By Benjamin W. Mkapa
GENEVA, Aug 16 2016 (IPS)

The EPA issue has once again re-emerged when, in early July, Tanzania informed East African Community( EAC) members and the European Union (EU) that it would not be able to sign the Economic Partnership Agreement (EPA) between European Union (EU)  and the six EAC member states.

The European Commission reportedly proposed signature of the EAC EPA in Nairobi, on the sidelines of the 14th session of the UN Conference on Trade and Development (UNCTAD XIV).

Benjamin William Mkapa

This is a major quadrennial event where all United Nations member states negotiate guidance for UNCTAD. For the European Commission, it would have been a propitious place for a signature ceremony as it would have projected the EPA as a “trade and development” agreement to the benefit of EAC.

Nevertheless, the agreement is antithetical to Tanzania’s as well as the region’s trade and development prospects.

The EPA for Tanzania and the EAC never made sense. The maths just never added up. The costs for the country and the EAC region would have been higher than the benefits.

As a least developed country (LDC), Tanzania already enjoys the Everything but Arms (EBA) preference scheme provided by the European Union.

In other words, we can already export duty-free and quota-free to the EU market without providing the EU with similar market access terms. If we sign the EPA, we would still get the same duty-free access, but in return, we would have to open up our markets for EU exports.

The EPA is a free trade agreement. Under it, Tanzania would have to reduce to zero the tariffs on 90 per cent of all its industrial goods trade with the EU, according duty-free access for almost all the EU’s non-agricultural products into the country.

Such a high level of liberalisation vis-à-vis a very competitive partner is likely to put our existing local industries in jeopardy and discourage the development of new industries.

Research using trade data shows that Tanzania currently produces and exports on 983 tariff lines (at the HS 6 digit level.) The EU produces and exports on over 5,000 tariff lines. If the EPA were implemented, 335 of the 983 products we currently produce would be protected in the EPA’s “sensitive list,” but 648 tariff lines would be made duty-free.

So the existing industries on these 648 tariff lines would have to compete with EU’s imports without the protection of tariffs. Will these sectors survive the competition?

These 648 tariff lines include agricultural products (maize products, cotton seed oil cake); chemical products (urea, fertilisers); vehicle industry parts (tyres); medicaments; intermediate industrial products ( plastic packing material, steel, iron and aluminium articles, wires and cables); parts of machines and final industrial products (weighing machines, metal rolling mills, drilling machines, transformers, generating sets, prefabricated buildings etc); parts of machines (parts of gas turbines, parts of cranes, work-trucks, shovels, and other construction machinery, parts of machines for industrial preparation/ manufacturing of food, aircraft parts etc).

We can already export duty-free and quota-free to the EU market without providing the EU with similar market access terms. If we sign the EPA, we would still get the same duty-free access, but in return, we would have to open up our markets for EU exports
The list does not stop here. Liberalisation (zero tariffs) also applies to the many industrial sectors that Tanzania and the EAC do not yet have existing production/exports ­ about 3,102 tariff lines for Tanzania.

Statistics show that in fact, for the EAC region, the African market is the primary market for its manufactured exports. In contrast, 91% of its current trade with the EU is made up of primary commodity exports (agricultural products such as coffee, tea, spices, fruit and vegetables, fish, tobacco, hides and skins etc).

Only a minuscule 6% or about $200,000 of EAC exports to the EU is composed of manufactured goods.In contrast, of the total EAC exports to Africa, almost 50% is made up of manufactured exports – about $2.5 billion – according to 2013 ­ 2015 data. Of this, $1.5 billion are EAC country exports to other EAC countries.

These figures tell two stories: One; the importance of the African market for EAC’s aspirations to industrialise. In contrast, the EU market plays almost no role in this. Two the EAC internal market makes up 60% of EAC’s manufactured exports to Africa, i.e., the EAC regional market is extremely valuable in supporting EAC’s industrialisation efforts.

The EPA would threaten this regional industrialisation opportunity that is currently blossoming since most EU manufactured products would enter the EAC market dutyfree. Just as our manufactured products are not competitive in the EU market, even though they can be exported dutyfree, might it not be the case that when EU manufactured products can come duty-free into the EAC market, EAC manufactured products may also not sell? The EPA could in fact destroy our economic regional integration efforts.

