The United States of America (USA) has had deep and cordial relationship with Kenya since independence. In 2019, the USA was ranked the second leading export destination for Kenya after Uganda. The continued increase of Kenyan exports to the USA over the years is attributed to the preferential treatment under the Africa Growth Opportunity Act (AGOA).
AGOA is a non-reciprocal trade policy measure geared towards promoting a stable and sustainable economic growth and development of eligible Sub-Saharan Africa countries. AGOA started in the year 2000 as part of the Trade and Development Act of 2000 under President Clinton administration. It provides duty free quota free access to US market to eligible country or region which the US does not have an existing Free Trade Arrangement. The current AGOA Act lapses in 2025 after President Barrack Obama extended it for a further 10 years in 2015.
To take advantage of the AGOA opportunity, Kenya developed the National AGOA Strategy 2018-2023, which provides a framework to guide exploiting the readily available US market. This includes broadening the product base considering that Kenya uses less than 15 product lines out of over 6,400 product lines. The strategy also incorporates value addition, targeting new niche markets and addressing the supply side constraints to fully utilize the remaining five (5) years before the lapse of the AGOA Act. The question remains what next after the lapse of AGOA?
Kenya is regarded as a developing economy and, after the expiry of AGOA in 2025, has the option of accessing the US market under the Generalized Systems of Preferences (GSP) or negotiate a Free Trade Deal as provided for by Article XXIV of the General Agreement on Tariffs and Trade (GATT) 1994. Currently, the negotiations on the Kenya-USA Free Trade Arrangement are ongoing following his Excellencies President Uhuru Kenyatta and President Donald Trump announcement of the commencement of negotiations on 6th February 2020, expected to be concluded by 2022. The Free Trade Agreement under negotiations is a Preferential Trade arrangement that allows for a reciprocal trade between Kenya and the US. This means that both countries will eliminate tariffs completely on the goods and services traded, with a general goal of developing economies of scale and comparative advantage, which promotes economic efficiency.
It is important to note that the USA has signed Free Trade Agreements (FTAs) with 20 countries in the world, with Morocco being the only African country that has signed the agreement. The other countries include Australia, Bahrain, Canada, Australia, Chile, Columbia, Mexico, Korea, Costa Rica, Panama, Peru, Honduras, Guatemala, Dominican Republic, El Salvador, Israel, Jordan, Singapore and Oman. All these FTAs that the US has signed with various countries build on the basis of WTO agreement disciplines with even stronger and comprehensive disciplines than the WTO agreement (WTO Plus).
Trade performance of countries that have signed FTA with the US shows over 100 per cent growth in trade since the agreement came into force. For example, US exports to Morocco grew by over 504 per cent and imports by over 192 per cent for the period to 2019 since the signing of the FTA on 15th June 2004, coming to force in 1st January 2006. This saw elimination of tariffs on more than 95 per cent of all goods and services. Morocco is ranked 64th largest trading partner with the US, trading goods worth US$ 4.5 billion and services estimated at US$ 1.5 billion. These exports have supported an estimate of 12,000 jobs. Further, US is the second largest investor in Morocco, accounting for about 17 per cent of total FDI inflows.
For the case of Kenya, trade has always been in favour of the US over the years as shown in Figure 1. The value of Kenya exports to the US increased from Ksh 2.8 billion in 2000 to Ksh 51.9 billion in 2019, translating to 1,754% growth. Imports also increased from Ksh 10.08 billion in 2000 to Ksh 62.3 billion in 2019, translating to 518 per cent growth. The major Kenya exports to the US are textiles and apparels, which accounted for about 67 per cent of total exports in 2019. Approximately 70 per cent of Kenya’s exports have been under AGOA, with minimal exports under the GSP. Further, about 28 per cent of the export products have been accessing the US market on Most-Favoured Nation (MFN) basis.
Figure 1: Kenya US trade relations 2001-2019
Source: KNBS (2000-2019), Economic Surveys
The ongoing FTA negotiations between Kenya and the US are important to ensure Kenya retains the US market access after the lapse of AGOA. The FTA is not only going to eliminate the tariffs and enhance market access but also reduce the barriers in trade in services, intellectual property protection, enhance transparency, guarantee non-discrimination in digital trade products, ensure fair competition and effective labour and environmental enforcement, among others. With the FTA coming into place, trade ties between Kenya and the US will be strengthened. Kenya is strategically located within the East and Central Africa and presents a strategic point for US firms to set up and start producing locally to take advantage of the available regional market. This will see more Foreign Direct Investments (FDIs) in Kenya by US firms just like the case for Morocco and other countries in the FTA framework with the US. This will also create more opportunities for employment for the growing un-employed youth, both in the short and long-run.
Most Kenyan products access the US market duty free while products from the USA to the East African Community (EAC) pay custom tariff. The analysis in Table 1 below indicates that 64 per cent of USA exports to Kenya enter on duty free basis under the current EAC Common External Tariff (EAC-CET), with a few products attracting 10, 25 and 35 per cent duty, respectively.
Table 1: Kenya imports from the US in 2018 in Ksh
|Tariff||Product lines||% share of product/ tariff lines||Value of imports||% share of import values|
Source: Kenya Revenue Authority (2018)
A total of 1,285 (29%) product lines accessed the Kenya market on zero(0) duty while 1,149 (26%) product lines were under 10%; 1,817 (40%) product lines under 25% and a total of 223 (5%) product lines were under 35%, 50% and 60%. In terms of import value, generally, 64%, 12% and 15% of the imports were under 0%, 10% and 25% duty, respectively. This means that most US products come in on duty free basis, with a few product lines attracting duties of above 35%. Assuming Kenya is going to eliminate tariffs completely for the products imported from the US under the FTA framework, Kenya could lose revenue worth about Ksh 4.1 billion based on the 2018 data.
Assuming the FTA will not be in place by 2025, Kenya will be eligible to access the US market under the GSP terms for over 4,600 product tariff lines. However, product market access will be limited since about 279 tariff lines, including textiles and apparels currently eligible under AGOA, will not access the US market under GSP. This means that Kenya would start paying duty for a large and significant proportion of its export products, including a number of agro-based products (flowers, vegetables and fruits) and textile and apparel which will trade under MFN. Importantly, coffee, tea and macadamia would still attract zero duty even after the lapse of AGOA.
The deal that Kenya is going to strike out of the ongoing FTA negotiations with US is very critical. The lessons learnt from the negotiations in the Economic Partnership Agreement (EPA) between the East African Community (EAC) and the European Union (EU), the 1996 WTO Singapore Ministerial Conference Resolution on balance of payment safeguards and development provisions, and Article XIV(b) of GATS on environmental measures should inform the process. There is opportunity to protect Kenyan firms, like the case for EPA, by negotiating asymmetrical Rules of Origin (RoO) and tariff liberalization given the difference in the levels of economic integration between the two countries. Kenya should also be alert when drafting the provisions of the agreement not to compromise the economy in the long-run. It is also important to complete the negotiations within the stipulated time so as not to lose out on access to the US market after the lapse of AGOA in 2025.
For Kenya to benefit from the Kenya-US FTA, there is need to address the constraints on the supply side, such as inadequate infrastructure, and low productive capacity of the producers which limits the exports. As stipulated in the Kenya Integrated National Export Development and Promotion Strategy, export growth should be enhanced through diversification from the limited narrow export base composed of agricultural products. Kenya should work on the competitiveness of her products to retain and benefit fully from the Kenya-US FTA.
Authors: Kenneth Malot and Shadrack Mwatu