Under the Radar: EAC infighting highlights divisions, threatens EU trade deal

Under the Radar: EAC infighting highlights divisions, threatens EU trade deal

Divisions in the EAC over the EU EPA highlights problems in the bloc and competing developmental strategies; if the EAC cannot act as one, can it survive?

EU efforts to sign an Economic Partnership Agreement (EPA) with the East African Community (EAC) have met with resistance as some EAC members are refusing to sign the agreement, instead calling for re-negotiation.

The EU-EAC EPA was drafted 14 years ago, and since then the EAC has doubled in size. Delays in ratification saw the EAC faced with steep tariffs in 2014, and member countries such as Kenya and Rwanda are pushing for bloc-wide ratification in order to finally conclude the agreement. Kenya is the EAC’s largest economy, and stands to suffer the most if all EAC members do not sign the agreement by September 30th. While Kenya and Rwanda already signed on September 1st, Tanzania, Uganda, and Burundi have refused to sign, seeking further negotiation and clarification.

Specifically, Tanzania’s President Magufuli is criticizing Kenya and Rwanda for putting pressure on other members, as he has some serious reservations about the deal. “Why are we signing the agreement while the EU has imposed sanctions on Burundi? Why are we signing the agreement while the UK has pulled out of the EU?”

Tanzania et. al. are concerned that their existing trade connections with the UK will be threatened after it leaves the EU. Specifically, some EAC nations are concerned that exports of tea, flowers, and other agricultural products – major sources of foreign exchange – will be undermined. The EPA was negotiated with an EU that included the UK, and uncertainty on how Brexit will be implemented has raised concerns.

EU sanctions on Burundi complicate matters for the EAC, as Burundi is being punished for its failure to institute political reforms and organize elections in the wake of last year’s coup attempt. Another problem for the EAC is the situation in South Sudan, which became a member in 2016. The security and humanitarian crisis in that country risks spill-over into neighbouring EAC member states, thus disincentivizing the very foreign investors and businesses the EAC is attempting to woo.

EAC’s largest economies – Kenya and Tanzania – at odds

While the problems in Burundi and South Sudan are serious, any economic fallout would be limited due to the small size of their economies. The real headache for the EAC – and Kenya in particular –  in terms of economic integration and trade promotion, is Tanzania. As the bloc’s second largest economy, Tanzania’s resistance seriously undermines EAC-EU efforts. Tanzania already riled EU negotiators by refusing to sign in July, and Dodoma’s resistance has only continued in recent months.

The main problem for Kenya is that unlike the other EAC members, it cannot afford to have the EPA flounder. All the other EAC countries, Tanzania included, have the option of retaining access to the EU market even without the EPA. Specifically, these countries are able to qualify for duty and quota-free access to the EU market under Brussel’s Everything but Arms initiative aimed at the world’s least developed countries. Kenya’s success has excluded it from this program, and as such Nairobi has been backed into a corner.

Tanzania has expressed its concerns with the EPA, claiming that it will not benefit the EAC. The specific point of contention is that while the EPA grants tariff-free status to EAC exports, it also seeks to remove tariffs from EU exports to the EAC within a decade. In 2015 EU exports to the EAC totaled $4.575 billion, with EAC exports to the EU reaching $2.945 billion.

Tanzania is arguing that this would destroy local industrialization efforts in a region already having to contend with cheap Chinese imports. Indeed, Uganda recently announced a three month ultimatum to foreigners (many of whom are Chinese) operating in the retail sector: either invest in bigger projects or leave.

Furthermore, under President Magufuli, Tanzania is pursuing an industrialization drive, with the government asserting that its nascent local industries will not survive the introduction of tariff-free EU imports. One example of this drive is last week’s ban on the export of mineral sands, a move aimed at increasing domestic refining and processing capacity.

