Trade Liberalization under Climate Pressure: A Recursive Dynamic CGE Analysis of Ethiopia

Abstract This paper assesses whether regional trade integration under the African Continental Free Trade Area (AfCFTA) can mitigate the economic and distributional impacts of climate-induced agricultural productivity losses in Ethiopia. A recursive dynamic Computable General Equilibrium (CGE) model is applied, incorporating crop-specific yield projections under RCP4.5 and RCP8.5 climate scenarios alongside tariff reductions and trade facilitation reforms. Results show that AfCFTA generates modest but sustained gains: real GDP increases by 0.21–0.55 per cent by 2035, with gains of over 5 per cent relative to the initial level over the 2021–2035 projection period, while private consumption rises by 0.42–0.75 per cent and imports expand by 1.80 per cent. Sectoral outcomes indicate a climate-constrained structural transformation, with manufacturing and services expanding while the agriculture sector contracts, as the sector hardest hit by climate change. Trade liberalization accelerates labor reallocation toward less climate-sensitive sectors, boosting employment among unskilled and semi-skilled workers and progressively affecting welfare, with the poorest rural households experiencing the largest gains in consumption. Despite these benefits, AfCFTA only partially offsets climate impacts. Our findings highlight that trade integration can support resilience, food security, and structural change when complemented by targeted climate adaptation and industrial policies.