An intercontinental game of chess is playing out in East Africa and it appears that Tanzania and Uganda are holding Kenya to ransom.
For the last decade the East African Community (EAC) and the EU have been negotiating an Economic Partnership Agreement (EPA) that would allow tariff and quota free trading between the two trading blocs.
The EAC is made up of five member states: Kenya, Tanzania, Uganda, Rwanda and Burundi. South Sudan’s application to join the EAC was accepted in April but there is still a lot of paperwork to be done before it becomes a full member.
The EAC is currently a common market, which allows for goods and services to be traded between the five countries free of any tariffs or quotas, as well as free movement of labour and capital.
The EPA deal between the EAC and the EU was agreed to by all member states in October 2014 and was to be signed and ratified in August 2016. Kenya played its first move this year when it tried to rush the EAC members into signing the deal early on July 18, seemingly to coincide with the visit of the EU Commissioner for Trade who was in Nairobi for the UN Conference on Trade and Development.
Initially, everyone agreed, but at the eleventh hour, first Tanzania and then Uganda, said that they would not sign until further negotiation had taken place.
Kenya’s motives for trying to rush the deal are no secret - if the EPA has not been signed by October 1, then all existing trade deals with the EU will lapse and each country will have to negotiate with the EU according to the bilateral trade laws that apply to them.
In the case of Tanzania, Uganda, Rwanda and Burundi this is not important. As least developed countries they automatically qualify for tariff-free exports to the EU under the Everything-But-Arms agreement.
Kenya, however, is categorised as a developing country and as such needs to pay between 4.5 percent and 19.5 percent on all its exports to the EU. It can also request a softer deal under the General System of Preferences Plus, which could waiver tariffs on up to two-thirds of its exported goods.
Any increase in tariffs will have serious implications for the Kenyan economy. In 2015, exports to the EU were worth approximately €1.25 billion (about R19.51 billion) - around a quarter of Kenya’s total exports.
Kenya is the world’s third-largest flower exporter, after Colombia and Ecuador. In 2015 flower exports to the EU were worth €475 million. Exports of fruit and vegetables were €689m. An increase in tariffs will push many farmers out of business or encourage them to move their operations to neighbouring countries - something Tanzania and Uganda are well aware of.
Change of heart
Tanzania and Uganda say that Brexit and the resulting instability in Europe caused their change of heart, but they are also worried about the EPA’s threat to their local economies. The EPA allows for immediate tariff-free export to the EU, but commits the EAC to reducing tariffs on 82.6 percent of imports from the EU by 2033. By 2033, the only member state that has any chance of competing with EU imports is Kenya, hence why it is far more in favour of the deal than the rest.
The EPA also restricts the EAC countries from imposing any export tariffs on raw materials. Export tariffs are used to encourage local mineral extractors not to export immediately, but to add value to raw materials in the local economy before selling them onwards. By disallowing these tariffs and allowing free imports of manufactured goods after 2033, the deal entrenches the EU’s ability to buy cheap raw materials, use them to manufacture final consumer goods within the EU, and sell them back to the EAC.
Tanzania and Uganda are understandably against this. But they may be playing another game as well. The three countries are currently involved in a number of internal negotiations surrounding where the region’s newly discovered oil resources will be refined and transported. By holding the key to tariff-free exports for Kenya after October 1, they are in a far stronger position to make demands on other issues.
* Pierre Heistein is the instructor of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein.
* The views expressed here do not necessarily reflect those of Independent Media.
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