Kenya is pursuing conclusion of the ongoing economic partnership agreements (EPAs) talks with Europe despite warnings of possible loss of tax revenues, the country’s top negotiators said.
Kenya is ignoring the warnings in favour of a binding pact with Europe that improves market access for its products and helps it source the development finance it needs to correct the imbalance in its economy.
The negotiators further warned that time was running out, citing the European Council’s rejection of an earlier proposal to extend the talks’ deadline to January, 2016.
“The EU Parliamentary Committee on International Trade voted for extension of the EPAs deadline to January 2016, but the EU Council rejected the offer, leaving us with a tight schedule,” said Joseah Rotich, the chief trade development officer and one of the EAC negotiators.
Negotiators have dismissed as unfounded warnings that Kenya risks suffering heavy custom revenue losses, arguing that such losses are usually negligible compared to gains that arise from increased export volumes.
“Kenya wants to conclude the EPAs for better rules of origin, an end to the EU’s agricultural subsidies as well as access development support,” said Mr Rotich.
The EU stopped charging taxes on 1,000 product lines from Kenya in January 2008 but Europe’s restrictive Rules of Origin (ROO) have continued to squeeze local exporters out of the lucrative market.
Last year, Kenya earned Sh134.9 billion from exports to Europe despite the fact that its beef, long-life milk and a raft of fresh produce and animal products enjoy zero tariffs.
The performance is considered dismal because the EU market for agro-based products is worth Sh22.2 trillion (€200 billion), according to official statistics.
EU rules of origin require all materials for making long-life milk, including additives like sugar, fruit, flavours, nuts or cocoa to originate wholly from the exporting country.
The rules also demand that any materials for making fruit juice (except for pineapple, lime or grapefruit) that is destined for the European market must not exceed 30 per cent of the ex-factory price.
The EPAs seek to commit the EU to 100 per cent opening of its market to African, Pacific and Caribbean (ACP) countries in exchange for liberalisation of 82.6 per cent of ACP markets. East Africa is also negotiating new rules of origin.
EAC member states are expected to seek moratoriums upon signing the EPAs before ratification and domestication of the pact.
Official statistics show that Kenya expects to suffer a Sh294 million ($3.5 million) revenue loss in 2017 when the pact takes effect.
This loss should rise gradually to Sh1.7 billion ($20 million) by 2033 when Kenya and its EAC partners are expected to have opened up 82.6 per cent of their markets to EU products. This loss will, at the time, account for about 0.3 per cent of government revenue.
“Revenue gains from expanded trade and the domestic taxes (direct and indirect) have the potential to offset this loss, especially if Kenya exploits the new market opportunities that will emerge under the EPAs,” said Mr Rotich.
But the South Centre, an international policy institution advocating for fair trade relations with the developing world, last week warned that removing tariffs on EU products could leave Kenya with a Sh16.5 billion ($193.8 million) drop in annual custom revenue collection.
The Switzerland-based policy think tank said that such a level of loss will outstrip the Sh10.4 billion ($121.8 million) gain expected from increased trade with Europe.
“The magnitude of loss can be gleaned from current statistics which show that even with current tariffs, imports have been growing at a faster rate than exports,” South Centre’s Trade Policy Advisor Aileen Kwa told the East African Legislative Assembly’s (EALA) committee in charge of international trade last week.
Ms Kwa said that apart from tax losses, the EPAs risk stifling expansion of industries and restrict trade with other partners. The Switzerland-based agency estimates that this adverse impact would cost the region’s economy Sh100 billion.
Kenya is not classified as a least developed country (LDC) and cannot therefore enjoy non-reciprocal tax free export of all products except arms to Europe – the Generalised System of Preferences (GSP) alternative that has traditionally benefitted developing countries.
Under the GSP, Europe will impose taxes on Kenya’s products with pineapple juice, for instance, attracting 11.7 per cent tariff while cut flowers are subjected to a nine per cent tariff.
The EAC is seeking to protect 1,400 tariff lines from external competition in on-going negotiations.
The list of protected products include meat, fish, dairy, vegetables, fruits, cereals, coffee, tea, juices, jams, canned fruit and vegetables, ham, cheese, wines and spirits, chemicals, plastics, car parts, wood, textiles and clothing and footwear.
Kenya and its EAC partners are opposed to Europe’s EPAs’ text on most favoured-nation and export tax elimination.
Kenya’s negotiators, however, maintained East Africa’s largest economy will not renege on the EPAs, having negotiated up to 98 per cent of the agriculture component and 90 per cent each on development, rules of origin and market access components.
Mr Rotich said EAC partner states would continue to lobby Europe on deadlines in the ongoing talks.
The EAC and the EU have been in talks since 2007, searching for new pacts to replace the current preferential trade deals that the World Trade Organisation (WTO) has rejected.
The five EAC member states signed an interim trade deal with Europe in 2007 to guarantee continued duty-free and quota-free access of the latter’s market following the expiry of the non-reciprocal trading arrangement that was based on a WTO waiver granted in 2001.
However, the EU has warned that it will terminate the offer and deny preferential market access terms to countries that will not have signed full economic partnership agreements (EPAs) by January 2014.
The warning has upset EAC member states who have responded with the demand that the EU must review the hard stance it has taken on the deadline.
“EAC is committed to conclusion of the negotiations but does not agree with the proposed deadline whose impact is put pressure on the negotiators,” Mr Rotich said.
EAC ambassadors in Brussels are also lobbying the EU Parliament to drop the proposed deadline.
“EAC sectoral council of ministers have agreed to elevate the contentious issues and proposed deadline to the political level aiming to lobby like-minded EU member States and the European Parliament,” Mr Rotich said.
The EU’s hard-stance is partly due to the fact that EAC member states have repeatedly failed to honour a series of deadlines, including one set by the ministerial organ for December 2011.
Mr Rotich however maintained that Europe is partly to blame for delayed conclusion of the talks after it introduced new issues such good governance in tax areas, trade and environment and obligations from Customs Union agreements.
“EAC has clearly told EU that introduction of new issues in EPA negotiations will delay its completion,” the official said.
Negotiation meetings at technical and senior officials’ levels have been scheduled for February 2013 to push on with the EPA agenda.