Wednesday, 24 June 2020
By Oduor Ong’wen
In the first week of February 2020, President Uhuru Kenyatta and Prime Minister Emeritus Raila Odinga attended a widely-publicized Prayer Breakfast in Washington, D.C.
On the sidelines of this event, President Kenyatta held a bilateral meeting with his US counterpart President Donald Trump. The occasion was used to officially initiate a free trade agreement (FTA) negotiation between the two countries.
On March 23, 2020, the Trump administration, through the Office of US Trade Representative, notified the Congress of negotiating objectives for the reciprocal bilateral trade arrangement.
On June 22, 2020, the Kenyan Government, through the Negotiating Principles, Objectives and Scope released by the Ministry of Industrialization, Trade and Enterprise Development articulated what Kenya aspires to as the endgame of these negotiations.
The negotiations proper are yet to commence, but there are already many red flags signaling pitfalls ahead. The overall concern is that whichever way we look at it, this agreement, when concluded, will undermine efforts at regional integration at driving seat of which Kenya has been.
As a customs union, the East African Community of which we are the largest economy, has a Common External Tariff (CET) regime. This means whatever goods and services enter on a Most Favoured Nation (MFN) or other terms will be deemed to have entered the markets of the other five Partner States, yet these countries – all of them LDCs – are not involved in the negotiations.
It also doesn’t sit well with the African Continental Free Trade Area (AfCFTA) to which we signed last year.
There are other key concerns as below.First, the motivation for Kenya in these negotiations seems to be solely based on securing market access to the United States of America beyond 2025 when the Africa Growth and Opportunity Act (AGOA) lapses.
“We are trying to figure out which is going to be the path forward for our arrangement with the US post-AGOA while the Trump administration was seeking to “re-engineer its relationship with the continent,” said Macharia Kamau, the Principal Secretary for Foreign Affairs.
Since AGOA was a duty free, quota free market access for qualifying goods, one is driven to ask how a reciprocal arrangement builds on this regime.
Second, while United States Trade Representative Robert Lighthizer hailed the “enormous potential” for the two sides to deepen their economic and commercial ties, the extent to which any eventual deal would benefit Kenya economically is under question.
It is worth noting that while USTR has outlined the negotiating objective to its legislature, there is no indication that Kenya’s Parliament is seized of these negotiations.
According to the US negotiating objectives, the FTA between the two countries will bring about enhanced harmonization of rules and policies between the two unequal countries.
It is a widely accepted maxim that treating two unequal partners equally amounts to injustice.
Yet, this is what the US seeks to do as shall shortly become manifest. Among the list of negotiating objectives set out by the US, the trade in goods will include objectives such as ensuring “fair, balanced, and reciprocal trade with Kenya”, and securing “comprehensive duty-free market access for US industrial goods.”
Third, the FTA will compel Kenya to harmonize its trade policies and trade-related laws with those of the US in several existing areas as well as new areas such as labour, environment, investments, competition policy, and government procurement.
The latter three, as well as trade facilitation, are the “Singapore Issues” that Kenya led the rest of developing countries in rejecting at the Fifth World Trade Organization (WTO) Ministerial Conference in Cancun, Mexico, in September 2003.
Disappointed and infuriated, the then USTR promised to achieve these objectives through bilateral deals. Is that promise coming to pass?
Fourth, the proposed FTA also calls for strengthening “disciplines to address non-tariff barriers that constrain US exports” as well as expanding “market access for re-manufactured goods exports by ensuring that they are not classified as used goods that are restricted or banned.”
This is extremely dangerous for a country that has ambitions to industrialise. In the “Big Four” agenda, Kenya has focused on manufacturing, with a goal of raising the manufacturing sector’s share of GDP to 15 percent.
Disciplining the importation of used goods and imposition of tariff and non-tariff barriers are some of the administrative and policy interventions that the country may resort to in order to incentivize its local manufactures.
In its negotiating objectives, the US wants to close for good this policy space. I see nothing in Kenya’s negotiating principles and objectives that would address this potential pitfall.
Fifth, the Kenya-US FTA, according to the USTR Notice of Negotiating Objectives, also aims to secure “duty-free access for US textile and apparel products and seek to improve competitive opportunities for exports of US textile and apparel products while taking into account US import sensitivities.”
Kenya’s textile and apparel sector has the potential to play a key role in anchoring the country’s deeper movement into middle income status and in serving as a source of gainful employment for its fast growing, young population.
As a manufactured good, it offers opportunities for increased value capture and streamlined trade logistics, and for the building of skills and experience from the factory floor to management level. Based on these foundations, it therefore serves as a potential gateway to other manufactured goods, offering opportunities for Kenya to capture an increasing share of global trade and to advance economic diversification.
With AGOA, Kenya’s apparel exports to the US increased from US$8.5 million (KSh 850 million) in 2000 to US$332 million (KSh 3.32 billion) in 2014. Almost 40,000 workers are employed in the Export Processing Zones (EPZ).
