The EPA with Europe is bad news for the entire region, even Kenya

Saturday July 30 2016

 

By Benjamin Mkapa

The EPA issue once again emerged when, in early July, Tanzania informed EAC member states and the European Union that it would not sign the Economic Partnership Agreement (EPA) between EU and the six EAC member states.

The European Commission had reportedly proposed the signing of the EPA in Nairobi, on the sidelines of the 14th session of the UN Conference on Trade and Development (Unctad XIV).

This is a major quadrennial event where all UN member states negotiate guidance for Unctad. For the European Commission, it would have been a propitious place for a signature ceremony as it would have projected the EPA as a “trade and development” agreement to the benefit of EAC.

Nevertheless, the agreement is antithetical to Tanzania’s as well as the region’s trade and development prospects.

The EPA for Tanzania and the EAC never made sense. The maths just never added up. The costs for the country and the EAC region would have been higher than the benefits.

As a least developed country (LDC), Tanzania already enjoys the Everything but Arms (EBA) preference scheme provided by the European Union.

In other words, we can already export duty-free and quota-free to the EU market without providing the EU with similar market access terms. If we sign the EPA, we would still get the same duty-free access, but in return, we would have to open up our markets for EU exports.

Threats to domestic producers and industries

The EPA is a free trade agreement. Under it, Tanzania would have to reduce to zero the tariffs on 90 per cent of all its industrial goods trade with the EU, according duty-free access for almost all the EU’s non-agricultural products into the country.

Such a high level of liberalisation vis-à-vis a very competitive partner is likely to put our existing local industries in jeopardy and discourage the development of new industries.

Research using trade data shows that Tanzania currently produces and exports on 983 tariff lines (at the HS 6 digit level.

The EU produces and exports on over 5,000 tariff lines). If the EPA were implemented, 335 of the 983 products we currently produce would be protected in the EPA’s “sensitive list,” but 648 tariff lines would be made duty-free.

So the existing industries on these 648 tariff lines would have to compete with EU’s imports without the protection of tariffs. Will these sectors survive the competition?

These 648 tariff lines include agricultural products (maize products, cotton seed oil cake); chemical products (urea, fertilisers); vehicle industry parts (tyres); medicaments; intermediate industrial products ( plastic packing material, steel, iron and aluminium articles, wires and cables); parts of machines and final industrial products (weighing machines, metal rolling mills, drilling machines, transformers, generating sets, prefabricated buildings etc); parts of machines (parts of gas turbines, parts of cranes, work-trucks, shovels, and other construction machinery, parts of machines for industrial preparation/ manufacturing of food, aircraft parts etc).

Threatening regional industrialisation and trade

Statistics show that, in fact, for the EAC region, the African market is the primary market for its manufactured exports.

In contrast, 91 per cent of its current trade with the EU is made up of primary commodity exports (agricultural products such as coffee, tea, spices, fruit and vegetables, fish, tobacco, hides and skins).

Only a minuscule 6 per cent or about $200,000 of EAC exports to the EU is composed of manufactured goods. In contrast, of the total EAC exports to Africa, almost 50 per cent is made up of manufactured exports – about $2.5 billion.

These figures tell two stories. One, the importance of the African market for the EAC’s aspirations to industrialise.

In contrast, the EU market plays almost no role in this. Two, the EAC internal market makes up 60 per cent of its manufactured exports to Africa. Thus, the EAC regional market is extremely valuable in supporting the Community’s industrialisation efforts..

Removing an important industrialisation tool - not new export taxes

The other area where the EPA hits the heart of our industrialisation aspirations are its disciplines on export taxes.

The logic of export taxes is to encourage producers to enter into value-added processing, hence encouraging diversification and the gradation of production capacities. Developed countries themselves used these policy tools when they were developing.

The EU has a raw materials initiative aimed at accessing non-agricultural raw materials found in other countries.
According to the European Commission, “Securing reliable and unhindered access to raw materials is important for the EU. 

In the EU, there are at least 30 million jobs depending on the availability of raw materials.” The EPA therefore prohibits signatories from introducing new export taxes or increasing existing ones.

For Tanzania and the EAC region with its rich deposits of raw materials including tungsten, cobalt, tantalum and so on, such disciplines in the long-run would be incongruent with our objective of adding value to our resources.

Losing important tariff revenue - shrinking the government coffers

The other area of loss resulting from the EPA is tariff revenue, and the numbers are not small.

Conservative estimates (assuming import growth of 0.9 per cent year on year) show that for the EAC as a whole tariff revenue losses would amount to $251 million a year by the end of the EPA’s implementation period Cumulative tariff revenue losses would amount to $2.9 billion in the first 25 years of the EPA’s life.

For Tanzania, the losses based on 2013–2014 import figures are about $71 million a year. Cumulatively, just for Tanzania, they come up to $700 million over the first 25 years.

The EPA to safeguard Kenya’s flower industry – a fair exchange?

The only area where the EPA is supposed to serve the interest of the EAC is by providing duty-free access to Kenya. As a non-LDC, Kenya does not have duty-free access via the EU’s EBA. Kenya’s main export item to the EU is flowers – total sales are worth just over $500,000 a year.

Without the EPA, Kenyan’s flowers would be charged a 10 per cent Customs duty. There are other Kenyan exports also – vegetables, fruit, fish – that will face tariffs.

However, the flower industry has thus far been the most vocal.

Nevertheless, all in all, Kenyan exports to the EU market (including the UK) amount to about $1.5 billion. If no EPA is signed, the extra duties charged to Kenyan exports amounts to about $100 million a year.

Is this worth signing an EPA for? The avoidance of duties of $100 million? The tariff revenue losses as the EPA is implemented (and more tariff lines are liberalised) would be comparable. This does not even include the tariff revenue losses of the other EAC LDCs, nor the challenges posed to domestic/regional industries.

Africa is a critical market for the EAC’s manufactured goods. Regional integration and trade is the most promising avenue for EAC’s industrial development. The EPA would derail us from that promise.

Benjamin Mkapa is a former president of United Republic of Tanzania