An Overview of the EU-Kenya Economic Partnership Agreement (EPA)

On 18th December 2023, Kenya and the European Union signed an Economic Partnership Agreement that came into force in July 2024. The EPA provides duty-free, quota-free EU market access to all exports from Kenya, combined with a partial and gradual opening of the Kenyan market to imports from the EU. The signing of this agreement is in line with the Kenya Trade Policy which seeks to exploit the country’s international trade prospects further.

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The World Trade Organization’s Trade Profile 2023 indicated that Kenya’s total share of world exports stood at 0.03% as of 2021. Kenya’s imports have also been growing faster than its exports, leading to a huge balance of trade deficit that has put pressure on the Kenya shilling because of limited foreign exchange generation from export activities. As of 2022, Kenya’s total exports stood at approximately USD 6.7 million and total imports of approximately USD 19.6 million leading to a negative trade balance (approx.-USD 12.8 million). The unemployment of highly educated youth indicates the unexploited potential in the global trade in services market, which requires urgent attention.

Further, exports are composed of a few primary commodities due to limited capacity for value addition in the manufacturing sector and the relatively underdeveloped intermediate and capital goods industries. As of 2021, 58% of Kenya’s exports were agricultural products, 32% were manufactured products and 9.9% were fuel and mining products.

Kenya’s imports are also from a limited number of countries. The EU accounted for 15.7%, Uganda 12.3%, the United States of America 8%, Pakistan 7.2%, the United Kingdom 6.7% and other countries accounted for 50.1%.

In the EU, four countries out of the 27 EU member states accounted for a significant percentage of total Kenya’s exports to the EU. The export products were dominated by flowers, horticulture and traditional exports- coffee and tea. The EPA creates opportunities for Kenya to exploit market potential in the 27 EU Member States, beyond the traditional destination markets of the Netherlands, Germany, Belgium and Italy.

Background

Between 1990 and 2000 trade between sub-Saharan African, Caribbean and Pacific (ACP) countries and the Member States of the European Communities (later the EU) was carried out under the Lomé IV Convention. The ACP countries benefitted from a preferential tariff system for their trade with the European Communities.

This system was, however, in breach of the ‘most-favoured-nation’ (MFN) principle under the General Agreement on Tariffs and Trade, according to which preferential treatment granted to ACP countries should also be granted to other countries with a similar level of development. Consequently, the Cotonou Agreement, signed in 2000, included a provision allowing the EU to negotiate different EPAs with ACP sub-groups.

Since 1971, the United Nations has recognized least developed countries (LDCs) as a category of States that are deemed highly disadvantaged in their development process, for structural, historical and geographical reasons. Countries in this category face a higher risk of deeper poverty and remaining in a situation of underdevelopment and are characterized by their vulnerability to external economic shocks, natural and man-made disasters and communicable diseases. The main determinants for classification are:

1. Gross National Income (GNI)
2. Human Asset Index (HAI)
   HAI is a measure of the level of human capital. It is grouped into the health sub-index (comprising of under-five mortality rate; maternal mortality ratio and prevalence of stunting) and education sub-index (comprising of gender parity; index of lower secondary education completion and Lower secondary education completion rate).
3. Economic and Environmental Vulnerability Index (EVI)
   EVI is a measure of structural vulnerability to economic and environmental shocks.

The international community has committed to supporting the goal of integrating the LDCs into the multilateral trading system and increasing their participation in world markets. Trade-related international support measures for LDCs include preferential market access for goods, preferential treatment for services and service suppliers, special treatment and flexibilities to implement World Trade Organization (WTO) rules and certain regional agreements, and special priority in trade-related technical assistance and capacity-building.

The EU-Kenya EPA builds on negotiations for an EPA with the EAC partner states under the Cotonou Agreement. The EAC initially envisaged the EU-EAC EPA as a bloc-to-bloc agreement; i.e. the EPA could only enter into force after having been ratified by all EAC partners. However, following the reluctance of other partner states, Kenya with the approval of the other EAC countries proceeded to negotiate with the EU.

In line with the EAC principle of variable geometry, Kenya has been the only EAC country to ratify the EU-EAC EPA which remains open for all EAC countries. The reluctance of other EAC countries to ratify the EPA was likely predicated on their ranking as Least Developed Countries which enabled them to enjoy duty-free and quota-free access to the EU market without the requirement that they open up their markets to the EU.

There has been an indication by other East African States of their desire to ascent to the EPA. This follows the qualification to graduate from the LDC category by Rwanda, Uganda and Tanzania in 2024.

Key Issues

Market Access

The EPA provides free access to the EU market by removing tariffs and quotas on all Kenyan exports of goods (except arms). Kenya, on the other hand, will open its market partially and very gradually to imports from the EU.

Kenya will benefit from transitional periods with liberalisation being carried out over 25 years after the entry into force of the agreement. Imports from the EU which are categorised as goods of economic importance to Kenya will continue to attract customs duty, in order to protect them from competition.

The EPA will limit non-tariff barriers to trade including country-specific standards, rules of origin, and sanitary and phytosanitary conditions in the following ways:

• The EU will support Kenya in meeting more demanding requirements, thus improving its competitiveness.
• The rules of origin will be less stringent (i.e. permitting a possibly bigger proportion of foreign materials in the processed products) for Kenyan producers than for EU producers.
• The EU will still apply its own sanitary and phytosanitary rules for imports from Kenya.

The EPA will provide for a trade defence mechanism: in the event that there is an increase in import risks disturbing the economy of a country, it is possible to reintroduce duties on the product concerned. However, this is only available for a period not exceeding two years.

