The Role of Policy and Regulation in Boosting Intra-Africa Trade: A Case of the East African Community
Regional markets provide a learning-by-doing platform for nascent and less competitive companies. This paper reviews the regional integration processes in the East African Community (EAC) and argues that deeper levels of integration have indeed fostered growth in regional manufacture trade. The regional market can be a strategic springboard for companies in the sense that market access barriers are expected to be much lower than in other global markets. Regional markets in this regard open opportunities for companies to enhance economies of scale and thus increase their incentives for investment specialisation and competitiveness. As far as developments on the trade policy front in Africa are concerned, regional integration initiatives have dominated the trade policy process and negotiations over the last decade. Among the regional blocs that have made significant progress is the East African Community (EAC), currently at the level of a Common Market. Except for the Association of South East Asian Nations (ASEAN) which grew at 6.1%, the EAC grew at an average of 5.8%, faster than all other economic communities during 2001-2009 (1). Intra-regional trade has also been very significant in the EAC bloc relative to the other African Economic Blocs. EAC is reported to have realised an increase in its intra-regional trade of 23%, which was the highest among the African regional blocs (2). The five EAC countries have all undertaken a series of trade reforms, principally as part of the structural adjustment programmes of the 1990s and more recently due to the deeper integration initiatives within the EAC common market. This was expected to have translated into dramatically reduced customs duty rates and hence foster increased intra-member trade. One of the stylised facts about the evolution of intra-African integration observed in the UNCTAD report in 2013 is that African merchandise trade has been rising faster than those of the developed and developing economies (3). In the same report it was noted however, that Africa still remains a marginal player in world trade accounting for only about 2.6%. Trade statistics as illustrated in Figure 1 reveal a progressive increase in intra-regional trade. There has been an observed 8-fold increase in intra-EAC trade on value terms between 2000 and 2011. However in terms of levels, there is greater scope for higher intra-regional trade levels. Poor implementation of commitments made by member states at the regional level, coupled with a host of non-tariff barriers and inadequate infrastructure in key areas such as energy transport and storage, account for lower levels than it would have been observed (4). An area in which intra-regional trade has unexploited potential is in manufactured goods. It is observed that the share of manufactured goods in intra-African trade is higher than its share of extra-regional trade but with falling importance in intra-African trade. However, this share has been declining, signaling a process of de-industrialisation. In EAC, the bulk of intra-regional exports are manufactured goods (5) and at 58.3%, the share of manufactured goods in intra-EAC trade was the highest between African Regional Economic Communities during 2007-2011(6). Given the forgoing, could the trade policy initiatives and reforms undertaken within the region be one of the drivers for this outcome? To garner more insights, we assess the potential correlation between intra-regional trade patterns and trade policy reforms undertaken within the EAC and use the Economic Community of West African States (ECOWAS) as a comparative. Policy Environment Effective trade policy direction, formulation and implementation are highly dependent on the quality of the institutional framework, given the direct effect on policy coherence and indirect effect on policy outcomes. The trade policy process and institutional structure within the EAC countries is shaped importantly by their membership of regional and multilateral trade organisations. The obligations motivate the countries to undertake domestic economic and sectoral reforms. The World Trade Organization (WTO) commitments made by the countries have also influenced the direction of the trade policies in these countries as well as the trade policy reviews (TPR) conducted by the governments and the WTO Secretariat. Kenya, Uganda and Tanzania have a long integration history that dates back to the original EAC, which was created in 1917 and collapsed in 1977. The EAC is currently at the level of the Common Market in terms of the linear integration ladder with Rwanda and Burundi acceding as member states in 2007. The common market protocol was put into force in 2005 and preceded the East African customs union created in 2000. The member states are yet to fully implement some of the agreed provisions of the protocol. This ushered in the EAC common external tariff (CET) that reduced average tariff protection in Kenya and Tanzania but increased for Uganda (7). Currently all internal tariffs have been eliminated. However, it is observed that Non-Tariff Barriers (NTBs), including non-harmonised technical standards, sanitary and phyto-sanitary requirements and roadblocks, constitute a major constraint to intra-EAC