Why exporters favour exclusive trade deal between Kenya, UK

Amidst a spirited race to beat a deadline for a post-Brexit trade deal with the United Kingdom by December 31, a common debate has been the fate of Kenya’s existing commitments under the East African Community (EAC) which is the overseer of regional trade.

Some critics maintained that Kenya’s pursuit of bilateral trade pact with the United Kingdom (UK) contravenes the principle of Article 37 of the EAC Common Market Protocol which advocates for a coordinated and common negotiated international trade and investment deals that are mutually beneficial to all members of the bloc.

Kenyan flower exporters, rattled by the experience from the previous joint negotiation of an Economic Partnership Agreement(EPA) deal between the EAC and the European Union(EU), will however not listen to such arguments.

Although the EAC– EU EPA negotiations were finalised, the agreement remains incomplete years later because only two EAC members--Kenya and Rwanda signed it in 2016.

“We believe that Kenya needs to pursue a bilateral agreement with the UK, and if we have any other EAC country that wants to jump in, they can use the same framework,” Kenya Flower Council (KFC) chief executive Clement Tulezi told the Business Daily.

“We have seen with the Economic Partnership Agreement how those discussions can be complicated, and so based on that, we don't have confidence that the discussions through the EAC is the way to go.”

In the half-finished EPA deal, the EU allowed Kenya interim duty-free market access although this cannot be relied on until other remaining partners of the EAC put ink to paper to make it legally binding.

The deal allows EAC products total access to the EU market, while 82.6 percent of imports from the EU are allowed into EAC market duty-free.

Losing such preferential terms due to the inconclusive EPA negotiations remains the biggest nightmare for Kenyan exporters because they would be the hardest hit should trade between the two blocs revert to ordinary conditions.

Of significance is that Kenya is the only EAC country not classified as a Least Developed Country (LDC), meaning that should the EPAs negotiations fail to conclude, then the country would be hardest hit because it would lose preferential access to the European market.

Contrastingly, as LDCs, other EAC members would still access the European market under the EU’s GSP scheme, or the Everything But Arms (EBA) initiative.

The EU’s EBA was born in 2001 to give all LCDs full duty-free and quota-free access to the market for all their exports with the exception of arms and armaments. Entry into the EBA is automatic and, unlike other GSP arrangements, the EBA has no time-limit.

Kenya's stance

Currently, Burundi, Rwanda, Tanzania and Uganda are beneficiaries of the of the EBA arrangement. Following Kenya’s successful move up the development ladder, the nation is no longer considered ‘least developed’ by the UN, thus, EBA preferences are no longer required.

Industrialisation and Trade Secretary Betty Maina has hinted at Kenya going it alone should the ongoing talks at the EAC level hit a dead end.

“The framework for discussion on trade is East African wide. Kenya is negotiating as part of East Africa unless it's difficult to conclude,” Ms Maina told the Business Daily.

“The UK has reached out to East African countries because as it exits the European Union it needs to put in place a WTO-compliant agreement.”

Kenya’s stance may be motivated by the fact that Article 37 of the EAC Customs Union Protocol only requires members negotiating external deals to send the EAC Secretary-General the terms of the negotiations it intended to conclude or amend with the third party for review and comment.

This has been interpreted by some critics to mean that was not violation of the EAC Customs Union protocol in its pursuit of the post-Brexit deal with the UK as long as it notified the bloc’s Secretary-General.

British High Commissioner to Kenya Jane Marriott, speaking on Citizen TV, recently insisted a deal between EAC and UK will be struck by end of the year.

“I am confident we will have a deal with the region...by the end of 2020 to allow continuation of trade benefits by all countries. It's going to take a lot of work, a lot of negotiations,” Ms Marriot said on August 11.

“We know that the UK is one of the key importers of Kenyan goods. There's a lot of mutual interest to keep matters trade going.”

The UK is the second largest market for Kenya’s exports after the Netherlands, accounting for about 17 percent of the merchandise whose exports’ earnings are only dwarfed by tea.

KFC fears that Kenya may lose its share of the UK market to rivals Colombia, Ecuador and Ethiopia if a trade deal is not in place by December.

“Ethiopia ranks amongst the low-income countries and will not be affected. The UK has crafted a deal already with Colombia and Ecuador to supply at zero percent,” Mr Tulezi said.

“So it only remains Kenya among the four dominant suppliers of cut flowers to the UK that will suffer. We don't think there will be a level playing field amongst us.”

The draft which the UK has presented to Kenya is believed to be largely similar to the EPA which facilitates trade with the EU.

“Five months is a short time for us to go through the portfolio of products that the UK could market in Kenya. But there are all possibilities, it is just harmonising the interests, and pursuing the bilateral way can be able to bring all these interests to the table quickly,” Mr Tulezi said.

“That's what we have been telling the government, and they have been reassuring us that by October we will have a draft agreement. But until we see pen-to-paper, it's still up in the air.”

UK exports

The United Nations Conference on Trade and Development (UNCTAD) suggested in a February report that Nairobi could potentially grow exports to the UK by 3.851 percent in a post-Brexit deal.

Erection of trade barriers between the UK and the 27-member EU after December, UNCTAD argues in the study, will result in some suppliers ordering goods directly from developing countries such as Kenya.

That could lead to a “substantial” market opportunity for exporters in developing countries and to a “lesser extent” the EU bloc, says the report titled Brexit Beyond Tariffs: The Role of Non-tariff Measures and the Impact on Developing Countries.

“These market opportunities are largest when Brexit takes its hardest form, and are attenuated somewhat by an FTA (free trade area) between the parties, which limits the incentive to switch demand,” the study says.

“But the likely persistence of NTMs (non-tariff measures) effects even in an FTA scenario means that there are some opportunities nonetheless, even substantial ones, provided that competitive developing country suppliers can overcome the costs associated with exporting to these two markets.”

The report assumed the prevailing tariffs and trade policies under the 27-member European Union (EU) bloc will remain intact in the proposed trade deal post-Brexit.

Kenya has struggled to significantly diversify her exports in the UK away from traditional tea, horticulture and coffee which are largely sold raw, exposing its farmers to price shocks in international markets.

“Kenya has to overcome some of the structural changes that are happening in its exports markets,” London-based Citi Bank chief economist for Africa David Cowan said in an interview in Nairobi on February 14.

“For example, Kenya exports a lot of tea to the UK, but tea consumers in the UK are increasingly drinking less of black tea and more of herbal tea. So, Kenya has to re-adjust its market to either meet that herbal tea demand or grow exports in countries like Egypt, India and Pakistan where people drink traditional tea or create new products.”

After nearly four years of politicking, haggling and delays that cost the political careers of two Prime ministers – Theresa Mary (2019) and David Cameron (2016) – the UK formally left the EU on January 31.

There’s, however, a transitional period that ends in December 2020.

The UK, with orders amounting to Sh40.08 billion in 2019, was the fourth largest buyer of Kenyan goods after Uganda (Sh64.11 billion), the United States (Sh51.92 billion), Netherlands (Sh48.0 billion) and Pakistan (Sh45.24 billion).

This is according to Economic Survey 2020 published by the Kenya National Bureau of Statistics.