After Brexit, the UK may be in a position to revise the EU’s existing Economic Partnership Agreement (EPA) with the East Africa Community (EAC) to compete with the current contentious offering. But would granting the EAC’s desire to focus more on industrialisation be the correct path to take?
A Brexit opportunity
It is looking more and more likely that the UK will eventually leave the EU with some form of deal that will allow flexibility around how it trades with the world, and with whom. Regardless of opinions over Brexit, there comes a time where it is important to find the positives in a situation and a potential silver lining for this giant looming cloud.
Enter trade arrangements with the East Africa Community (EAC). It is now confirmed that the UK will mimic the existing EU trade relationships with the EAC if/when it leaves, but it is also well-known that the trade deal the EU has been negotiating has been met with constant pushback.
An Economic Partnership Agreement (EPA) solidifies the existing Cotonou Agreement trade arrangements into a full trade deal that provides the EAC with full duty-free and quota-free access to the EU market in return for market liberalisation and certain privileges, a model the UK is keen to copy.
However, the EU EPA with the EAC has yet to come into force because several EAC countries are refusing to sign it, questioning the benefits for the region and citing countless negative implications centred around stifling further industrialisation, a priority area.
As a naive opportunist, there seems to be an opportunity here for the UK to offer a better deal with a genuine win-win outcome, improving the deal by focusing on the industrial development the EAC wants. Ultimately if these demands are met, the UK could actually ratify the trade deal, a feat the EU has so far been unable to achieve.
Is industrialisation enough?
The EAC is determined that their trade arrangements with the EU/UK should promote industrialisation, looking at past successes of export-led economic growth. However, if the UK were to offer an EPA that indeed promotes industrialisation, there would surely need to be checks and balances in place to ensure this strategy is not just centred around trickle-down ideals.
Promoting industrial development is only useful if the benefits are experienced by all society, and not just existing sizeable companies looking to increase exports. So, how can this predicament be solved– can the UK amend the EPA so that it not only facilitates industrialisation in the region, but is inclusive and beneficial for society?
How could the EPA be improved?
This predicament can be broken down into two challenges. Firstly, the deal itself would need to be amended so that it is indeed more industrialisation-friendly.
There are several contentious trade policies that have been criticised for not focusing on industry, but some amendments could be made to these that would both benefit the EAC and not be too detrimental to the UK considering relatively small trade volumes with the region. Some greatly simplified examples of amendments are below, weighted in favour of EAC industrialisation:
- Market liberalisation
The EU expects 82% of tariffs on goods to be liberalised but the EAC see this as potentially damaging to its existing industrial competitiveness.
Solution: allow more key products to be exempt from liberalisation or slow the liberalisation schedule to allow companies more time to prepare.
- Export taxes
Considered an effective policy for promoting industrialisation, the EU banned the creation of new export taxes to keep primary imports cheap.
Solution: relax rules on the creation of new export taxes for specific primary products
- Most favoured nation
The EU wants to receive the same preferential treatment given to other countries by the EAC, potentially damaging intra-Africa trade.
Solution: allow the EAC to give some preferential treatment to its neighbours.
- Rules of origin
The EU has tough rules stating that 65% of a product must be made in the region, affecting the development of complex supply chains.
Solution: lower the rate to the US AGOA level of 35%.
- Development cooperation
Potentially a high-impact area for policy, the budget dedicated to promoting trade facilitation and access to trade is wholly inadequate.
Solution: the UK has the potential as part of its East Africa aid strategy to focus more on trade facilitation if it wishes.
Who would benefit?
The next step would be to assess the impact of these changes on real businesses, understanding that in order to have a positive impact the benefits would have to go further than supporting existing large-scale industrial businesses.
To analyse this in my forthcoming thesis, I set the potential changes to the EPA against a ‘typical’ agri-processing value chain, deemed as a good example of inclusive small-scale industrial development, and interesting findings emerged. Overall, the results showed that the improvements suggested would have a positive effect on the industrial elements of the value chain.
However, they would potentially have an adverse effect on elements of the supply side, in this case agricultural inputs. For example, changes such as export taxes promote raw material processing, but at the expense of existing raw material exports.
There are two takeaways. The first, generally speaking, is that there is an opportunity for the UK to put forward an EPA that would have a positive effect on the facilitation of industrialisation in the region. Considering this is a focus for all EAC countries, this seems like a positive change.
However, the second takeaway is that the research conducted provides an insight into the challenges and intricacies of trade policy centred on a specific goal. By targeting one area of the economy, industrial growth, and fine-tuning trade policy to facilitate it, there is risk that other areas of the economy will be damaged in the process.
While industrial elements may benefit, backward linkages may be particularly hard hit. Considering the numbers employed in agriculture and raw material extraction, the real question is whether the EAC’s focus on trade deals for industrialisation is indeed the correct focus.
Would a UK focus on industrialisation have the positive effects expected by the EAC, or end up hindering growth? Brexit provides an opportunity to revisit and improve trade relations with the EAC, but simply following the age-old model of development by structural change might not be the answer. The UK can do better.
Alistair Cowan is a MA Globalisation, Business and Development student at IDS (2017-2018), and is currently based in the East Africa region focusing on private sector and market systems development.