trade. Although the EAC partner states agreed to eliminate the NTBs identified by the EAC Secretariat, the majority of the rules and regulations have not been eliminated. In this regard, Kenya and Uganda were identified as imposing significantly more rules on their imports than other sub-Saharan African countries (8). In an effort to address NTBs, a National Monitoring Committee (NMCs) was established in all the EAC member states and these report quarterly to the EAC Sectoral Committee (9). The enhancement of industry competitiveness due to deeper integration is even greater thanks to joint corridor initiatives and regulatory harmonisation. In addition, some of the key policy initiatives undertaken by the EAC member states, with potential bearing on intra-regional trade, include harmonisation of approximately 1200 voluntary standards and the enactment of Economic Export Processing Zones (EPZs) to ensure uniformity in line with the EAC Customs Union (CU) EPZ provisions (10). Each of the five EAC member states has initiated a series of policy reforms that have a bearing on intra-regional trade. The implementation of the Revenue Authorities Digital Data Exchange programme (RADDEX) on the customs borders has fostered information exchange. Coupled with a series of NTB elimination using non-intrusive methods (11) and the operationalisation of the One Stop Border Post (OSBP) initiative, the transaction costs and border delays are expected to significantly reduce. Similarly, landlocked member states such as Rwanda have initiated trade facilitation systems. Examples include the operation of the electronic single window system and extended opening hours at the border posts. There is still however, some progress to be made on harmonisation regarding export regimes and export taxes (12). For example, a duty remission rule ratified by the EAC, which requires manufacturers using imported input to only export outside the region or pay full duty, seems to raise a bit of concern from the manufacturing firms (13). Intra-Regional Trade Trends An examination of the trend in merchandise trade in East Africa over the last 20 years shows significant growth in the last decade. It is reported that intra-EAC trade increased 16% between 2005 and 2010 albeit constraining the high cost of doing business (14). This may be attributed mainly to various reforms undertaken by the EAC countries towards easing the tariff rates or total elimination of tariffs, such as within the EAC CU and now the Common Market. Examining the trends in intra-regional trade for both exports and imports within EAC, it is evident that the pattern shows a positive trend during 2000 to 2011 period, as illustrated in Figure 1. This is supported by conclusions that relatively larger intra-regional shares for EAC exist, as indicated by intra-regional intensity and revealed trade preference indices (15). However, a closer look at the shares of intra-regional trade reveals a declining share of intra-regional trade. During 1996-2000, EAC had 13.8% share of intra-regional trade, 13.1% during 2001-2006 and 12% during 2007-2011 (16). This may be reflective of the increasing bilateral trade between the EAC member states and other African countries in the other regional blocs. The positive and growing trend of intra-EAC trade since 2006 is indicative of a potential positive impact of trade reforms within the EAC integration process. The coming into force of the East African CU in January 2005 ushers in relevant trade reforms expected to motivate entrepreneurs and traders to target the regional market. This appears to correlate with an enhanced increase in EAC intra-regional trade as illustrated in Figure 1. This may support the assertion that the signing of the EAC treaty has had an effect on the partner states (total trade and trading pattern) (17). Heterogeneity is also evident given the different economic environment in each of the five EAC countries as illustrated in Figure 2. Kenya, the economically more powerful member of the region, exhibits the highest levels in value terms whereas Burundi, being relatively the smallest economy, exhibits the lowest levels in value terms. One interesting trend is that all countries show a significant increase in intra-regional trade in value terms from 2007. Since this coincides with the coming into force of the EAC Customs Union two years earlier, it may be interpreted as facilitative outcome of the reforms enshrined in the commitments member states made in the CU protocol. The positive tendencies in intra-regional trends may be understated given that there are very high reported levels of informality among these regions. Informal economy accounts for about 38% on average for sub-Saharan Africa (18). Kenya, Uganda and Rwanda are big players in the intra-COMESA and EAC trade with significant trade (exports and imports) taking place in comparison with other export markets (19). Conclusions There seems to be a discernible correlation between the trade policy reforms and regulations and the growth of intra-regional trade. This seems apparent in the EAC regional bloc notwithstanding the existing NTBs (20).The intra-trade growth observed after 2007 is likely to be reflective of the lagged positive effects of the reforms associated with the entry into force of the Customs Union in 2005. This is also supported