In this article, we will touch upon the USA and China influence on Ethiopia’s journey towards becoming a potential hub for apparel sourcing, globally.
How the USA is entering the Ethiopian market?
Ethiopia and the US have strong bilateral trade relations. The US has been the largest aid donor for Ethiopia. Ethiopia being the fastest-growing and the fifth-largest economy in the Sub-Saharan region has recorded almost a 10 per cent annual growth in the last decade. Both the governments have shown strong desires for FDI and a diversified economic relationship between them. The biggest boost to US-Ethiopia trade in garments and textiles, however, comes from the AGOA association between the two nations.
Did you know: The renewed Africa Growth and Opportunity Act (AGOA), has forced several big companies like Corbetti Geothermal Company, l.P Horticulture, KKR & CO., Blackstone and Coca-Cola, to move into Ethiopian markets and take advantage of the benefits this act has to offer.
The sole purpose of AGOA was to assist the Sub- Saharan economies in their growth and development. Currently, the AGOA legislation stands valid till 2025, and it provides trade preferences for duty-free access and quota into the US market, for some products.
AGOA has expanded the duty-free benefits that previously were available only under the Generalized System of Preferences (GSP) programme. Around 7,000 African products are currently enjoying tarifffree access to the US market under AGOA.
From the graph, you can see that after the establishment of AGOA, the trade between the US and Ethiopia has increased exponentially.
Many Ethiopian entrepreneurs are taking advantage of the AGOA to operate globally. For instance, Ethiopian eco-friendly footwear manufacturer, SoleRebels, has transformed into a global footwear company with an annual sales projections of $15 mn through AGOA benefits. Such success stories are attracting more and more foreign investments in Ethiopian garment industry. The attraction here is surely the duty-free access to one of the biggest global markets in the industry.
How China is entering the Ethiopian market?
Ethiopia is a landlocked country with a huge population which can pour out fast fashion at much lower costs than the earlier obvious outsourcing choices for the industry like China. Tax incentives, duty-free access to big global markets, infrastructure investments, and super-cheap labour has converted earlier apparel sourcing destinations like China into middlemen who take advantage of Ethiopian industry and bring orders to the country from brands like Levi’s, Guess and H&M. Industrialists setting up their factories in Ethiopia are exempt from income tax for the first five years, and absolved from taxes/duties in the import of construction supplies and capital goods.
The Hawassa Industrial park is a giant step in this direction of attracting Chinese investors to the Ethiopian economy. According to the Ethiopian Investment Commission, the Hawassa Industrial Park in Ethiopia was built up within nine months, for $250 mn, by a State-owned Chinese construction company. Did you Know: Ethiopia has already opened four massive, publicly-owned industrial parks, and intends to add eight more to this list by 2020. China has financed Ethiopia heavily which allows Ethiopia to be this generous to Chinese investors.
According to the China-Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies, from 2010 to 2015, China has given Ethiopia $10.7 bn in loans alone. This loan amount is now being utilised heavily by Chinese companies, which in turn are helping in the development of Ethiopian labour and infrastructure like building dams, cellular networks, and roads in Ethiopia.
Ethiopian Investment Commission is intending to create around 2 mn jobs in the manufacturing sector by 2025. Chinese investments are largely helping the country to achieve such ambitious targets. Chinese investments can be seen boosting Ethiopian infrastructure in roads, rail, and air transportation. China has also built the Addis Ababa-Djibouti Railway, also known as the Ethiopia-Djibouti Railway that has helped in both increasing access to export commodities and reduction in import costs in the country. Ethiopia is now building an economic belt along this railway line.
As discussed above, Chinese investment is a major boost to the development of industrial parks in Ethiopia. Chinese investors are also directly investing in the Ethiopian manufacturing sector. In 2010, Huajian, a Chinese shoemaker invested in Ethiopia’s manufacturing sector. Huajian manufactures for brands like Calvin Klien and Guess.
As per the Ethiopian Investment Commission (EIC), Chinese investors have created around 28,300 jobs in various Ethiopian sectors, from 2012-17. There were 279 Chinese companies during this period, which created over 19,000 jobs alone for the manufacturing sector.
The US and China effect
The US and China together are thus creating the new Ethiopia, the emerging apparel sourcing hub that the global players are eagerly waiting to cash in. The Chinese and other Asian garment industries are consolidating in the past few years, and they are now more focused on high value-added areas to counter the wage hikes in their countries. Ethiopian industry provides these manufacturers a safe haven with extremely low costs and the added advantage of free access to the US market.
Did you know: The Ethiopian textile industry offers some of the lowest wages across the globe.
