Ratio Magazine | Monday, 27 April 2009
EAC Regional: Private Sector Ambivalent on EPAs
Uganda, Tanzania, Rwanda and Burundi all qualify for free EU market access under the Everything But Arms (EBA) scheme, but chose to sign a joint EPA with Kenya to preserve the EAC customs union. As the conclusion of the EPA negotiations approaches and the global economic crisis continues, the debate over how an EPA will affect East Africa has produced few clear answers. By Rachel Keeler.
In between meetings on one particularly busy recent Friday morning, the Kenyan Ministry of Trade’s Bernard Kagira took an hour to share cocktail sandwiches and the status of Economic Partnership Agreement (EPA) negotiations with a group of concerned Kenyans. The focus of the meeting was a new research paper detailing the myriad inabilities of East African states to meet European Union (EU) technical trade standards. “We need to look at ourselves not as underdogs - we have got an opportunity, so how do we address that opportunity?” Kagira coached. “It reaches a point where you must not rely on donor money.”
European health, safety, labor, environmental and ethical standards are a big deal in EPA circles. Europe says clean food and workers’ rights save lives, but critics say EU corporate lobbies raise ridiculous technicalities to shut out African exports. Either way, Africa wants development aid to help bring its industries up to par. Many say the promise of trade capacity building is the only reason African leaders agreed to consider EPAs to begin with.
In 2000, the World Trade Organization (WTO) declared preferential access to EU markets for African states illegal because it was both exclusionary (not extended to all developing countries) and non-reciprocal. The EPAs are thus structured to introduce reciprocity to preserve the preferences. This goal comes with a host of complaints from states now expected to open their markets to the EU: worries about competition from cheap EU products, destruction of regional trade, and the persistent inability of African exports to compete on the European stage. The deals are now in the final stages of negotiations between the EU and various African trade blocks, with a conclusion expected to the East African Community (EAC) treaty this July.
As that conclusion approaches and the global economic crisis rages on, the debate over how an EPA will affect East Africa has produced few clear answers. Civil society whines that trade development aid will be out of reach now that the crisis has depleted European budgets. The government speaks only of rising to challenges, and caught somewhere in between is the largely ambivalent private sector.
Status of Negotiations and Lingering Issues
July deadline: Apparently the 31 July 2009 deadline for a final EAC EPA that has been tossed around in the media is more a semantic guideline. “Negotiations were to be ‘concluded’, not ‘signed’,” by July,” Kagira said. What the EAC is actually hoping to sign in the next month is the interim agreement that was merely initialled in November 2007. Some might interpret this as running slightly behind schedule on negotiations that have dragged on since 2002. But it could cause problems for the EAC to sign a final deal with the EU before full implementation of its customs union kicks in the end of this year.
There is a long list of issues left to be negotiated before a final deal can happen:
– Rules of origin: Europe has promised less onerous rules, which will benefit EAC textile and apparel exports; Kenya is still conducting sectoral consultations to decide what terms to demand.
– MFN: The most favoured nation (MFN) clause is unresolved and extremely contentious. Europe wants to receive the same bilateral preferences the EAC extends to any country with a more than 1% share of global trade. That means any future deals with China or India would apply to Europe as well. This is bad business for East Africa, with the importance of its trade with Asia on the rise.
– Services: The current understanding is to leave trade in services under WTO limits. The Kenyan Ministry of Trade will hold 22 days of stakeholder fora on services in May 2009 with sector specific meetings to determine whether the region is willing to liberalise further. With a comparative advantage in labour, policy on temporary movement of skilled and semi-skilled persons is important to the EAC. East Africa will benefit if workers are allowed to enter the EU more easily, especially as remittances have fallen due to the global crisis. Uganda has said the services sector has the highest growth potential in the country, surpassing even agriculture.
– Agriculture: Full texts from each side will be tabled for the first time at the next EU-EAC meeting to be held soon in Mombasa. No one expects the EU to budge much on subsidies.
Most controversial of all are trade related issues governing competition, government procurement, investment and intellectual property rights (the “Singapore Issues”) that will be discussed for the first time in Mombasa. Even if the EU manages to push these past the EAC stance against them, East African governments do not have the capacity to enforce them. Aid for trade would have to come from the EU side, which could happen since big money is at stake for European corporations.
Development aid: The development co-operation text is 80% complete, but with no concrete offers from Europe yet. Civil society is demanding a special EPA financing facility to be run out of the EAC that could rapidly address specific supply side constraints. This actually makes more sense than the EU proposal to funnel everything through the slow and inefficient European Development Fund, but is unlikely to happen.
