Kenya is teetering on the brink of a massive revenue loss after trade talks it initiated in 2007 with the European Union now threaten to stall following continued disagreements.
The contention in the talks, which are being discussed under the banner of East Africa Community, is two pronged. For starters Kenya together with its other EAC members has been challenging the European Union’s strict sanitary and phytosanitary requirements on regional exports that have long locked commodities from the region out of the European market. The standards according to member states are said to be higher than those of other world organizations.
But the biggest bone of contention that has dragged on since 2007 is ‘the most favored nation’. Under this clause, the European Commission insists that in the event that EAC countries open up more trade under a Free Trade Area with major trading economies, whom EC defines as countries whose share in total global trade is at least one percent, the same benefits should be passed to the EU. But the Economic preferential agreement (EPA) experts argue that the clause will be a stumbling block to economic growth because it locks EAC’s trade with other blocs even where terms are more favourable.
The region, under the EAC bloc, has been negotiating the contents of EPAs with European Commission since 2007, the deadline that World Trade Organisation gave its members to scrap all the non-reciprocal preferential trade agreements such as the ones Europe used to extend to its former colonies. An EPA is the only recognisable trade instrument through which East Africa will safeguard its preferential relations with Europe in the future as the world shifts from the previous non-reciprocal trade deals.
Kenya trade relations with the European Union are based on the Framework Economic Partnership Agreement (FEPA) which was started by the member states of the East African Community (EAC) and the European Commission in November 2007. This Agreement is a stepping stone towards a comprehensive Economic Partnership Agreement, for which negotiations are ongoing.
The Framework Economic Partnership Agreement (FEPA) provides the EAC member states duty free, quota free access to the European Union market as of 1 January 2008, with transitional phases only for rice and sugar until January 2010 and September 2015 respectively. These provisions effectively grant Kenya an access to the European Union equal to Least Developed Countries , with a bonus of this being based on a negotiated legally binding agreement, rather than a unilaterally granted preference subject to review and possible withdrawal by the granting party. In addition, the FEPA provides for improved and more development friendly provisions for determining the origin of products such as textiles and fisheries.
The FEPA is a World Trade Organisation compliant agreement and hence is based on principle of reciprocity. While the EU opens its markets to EAC products in full from the start (apart from sugar and rice), the EAC liberalises 82.5 percent of current trade over a period of 25 years. In fact, already 65.4 percent of this trade is already entering into the EAC at zero duty given the EAC Common External Tariff is set at 0 percent for raw materials and capital goods. Thus, effective liberalisation is on products that account for 17.2 percent of current total trade with the EU.
The advantage in liberalisation of the products is that reduction in cost of obtaining intermediate products due to gradual phasing down of the current 10percent tariff to zero will enhance the agricultural and industrial competitiveness of the EAC countries.
In addition, the FEPA also caters for measures to address possible adverse effects of liberalisation to any specific sector in the economy by including clauses for safeguards. These can be evoked to reintroduce tariffs or/and quantities restrictions should “injury” to an EAC industry be experienced.
Under the pact’s legal framework, EU has offered 100 per cent duty free market access with exception to ammunition and transitional arrangement for sugar and rice in exchange for 82.6 per cent liberalisation of trade with EAC subject to an exclusion list accounting to 17.4 per cent to the trade.
European Union officials have expressed concerns that negotiators from the East African team were taking too long to respond to its latest move to relax their position over the terms that need to be met for a new trade pact with East Africa to be concluded, frustrating the talks. Burundi, Rwanda, Tanzania and Uganda, all are least-developed countries, will enjoy duty-free quota access to the EU markets even if the EPA. But Kenya risk seeing tariffs imposed on a good number of exports to Europe including horticulture products.
Kenya exported a total of Sh100.3 billion worth of goods to Europe under preferential terms last year, and imposing the tariff before the talks are finalised would expose the country to huge losses in foreign exchange.
The European Union is Kenya's first trading partner, accounting for more than 21% of total Kenyan trade with the world.
In 2009 the 27 EU Member States absorbed more than 30% of Kenya's total exports. Agricultural products, notably foodstuff and flowers represent more than half of Kenya's exports to the EU.
The EU is also the origin of around 18 percent of Kenya's total worldwide imports. Key EU exports to Kenya are machinery and transport equipment.
The flower industry which is one of the largest sources of expert revenue for the government has been among those calling for a quick conclusion of the trade negotiations with the European Union since any stalling of the talks would lead to the imposition of an 8-12 percent import duty in the EU for Kenyan flowers.
"If that is slapped on our industry, it certainly will mean the demise of the industry because it survives on volumes and quality. Very few farms make 10 percent profit," said Ms Jane Ngige of the Kenya Flower Council.