ECONOMIC PARTNERSHIP AGREEMENTS

ECONOMIC PARTNERSHIP AGREEMENTS
(WRITTEN ON 26TH FEB 2013) 

What are Economic Partnership Agreements (EPAs)?

Economic Partnership Agreements are a scheme to create a free trade area (FTA) between the European Union and the African, Caribbean and Pacific Group of States (ACP). They are a response to continuing criticism that the non-reciprocal and discriminating preferential trade agreements offered by the EU are incompatible with World Trade Organisation rules. The EPAs are a key element of the Cotonou Agreement, the latest agreement in the history of ACP-EU Development Cooperation and were supposed to take effect as of 2008, but as of March 2012 the negotiations are not yet completed.

The Economic Partnership Agreements (EPAs) between the EU and African, Caribbean and Pacific Group of Countries are aimed at promoting trade between the two groupings-through trade development, sustainable growth and poverty reduction. The EPAs set out to help ACP countries integrate into the world economy and share in the opportunities offered by globalization.

 What are the objectives of Economic Partnership Agreements (EPAs)?

The overall objectives of EPAs are to ensure sustainable development of Kenya and other

ACP  countries,  their  smooth  and  gradual  integration  into  the  global  economy  and eradication of poverty.  Specifically EPAs aim at:- 

•   Promoting sustained growth;
• Increasing the production and supply capacity;
• Fostering the structural transformation and diversification of Kenyan economy
•   Support for regional integration.

 Historical Background of EPAs

For over 30 years, until 31^st December 2007, most of Kenya’s (and other ACP countries)

Exports entered the EU market without being charged any import duties. This was as a result of an on reciprocal preferential market access which the EU extended to the ACP countries first under the Lome Conventions (1975-2000) and later under the Cotonou Agreement (2000-2007).The main objective of the preferential trade regime was to promote industrial development in the ACP countries.

However the preferential trade regime did not achieve its overall objective since the share of Kenya’s exports in the EU market remained very low and scarcely diversified. The same can be said of the ACP exports to the EU its share in the EU’s total imports decline from 6.7% in 1976 to 2.0% by 2007. At global level, Kenya and other ACP countries suffered marginalization over the same period.

The  ACP  and  the  EU  agreed  to  address  these  concerns  through an  alternative trade arrangement. One which does not only look at the North-South cooperation but also south-south  trading  opportunities through  regional  integration,  as  well  as  enhancing  ACP countries’ access to the global market.

At the WTO, then on reciprocal preferential market access which the EU was extending to

Kenya  and  other  ACP  countries  came  under attack on  account  of  it  being  incompatible with WTO  rules.  The WTO Ministerial meeting of 2001 gave the EC and the ACP countries up to 31^st December 2007 to rectify this anomaly.

Kenya  (and  other  ACP)  and  the  EU  undertook  to  address  this  anomaly  through  a

framework  of  a  new  trade  regime  in  form  of  Economic  Partnership  Agreements  that  had already been provided for in the Cotonou Agreement, which the two parties signed in June

2000. This new trade regime is reciprocal (i.e. Kenya opens her market to EC products as

EC opens her market to Kenya’s products), on an asymmetric basis (EC to open100% of her market and Kenya less than 100%), and thus WTO complaint. According to Cotonou Agreement Article 37(5),ACP countries had the option of going for this new trade regime or  settling  for  the  GSP  (available  for  developing  countries  such  as  Kenya)or  Everything But Arms (available for least developed countries).

Therefore, Economic Partnership Agreements are agreements that spell out the new trade arrangement between the EU and ACP countries which choose to conclude the Agreement with the EU.

                                                                

Case against EPAs by Kenya Small Scale Farmers Forum (KESSFF)

The KESSFF through their national chairman, Mr. Moses Shah, had sued the Government of Kenya for signing the interim EAC-EPA which farmers think will trample upon their basic human rights to decent livelihood. The chairman raised the following pertinent concerns about the hurriedly implementation of the EPAs;-

(i)                 Food insecurity will arise thus undermining Kenya’s sovereignty. This will be contributed by the fact that the EAC states will gradually open up their markets to goods from the European Union over a period of 25 years. After 15 years, 80% of exports from the EU will enter the EAC market free of duties.

(ii)               EPAs will negatively affect the industrial and manufacturing sectors of the Kenya economy as it would open the Kenyan market or economy to cheap and heavily subsidized products from the EU. Eventually, the industries will shut down.

