16 May 2018

East Africa: EAC and EU - Economic Partnership Agreement

opinion

The authors argue that the on-going negotiations around the Economic Partnership Agreement (EPA) between the East African Community (EAC) and the European Union (EU) should solely focus on: 1) economic benefits for EAC member states and 2) sustainability of the region's commitment to the agreement's provisions.

For Kenya, increased access to the EU market is the magic wand. This is mostly due to its comparative advantages in vital sectors, with a potential to improve the country's export revenue base. However, the agreement has not been ratified by member states, with the exception of Kenya and Uganda.

The EPA provides a duty and quota free access to EU markets for East African goods in exchange for liberalisation of the regional market for European products. The EU will keep its market open for the region in exchange for gradual liberalisation of over 80 percent of the signatories' market over a period of 25 years.

The United Nations Economic Commission for Africa (UNECA) report titled "Analysis of the Impact of the EAC-EU Economic Partnership Agreement on the EAC Economies" warns that this move opens up local market to imports from more developed nations within the EU and this could hurt the fledgling industries within EAC due to competition from high standard goods. The report further asserts that local industries will struggle to withstand competition pressure from EU firms, while the region will be stuck in its position as a low value-added commodity exporter.

Other findings of the report do not portend improved market access to EU market for the EAC, rather a decline in tariff revenues from EU and further prevents the EAC from later applying a higher tariff rate on capital and manufactured goods like pharmaceuticals, and this agreement will mainly benefit the EU which needs unrestricted access to the EAC market. The report suggests that the agreements is more advantageous to the EU and that EAC countries must renegotiate for quota-free and duty-free access to the EU market, which would be a huge benefit for all the countries in the region.

A study commissioned by the Kenya Human Rights Commission titled "The ABC of EU-EAC Economic Partnership Agreement" faults the agreement and suggests that Kenya will likely be the most affected if the EPA is not ratified because its products will not qualify for preferential treatment and as such still attract high tariffs. This is because Kenya is classified as a developing country and does not qualify for the favourable "Everything but Arms" (EBA) arrangement reserved for the Least Developed Countries.

A study conducted by UNECA indicated that implementation of the agreement would reduce welfare in the EAC, with Kenya being the hardest hit (US $45million loss) while the EU will register a welfare gain of US $212 million. This is supported by the EAC study titled "Economic Impact of EU - East African Community Economic Partnership Agreement" which found that implementing the EPA would put the EAC at risk of losing trading opportunity with other states and only the EU would benefit from the agreement. Kenya has fairly developed industrial and manufacturing sectors. While the country's portfolio in these sectors is to sell finished products within the region, it only exports raw materials to the EU. Trade liberalisation and elimination of tariffs on EU products opens up the market to imports from EU that will compete with local products leading to loss of business, unemployment and decline in revenue.

These are the issues that are still outstanding in the post Doha agenda of the World Trade Organisation, especially on agricultural products, which are central to the EAC economy.

While trade liberalisation is meant to grow the economy, the advantages of EPA must be critically examined. Kenya must specifically assess the agreement to ensure it reaps maximum economic dividends from it. The EPA should create jobs and improve revenue earnings and throughput economic development in the country.

A primary target sector that Kenya could benefit from by enforcing the EPA is the horticultural industry, which accounts for 21 percent of the country's export, earning US $1.1 billion annually. Horticultural products will enjoy preferential access to the EU market with little to no competition from other exporting countries such as Ethiopia and Colombia. Kenya will escape the high EU tariffs, embolden its access to the lucrative European market, and be able to improve its trade infrastructure through technical assistance from the EU. This will enable it to address technical regulations and compliance standards in the export markets in an effort to expand and add value to the economy.

According to the UNECA report cited above, EAC imports could decline by US $42 million mainly in manufacturing while tariff revenues from EU imports would decline by US $169 million. A great amount of Kenya's tax revenue is derived from customs and import duties. In the absence of the EPA, Kenya's export would fall under the Generalised System of Preference and Most Favoured Nations tariffs, with a high risk of market loss. However, due to the EPA, its exports to the EU will continue to benefit from the duty-free and quota-free access.

Going forward the country must employ a mixed approach to international trade in order to fully exploit its gains effectively, it should approach EPA with patient ambition whilst also crafting lucrative deals with high net worth economies that guarantee access of strategic products. Technical assistance programmes that come with most agreements must be harnessed to result in incremental value addition to the products for optimal competition in the relevant market.

*Jack Juma Obiero and Zamzam Idris are former associates in the International Relations and Diplomacy Division at the Kenya Revenue Authority

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