BY DAVID NALO
When the EAC partner states agreed to establish a Customs Union in 2005, they also agreed that its implementation shall be progressive.
This has come to pass and significant progress has been made in the implementation of the Customs Union protocol. This has resulted in huge increases in the volume of intra-EAC trade since 2005.
The elimination of internal tariffs among partner states was to be achieved in five years. A common external tariff (CET) with a minimum rate of zero percent for raw materials and capital goods, 10 percent for intermediate products and 25 percent for finished products, was to be achieved within the same period. For sensitive goods, the rates of the CET were set higher than 25 percent in order to allow domestic production within EAC and industries to grow.
A third aspect of Custom Union is the removal/elimination of Non Tariff Barriers (NTBs) to trade in the Community. The Custom Union also provided for the application of the principle of asymmetry, rules of origin, duty drawbacks, refund and remission of duties and taxes, customs cooperation, simplification and harmonisation of trade documentation and procedures as well as exemption regimes among others.
Initially elimination of internal tariff appeared to favour the other partner states and disadvantaged Kenya, which eliminated all internal tariffs immediately in 2005 but whose exports of some category of goods to the other partners continued to attract tariffs until December 31st 2009. However, this did not adversely affect her exports to the EAC. In real terms, however, all countries of the region have benefited.
The EAC countries have continued to be major export destinations for Kenya. In 2008 for example, Uganda was Kenya’s number one export destination, Tanzania was fourth and Rwanda tenth. In the same year, Kenya’s exports to the EAC have accounted for 51.6 percent of exports to Africa.
Kenya’s total exports to EAC between 2004 and 2008 to the four partner states increased from KSh64 billion to KSh84 billion between 2004 and 2008. Uganda is Kenya’s largest export market followed by United Republic of Tanzania accounting for 50 percent and 11 percent respectively. Kenya’s import from the region increased from KSh3 billion to KSh12.6 billion in 2004 and 2008 respectively.
The largest importer to Kenya is Tanzania accounting 58 percent of all imports from EAC. Overall Total Value Exports from Kenya grew by 31 percent while imports from Tanzania and Uganda grew by 300 percent.
Intra-EAC trade is on the rise for all the partner states, the most prominent is the increase in Kenya’s trade with the other partner states, which means demand for her goods (especially manufactured goods), is increasing. The challenge will be for producers and manufacturers to meet this increased demand.
Consumers may also find it more compelling to buy goods produced within the region due to proximity to each other (as evidenced by increased cross border trade), lower levels of NTBs, similarities in culture, language, product differentiation and regional infrastructure improvement which promotes trade within the region.
And now that the Custom Union is fully fledged, one expects that there will be no barriers to trade. However there is no perfect world and EAC is no exception. Non Tariff Barriers have manifested themselves in various forms in the region. The barriers are being addressed through the EAC mechanism for the elimination of Non Tariff Barriers.
This is a joint initiative of the East African Business Council and the East African Community Secretariat. The objective of the mechanism is to facilitate the process of identifying, reporting and monitoring the elimination of current and future NTBs within the EAC partner states so as to consolidate the gains from the Customs Union.
At the country level, National Monitoring Committees on NTBs have been established and meet monthly to monitor the progress made in addressing a number of identified NTBs at the regional level for elimination and to receive reports on the eliminated and new NTBs.
Since the establishment of these committees, the progress in the reporting, monitoring and elimination of the NTBs has been remarkable.
But what will be critical for the partner states to realise the full potential of the Custom Union is the rules and its application.
Rules of origin are integral part of the EAC Customs Union. Application of rules of origin has seen several milestones. Partner states have adopted simplified rules of origin in a bid to make it easier for small business persons to engage in cross-border trade.
Currently, there are two criteria applicable in EAC namely, wholly obtained and substantial transformation. The former refers to products which are wholly produced in one partner state, while the latter refers to products whose processes of production constitute a substantial transformation.
In the EAC context, substantial transformation refers to value of the materials not exceeding 60 percent of the total cost of the materials used in the production of the goods, value addition resulting from the process of production accounting for at least 35 percent of the ex-factory cost of the goods and when goods are classified or become classifiable under a tariff heading other than the tariff heading under which they were imported.
The other purpose of the EAC rules of origin is to distinguish between goods produced within the EAC for purposes of eligibility for preferential treatment against those produced outside the EAC customs territory that attract duties specified in the Common External Tariff.
The EAC partner states adopted a set of rules of origin under which goods qualify for EAC tariff treatment if they originate in the partner states. This means that all goods that meet the requirements of the EAC rules of origin qualify for EAC tariff treatment when they are traded within the region.
But issues have been raised with regard to the application of the rules of origin. The understanding and interpretation of the rules of origin is limited in most partner states, particularly for companies which produce for the local market. Limitations in access and efficiency in issuance of certificates tend to encourage cases of fraud, where importers present fake or fraudulent certificates of origin for goods which would normally not qualify for preferential treatment. At the same time, there also seems to be negligence on the part of some authorities who do not necessarily abide by the manual for application of the rules of origin. This is a challenge that faces the EAC.
