THE IMPACT OF ETHIO – CHINA BILATERAL TRADE ON THE ETHIOPIAN ECONOMY: A RECURSIVE DYNAMIC CGE APPROACH

Abstract

Bilateral and regional trade agreements have become an increasingly prominent feature of international trade over the last two decades. Bilateral and regional trade agreements are a feature of a global trading system alongside multilateral trade agreements. Bilateral and regional trade agreements are sometimes referred to as preferential trade agreements because they are only beneficial to the particular states or countries to which they relate. The impact on Ethiopia’s economy with bilateral trade between China and Ethiopia taking in to account the strategic sectors or otherwise, however, has not been studied. Thus this paper tried to see the impact of bilateral trade arrangement using a Dynamic Recursive CGE model. Four simulation scenarios are examined involve tariff reeducation or create Free trade area (FTA) between Ethiopia and China at one time, in 2016, or through phases, a 25% tariff removal each year from 2016-2019. Another scenario involves excluding strategic sectors from the bilateral trade agreement and involving sensitive government sector in simulation. . The impact of BTA has been found to be significant on traded commodities. Particularly, the price of machineries, vehicles and equipments will decrease. Government revenue also decreases as tariff revenue is an important source of revenue for the Ethiopian government. GDP and trade balance are, however, positively affected. The increase in GDP might be associated to the increase in disaggregated production and private consumption. The larger increase in exports as compared to the increase in imports leads to an improvement in trade balance. The private consumption is also increased that might be due to the availability of cheap consumption commodities from abroad as a result of tariff removal. On the other hand, the results show a decrease in investment which might be attributed to the inability of domestic producers to compete with foreign suppliers at a lower price. Household welfare is improving for simulation 1 and 2 where the the household enjoin the benefit of tariff reduction gradually and one time complete abolishment, however, this is not the case in simulation 3 where government strategic sectors are protected. Furthermore the protection of strategic sectors benefits only producers in these sectors. Exclusion of strategic sectors from BTA helps producers face less competition as the price of imported commodities will include tariffs. Protection of strategic sectors will also increase government revenue. The impact of protecting strategic sectors on the overall economy, however, is negative. It results in a decrease in GDP as well as deterioration of trade balance. Overall household welfare will improve when there is tariff reduction.