The pains EAC has taken to build a regional market may instead help serve EU’s commercial interests by offering the EU one EAC market, rather than ensuring that that market can be accessed by our own producers.

The other area where EPA hits the heart of our industrialisation aspirations are its disciplines on export taxes. At the World Trade Organization, export taxes are completely legal.The logic of export taxes is to encourage producers to enter into value-added processing, hence encouraging diversification and the upgradation of production capacities. Developed countries themselves had used these policy tools when they were developing.

The EU has a raw materials initiative aimed at accessing non-agricultural raw materials found in other countries. According to the European Commission, ‘securing reliable and unhindered access to raw materials is important for the EU. In the EU, there are at least 30 million jobs depending on the availability of raw materials.’ In implementing this initiative, the EU has used trade agreements to discipline export taxes.

The EPA prohibits signatories from introducing new export taxes or increase existing ones. For Tanzania and the EAC region with its rich deposits of raw material, including tungsten, cobalt, tantalum etc; such disciplines in the long-run would be incongruent with our objective to industrialise and add value to our resources.

The other area of loss resulting from the EPA is tariff revenue, and the numbers are not small. Conservative estimates (assuming import growth of 0.9% year on year) show that for the EAC as a whole tariff revenue losses would amount to $251 million a year by the end of the EPA’s implementation period Cumulative tariff revenue losses would amount to USD 2.9 billion in the first 25 years of the EPA’s life.

For Tanzania, the losses based on 2013/­2014 import figures are about $71 million a year by year 25. Cumulatively, just for Tanzania, they come up to $700 million over the first 25 years.

Where is the Promised Development Aid?

EU has made many promises that the EPA would be accompanied by development assistance. Hence the EAC EPA incorporates a ‘Development Matrix’ containing a list of economic development projects for the EAC. The price tag of implementing this Development Matrix is $70 billion.

The Matrix and assistance is to be reviewed every 5 years. For the time-being, the EU has pledged to contribute a paltry $3.49 million, which translates into 0.005% of the total required funds!This is also a far cry from the tariff revenue losses the region faces ­the $251 million a year mentioned above.

The only area where the EPA is supposed to serve the interest of the EAC is by providing duty-free access to Kenya. As a non-LDC, Kenya does not have duty-free access via the EU’s EBA. Kenya’s main export item to the EU is flowers ­ just over $500,000 a year.

Without the EPA, Kenyan’s flowers would be charged a 10% customs duty. There are other Kenyan exports also ­vegetables, fruit, fish – that will face tariffs. However, the flower industry has thus far been the most vocal. Nevertheless, all in all, Kenyan exports to the EU market (including the UK) amounts to about $1.5 billion.

If no EPA is signed, the extra duties charged to Kenyan exports amounts to about $100 million a year. Is this worth signing an EPA for? — The avoidance of duties of $100 million? The tariff revenue losses as the EPA is implemented (and more tariff lines are liberalised) would be comparable.

This does not even include the tariff revenue losses of the other EAC LDCs, nor the challenges posed to domestic/ regional industries. In addition, the Brexit development is further reason for the region to pause and reconsider.

The UK is a major export market for Kenya, absorbing 28% of Kenya’s exports to the EU. This reduces the EPA’s supposed ‘benefits’ by a quarter for Kenya. There is a possible solution for Kenya ­ to apply for the EU’s Generalised System of Preferences Plus scheme (GSP+). Under this, almost all of Kenya’s current exports could enter EU duty-free including flowers and fish.

This option could be explored. Alternatively all EAC countries would do well to attempt to diversify production and exports away from primary commodities towards value-added products, and also to diversify our export destinations. Africa is a critical market for EAC’s manufactured goods. Regional integration and trade is the most promising avenue for EAC’s industrial development. The EPA would derail us from that promise.

This article was published firstly in Daily News of Tanzania

Excerpt:

We live now in a fast-changing world. The paradigm of globalisation and free trade is being questioned. It is now being asked whether state capitalism might be the next model of the day: capitalism guided by the strong hand of the state. As this debate continues, the reality is that the markets of Africa’s major trading partners –the U.S. and EU– are stagnant or even shrinking. On the other hand, our markets are growing, as are the markets of the emerging developing economies.

Trade agreements facilitate exports. While exports can be a very important instrument for our overall development strategy, they are but one pillar. The main pillar, if we are serious about development, must be increased domestic production capacities, diversification, industrialisation, and agricultural production. Africa cannot continue to export a narrow range of products and import a broad range of finished goods on our way to development.

