April 2, 2020 - 5 minutes read

THE IMPACT OF TRADE AGREEMENT NEGOTIATIONS BETWEEN KENYA AND THE UNITED STATES OF AMERICA.

By Magdalene Kariuki
Introduction:

A population estimated at 1.3 billion predominantly made up of young people and with
an abundance of natural resources, Africa presents market opportunities, a growing
labour force and raw materials for manufacturing.

A lot of investments flowing into the continent had been focused in the extractives
sector; however, this is changing. Countries in the North are now cognizant and
appreciate other opportunities which lie within agriculture, banking, consumer goods,
infrastructure, mining, oil and gas, and telecommunications
Although Africa’s growth prospects are bright, they differ not only country by country
but also sector by sector.

It is no longer in question that Africa is one of the fastest-growing consumer markets in the world presenting exciting opportunities to global businesses for expansion in retail and distribution. It is no wonder then that there is an increasing rush from Northern and Eastern countries to strengthen diplomatic, strategic and commercial ties- dubbed “the new scramble for Africa”.

Some of the mechanisms being used to do this is through bilateral trade agreements
and Trade and Investment Agreements (TIFAs).
TIFAs merely “provide strategic frameworks and principles for dialogue on trade and
investment issues” while bilateral trade agreements confer favored trading status
between two nations. By giving them access to each other’s markets, it increases trade
and economic growth.
In this instance the focus will be on bilateral trade agreements, specifically the one
between Kenya and the US and the foreseeable impact of the same.

Background :

Kenya is one of the 39 sub-Saharan African countries currently benefiting from duty-
free access to the American market courtesy of the African Growth and Opportunity Act (AGOA).

As a result, trade between the two countries stands at about $1.1 billion per annum with over 70 percent ($466 million in 2018) of Kenya’s exports to the United States entered under AGOA. This made America Kenya’s third-biggest trading partner in 2019, importing $667m-worth of clothing, fruit, nuts and coffee. Notably U.S imported
Kenyan goods worth Kes. 46.4B in the past 11 months making it number 2 to Uganda at Kes. 49 Billion in the same period. Kenya imported Kes. 55.1B being a 10.4% increase from Kes. 49.9B in 2018.

With the WTO waiver that allows the United States to have this preferential regime
coming to an end on September 25, 2025 and the upcoming expiration of the Cotonou
Agreement with the EU, trade partners are anxious to secure and cement trading
relationships.

In regards to AGOA, three options were provided for at the point of expiration: a) an FTA between US and the AU; b) FTA with a sub-regional economic community (e.g. EAC); and c) an FTA with one country. In this case, the Trump administration has taken option c) which has left many to wonder how why so and why Kenya.

Kenya is seen to be a strategic choice geo-politically as well as the existence of a strong
market economy makes it a partner of choice . Kenya has made significant
improvements towards its ease of doing of business having improved from 65 to 56
from 2018 to 2019. With a growing GDP averaging 5.8% p.a. and continued efforts by
the Government to address legislative and policy environment it is anticipated that
Kenya will be able to cross over to top 50 countries to do business.

About the proposed FTA between Kenya and the US:

The U.S.-Kenya Trade and Investment Working Group established by President Trump and President Kenyatta in August 2018, was tasked with laying the groundwork for a stronger bilateral trade relationship. In more ways than one, the proposed FTA is similar to the United States-Mexico-Canada Agreement (USMCA).
In summary it focuses on:
• Creating a more level playing field for American workers, including improved rules of
origin for automobiles, trucks, other products, and disciplines on currency
manipulation.
• Benefiting American farmers, ranchers, and agribusinesses by modernizing and
strengthening food and agriculture trade in North America.
• Supporting a 21stCentury economy through new protections for U.S. intellectual
property, and ensuring opportunities for trade in U.S. services.
• New chapters covering Digital Trade, Anti-corruption, and Good Regulatory
Practices, as well as a chapter devoted to ensuring that Small and Medium Sized
Enterprises benefit from the Agreement.
• Similarly, at the US-KE negotiation meeting held on the week of February 3-7, 2020 in Washington, D.C. the following were the key outcomes:
• Adoption of a phytosanitary protocol by Kenya that allows American wheat growers
in Washington State, Oregon, and Idaho access to Kenya’s wheat market valued at
$470 million. This will be first time that this is taking place in over a decade.
• Development of a plan to provide technical assistance and trade capacity building
with the aim of maximizing Kenya’s utilization of trade benefits under the AGOA.
• A U.S.-Kenya Small and Medium Enterprise (SME) Roundtable to identify and discuss ways to strengthen commercial cooperation in the SME sector and discuss the
benefits to SMEs on both sides of reducing barriers and increasing trade between the
United States and Kenya.
• Site visit to the Howard University School of Business’ Small Business Development
Center to exchange information on U.S. best practices to support the SME sector.