with the high intra-regional growth rates (21).Trade indices show that Ugandan exports and imports exhibit high integration with EAC (22). It is also observed that one of the main obstacles to boosting the potential of intra-regional trade is sluggish implementation of the signed trade agreements governing the regional blocs. Intra-EAC trade data shows that, other than Burundi, total trade has been on the increase for the other partner states. The four countries have had trade relationships for a long time and can be considered natural trading partners. Data shows that the EAC countries have maintained trade relationships even after the breakup of the 'first community'. Kenya, Uganda and Rwanda import more from EAC partner states since the 1990s. The effect of the EAC treaty has been the dramatic increase in imports and also largely exports. Since the 1990s, Tanzania has exported more in the EAC countries. Since the coming into force of the EAC treaty both imports and exports have increased, mostly to Kenya. The role of trade policy in facilitating intra-regional trade appears positive and especially trade measures that have seen tariffs and tariff-related barriers shrink. The EAC borders are relatively more open now than in the pre-2000 period and border measures, though still constraining to trade, are responsible for increased formalisation of cross-border trade. Peter Kiuluku is Executive Director and Dr Caiphas Chekwoti is Trade Policy Expert at the Trade Policy Training Centre in Africa (trapca) at the Eastern and Southern African Management Institute (ESAMI). Footnotes 1. World Bank (2012), Special Focus: Deepening Regional Integration in the East African Community (EAC), Edition 6, http://siteresources.worldbank.org/INTAFRICA/Resources/257994-1335471959878/kenya-economic-update-june-2012-special-focus.pdf 2. http://www.thecitizen.co.tz/News/Intra-EAC-trade-highest-in-African-economic-groups/-/1840392/1876740/-/1yfupbz/-/index.html 3. UNCTAD (2013), Intra-African trade: unlocking private sector dynamism, Economic Development in Africa report 2013 4. Lapadre et al. (2013), Measuring Trade in Regionalism in Africa: The case of ECOWAS 5. World Bank (2012), Special Focus: Deepening Regional Integration in the East African Community (EAC), Edition 6, http://siteresources.worldbank.org/INTAFRICA/Resources/257994-1335471959878/kenya-economic-update-june-2012-special-focus.pdf 6. UNCTAD (2013), Intra-African trade: unlocking private sector dynamism, Economic Development in Africa report 2013 7. WTO (2006), Trade Policy Review report for East African Community, WT/TPR/S/171 8. World Bank (2012), Special Focus: Deepening Regional Integration in the East African Community (EAC), Edition 6, http://siteresources.worldbank.org/INTAFRICA/Resources/257994-1335471959878/kenya-economic-update-june-2012-special-focus.pdf 9. tralac(2012), Trade Policy Review of the East African Community, commentary by Willemien Viljoen 10. WTO(2012), Trade Policy Review report for East African Community, WT/TPR/G/271 11. WTO(2012), Trade Policy Review report for East African Community, WT/TPR/G/271. The methods include scanning import/export cargo at the port, use of electronic tracking system and Mega port initiative implemented by Kenya 12. Manufacturers are required to sell 80% of their products outside the EAC under the Harmonized export promotion instruments which include mainly manufacturing under bond, export processing zones, and duty remission schemes. The export taxes applied applied by some EAC countries include export taxes on hides and skins which was increased in 2006 from 20% to 40% of the f.o.b. value by Kenya and Tanzania; an export tax of either 15% of the f.o.b. value, or US$160/tonne on raw cashew nuts maintained by Tanzania; a cess of 1% on exports of coffee, 2% on cotton, and US$0.8/kg on raw hides and skins maintained by Uganda. 13. Business daily newspaper, accessed on 29th Oct 2013 14. tralac(2012), Trade Policy Review of the East African Community, a commentary by Willemien Viljoen 15. Lapadre et al. (2013), Measuring trade regionalization in Africa: The case of ECOWAS, 16. UNCTAD (2013), Intra-African trade: unlocking private sector dynamism, Economic Development in Africa report 2013 17. Johansein Rutaihwa and Neema Rutatina. "What Does the Intra-Industry Trade Data on EAC tells us?" International Journal of Academic Research in Economics and Management Sciences Volume 1.Issue 5 (2012): 174-192. 18. UNCTAD (2013), Intra-African trade: unlocking private sector dynamism, Economic Development in Africa report 2013. 19. http://www.eac.int/ 20. CEO Bidco, a conglomerate manufacturing processed foods, soaps and cooking oil attributes his business expansionto the coming into force of the EAC Customs Union, http://www.ft.com/cms/s/0/5006672a-1764-11e1-b20e-00144feabdc0.html#axzz2jH8mIwBn 21. World Bank (2012), Special Focus: Deepening Regional Integration in the East African Community (EAC), Edition 6, http://siteresources.worldbank.org/INTAFRICA/Resources/257994-1335471959878/kenya-economic-update-june-2012-special-focus.pdf 22. Shinyekwa I. and L. Othieno(2013), Comparing the performance of Uganda’s Intra-East African Community trade with other blocs: A gravity analysis, EPRC Research Series 100 This article was published in GREAT Insights Volume 2, Issue 8 (November 2013).