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Trade war and free trade

Ton Haverkort
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A trade war is a situation in which countries try to damage each other’s trade, typically by the imposition of tariffs or quota restrictions. This situation is now looming between the USA and China following threats of the President to increase tariffs on steel and aluminium. According to President Trump, such this war is easy to win. We will see. To begin with here follow some of the news headlines, following the imposition of the tariffs:
“Equities in Europe are expected to open significantly lower on Friday as investors see higher risks of a global trade war.”
“The FTSE 100 is seen down by 66 points at 6,881; the CAC 40 is set to be off by 72 points at 5,082; and the DAX 40 is expected to open lower by 189 points at 11,892; according to IG.”
“Asian equities slumped after Chinese authorities said they could hit 128 U.S. products with tariffs in response to the announcement from President Donald Trump that up to $60 billion worth of Chinese products will face new import taxes.” It seems the war has begun, at least a war of words, hence the fear and the nervousness of the stock markets. It also seems that all consequences of beginning this trade war are not fully overseen yet. Thousands of workers and producers in the USA may in fact lose their jobs or their exports instead and be on the losing side rather than on the winning side. President Trump’s WIN-LOSE strategy may and up in a LOSE-LOSE for all.
The “America first” slogan represents the WIN-LOSE concept very well. A WIN-LOSE person is strong and self-centred. (S)he has the courage to express his or her own convictions but is not very considerate of the opinion of others. Most people have been raised in this mentality from birth, in the family, at school, in sports, at work. Children, students, workers have been and are constantly being compared with others and are encouraged to be nicer, better, stronger than others. As a result, they will be loved and appreciated more than others. At home, a child may feel less loved than a brother or sister. At school a student gets better results than others. At the office workers compete for a promotion. In WIN-LOSE, we think “If I win, you lose.” “I get my way, you don’t get yours.” In this frame of mind, people often use position, power, credentials, possessions or personality to get their way. Many people are deeply inscripted in what Stephen Covey calls the Scarcity Mentality. People with this mentality think that there is only so much out there and if someone else were to get a big piece out of the pie, there is less remaining for the rest. These people have a difficult time, sharing recognition, credit, power or profit, even with those who help making it. We often see this mentality in Ethiopia as well. People have a very hard time being genuinely happy for the success of other people, even and sometimes especially, members of their own family or close friends and associates. It is as if something is taken away from them when someone else receives special recognition or is becoming successful. Although they might verbally express happiness for the success of others, deep inside they are jealous and unhappy. They compare themselves with that other person, who they feel is winning and thus they are losing. Such people covet what others have and look forward to the time things will go less well for the other. They are always comparing and competing and spend their energy and resources on possessing things or other people to increase their sense of worth. They surround themselves with people who will not challenge them and who are weaker. They win, others lose.   WIN-LOSE is really LOSE-LOSE in the long run.
Things can really be different if we seek mutual benefit instead. If we are able, to think WIN-WIN, agreements and deals are beneficial to all parties. They feel good about it and make it work. Thinking WIN-WIN is being co-operative, not competitive. WIN-WIN is not your way or my way; it is a better way. An essential character trait for Win/Win is the abundance mentality as opposed to the scarcity mentality that we looked at earlier. The abundance mentality is a paradigm that means: there is plenty for everybody.
It results in sharing of prestige, of recognition, of profits, of decision making. Thinking WIN-WIN may result in WIN-WIN agreements between countries, companies and suppliers, employer & employees, any group of people who interact to accomplish something.
With this in mind, it is obvious that the current course taken to deliberately begin an international trade war, is going to result in a head-on collision between the USA and China. All affected will be hurt in the end.
It is therefore encouraging to learn that the leaders of 44 African countries have signed a deal to create one of the world’s largest free trade blocs. The agreement was signed at a summit in the Rwandan capital, Kigali.
It is hoped the deal will come into force within six months, and increase prosperity for 1.2 billion Africans. Some more work needs to be done as all member nation will have to sign the deal before it can come into effect. It will be the result though of thinking WIN-WIN by African leaders. The African Continental Free Trade Area (CFTA) would remove barriers to trade, like tariffs and import quotas, allowing the free flow of goods and services between its members. In theory that should boost commerce, growth and employment. African Union commission head Moussa Faki Mahamat called it a “glorious challenge… which calls for the courage to believe, the courage to dare… the courage to achieve”.

