Trade Policy Review – East African Community (EAC)Joan Akoth
Post Date: 11 September 2019
Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries’ trade and related policies are examined and evaluated at regular intervals. Significant developments that may have an impact on the global trading system are also monitored. All WTO members are subject to review, with the frequency of review depending on the country’s size.
The EAC underwent its third Trade policy review from 20th to 22nd March 2019 in Geneva, Switzerland, covering all the Partner States of Burundi, Kenya, Uganda, Rwanda and the United Republic of Tanzania.
The review is based on a report by the WTO Secretariat and a report by the Governments of Burundi, Kenya, Rwanda, Tanzania and Uganda, with the objective of; achieving greater transparency in, and understanding of the EAC’s trade and trade-related policies on the Customs Union and Common Market by the WTO Members, and enabling a multilateral assessment of the adherence by EAC Partner States who are WTO Members, to the rules, disciplines and commitments made under the WTO Agreements .
The review focuses on; Economic Environment, Trade and Investment Regimes, Trade Policies and Practices by Measure and Trade Policies by Sector of the EAC member states.
The summary below brings out the issues addressed in the four areas of focus;
The East African Community (EAC) is comprised of Burundi, Kenya, Rwanda, Tanzania, Uganda, and South Sudan (Yet to be a member of the WTO) with a population of 179.2 million in 2017 and a combined GDP estimated at USD 170.9 billion in 2017. Kenya, Tanzania, and Uganda are the largest economies of the Community accounting for about 46.4%, 30.5% and 16.0% of the total GDP respectively. Rwanda and Burundi accounted for 5.3%, and 1.8% of GDP respectively. All the EAC countries are in the low-income group, except Kenya which is in the lower-middle-income group.
The main contributors to the EAC GDP are the Service and Agriculture sectors contributing 47% and about 34.2% respectively over the review period. The contribution of the manufacturing sector declined slightly during the review period, to 7.8% in 2017. Despite the slightly lower contribution from the Service sector, about 80% of the population which lives in rural areas depends on agriculture for their livelihood.
The EAC Agriculture and Rural Development Policy (EAC-ARDP) is the main framework for interventions in the Agricultural sector providing for details for implementation of the framework over the period 2005-30. The Food Security Action Plan (FSAP 2011-15 )serves as an instrument to guide the coordination and implementation of EAC member States' joint regional food security programming activities including the EAC Food and Nutrition Security Policy; the EAC Food and Nutrition Security Strategy and Action Plan; the EAC Regional Strategy on Aflatoxin Prevention and Control; the Livestock Policy to enhance growth in livestock productivity and competitiveness (Section 4.1.3); the Sanitary and Phytosanitary Protocol; the EAC Fisheries and Aquaculture Strategy; and a total of 23 staple food standards.
EAC countries committed to raise agricultural productivity by at least 6% per year until 2015 and to increase the share of the national budget allocated to the agricultural sector to at least 10% under the Comprehensive Africa Agriculture Development Programme (CAADP).
Due to its high contribution to GDP, agricultural products enjoy higher protection under the CET, with an average tariff of 20.7%, compared to an overall average of 12.9%. Under the EAC duty exemption regime, seeds approved as fit for sowing; fertilizers approved by the relevant national authorities; horticulture, agriculture and floriculture inputs; and inputs for use in the manufacture of agricultural equipment can be imported duty-free.
The manufacturing sector contributes about 8.9% of the EAC GDP. The sector is concentrated by agro-processing activities with limited value addition hence the slow industrial growth. To enhance productivity and structural transformation of its economies, an African Industrialization Strategy (2012-2032) was developed with the aim of diversifying the manufacturing base and raising local value-added content of exports to at least 40% by 2032.
The EAC has a vision of “a prosperous, competitive, secure and politically united" region, through the successive establishment of a customs union, a common market, and a monetary union. This is to be operationalized through five-year development strategies with the following milestones having been realized;
EAC countries' economic performance was relatively strong during the review period with Kenya's economic performance remaining strong during the review period. It’s real GDP growth rate averaged 5.5% per year outperforming the 2008-12 average of 4.7%. This was attributed to the favorable weather conditions hence the 37.7% GDP share of agriculture in 2017 up from 29.1% in 2012, largely supported by tea and horticulture production.
The declining share in manufacturing is a reflection of the low availability of raw materials, high costs of production, and stronger competition from imported goods.
Price stability is the primary objective of monetary policies in the EAC countries. Harmonization efforts including the Forecasting and Policy Analysis System (FPAS), which is being developed to facilitate the adoption of a forward-looking interest rate-based monetary policy framework to achieve price stability. Core macroeconomic policies are not yet harmonized and remain country-specific.
