Standard | 10 Aug 2016
Collapse of EU trade deal: Kenya finds itself isolated for a third time in four months
Kenya has found itself isolated after its peers in East Africa developed cold feet on a trade deal with the European Union (EU).
Paul Wafula and Domnic Omondi
One after another, the five countries in the region have backed out of the deal, leaving Kenya on the negotiating table alone.
Unlike Kenya, the other East African countries have nothing to lose if they do not ratify the deal, known as the Economic Partnership Agreements (EPAs), by the October 1 deadline – at least not in the short term.
The EPAs are trade and development agreements negotiated between the EU and African, Caribbean and Pacific (ACP) partners engaged in regional economic integration processes. When talks on the deal began in 2002, the East African Community (EAC) agreed to enter the negotiations as a bloc.
But with the signing deadline looming, Tanzania has put the first nail in the coffin after publicly declaring it would not sign the agreements.
This jolted Kenya into action in a race against time, and further tested its strained relationships with its regional neighbours for a third time this year.
In April, Uganda chose Tanzania over Kenya in building its oil pipeline route, leaving Kenya to go it alone. And then in May, Rwanda confirmed it would chose the Tanzania rail route over Kenya’s standard gauge railway.
Cracks that led to the collapse of EPAs deal emerged at an EAC meeting called on July 5 ahead of the United Nations trade meeting Nairobi hosted that month.
It was an extraordinary meeting for the EAC secretariat. No one needed to leave their offices to attend it; it was to be a video conference.
Notification letter
Kenya was hoping to get its neighbours’ approval to sign the EPAs on the sidelines of the UN meeting.
But one member was missing at the conference table. Tanzania.
Tanzania later said it was not aware of the meeting – but the EAC secretariat confirmed it had sent a notification letter to all partner states.
Uganda’s minister of trade, industry and cooperatives, Amelia Kyambadde, chaired the meeting.
The absence of Tanzania, East Africa’s most populous nation, set the stage for what would come days later. The country stunned Kenya when it rejected the trade deal that has been negotiated for more than a decade on the grounds that it is not in the interests of its local industries.
Kenya now has to ‘suffer’ the consequences of being the only country in the region that is not a least developing country (LDC).
It is the second time Kenya will be Únding itself between a rock and a hard place on the EU trade deal.
In the run up to October 1, 2014, the earlier deadline date, Kenya found itself in a similar situation, which saw it miss the deadline.
A month earlier in September, the country had rebased its gross domestic product (GDP), a move that pushed it up the economic ladder into the bracket of a low-middle income economy. Kenya was, in essence, no longer a poor country and was to be treated as such.
In the same month, a report by the United Nations Development Programme (UNDP) spelt out the price of being a middle-income economy.
“A larger economy means Kenya needs less support and will not be eligible to access key export markets on preferential terms. Hence, Kenya might experience loss of access to key markets it currently trades in under special terms as a poor country,” read the report in part.
The UN report warned that the country now needed to brace itself for the consequences that came with its new status, noting that it stood to lose well over Sh285.6 billion per annum in official development assistance (ODA).
Punitive taxes
When Kenya failed to meet the first deadline, the European Council did not hesitate to remind it of the burden of walking around with a middle-income tag.
It immediately slapped Kenyan exports into the European market with punitive taxes.
This saw products attract duty of between 5 per cent and 22 per cent, threatening to price local traders out of the international market.
This cost exporters more than Sh600 million in discounts every month to allow them to factor in the new taxes and remain competitive. More than 87 per cent of Kenya’s exports are agricultural, agro-processed and manufactured products.
The levies were reversed in December 2014, three months after they were enforced.
EU’s arm-twisting tactic was received with indignation, with some people describing it as “heavy handed” and “blackmail”.
One policy analyst told British publication The Guardian: “It’s putting Kenya in a situation of forcing its partners to sign up to something they were not in favour of.”
She added that there was nothing for the other East African member states to gain. Indeed, some civil society organisations have recently taken up that line to argue against EPAs.
According to them, the four EAC member states signed the deal not because they agreed with it, but because they were under pressure to meet the October 1, 2014 deadline so as to save Kenya – the only non-LDC country in the region – from being “removed from the list of beneficiaries of the Duty-Free, Quota-Free Market Access to the EU”.
There was a sigh of relief, especially from Kenyan flower exporters, when the deal was finally ratified, but misgivings on what the agreement meant for the region remained.
These issues were bound to bubble up to the surface once again.
The perfect moment for this was in the lead up to the renewal date, October 1, 2016.
And just like in 2014, the European Commission has already flexed its muscle by making it clear that Kenya will immediately be subjected to high tariffs if it does not get the agreement signed by October 1, 2016. This threw Nairobi into a panic.
The Government, under pressure from flower companies and lobbyists, kicked off an intense lobbying exercise that resulted in some accord that the agreement be signed on July 18 during the United Nations Conference on Trade and Development (UNCTAD) in Nairobi.
The five member states, said Cabinet Secretary for Trade and Enterprise Development Adan Mohamed at a press briefing, agreed to this.
However, it did not come to pass over what Mr Mohamed termed as “delays”. The agreement, he said, would instead be signed in the first week of August.
