Kenya’s tariff dilemma in trade talks with US

Trade Secretary Betty Maina. FILE PHOTO | NMG 

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By ALLAN ODHIAMBO
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Summary

• Though Kenya has over the years reduced its overall protectionism, tariffs remain its main trade policy instrument while juggling between boosting international trade and cushioning local producers from external competition.
• A review of submissions by multiple influential US business groups to the Office of the United States Trade Representative (USTR) however reveals that Kenya’s protectionist policies are likely to be tested in the negotiations for a Free Trade Agreement (FTA) between the two nations.
• For instance, a lobby of US dairy producers, the International Dairy Foods Association (IDFA), has raised concerns with Kenya’s tariffs on dairy products claiming it would limit their entry into the country.

Kenya’s tariff policy and market access terms are in focus in negotiating a new bilateral trade deal with the US amid calls for caution not to overexpose its nascent industrial and agricultural sectors.

Though Kenya has over the years reduced its overall protectionism, tariffs remain its main trade policy instrument while juggling between boosting international trade and cushioning local producers from external competition.

For example, in the existing Kenya-US trade arrangement, several top US exports to Kenya, such as machinery and aircraft face low or zero tariffs though the east Africa nation’s agriculture sector presents the highest hurdles to US exports, with an average tariff of 20.3 percent, and relatively high tariffs on dairy (51.7percent), animal products (23.1percent), and cereals (22.2percent) — a deliberate strategy to protect agriculture from external competition.

Comparatively, an analysis by the US Congressional Research Service shows that nearly 80 percent of US imports from Kenya as at 2019 entered duty-free under either Africa Growth Opportunity Act (Agoa) or the Generalised System of Preferences (GSP), while the remaining imports were largely duty-free on a most-favoured-nation (MFN) clause basis. The US average effective applied tariff (total imports divided by duties) on Kenyan imports was 0.1 percent in 2019.

A review of submissions by multiple influential US business groups to the Office of the United States Trade Representative (USTR) — the government agency responsible for developing and recommending trade policy to the US President – however reveals that Kenya’s protectionist policies are likely to be tested in the negotiations for a Free Trade Agreement (FTA) between the two nations.

For instance, a lobby of US dairy producers, the International Dairy Foods Association (IDFA), has raised concerns with Kenya’s tariffs on dairy products claiming it would limit their entry into the country.

“Currently, Kenya maintains its highest tariffs on a range of agricultural products, including dairy at an average of over 50 percent, because it considers dairy to be ‘sensitive’ products and uses tariffs to stabilise domestic prices,” IDFA president and CEO Michael Dykes said in a letter to US Trade Representative, Robert Lighthizer dated August 5.

“US negotiators should seek ambitious tariff reductions, including for protected dairy products in Kenya, while seeking a simplified, trade facilitative entry of US dairy imports into Kenya,” he further said.

Similarly, the US Council for International Business (USCIB) proposes a seamless market access for US products into the Kenyan market, including exemption from border taxes such as the two percent import declaration fee (IDF) and the 1.5 percent railway development (RDL) just as imports from Kenya’s trading partners in the East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa) are.

“The core of any free trade agreement is tariff elimination, and the agreement with Kenya should contain commitments by Kenya to expeditiously eliminate its tariffs on US products. Any exceptions should be limited, and subject to automatic revision to match more generous terms Kenya might provide to subsequent negotiating partners,” the USCIB argued in its submissions to the USTR.

The US Chamber of Commerce, through its US-Africa Business Center, shares the views that the sought-after FTA deal between the two nations should eliminate all tariffs and address non-tariff barriers for industrial and farm goods, including US tariffs on imports of steel and aluminum from Kenya, while expanding market access for remanufactured goods exports.

Separately, the American Chemistry Council (ACC) — a lobby of US chemical manufacturers — has also taken issue with Kenya’s tariff policy and pushed for a review under the targeted FTA.

