Biniam Bedasso and Tilahun Emiru,
ADDIS ABABA/CHICAGO – The recent decision by US President Joe Biden’s administration to revoke Ethiopia’s eligibility for the African Growth and Opportunity Act (AGOA) has revived the debate over the effectiveness of imposing economic sanctions on poor countries.
The administration cited “gross violations of internationally recognized human rights” in the conflict in northern Ethiopia as the basis for the move.
But it is unclear how Ethiopia’s exclusion from the program will end the violations, especially given the involvement of multiple state and non-state actors in the conflict.
AGOA offers eligible countries in Sub-Saharan Africa duty-free access to the US market for selected products. Ethiopia stands to lose preferential access to a market segment worth $240 million, which is equivalent to roughly 9% of the country’s total exports.
The loss will be felt most acutely by the apparel and leather industries, which employ around 200,000 people, most of whom are women.
In general, there is little theoretical support for using international economic sanctions to influence governments’ domestic political behavior.
What explanations there are derived from the Heckscher-Ohlin model of international trade, according to which a country benefits from exporting goods produced with its most abundant resources and importing goods that use resources that are scarce.
If sanctions are imposed and trade is limited, the country’s supply and demand balance will be disrupted and overall welfare will decline – something political leaders would like to avoid.
But the model assumes that there are only two trading partners. In the real world, production and value chains are highly complex, and markets are diversified.
Unilateral sanctions can impose significant pain as trade patterns adjust to the new reality, but these are short-term costs, particularly at a time when great powers are jostling for influence.
For example, after the US decision to delist countries from AGOA, China announced plans to “expand zero-tariff treatment of products” and import $300 billion worth of African goods over the next three years.
The decision to expel a country from AGOA could still be expected to pressure its government in three ways: deny it tax revenues, limit its access to foreign exchange, and encourage investors and interest groups to lobby for a policy change. But none of these levers is likely to work in Ethiopia.
To spur growth in the ultra-competitive light manufacturing sector of the global economy, Ethiopia adopted a low-tax environment for apparel and leather-goods production.
It developed industrial parks allowing foreign firms to start production with the minimal initial outlay and offering reduced taxation to promote long-term investment.
During the early stages of the investment cycle, the most immediate benefits are employment generation and foreign-currency earnings, not tax revenue.
Ethiopia will lose some foreign exchange because of the Biden administration’s move. But this loss is likely to affect the supply and prices of imported consumer goods rather than any product or service that could contribute to “gross violations of human rights.”
Most significantly, Ethiopia’s expulsion from AGOA not only limits the likelihood that investors will pressure the government to change its behavior but also restricts the growth of a private sector that could have a vested interest in doing so in the future.
Many of Ethiopia’s foreign investors sought to take advantage of AGOA privileges to produce goods for the US market. Because this preferential access has been terminated, these firms have little reason to stay in the country.
US firms that have invested or contemplated investing in Ethiopia could have mediated between the US and Ethiopian governments.
But their interests in Ethiopia are not significant enough to expend much political capital on lobbying. In the past, the US government encouraged its textile and apparel industries to invest in Ethiopia.
Now that the suspension exposes these firms to unforeseen costs related to the relocation of production, they are unlikely to increase their investments in the country.
Worse, such uncertainties will make many US investors cautious about investing in other African countries as well. While Ethiopia stands to lose the most from the recent sanctions, the potential losses extend beyond its boundaries.
The brunt of the sanctions will be borne by the low-skilled and unorganized workers who lose their jobs when the foreign firms that benefited from AGOA leave the country.
These workers also will suffer from the overall loss of strategic opportunities for industrial growth that would have come from exporting to the US market.
Moreover, future generations will shoulder the cost of the debt-financed infrastructure that the sanctions rendered less productive.
Given the realities of the global economy, sanctions like kicking Ethiopia out of AGOA will not change the behavior of political elites.
Instead, they will undermine sustainable-development and anti-poverty efforts and threaten the livelihoods of the most vulnerable.
Biniam Bedasso is a senior research associate at the Center for Global Development. Tilahun Emiru is an assistant professor of economics at Lake Forest College.
Copyright: Project Syndicate, 2022.