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Cablegate: Ethiopia: 2010 National Trade Estimate Report On Foreign

VZCZCXRO7601
RR RUEHROV
DE RUEHDS #2853/01 3381132
ZNR UUUUU ZZH
R 041132Z DEC 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 7028
INFO RUCNIAD/IGAD COLLECTIVE
RUEPADJ/CJTF HOA
RUEAIIA/CIA WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RUEWMFD/HQ USAFRICOM STUTTGART GE
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 06 ADDIS ABABA 002853

SIPDIS

DEPARTMENT FOR AF/E JWIEGERT; AF/EPS - ABREITER AND GMALLORY;
EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD; EEB/TPP/BTA
DEPARTMENT PASS TO USTR FOR PATRICK COLEMAN, BARBARA GRYNIEWWICZ,
GLORIA BLUE, JANE DOHERTY, AND JEFF WEISS
DEPT OF COMMERCE FOR ITA MARIA RIVERO
DEPT OF TREASURY FOR REBECCA KLEIN
USAID FOR AFR/EA - HELLYER, DALTON, AFR/SD - CURTIS

E.O. 12958: N/A
TAGS: ETRD ECON EFIN EINV BEXP AF ET
SUBJECT: ETHIOPIA: 2010 NATIONAL TRADE ESTIMATE REPORT ON FOREIGN
TRADE BARRIERS

REF: STATE 106353

ADDIS ABAB 00002853 001.2 OF 006


1. (U) This cable is a response to reftel request for the 2010
National Trade Estimate Report on Foreign Trade Barriers.

TRADE SUMMARY
-------------

2. (U) The U.S. goods trade surplus with Ethiopia was $147.2 million
in 2008, an increase of 89 percent over the surplus of $77.7 million
in 2007. U.S. goods exports in 2008 were $299.4 million, up 80
percent from the previous year. Corresponding U.S. imports from
Ethiopia were $152.2 million, up 73 percent. U.S. goods exports in
the first nine months of 2009 reached $159 million indicating a
short fall of $39 million in contrast to $198 million in the same
period of 2008. Corresponding U.S. imports from Ethiopia during the
same period were $88.4 million in contrast to $128 million in 2008.
Ethiopia was the 108th largest export market for U.S. goods during
2008.

3. (U) The stock of U.S. foreign direct investment in Ethiopia
reached $254.7 million as of September 2009, which includes both
projects under implementation and operation.

IMPORT POLICIES
---------------

4. (U) Ethiopia is not a Member of the World Trade Organization
(WTO), but has begun the process of acceding to the WTO. It
submitted the Memorandum of Foreign Trade Regime to the WTO in
December 2006, sent replies to the first round of WTO member
questions in January 2008, and held its first Working Party Meeting
in May 2008. Ethiopia submitted its replies to a second round of
questions generated after its first Working Party in March 2009.
In June 2009, Ethiopia submitted a Legislative Action Plan to meet
WTO requirements. Additionally, Ethiopia has finalized a number of
other WTO Accession documents with U.S. Government support and these
documents will be forwarded to the WTO Secretariat upon final
approval by the Ethiopian Ministry of Trade and Industry. The
Second Working Party Meeting is expected to be held in 2010, pending
Ethiopia's confirmation with the WTO. Ethiopia has made modest
progress in drafting new legislation and implementing capacity
building measures relevant to accession with the help of technical
assistance from a number of donors, including the U.S. Government.
Ethiopia is a member of the Common Market for Eastern and Southern
Africa (COMESA). Economic relations between the U.S. and Ethiopia
are governed by the 1953 Treaty of Amity and Economic Relations.