(iii)             Job losses and unemployment will arise once the EPAs come into force.

(iv)             Government revenue collectible from trade tariffs and custom charge will reduce.

(v)               Fishing will be threatened since Europe has huge ships which contain small boat schooners or trawlers which will be sent to Kenya’s territorial waters.

(vi)             Study by Kenya Institute for Public Policy Research and Analysis (KIPPRA) has shown that massive loss in agricultural produce would result if EPAs come into force since the EU has heavily subsidized their agricultural produce especially for dairy farmers.

Case against EPAs by Kenya Human Rights Commission

KHRC argues that the Economic Partnership Agreement (EPAs) that is sold as a partnership to Kenya and the whole of East Africa Community, is a scheme designed to open up African markets for European Transnational Co-operation which means  EPAs will run counter to the logic of the African Union’s (AU’s) African Economic Community (AEC). EPAs which are forced upon the African continent are a form of exploitation which is deeper and more complete than under Lome Conventions as this time around African countries will be forced to open up more than 80 percent of her market jeopardizing her socio-economic growth prospects. The issues KHRC has raised include;-

(i)Standstill Clause

Perhaps the most toxic feature of the EPAs is the “standstill clause.” The clause in essence will force ACP countries to freeze all their tariffs at the current rates which will include products that are not supposed to be opened for the next 20 years. In the EAC case this also applies to products on her exclusion list or sensitive list.  In SADC this applies to products subject to liberalization. Even though countries have transition periods of 15 or 25 years for tariff elimination “the EPA text does not allow for tariffs to be increased” (South Centre, 2010b). In essence this will ensure that African countries reindustrialize as they will face unfair competition from European companies.

(ii)Rendezvous Clause

The Rendezvous Clause outlines the areas for further negotiations under comprehensive EPAs. These areas will be trade facilitation and customs, outstanding market access and trade subjects that include rules of origin, the Singapore issues of competition policy, investment and transparency in government procurement; services, intellectual property, dispute settlement, economic and development cooperation and other issues that the parties see as necessary. The challenge for countries like Kenya and others in Africa is that this clause provides for the continuation of negotiations in the various areas outlined above. Areas that are widely acknowledged to be detrimental to Africa’s development agenda and areas African countries are still disputing at the WTO level. This clause will thus render Africa’s work at the WTO irrelevant and ensure EPAs include WTO plus disciplines. Such a clause precludes the idea of a proper and principled negotiation of EPAs or the very notion of partnership.

(iii)The MFN Clause

The MFN (Most Favoured Nations) Clause in the interim EPA agreement will deter and prevent other countries negotiating FTAs with African countries. The MFN Clause will force African countries to offer the EU the same terms that they offer another “major trading economy” once the EPA enters into force. This clause works against the promotion of south-south trade and regional integration. This provision too goes beyond the WTO Article XXIV on regional trade agreements and free trade areas (problems described above). The fear is that if the EAC for example liberalize 80 percent of her trade with the EU and then signs another FTA agreement to liberalize 90 percent of her trade then the EAC must extend the same tariff liberalization to the EU as well.  Most texts define the term “major trading economy” as either regions with a share of world trade greater than 1.5 percent or countries with a share of greater than 1 percent. The interpretation means such countries as Brazil, India and China and regions such as ASEAN and MERCOSUR will not be eager to push for a trade deal with Africa.

(iv)Export Taxes

Another fatal clause in the EPAs texts is the one on export taxes that prevents African countries from raising existing export taxes or imposing new ones. The motive behind “this is because the EU is interested in ACP countries’ raw materials such as its minerals which are critical to the growth of EU’s own manufacturing sector” (South Centre, 2010:7). African countries must insist that they have the right to use existing export taxes and impose new ones whenever their development agenda dictates so. This must be done without recourse to requesting the EU to grant this provision in “the same way the EC implements subsidies without informing, consulting or gaining agreement from the ACP countries”(South Centre, 2010:17). Giving African countries the ability to use export taxes and duties will ensure that they are able to diversify and encourage the production of high value products. The WTO allows countries to use export taxes and duties and the EU insistence on their removal goes well beyond the scope of Article XXIV. 

