What Kenya ought to do to learn from the US free commerce settlement

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What Kenya should do to benefit from the US free trade agreement

Wednesday February 10, 2021

BY KENNETH MALOT
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With SHADRACK MWATU
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Summary

  • The timing of the negotiations could not have been more favorable in view of the expected expiry of the African Growth Opportunity Act (Agoa) in September 2025.
  • If Agoa expires without a specific preferential trade agreement, Kenya, as a developing country, can only continue trade with the USA through the Generalized System of Preference (GSP).

Kenya is currently negotiating a free trade agreement with the United States of America. This is in line with the fourth timetable of the Constitution, which delegates foreign policy, foreign policy and international trade functions with the national government.

The timing of the negotiations could not have been more favorable in view of the expected expiry of the African Growth Opportunity Act (Agoa) in September 2025.

If Agoa expires without a specific preferential trade agreement, Kenya, as a developing country, can only continue trade with the USA through the General System of Preferences (GSP) in accordance with the General Agreement on Tariffs and Trade. GATT) 1994 or under Most Favored Nation (MFN).

Over 90 percent of the APS tariff lines are duty-free in accordance with Agoa’s Duty Free Preferences policy. However, if Kenya’s trade with the US were regulated by the GSP, it would be unlikely that the country would maintain or improve its export volume to the US, as the GSP only promises preferential market access for 4,800 product lines, which is not necessarily duty-free.

The World Bank and United Nations Conference on Trade and Development (UNCTAD) indices show that Kenya has a bilateral comparative advantage over the US in agricultural products such as tea and maté, fruits and vegetables, livestock and cattle products, coffee and coffee substitutes . Sugar confectionery, cereals, spices, tobacco, hides and hides, margarine, jute and textile fibers and concentrates of common metal.

30 percent of these products are Kenya’s marginal products and offer the opportunity for product diversification and export promotion.

The country has the highest total factor productivity (TFP) in the textiles, apparel, non-metals, base metals and machinery subsectors. As a measure of how efficiently resources in the production process are converted into final goods and services, TFP is important to signal sectors in which government incentives and trade policies should be targeted.

Under Agoa and the APS, 78 percent of US exports face customs-related obstacles when entering Kenya. Established in 1971, the GSP aims to support the trading environment in developing countries by, among other things, helping the infant industry to improve production capacity for long-term industrialization and development. The US is among the 13 countries that grant GSP preferences to developing countries like Kenya.

The negotiations for a free trade agreement between Kenya and the USA aim to create a liberal, facilitated and competitive investment environment. The investment negotiations focus on four pillars: Promotion, Protection, Facilitation and Liberalization.

The FTA is expected to lower investment restrictions, creating incentives for US companies to target Kenyan sectors with the highest total factor productivity for FDI.

Given that these are Kenya’s emerging sectors that aim to promote manufacturing and food security and nutrition as enshrined in the Big Four agenda, Kenya may consider applying the procedural requirements under Article XVIII (b) of the GATT 1994 in relation to balance of payments measures to protect the population to simplify sectors at the level of intermediate and finished products, considering slight liberalization in the phase of inputs, when the country has restrictions on the supply of raw materials.

A free trade agreement between Kenya and the USA would enable mutual bilateral trade and thus reduce customs barriers. In order to adequately support sectors that are at risk of increased competition, an exclusion criterion is required, which specifies precisely which US goods and services should be admitted to the Kenyan market.

The criterion should take into account tariff lines that are classified as sensitive according to the Common External Tariff of the East African Community (EAC) and the Economic Partnership Agreement between the EAC and the European Union (EU). In addition, products from the highly subsidized US agricultural sector should be excluded from liberalization in the trade agreement.

Kenya will benefit from technology, knowledge and intellectual property transfers in sectors such as services, agriculture and manufacturing. Negotiators must promote access to Kenya’s marginal products in the US market through more flexible rules of origin than is currently the case under Agoa. Marginal products that must be promoted include dairy products, iron and steel products, pharmaceuticals and paper items.

In order to protect the EAC market while increasing US market share, Kenya must inform the EAC Council of Ministers of its intention to have a free trade agreement with the US approved.

To develop a free trade agreement that does not limit the Kenyan agricultural and manufacturing sector’s potential to promote market-oriented production overseas, as envisaged in the country’s national export development and promotion strategy, the Big Four agenda and Vision 2030 to learn from other free trade agreements the US has with developing countries such as Kenya.

The US-Jordan Free Trade Agreement is a good case study for drawing lessons. The 18-year free trade agreement created over 50,000 new jobs in its first few years, attracted trade and foreign direct investment, and contributed to an average annual GDP growth rate of seven percent to Jordan.

Under the free trade agreement, Jordan exports more to the US than it imports. The private sector representatives in Jordan, particularly chambers of commerce, manufacturers’ associations, consumer associations and academia, played an important role in ensuring that the free trade agreement reflected the needs of the private sector. Like Jordan, Kenya must continue to involve the private sector in order to keep the negotiations informed.

Mwatu and Malot are trade and foreign policy analysts at the Kenya Institute for Public Policy Research and Analysis (KIPPRA).

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