Trade agreements require substantive reform for industry to benefit

Being better integrated than many African markets into global trade flows has brought opportunities and challenges for Kenya. As it looks to increase regional integration through the East African Community (EAC) in the hope of expanding opportunities for exporters, the country has to balance this against a sometimes competing priority of boosting trade with the EU.

Trade 

Kenya’s trade deficit is significant, at $9.8bn in 2012. The country is a signatory to all important trade agreements, but it is yet to see major benefits from the 1994 General Agreement on Tariffs and Trade, as most exports already go to markets with minimal tariffs due to preferential rates. However, Kenya’s economy remains East Africa’s powerhouse, commanding 62% of all trade within the EAC between 2007 and 2012. Moreover, its trade is evenly split between African countries and the rest of the world. The EAC is the fastest-growing economic region after the Association of South-East Asian Nations, which means the potential for increased demand from EAC markets – and from the Common Market for Eastern and Southern Africa (COMESA) – is substantial.

Kenya has a dominant position in the $85bn, 135mperson East African economy, which has competitive levels of trade integration on the continent compared to the western, central or southern African blocs. Yet implementation of harmonisation has proved challenging. The intention to follow World Trade Organisation three-band tariff structures since 2010 has been frustrated by the creation of special lists to protect respective members’ industries. Intra-EAC trade grew from $1.6bn in 2005 to $5.5bn in 2012, but competing trade blocs within the community cost businesses $23bn in lost opportunities over the same period, the International Finance Corporation has reported.

Several issues continue to beset efforts to establish a common external tariff, under which raw materials would be imported at zero duty, intermediate products at 10% and finished products at 25%. These definitions are subject to interpretation, certificates from partner countries are not recognised and some products are banned. Kenya’s profile in the regional market means it remains most vulnerable to limited integration. Any non-tariff barrier in the EAC common market will hurt Kenya more than its partner states, given that it is the most industrialised member and a net exporter to the EAC market.

EU

Attempts to strengthen regional integration are mirrored by efforts to boost trade with the EU. A push to conclude 12 years of negotiation on an economic partnership agreement (EPA) between the EU and the EAC is ongoing, despite the October 1, 2014 deadline being missed. As the agreement is negotiated by region, EAC states cannot subscribe independently.

The EPA would replace the current Cotonou Agreement between the EU and the African, Caribbean and Pacific states. Trade with the EU has been lucrative, doubling between 2009 and 2012 to $1.24bn, equivalent to 20% of total Kenyan exports. However, with the market access regulations scheduled to end in 2014, tariffs will soon be imposed, reducing many Kenyan products’ competitiveness. The agreement may also mean that Kenya faces a more challenging set of trade restrictions than other EAC members. It is classified as a developing country, but its EAC partners qualify as “least developed countries” and thus have duty-free, quota-free access to the EU under the Everything but Arms scheme.

COMESA

The 15-member COMESA economic bloc has encountered fewer problems than the EAC. However, plans to establish a common market and a common external tariff in 2014, delayed from 2004, have faced challenges. The potential of the bloc – which includes some of Africa’s most populous countries, and some of its richest agricultural and industrial producers – is sizeable, and the group remains the biggest market for Kenyan manufactured goods. Kenyan trade grew by 65% to $992m between 2009 and 2012, and it represents 40% of intra-COMESA export trade. The EU is also currently pursuing an EPA with COMESA.

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The Report: Kenya 2014

Industry & Retail chapter from The Report: Kenya 2014

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