Ed Brzytwa, the ACC director for international trade, noted that though Kenya’s average MFN tariff rate for chemicals is 3.6 percent, its average World Trade Organisation (WTO) bound rate — the maximum MFN tariff level for a given commodity line — is 38.4 percent.

The MFN is given to an international trade partner to ensure non-discriminatory trade between partner countries of the WTO. A country which provides MFN status to another has to provide concessions, privileges, and immunity in agreements.

When countries join the WTO or when WTO members negotiate tariff levels during trade rounds, they make agreements about bound tariff rates, rather than applied rates.

Bound tariffs are not necessarily the rate that a WTO member applies in practice to other WTO members' products.

Members have the flexibility to increase or decrease their tariffs (on a non-discriminatory basis) so long as they didn't raise them above their bound levels.

“However, Kenya has bound only 2.4 percent of its chemical tariffs in its WTO goods market access schedule, which means that for 97.6 of its chemical tariffs, it could raise its tariffs to any rates that are legally allowed under Kenya law.

Kenya also maintains MFN tariff peaks as high as 17.5 percent for key chemicals of US export interest” Brzytwa said in an April 18,2020 letter to Edward Gresser, Chair of the Trade Policy Staff Committee Office of the United States Trade Representative.

He added: “In this light, ACC seeks full tariff elimination between the United States and Kenya — without any transition periods or staging of tariff reductions — in order to provide new market access for US-made exports of chemicals and plastics (HTS Chapters 28-39). Full, binding, and enforceable tariff elimination between the United States and Kenya would provide greater certainty for US chemical manufacturers exporting to Kenya, investing there, and building supply chains in the region.”

The chemical manufacturers urged the US government to also secure a commitment by Kenya to participate in the WTO Chemical Tariff Harmonisation Agreement, whereby Kenya would bind all its tariffs at certain levels in its WTO goods market access schedule, arguing that this would provide additional certainty for US-Kenya chemicals trade.

HEATED HAGGLING

Chemicals currently comprise about 17 percent of all goods exports to Kenya. More than 80 percent of chemicals exported to Kenya are resins: polyvinyl carbonate and high density polyethylene (HDPE), according to the ACC.

While US-Kenya bilateral trade in chemicals and plastics today is relatively small, it has grown rapidly in recent years and presents opportunities for expansion. Total chemicals trade between the US and Kenya was $77 million (Sh8.33 billion) in 2019.

These demands by the various US lobby groups give a hint of the likely heated haggles over tariffs as negotiators pursued an FTA.

Industrialisation and Trade secretary Betty Maina noted that market access would form a key area in the FTA talks with the US.

“The US-Kenya FTA will aim at progressively eliminating tariff and non-tariff barriers on substantially all trade in goods in order to establish a free trade area among the parties. Tariff negotiations will be conducted on a comprehensive basis,” she notes in a brief on the principles, objectives and scope of the Kenya-US FTA talks dated June 22,2020.

She added: “Such negotiations should aim to achieve the high level of tariff liberalisation, through building upon the existing liberalisation levels between the two countries and through tariff elimination on a high percentage of both tariff lines and trade value. The scheduling of tariff commitments should seek to maximise the benefits of regional economic integration.”

The Trade ministry said priority would be given to early tariff elimination on products of interest to Kenya.

Kenya is eyeing a new trade deal with Washington before the expiry of Agoa, which allows sub-Saharan African countries to export thousands of products to the United States without tariffs or quotas until 2025.

Agoa grants 40 African States quota and duty-free access to the US market of more than 6,000 product lines.

Statistics showed that the two-way goods trade between these nations totalled Sh106 billion in 2019, up 4.9 percent from 2018.

Kenya is also pursuing a new bilateral trade deal with the UK post-Brexit. It hopes that new deal would cushion her from potential hits after partner States of the EAC failed to conclude an Economic Partnership Agreement with the EU.

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 binding.

Only Kenya and Rwanda signed deal.