Africa, Economy & Trade, Headlines

ECONOMY-EAST AFRICA: Long-Awaited Customs Union is Established

Joyce Mulama

NAIROBI, Mar 3 2004 (IPS) - Member states of the East African Community have signed a protocol for establishing a customs union that is expected to boost growth in the region.

The agreement was initialled Tuesday (Mar. 2) in the northern Tanzanian town of Arusha by the Presidents of Kenya, Tanzania and Uganda. It will take effect in July this year.

Negotiators had been locked in discussions until the last minute about how goods flowing between the three countries should be taxed – a delicate issue that has derailed previous efforts to establish the union. Since last November, the signing of the protocol has been postponed four times – this after four years of discussion.

Tanzania and Uganda have long claimed that they cannot compete on equal grounds with Kenya, seen as the economic hub of the region.

According to the Kenya National Chamber of Commerce and Industry, the country exported up to 184.2 million dollars worth of goods to Tanzania between 1999 and 2002. Imports during the same period amounted to only 12,236 dollars.

Similarly, goods exported to Uganda for the same period were valued at between 276.3 and 407.9 million dollars, while imports ranged between 4,039 and 9,078 dollars. Both Tanzania and Uganda feared that a common tariff on goods circulating in the East African Community (EAC) would exacerbate these trade imbalances.

As a result, the protocol stipulates that products from Tanzania and Uganda which are sold in the EAC will not be taxed – while those from Kenya will be, for a period of five years.

Goods from countries outside the customs union will be taxed under a common external tariff that divides imports into three categories. Raw materials will be allowed to enter the EAC tax free, while semi-processed and -finished goods will be taxed at 10 percent. Finished products are to have a 25 percent tax imposed on them.

“A customs union is advantageous because it means trade within a wider market, increased competition among traders and efficiency in terms of production,” said John Ochola of the Nairobi-based Institute of Economic Affairs.

The EAC presently offers a market of about 90 million people. According to the community’s secretariat, the combined gross domestic product of EAC member states stands at 25 billion dollars.

However, Ochola believes that simply taxing Kenyan goods might not be sufficient to make Tanzania and Uganda equal players in the region.

“It is important to have in place more compensation mechanisms.to encourage investors to invest also in the two countries, and not only to concentrate on Kenya,” he told IPS.

The customs union is seen as the first step in a process that will culminate in a common market, a common currency – and political federation for EAC states.

“As we move from (conducting affairs as a single state), we begin to move towards expanding our markets – we look further to creating a single market to serve the region. This is good for the stability of the region,” says Peter Ondeng, Chief Executive Officer at the Kenya Secretariat of the New Partnership for Africa’s Development (NEPAD).

NEPAD is a programme spearheaded by five African leaders which aims to improve governance across the continent in return for increased aid and investment from developed countries.

For Kenyans like Caroline Alinda, however, Tuesday’s protocol is less important than a simple guarantee of free movement between EAC member states. Although the three countries signed an agreement in 2002 to allow their nationals to move freely in the region, people who have tried to do so complain of harassment at border posts.

Alinda, a trader who shuttles between Nairobi, Kampala and Dar es Salaam, says “If the EAC adheres to the spirit of looking at the interests of the small man, such as ensuring total free movement of citizens, it will not collapse again.”

The community was initially formed in 1967, but dissolved ten years later because of a variety of reasons – including disputes over the merits of capitalist and socialist economies.

Victor Umbricht, a former World Bank staffer who was appointed to oversee the division of EAC assets following the collapse, recalls that it had “serious consequences” for the region.

A 1987 interview drawn from the bank’s archives quotes him as saying: “It was not only a collapse in form, it was one of substance. The borders were closed. You could not cross the border any more from Kenya to Tanzania. There were no inter-country railways, no trade, no airways. We had no post and telecommunications services any more, no joint navigation.”

“We even had a war in 1978-79 between Tanzania and Uganda when Idi Amin was thrown out, so everything was in a shambles. It was chaotic,” he adds.

In 1999 the EAC was re-established with a treaty that envisages economic and political union between member states.