East African traders have expressed fears that subsidised Egyptian products will swamp the regional market following a decision by the East African Community to extend the Free Trade Area to Cairo.

The traders say the extension, without any qualifications based on rules of origin, would render EAC products less competitive on the market because energy costs, in particular, are substantially lower in Egypt.  

Vimal Shah, the chairman of the Kenya Private Sector Alliance (Kepsa), said as long as the issue of the Rules of Origin is not addressed, there would continually be a trade dispute between the EAC and Egypt, and that the former would be the loser.

“EAC manufacturers exporting to Egypt are required to observe the 35 per cent threshold of value addition to qualify for free access to the Common Market for Eastern and Southern Africa (Comesa), of which Egypt is a member; but instead, Egypt has demanded that we observe the 45 per cent threshold it introduced against the Comesa requirement,” said Mr Shah, adding that this will undermine the equality of trade between the two parties.

At a recent bilateral meeting between the EAC and Egypt, the two parties agreed to allow free movement of goods under the Free Trade Area regimes based on the acquis principle — “that which has been agreed upon.”

“We are extending the FTA to all the EAC partner states and we are looking for a reciprocal offer from the EAC partner states too,” said Egypt in the agreement.

READ: More traders to enjoy duty-free access to East Africa

Egypt warned that should EAC partner states keep a list of sensitive products such as the 183 items proposed by Tanzania, it would also consider keeping a list whose items will be gradually eliminated with those countries.

“It will be subject to negotiation. Until this is addressed, East African firms will still have difficulties in exporting their goods to Egypt,” said the delegation led by Tamer Mahmoud, head of the Regional Trade Agreements department in the Egyptian Ministry of Trade and Industry.

Mr Shah said the main problem has been Egypt repackaging goods like sugar it imports from Brazil, electronic equipment and paper materials from other countries, and exporting them into the region as its own goods when they do not meet the rules of origin threshold.

“This will see even cheaper goods like sugar coming into the region than the ones produced here,” said Mr Shah.

READ: Trade row pits Kenya against Egypt

But Andrew Luzze, the executive director of the East African Business Council, said that East African traders should not worry about losing out to Egypt because not all products will be allowed in freely.

“Under the FTA regime agreed upon by EAC and Egypt, products such as sugar, textiles, rice and wheat will remain on the list of sensitive goods, thus balancing the trade,” said Mr Luzze.

He added that the regional bloc was negotiating a simplified rules of origin with the other trading blocs like Comesa.

“The negotiations are expected to be concluded soon,” said Mr Luzze.

In 2011, Egypt raised its local value addition requirement for East African goods to 45 per cent, a move that Nairobi interpreted as an attempt to lock out its galvanised iron sheets.

But like Kenya, Rwanda and Burundi, Egypt is member of the Comesa Free Trade Area whose rules of origin require products from member states to have at least 35 per cent local value addition for free entry into the 19-member trading bloc.

East Africa’s main exports to Egypt are tea, coffee, tobacco products (cigarettes and tobacco leaf), edible oil and meat while Egyptian exports into the region are mainly manufactured goods that include confectionery products, electronics, sugar and diapers.

In the bilateral meeting held in Nairobi, the two parties agreed that the EAC partners under Comesa — Kenya, Uganda, Rwanda — would maintain the FTA status under Comesa, where zero tariffs apply for all products produced within the countries.

According to the agreement, Tanzania, which is not a member of Comesa, would provide an immediate tariff liberalisation offer of 96.89 per cent while the remaining 3.11 per cent or 183 goods would be subject to a five year phase-down at the rate of 20 per cent each year.

Uganda, which is enacting legislation for accession to the Comesa-FTA by December, will prepare its tariff offer, which includes Egypt, and submit it then.

Trade in sugar will be treated as in the EAC Common External Tariff rates for sensitive products, attracting 100 per cent duty, pending the outcome of a comprehensive study on the sugar industry commissioned by the EAC Secretariat.

According to Eric Musau, an analyst at Standard Investment Bank, Egyptian companies have the advantage of cheaper electricity, oil and gas to gain competitive advantage in terms of cost of production.

“The issues of energy, high cost of raw materials, infrastructure and bureaucracy are raising the cost of production in East Africa,” said Mr Musau, adding that the technology here is not advanced enough to produce goods for a large market as is the case with South Africa and Egypt, and upgrading to this level could be expensive for companies unless they are sure of a large market for their products.

Firms such as Colgate Palmolive, Procter & Gamble, Eveready and Cadbury have taken advantage of the FTA arrangement to move their manufacturing operations to Egypt where they produce items like toothpaste, washing powder, sanitary towels and diapers cheaply for shipment to Kenya.

READ: Fakes, high energy costs push manufacturers out of Kenya

“Companies are relocating because of the harsh business environment in Kenya both in terms of production and transportation,” said Mr Musau.

Egypt gives a 30 per cent subsidy to its industry, making the cost of production lower. Equally, at the cost of $0.03 per kilowatt of electricity, manufacturers in Egypt spend less on power than with their counterpart in the EAC.

In June Egypt slashed $6 billion off its energy subsidy budget in deficit reduction measures, that could see the cost per unit rise to $0.06 in five years. That would still be lower than the rates obtaining in East Africa.

Kenyan manufacturers pay between $0.18 and $0.21 per unit of electricity, while Uganda and Tanzania pay $0.11 and $0.7 per kilowatt of electricity respectively.

Kenya’s tea dominates the country’s trade with Egypt, accounting for 96 per cent of the Ksh21.4 billion ($251.7 million) worth of goods that it exports to Egypt, compared with imports worth $350.5 million.

The country exported 6.3 million kilogrammes of tea, equivalent to 21 per cent of all Kenyan tea exported.

Egypt is also keen on increasing flower imports from Kenya, which it has been re-exporting to Russia and Dubai.

In 2010, BAT Kenya said its tobacco exports to Egypt amounted to over Ksh10 billion ($112 million), with over half generated through sale of its Rothmans cigarettes. Mastermind is also a key exporter of cigarettes to Egypt.