A. Tariffs

5. (U) Revenue generation, not protection of local industry, appears
to be the primary purpose of Ethiopia's tariffs. High tariffs are
applied to protect certain local industries, however, such as the
textile and leather industries. Goods imported from COMESA members
are granted a 10 percent tariff preference. Ad valorem duties range
from 0 percent to 35 percent, with a simple average of 16.8 percent.
In February 2007, the government levied a ten percent surtax on
selected imported goods, with the proceeds designated for
distribution of subsidized wheat in urban areas. In July 2008, the
government of Ethiopia introduced an export tariff on raw and
semi-processed hides and skins in an effort to shift domestic
production to focus more on finished leather, hides and skins, which
reap higher world prices.

6. (U) The estimated impact of this trade barrier is less than $10
million based on its minimal impact on U.S. exports.

B. Foreign Exchange Controls

7. (U) Importers are facing increasing difficulty in obtaining
foreign exchange, particularly those importing goods or inputs
destined for domestic sales. Ethiopia's central bank administers a
strict foreign currency control regime and has a monopoly on all
foreign currency transactions. The local currency (Birr) is not
freely convertible. While larger firms, state-owned enterprises,

ADDIS ABAB 00002853 002.2 OF 006


and enterprises owned by the ruling party have not typically faced
major problems obtaining foreign exchange, less well connected
importers, particularly smaller, new-to-market firms, increasingly
face burdensome delays in arranging trade related payments. An
importer must apply for an import permit and obtain a letter of
credit for the total value of the imports before an order can be
placed. Even then, import permits are not always granted. Ethiopia
currently maintains four requirements and potential restrictions for
payments and transfers of international transactions, which include:
1) tax certification requirement for repatriation of dividend and
other investment income; 2) regulations covering the repayment of
legal external loans and foreign partner credits; 3) rules for
issuance of import permits by commercial banks; and 4) a requirement
to provide a clearance certificate from the National Bank of
Ethiopia (central bank) to obtain import permits.

8. (U) The stock of Ethiopia's foreign exchange reserves fell to one
month of import coverage in December 2008, but recovered slightly to
about 1.8 months by December 2009. International economists expect
the foreign exchange crisis to continue for the foreseeable future
as Ethiopia continues to rely on donor flows to combat the problem.
An acute shortage in Ethiopia's foreign exchange market has stalled
overall business in both the private and public sectors. Whereas
firms seeking bank letters of credit for imports requiring hard
currency previously could acquire those upon demand and with an
initial 30 percent deposit, such requests now routinely face waits
in excess of three months and require 100 percent of the payments up
front. The government's recent tightening of the banking
regulations to manage its limited foreign exchange reserves has
consequently dampened the supply of desired consumer and industrial
imports. The limited supply of foreign exchange in Ethiopia's banks
has continued to take a toll on U.S. commercial interests as
companies have had increasingly difficulty in importing essential
consumer inputs and industrial capital goods from abroad. As a
result, some prominent U.S. and other foreign business interests in
Ethiopia may be forced to suspend business operations in Ethiopia.


9. (U) The estimated impact of this trade barrier is $25 to $100
million based on the amount of U.S. machinery and spare parts that
are exported to Ethiopia.

C. Sanitary and Phytosanitary (SPS) Regulations

10. (U) On September 9, 2009, the Ethiopian Government enacted
Proclamation No. 655/2009, establishing a regulatory framework for
biosafety in Ethiopia. The stated objective of the proclamation is
to protect biodiversity, as well as human and animal health, from
the "adverse effects of modified organisms." This law places a
significant regulatory burden on those who seek to import food
commodities containing "modified organisms" (MO) and is both more
expansive and comprehensive than internationally accepted norms on
biosafety outlined in the Cartagena Protocol on Biosafety. For
example, it makes no distinction between viable (i.e., able to
reproduce in the environment) and non-viable organisms, as outlined
in the Cartagena Protocol. As a result, the proclamation may result
in a significant barrier to trade in both processed and raw food
products, as well as a variety of agricultural products. Corn, soy,
and cotton derivative products are among the potentially affected
products.