The EPA provisions bar the EU from granting export subsidies thus ensuring the products imported into Kenya are not disproportionately cheaper than locally produced products. However, there are no restrictions on subsidies by the EU to products in the EU market which raises concerns over the ability of Kenyan products to compete with subsidised goods in the European market.

Sustainable Development

The trade and sustainable development clauses commit to international standards and agreements on labour, gender equality, climate and the environment. This includes the International Labour Organization Declaration, the Beijing and Beijing+5 Declarations on Women’s Rights, the Paris Agreement on Climate Change and the Sustainable Development Goals. The EPA will also commit the parties to combat illegal wildlife trade, illegal logging and illegal, unreported and unregulated fishing.

The EU will provide aid and capacity-building support to help Kenya comply with these obligations.

Dispute Resolution

The Kenya-EU EPA sets out mechanisms to promote amicable settlements and prevent the escalation of disputes. The mechanism provides for successive steps ranging from consultations between the parties to mediation involving a neutral third party and then to the establishment of an arbitration panel. Failure to comply with the ruling of the arbitral panel may trigger the suspension of preferential market access.

Development Support

Under Annex VI of the EPA, the Parties acknowledge the support of the EU for development across a wide range of sectors. This is in line with the WTO’s Aid for Trade initiative of which the EU is the leading provider.

The partnership aims to promote an inclusive green transition focusing on the digital, climate, energy and transport areas, supported by smart, clean and secure investments from both the public and private sectors.

The EU is expected to provide support in the following manner:

• Enhancing the competitiveness of the Kenyan economy.
• Building the capacity of Kenyan businesses to trade internationally.
• Assisting Kenya in the smooth implementation of the EPA.

Opportunities

Growth in Trade

There has been a steady increase in exports to Western Europe throughout the years. The EPA grants Kenya quota-free duty-free access to the EU market which is likely to bolster trade, industry and the economy. As of 2022, 15.7% of all Kenyan exports were to the EU.

Earnings from exports to the EU went up by 39.9% in the first quarter of 2024 compared to the first quarter of 2023. The growth was largely driven by the increase in domestic exports of cut flowers and avocados, and re-exports of kerosene-type jet fuel to the Netherlands. It is expected that under the EPA exports to the European Union will increase further.

Industrial Expansion and International Competitiveness

The agreement supports the development of Kenya’s agricultural and industrial sectors. Agriculture remains the backbone of Kenya’s economy with 58% of the country’s exports being agricultural products. Access to the EU market increases demand for goods and bolsters local production. International trade provides opportunities for agricultural and industrial development through export opportunities for agricultural produce and industrial products. International trade has offered a platform for enhancing the country’s competitiveness through the opportunity for importation of raw material, intermediate products and capital goods that are much needed by the productive sectors, but which are either in short supply or completely unavailable in the country.

Balance of Trade and Balance of Payments

Currently, Kenya has a balance of trade and balance of payments deficit. As of June 2024, Kenya’s trade deficit stood at KES 386.1 billion while its current account deficit widened to KES 131.2 billion during the first quarter of 2024.

With duty-free and quota-free access to the EU market, Kenyan exports are expected to increase which in turn will improve its balance of trade and its current account balance by boosting export revenues.

Furthermore, the EPA is expected to attract more EU investment into Kenya due to the stable and predictable trading environment it creates. An increase in foreign direct investment is likely to improve the financial account balance.

Increased Investment

The opportunity for production for the global market, which is availed in the economy by international trade, remains the single most powerful incentive for increased investments – domestic or foreign direct investment.

Sustainable Development

The EPA includes enforceable commitments to sustainable development with an emphasis on labour, gender equality, climate and the environment.

Key Concerns

1. The gradual removal of tariffs by Kenya will inhibit the ability of Kenya to competitively manufacture goods and will undermine local industries resulting in over-reliance on imports. An assessment of the impact of the EPAs (published in 2005 by the United Nations Economic Commission for Africa but not officially endorsed by it) found that the EPAs would result in a trade expansion that would favour the EU rather than the regional partners, and in loss of revenue for all countries studied. Furthermore, as a result of the erosion of preferences arising from the continued liberalization under WTO, Kenya faces the problem of declining exports in EU and US markets caused by stiff competition as other countries similarly benefit from preferential access to the EU market.
2. The EPA risks undermining EAC trade with African regions or southern partners. The EPA includes an MFN clause that requires Kenya to extend any more favourable treatment it grants to a major trading economy or country to the EU as well. This means that if Kenya enters into a preferential trade agreement with another major economy, the same benefits must be extended to the EU. The obligation to extend favourable treatment to the EU could lead to trade diversion, where trade is shifted from regional partners to the EU. This could undermine efforts to strengthen intra-African trade and economic integration, which are key goals of the African Continental Free Trade Area Agreement.
3. The safeguard mechanisms against import surges due to tariff removal or reduction are difficult to trigger. The EPA includes specific conditions that must be met before safeguards can be activated. These conditions often require clear evidence that an import surge is causing or threatening to cause serious injury to domestic industries. The process to trigger safeguards involves multiple steps, including investigations, consultations, and notifications to the EU. This can be time-consuming and may delay the implementation of protective measures.
4. Effective participation in trade negotiation, however, requires a robust negotiation mechanism in the form of an institutional structure and negotiating team with requisite skills. Presently, with the exception of the National WTO Committee which is recognized as a permanent national structure for negotiation of the WTO issues, there isn’t a Standing Committee to undertake trade negotiations covering regional and bilateral trade negotiations. There also lacks a mechanism for ensuring that experts from line ministries and private sector institutions who are seconded to undertake specific negotiations remain as standing committee members to ensure institutional memory, consistency and retention of capacity for trade negotiations in a core group/committee of negotiators.

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