Why the Economic Partnership Agreements failed in the East African Community?

by Jane Nalunga

© Thomas Reimer

Jane Seruwagi Nalunga is Country Director of the Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI Uganda) and is an expert on trade, investment and fiscal policy related issues. She has more than twenty years of experience in trade related policy research, analysis and advocacy and has authored a number of studies and articles. Nalunga sits on a number of national policy making bodies and advises government and Parliament on trade related matters.

Economic Partnership Agreement (EPA) negotiations between EU and Africa, Caribbean and the Pacific (ACP) countries were launched in 2002 and were supposed to be concluded and ratified by 2008. The East African Community (EAC) is a regional intergovernmental organization of six partner states: the Republics of Burundi, Kenya, Rwanda, South Sudan, the United Republic of Tanzania, and the Republic of Uganda, with its headquarters in Arusha, Tanzania. The EAC is home to 150 million citizens, of which 22% is urban population. With a land area of 1.82 million m² and a combined Gross Domestic Product of US$ 146 billion (EAC Statistics, 2016), its realization bears great strategic and geopolitical significance and prospects for the renewed and reinvigorated EAC.
The EPA negotiations between the EU and the EAC were concluded in 2014 after 12 years of negotiations. However while Tanzania, Uganda and Burundi have not signed, Rwanda and Kenya have individually signed, with Kenya ratifying and depositing the ratification instruments with the European Union in 2016. As the EAC is one economic entity with a common external tariff, the EPA cannot be implemented because not all the EAC partner states have signed and ratified it.

© Seatini

Appreciating the failure of the EPA in the EAC requires understanding the negotiation process and the onerous provisions in the EPA text. Regarding the negotiation process, it was based on meeting deadlines rather than ensuring a viable agreement. The EU also used undue pressure on the EAC and also failed to fulfill some of its promises. For example The Cotonou agreement 2000, Article 37( 5) provided that: “Negotiations of the economic partnership agreements  will be undertaken with ACP countries which consider themselves in a position to do so, at the level they consider appropriate […] taking into account regional integration processes within the ACP”. Article 37 (6) also provided that: “In 2004, the Community will assess the situation of the non-LDC which, […] are not in a position to enter into economic partnership agreements and will examine all alternative possibilities, in order to provide these countries with a new framework for trade which is equivalent to their existing situation and in conformity with WTO rules”. Therefore developing countries like Kenya were promised an alternative in case they were unable to negotiate the EPA. However this promise was never fulfilled and in fact the articles were deleted in the subsequent review of the Cotonou agreement.
As stated the EU exerted a lot of pressure on the EAC. When the EAC and EU initiated the Framework EPA in November 2007, the EU used the review of her Market Access Regulation 1528/2007 to clearly indicate that ACP countries that will not have signed or ratified EPAs by 1 October 2014 will be removed from the list of beneficiaries of the Duty Free Quota Free market access. For the EAC, this meant that goods from Kenya, the only non-LDC in the EAC, would attract a tariff of about 12% leading to an estimated revenue loss to Kenya of about US$194 Million per year. In a bid to salvage Kenya from this looming predicament, the EAC concluded the EPA negotiations in October 2014. However in 2016 the EU Commission amended the Market Access Regulation, which provided for the removal of Kenya from accessing the EU market, duty free and quota free unless it signs and ratifies the EPA by October 2016. Kenya had no alternative but to sign and ratify the EPA.
The rest of the EAC might never sign/ratify the agreement since they can access the EU market through the Everything But Arms (EBA) initiative. EBA is an initiative of the EU under which all imports to the EU from Least Developing Countries (LDCs) are duty-free and quota-free with the exception of armaments. EBA entered into force in 2001. This initiative is one of the reasons why the EPA have failed in the EAC since the LDCs do not see any benefit from the EPA other than onerous demands from the EU which are inimical to the achievement of the region’s overall development interests and aspirations for structural transformation. The demands from the EU include, inter alia, the very extensive liberalisation, limitations on the usage of export taxes and the proposal to negotiate new issues such as investment, competition policy and government procurement. The need to remove these contentious issues from the EPA text was raised not only by the civil society organisations but even by President Magufuli of Tanzania and President Museveni of Uganda in his capacity as the EAC Summit Chairperson.

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Regarding the liberalisation schedule, the EAC offered to liberalize about 83% of her imports from the EU over a 25 year transition period. The rationale for this extensive liberalisation was to promote industrialisation through increased access to cheap industrial inputs and capital goods like machinery; and for necessities like pharmaceuticals. Only 17% was excluded from liberalization to presumably cater for the protection of sensitive products to promote food security and infant industries especially the agro processing industries.  Therefore most agricultural products were on the exclusion list.  However what should be noted that the  liberalisation schedule in the EPA text seems to be taking a static approach to development which does not envisage the EAC region graduating to producing either industrial inputs or capital goods. President Museveni put it very well in his statement to the European Union Commission President Jean-Claude Juncker: “What happens when EAC partner states start producing these items and now need to protect them after signing the EPAs?” (The State House of Uganda, 28 September 2017). The extensive liberalisation would also lead to revenue losses as per the study undertaken by the South Centre (2016). The estimated total cumulative tariff revenue losses, as a result of the extensive liberalisation would amount to € 3 billion at the end of the 25 years of implementation, taking into account tariff and VAT losses as well as trade diversion. This drastic reduction in tariff revenue will result into severe fiscal constraints that will impinge negatively on the provision of social services especially the health and education sector as a result of reduction in budgets. This will in turn affect the most vulnerable population who are the rural poor women and children.
The issues of the increasing domestic subsidies in the EU which the EU has been reluctant to discuss in both the EPA and WTO negotiations has also contributed to the rejection of the EPAs. Although under Article 68(2) the EU undertakes not to grant export subsidies to all agricultural exports to EAC Partner States, the real challenge to the EAC’s agricultural production and industrialization are the ever increasing domestic subsidies. In addition, the EU - EAC text also included the Rendezvous Clause (Article 3) whereby the parties undertook to conclude within five years upon entry into force of the agreement, negotiations in areas of services, investment, government procurement, trade and sustainable development, intellectual property rights and competition policy. Binding rules in these areas would constrain the policy space for governments to promote industrialization and sustainable development.
To conclude, any viable trade agreement between the EU and the EAC should take into account the level of development of the EAC partner states, their social and economic challenges and their aspirations to address these challenges (23 July 2018).