(v)Regional Integration in Africa

The EPA onslaught from Brussels has already damaged regional integration in Africa by dividing SADC in two. This is not only adding to the overlapping membership problem of RECs but in East and Southern Africa the EPA process have effectively destroyed regional integration by creating an amorphous group know as ESA. A group that is not recognized by the AU but that is also not a properly constituted region. (South Centre 2008:22) indicates “that there are real chances that initialed agreements will have a direct impact on countries which have taken the decision not to initial an interim EPA with the EC.” This is the case where a customs union or common market is already established and one member has initialed the EPAs individually. The case of Central and West Africa is poignant. That is “in West Africa, Ivory Coast initialed an interim EPA despite being a member of WAEMU (a customs union).

(vi)Local Production and Regional Integration in Africa at Risk

The South Centre has analyzed the degree to which products produced domestically in Africa will be affected by the tariff elimination due to EPAs. The analysis focuses on the harmonized Commodity Description and Coding System (HS) of tariff nomenclature. Total tariff lines are 5051 on a 6-digit level.

Under these tariff lines the EAC can only compete with the EU on only 10 percent of tariff lines. About 1100 tariffs lines out of 2144 will be put at risk or destroyed representing 51.3 percent of tariff lines or products where the EAC currently produces. A further 2366 tariff lines will be liberalized representing the demise and future potential production. Thus for the EAC 68.6 percent of all her tariff lines or products are exposed to risk. A short summary of products that are at risk from the EPA as the EU is more efficient at producing and where the EAC trades locally in the region are:

·         Vehicle industry

·         Agricultural products

·         Books, brochures and other printed material

·         Final industrial products

·         Processed oil products

·         Chemical products for agriculture

·         Commodity chemicals

·         Medicines, vaccines and antibiotics and

·         Intermediate industrial products

Case for EPAs by the European Union

General Scheme of Preference (GSP) and GSP Plus are non reciprocal unilateral trade preference arrangement which EC extends to developing countries. This regime entails duty free market access for most of the products. The key down side of these trade regimes is that they are not contractual and are subject to be amended by the EC periodically without much input of the beneficiary countries. They are not therefore secure enough to stimulate trade related investments that target the EC market. Kenya requires predicable trade regime which investors can base their decisions on long term and secure basis. In addition, under the GSP and GSP plus,

There are some products which are attracting import duty while under EPA they are not.

These include select agricultural products such as dairy products, horticultural products

(Flowers, fruits and vegetables) which Kenya and other EAC countries have comparative advantage for their production. EPA offer the option of a contractually secure trade regime which Kenya can use in stimulating investments targeting the EU market. Under the GSP, exports of particular products that capture beyond certain level of market of the EU market will be removed from enjoying preferential tariff (Graduation).

Case for EPAs by Ministry of Trade & Industry in Kenya

The Ministry is in support of EPAs being signed since they are now comprehensive and suitable for Kenya rather than going back to quota restriction and Generalized Scheme of Preference (GSP).

(i) To sustain Kenya’s export market in the EU

European Union has been a key destination market for Kenyan exports. For instance in 2011,Europe Union accounted for 24% of Kenya’s total exports, making this economic block the second destination market for Kenyan products after the EAC. Kenya has been able to expand its export to the EU over the last 30 years because of the duty free preferential market access under the ACP trade arrangement. As already mentioned above, this arrangement ended on 31^st December 2007.Economic Partnership Agreements provide a contractual alternative for ACP countries to secure these trade preferences on a long term basis.

Kenya therefore is negotiating EPAs in order to sustain current market preferences and

avoid macroeconomic instability and disruption of economic activities, especially in the agricultural sector, whose growth has relied on EC market. This is the principal reason that made Kenya, along with other EAC countries to initial the Framework Agreement for Establishing the EPA (FEPA) on 17^th November 2008. As a result of this move, Kenya reaped the following benefits:-

•   Preservation of the competitiveness of Kenya’s horticultural and fisheries products, among  other  export  products  to  the  EU,  which  were  under  threat  if  the  EPA  deal was not  concluded.  The concluded deal  halted an  imminent  tariff  hike  of  between 5.3%  and  15.7%  on  these  products.  This tariff increase was sure to occur in the mid-night of 31^st December 2007, under a GSP regime that Kenya was to shift to as a developing country.  The move therefore saved the economy from an immediate loss of over KShs70billion in annual exports to the EU market.

• Saving  of  over  1.5  million  jobs  already  in  place  in  the  horticulture,  fisheries  and other  related  industries,  whose  growth  has  been  propelled  over  the  years  by  the preferential market  access  into  the  EU  market.  This move ensured that lives of some 4.8million dependants on this work force were not disrupted.