But not only has the first week of August ended without the deal being signed, but the voices of dissent, led by former Tanzanian President Benjamin Mkapa, have gone a notch higher.
Mr Mkapa, whose views are shared by the current Tanzanian government, argues that the EPAs for Tanzania and the EAC never made sense.
In an opinion piece on the subject in The EastAfrican, he said the costs for the country and the EAC would be higher than the benefits.
As an LDC, Tanzania already enjoys the Everything but Arms (EBA) preference scheme provided by the EU.
“In other words, we can already export duty-free and quota-free to the EU market without providing the EU with similar market access terms. If we sign the EPA, we would still get the same duty-free access, but in return, we would have to open up our markets for EU exports,” he said.
Less generous
According to Mkapa, if the EPAs were implemented, 335 of the 983 products we currently produce would be protected under the agreement’s “sensitive list”, but 648 tariff lines would be made duty-free.
Therefore, the industries under these 648 tariff lines would have to compete with EU imports without the protection of tariffs.
But if the deal is not signed by October, Kenya’s exports will immediately be subjected to the less generous Generalised System of Preferences (GSP). Under GSP, the country’s products will face higher tariffs, ranging from 1.6 per cent to 22 per cent.
Critics of the EPAs, including a group of 14 civil society organisations, say the deal would kill the region’s infant industries and jeopardise its “structural transformation and sustainable development”, as cheap manufactured commodities from Europe flood the East African market.
And with duties for imports coming into the country from Europe already low, skeptics of the trade deal have argued that companies from Europe will have no reason to set up locally.
They also cite a UN report that noted that the deal would come with massive revenue losses, with Kenya standing to lose Sh10.9 billion; Tanzania Sh3.3 billion; Uganda Sh964 million; and Rwanda Sh573 million.
However, a 2015 report on EPAs by the Institute of Economic Affairs (IEA) found little to worry about on the agreement, except for the ambiguity of how the EU will ensure agricultural products that enter East Africa are not subsidised.
While the deal talks of EAC opening up about 82.6 per cent of its market to EU exports over a 25-year period, the IEA report notes that only 17.2 per cent of imports from the EU will be liberalised.
The report, written by a trade analyst at IEA, Leon Ong’onge, noted that the majority of these products are intermediate rather than finished goods.
Moreover, according to the report, 17.4 per cent of the products from the EU that are excluded from the reduction schedule include mostly agricultural and other goods that are of strategic value to EAC member states.
The EU has also committed to help EAC members with technical assistance. This is because most East African exports into the 28-member market have been rejected for not attaining certain standards.
The EPAs note that the union will help the region comply with such non-tariff barriers as the stringent measures put in place to safeguard human, plant and animal health in the EU.
And to allay fears that subsidised agricultural exports from Europe would enter the EAC, the EU has committed in Article 78(2) not to subsidise agricultural exports to East Africa. But how this will be implemented is the headache.
“Whether and how this commitment will be practicable, for example in the separation of produce for domestic use and for export, remains to be seen, considering the pervasive subsidisation allowed by the EU’s agricultural policy,” said Mr Ong’onge.
Bottom line
Whichever way it goes, the bottom line is that Kenya has to up its game by reducing the costs of production. This is because non-ACP states have also been negotiating trade arrangements with the EU.
“In the long run, these agreements could erode the preferences that Kenyan exports receive as the tariffs levied on other countries decline over time. Kenya should, thus, eliminate the high costs of energy and infrastructure that make its exports to the EU expensive,” concluded Ong’onge.
Kenya mainly exports flowers, fruits and vegetables to the EU. The country’s flower exports control over 30 per cent of the European market.
Other exports include coffee, tea, textiles and apparel, fish and fish preparations, tobacco and soda ash. Kenya has also been exporting pyrethrum extract, but this has been declining due to the development of artificial substitutes.
Kenya exported goods worth Sh149 billion to Europe, according to Director General for Trade at the European Commission.
Now the country is hoping that because the EPAs deadline was unilaterally set by the EU, in the same fashion, the EU will extend the deadline.
“The indication also is that there was communication with the EU and the deadline will be extended to allow consensus building,” said Richard Kamajugo, the senior director for trade and development at Trademark East Africa.
Better terms
Mr Kamajugo also notes that discussions by some think tanks indicate there are provisions in the agreement that can provide leeway for continued tariff preferences for Kenya in the EU. Exporters to the EU can only hope this is the case.
A Kenyan diplomat, who has been engaged in the talks but did not want to be quoted over the issue’s sensitivity, said Kenya sees the move by Tanzania to lead the onslaught against the deal as taken out of “malice”.
“We see this as blackmail and it is aimed at increasing [Tanzania’s] share of exports to the EU at the expense of Kenya. The argument that the deal is not good for local industry is hollow because it is the region that is exporting goods at better terms,” the source said.
The diplomat added that Kenya had done everything required to see the deal through.
“What is known as legal scrubbing was completed in September 2015 and all the contradictions in provisions were removed to ensure the intended purpose and the spirit of negotiations was accurately captured. The agreement has also been translated into the 23 official languages of the EU, and Kiswahili,” the source said.
And, as the clock ticks down to the deadline, Kenya has an ambitious plan to build consensus, including the near-impossible option of starting fresh consultations with the Tanzanian trade minister, and lobbying individual member countries.