Ton Haverkort

Asia And The Evolution Of International Trade

Alazar Kebede
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The world economic history well recorded the beautiful story of how Asian countries shaped the international trade more than a millennium ago. Stewart Gordon revisited this phenomenon in his 2008 published book entitled “When Asia Was the World: Traveling Merchants, Scholars, Warriors and Monks Who Created the ‘Riches of the East”.
Stewart Gordon stated that the Asian world in 500-1500 CE, was a place of great empires and large capital cities. In Southeast Asia were the kingdoms of “Srivajaya, Pagan, Angkor, Champa and Dai Viet”. China went through dynastic changes but was strongly linked to the rest of Asia. India had empires as well such as the “Kushans, the sultanates and the Mughals based at Delhi, as well as the “Cholas and Vijayanagara” in the south. The Middle East had the “Abbasid Caliphate”. Central Asia had “Genghis Khan’s empire”, the largest the world has ever known, and it had the empire of “Timur”. The populations of these realms were, in many cases, larger than the whole of Western Europe.
According to Stewart Gordon, Asia was a vast world of contrast, from deserts to mountains, from monsoon rain forest to dry plains. It held a bewildering variety of cultures and languages, many local religions and varieties of Buddhism, Islam and Hinduism that spread across wide regions. But it was its networks that made the great Asian world unique. Bureaucrats, scholars, slaves, ideas, religions and plants moved along its intersecting routes. Family ties stretched across thousands of miles. Traders found markets for products ranging from heavy recycled bronze to the most diaphanous silks.
Asian empires tended to promote linkages and connections to other kingdoms in several ways. Often their own territories crossed “natural” ecological boundaries and brought together regions and societies in unexpected ways. The Kushans, the Afghans and the Mughals established empires that successfully ruled both sides of the formidable Himalayas. The South Indian Chola kingdom built a navy and conquered the islands of Sri Lanka, Java, and Sumatra, politically tying together India and Southeast Asia. Genghis Khan ruled both the steppe and large areas of agricultural China.
Stewart Gordon in his book stated that administrative continuities generally promoted trade between ecologically different regions in which the trade in horses from the steppe to the plains of India, in rice from south to north China, in steel from Damascus to Afghanistan. The big states also produced widely used currencies, such as Chinese cash and silver “Dirhams”, and established standards for normalising local weights and measures.
They also frequently organized postal systems for reliable communication. One could send a letter from Mangalore, India and have it arrive in Cairo, Egypt in slightly over a month. A letter of introduction went from the far Western border of India to Delhi and back in less than two months. Although the big capital cities such as Delhi, Beijing, and Baghdad, were impressive and often many times the size of any European city of the time, the importance of medium-sized cities cannot be overemphasised.
According to Stewart Gordon, these empires, by and large, rose by the expansion of power of a regional family based in a medium-sized city their regional capital. When empires fell, they generally devolved into regional successor states. The regional capitals usually not only survived, but also they thrived. Medium-sized cities thus remained long-term sources of demand, learning, and patronage, and in addition, they produced the bureaucrats necessary to run an empire.
Stewart Gordon noted that cities, large and small, needed basic food, fabric, fuel and building materials. The elite of these cities attracted the more sophisticated trade goods of the Asian world. The Chinese urban elite generated an almost insatiable demand for ivory, both African and Southeast Asian, which found its way into religious statues, pens, fans, boxes and the decoration of furniture. Their demand for the most aromatic incense in the world was filled by incense logs and bushes from Southeast Asia and India. The demand for elegant clothes and beautiful colors in population centers of the Middle East, India and Southeast Asia pushed discovery of and trade in new plant dyes.
According to Stewart Gordon, the urban centers were also places of specialized manufacture that created trade opportunities and employment for these skills. Cities produced books, artwork, fine fabrics, sophisticated musical instruments, jewelry and scientific instruments, all of which were in demand throughout the Asian world. Syria developed steelmaking to such a high art and in such quantity that traders brought its products to all parts of the Asian world. Damascus blades were just as ubiquitous in Indonesia as they were in Central Asia. China produced prodigious quantities of ceramics that were traded across the Asian world, from the Philippines and Japan to the west coast of Africa.
As Stewart Gordon well explained, trade mattered. The volume and variety of trade affected much of the population of the great Asian world. Tropical spices and medicines moved north to the plains of India, west into the Middle East and east into China. These medicinal plants were not “discovered” by doctors in cities, much less by the traders who brought them. These spices and medicines were first discovered by the forest dwellers who experimented with their local profusion of plants.
Trade served the spread of the universalising religions. Ritual objects and books of both Buddhism and Islam came from specialized centers and moved along both water routes and caravan routes to Tibet, Central Asia, Southeast Asia and China. Trade in the great Asian world included the exotic, the prosaic and everything in between. At one extreme, a giraffe was somehow transported from Africa to the imperial court of China.
At the other extreme, fish paste produced on the coast of Thailand and ordinary Chinese iron cooking pots were regular, profitable items traded to the islands of Southeast Asia. Rice, the most prosaic of foods in India, China and Southeast Asia, became a high-status food across the steppe world. Every ship and every caravan carried a range of goods from the precious to the mundane.

