24 May 2017

East Africa: EU-EAC Trade Deal - Why Has It Been a Hard Sell?

Photo: The Independent
Tanzania president Magufuli consults president Museveni.

The East African Community is divided on whether to sign a key trade agreement with the European Union. ALON MWESIGWA explains how the EU-EAC Economic Partnership Agreement (EPA) would affect the region.

It is midday on a Sunday and Tom Sajje organises his fishing net in Kitooro on the shores of Lake Victoria, preparing for the evening's journey to fish.

"These days, we struggle to get fish; it is no longer as available as it used to be," Sajje said, referring to the dwindling fish stock in the lake.

Sajje, who is clearly using archaic methods, says they have not been helped much to improve their fishing methods and their general well-being. People like Sajje have a special mention in the EU-EAC EPA trade deal. It promises "ensuring preservation and priority of particular needs of the artisanal/subsistence fishery."

The EU-EAC-EPA deal would also ensure technology transfer, provide for funds, environmental protection, which would in turn grow fish stock, and elevate people like Sajje, but most importantly improve fish exports.

That's not all. Once signed, it will affect everyone - from a management firm at an air-conditioned office in town to a cassava farmer in Moroto. The issue is for better or for worse. The 640-page agreement gives a glimpse of how trade will be like in the next 25 years if it is signed.

In its preamble, it promises "to serve as an instrument of development... and facilitate attraction of investment, technology and the creation of employment in the EAC."

Yet, the hardest question is why a trade deal that promises so much - at least on the surface - including unimpeded access to the European market and support to sectors such as agriculture and fisheries - has been a hard sell to the region.

THE DEAL

The EPA is a trade deal between the European Union and the Africa, Caribbean and Pacific countries (ACP), a group of 79 countries, mainly former EU colonies.

This deal has its roots in the year 2000 when the ACP signed the Cotonou agreement - named after the capital city of Benin, where it was signed - with Europe.

Under this arrangement, the former enjoyed privileged access to the EU's market, which was seen as unfair to other countries that didn't have this arrangement.

At the end of 2007, the Cotonou agreement ceased to be legal under the rules of the World Trade Organisation (WTO) that preached reciprocity rather than privilege in trade. This meant the EU had to look for a new arrangement that would not appear to be favouring former colonies over other countries, which was seen to distort global trade.

Thus, the EU sought to replace the Cotonou trade preferences with new economic partnership agreements (EPAs) based on reciprocity, not dependency. In 2008, the EU started negotiating with regional blocs, including the EAC, where negotiations were completed in 2014.

But the EPAs have stirred more controversy than consensus. Kristian Schmidt, the head of delegation of the European Union Uganda, told The Observer: "On our side, we have signed and we are also convinced that your trade negotiators have done an excellent job. You have a great deal on the table, one that encourages regional integration in East Africa and one that ensures that your access to European markets is not a favour that we can give and take back."

He added: "We are offering you open-ended and unconditional access to a market of 28 countries and 440 million consumers and you are hesitating to take the offer."

But that is not how the region sees it. It sees it as EU's desperate search for a market, one which will also have dire implications for the region's ambitions to industrialise, and sometimes a push to contain China and India's influence in the region.

At the just-concluded EAC summit in Dar es Salaam, Tanzania's President John Magufuli told delegates: "I have failed to find a solution for the EAC-EU trade deal but I am optimistic President Museveni [of Uganda] will do."

The United Nations Economic Commission for Africa (Uneca) has said in a May 2017 report that local industries will struggle to withstand competitive pressures if EPA is operationalized. Isaac Shinyekwa, a researcher of international trade based at the Economic Policy Research Centre at Makerere University, said: "It [EPA] is not a magic bullet."

"What the EPA does is that it robs East African countries of the policy space to decide how to develop their industries," said Shinyekwa.

"Signing EPA means we have already negotiated with EU and we can't change. There is no policy space. We use policy space to analyse what we want and [act on it]."

CONTROVERSY

The agreement calls for up to 82 per cent opening up of the East African states for EU products in 25 years after the signing by removing taxes on them. Tanzania, which has vehemently opposed the deal, says opening its market to reflect the EPA is a stab into its ambitions to industrialize.

The EU is a superior party in this deal and its products, produced more efficiently and cheaply, can have a lethal impact on infant industries in the region. While the liberalisation will be gradual, giving EAC states time to develop capacities to compete with the EU, there are doubts whether the region can industrialise fast enough to match EU competition by the 25th year.

