The EAC: A customs union that isn’t.
The Citizen | 26th June 2023
By Richard Mshomba
Economic integration is important for development in Africa. However, when countries simply claim to have achieved certain levels of integration when they have not, they run into trouble.
Negotiations between the EU and EAC to establish an Economic Partnership Agreement (EPA) have revealed, very clearly, that the EAC is not a genuine customs union. Recently, the EU and Kenya alone concluded negotiations to establish an EPA. Kenya has also reached a bilateral EPA agreement with the UK. These bilateral arrangements would not be possible in a real customs union.
In a customs union, member countries remove trade barriers among themselves and maintain common external tariffs. Members of a customs union usually first negotiate among themselves to establish a common position before they negotiate with non-members. The East African Community (EAC) “became” a customs union in 2005. Almost 20 years later, the EAC is not yet a full-fledged customs union.
A major challenge in the EAC is that, unlike the other six countries in the group, Kenya is not a least developed country (LDC). LDCs have duty-free-quota-free access to the EU market through EU’s Everything But Arms program.
Meanwhile, the EU is an important market for Kenya. About 15 percent of Kenya’s exports go to the EU. Even more important is that Kenya’s main exports to the EU are agricultural and horticultural products which, without special trade arrangements, would be subject to high import duties. Production of these goods has become an important source of foreign currency and employment, especially for women, in Kenya. In 2020, the horticulture sub-sector in Kenya employed 6.5 million people directly and indirectly, about 25 percent of the labour force. In 2020, horticulture generated $1.4 billion in export revenues, 27 percent of total export revenues. About 45 percent of Kenya’s horticultural exports go to the EU, making it the most important market for its horticultural exports.
Although the EAC leadership gave Kenya the green light to proceed with EPAs on its own, a major problem is that the EAC has a high level of intra-regional trade. Kenya’s exports to the EAC bloc in 2021 were 17 percent of its total exports. Conflicts among the EAC members are common. Kenya and Tanzania, in particular, always seem to be able to find something to quarrel about. Since the EAC has no functioning dispute settlement mechanism, the conflicts often escalate to the point of requiring the presidents of the two countries to intervene.
The bilateral agreements between Kenya and the EU and the UK will be a source of tension among the EAC states, especially because transshipment is likely to happen. Transshipment occurs when a product exported from country A to country B is, in turn, exported to country C as if it were produced in country B. Consider a product for which trade among EAC countries is duty-free. Assume that the same product imported by Kenya from the EU is not subject to import duties because of the EU-Kenya EPA deal. However, this product, imported from the EU, would be charged a tariff in any other EAC country. Transshipment happens if, for example, the EU exports that product to Kenya duty-free and then the product is repackaged in Kenya and exported to Tanzania, as if it were produced in Kenya. Notwithstanding the rules-of-origin provisions, transshipment can still occur.
Kenya will also find itself in situations where it cannot satisfy countries in the EAC and the EU or UK at the same time, as the following case illustrates. Up until 2022, the minimum tariff in the EAC for sensitive products had been 25 percent. However, that minimum was raised to 35 percent in 2022. Raising the common external tariffs by the EAC created problems for Kenya with respect to its EPA with the UK. The UK asked Kenya to respect the provisions of their EPA agreement and exempt its exports to Kenya from the new tariff rates, thus creating tensions. These types of dilemmas will be common.
The EAC should not deceive itself into thinking that it is a customs union. It is not – at least, not yet.