First posted on:
PIIE Trade and Investment Watch, 12 February 2020
The United States and Kenya recently announced that they would begin negotiations on a bilateral trade agreement. If successful, the United States would forge its first bilateral trade accord with a sub-Saharan African country; for Kenya, it would also be the first of its kind with an advanced economy.1 If they get it right, the pact would present a great opportunity for both: Kenya would be able to modernise and open its economy to foreign direct investment (FDI) and growth; and the United States would develop a modern framework to govern trade relations with an important African partner, which could serve as a template for trade agreements with other African economies, allowing it to tap into the region’s market potential and catch up to China’s presence in this part of the world.
Kenya currently enjoys unilateral trade advantages under the US Generalized System of Preferences (GSP), which benefits poor countries globally, and the African Growth and Opportunity Act (AGOA). Both are designed to provide access to the US market for eligible countries. But these preferences, while useful, are not a strategy for trade growth. They are limited to tariffs, can be unilaterally revoked – AGOA expires in 2025 – and are eroded each time the United States grants more secured market access to another partner. As important, lack of reciprocal liberalisation commitments in these programmes reduces their potential to drive domestic reforms that promote more efficient use of resources in the beneficiary country, limiting the expansion of its exports, and misses the opportunity to signal commitment to an open, business-friendly environment. These are benefits Kenya does not get from a preferential programme.
Moving countries from unilateral preferential schemes to reciprocal agreements is a long-standing US trade policy objective, undertaken when Central American countries moved from the Caribbean Basin Initiative to the Central American Free Trade Agreement in the early 2000s. Since then the United States has wanted to enter into free trade agreements (FTAs) in Africa as well.
A major concern about potential US-Kenya negotiations is that the parties could settle for a limited deal. Kenya would benefit from a deep preferential trade agreement, but it needs time to forge such an agreement and align its domestic political economy to support it. Kenya needs to revise some of its current trade policies and practices and tackle controversial issues head on. Plenty of challenging issues will need to be sorted out: high import tariffs on dairy, corn, and other products; sanitary and phytosanitary barriers, like import bans on genetically modified products or complex requirements on meat, dairy, and poultry; restrictions on government procurement; trade barriers in insurance and telecommunication services; and restrictions on FDI in combination with local requirements, among others. Practices such as closing borders or banning imports, like the recent episode of blocking Uganda’s milk supply, will come under pressure. Open consultations with the private sector, good mechanisms to improve coordination among government agencies, and broad communication initiatives would help Kenya get its domestic political economy right. In parallel, Kenya should address some of the main problems impeding private sector growth.
But for US-Kenya negotiations to deliver, Washington needs to move away from the one-sided bilateral deals recently favoured by the Trump administration and find the right template. The agreement should also be designed to effectively support regional integration.
Two-way trade in goods between the United States and Kenya amounted to over $1 billion in 2019 (Figure 1); at $391 million, US exports to Kenya included aircraft, plastics, machinery, and cereals; at $667 million, main US imports from Kenya comprised apparel, nuts, titanium, and coffee. The United States is Kenya’s third largest export market and its seventh largest source of imports (Figure 2). With Kenya’s economy growing at an average 5.6% for the past five years, and its leadership position as the trade heart of East Africa widely recognized, there is significant potential to expand the relationship.
Figure 1 US-Kenya goods trade totalled over a billion dollars in 2019
Figure 2 The United States is Kenya’s third largest export market and seventh top source of imports
Kenya has been one of the largest beneficiaries of AGOA. Thanks to increased FDI, in 2018 it was the number one apparel exporter from the region to the United States, with $4.7 billion in cumulated exports since the start of the programme in 2000. But to effectively move into a reciprocal relationship with benefits for both parties, it is critical to consider the following points.
First, recent US trade deals are not suitable models for Kenya. The drivers for a US-Kenya trade accord are not the same, so the right framework needs to be found. The US-China and US-Japan deals are very limited in scope, with neither reciprocal access to the US market nor binding enforcement mechanisms. The United States-Mexico-Canada Agreement (USMCA) includes some positive novel provisions, such as those on digital trade, but its protectionist approach toward rules of origin and intrusive plant-level labour and environmental inspections could restrict the pact’s potential and increase litigation and uncertainty.
Africa’s friends in the US Congress should push away from the USMCA model in favour of more “traditional” US FTAs. The kind of rules negotiated in the Trans-Pacific Partnership, with the type of commitments made by Vietnam in that negotiation, are worth exploring. A deep FTA would cover trade in goods and services, investment, intellectual property, and government procurement; secure access to each party’s markets with appropriate tariff phaseout periods; include rules-based dispute settlement mechanisms; be of indefinite duration; and avoid unnecessary constraints. If for political reasons, a short-term deal is favoured, it should be crafted in a way not to impede a better agreement later. Capacity-building measures should accompany the trade accord.
Second, a US-Kenya agreement must effectively support regional economic integration, which is another driver of economic growth. Kenya’s decision to pursue a bilateral agreement with the United States has generated controversy in the region. While a bilateral US-Kenya FTA may help spearhead modernisation of the East African Community (EAC) in the medium term, it would imply a deviation from the common external tariff, with implications for the movement of goods within the group. In addition, the African Union favoured negotiating a continent-wide FTA with the United States to leverage the strength of the recent African Continental Free Trade Area. As levels of interest and readiness vary across countries in the group, starting negotiations with one member can open the door for others to follow. But the agreement would need to deliberately support intraregional integration, by including, for example, provisions that would allow for the accession of other sub-Saharan African countries, potential cumulation of inputs for compliance with rules of origin, and others.
Finally, to increase its readiness to benefit from this potential trade agreement, Kenya would need to address constraints that limit private sector growth, including relatively high labour costs, corruption and bribery, unpredictable application of government regulations, delays in tax refunds, and others, while strengthening its framework for investors, including in the special economic zones. An FTA is not a panacea, for sure, but it can be a powerful driver of reform.
1. The East African Community (EAC), comprising Burundi, Kenya, Rwanda, Tanzania, and Uganda, finalized negotiations for an Economic Partnership Agreement (EPA) with the European Union in 2014. While Kenya signed and ratified the pact, entry into force has been stalled due to concerns from other EAC members.