Contrary to RMB economists’ conclusion, Ethiopia’s textile sector was hit hard by the US decision in January 2022 to remove that country from the list of African Growth & Opportunity Act (Agoa) beneficiaries.
RMB’s opinion is important, given the reputation of the financial institution and therefore the risk of its erroneous conclusions being used by SA politicians to support their argument that losing Agoa won’t be such a big blow to the SA economy.
In a report last week titled “SA’s Agoa status: more noise than substance”, RMB economists said Ethiopia was not affected by its loss of Agoa trade benefits, basing their conclusion on trade data that showed Ethiopia’s textile and apparel exports to the US shot up 32.4% in 2022.
This figure is correct, but RMB’s conclusion is completely wrong. First, it missed the fact that US buyers place textile and apparel orders 12-18 months in advance, which would explain the increase in Ethiopian exports to the US last year. US authorities are aware of this, as noted by the report on Agoa the US International Trade Commission submitted to the US Congress in March. The trade commission said Ethiopian exports to the US are “expected to taper off in the future”.
It makes perfect business sense too that some Ethiopian exports to the US will continue for a while after Agoa benefits end. It would be a logistical nightmare for all US retailers to switch orders as soon as the authorities announce that a country has been taken off the Agoa list.
The other point missed by RMB is that in the seven years from 2014 to 2021, Ethiopian textile and apparel exports to the US shot up 2,000% (an average of 286% a year), according to the commission’s report. Thirty-two percent growth in 2022 is way below the seven-year average and in fact reveals a sharp dip in the growth rate, which can be explained by the bite of Ethiopia’s removal from Agoa.
Ethiopian exports rose slowly from 2001 to 2014 and then surged in the next seven years, according to the trade commission, because of Ethiopia’s success in attracting foreign direct investment, primarily from Turkey, India, China, Sri Lanka, Taiwan and the United Arab Emirates.
The other factor behind the continued increase in Ethiopian exports, albeit at a reduced rate compared with the seven-year average, is that some textile and apparel producers in Ethiopia indicated they will absorb the loss of the Agoa benefits to keep their US contracts. This may be possible due to the huge differential between wages paid in Ethiopia and in some of the countries it competes with for textile and apparel exports. But, as the commission points out, it is not sustainable, especially if Ethiopia fails to regain its Agoa status soon.
Indian garment manufacturer Arvind told investors in a May 2022 update that “the traffic for that location [Ethiopia] has come down, so we have started kind of reducing the footprint there”. It had created a provision in its books to cover a possible write-down in the value of its Ethiopian investment. Arvind has said it will move some of its Ethiopian garment production capacity to India.
The Industrial Federation of Textile, Leather & Garment Workers trade union has reportedly flagged a loss of jobs by Ethiopian garment workers, saying most of the factories in the Hawassa industrial park lost their US orders. The industrial park has played a key role in Ethiopia’s growth as an apparel supplier to America, with 90% of the park’s tenants exporting their production to the US.
The impact of Ethiopia’s removal from Agoa was raised by investors, manufacturers and exporting firms in a meeting with the Ethiopian finance minister and its ambassador to the US, held last October. According to a summary published on the Ethiopian embassy website, that meeting noted that the biggest losers would be young women “who supported children and elderly parents”.
The Ethiopian government is clearly worried. It has hired US lobby firm Squire Patton Boggs to help persuade legislators and the Biden administration to reinstate Ethiopia by pointing out that the country has dealt with the issues the US cited when kicking it off Agoa.
• Sikhakhane, a former spokesperson for the finance minister, National Treasury and Reserve Bank, is editor of The Conversation Africa. He writes in his personal capacity.
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