•   Safeguarding  of  over  US$1 billion  investments  which  are  already  in  the horticulture  and  fisheries  sector  and  other  interrelated  industries  (such  as chemicals, farm inputs and agri-equipments). These investments were under threat of being wiped out as investors were being induced to relocate to least developed neighbouring  countries  by  the  preferential  market  access  to  the  EU  under  the Everything But Arms trade arrangement, which these countries are entitled to.

•  Ensuring  against  macroeconomic  instability  that  was  imminent  as  a  result  of  the envisaged  drop  in  exports  and  subsequent  worsening  of  the  balance  of  payments(BoP). BoP deficit was expected to increase from about KShs44bn in 2006 to over KShs110bn in 2008, accompanied by depreciation of the Kenya Shilling.
•  Market access for products such as textile and apparel, whose rules of origin have been revised. This is sure to trigger further investments and more jobs in this sector targeting the EU market.

•  Saving the economy from the loss in domestic taxes generated from incomes in the horticultural and fisheries sector among others. Direct (income) taxes and indirect (consumption) taxes is estimated at well over KShs2 billion.

(ii)Expansion of trade into the EU market in support of vision 2030 quest for increasing exports by 20% by year 2030.

Kenya has the opportunity to expand market to the European Union for products which the country has comparative advantage and which were not enjoying the duty free market access into this market. These products include dairy produce, cereals, and products of milling industry, edible vegetables, and meat among others. Annex 1 of this brief gives the tariff rate which these products were attracting under the Cotonou trade regime and which they are attracting under the EPA. These products have potential of revolutionizing development in Kenya through

investments  targeting  production  of  these  products,  for  eventual  export  into  the  EU market.

 In case the EPA is not concluded Kenya stands to lose the EU market as a result of tariff hike.

(iii)To define a framework for trade in services and negotiate a scheme for Kenya’s (and other ESA countries) export of tradable services (professional services and other identified services) to the EC.      

(iv) To improve EU market access for products through negotiated non tariff requirements and other market access enhancing measures. These include:-

•   Sanitary and Phytosanitary measures–introduction and enforcement procedures and processes

•   Simplified Rules of Origin for all products, including fisheries

•   Safeguarding of benefits under commodity protocols–sugar, beef and veal and bananas.

•   Safeguarding against WTO driven Preference erosion through targeted developmental measures to aimed at preservation of the eroded margin through competitiveness.

•   Safeguarding products of Kenya’s (as well as EAC countries) export interest against erosion of competitiveness as a result of EU Common Agricultural Policy Reform program.

5. Deepening of regional integration

Kenya, like all other EAC countries is bound by the EAC Customs Management Act to negotiate trade agreements as a regional bloc. The EAC Summit made a decision for the EAC to negotiate EPAs with the EC in 2002. Therefore, negotiation of the EPAs was a fulfillment of an EAC Summit decision made in the interest of trade and economic development in the EAC. European Union is a key trading partner of the EAC countries and hence the EAC-EC EPAs are meant to consolidate trade gains and open up new horizons for business and investments for the EAC countries.

What are the risks of EPA’s on Kenyan economy and what measures have been put in place to these risks according to the Ministry

The principal risks of EPAs, which are to be avoided through negotiations, include revenue loss, unemployment in sectors that face competition from EU products, deindustrialization.

The Ministry commissioned KIPPRA in 2005 to estimate the revenue loss and propose strategies to avoid these losses through EPA negotiations. Assuming a100% liberalization of the Kenyan market to EU products, the study estimated the loss atKShs6bn. This loss is equivalent to a 2% reduction of government revenue and 1.5%reductionof import duties.

The 100% liberalization was however not realistic since the region liberalized 82.6%.

Further, the launch of the EAC Customs Union on 1^st January 2005, led to drastic reduction of existing tariffs to the EAC CET tariff structure of 0% for raw material and capital goods; 10% for intermediate products and 25% for finished products. For Kenya, this policy shift crashed about six external tariff bands from six to three, and tariff on finished products from 35% to 25%.

In 2006, the Ministry of Trade and Industry undertook a study (Fred Miencha (June 2006) to re-estimate revenue loss, using the KIPPRA model but EAC CET 2005 tariff structure.

The study results showed expected revenue loss to be KShs4.98 billion, on the assumption that “substantially all trade” means opening up 80% of the Kenyan market to the EU products. On the other hand, trade creation and consumer welfare were estimated at about Ksh 33 billion and Ksh. 2.4 billion respectively. Thus, the latter will have a counteracting effect on the revenue loss.