While we do not advocate closing the doors on the US textile and apparel, duty free access would undermine the potential of this sub sector, which could be one of Kenya’s “quick win” areas as far our industrialisation drive is concerned.
Further, the US wants to secure “comprehensive market access for US agricultural goods in Kenya by reducing or eliminating tariffs” and providing “reasonable adjustment periods for US import-sensitive agricultural products, engaging in close consultation with Congress on such products before initiating tariff reduction negotiations.”
Kenya will have to eliminate “practices that unfairly decrease US market access opportunities or distort agricultural markets to the detriment of the United States, including: non-tariff barriers that discriminate against US agricultural goods, and restrictive rules in the administration of tariff rate quotas.”
This is the clincher. In her interest, the US wants a comprehensive market access while at the same time protecting her import sensitive farm products, thus limiting market access for Kenya’s agricultural products. Kenya’s negotiating principles and objectives document is manifestly silent on both the matter of governance of imports of agricultural products and access to the US market.
According to the US negotiating objectives, in the area of sanitary and phytosanitary measures (SPS), Washington wants to build upon WTO rights and obligations, including with respect to science-based measures, good regulatory practices, import checks, equivalence, regionalization, certification, and risk analysis, making clear that each Party can set for itself the level of protection it believes to be appropriate to protect food safety and plant and animal health in a manner consistent with its international obligations.”
Other SPS negotiating objectives for the US in the FTA include obtaining “commitment that Kenya will not foreclose export opportunities to the United States with respect to third-country export markets, including by requiring third countries to align with non-science based restrictions and requirements or to adopt SPS measures that are not based on ascertainable risk.”
In the Kenya’s negotiating objectives, the SPS provisions will be negotiated on the basis of EAC-US Cooperation agreement. In the “Cooperation Agreement Among the Partner States of the East African Community and the United States of America on Trade Facilitation, Sanitary and Phytosanitary Measures, and Technical Barriers to Trade,” the obligation of the US is limited to capacity building, including training, information exchange and cooperation between respective authorities.
There are no provisions about the US foreclosing export opportunities for EAC Partner States, including third countries (remember the US has NAFTA, for instance).
The US wants to ensure “high standards for implementation of WTO agreements involving trade facilitation and customs valuation” in the proposed FTA. Kenya is required to ensure that “all customs laws, regulations, and procedures are published on the Internet as well as designating points of contact for questions from traders”.
The June 22 proposed principles and objectives, like with SPS measures, defers to the EAC-US cooperation agreement. Again here it applies to the SPS provisions mutatis mutandis.
As already observed herein before, this is part of the Singapore Issues that Kenya and other developing countries fiercely resisted in the WTO. This concern similarly applies to Technical Barriers to Trade (TBT) negotiations where Kenya is to implement “decisions and recommendations adopted by the WTO TBT committee that apply to standards, conformity assessment, transparency and other areas.”
If we are to negotiate on behalf of promoting our local productive capacity, safety and citizens’ wellbeing, Kenya needs to have a strong position on this. Further, the US intends to “obtain commitments that Kenya will not foreclose export opportunities to the United States with respect to third-country export markets, including by requiring third countries to withdraw or limit the use of any relevant standard, guide, or recommendation developed in accordance with the TBT Committee Decision.”
Where is reciprocity in Kenya’s negotiating principles and objectives?
The USTR also listed several other negotiating objectives such as “ensuring that procedures facilitate e-commerce shipments and a simplified process for the return of domestic origin goods to meet the challenges disproportionately impacting small business e-commerce.”
Moreover, Kenya will be required to “provide for automation of import, export, and transit processes, including through supply chain integration; reduced import, export, and transit forms, documents, and formalities; enhanced harmonization of customs data requirements; and advance rulings regarding the treatment that will be provided to a good at the time of importation.”
On trade in services, the US intends to “secure commitments from Kenya to provide fair and open conditions for services trade, including through: rules that apply to all services sectors, including rules that prohibit discrimination against foreign services suppliers; restrictions on the number of services suppliers in the market; and requirements that cross-border services suppliers establish a local presence.”
Kenya’s position as expressed in the principles, objectives and scope is again fairly modest and likely to give the US a virtual free pass. Ordinarily requirement of the establishment of local presence in Mode 1 (cross-border services supply) is both a capacity building and employment creation issue.
The principles and objectives developed by Kenya are silent on Mode 4 services supply (movement of natural persons). It reiterates that the negotiations shall take into consideration Special and Differential Treatment (SDT). Developing countries have had difficulties with SDT as they are normally based on “best endeavor” undertakings.
Washington similarly wants to “retain flexibility for US non-conforming measures, including US non-conforming measures for maritime services,” while improving “the transparency and predictability of regulatory procedures in Kenya.”
The US also wants “competitive supply of telecommunications services by facilitating market entry.” In financial services, the US negotiating objectives include expanding “competitive market opportunities for the US financial service suppliers to obtain fairer and more open conditions of financial services trade.”
