Competition from Egypt held off for two years under free trade area agreement

Saturday June 13 2015

Finalisation of negotiations on outstanding

Finalisation of negotiations on outstanding TFTA areas especially with regard to rules of origin (RoOs), trade remedies, and dispute settlement will be introduced following the launch of a post-signature implementation plan. After the launch, the deal will enter into force upon ratification of the text by two-thirds of the Tripartite FTA member states. The Tripartite FTA will then form a building block for the continent-wide free trade agreement, known as the Continental FTA. ILLUSTRATION | PATRICK GATHARA 

By CHRISTABEL LIGAMI, TEA Special Correspondent

East Africa’s producers of sugar, maize, cement and other goods categorised as “sensitive” will be protected from intense competition from Egypt and other countries as the Tripartite Free Trade Area (TFTA) comes into force next month.

Restrictions on the entry of the sensitive goods will remain in force until 2017, allowing the industries to adjust to the cut-throat competition expected from cheaper products.

The list of sensitive goods also has wheat, rice, textiles, milk and cream, meslin grain and flour, cane and beet sugar, khangas, kikois, kitenges, second hand clothes, beverages, spirits, plastics, electronic equipment and paper materials. All these will be subject to duty and quota restrictions.

TFTA was launched by the Heads of State in Egypt on Wednesday last week. It will pool the trade interests of the East African Community (EAC), Southern African Development Community (Sadc) and the Common Market for Eastern and Southern Africa (Comesa) and other African countries that have a combined GDP of more than $1 trillion, and a population of 625 million people.

The countries that signed the deal were Kenya, Uganda, Tanzania, Rwanda and Burundi, Zimbabwe, Egypt, Sudan, Ethiopia, Malawi, Namibia, Comoros, Seychelles, Mozambique. Others were Angola, Botswana, Democratic Republic of Congo, Djibouti, Lesotho, Eritrea, Madagascar, Mauritius, South Africa, Swaziland, Zambia.

The launch of the TFTA effectively opens the door for EAC goods that could not easily access bigger markets such as South Africa, Egypt, Ethiopia and Eritrea. 

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“The two-year period will allow for gradual tariff alignments and adjustments by the TFTA member states before all trade in goods in the tripartite region becomes free,” said Mark Ogot, senior assistant director at Kenya’s Ministry of East African Affairs, Commerce and Tourism and a tripartite expert.

He said the particular goods would be imported into the countries under strict quota and duty provisions.  

East African traders have over time expressed fears that subsidised products from developed markets like Egypt would swamp the regional market if the EAC market is extended to the Free Trade Area.

“The main challenge has been that some countries repackage goods like sugar, electronic equipment and paper materials from other countries, and export them into the region as its own goods when they do not meet the rules of origin threshold. The goods are then sold at a cheaper price at the expense of the locally manufactured goods,” said Vimal Shah, chairman of the Kenya Private Sector Alliance (Kepsa). 

Under the current rules of origin, only goods produced wholly from local inputs are allowed to cross national borders without attracting Customs taxes. 

“The list of sensitive goods should be maintained to balance the trade until a proper agreement especially on rules of origin has been reached,” said Mr Shah. In East Africa for example, Kenya has been protective of its sugar industries under the Comesa sugar safeguard that allows it to limit the entry of sugar imports. 

Also, the common external tariff (CET) rates on the sensitive products in the EAC are substantially higher than the 25 per cent maximum rate for non-sensitive products. For example, rice will attracts a CET of 75 per cent in Uganda, Tanzania instead of 35 per cent as it is in the other EAC countries,  wheat attracts between 60 and 35 per cent CET in both countries and sugar 100 per cent.  

CET is a single/common tariff agreed to by all member states of a custom union like EAC on imports of goods outside the union. 

The removal of tariffs on goods under the TFTA is expected reduce the cost of procurement of essential raw materials and, therefore, of production. This would make East Africa’s products cheaper, more accessible to the region and more competitive on the global market.

A trade framework adopted by the partner states during TFTA launch by the Heads of State requires countries to exchange tariff concessions based on reciprocity. The agreement will be enforced from July 1.

“The aim is to liberalise as many goods as possible, effective immediately once the agreement has been ratified,” noted Mr Ogot.

According to Mr Shah, liberalisation of trade in all the goods in the FTA agreement is necessary and unavoidable since duty and quota-free movement of goods is always a key aspect of any FTA.

“It is also important to have a competition policy in the TFTA for fair competition that is mutually beneficial to business,” said Mr Shah. “EAC partner states have a competition policy but implementation has been slow due to limited awareness of its importance.”

The World Trade Organisation does not have any policies on competition. However, through its principles of non-discrimination, monopoly, national treatment and others as enshrined in the multilateral agreements on trade, competition is somewhat indirectly covered to some extent.

Eric Musau, an analyst at Standard Investment Bank, says that manufacturing companies from developed economies like Egypt, South Africa have an added advantage of cheaper electricity, oil and gas.

“The issues of energy, high cost of raw materials, infrastructure and bureaucracy are raising the cost of production in East Africa, making the local companies less competitive,” said Mr Musau.

The TFTA agreement will, therefore, serve as the basis for the completion of a Continental Free Trade Area by 2017, with the aim of boosting trade within Africa by up to 30 per cent in the next decade, and ultimately establishing an African Economic Community.

As per the agreement, finalisation of negotiations on outstanding TFTA areas especially with regard to rules of origin (RoOs), trade remedies, and dispute settlement will be introduced following the launch of a post-signature implementation plan.

After the launch, the deal will enter into force upon ratification of the text by two-thirds of the Tripartite FTA member states. The Tripartite FTA will then form a building block for the continent-wide free trade agreement, known as the Continental FTA.

The Comesa-EAC-Sadc partnership faces significant challenges in harmonising differential RoOs, as the EAC and Comesa regimes in this area are significantly different from the ones used by SADC.

The TFTA experts have suggested that where rules are common (including wholly originating) 35 per cent ex-works costs (distribution and logistics) should be retained as an interim option. If enacted, such a move could mean that products on which these value-added criteria of 35 per cent ex- works cost would apply could gain duty free regional market access. 

“Work on rules of origin will continue after the launch of the TFTA as part of the “post signature activities, noted Mr Ogot. 

“TFTA has been launched, while negotiations would continue on product- specific rules of origin. The final outcome is hard to predict.” 

Although the provisions of the Tripartite Draft Agreement favour a single value-added rule as in the EAC and Comesa regional agreements, the focus has shifted during negotiations from a percentage-based approach towards a product-specific approach, which will involve defining specific rules for numerous product categories (those covered by divergent rules of origin).  

According to the agreement the modalities for tariff liberalisation set a goal of 100 per cent tariff liberalisation under the TFTA. 

The principle of “building on the acquis” has been retained. As a result, countries that are members of existing regional economic community (REC) FTAs are not required to negotiate tariff liberalisation under the TFTA with other members of the same regional deals. However, they can consolidate their existing tariff liberalisation levels into the TFTA in line with the above-mentioned principle.

The agreement also requires that Tripartite Partner States accord one another the Most- Favoured- Nation Treatment.

“Nothing in this Agreement shall prevent a Tripartite Member/Partner State from maintaining or entering into new preferential trade agreements with third countries provided that any advantage, concession, privilege or  favour granted to a third country under such agreements are offered to the other Tripartite Member/Partner States on a reciprocal basis,” says the agreement.

“Tripartite Member/Partner States shall not impose new import duties or charges of equivalent effect except as provided for under this Agreement.”

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