Why EAC tariff review is a big deal

Very major changes in trade relations in the East African Community are expected to happen within the current budget cycle as member states start implementing a new and comprehensive common external tariff (CET).

From what I gather, partner states in the regional economic block have agreed to finalise a review and to implement a revised CET by July 1 this year.

Whichever way events unfold in the coming months, the business community will be waiting with bated breath for the outcome of the CET review.

The implications of the changes that may come with the revised CET on the cost of doing business and on competitiveness will be major. A review of a CET in the context of countries with diametrically opposed industrial policies will not be easy.

Which is why when the negotiating parties reached a consensus during last month’s meeting in Nairobi on the tariff lines which will attract tariffs beyond the maximum 25 percent, it was celebrated as a breakthrough.

The hard part will come when the parties start the process of mapping and classification of products. From what I gather, issues continue to linger on textiles, steel products and motor vehicles.

Sources told me that the Nairobi meeting directed partner states to submit national production data on textiles, steel products and motor vehicles by February 28, this year.

The deadline for ‘mapping’ – determining which product belongs to which tariff band - has been set at May 15.

Last reviewed way back in 2010, the East African Community CET has been dogged by big policy co-ordination challenges characterised by perennial requests by member states for stay of application, unilateral exemptions and frequent applications for duty remissions.

The upshot of the culture of poor adherence to the CET tariff regime and frequent derogation of the rules by trading partners was an unstable regime that makes complete nonsense of the idea of a common external tariff.

On paper, the EAC has a very simple three-band structure that should have given us a stable tariff regime. The tariff for finished goods under the CET was set at 25 percent, intermediate goods at 10 percent and raw materials at zero percent.

In addition, there was a limited number of products under the so-called sensitive list that attracts rates above the maximum rate, ranging from 25 percent to 100 percent. It has become practice for Finance ministers to introduce changes and derogations on the CET whenever they go to Arusha for the annual pre-budget consultations.

Today, the most active part of the Arusha-based bureaucracy today is the dispute settlement mechanism section. And, the busiest department is the entity known as the sectoral council on trade, industry, and finance that has been spearheading the comprehensive review of the CET.

When the comprehensive review of the incumbent CET process ends, we will need to have a retrospective look and audit at the pitfalls it has encountered since it came into force in 2005.

I went through a study whose finding I found illuminating.

First, it would appear that Uganda has had the highest number of unilateral derogations since the CET came into force.

Secondly, the study reveals that in East Africa, the manufacturing sector receives a disproportionate share of import protection. That trade policy is a reflection of preferences of economic interest groups and power and influence of business associations.

Third, in the agricultural sector wheat, barley, rice and sugar took the biggest share of unilateral derogations.

In the industrial sector three product categories dominate - paper and paper products, cement, and iron and steel products. I have also read somewhere that in Africa, negotiations to review CETs and trade agreements have a better chance of success where regional business associations have a strong voice.

There is a strong case indeed for strengthening and enhancing the profile The East African Business Council -- the largest regional business association in the region. It is impossible to plan for the long term if tariffs keep changing every year.