Value-added Criterion also poses a challenge in the implementation of the EAC rules of origin. Its computation which is very complex renders it difficult to apply not only to the exporters/manufactures but also to the implementing authorities.
This criterion is seen as a non-tariff barrier to Intra-Regional Trade other than a tool of protection against trans-shipment. Other implementation challenges include; complexity of the processes in the schedule for some customs officers; need for familiarisation with manufacturing process is a difficult task; variation in the interpretation of rules of origin by different competent authorities and the need to understand the entire rules of origin criterion which remains a big challenge.
But despite these challenges, where eligibility for preferential treatment of goods is in doubt, a verification mission is usually mounted and carried out to ascertain whether or not, the goods in question meet the criteria. Some of the verification missions currently in process include those of motor vehicles, products manufactured by Nestle Kenya, lubricants manufactured by Kenol/Kobil, beauty products manufactured by Inter-consumer Products and televisions manufactured by AUCMA Digital Technology Africa Limited. When such missions are conducted, the outcome and final verdict must be approved by the relevant Sectoral Council (in this Finance, Trade and Investment) and the full Council of Ministers.
The purpose of the EAC rules of origin is to determine the tariff treatment as provided for under the World Trade Organisation (WTO). Partner states have continued to improve on their compliance to the rules of origin to ensure that they are transparent and do not in any way restrict, distort or disrupt trade. In an attempt to ensure that the rules are developmental in nature, precise, transparent, predictable and stable as well as minimise scope for interpretation and administrative discretion, the partner states have identified provisions on the manual on the application of rules of origin that pose implementation challenges and make proposals for their review and this is to be considered by the Committee on Customs for adoption.
It is, therefore, important to appreciate the role played by rules of origin in promoting industrial development in the EAC region, employment creation and the various steps that the Community has undertaken towards the achievement of freer flow of goods in the region such as the simplification of the rules, amendment of the manual and in lifting the stay in the application of the Change in Tariff Heading Criterion which has enabled the motor-vehicle assemblers to access the EAC Market at preferential tariff rates.
The other important factor in the Custom Union is the CET which is one of its crucial elements. The EAC CET regime has very low rates on raw materials and capital goods, moderate rates on intermediate goods and highest rates on consumer goods. Specifically, the rates are zero percent for raw materials and capital goods; 10 percent for intermediate goods; and 25 percent for consumer goods.
Partner states also identified a set of sensitive products where potentials for domestic production and cross-border trade existed and whose importation from outside the community could affect domestic production. Such products are accorded additional protection over and above the maximum 25 percent duty.
Partner states agreed on the classification of sensitive products and the applicable rates of duty in 2005 when the Custom Union Protocol commenced. Such sensitive items would attract rates of over 25 percent and, in some cases, a mixture of specific duty and ad valorem rates. Partner states also agreed to review the maximum rate of the CET after a period of five years and the process is currently ongoing.
On the issue of sensitive products, the EAC trade regime has designated 58 goods as sensitive products and set advalorem tariffs ranging from 35 percent to 100 percent. The top rate of 100 percent applies to most varieties of sugar; high rates also apply to rice (75 percent); wheat (60 percent), milk and various milk products (60 percent) and maize (50 percent).
This measure was intended to protect local production on the assumption that the region had adequate capacity to meet the demand for the selected commodities.
The tariff protection rates were agreed upon and set at the regional level. However, during the pre-budget consultations of Ministers of Finance, undertake some reviews in response to the economic, social and trade requirements. A notable example is the review of CET rate of cement to 25 percent in 2008 for a period of two years to address the shortages that were being faced in the region.
Similarly, the import duty rate on rice from Pakistan has been lowered to 35 percent instead of 75 percent for a period of two years and a further two years. But with the aggressive programme of expanding land areas which are under irrigation as recently announced by His Excellency President Mwai Kibaki, the country and indeed the entire EASC region should target to be self reliant in rice production.
Relevant and important aspect of the Custom Union is Duty Remission. The Customs Management Act provides guidance on handling of remissions and exemptions of import duty. Under sections 138, 139 and 140, the Council may grant remission of duty on goods imported for the manufacture of goods in partner states and prescribe regulations on the general administration of the duty remission.
The special concessions are granted on special grounds including the need to enable infant industries attain meaningful levels of competitiveness or for attainment of national policy objectives. For instance, the exemptions on paper and paper products are largely driven by governments’ universal obligation for access and affordability of education services. Some notable remissions include the approval of Ugandan list of raw materials and industrial inputs, approval of Tanzanian manufacturers and quantity of completely knocked down (CKD) motorcycles and bicycles to be imported, approval of Kenya manufacturers and quantities of paper and CKDs for assembly of motor-cycles.
With proper handling of the administrative issues surrounding the Customs Union, addressing NTBs in an efficient manner and proper application of the EAC CET and the exemption and duty remission schemes, the transition to the fully fledged customs union is bound to continue to bear more fruit to the Governments, businessmen and all citizens of the partner states.
Equally important is the issue of ushering necessary reforms to support the Common Market when it becomes effective on 1st July 2010. And some of the reforms which are required are legislative, administrative, as well as are capacity building when it some to service industry in the region.
(DAVID NALO is the Permanent Secretary, Ministry of East African Community)