The EAC countries currently maintain different national currencies with different exchange rate regimes but aspire to establish a single currency by 2024. Since the end of 2016, the EAC exchange rate regime has been classified as floating in Uganda, stabilized in Kenya and Tanzania and crawl-like in Burundi and Rwanda.
The ratio of EAC countries' trade (including intra-EAC trade) in goods and services to GDP remains moderate, at about 50%. Intra-EAC trade still remains low with countries sourcing only about 6% of their total imports from the region, and supplying 20% of their total exports to the region. This is attributed to; informal cross-border trade, poor infrastructure; sanitary and phytosanitary measures; technical barriers to trade; similarities in the production of a limited number of identical manufactured goods (e.g. cement, petroleum, textiles, sugar, confectionery, beer, salt, fats and oils, iron and steel products, paper, plastics and pharmaceuticals) for which the production capacities have recently increased in most countries; and the use of different currencies.
Extra-EAC trade in goods continues to display a deficit, with exports generally covering less than 50% of imports. EAC Exports are generally dominated by low-value commodities such as tea; coffee; cut flowers; and non-monetary gold whereas Imports are dominated by manufactured products, including fuels, chemicals, machinery and transport equipment which are high-value products.
FDI remains a major source of financing for EAC countries with Investment inflows that are largely being channeled to the manufacturing and construction sectors. There is a strong temporal variation in the destination of these investments; the largest recipient of intra-EAC investment flows was Tanzania in 2014, due to its booming gas industry followed by Kenya in 2015, as a result of the SGR.
Trade and Investment Regimes
The EAC treaty entered into force in 2002 with the last amendment having taken place in 2007. Its broad objective is to develop policies and programmes aimed at widening and deepening cooperation among its member countries in the political, economic, social, cultural, research and technology, defense, security, and legal and judicial affairs. This is to be achieved through the progressive establishment of a customs union, a common market, a monetary union, and a political federation.
The EAC’s Secretariat ensures the implementation of regulations and directives adopted by the Council of Ministers.
The executive arm of the EAC consists of the Summit (of Heads of States or governments), in charge of setting the broad vision for the Community; the Council of Ministers, acting as the decision-making organ; the Coordinating Committee (composed of permanent secretaries); and sectoral committees, which are technical in nature and in charge of sectoral matters.
The Sectoral Council on Trade, Industry, Finance and Investment (SCTIFI) is responsible for making decisions and recommendations to the Council of Ministers on trade policy issues, such as customs tariff, trade remedies, and duty remissions, elimination of non-tariff barriers (NTBs), export promotion, competition, SME development, and trade in services, trade relations with external parties, industrial development, and investment promotion.
The legislative body of the Community is The East African Legislative Assembly (EALA) with the mandate to legislate on all matters relating to the operationalization of the Treaty whereas The East African Court of Justice (EACJ) has jurisdiction over the interpretation and application of the EAC Treaty.
In principle, EAC countries are supposed to negotiate as a bloc in matters related to trade with third parties. However, a member may separately negotiate bilateral trade agreements Under the Customs Union Protocol, subject to notification to the other members.
Ever since its establishment, the EAC has; launched the customs union in 2005, seen the implementation of a Common External Tariff (CET) in 2010, consolidated EAC free trade areas through several reform steps, including the interconnectivity of their customs systems, the adoption of an Authorized Economic Operator (AEO) system, and the establishment of one-stop border posts and eliminated about 127 non-technical barriers to trade out of the 133 identified as at May 2018.
All EAC countries are original WTO members except South Sudan with all of them having accepted the 2005 Protocol Amending the TRIPS Agreement except Burundi, and they accord at least the Most-Favored-Nation (MFN) treatment to all their trading partners.
The EAC countries are also involved in various Trade Agreements and Arrangements. Key among them being; the Tripartite Free Trade Area (FTA), involving members of COMESA-EAC-SADC, and the African Continental Free Trade Area (AfCFTA).
In addition, EAC countries are, individually, members of other arrangements, such as the Intergovernmental Authority on Development (IGAD), COMESA, the SADC, and the Indian Ocean Rim-Association for Regional Cooperation (IOR-ARC), the Economic Community of Great Lakes Countries (CEPGL).
The EAC trading partners include; the EU under the Economic Partnership Agreement (EPA) negotiations, and the US under the African Growth and Opportunity Act (AGOA).