What has been agreed on thus far:

So far what has been agreed upon is the direct cargo flights. This will facilitate faster
movement of goods and penetration into the US market and further ease logistics for
importers from the US to Kenya.

This deal is espoused in the Amendment to the US-Kenya Air Transport Agreement
which added the 7th freedom traffic rights for all cargo operations signed by the
Kenya Cabinet Secretary for Transport Mr. James Macharia and the Assistant Secretary of State for Economic Affairs Ms. Manisha Singh. This amendment will permit all-cargo airlines from the United States to fly between Kenya and a third nation without being required to stop first in the United States.

The aim of the direct cargo flights agreement is to fully open the Kenya air cargo
services market to US carriers and represent one way in which the US Government is
delivering for US cargo carriers and American workers as well liberalizing the international civil aviation sector in Africa.

The Jomo Kenyatta International Airport (JKIA) was ranked the second fastest growing cargo airport in the world according to according to the World Airport Traffic Report second to Rockford Airport, USA.
Additionally, Kenya is the only country in East Africa with direct flights to the US having commenced non-stop flights to New York in 2018.

Implications & Concerns Related to the FTA Between Kenya and the US:

An area of concern has been the likely impact of the Kenya-US negotiations on the
ongoing Africa Continental Free Trade Area (AfCFTA) negotiations and the African
Growth and Opportunity Act (AGOA).

Based on the principles of AfCTA which include openness and transparency as well as
the provisions in the agreement, Kenya is mandated to notify other countries of its
intention to enter into a [bilateral] free-trade agreement. This briefing was expected to
take place at the 33rdAU Summit taking place in Addis in the week of 10th February,
2020.

In addition, any preferences given to a third party must also be given to other parties
of the African Continental Free Trade Area.
Also, Kenya is a member of the East African Community (EAC), a regional trade bloc,
which requests that members negotiate their trade pacts together. It will therefore be
interesting to watch how this new trade pact will impact on forthcoming bloc
negotiations.

However, in the interim, there is an expectant spillover effect with regards to the
adoption of a phytosanitary protocol by Kenya to Uganda; although Uganda did not
have a flag smut ban on West Coast exports it could not access wheat from these areas
owing to Kenya’s Sanitary and phytosanitary (SPS) barriers as Uganda generally use
Kenyan port facilities. Although the U.S. market share in Kenya is low, per the October
2019 Submissions by the US Wheat Associates on the 2020 National Trade Estimate
Report on Foreign Trade Barriers Impact, even a five-percent rise in market share would be worth over $20 million to the U.S. wheat industry.

This accruing benefit however does appear lopsided in favour of America in view of
several factors such as the fact that American wheat farmers are heavily subsidized with not much being said as to how Kenya will be capacitated to restore its wheat
production, as well as how to protect potential agreements with other African countries in view of the AfCFTA.
Additionally, and relatedly, during the High level Round Table held between Kenyan and US Business Leaders hosted by the Corporate Council on Africa (CCA) on the 13th of February, 2020 an issue that came up was that of pricing of wheat from the American markets. Additionally, there was a logistical challenge that came up in the discussions with regards to transportation costs.
Further, another area of concern has been the potential adverse effect on local industry.