As part of “digital trade in goods and services and cross-border data flows,” the US wants to secure “commitments not to impose customs duties on digital products (e.g., software, music, video, e-books)” and “establish state-of-the-art rules to ensure that Kenya does not impose measures that restrict cross-border data flows and does not require the use or installation of local computing facilities.”
In her objects the US avers that Kenya must (my emphasis) agree to establish “rules to prevent governments from mandating the disclosure of computer source code or algorithms.”
All these are areas where Kenya has the highest potential for being globally competitive or strategic interest and where state support or other forms of discriminative support may be called for. It is totally absent in Kenya’s negotiating principles and objectives.
While in her negotiating objectives, the US wants to seek “provisions governing intellectual property rights that reflect a standard of protection similar to that found in US law, including, but not limited to, protections related to trademarks, patents, copyright and related rights (including, as appropriate, exceptions and limitations), undisclosed test or other data, and trade secrets.”
Kenya’s position is that “the text on intellectual property in the Kenya – USA FTA shall aim to reduce IP-related barriers to trade and investment by promoting economic integration and cooperation in the utilization, protection and enforcement of intellectual property rights.
It shall cover other intellectual property areas covered by Convention on Biodiversity, including genetic resources, folklore, traditional knowledge, and benefit sharing.”
What we, as a country, seek in covering these disciplines is unclear.On April 22, 2020, the US Chamber of Commerce made its comprehensive response to the USTR’s March 22 Notice of Objectives.
The broad areas addressed are as below:§ Single Comprehensive Deal: Conclude a single, comprehensive agreement that reflects an outcome on all issues under negotiation, as agreed by the parties, rather than seeking agreement on a subset of issues or pursuing a phased approach.
Trade in Industrial Goods: Eliminate all tariffs on industrial goods traded between the United States and Kenya, include a high-standard chapter on Technical Barriers to Trade (TBT) to address non-tariff barriers, and expand market access for remanufactured goods exports by ensuring that they are not classified as used goods that are restricted or banned.
1. Trade in Services: Secure high standard rules and open market access commitments to ensure access to Kenya’s services market, including obligations for new services. § Trade in Agricultural Products:
Address market access through tariff elimination and by resolving concerns about non-science-based restrictions on agricultural trade with a high- standard chapter on Sanitary and Phytosanitary (SPS) measures.
2. Protect Intellectual Property: Address intellectual property (IP) rights and enforcement as they relate to patents, copyrights, trademarks, and trade secrets to enhance U.S. and Kenyan leadership in innovative industries.
3. Protect Investment: Eliminate forced technology transfers, reduce barriers to foreign direct investment by ensuring non-discriminatory treatment, ensure a high standard of protection for U.S. investors subject to a high standard investor-state dispute settlement mechanism.
4. Good Regulatory Practices: Formalize a joint commitment to follow good regulatory practices, including sufficient advance notice and comment periods and in-depth consultations that include both domestic and foreign stakeholders.
5 Emerging Technologies: Promote effective regulatory cooperation to address emerging technologies and prevent unnecessary regulatory divergence. § Digital Trade:
Facilitate a mutual right to transfer and store data across borders for all sectors, prohibit data localization requirements, ban customs duties and taxes on electronic transmissions, promote risk-based approaches to cybersecurity, foster cloud use across sectors, ensure non-discriminatory and interoperable frameworks for the protection of personal information, and align any plans to tax digital services with international tax regimes.
6. Government Procurement: Establish open, fair, transparent, predictable, non- discriminatory, and value-based rules to govern government procurement.
7. Procedural Fairness for Pharmaceuticals and Medical Devices: Seek standards to ensure that government regulatory reimbursement regimes are transparent, provide procedural fairness, are nondiscriminatory, and provide full market access for U.S. products.
8. Section 232 Tariffs: Remove expeditiously the U.S. Section 232 tariffs on imports of steel and aluminum from Kenya. The US CC document went further to address sector-specific areas including, but not limited to:
(i) agriculture and biotechnology (market access). This is a window for the penetration into Kenya of genetically modified foods;
(ii) Automobile (compelling Kenya to access the US Federal Motor Vehicle Safety Standards);
(iv) customs and trade facilitation;
(v) digital trade; (vi) government procurement;
(vii) intellectual property; and small and medium enterprises (SMEs).So far, there is no similar document from the Kenya National Chamber of Commerce and Industry, Kenya Association of Manufacturers (KAM) or Kenya Private Sector Alliance (KEPSA).
The members of these organisations as well as Kenyan farmers stand to lose substantially should the US realize its stated objectives, which are supported by their chamber of commerce, and which they are likely to realize.
In conclusion, the Kenya-USA FTA portends a bad deal as our country will have to negotiate in areas where she currently has policy flexibilities; have to undermine the regional integration in both letter and spirit; and reverse the little gains of multilateralism in trade relations.
In the undesirable event that we must negotiate this FTA with Washington, our interests would be served best doing so as the EAC. No deal is better than a bad one. Rethink these negotiations.