Kenya has had decades-long formal trade relations with Europe under the Lomé Conventions and the Cotonou Agreement extended to African, Caribbean and Pacific (ACP) countries. Kenyan exports to the EU faced preferential tariffs, which provided Kenyan exporters an advantage over those from other countries that did not enjoy these benefits. The EU’s extension of preferential benefits to the ACP was challenged at the World Trade Organization for contravening the General Agreement on Tariffs and Trade because it was discriminatory and non-reciprocal (EU exports to ACP were subject to tariffs). The EU therefore proposed reciprocal trade agreements that would see EU goods enter ACP market duty-free, the reduction of duty being phased over about 25 years. The EU has already agreed to EPAs with Caribbean and West African countries, and threatened to drop the preferential access for other ACP countries that have not signed an EPA by October 1, 2014. Their exports would then be subjected to higher Most-Favoured Nation (MFN) rates, for which all other WTO members are eligible.Â

It is necessary to recognize that except for Kenya, all other EAC members are classified as Least Developed Countries, and would still receive preferential treatment in the EU under the Everything but Arms arrangement.

So, won’t an EPA benefit Kenyan exporters because it retains their preferential access and prevents them from facing taxes?

The simple and direct answer is yes. The EU is a significant export market for Kenya because nearly a quarter of Kenya’s exports are to the EU; in 2012, the value of Kenya’s exports to the EU was KSh. 108 billion, which isn’t pocket change. The bulk of these exports were cut flowers and other horticultural products that would face significant competition from other exporters like Colombia. Preferential treatment therefore provides a definite advantage to Kenyan exporters

The complete effect of the EPAs will, however, be clearer when the other shoe drops, especially with regard to the reduced duty on imports from the EU. Granted, Kenyan consumers will benefit from cheaper, (probably higher quality goods) from the EU. The potential economy-wide effects, however, are less rosy. One obvious impact of reduced tariffs is a loss of revenue from import tariffs.

In addition, and more importantly, EU products will drive domestic producers out of the market. Most EU products are more competitive than Kenyan ones, owing to the technological advantage in the EU and the support schemes like the Common Agricultural Policy, which significantly reduce the cost of production. Cheaper imports from the EU will outcompete domestically produced goods. In addition, Kenyan products will be outcompeted in the EAC. In 2012, Kenya exported KSh. 86 billion worth of goods to the other EAC members. Cheaper imports from the EU will definitely see this access to the EAC, an equally important market, eroded.

 

Another important factor to consider is the effect that the EPA will have on trade relations and negotiations with other partners. The EPA provides that the terms of any EAC agreement with a major trade partner that contributes more than 1% of global trade will be applicable to EU exporters as well. This requirement hampers the flexibility of Kenya and the EAC in seeking better terms while negotiating other trade agreements. Furthermore, I foresee a situation where the coming into effect of the EPA will incentivize other trade partners like the United States to seek reduction or removal of duties on their exports to Kenya by using threats of dropping some benefit that Kenyan exports receive in their markets.

True to the nature of trade agreements, there will be gainers and losers from the EPA. But are the short-term retention of benefits to exporters to the EU worth the long-term cost to domestic producers, the regional exporter and the government? The next post will use international trade theory and statistics to fill in the gaps between the sweeping broad strokes in this post, and then make some policy prescriptions on how to address with the potential consequences of the EPA.