Manager of the Ethiopian Coffee Exporters Association (ECEA), believes China’s zero-tariff policy for African goods could be a game-changer for Ethiopian coffee.

He explained that this policy makes Ethiopian coffee more competitive in the lucrative Chinese market.

“Without additional import tariffs,” Gizat emphasized, “the zero-tariff policy offers a significant opportunity for Ethiopian coffee to access the Chinese market.”

Compared to coffee from countries without this benefit, the general manager suggested that the policy could increase Ethiopia’s coffee export volume and strengthen its position in China’s growing coffee market.

“This opportunity could lead to higher export revenues for Ethiopia and help diversify its export markets,” Gizat stated.

China’s offer of zero-tariff treatment for Ethiopian goods arrives at a critical juncture as Ethiopia confronts the potential negative economic consequences of the forthcoming European Union Deforestation Regulation (EUDR).

A recent study by the Overseas Development Institute (ODI) forecasts that the EUDR, scheduled to take effect on December 30, 2024, will have substantial economic repercussions for Ethiopia.

The study predicts that in the most extreme scenario—a complete cessation of exports to the European Union—Ethiopia could experience a considerable economic downturn. Specifically, the country may face an 18.4% decline in total exports, a 5.8% decrease in imports, a 3.3% loss in public revenue, and a 0.6% reduction in GDP.

Gizat believes that the Chinese zero-tariff policy could serve as a strategic counterbalance to the challenges that Ethiopian coffee exports may encounter when the new regulation takes effect.

However, Gizat cautions that the Chinese market is unlikely to absorb the entire volume of coffee that has traditionally been exported to the European Union in the short term.

This assertion is underpinned by official data indicating that China currently imports only 20,000 tons of coffee annually from Ethiopia, a figure that pales in comparison to the European Union’s purchase of over 100,000 tons, which comprises more than a quarter of Ethiopia’s annual coffee exports.

Turning Ethiopia into a manufacturing hub

Gemechu Daba, an adjunct lecturer in the Economics Department at Addis Ababa University, also believes that the grant zero-tariff treatment policy has the potential to strengthen the country’s export sector. However, he stresses the impact of this new policy may depend on various factors, such as quality and price competitiveness.

The adjunct lecturer explained that if Ethiopian products are competitive in terms of both quality and price, zero-tariff access could enhance their appeal to Chinese consumers.

“Nevertheless, Ethiopia must ensure its capacity to meet the anticipated increase in demand while maintaining consistent quality standards, which could pose a substantial challenge,” he stated. “This will necessitate significant investments in infrastructure, technology, and human resources.”

On top of bolstering Ethiopia’s export sector and promoting commodity diversification, Gemechu contends that the zero-tariff policy, coupled with the observed rise in wage rates within China, could incentivize certain Chinese manufacturers to relocate their operations to Ethiopia, particularly in the textiles industry.

“Lower labor costs in Ethiopia relative to China may attract manufacturers seeking to reduce expenses,” he argued. “With zero tariffs, products manufactured in Ethiopia could be re-exported to China without incurring additional costs, thereby enhancing profit margins.”

Gemechu further added that, if Ethiopia continues to invest in the development of its infrastructure, including roads, ports, and electricity, it will become an even more attractive destination for foreign investment.

However, he indicated that relocation decisions will also be influenced by factors such as political stability, the regulatory environment, and the availability of skilled labor.

“Ethiopia must capitalize on this potential for increased foreign investment to secure a prosperous economic future,” Gemechu underscored.

The bilateral relationship between Ethiopia and China, initially established in 1970, has undergone a significant transformation.

From its origins centered on livelihood support and capacity building, the partnership has expanded to encompass a broad range of development initiatives. These include substantial financing for infrastructure projects, strategic foreign direct investment, and mutually beneficial trade collaborations.

As of October 2023, their collaboration progressed to an “all-weather development cooperation,” a designation held by only a few countries with China.

Key areas of focus include infrastructure development—railways, highways, telecommunications, and power generation.

Since 2006, Ethiopia has undertaken over 70 major projects under Chinese initiatives, with the Chinese government allocating approximately $14.83 billion in loans from 2006 to 2018. Currently, Chinese FDI in Ethiopia totals around $4 billion, with 1,844 projects operational.

Agreeing with experts such as Gemechu, Merid emphasized that, given China’s rising wage rates and its shift toward high-tech industries, Ethiopia is well-positioned to attract small and medium manufacturers in labor-intensive sectors like textiles as well as potentially large-scale Chinese corporations.

