Eyes on the Prize
Does the peace deal between Ethiopia and Eritrea—now rewarded with a Nobel Prize—bring the kind of cooperation between the two countries that it aspired to do a year ago?
Ethiopia’s Prime Minister Abiy Ahmed won this year’s Nobel Peace Prize for his efforts to end the two decades long Ethiopian-Eritrean “no peace, no war” stalemate. In its citation, the Nobel Committee got all lyrical: “When Prime Minister Abiy reached out his hand, President [Isaias] Afwerki grasped it, and helped to formalize the peace process between the two countries.” But, does this deal bring the kind of cooperation between the two countries that it aspired to do?
A year has lapsed since this historical deal was signed. Even though the peace deal seemed promising at first, and the land routes were re-opened in September, 2018, it was short lived; because, all the land routes were eventually closed by mid-April 2019 without any official explanation from both sides.
But at least the re-opening gave a chance for a brief moment of an intensified cross-border trade. During those brief months around 1,500 trucks used to cross the border per day carrying different agricultural products such as teff (Ethiopia’s staple food), barley, coffee, sesame and corn as well as timbers, house bricks, furniture and petroleum from Ethiopia. The same trucks would return from Eritrea with textiles and garments, and various electronic goods, although not fully loaded. These were taking place without any trade protocol, so the border crossing trade agreements paving a way for uneven and hostile trade relations.
Granted, this unregulated trade looked positive on the surface, it had been also a source of tension. Concerned about the untaxed goods, Ethiopian manufacturers were the first to profess their disquiet. Similar feelings were also forthcoming from the Eritrean agricultural goods’ importers whose prices deflated due to the influx of goods from Ethiopia. Meanwhile, this mass exportation of agricultural products such as teff had created fear of supply shortage among Ethiopian consumers.
The export of petroleum from Ethiopia to Eritrea – whose access to petroleum is restricted by government ratios – had created tension. This is because even if the exportation was done at a household level, it had created a shortage in border-crossing areas. The tension created by the shortage was further fueled as the petroleum was imported and meant to be sold only for Ethiopian citizens at a subsidized price. This was another jab to the Ethiopian economy which is already on its knees due to a foreign currency crunch.
This uneven and chaotic trade may make one to wonder, if the two countries’ new relationship would revert back their previous hostile economic cooperation.
Previously, the two countries were economically integrated till 1998 starting from Eritrea’s independence in 1991. During these years of economic cooperation, the two countries had strengthened their ties through a number of trade agreements. This includes the 1995 free trade agreement and the 1991 agreement on the use of a common currency, the Ethiopian Birr, used by Eritrea until it adopted its own currency. Significantly, in the 1991 agreement Eritrea formally granted Ethiopia free access to use the port in Assab and Massawa port for an “insignificant transit charge” of 1.5 percent. The agreement also allowed Ethiopia to run and maintain the Eritrea-based Assab oil refinery, necessary for providing its citizens with refined oil. The implementation of the agreements was overseen by a joint ministerial committee from both nations.
Although good on paper, both sides worried about being sold a raw deal. The agreement on the Assab Oil Refinery was one such source of tension. When the refinery was built in 1967 it was financed by a loan from the former USSR and a contribution by the Ethiopian government. When ownership of the refinery was transferred to the Eritrean government, no arrangement was made for retribution to Ethiopia. This was later seen by Ethiopians as benefiting Eritrea at their expense. Even though Ethiopia was now allowed to use the refinery, the agreement mandated them to pour 30 percent of its refined petroleum products back into the barrels of the Eritrean government. Over the following years, the allocation of refined petroleum to Eritrea rose from 17 percent in 1992 to 54 percent in 1997. As the demand for petroleum in Eritrea went up creating a shortage, Ethiopia found itself spending millions of dollars on petroleum imports to fulfill its domestic demand. Moreover, Ethiopia had to spend hard currency to purchase crude oil, which Eritrea got to buy at a subsidized rate in the local Birr currency after it was refined. This helped Eritrea to save hard currency otherwise spent on the purchase of crude oil.
Similarly, the deal that made it possible for Ethiopia to use the Eritrean ports of Assab and Massawa also had its downsides. Given Ethiopia’s dependence on these ports for most of its imports and exports, the “insignificant” 1,5% transit charge for the Massawa port turned out to be far from insignificant. According to an IMF’s 1998 report Ethiopia’s port service fees made up around 10 percent of Eritrea’s GDP.
Trade deficit was another source of tension. In the few years of the economic cooperation, Eritrea depended heavily on Ethiopian food imports to feed its population. Leather was also the second most imported commodity of Eritrea from Ethiopia. Since all of these purchases were made in Birr, the Eritrean government was expected to save its spending on hard currency. Meanwhile, the products Ethiopia imported from Eritrea consisted mostly of manufactured goods, such as machinery and transport equipment. In the years 1992, 1993 and 1994, Eritrea exported from 130,207 million to 345 million Birr worth of items to Ethiopia, according to a 1998 publication by The Reporter. By comparison, Eritrea exported only 47, 58 and 76 million worth of items to Sudan in those same years. By 1996, Eritrean exports to Ethiopia had reached as high as 70 percent while only nine percent of Ethiopian exports made it to Eritrea.
On the other side of the aisle, Eritrea accused Ethiopia of violating the spirit of the free trade agreement through protectionist policies, according to a 1995 report by the joint ministerial committee. The committee found that Ethiopia subjected Eritrean products to indirect taxes and various intermediate payments in every Ethiopian region. Tensions further escalated when Eritrea in late 1997 introduced its own currency, the Nakfa, the adoption of which required a clear delineation of their borders. Months later, a crisis erupted in Badme town, when an Eritrean patrol barged in to Ethiopian administered area. This ensued a clash that lead to the death of at least one Eritrean. In response, the Eritrean army marched in and forced Ethiopians out of Badme. The Badme incident proved to be the tipping point; in response, the Ethiopian government declared war on Eritrea.
In evident to this history where economic tension between the two nations played a huge role because of the 1998 war. We should draw caution before jumping into the trade opportunity opened by the reconciliation. Because trends are showing that this history of uneven trade and economic tension could repeat itself. The fact that the two countries are yet to set up a trade protocol and border crossing trade agreement should further raise our concern, so that we can prevent this vicious cycle. It also puts the Nobel Peace Prize in a more realistic light.