East African Community and the Need for A Regional Trade ...

CUTS-ARCPolicy BriefsConsumer Unity& Trust SocietyAFRICA RESOURCE CENTRENo.4/2001East African Community and the Need forA Regional Trade AgreementDuring a summit in Arusha, Tanzania in January 1999, the three Heads of State of Kenya, Tanzania andUganda resolved to sign a treaty re-establishing the East African Community (EAC). The purpose was toachieve a set of developmental objectives for the three countries as well as to promote trade within theregion. It was expected to improve their economic and political bargaining power by forming a unitedentity.In January 1999, the EAC was reconstituted to achieve a set of developmental objectives. However, itwas not clear what economic and political conditions are to be taken into account for these objectives tomaterialise.This Policy Brief examines arguments for a regional trade agreement among members of the EAC andpoints out the benefits that these countries could draw from such an arrangement.Regional Integration Arrangements inAfricaIn Africa, regional integration arrangements havecome in two waves. The first wave, occurred in the1960s, was inspired by the creation of the EuropeanEconomic Community (EEC). Neighbouring nationswere facing economic difficulties and thus, sought forcooperation. This was based on import-substitutionpolicy, which consisted of protection (such as hightariffs and non-tariff barriers) for ‘infant industries’before introducing them to the competitive worldmarket. This approach proved unsuccessful as mostof these industries never developed and by the end ofthe 1970s nearly all the regional arrangements hadfailed.In 1980s, a waning confidence in the GeneralAgreement on Tariffs and Trade (GATT) sparked asecond wave of regional integration among the Africancountries. The dissatisfaction was rooted in anincreasingly cumbersome negotiating process as aresult of growing number of countries joining theGATT.The East African countries participated in both thewaves. During the first wave, the arrangement amongthe East African Community (EAC) was focused onlyon its member states, while in the second, thesecountries sought closer ties with other Africancountries and the European Community (EC) tosecure improved access to the developed-countrymarkets and political support in an increasinglymultilateral (international) trading system. As of now,the EAC is considering a bilateral EconomicPartnership Agreement (EPA) with the EC as a steptowards securing better market access and politicalsupport for the regional integration.History of the East AfricanCommunityEarly YearsAt the beginning of the 20 th Century, as members ofthe British Empire, Kenya and Uganda were engagedin a cooperation agreement. They built a Kenya-Uganda railroad granting Uganda access to theMombassa port. This was significant as Uganda is alandlocked country. After the First World War,Tanganyika (the present-day Tanzania) became a partof the British Empire and participated in this regionalrelationship. By 1948, an East African HighCommission was established, with legislative andadministrative authority for policy-making in the threecountries.

In 1961, as the countries were on the verge ofindependence from the British rule, the East AfricanCommon Service Organisation replaced the EastAfrican High Commission established by the British.The East African Community was established in 1967with the goal of forming the East African CommonMarket.The main objectives of the Community were tostrengthen and regulate industrial, commercial andother relationships to the end that there shall beaccelerated, harmonious and balanced developmentand sustained expansion of economic activities.The accrued benefits were expected to be sharedequitably through harmonisation of economic policy,formulation of joint projects and consultation duringthe planning stage, and implementation in areas suchas agriculture, education and manpower, energy andpower, industry, tourism, balance of payments,transport and communications, etc.In the first half of the 1970s, Kenya embracedcapitalism, Tanzania socialism, and Uganda wasconfronted with a political coup, which put a questionmark on the political stability of the region. Ultimately,ideological division among the members, coupled withUganda and Tanzania’s frustration over increasingtrade deficit with Kenya, were two significant factorsleading to the demise of the EAC in 1977, a decadeafter its inception.The EAC could not attain its goal of establishing amonetary union because the East African CurrencyBoard (EACB) disbanded into three separate centralbanks. The economic foundations of the arrangementwere shaken further when another essential organcould not meet its objectives.The East African Development Bank (EADB) wasintended to develop the region’s industries by takingequal amount of contributions from the three memberstatesand in turn investing 38.75 percent each inTanzania and Uganda, and 22.5 percent in Kenya.However, as the EADB was to invest in ‘viable’projects only, which were mostly in Kenya, itexperienced difficulties in meeting its developmentalaims for the region as a whole.The New IncarnationIn 1984, efforts were made for making a regionaltrade agreement among the EAC member states. In1993, in order to increase the level of cooperation thethree countries established a Tripartite Commissionfor East African Cooperation, which began itsoperation in March 