The European Union (EU) is the number two destination market for Kenyan exports, after COMESA. In 2004, the share of Kenyaís total exports to the EU was 26%. Preferential market access to the EU under the LOME IV trade arrangement has been instrumental to Kenyaís penetration to the EU Market. Under this arrangement, about 98% of Kenyaís products have benefited from duty free market access. Among the products which have attracted some duty, include selected agricultural and agro-processed products.
The above trade regime lapses on 31st December 2007, and thereafter it will be replaced by WTO compatible trade arrangement, which entails reciprocity between the ACP and the EU under the framework of an Economic Partnership Agreement.
The options which Kenya has are either to negotiate the Economic Partnership Agreement (EPA) or shift to the EU Generalized system of Preferences for developing countries with effect from 1st January 2008. The latter will imply that Kenyan Exports to the EU will face some tariffs, a development that would see Kenyaís exports losing EU Market overnight on account of being uncompetitive and serious economic ramification being felt in all sectors that are currently dependent on the EU market for exports.
Kenya has therefore opted to negotiate an Economic Partnership Agreement which at the very minimum is geared towards sustaining the current EU preferential market access as well as addressing supplied side constraints through a negotiated development support program. The EPA negotiations bring together 16 countries of Eastern and Southern African region.
Effects of EPAs on Kenyan Economy
In preparation for negotiation of EPA, Kenya has undertaken an impact assessment with a view to establishing: Macro and Social-economic effects of EPAs; Effects of EPAs on industry and agriculture, Impact of EPA on Kenyaís position in the regional market and implications of the EPA on Kenyaís continued access to the EU market. Some of the key results of the impact assessment can be grouped into macro, socioeconomic and effects of EPA on the industrial and agricultural sectors.
Macro and Socioeconomic Effects
From a macro and socioeconomic perspective, the study reveals that potential gains will be: lower prices for consumers of imported goods sourced from EU. The analysis indicates that 34% of consumer goods imports are sourced from EU, 17% of motor vehicles, 58% of machinery and equipment and 22% of imported intermediate inputs. Thus elimination of the tariff will imply price reduction for Kenyan consumers. Trade is also projected to increase as a result of opportunities for enhancement of regional trade under EPAs as well as increased market penetration in the EU market. Already Kenya is a major player and beneficiary of the COMESA market in terms of Exports and re-exports. The implication of all these is that there will be expanded trade between Kenya and ESA membersí countries.
This is likely to boost our export earning from COMESA beyond the current level of Ksh 77 billion annually. In essence, a concluded EPA negotiation between East and Southern Africa(ESA) and EU will increase south-south trade from Kenya as well as the volume of trade between Kenya and the EU.
Effects of EPAs on industry and Agriculture
The EU is the largest single source of Kenyaís imports of intermediate inputs, machinery and capital equipment. Itís therefore expected that liberalization through EPA will increase competitiveness of Kenyan industries through cheaper intermediate inputs and capital equipment. On agriculture the study findings suggest that the EU-ESA Partnership Agreement will be beneficial to Kenyaís exports of agricultural exports to the EU. Exports of horticultural products, coffee and tea will at worst remain the same or at best substantially increase especially if the EU withdraws subsidies extended to its farmers and zero rates tariffs on products that are actually attracting duty under the ACP-EU trade regime.
To benefit from this, Kenya must build its capacity in adding value to the commodities that are currently exported in bulk. For instance, attaining a value addition level of 5% for Kenya tea exports would increase export earnings by more than Ksh12 billion (using 2003 export figures).
The EPA is expected to pose significant challenges for some of Kenyaís major food commodities such as wheat, rice, sugar, dairy, maize and even meat and meat products. The challenges arise primarily from the EU subsidy on Agricultural products. It is however important to note that the EC, through the WTO process has undertaken to eliminate subsidies by 2013 and has offered to fast track the reduction of products of exports interest to ESA region within the framework of EPA.
Strategies to Mitigate Negative Effects of EPAs
There exists an inbuilt mechanism through the EPAs negotiations to address the negative impact of EPA. These include negotiation of a phase-in period, FTA product coverage and development program. All these are geared towards upholding the intent of Cotonou Agreement that no country will be worse of than it currently is after conclusion. Itís a win-win for all countries.
In view of this, Kenya is pursuing the following strategies in addressing the projected negative impact
1. Duty free access and quota free access to the EU market for all agricultural and noĖagricultural products under simplified rules of origin regime.
2. Negotiating for less than 100% FTA product coverage for EU exports into Kenya and long phase-in period.
3. Proposal for comprehensive infrastructural and non-infrastructural constraints that have been singled out as inhibiting industrial and agricultural competitiveness.
4. Negotiating for improved predictability of EUs trade regulatory requirements such as SPS requirements and product quality standards through a negotiated SPS management and a capacity building program for trade facilitation institutions.
5. Regional market negotiation.
6. Negotiating Bilateral Fisheries Agreement with the EU on the basis of a regional fish framework Agreement. This is expected to unlock a huge potential for Kenya marine fisheries.
In view of the massive gains to accrue to Kenyan economy out of EPAs, itís therefore important that the private sector and the non-state actors rally behind timely conclusions of EPAs with the EU. The government, in collaboration with the European Union is pursuing this goal through the Kenya European Union Post Lome Trade program (KEPLOTRADE), which is facilitating this process through support from consultations among stakeholders, analytical work in support of negotiations and capacity building.
By David S.O Nalo
Permanent Secretary, Ministry of Trade and Industry, Kenya.
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