The EAC industrial development strategy 2012-2032 identifies six sectors as crucial for the region's industrial development: iron-ore and other mineral processing; fertilisers and agrochemicals; pharmaceuticals; petro-chemicals and gas processing; agro-processing; and energy and bio-fuels.

Yet a September 2016 study by the South Centre, a think tank based in Switzerland, said EPA would instead adversely affect these sectors. The report argues that removing tariffs on EU products would kill infant firms by outcompeting them.

"No country industrialised without using tariffs to nurture and develop infant industries, except Hong Kong," said the South Centre report. "The EPA will eliminate most duties for imports from EU."

The South Centre says between 60 and 70 per cent of existing EAC local production could be jeopardized when the EPA liberalisation is implemented.

LOST REVENUE

As a result of EPA, Kenya will have at least 998 tariff lines eliminated, Uganda (529) and Tanzania (697). Burundi will have the smallest number of tariffs lines eliminated perhaps because of the small nature of its economy.

The South Centre projects that within the EAC as a whole, without signing the EPA, revenue from tariffs and VAT on EU imports would gradually rise from $455m to $577m at the end of the implementation period.

After signing the EPA, tariff revenue would decline to $317m at the end of the implementation period, accounting for a revenue loss of $260 million in year 25. The cumulative loss for the region in 25 years is estimated at $3bn - about 11 per cent of Uganda's GDP.

Trade integration researcher Martin Luther Munu said there was a challenge of waiving tariffs, which could deindustrialize some local sectors that would have been able to cover for the lost revenue.

EXPORT DUTY

The EU-EAC EPA also disallows East African states from imposing new duties or taxes in connection with the exportation of goods to the EU. If EAC states must impose export taxes - say for food security, protect domestic industry or currency stability - they must notify the EU first, the agreement says in Article 14. And such a measure would be reviewed by the EPA council after 48 months.

Exports taxes are a tool to help discourage the exportation of raw materials that are in demand for local infant industries. With the EPA limiting their usage, it has been seen as ploy by the EU to get raw materials for its industries and starving those in the region.

The EPA's provisions on liberalisation and export taxes pale in comparison with what the EU states used to develop their industrial capabilities when they were at the same level as EAC today.

They discouraged exportation of raw materials and criminalized export of skilled artisans and technology. The EU-EAC EPA seems to suggest the reverse.

WHAT'S IN it FOR AGRICULTURE?

The EAC states have the biggest portion of their populations eking a living out of agriculture, which the agreement recognises as "the main source of livelihood for the majority of [their] population, as the primary factor to ensure food and nutrition security... "

Much of the liberalisation will be in non-agricultural products, according to the South Centre analysis. The region would benefit from entry to the EU market.

The fear, though, is that when EU agricultural products are highly subsidized, it makes it hard for EAC businesses to compete in the EU market. According to Farm Subsidy, an online journal, the EU spends at least 59bn euros a year on farm subsidies.

There have been calls to have subsidies removed, but the EU says this can only be addressed at the WTO level. "Our being competitive in Europe will not come in the short term," said researcher Munu. "The standards in the EU are high; they are particular about which pesticides you use and you may not access their market on that basis. We may sign the EPA and nothing changes.

MORE CONTENTION

Another area of contention has been Article 14 (4) and 15, which say if the EAC negotiates a trade deal and extends concessions to another country outside Africa but with global trade of more than one per cent; the same must be extended to the EU.

Shinyekwa said: "This is meant to contain the emerging economies' - China, India, and Brazil - interests on the continent".

Britain's exit from the EU has produced another headache. But Massimo Diomedi Camassei, trade advisor at the EU delegation to Uganda, told The Observer early this year that even after Brexit, the EU will still remain the biggest single market in the world, which the EAC ought to tap.

LOOKING AHEAD

So, what happens if the region doesn't approve the deal? Apart from Kenya, other countries would still access the EU market through the Everything but Arms (EBA) window.

Kenya is not regarded as a least developed country; so, it would have to battle increased tariffs on its products destined for Europe. While Kenya and Rwanda have signed, the deal can only work after other partner states have signed.

By other states not signing, Kenya may think it is being sabotaged and this has dire implications for the bloc - the worst being a break-up. As states mull over whether to sign or not, Sajje counts his chances for the next catch.

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