In September 2011, the European Commission proposed to remove 16 African countries from the European Union (EU) Market Access Regulation 1528/2007. At the end of 2007, this regulation allowed those African countries that had initialed or signed an Economic Partnership Agreement (EPA) to enjoy duty-free access to the EU market as they continued to move towards signing and ratification. This regulation provided the necessary cover for our countries as we continued to negotiate the difficult issues with the EU: for example, export taxes, the level of liberalisation, and development assistance.

Though these negotiations have not been concluded by both sides, the EU is now saying that if Ghana, Kenya, and Namibia (which have initialed but not signed) and Botswana, Cameroon, Ivory Coast, Swaziland, and Zimbabwe (which have signed but not yet ratified) have not ratified the EPA by January 1, 2014, they will be dropped from the list of countries receiving EPA treatment.

We are therefore facing the moment of truth. There are several options:

1) Kenya alone signs the EPA, so that it can retain its preferences in flowers and fish. This would destroy the East African Community (EAC) customs union, whose members are Kenya, Uganda, Tanzania, Rwanda, and Burundi. The Least Developed Countries (LDCs) would not be able to open up their markets to Kenya if they did not want EU goods to flood their internal markets.

2) The entire EAC region signs the EPA. In this case LDCs in the World Trade Organisation (WTO) that do not have to take tariff cuts in WTO trade liberalisation rounds will have to cut their tariffs to zero for at least 80 percent of trade with the EU. This will have significant ramifications for the region’s ability to industrialise. Given that the EU remains a major food exporter and still subsidises its agricultural sector to the tune of 60 billion euros a year (despite the fact that the EAC excludes some agricultural tariff lines from liberalisation) this could shrink the size of the local markets that our small farmers sell on.

3) The entire region does not sign the EPA. In this case, Kenya would lose its preference in flowers. But how important is this sector compared to opening up the EAC market to the EU and the very real threat of not being able to industrialise in the future?

The EU’s insistence on the elimination of tariffs for 80 percent of trade, restrictions on the use of export taxes and quantitative restrictions, and the standstill clause would undermine Africa’s efforts to industrialise and its ability to move up the industrial value chain. As a result, Africa would remain a perpetual supplier of raw materials.

As for the effect on food security and rural livelihoods, the EU has not indicated any willingness to abolish its agricultural subsidies, which constitute major unfair competition against African producers of milk, poultry, pork, beef, cereals, etc.

Regarding the effect on regional trade and integration, regional markets provide the best opportunity for Africa to diversify and develop. If African countries in EPAs have to liberalise 80 percent of trade, Africa’s regional markets risk being taken over by EU products. The opportunity to increase intra-African trade, diversity and
industrialisation will be significantly reduced.

As for the effect on general development due to tighter intellectual property discipline, the EU would like EPAs to include intellectual property rules that go beyond the WTO’s already excessive standards. Such “WTO plus” rules will make it more difficult for African countries to access the knowledge and technology needed to industrialise and increase agricultural production.

The question is: what is the EU’s interest in the EPA? Is this EPA being negotiated because the EU cares deeply about African and EAC regional integration and development, or is it driven primarily by the EU’s own economic interests?

If we decide to drop option 1 (Kenya signing the EPA alone) and option 2 (EAC collectively signing the EPA), do we have alternatives?

Since around 2007, the intra-African market has surpassed the EU market as the biggest export market for EAC countries. Total EAC exports to the EU amounted to 2.5 billion dollars in 2008, while exports to Africa came to about 3.2 billion dollars

Thus I am compelled to conclude with the final observation of the South Commission’s Report:

“In mobilising all its latent power, the South has first to ensure that its economies are self-fueling and that their growth is not simply a by-product of growth in the North. The South needs to expand its presence in Northern markets, for which purpose it needs improved access and the rollback of protectionism, which is now often directed specifically at products of considerable interest to the South in terms of export. But the emerging development patterns of the North clearly suggest that the northern locomotive economies will not pull the train of southern economies at a pace that will satisfy its passengers, who are the people of the South. The locomotive power has to be generated to the maximum extent possible from within the economies of the South themselves.” (END/COPYRIGHT IPS)

* Benjamin W. Mkapa is the former President of Tanzania and Chairperson of the South Centre (http://www.southcentre.org ).