Magufuli has been pushing hard to improve Tanzania’s infrastructure and economy, and he needs to begin producing results, as the country’s GDP growth dropped to 5.5% in Q1 2016, compared with last year. One way he is seeking to do this is to push for greater domestic industrial production and consumption, as well as intra-African trade as opposed to reliance on FDI. This approach will cause problems if Tanzania wants to capitalize on its recent natural gas and helium discoveries.

East African Community divided over development strategy

The division in the EAC reflects a division regarding development policy. The approach taken by Tanzania, and to a lesser degree Uganda and Burundi, is conflicting with that of Kenya and Rwanda. The latter are focusing on increasing free trade and FDI. Kenya’s greater economic clout may give it the confidence (that Tanzania lacks) to favour this approach, while Rwanda reform efforts are driven by the need to overcome its landlocked nature and small population.

Rwanda has made a commitment to become a middle-income country by 2020, and to this end has implemented a series of reforms, including the duty free importation of machinery equipment and raw minerals, as well as zero percent corporate tax for companies that relocate their headquarters to the country. Moreover, Burundi has increased its Ease of Doing Business rank to 62nd, the highest in East Africa.

The government is also promoting the Kigali Special Economic Zone, and has attracted new textile investors. President Paul Kagome has also stated that agriculture was the number one priority, with the country having seen cross-the-board increases in agricultural production from fruits to livestock. Rwanda has also pledged to increase horticulture exports to $140 million by 2020, up from the current $6 million. This agricultural push is being a facilitated by the introduction of the new Agricultural Land Lease Client Charter and standardized Contract and Corporate Farming Models.

Rwanda is also benefiting from ties to EU construction firms, with Portugal’s Mata-Engil having been contracted to build a $818 million international airport, with a final capacity of 4.5 million passengers a year. All these efforts have seen Rwanda’s GDP growth forecasts reach 6% for 2017 and 6.5% for 2018.

Similarly, Kenya is also benefiting from EU investment, with Volkswagen announcing the construction a factory in Thika, north of Nairobi. VW is eyeing the growing Kenyan auto market, and plans to build its popular Polo Vivo model in the country, in partnership with Kenya Vehicle Manufacturing. Volkswagen South Africa CEO Thomas Schaefer stated that “the EAC has got the potential, and today is the first step in this direction.”

Other options?

Following the discovery of 750 million barrels of oil in 2012, Kenya has moved ahead with its efforts to upgrade the Mombasa cargo port – East Africa largest – slated to begin in 2017. With the help of a $296 million loan from the Japan International Cooperation Agency, Kenya is seeking to upgrade the port’s capacity from the current 1.05 million TEU, to 2.5 million TEU by 2021. This will aid Kenya’s efforts to become the EAC’s door to the world, and aid greater regional economic integration by fostering the exports of its landlocked neighbours.

Kenya, and the EAC in general has some breathing space regarding foreign investment, for if the EU deal stalls, there remains significant interest from Asian countries, notably Japan. Alongside Japan’s investment in the Mombasa port, Tokyo has pledged $64 billion in investment to Africa since 2013, and between 2012 and 2015, there has been a 30% increase in the number of Japanese companies operating in sub-Saharan Africa. Indeed, in re-entering Kenya after 40 years, Volkswagen joins the likes of Isuzu, Toyota, Nissan, and Mitsubishi already in the country. Indeed, the recent 6th Tokyo International Conference on African Development took place in Nairobi, with 10,000 delegates attending the event.

Japan’s heightened interest in the region has in turn been spurred by Chinese inroads into Africa. This means more opportunities for investment for EAC members, yet this remains a double-edged sword. On the one hand, if the EU deal falls through, the EAC can look to other nations to pick up the slack. Yet, on the the other hand, if the EU deal falls through, it may tarnish the EAC’s reputation, and discourage others from seeking EAC-wide deals. This could see China, Japan, and others resorting to bilateral agreements instead to avoid complications, undermining the EAC in the process.

Under the Radar uncovers political risk events around the world overlooked by mainstream media. By detecting hidden risks, we keep you ahead of the pack and ready for new opportunities.

Under the Radar is written by Jeremy Luedi.

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