Measures taken to avoid the risks and ensure that EPAs deliver development of our economy

In preservation of the intent of Cotonou Agreement that ‘no country will be worse of than

it currently is’ after conclusion of an EPA, Kenya is pursuing the following strategies in

order to address the projected negative impact.

1. Limited market opening for EU products, where only 17.2% of EU products are being liberalized over a period of 18 years from the date to be determined in the comprehensive EPA.

(1)About  54%of  these  products  are  intermediate  goods  where reduction of tariffs to zero will contribute towards competitiveness and thus stimulate industrial  and  economic  development. This  implies  minimal  revenue  loss,  which  will obviously  be  mitigated  by  economic  benefits  arising  from  economic  growth  that  will be stimulated by EPAs. Economic growth is expected from sectors such as cotton and textile where the EU market has been opened through relaxation of the rules of origin, and  many  other  agro  processed  products  which  under  the  EAC  EPA  are  now  not attracting any import duties in the EC. It is worth noting that even before EPAs, already 65.4% of EU exports into Kenya and

EAC  countries  were  coming  in  duty  free  under  the  EAC  Customs  Union.  This is a

demonstration  that  bulk  of  EU’s  exports  into  Kenya  and  the  EAC  region  are  mainly

raw material and capital goods.

(2) Excluding  products  from  liberalization  under  EPAs  in  order  to  safeguard  agriculture, Kenya’s market interest in the region.  Therefore,  exclusion  list  is  the means  by  which  the  Government  is addressing  the  welfare  loss  and  threats  posed  by EPAs  on  Agriculture  and  Industry.  The products in the exclusion list include agricultural and industrial products. See annex 2 for a detailed list of these products.

(3)Negotiating simplified rules of origin that are supportive of agricultural and industrial development, laying emphasis on value addition for agricultural products.

(4) Proposal  for  a  comprehensive  infrastructural  and  non  infrastructural  development program  to  address  infrastructural  and  non  infrastructural  constraints  that  have  been singled  out  as  inhibiting  industrial  and  agricultural competitiveness.  The  funding  of this  program  is  foreseen  under  the  10^th EDF  and  other  funding  modalities  that  are foreseen in the EPAs.

(5) Negotiating  for  improved  predictability  of EAC’s  and EU’s  trade  regulatory requirements  such  as  SPS  requirements  and  Product  Quality  Standards  through  a negotiated  protocol  on  SPS  management;  and  a  capacity  building  program  for  trade

facilitation  institutions  such  as  KEPHIS,  KEBS,  Department  of  Veterinary,  Customs Department, etc.

(6) Hedging  the  regional  market(for  products  where  Kenya  has  a  demonstrated  export

potential)from  EU  products  through  regionally  negotiated  EPAs,  where  Kenya is articulating her interests in the regional market.

(7) Integrating marine and inland fisheries in EPAs. This is expected to unlock a huge potential  for  Kenya  marine  fisheries,  which  if  fully  exploited  is  expected  to  rival current  dominance  of  inland  fisheries  exports,  to  the  benefit  of  Kenya’s  overall economic development. A process has been initiated to explore ways for development and  utilization  of  the  marine  resources  through  various  options  including negotiating Framework Partnership agreement with the EU, developing own capacity (own fishing fleets),  among  other  options. A  Task  Force  to  steer  the  negotiations  of  the  FPA  was appointed  by  the  Minister  of  Fisheries  and  is  due  to  commence  work  as  soon  as modalities for the FPA negotiations including financing are initiated.

CONCLUSION

After careful analysis of the EPAs case, I found that from 2007 the EAC has seen her share of intra-African markets exceed the EU as her largest export market. In 2008 the EAC’s exports to Africa reached approximately USD 3.2 billion whilst exports to the EU were about USD 2.5 billion. A look at manufactured exports highlights the increased importance of the African market.  The EAC manufactured value added to the rest of Africa is USD 1.8 billion while to the EU it is USD 164 million in 2009. These statistics represent the best case for EAC diversification and industrialization through African markets as opposed to the EU market that absorbed primary products that are not processed at all or have little processing such as horticulture, minerals etc. What this shows is that Africa is the critical market place for the EAC and Kenya in particular. In the final analysis Kenya must not jeopardize her long term economic interests for apparent short term gains through EPAs. Consequently the recommendation must be that Kenya concentrates on regional markets and not sign a final EPA text that will forestall her economic transformation and development.

---