Supply side constraints: Poor infrastructure, high input costs and pervasive inefficiency have always been the biggest barriers to African trade. With no solid promises of development aid, the Kenyan government says it plans to step up and fix the problems itself. Kagira cites road improvement projects that have led to mushrooming flower farms in Molo, and the oversubscribed KES18bn government infrastructure bond put out in January 2009 to finance roads and power. “I think beyond what you see on the coalition front, there is a lot happening,” he said. “And more could happen without this friction.” The friction, of course, is the deal-breaker. Political instability in Kenya threatens the economic wellbeing of the entire region.
Still, much capacity building in East Africa has already been off-loaded to the private sector. Big horticulture firms in Kenya have met stringent EU phyto-sanitary standards all on their own. The fisheries industry in Uganda is also now EU certified, due solely to the efforts of a private exporters association there. The association has shown thousands of artisan suppliers how to meet technical requirements. However, Consumer Unity & Trust Society, the author of the new standards report, says private exporters that train small farmers in Kenya are deducting the costs from their payment. Lack of government support could ultimately shut smallholder farmers, who produce many of Kenya’s major vegetable exports, out of the markets. Small-scale producers in coffee, tea and fisheries in Tanzania also face unmet capacity restraints.
Private sector perspectives: The truth is that most businesses in East Africa are not too worried about the outcome of the EPA. Capacity constraints are constant, and expectations are that the deal will simply preserve the market access exporters already have. A mountain of sensitive product exclusions have been compiled separately for each member of the EAC through consultations with the private sector, which will protect the region from EU competition.
A major worry was once that cheap European manufactured imports would destroy Kenya’s regional market share. But Walter Kamau from the Kenya Association of Manufacturers (KAM) says that this is no longer an issue. “Manufacturers are not worried. We showed them the exclusive list, which is 18% of total traded tariffs, and no threat as such,” he wrote in a recent comment. “We want to safeguard the existing export markets,” he added. “We are very engaged in the EAC EPA negotiations in order to maintain market access which has been duty free, quota free since January 2008.” Kamau said for Kenya, the global crisis has affected a few sectors, including a 10% drop in demand for packaging materials and price declines for metal products and flowers. But KAM expects manufacturers can make gains in European markets if the EPA is negotiated well. The exclusion lists are technically still up for review, as are safeguard measures to protect infant industries.
Vimal Shah from Bidco, a regional manufacturer of vegetable oils, is slightly worried about how well this last round of negotiations will go. “It’s about making sure those exclusion lists stick,” he said, but “our negotiating capabilities have been quite weak.” East Africa could lose out on when it comes down to final horse trading with EU negotiators. The EAC side is stretched thin and working with little persuasive evidence. Quality impact assessments do not exist. Kenya’s Ministry of Trade has only just commissioned a study on the impact of the interim EPA that was initialled in November 2007, and the research may not even be finished before the final contract is signed. Stakeholder consultations are as good as it gets. To their credit, EAC governments have been working hard to secure these.
EAC dynamic: The new EAC Trade Negotiation Act of 2008 comes into force this year. It means the community must take a common stance on all external trade negotiations. As usual, the less developed members are suspicious of how this move with benefit Kenya at their expense.
Many least developed countries (LDCs) have refused to join their trade blocks in signing EPAs because they already qualify for free EU market access under the Everything But Arms (EBA) scheme. Uganda, Tanzania, Rwanda and Burundi all qualify as well. But they chose to sign a joint EPA with Kenya to preserve the customs union. There are two additional benefits they gain from this: The promise of stability (because EBAs are non-negotiable and can be revoked anytime) and development aid. Stability should attract new long term investment across the EAC market. But now that it appears aid might not be coming, groans about investment and trade favouring Kenya have re-emerged. It will cost Rwanda, Burundi, Tanzania and (to a slightly lesser extent) Uganda many times more than Kenya to set up the institutions required to meet EU technical standards.
Kagira says Kenya has potential to export more livestock products to the EU, something Namibia and Botswana have been successful with. Uganda is also looking at the industry’s growth potential, especially for dairy products. But both countries face disease management constraints, and Uganda has problems with business infrastructure. Coffee accounts for over 70% of exports from Rwanda and Burundi to the EU. Rwanda has potential to profit from roasting value addition and niche markets for organic and fair trade products. But Burundi’s instability and dismal infrastructure will prohibit growth there.
Overall, regional market concerns probably outweigh EPA issues. The Uganda Manufacturers Association announced in April that transition to a common market in 2010 could wipe out Ugandan manufacturing, which faces higher transport costs than Kenyan and Tanzanian producers. Uganda is also afraid of Comesa sugar entering the EAC market through Kenya and destroying its local industry.