1996. In 1998, these countriesdecided that a political federation with zero internaltariff on the majority of goods and with a singlecommon external tariff would be the ultimate objectiveof the new East African Community.The East African Cooperation Development Strategy(1997-2000) charted out the following goals andguidelines for the regional trade agreement:• greater cooperation in order to ensure that eachmember benefits fairly from the terms of theagreement;• concern for environmentally sensitive economicdevelopment and sustainable use of naturalresources;• create a single investment region through a singlemarket;• achieve improved status for women; and• promote peaceful relations among the members.Future objectives of the EAC are to:• establish an institution for improved decisionmakingfor the purpose of better regionalintegration;• address common market issues resulting fromuneven levels of industrialisation and economicdevelopment;• create an appropriate system of adjustment fortrade imbalances; and• establish an effective secretariat, which is essentialfor facilitating the goals of the agreement.Current State of AffairsAn analysis of the EAC should first outline variouslevels of economic integration in order to explain theprogress of the regional trade agreement.The first level of integration simply combines marketsinto a free trade area (FTA) that eliminates internaltrade barriers (such as import duties, quantitativerestrictions) but external tariffs may vary among themembers.The next level of integration is establishing a customsunion, which is similar to a FTA except that it requiresa common external tariff. Third is a common market,which guarantees free internal movement of goods,services and other factors of production. It holdscommon external regulation of products andproduction factors (the Common Market for Easternand Southern Africa and the European CommonMarket are examples of such an arrangement).However, the EAC is unlikely to fully liberalise tradefor all goods, as some of its members may not befully convinced of the arguments for free trade, andsome sensitive sectors may be protected due topolitical and economic considerations.2

The European Community intends to engage African,Caribbean, and the Pacific (ACP) countries withEPAs, as they may help promoting deeper economicintegration. However, the establishment of a freetrade area among countries is a necessary conditionfor entering into an EPA, and the EAC qualifies forthat. Under the current plan, if the EAC is to engageinto an Economic Partnership Agreement (EPA) withthe European Community (EC), liberalised internaltrade would cover 80 percent of all trade by 2005and 90 percent by 2015.In spite of this encouragement from the EC to have adeeply integrated regional trade arrangement, the finalversion of the EAC Treaty, as signed on November30, 1999, was not as far-reaching as was originallyplanned. There were problems like trade imbalancesbetween these countries, lack of a clear and equitablemethod to distribute benefits from the arrangement,difficulty in recovering the loss of government revenuein the form of tariffs, etc. In short, problems infostering better regional integration are rooted ineconomic differences between the three countries,as Kenya dominates intra-regional trade. (SeeTable 1)Why A Regional Trade Agreement?There appears to be economic logic for a regionaltrade agreement among the members of the EACand its arrangement with the EC for an EPA, but thepolitical foundation will be critical for its success. Thefoundation of the EAC was based on political factors,but economic considerations were also important.This is commendable. The reason why politics shouldsometime outweigh economics is that the structureof a nation’s international trading system must bedesigned to protect it, as far as possible, from theinternal political system of lobbyists. Governmentsmust consider political consequences of their policiesand as a result most regional trade agreements arepolitically motivated.Table 1: Internal Trade in East AfricaIn so doing (from the perspectives of foreign policyand national security), sometimes political concernsmay overshadow the economic costs of an agreement.These costs would be seen as a necessary price forfulfilling non-economic objectives. Furthermore,sometimes a small group of like-minded countries mayfeel that they can further their objectives in liberalisingtrade flows more effectively among themselves thanin a multilateral context.However, available statistics suggest that there is verylittle trade among the countries of Sub-Saharan Africaand little basis for fostering comparative advantagesin intra-regional trade. Poor countries do not usuallytrade much, therefore the low levels of trade in Sub-Saharan Africa is not unusual. As a result, there maynot be any real economic incentive for countries ofthe region to join in a regional trade agreement.On the contrary, the multilateral trading system asunder the World Trade Organisation (based on themost-favoured-nation and national treatmentprinciples) may be a superior option for these countriesto gain better market access. Moreover, a singleproduct, whose destination in most cases is outsidethe region, dominates exports of most of thesecountries. (See Table 2)At the same time, a regional trade agreement canrestrict the power of national interest groups and thus,ensure the success of trade liberalisation policies,even