Kenya industry safeguards place it on a collision path with WTO

Kenya faces a dilemma over continued protection of its manufacturers amid risk of reprisals from other World Trade Organisation (WTO) members aggrieved by its actions.

The global body has in its latest audit report for July 2015 listed Kenya among countries that are using tariff barriers to shield domestic producers against external competition and warned that such measures could restrict trade and weaken the prospects for full recovery from the global recession.

The survey released on July 23 by WTO Director-General Roberto Azevêdo showed that 104 new trade-restrictive measures (excluding trade remedy measures) were put in place globally in the reporting period October 16, 2014 to May 15, 2015 – an average of around 15 new measures per month.

This monthly rate has remained relatively stable since 2012, though the overall stock of measures nevertheless continues to rise.

Of the 2,416 measures recorded since October 2008, less than 25 per cent have been removed, leaving the stock of restrictive measures still in place at 1,828. This represents an increase of 12 per cent compared to the last report.

“This remains a cause for concern and continued vigilance is required from WTO members,” Mr Azevêdo says.

“The multilateral trading system has proven its usefulness in providing a predictable and transparent framework governing trade between nations and in helping members resist protectionist pressures as a response to the global economic and financial crisis and thereafter,” adds the WTO boss.

“This role in providing a stable, predictable and transparent trading environment should be kept in mind as members prepare for the WTO’s tenth Ministerial Conference in Nairobi in December.”

Protectionism

Kenya has over the past decade found itself flagged in the WTO roll of countries effecting restrictive administrative measures even as the government maintained a series of measures it said would assist protect local manufactures from cheaper imports.

A report by the WTO in 2009 pointed out that between 1996 to 2006, Kenya effected upward tariff adjustments of at least 15 percentage points on 250 products and goods, making it one of the top users of tariffs to protect domestic producers.

The administrative measures escalated following the onset of the global economic crisis with many countries resorting to using formal as well as informal contingency measures to shield their economies from external competition.

“It is no secret that manufactures have had a difficult time in Kenya starting from the time fuel prices hit the roof and the cost of power was unbearable. The state had to come to the aid of manufacturers and protect the little money they were making,” Patel Shah, a plastics dealer in Nairobi said.

Kenya in December 2014, for instance, offered temporary support measures for several goods and items under the duty remission scheme.

Among the beneficiaries were importers of duplex board products for exports of unit and folding boxes, corrugated boxes, flower sleeves, labels, paper and paperboard products, and BOPP film.

Others were importers of textile and textile articles, and staple fibres, glucose and glucose syrup, industrial sugar, wheat grain and completely knocked-down kits for motorcycles.

In his 201516 Budget, Treasury secretary Henry Rotich issued an extension on these administrative safety nets, further complicating Kenya’s case before the aggrieved WTO partners.

The minister in his budget handed a lifeline to manufacturers of fish nets, gas cylinders, plastic packaging tubes and food processors – long affected by competition from cheaper imports – when he said the government would implement a deliberate strategy to support local companies by increasing the import cost of non-essential goods.

Manufacturers of paper and paper board products that have been subjected to a stay of application of the Common External Tariff (CET) at the rate of 25 per cent will also have some relief. The tax has over the years made paper and paper board products more expensive for the packing industries and other users.

In order to lower costs, Mr Rotich proposed the withdrawal of the stay of application of the CET and subjected the products to 10 per cent duty.

Skin and raw hide processors also got a reprieve after Treasury moved to harmonise export duty on their products to avoid smuggling.

“In order to deter smuggling, the ministers for Finance have agreed to harmonise the export duty rate on hides and skins at 80 per cent of Free On Board value or $0.52 (Sh50.49) per kilogramme, whichever is higher. The harmonised rate will be implemented during the 201516 financial year,” Mr Rotich said.

Motorcycle assemblers also won further extension of a special tax waiver on imported parts, raising hope for growth of the sector. Motorcycles are a popular mode of transport in urban areas in the region for their ability to beat lengthy delays caused by incessant traffic jams.