He believes Ethiopia’s proximity to key markets in Europe, the Middle East, and the rest of Africa provides a logistical advantage for Chinese companies looking to optimize their supply chains and reduce shipping times.

“Establishing production bases in Ethiopia could enable these firms to better access regional markets while benefiting from the tariff-free access granted by China’s new policy,” Merid remarked. “The potential for Ethiopia to become a hub for Chinese mega-companies is a promising development for the country’s economic future.”

Navigating post-AGOA era

Experts contend that Ethiopia can leverage the zero-tariff opportunity offered by China to mitigate the losses it faced following its exclusion from the African Growth and Opportunity Act (AGOA) in 2021, at least partially, if not entirely.

According to Gemechu, the zero-tariff policy could help Ethiopia offset some of the losses incurred due to the exclusion from AGOA.

He added that by gaining easier access to the Chinese market, Ethiopia could diversify its export destinations and reduce its reliance on the U.S.

“If Ethiopia focuses on sectors where it holds a competitive advantage, such as agriculture or textiles, it could recover some of the trade volumes lost under AGOA,” Gemechu argued. “While it may not fully replace the value of AGOA, this new arrangement offers a valuable alternative.”

Prior to its exclusion from the AGOA, Ethiopia had exported goods valued at $400 million annually to the United States.

However, following the termination of its AGOA benefits, major manufacturers such as Philips-Van Heusen Corporation (PVH), operating within various industrial parks, ceased their operations.

In response to Washington’s decision to revoke Ethiopia’s AGOA privileges, additional multinational enterprises, particularly those situated within the Hawassa Industrial Park, reduced the scale of their operations.

While Merid, the macroeconomist, concurs with Gemechu’s assessment, he offers a distinct perspective on the matter.

Merid contends that although the zero-tariff treatment from China could serve as an alternative and partially mitigate the economic repercussions, it is unlikely to entirely offset the benefits forfeited due to the loss of AGOA privileges.

He explained that the U.S. and Chinese markets have distinct consumption patterns and demand structures, making a simple redirection of exports challenging.

“Ethiopia must adopt a strategic approach to maximize this opportunity with China, focusing on diversifying its product range and improving quality to meet the specific demands of the Chinese market,” Merid asserted.

Birr meets Yuan

At the 2024 Summit of the Forum on China-Africa Cooperation (FOCAC), Prime Minister Abiy Ahmed and Chinese President Xi Jinping also reached a currency swap agreement, enabling businesses in both countries to conduct transactions using their respective local currencies, the Birr and the Yuan.

Finance Minister Ahmed Shide, who announced the agreement, noted that the central banks of both nations are currently finalizing the details of the arrangement.

This agreement is similar to the currency swap deal Ethiopia signed with the United Arab Emirates (UAE) in July 2024.

According to media reports, the bilateral currency swap agreement between the central banks of the UAE and Ethiopia involves a value of up to three billion dirhams (approximately $816.79 million).

Merid explains that the recently signed currency swap agreement between China and Ethiopia is a strategic step towards the broader BRICS+ initiative of de-dollarization, which aims to reduce reliance on the U.S. dollar in international trade.

By facilitating trade in their local currencies, Merid believes both nations are taking significant strides towards enhancing their economic sovereignty and reducing vulnerabilities associated with dollar fluctuations.

“The currency swap agreement simplifies and reduces the cost of transactions and is a foundational move to strengthen bilateral trade and investment ties,” he stressed.

According to Merid, the currency swap agreement could mean greater flexibility in managing foreign exchange reserves and reducing the pressures of maintaining dollar reserves for trade purposes for Ethiopia.

“By decreasing reliance on third-party currencies, Ethiopia can streamline financial transactions, potentially making it easier for businesses to engage in cross-border trade,” he stated. “The agreement thus supports both nations in fostering a more resilient and diversified trading relationship, which is particularly important in the context of global economic uncertainties.”

Furthermore, Merid emphasizes that this currency swap could encourage more direct investment flows between China and Ethiopia over time, further deepening economic cooperation and creating new growth opportunities.

Gemechu also anticipates that the currency swap agreement could reduce Ethiopia’s dependence on third-party currencies, particularly the U.S. dollar, facilitating smoother financial transactions. “With the swap agreement, Ethiopia can trade with China using their respective currencies, simplifying transactions and reducing currency conversion costs.”

In addition, Gemechu noted that this arrangement could help both countries mitigate risks associated with fluctuating exchange rates, making trade more predictable. “This could enhance trade efficiency and encourage more robust economic exchanges between the two countries.” AS