Scaling up the sectors

Tesfaye Getnet
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The Chinese investors who have placed their fingerprints on the  railways, roads , manufacturing , and the Turkish and Indian  investors in textiles and the coming of European and American  businesspeople to work in industry is a  good witness  to show that much has been done to attract foreign investors to Ethiopia. Obtaining land, electricity and fast service are challenging areas for investors. The current State Minister for Business and Diaspora Affairs in the Ministry of Foreign Affairs Dr. Aklilu Hailemichael says more investment will come from abroad if work is done to increase exports. His biography on the Ministry of Foreign Affair’s website shows that he started his career in the agricultural sciences and completed his PhD degree in Technology and Agrarian Development in the Department of Social Sciences at the Wageningen University and Research Centre of the Netherlands in 2007. He worked as a lecturer and researcher in the College of Agriculture and Natural Resources in Mekelle University. Apart from teaching and research, he also contributed to institutional building and development as a Vice-President of Aksum University for several years and as vice college dean at Mekelle University. He is an adjunct associate professor in the College of Development Studies of Addis Ababa University.
Capital’s Reporter Tesfaye Getnet sat down with Dr. Aklilu to learn more about the government’s plan to improve Ethiopia’s business relationship with the rest of the world. Excerpts;

Capital: How would you describe Ethiopian foreign direct investment?
Dr. Aklilu: In our ministry we have sector called economic diplomacy. This sector is part of the general diplomacy and is focused on promoting, protecting and realizing our national interest in terms of our country’s economic gain. In our policy the core point is development. The trait for national existence is poverty. So to promote our development in a fight against poverty we built a relationship with state and non-state actors. Our foreign policy serves our domestic policy and the main target is to reduce poverty and to sustain development. We strongly believe that we have a good FDI policy and because of this we have been increasing our exports and our country is one of the top destinations in terms of attracting FDI.
Capital: Even though the government has been working to attract foreign investors there are challenges when it comes to getting land, electricity and licenses. How you are working to overcome these challenges?
Dr. Aklilu: We have an institution like the Ethiopian Investment Commission which is established to provide services the investors need. You can look at the industrial parks which have shelter, water, roads, power, banks and customs offices and this is the real testimony to how we are working to ease the burden of investors. Outside of the industrials parks, regional investment bureaus are working to provide better services for investors as quickly as possible.
Capital: Foreign investors want to do business in telecom which is monopolized by the government and banks which are only allowed only for local people and the state. Why has the government closed these sectors to foreign investors?
Dr. Aklilu: Ethiopia has set a priority where foreign investors can come and operate in here. The top priority is manufacturing. This is the area where we lack capital and the area that is very important to facilitate our development. Ethiopia has the vision to have a large manufacturing economy by 2025. In manufacturing we give are giving priority to textiles, garments, leather, agro- processing, pharmaceuticals, construction materials and other related areas. Foreign investors are expected to invest in these areas and to fill needs which can generate employment and transfer technology.   For their areas like banks and telecom sectors we believe that we can do these by ourselves so they need protection.
Capital: Economists argue that if the government allows foreign investors in banks and telecommunication, competition will increase which ultimately will increase efficiency and bring more job opportunities. What are your thoughts about this?