They are also used heavily in rural areas where they offer more flexibility and wider reach as most areas suffer from poor road networks.

Harrison Mwakyembe, chairman of the EAC Council of ministers said the tax waiver would now be further extended to June 2016.

“In exercise of the powers conferred upon the Council of Ministers by Section 140 of the East African Community Customs Management Act 2004, the Council of Ministers has stayed the application of the conditions contained in Legal Notice No. EAC392013 of June 30, 2013 on duty remission for motor cycle assembly for one year,” he said in a gazette notice.

An earlier tax schedule by the regional tax schedule by the EAC Council of ministers, imported motorcycle parts – commonly known as completely knock down kits – would have attracted a 15 per cent tax starting July 1, 2014.

The implementation of the tax introduced in 2013 was, however, shelved for a year until June 31, 2015 following intense lobbying by manufacturers of motorcycles that have become a popular mode of transport especially in rural areas.

If implemented the unpopular tax move would mean that motorbike manufacturing firms will pay the full 25 per cent tax to import spare parts, which is the equivalent of duty paid for finished motorcycles under the EAC Customs Union protocol.

Only manufacturers who sourced for motorbike parts from any of the EAC member states were allowed to enjoy the 15 per cent tax waiver, according to earlier plans by the ministers.

The regulation applies in all the EAC partner states with each having varied duty remission rates. The duty remissions scheme, introduced eight years ago, allowed export-oriented manufacturers of commodities in the EAC bloc to pay reduced rates for import inputs instead of paying in full the 25 per cent common external tariff rates in line with the customs union protocol.

This is in addition to the requirement that manufacturers of the goods produced using inputs shipped in under the duty remissions scheme are supposed to sell up to 80 per cent of their products outside the EAC.

It means only 20 per cent of the goods manufactured using inputs that have benefited from the duty exemptions can be sold in the entire region.

Although these measures may be deemed beneficial to local manufacturers, a sustained use of tariff barriers may attract reprisal from other countries which felt disaantaged by them.

“Although the reports have confirmed that the overall trade policy response to the 2008 crisis has been significantly more muted than expected based on previous crises, they have also drawn attention to a number of worrying trends,” Yonov Frederick Agah, deputy director general of the WTO says in a brief.

“For example, while WTO members are showing restraint with respect to the introduction of trade-restrictive measures, the accumulative stock of these continues to rise.”

In the aftermath of the 2008 economic and financial crisis, the WTO was requested to enhance its trade monitoring and surveillance function, so as to provide members with all the information needed to collectively prevent the risk of backsliding into protectionism.

“Today, there is widespread agreement that protectionism is counterproductive. Faced with an economic downturn, the probability of governments resorting to protectionist policies that favour domestic producers always tends to increase” Agah says.

Pressure

“Politicians, under domestic pressure from trade unions and industry lobbies, may opt for policies that may appear to provide short-term benefits for their constituencies, but in reality end up hurting domestic consumers and damaging competitiveness,” he further says.

Despite the action by Kenya and other countries, the WTO reckons that though such measures should ordinarily aim at protecting domestic producers from dumping, there was no evidence that these countries were victims of such trading practices.

“Of the trade-restrictive measures introduced since 2008, fewer than 25 per cent have been eliminated. Similarly, a large number of behind-the-border measures are creating barriers to trade and are hurting businesses, in particular small and medium-sized enterprises,” Agah says.

In 2013, Kenya was caught in a brief tariff tussle with Zambia that for a moment threatened to escalate into a full trade row.
Zambia temporarily imposed duty on Kenyan exports in retaliation to Nairobi’s refusal to allow hundreds of tonnes of its sugar to enter the country.

About 10 trucks laden with Zambian sugar destined for the Kenyan market were detained at the Namanga border for more than three weeks, prompting Zambia to retaliate.

The Zambian government invoked provisions of the protocol of the Common Market for Eastern and Southern Africa (Comesa), which allows retaliation against unfair trade practices. The two countries are members of Comesa.

oodhiambo@ke.nationmedia.com