Business Daily (Nairobi)
George Omondi
16 November 2009
Kenya-based subsidiaries of multi-national firms will not get government backing in their quest for a review of the rules of origin regulations that have cut their exports to East Africa by more than 75 per cent since they came into force in July 2005.
David Nalo, the permanent secretary in the Ministry of Trade, said the state was satisfied with the application of the rules that came into force with the establishment of a customs union insisting that the private sector should instead cooperate with the authorities in applying them.
"The government is satisfied with the application of the rules of origin and the private sector must cooperate to make it work," he said.
Rules of origin refer to a set of criteria that is used to distinguish goods produced inside a trading bloc and therefore qualify for preferential treatment within the bloc from those that are produced outside.
It is usually determined by capping the amount of imported raw materials in local production at a specified level - the aim being to promote value addition that is critical in creating jobs and ensuring industries do not pass off imported goods as their own.
EAC allows goods produced wholly from imported raw materials to enjoy preferential treatment so long as the cost of the imported material does not exceed 60 per cent of the final product's cost. Such products must also meet the 35 per cent local value addition rule.
Uganda and Tanzania were the leading destinations for Kenyan products even before the launch of the customs union but the export mix has more recently changed from re-exports (goods exported after they were imported into the country) to those that meet the rules of origin.
A big chunk of Kenya's trade with its East African partners mainly comprise of re-exports such as petroleum, chemicals, machinery, transport equipment and manufactured goods, according to a recent study of the impact of the customs union.
Kenya's re-exports to Uganda touched the 60 per cent mark of total exports in 2003 but has since stabilised at 10 per cent.
Re-exports to Tanzania also rose to 45 per cent of total exports in 2003 but has since the introduction of rules of origin dropped to only 6 per cent.
Trade experts reckon that -- in a region where agriculture and manufacturing sectors remain predominant -- value addition offers local firms the best opportunity to stimulate demand for locally produced good in the regional market.
Kenya's business lobby groups are however opposed to a provision in the EAC treaty that defines value addition as a substantial transformation of the product and not merely procedures such as packaging, mixing of ingredients and assemblage of imported parts.
"It is the view of the private sector that EAC Partner States should remove the usage of rules of origin in the fully fledged customs union taking into consideration the issue of multiple memberships in SADC and COMESA and porous borders," Mr Keli Kiilu of the East African Business Council said.
Kenyan producers appear to have suffered the greatest hit since the EAC brought the rules of origin into force in July 2005.
Kenyan firms such as Nestle, Aucma Digital, KenolKobil, Inter Consumer, CMC Motors and General Motors have recently protested Uganda and Tanzania's blockage of their products for failure to meet the rules of origin specifications.
Kenya's motor vehicle assemblers have argued that assemblage of parts together with activities such as painting constitutes substantial transformation that should be taken into account when calculating the 35 per cent value addition threshold.
"Generally, the application of the rules of origin could be very easy where there is sufficient level of disclosure by the manufacturers. The reality in East Africa is however that most local manufacturers are never willing to provide all the information that technical experts need making it harder for negotiators to defend their products," said Mr Nalo.
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