interview-2Dr. Aklilu: Only local banks operate in Ethiopia but competition is increasing. When we think we lack capital and technology we will consider allowing foreign investors in this area.
Capital: The protests in the last two years   have damaged the property of some foreign and local companies. Some fear that this may hinder future foreign investments coming into Ethiopia. What is your opinion on this point?
Dr. Aklilu: We have been growing by double digits over the last 15 years.  We have built positive images consistently in the case of our agriculture products, investing in infrastructure, education, health and so on.  The development we have made has caused people to the ask government for speedy results like roads, electricity and jobs. Sometimes the demand created complaints and problems of governance which led to unrest in some areas. We are starting on the long journey of development and you may face accidents while  you are moving but the problems that we face will not reverse our way to becoming a prosperous country. The violence did not stop our development. If you look at the last year’s report we registered a 23 percent increase in terms of FDI. Companies came from India, the USA, Europe, China and others. Our investors know that we cannot fail in continuing the development. They know that we have institutions that have internal systems to identify problems and created dialogues with the public when problems occur. I believe that we will address the challenges and keep the momentum to have the development that we are working on now.
Capital: Last year’s exports did not meet the USD four billion expectations. What should be done to increase the exports and minimize the trade deficit?
Dr. Aklilu: Ethiopia is trying to get more earnings from exports. A number of companies are coming and exporting their products. We have good access to the USA through AGOA without tax and quotas.  Our exports go to Europe, Asia and we are working with COMESA to conduct trade in Africa. Our airline is creating a good opportunity to connect us with most of the world. To facilitate our trade we have a bilateral preferential trade agreement with more than 50 countries.  That is the market side but we have to work on the supply side. The core sector to strengthen our exports is agriculture. The government is doing a lot to improve agriculture and this why we have many extensions agents in the country. In every kebele there are at least three extension workers who give information to the farmers on improving production, herbicides and on the market side cooperative agents are working to benefit the farmers by improving market access. The agricultural institutes at the federal and regional levels are conducting research to adopt technology on improving seeds which give better yields and resist disease.  We are observing apart from their home conception our farmers are  commercializing  their products but we have to improve our efficiency  to attract more investors to do better jobs in exporting coffee, sesame, oilseeds, meat live animals and other agricultural products.
Capital: As we understand from exports, foreign investors are getting more benefit than the local investors in accessing The African Growth and Opportunity Act (AGOA) market.  What do you say about this?
Dr. Aklilu: The AGOA market is open to both local and foreign investors but the problem for local investors is capital. As a government we are giving loans to local investors to promote their investment in industry.  We are providing loans for 70pct of their projects. In order to have more local investors in AGOA we need to improve agricultural productivity and quality.  However some of our farmers and local companies are still benefiting from AGOA.
Capital: Many thousands of jobs have been created in manufacturing but there is high turnover largely because of the small salaries.  Should there be a minimum wage?
Dr. Aklilu: I can’t claim that the wage is good enough for the workers. However, I know from the system that the more productivity comes from one company the more benefit will come for the workers.   If you look at China labor was very cheap and   many western companies were shifting their business to China which ultimately  helped China have a per capita income  of  USD7,000. This has helped Chinese workers get a better salary. In the same way Ethiopia will have better wages for her workers if we increase productivity and exports by attracting more investors.
Capital: Investors frequently complain about the quality of the workers from vocational schools. What should the Ministry of Education do to overcome these challenges?
Dr. Aklilu: I cannot generalize about all of the labor that we have in manufacturing. There are varieties of skills among individuals. The vocational schools and universities are playing a good role in bringing trained workers to the workforce. However there is still work to be done so schools should update themselves in knowing the practical knowledge that the industry needs and in facilitating apprenticeships and training in manufacturing for their students.  We can’t deny that the more quality workers we have the more quality and quantity production we will get in the market.
Capital: Does the ongoing misunderstanding between Ethiopia and Egypt on the Great Ethiopia Renaissance Dam affect their trade relationship?
Dr. Aklilu: Discussions on dam are still going on and the construction of the dam still in progress. As a state minster I have received many Egyptian investors that want to work in Ethiopia. This demonstrates that the two countries are working to have a good business relationship. Among our neighbors we have a very good relationship with Sudan, we are connected by roads and we have a plan to connect by rail. We export our products to them and a lot of business is being conducted by the two nations.
Capital: Chinese have the most FDI in Ethiopia and play a big role in development but some fear the Chinese involvement in Ethiopia will create a lot of debt. What are your thoughts?
Dr. Aklilu: We have benefited greatly from their investment. It helps us access international markets, increase productivity, and bring jobs because they often work with local investors through joint ventures. They also help us improve our technology. We work with the Chinese using the same policy as we do for investors from Turkey, Japan, India, the USA, UK, Germany  and other  European countries. For developing countries it is normal to take on debt but we do this in a way that benefits us and we assess the risks beforehand.
Capital: Turkish investors have a lot of capital in Ethiopia. However recent news reports indicate their products have been rejected in some countries. What do you think about this?
Dr. Aklilu: I don’t think Turkish businesspeople are investing their money abroad to bring low quality products.  As far as I know the Turkish are very competitive and their products meet European standards. They are working here in Ethiopia with the same calculation.
Capital: Recently the Djibouti government canceled their contract with DP World to manage a port does this concern Ethiopia?
Dr. Aklilu: No this is an internal affair of Djibouti and Ethiopia will continue to access the port like it did before. I can assure you Djibouti will continue to be the major port service provider for Ethiopia.
Capital: When the Dubai based logistics giant DP World and the government of Ethiopia officially disclosed Ethiopia’s 19 percent stake buyout of the Berbera Port, Somalia said they were not happy with the agreement. They claimed that Somaliland is not a recognized country and the deal breeches international law.  Is it right for Ethiopia to work with an unrecognized country?
Dr. Aklilu: Generally Ethiopia has made contracts with Sudan, Djibouti, Somali and Somaliland to obtain port services for its huge populate. We fully respect the internal policies of neighboring countries. We are working to use Berbera Port in a way that will not affect the relationship between Ethiopia and Somalia.