Trade Policies and Practices by Measure
Under the EAC, the customs procedures have not been harmonized with different countries using different systems. The use of these different systems is a source of delays in cargo clearance for transit goods within the EAC. Each revenue authority has its own distinctive revenue management system with taxes and duties being assessed and paid at destination Partner States.
Some of the measures put in place to ensure the harmonization of customs procedures include;
Under the rules of origin, EAC preferential rules of origin are provided for in Article 14 of the Customs Union Protocol. Goods are defined as originating in the country where they are wholly produced or undergo substantial work or processing.
The principle of absorption is allowed under the new rules of origin. Under the new principle, a product with originating status, used as a raw material in the manufacture of another product, is treated as an originating material with Non-originating materials used in its manufacture not being taken into account when determining the origin of the new product.
The negotiations on preferential rules of origin are currently ongoing between the EAC, COMESA and SADC under the tripartite FTA with rules of origin having been adopted on 3267 tariff lines of the total 5387 tariff lines.
All EAC countries apply the CET to imports from non-member States. The EAC CET is based on the HS 2017 version of the Harmonized Commodity Description and Coding System (HS). The EAC CET comprises; zero on raw materials and capital goods; 10% on intermediate goods; 25% on finished goods; and rates above 25% on some items deemed sensitive with regards to promoting local productive capacities and environmental purposes. The sensitive items specified in Schedule 2 of the EAC CET are, goods where EAC member States see the potential for local production and trade, consisting of some 63 tariff lines, cover, dairy products, wheat, rice, sugar, woven fabrics, and worn clothing.
Changes to the CET since the last review include: cement, from 55% to 25% attributed to a shortage in the region; dairy products including cheese and curd from 25% to 60%; wheat or meslin flour, from 60% to 50%; and matches from 50 to 25 as well as Sacks and bags, of a kind used for the packing of goods from 45 to 25.
Of all the sectors in EAC, Agriculture is the most tariff-protected sector with a 20.7% average applied tariff on agricultural products and 11.7%tariff on non-agricultural products. Animals and animal products, cereals, sugar, beverages, dairy products, fish products, fruits and vegetables, and clothing are the product groups that have import duties of over 20%. Sugar, chemicals, non-electric machinery, petroleum, and transport equipment display higher coefficients of variation, implying larger tariff dispersion within these product categories.
EAC member states have separately bound their tariffs at the WTO with varying Bindings in terms of coverage of tariff lines and levels of bound rates.
The absence of binding tariffs for over 70% of tariff lines for the EAC countries with the exception of Rwanda leaves EAC members great flexibility to increase MFN duties, thus reducing the predictability of the tariff regime. The simple average tariff rate for Kenya is 94.0, Uganda’s is 72.8, Tanzania’s is120.0, Burundi’s is 68.3 and Rwanda’s is 89.4.
EAC countries must grant duty-free access to imports from the other countries with EAC countries giving each other reciprocal tariff preferences. EAC tax policies are to be harmonized under the Policy on EAC Domestic Tax Harmonization with harmonization proposals for VAT and excise taxes are currently being developed. Corporate tax is applied at the standard rate of 30%, except in Kenya where non-resident corporations are taxed at 37.5%. EAC countries provide tax incentives in the form of corporate income tax, remission of customs duties, VAT and special economic zones to attract investments to the region.
Members of the EAC are to adopt a common policy on standardization, quality assurance, metrology, and testing of goods and services produced and traded within the Community guided by the Standards, Quality, Metrology, and Testing (SQMT) Act, 2006 and the SQMT Protocol of 2001. The Act provides for the adoption and harmonization of standards by member states, the enforcement of technical regulations, the declaration and acceptance of certification marks, and the alignment of national laws and regulations. At national level, the institutional setting is supplemented by national standard bodies (NSBs) and bodies in charge of metrology, and accreditation.
The EAC Competition Act of 2006 promotes fair competition, trade and consumer welfare. It applies to all economic activities and sectors having cross-border effects whereas domestic activities are regulated under national competition laws and institutions.
EAC members are to harmonize and mutually recognize standards and implement a common trade policy for the Community under the CM Protocol. In addition, EAC countries are to implement the TRIPS Agreement to promote copyright and cultural industries, traditional knowledge, geographical indications, and technology transfer in the region. The main challenge to IPs is Counterfeiting and piracy of trademarks and copyrights. An EAC Policy on Anti-Counterfeiting, which resulted in the Draft EAC Anti-Counterfeit Bill (2013), provides a legal framework for EAC members to prohibit trade in counterfeit goods.