Whereas the conversation around protectionism does not feature majorly in FTA
negotiations, there are legitimate concerns on what this could do to Kenyan indigenous nascent industry players. This relates to one of the Government’s economic stimulus plans within the Big 4 Agenda which is Manufacturing which aims to increase its contribution to GDP from 9.2% to 20 % of GDP by 2022.

Moreover, another area of concern is Kenya’s preparedness to benefit from the FTA. For instance, following the US-Kenya Air Transport Agreement it has emerged that the
country does not have planes big enough to export the goods directly to the US market.
A related issue in this regard is the fact that there does not exist a cold chain in New York which is Kenya’s route- thus would not benefit exports for instance in the horticultural industry.
Another issue that has come us is Kenya’s capacity to negotiate on an equal footing with many economists expressing concerns over bargaining power being on America’s side.

Its economy is, after all, 200 times bigger than Kenya’s. This may expose Kenya to
making significant concessions that could undermine African regional integration.
Despite these emerging concerns there are optimists who see this as a major
opportunity for both countries especially with regards to market penetration,
technological advancements and innovation, spur economic growth and help Kenya
raise standards to meet new manufacturing American requirements for export; and
open up local industry to new investments.

Additionally, while at the Round Table Government representatives from Kenya noted
that whereas the USMCA was the template being used, they would be keen to weave in
cultural considerations that protect local industry as well as regional and continental
commitments.

The hope is that the FTA is an opportunity to safeguard a future bilateral trade and
investment framework and provide as a model for future trade agreements in the
region.

Examples of Impacts of American Bilateral Agreements :

The United States has bilateral trade agreements in force with 12 other countries. Here’s the list, the year it went into effect, and its impact:
• Australia (January 1, 2005) -This agreement generated $26.7 billion in 2009, increasing trade 23% since its inception. U.S. goods exports increased 33%,
while imports rose 3.5%.
• Bahrain (January 11, 2006) -All tariffs were removed. The United States increased
exports in agriculture, financial services, telecommunications, and other services.
• Colombia (October 21, 2011) -Tariff reductions expanded exports of U.S. goods by at
least $1.1 billion. These increased U.S. GDP by $2.5 billion.

• Chile (January 1, 2004) – It eliminated tariffs, provided protection for intellectual
property, and required effective labor and environmental enforcement, among other
things. Unfortunately, trade decreased since 2004. U.S. exports to Chile fell 26% to
$8.8 billion, while imports dropped 29% to $5.8 billion.
• Israel (1985) – Reduced trade barriers and promoted regulatory transparency.
• Jordan (December 17, 2001) – In addition to reducing trade barriers, the agreement
specifically removed barriers to U.S. meat and poultry exports. It also allowed
increased imports of agricultural products from Jordan.
• Korea (March 15, 2012) -Almost 80% of tariffs have been removed, boosting exports
by $10 billion. On March 26, 2018, the Trump administration exempted South Korea
from a 25% steel tariff. The U.S. ally is the third largest foreign supplier of steel. In
return, South Korea amended the 2012 agreement. The United States will keep its
25% tariff on pickup trucks for an additional 20 years. Under the original agreement,
the tariffs would have expired in 2021. South Korea agreed to double its import quota
for U.S. cars.
• Morocco (January 5, 2006) -The goods trade surplus rose up to $1.8 billion in 2011, up from just $79 million in 2005.
• Oman (January 1, 2009) – Discussions are underway to agree on the details of labor
standards in Oman.
• Panama (October 21, 2011) -Trade representatives are negotiating labor and tax
policies. The agreement will remove a 7% average tariff, with some tariffs as high as
81% and others as high as 260%. The Panama Canal’s impact on the U.S. economy is
tremendous. This strategic waterway keeps the costs of imports down. It also
provides better access to markets in China and other Asian countries.
• Peru (February 1, 2009) -Trade with Peru was $8.8 billion, with exports at $4.8 billion, the year the agreement was signed. The FTA eliminated all tariffs and provided legal protections for investors and intellectual property. It was the first to add protection for labor and the environment.
• Singapore (January 1, 2004) -Trade totaled $37 billion in 2009, a 17% increase since
the FTA’s inception. Exports rose 31% to $21.6 billion.

Spread the love