in multilateral context. It has been argued thatas a regional trade agreement covers a larger politicalcommunity than just one nation, each national interestgroup will have less significance and influence andthus, less capable of seeking protectionist policies.Another argument is that as each country in a regionaltrade agreement may have different preferences,compromises may result and thus, increase politicalefficiency and functioning of such an arrangement.Furthermore, the political economy of the internationaltrade often supports the regional arrangement,because it could be easier tonegotiate at that level.Kenya Tanzania UgandaKenya — 13.7 (0 *) 15.7 (0 *)Tanzania 0.45 (10.4) — 0 (0) *Uganda 0.24 (25.9) 0 (0) * —Notes: Data are for the year 1997 and indicate the destination and source ofexports and imports respectively as percentage of total exports and imports.Figures in parentheses are percentage of total imports. Figures for exports areread horizontally, while that of imports vertically. * These are so small andinsignificant that they are indicated with a zero.Source: Report of the Permanent Tripartite Commission for East AfricanCooperation: 1996-98.On balance, these are the reasonswhy countries like Kenya, Tanzaniaand Uganda should seek a betterinternational voice through a regionaltrade agreement.There is also the possibility for thesecountries to concentrate on tradingthose products on which they havecomparative advantages. At present,Kenya’s comparative advantage3

Table 2: Principal Exports in 1997 (as percentage of total exports)Product Category Kenya Tanzania UgandaTea 20.0 — 5.1Horticulture 11.4 — —Petroleum Products 5.9 — —Coffee 14.9 13.1 46.9Cotton — 16.2 —Manufacturers — 14.6 —Cashew Nuts — 10.5 —Minerals — 12.9 —Maize — — 2.9Fish & Fish Products — — 4.5Tobacco — 1.8 —Gold — — 12.3Others 47.8 30.9 28.3Source: Report of the Permanent Tripartite Commission for East African Cooperation: 1996-98.seems to cover a wide range of tradable services,whereas Tanzania’s strengths probably lay in itsnatural resources and Uganda has a strong agroindustrialproducts and food sectors.However, other factors are to be taken into accountwhile advocating for a regional trade agreementamong the EAC members. One such factor is themembership in multiple RTAs, which may causeconflict or confusion between numerous rules. Forexample, rules of origin, which is an integral part ofthe functioning of a trading system, may become toocumbersome to follow when numerous regionalarrangements are closely linked.The EAC members are part of a Cross BorderInitiative (CBI), among 14 African countries, whichseeks a market driven concept of integration inEastern and Southern Africa and the Indian Oceancountries. Kenya and Uganda are members of theCommon Market for Eastern and Southern Africa(COMESA). Another considerable and, oftenmentioned, factor is the magnetic pull of South Africathrough the Southern African DevelopmentCommunity (SADC).ConclusionsTowards the end of the 20 th Century, the EAC wasrevived with expectations and objectives similar tothose of the first attempt. The original treaty had fallenapart as the political and economic differencesplagued it from the outset. As the new incarnation isstill in its infancy, it is difficult to assess its progressand impact.However, there have been several developmentssince the demise of the first attempt. A lot of economicand political literature has addressed the subject ofsmall countries entering into regional tradeagreements. Some of the conclusions are encouraging,while others are not. Strictly from the point of viewof trade, it seems that the EAC may experience awelfare loss, as there could be a loss of tariff revenue.This loss may be replaced, to some extent, byincreased consumer welfare and thus, an increasedtax base.Perhaps the most significant gain could be moreforeign direct investment (FDI) into these countries,as a result of a bigger market size. However, thisperceived increase in FDI would crucially depend onpolitical stability in the region. The EAC must engageinto increased regional trade to guarantee that stability.Although an economic partnership agreement withthe European Community may not be a perfect optionfor the EAC, it would guarantee better access to alarge market for agricultural products and thus, alsopolitical support for a regional trade agreement amongthese countries.© CUTS 2001. This Policy Brief is produced by CUTS under a grant from HIVOS, Regional Office Southern Africa, Harare, Zimbabwe, to inform, educate andprovoke debate on issues of trade and sustainable development, and economic equity. Readers are encouraged to quote or reproduce material from thispaper for their own use, but as the copyright holder, CUTS requests due acknowledgement and a copy of the publication.This Policy Brief is researched and written by Jeremy E. J. Streatfeild for CUTS Africa Resource Centre, 4 th Floor, Main Post Office Building, P.O. Box 37113, Cairo Road, Lusaka,Zambia, Ph: 260.1.22 4992, Fx: 260.1.22 2789, E-mail: cutsarc@zamnet.zm, and printed by Jaipur Printers Pvt. Ltd., Jaipur 302 001, India. The paper is a part of the writer’sthesis presented to the Faculty of the World Trade Institute, Bern, Switzerland, under the Masters in International Law and Economics programme.Head office: D-217, Bhaskar Marg, Bani Park, Jaipur 302 016, India. Ph: 91.141.20 7482, Fx: 91.141.20 7486, E-mail: cuts@cuts.org, Web Site: www.cuts.org