How customs union can boost trade

The integration of the East African Community aims at closer ties among the partner states through coordination of the implementation of policies, projects and programmes in such areas as political, economic, social and cultural fields for the benefit of the people of East Africa.

Overall, there are 17 areas of cooperation identified in the EAC Treaty.

The step towards a full integration are a customs union, a common market, a monetary union and ultimately a political federation.

The customs union protocol was signed in 2004 and commenced in January 2005 and is to become fully fledged in 2010.

Next year will also see the common market protocol begin.

The aim of this article is to try and shed light on the applications of four key aspects of the customs union, namely the elimination of internal tariff and its impact on trade, elimination of non-tariff barriers (NTBs), and application of the rules of origin and common external tariff.

Significant progress has been made in the implementation of the customs union protocol, resulting in huge increases in the volume of intra-EAC trade since 2005.

On the surface, elimination of internal tariff appeared to favour the other partner states and disadvantaged Kenya, whose exports of some categories of goods to the other partners continued to attract tariffs, did not adversely affect her exports to the EAC.

In real terms, however, all countries of the region have benefited.

In 2008, for example, Uganda was Kenya’s number one export destination, Tanzania was fourth and Rwanda tenth, worldwide and in the same year, Kenya’s exports to the EAC have accounted for 51.6 per cent of exports to Africa.

Kenya’s value of total exports to the four Partner States increased from Sh64 billion to Sh84 billion in 2004 and 2008 respectively.

Uganda is the largest Kenya’s export market followed by Tanzania, accounting for 50 per cent and 11 per cent respectively.

Kenya’s import from the region increased from Sh3 billion to Sh12.6 billion in 2004 and 2008 respectively.

The largest importer to Kenya is Tanzania accounting 58 per cent for all imports from EAC.

Overall, total value exports from Kenya grew by 31 per cent while imports from Tanzania and Uganda grew by 300 per cent.

Intra-EAC trade is on the rise for the member states, the most prominent is the increase in Kenya’s trade with the neighbours, which means demand for her goods (especially manufactured goods), is increasing at the expense of third-party imports.

The challenge will be for producers and manufacturers to meet this increased demand.

Consumers may also find it more compelling to buy goods produced within the region due to proximity to each other (as evidenced by increased cross-border trade), lower levels of non-tariff barriers similarities in culture, language, product differentiation and regional infrastructure improvement.

To become a fully fledged customs union, one expects there would be no barriers to trade.

Unfortunately, there is no world of perfection.

Non-tariff barriers have been addressed through the EAC mechanism for the elimination of NTBs.

This is a joint initiative of the East African Business Council and the EAC Secretariat.

The third and most critical area of customs union is the Rules of Origin and its application.

Rules of Origin are integral part of the EAC customs union.

Partner states have adopted simplified Rules of Origin in a bid to make it easier for small businesses to engage in cross-border trade.

There are two Rules of Origin criteria applicable in EAC namely, wholly obtained and substantial transformation.

The former refers to products which are wholly produced in one partner state, while the latter refers to products whose processes of production constitute a substantial transformation.

The purpose of the EAC Rules of Origin is to distinguish between goods produced within the EAC for purposes of eligibility for EAC preferential treatment against those produced outside the EAC customs territory that attract duties.

But issues have been raised with regard to the application of the Rules of Origin.

The understanding and interpretation of the rules of origin is limited in most partner states, particularly for companies that produce for the local market.

Limitations in access and efficiency in issuance of certificates tend to encourage cases of fraud, where importers present fake or fraudulent certificates of origin.

At the same time, there also seems to be negligence on the part of some authorities who do not necessarily abide by the manual for application of the Rules.

This is a challenge. Value-added criterion also poses a challenge in the implementation of the EAC Rules of Origin.

Its computation which is very complex renders it difficult to apply not only to the exporters/manufacturers but also the implementing authorities.

Despite these challenges, a verification mission is usually mounted and carried out to ascertain goods that meet the origin criteria.

Some of the verification missions in process are those of motor vehicles, products manufactured by Nestle Kenya, lubricants manufactured by Kenol/Kobil, beauty products manufactured by Inter-consumer Products and televisions manufactured by AUCMA Digital Technology Africa Ltd.

When they are conducted, the outcome must be approved by the relevant Sectoral Council (in this Finance, Trade, and Investment) and the full Council of Ministers.

It is, therefore, important to appreciate the role played by Rules of Origin in promoting the industrial development of the EAC region, employment creation and the steps in the achievement of freer flow of goods.

Common External Tariff, popularly known as CET, is one of crucial elements of a Custom Union.

The Community’s CET regime has very low rates on raw materials and capital goods, moderate rates on intermediate goods and highest rates on consumer goods.

Local production

The EAC trade regime has designated 58 goods as sensitive products and set advalorem tariffs with the top rate of 100 per cent applying to most varieties of sugar, rice (75 per cent), wheat (60 per cent), milk and various milk products (60 per cent) and maize (50 per cent).

This measure was intended to protect local production on the assumption that the region had adequate capacity to meet the demand.

Since the launch of the customs union in 2005, CET has been applied uniformly.

With proper handling of the administrative issues of the Customs Union, addressing NTBs well and proper application of the EAC CET and the exemption and duty remission schemes, the transition to the fully fledged customs union is bound to continue to bear more fruit to the member States.

Mr Nalo is Permanent Secretary, Ministry of East African Community.