11. (U) The biosafety law grants the Ethiopian Environmental
Protection Authority (EPA) the power to regulate the making or use
of any MOs in "teaching, research, production, import, export,
transit, release, contained production, transport, placing on the
market, or use as pharmaceutical, as food, as feed, or for
processing." According to the law and directives, an Advanced
Informed Agreement (AIA) must be obtained before a viable or
non-viable MO may enter Ethiopia. The AIA application process
includes submission of product characterization information,
environmental and human health risk assessments, social and economic
impact assessments, and risk management plans. By contrast, the
Cartagena Protocol only requires an AIA for living modified
organisms intended for direct release into the environment, not for
those intended for food, feed, or processing.

ADDIS ABAB 00002853 003.2 OF 006

12. (U) The estimated impact of this trade barrier ranges from $100
to $500 million based on the historical amount of U.S. food exports
to Ethiopia.

STANDARDS, TESTING, LABELING, AND CERTIFICATION
--------------------------------------------- --

13. (U) The Quality and Standards Authority of Ethiopia regulates
all exports and imports that are subject to Ethiopian standards.
Certification is required for foodstuffs, construction materials,
chemicals, textiles, and pharmaceuticals. Outside of the new
biosafety legislation affecting food and agricultural products, the
standards appear to be consistent with international norms.
Pharmaceuticals that have been extensively tested and licensed in
other countries are allowed to enter the Ethiopian market without
further testing. Industry sources have reported instances in which
burdensome regulatory or licensing requirements have prevented the
import and/or local sale of products from the United States and
other countries, particularly personal hygiene and health care
products.

14. (U) Ethiopia established a National Codex Committee (NCC) in
2003, which advises the Ethiopian Government on food standard
issues. The NCC is a member of the Food and Agricultural
Organization of the United Nations (FAO)/World Health Organization
(WHO) Coordinating Committee for Africa (CCAFRICA), which
participates in Codex (the WTO-recognized body for setting
international food safety standards).

15. (U) The new biosafety law imposes rigorous examination and
burdensome labeling requirements for MO-related food and
agricultural products. The EPA must be notified before any MO is
transported into Ethiopia and MOs must be declared at points of
entry. MO-related products must be labeled, in English and the
local language (Amharic), with the words "contains modified
organism." Customs officers have the authority to examine, sample,
and detain loads if they are thought to contain unauthorized MOs.
Transporters must obtain a special license to bring viable MO
products into Ethiopia.
The estimated impact of this trade barrier is included in the SPS
regulations section.

GOVERNMENT PROCUREMENT
----------------------

16. (U) A high proportion of Ethiopian import transactions are
conducted through government tenders, reflecting the heavy
involvement of the government in the overall economy. The tender
announcements are usually made public to all interested potential
bidders, regardless of the nationality of the supplier or the origin
of the products or services. Bureaucratic procedures and delays in
the decision-making process sometimes impede foreign participation
in tenders. U.S. firms have complained about the abrupt
cancellation of some tenders, a perception of favoritism toward
Chinese vendors, and a general lack of transparency in the
procurement system. Business associations have complained that
state-owned and ruling party-owned enterprises have enjoyed de facto
advantages over private firms in the government procurement process.
Several U.S. firms have complained of pressure to offer vendor
financing or other low-cost financing in conjunction with bids.
Several significantly large contracts have been signed in recent
years between government enterprises and Asian companies without a
tender process. Ethiopia is not a Member of the WTO and, therefore,
is not a signatory to the WTO Agreement on Government Procurement.


17. (U) The estimated impact of this trade barrier is $100 to $500
million based on the number of U.S. company registered complaints of
these practices.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION
---------------------------------------------

18. (U) Ethiopia is a party to the World Intellectual Property

ADDIS ABAB 00002853 004.2 OF 006


Organization Convention. The Ethiopian Intellectual Property Office
(EIPO) is responsible for the administration of patents, trademarks,
copyrights, and other intellectual property policy and legal issues.
In the past few years, Ethiopia has enacted a series of new laws
pertaining to copyright and related rights, plant varieties, and
trademarks. In July 2008, EIPO confiscated and destroyed close to
half a million pirated copies of locally produced songs and films in
Addis Ababa.

