Kenya will not sign a free trade agreement that China has been negotiating with the East African Community (EAC) partner States since 2016, Trade principal secretary Chris Kiptoo has said.
Mr Kiptoo Monday said the decision, which could trigger diplomatic unease between Nairobi and Beijing, is intended to protect Kenya’s nascent manufacturing sector from being over-run by China’s cheaper and more efficient producers.
The current trade balance is skewed heavily in favour of China, and the proposed comprehensive free trade agreement (FTA) would see Chinese goods access the EAC market at more favourable tariffs.
“China already accounts for 25 per cent of Kenya’s import bill under the current common external tariff structure of zero per cent, 10 per cent and 25 per cent for raw materials, intermediate goods and final goods respectively.
“This means that China is likely to get even a larger share of Kenya’s market once we enter into a free trade arrangement,” said Mr Kiptoo.
China has been negotiating for the creation of a free trade agreement with EAC for the past two years.
“China accounts for less than two per cent of our exports currently. An FTA with China might improve our export share but not significantly. A preferential trade agreement with China is what we prefer…an Agoa type of trade,’ said Mr Kiptoo.
Joint feasibility study
The Asian economic giant wrote to former EAC secretary-general Richard Sezibera proposing to negotiate with the EAC partner states a comprehensive free trade agreement.
China also requested to undertake a joint feasibility study with the EAC on the proposed free trade area.
The EAC secretariat was expected to undertake a comprehensive cost-benefit analysis on the implications of negotiating a free FTA with third parties by June 30.
“The Chinese people are doing a lot here especially in the provision of services such as finance, development and we are happy with that. In the area of trade, there exists a huge imbalance which is making us feel we really need to see more in the other direction,” he said.
Kenya signed a double taxation agreement (DTA) with China last October to incentivize Chinese firms setting up base in Kenya.
There are already more than 400 Chinese firms in the country serving in various sectors of the economy such as real estate, finance and agriculture among others.
“Kenya is ready to agree on certain commodities that China would want to import so that local exporters can focus on them specifically for the Chinese market,” said the PS.
China is the leading source of Kenya’s imports.
Kenya exported goods worth Ksh10 billion ($99.76 million) to China in 2016 but imported goods worth Ksh337.4 billion ($3.37 billion) from the Asian country, indicating a trade deficit of a whooping Ksh317.4 billion ($3.2 billion).
According to leading economic indicators by the Kenya National Bureau of Statistics, Kenya imported goods worth Ksh175 billion ($1.7 billion) from China between January to May in 2017, an average of Ksh35 billion ($348.9 million) per month.
If this trend persists, imports from China will hit the Ksh420 billion ($4.2 billion) mark, breaking the Ksh400 billion ($4 billion) ceiling for the first time, just two years after it broke the Ksh300 billion ($3 billion) mark in 2015.
High imports from China are attributed to an increase in infrastructure projects currently going on in the country such as the construction of the standard gauge rail which has taken the lion’s share of the purchases.
The 472km railway line between Mombasa and Nairobi is Kenya’s single-largest infrastructure project since independence, constructed at a cost of Ksh327 billion ($3.3 billion) co-financed through commercial and semi-concessional loans from China and the government of Kenya.
Other imports from China include electronics, household goods and steel materials.