Africa’s Free-Trade future

Staff Reporter
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With the launch of the African Union’s long-awaited Continental Free Trade Area this month, African leaders have an opportunity to set their countries on a path toward social and economic transformation. But they will first need to come together to ensure that the new framework’s power is not merely symbolic.

When African leaders launch the massive Continental Free Trade Area (CFTA) on March 21, 2018, at a summit in Kigali, Rwanda, their top priority should be to avoid rolling out something that is either hollow or redundant. The CFTA – one of 12 flagship programs under the African Union’s (AU) Agenda 2063 framework – could double intra-African trade and bring enormous benefits to the continent. But much will depend on the arrangement’s final shape.
One positive sign is that the CFTA will include trade in services, which already contribute more than 50% of African countries’ GDPs, on average. A growing body of research suggests that services will provide new social- and economic-development pathways for Africa. In their recent book The Unexplored Potential of Trade in Services in Africa, Nora Dihel and Arti Grover Goswani of the World Bank marshal data to show that services have the potential to provide much-needed employment and incomes for ordinary people across the continent.
Service industries such as communications, transportation, banking, insurance, energy, education, and health are key drivers of development, while both tourism and construction currently have high growth potential. Moreover, for many young professionals, services are the only way to earn a living. And with the emergence of entrepreneurial universities – where course work and dissertations produce business propositions rather than just paper degrees – vibrant services markets will become more necessary than ever.
But Dihel and Goswani also warn of “regulatory hurdles.” African policymakers will need to go beyond the initial framework that has already been agreed under the CFTA, to identify sectors that can be brought into the fold of a wider, integrated services market. And a comprehensive framework to establish the terms and conditions of trade and investment in specific sectors, and to attract investment, should follow.
In selecting sectors to promote, the focus should be on infrastructure and areas where countries have already made market-access commitments through the World Trade Organization. That implies that policymakers should concentrate on communications, tourism, banking, transport, and energy, followed by education, health, and construction services. One positive development came earlier this year with the establishment of the AU’s Single African Air Transport Market, which covers 23 countries and 70% of air travel in Africa.
As for trade in goods, the main goal of the CFTA is to open up markets through a broad reduction in tariffs. But before that can happen, African countries need to agree on a common schedule for lowering their import barriers. That will require potentially complex negotiations among multiple stakeholders. To simplify matters, it will be important to keep the number of negotiating parties to a minimum, perhaps by forming country groupings. Beyond that, a fairly short timeframe for negotiations should be established, so that talks do not bog down.
Beyond across-the-board tariff reductions, policymakers will also need to designate sensitive and excluded products in a way that promotes regional value chains, including in agro-processing, chemicals, and automobiles, as well as in the services/logistics inputs that constitute up to 60% of the value of final products. Policymakers should also impose a cap on the maximum value of imports that can be excluded. On the whole, African trade already comprises relatively few product lines, which means that if the most-traded products are excluded, intra-African trade will suffer, and the entire CFTA will be rendered redundant.
Although trade under the CFTA regime will not begin until there are established rules of origin, participants have at least agreed to follow the World Customs Organization’s recognized criteria for determining “value addition,” “material content,” “substantial transformation,” and whether goods are “wholly obtained.”
Still, producing product-specific rules for 6,000-odd goods can take a very long time (it has taken the WTO over 27 years). To expedite the CFTA, African countries could agree to a general minimum threshold of 20-40% for value addition and a maximum of 60-80% for non-originating material. And in the meantime, work on determining substantial transformation and other product-specific rules could continue, albeit with a set timeframe.
A critical objective in setting the CFTA’s product-specific rules of origin should be to promote the production and trade of inputs and other intermediate products within Africa. The CFTA should enshrine the principle of “Made in Africa,” even as it recognizes that some inputs will necessarily be sourced from abroad.
One hopes that African heads of state will turn up in large numbers to the AU Kigali summit this month. The launch of the CFTA is a major milestone for Africa. It will permanently change the continent’s economic geography and defining narrative. African leaders should use the occasion to send a clear message to the rest of the world that Africa is ready for a social and economic transformation.

Francis Mangeni is Director of Trade, Customs, and Monetary Affairs at the Common Market for Eastern and Southern Africa (COMESA).

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