What Fate for the EU-East African Free Trade Agreement?

14 December 2016 Andrew Manners, FDI Visiting Fellow

Background

After ongoing delays, Tanzania announced in July this year that it would not be signing the EPA, a free trade agreement between the EU and East African Community (EAC). As the January 2017 ratification deadline draws nearer, that stance has not changed and Tanzania continues to voice fears over EU imports flooding its domestic market. With the country already enjoying free trade to Europe as a “least developed country”, the Tanzanian Government remains steadfast in its refusal to sign the accord. This means that the EAC is unlikely to ratify the agreement as a single economic bloc, although other member states, including Rwanda and Kenya, may still move to implement the EPA on a bilateral basis sometime in 2017.

Comment

Continued Tanzanian opposition threatens to derail the controversial EPA free trade agreement, which has now been almost ten years in the making since negotiations began in 2007. In Tanzania, lawmakers from the ruling Chama Cha Mapinduzi party and opposition parties have argued that the free trade agreement will open up Tanzanian markets to EU exports with zero tariffs, thereby harming those domestic markets.

Earlier in July, in fact, former President Benjamin W. Mkapa argued that the ‘high level of liberalisation’ required by the EPA would reduce tariffs on around 82 per cent of industrial goods, up from about half that now. The result, he said, ‘is likely to put our existing local industries in jeopardy and discourage the development of new industries.’ Secondary sector sellers, in particular, could be hit hard as a result.

Making the EPA less appealing, meanwhile, is the fact that Tanzania, Uganda, Burundi, South Sudan, and Rwanda already export duty-free to the EU as “least-developed countries”, without the EU enjoying reciprocal access; having graduated to “lower middle income” status in mid-2015 (along with Bangladesh, Myanmar and Tajikistan), Kenya no longer enjoys such one-way market access.

While most of the EAC is already on board, potentially as a means boosting EAC solidarity – but also because Rwanda and Burundi have close ties with Nairobi – Tanzania is refusing to cede the asymmetrical benefits conferred by its current status, particularly if it risks damaging its own domestic market. Tanzania also has less trade with the EU than Kenya, relying on local links instead.

But for Kenya, the EU remains its third-largest export destination (behind India and China), with Nairobi exporting over $1.05 billion worth of flower and horticultural goods alone to Europe. Given the stakes, therefore, Kenya has tried to lock in the EPA, lobbying the other EAC members and threatening to conclude the deal without their consent. But those efforts ran into headwinds last month in the form of a civil suit lodged on behalf of Tanzania in the East African Court of Justice. The case is still ongoing, and the EAC members are due to meet this month in the Tanzanian city of Arusha, to discuss the fate of the pact.

Still, with Tanzania likely to hold out, at least at this stage, and with all six EAC members needing to ratify the EPA before it can be implemented, the fate of the deal remains uncertain. If Tanzania cannot be persuaded to ratify the agreement before the January deadline, then Kenya and others may instead look towards securing bilateral versions of the EPA.

The head of the EU delegation to Kenya, Stefano Dejak, recently announced the bloc’s intention to work closely with Kenyan Government even if the EPA is not ratified. Specific details remain unknown, but the positive rhetoric coming from the EU suggests that a deal can be struck, and that the short-term economic fallout for Kenya will not be too severe. Rwanda and Uganda may also try to reach an EAC-type deal with the EU.

For those countries that do reach deals with the European bloc, bilateral trade is expected to increase, unrestrained by tariffs and quotas. Having said that, it is still too early to tell if signing such a deal with the EU would provide a net positive for growth, and there remains a reasonable threat that any jump in exports may be offset by shrinking domestic markets in the face of European competition.

Finally, the failure to present a united front and reach a trade deal almost ten years in the making highlights the yawning gaps within the EAC and undermines its status as an integrated trading bloc. With Tanzania and Kenya both vying for regional pre-eminence, the EAC is likely to come under further strain.

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