19. (U)Ethiopia has yet to sign onto a number of major international
IPR treaties, such as: the Paris Convention for the Protection of
Industrial Property; the WIPO Copyright Treaty; the Berne Convention
for the Protection of Literary and Artistic Works; and the Patent
Cooperation Treaty. As EIPO has been tasked only to protect
Ethiopian copyrighted materials and pirated software, EIPO has taken
no action to confiscate or impede the rampant sale of pirated
foreign works in-country, arguing that it has no obligation to
protect such works which it considers to be outside of its purview.

20. (U) Several Ethiopian firms, particularly in the tourism and
service industries, operate under the names, or use the symbols, of
major international brands. The lack of government registration
requirements and enforcement capacity leave the government in a
position of only responding to formal IPR challenges brought to
Ethiopia's Competition Commission.

21. (U) The estimated impact of this trade barrier is $100 to $500
million based on the amount of pirated works sold in Ethiopia and
the number of businesses operating illegally under U.S. brand
names.

SERVICES BARRIERS
-----------------

A. Telecommunications

22. (U) The state-run Ethiopian Telecommunications Corporation (ETC)
maintains a monopoly on telecommunications and Internet service and
is closed to private investment. The sector remains underdeveloped
and Ethiopia, with an estimated population of over 80 million, has
the lowest telecommunications and internet penetration rates in
Africa with just 3.1 million mobile phones, 900,000 fixed phone
lines and 40,000 internet subscriptions as of March 2009.

23. (U) Telecommunications service in Ethiopia is patchy and
unreliable at best. While most of Addis Ababa receives mobile phone
coverage, attempted calls often fail for broken signals, false
errors of recipients being out of the service area, or a lack of
network capacity to carry the call. Both coverage and service in
most other major towns is unpredictable. To date, the Ethiopian
government has not made any special accommodations for the business
community to acquire improved telecommunications services to compete
in the global market. The government has taken a populist approach
in improving the telecommunications sectors by focusing the bulk of
its efforts toward broad access for rural areas before it plans more
robust and high tech upgrades to help businesses. Chinese companies
have received the vast majority of orders from ETC for upgrading its
infrastructure.

24. (U) An August 2005 directive allows private companies to provide
Internet service through the government's infrastructure, but
implementing regulations have yet to be promulgated and ETC
maintains a de facto monopoly on Internet services. There are no
regulations on international data flows or data processing use. In
late 2009, Ethiopia released a tender soliciting an international
firm to overhaul ETC's management operations.

25. (U) The estimated impact of this trade barrier is over $500
million based on the U.S. private sector's capacity to develop the
local telecom sector and telecom restrictions on current U.S.
businesses operating in Ethiopia.

B. Franchising

26. (U) Difficulties in product quality control, banking

ADDIS ABAB 00002853 005.2 OF 006


regulations, and continuing foreign exchange convertibility issues
make franchising difficult. Currently, there are no U.S. franchise
operations in the country, though two U.S.-flagged hotels operate
under United States-linked management contracts.

27. (U) The estimated impact of this trade barrier is $100 to $500
million based on the numerous U.S. franchise companies that would
consider enter the populous Ethiopian market.

INVESTMENT BARRIERS
-------------------

28. (U) Official and unofficial barriers to foreign investment
persist. Investment in telecommunications services and defense
industries is permitted only in partnership with the Ethiopian
government. The banking, insurance, and micro-credit industries are
restricted to domestic investors. Other areas of investment
reserved exclusively for Ethiopian nationals include broadcasting,
air transport services using aircraft with a seating capacity of up
to 20 passengers, and forwarding/shipping agency services. Foreign
investors are also barred from investing in a wide range of small
retail and wholesale enterprises (e.g., printing, restaurants, and
beauty shops).

29. (U) According to Ethiopia's 2007 Plan for Accelerated and
Sustained Development to End Poverty (PASDEP), it allows for the
participation of the private sector in generation of power for sale
to the national grid and also allows the private sector to
participate in off-grid transmission, distribution, and sale of
electricity. In addition, the Minister of Mines and Energy has
recently stated that Power Purchasing Agreements (PPAs) and other
financing modalities are under consideration. In fact, PPAs and
Independent Power Producers (IPPs) are referenced in a draft feed-in
tariff bill that appears to open the door for private investors to
sell electricity generated by renewable energy sources to the
national grid. Ethiopian government officials have asserted in
recent meetings with U.S. Government officials, however, that
Ethiopia is interested only in foreign concessional financing for
large-scale energy projects.

30. (U) The government is privatizing a large number of state-owned
enterprises. Most, but not all, of the tenders issued by the
Privatization and Public Enterprises Supervising Agency are open to
foreign participation. Some investors bidding on these properties
have complained about a lack of transparency in the process. Others
who have leased land or invested in formerly state-owned businesses
subject to privatization have experienced political impediments to
assuming full control of acquired firms (e.g., transferring title,
delay in evaluating tenders, and tax arrears).

31. (U) All land in Ethiopia belongs to the state; there is no
private land ownership. Land may be leased from local and regional
authorities for up to 99 years. In practice, land has been made
readily available by the authorities to foreign investors in
manufacturing and agriculture business, but less so for real estate
developers. An ongoing border dispute with Sudan has resulted in
investors, including foreign investors, who had been granted land
usage rights in the area to have their land and all assets forcibly
taken by Sudanese authorities without recourse or response from the
Ethiopian government.

32. (U) Some of these investment barriers are addressed in other
sections of this report; however, the estimated impact of this trade
barrier is over $500 million primarily due to the potential U.S.
investment in the financial sector as well as increased U.S.
investment in large scale manufacturing and agricultural
operations.

OTHER BARRIERS
--------------

A. Parastatal and Party-affiliated Companies

33. (U) Ethiopian and foreign investors alike complain about
patronage networks and de facto preferences shown to businesses

ADDIS ABAB 00002853 006.2 OF 006


owned by the government or associates of the ruling party in the
form of preferential access to bank credit, foreign exchange, land,
procurement contracts, import duties, etc.

34. (U) Partially overlapping with the Government Procurement
section of this report, the estimated impact of this trade barrier
is over $500 million based on the difficulty private sector
companies face if they do not partner with a state-owned enterprise
or ruling party-owned entity.

B. Judiciary

35. (U) Ethiopia's judicial system remains inadequately staffed and
inexperienced, particularly with respect to commercial disputes.
While property and contractual rights are recognized, and there are
commercial and bankruptcy laws, judges often lack understanding of
commercial matters and scheduling of cases often suffer from
extended delays. Contractual enforcement remains weak. There is no
guarantee that the award of an international arbitral tribunal will
be fully accepted and implemented by Ethiopian authorities.
Ethiopia has signed, but never ratified, the 1965 Convention on the
Settlement of Investment Disputes between States and Nationals of
Other States. The Ministry of Justice and the Federal Ethics and
Anti-Corruption Commission (FEACC) are the government entities with
primary responsibility to combat corruption. FEACC has arrested
many officials, including managers of the Privatization Agency,
Ethiopian Revenue and Customs Authority, National Bank of Ethiopia
and the state-owned Commercial Bank of Ethiopia, and charged them
with corruption. In 2009, FEACC actively arrested officials of
private financial institutions in allegedly involved in unlawful
business practices and individual businesspersons accused of tax
evasion.

36. (U) The estimated impact of this trade barrier is $10 to $25
million based on registered complaints made by U.S. firms or
individuals.

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