Objectives of the EAC Customs Union
The current EAC regional integration initiative has its origin in the Mediation Agreement for Division of Assets and Liabilities of the East African Community which collapsed in 1977.
In that Agreement, signed on 14 May 1984, there was a provision that the 3 East African countries (Kenya, Tanzania and Uganda), could explore areas of future co-operation. It was on that basis that the then 3 Heads of State held a Mini – Summit on the sideline of the Commonwealth Heads of Government and States (CHOGS) Summit held in Harare in November 1991, during which they announced their intention to re-launch the East African Co-operation.
On 30 November 1993, the three Heads of State signed an Agreement on the establishment of the Permanent Tripartite Commission for East African Co-operation. However, full fledged co-operation took root after the launching of the Secretariat in Arusha on 14 March 1996.
At the on-set, East African Co-operation generally viewed itself as a fast track for regional integration in the Eastern and Southern African region, particularly as fast tracking the COMESA integration initiative.
This was out of the fact that the 3 Member states - Kenya, Tanzania and Uganda, were also members of COMESA and at that time were trading under the COMESA trade regime. Within the COMESA trade regime, Kenya by 1999 had reached a tariff reduction of 90% while both Tanzania and Uganda were at 80%. Therefore, Kenya was granting the other 2 sister states preferential market access at 90% tariff reduction.
However, following issuance of a withdrawal notice from COMESA by Tanzania in September 1999, the 3 EAC Partner States agreed within the framework of the Treaty for the Establishment of the East African Community, signed on 30 November 1999 and came into force on 7 July 2000, to continue trading preferentially along the trade regime applicable at the time of signing of the Treaty.
A Protocol for the Establishment of the East African Community Customs Union was signed by the 3 East African Heads of State on 2 March 2004 in Arusha, Tanzania.
The Republics of Burundi and Rwanda joined the Customs Union in 2008 and started applying its instruments in July 2009.
Objectives of the Customs Union
While the objectives of the East African Community are broader and cover almost all spheres of life, the main objective of the Customs Union is formation of a single customs territory. Therefore, trade is at the core of the Customs Union.
It is within this context that internal tariffs and non-tariff barriers that could hinder trade between the Partner States have to be eliminated, in order to facilitate formation of one large single market and investment area. Similarly, policies relating to trade between the Partner States and other countries, such as the external tariffs, have to be harmonised. Therefore, within a Customs Union, Partner States have to behave as a single customs territory and trading bloc.
The aim of creating one single customs territory is to enable Partner States to enjoy economies of scale, with a view to supporting the process of economic development. Unlike in developed countries, economic integration is not just for purpose of trade per se, but as a vehicle for bringing about faster economic development.
Nevertheless, a Customs Union on its own will not bring about faster economic development. Therefore, it has to be supported by other measures such as development of infrastructure, to link production areas to markets. In addition, measures to support development of human resources across the region are similarly important.
Benefits of a Customs Union
On the average, the size of each of the EAC countries is around 20 million people in population with a GDP of around US US$20 billion. Such economies on their own are too small to attract any major meaningful investment in today’s globalised economy, where mass production is vital to reduce unit costs.
In 2000, with their total GDP of US$ 25.553 billion (Kenya - US$10.357 billion; Tanzania - US$ 9.027billion and Uganda - US$ 6.17 billion) and a combined population of around 86 million people, the 3 countries combined compared unfavourably with Vietnam with a total GDP of US$ 31.344 billion and a population of 79 million people. Vietnam would have been more attractive to investors since it is one customs territory.
By moving towards the creation of one economic region through the Customs Union, EAC created a single market of over 145 million people and a combined GDP of around US$ 147.5 billion (EAC Facts & Figures Report 2015). This large economic region can only be meaningful if it is more than a simple aggregation of neighbouring countries. Before the Customs Union, trade in the region was carried out under different external tariffs; customs regulations, procedures and documentation.
The EAC Customs Union has assisted to level the playing field for the region’s producers by imposing uniform competition policy and law, customs procedures and external tariffs on goods imported from third countries, which has supported the region to advance its economic development and poverty reduction agenda.
Further to this, the Customs Union has promoted cross-border investment and served to attract investment into the region, as the enlarged market with minimal customs clearance formalities, it is more attractive to investors than the previously small individual national markets. In addition, the Customs Union offers a more predictable economic environment for both investors and traders across the region, as regionally administered Common External Tariff (CET) and trade policy tend to be more stable.
Private sector operators based in the region with cross-border business operations are able to exploit the comparative and competitive advantages offered by regional business locations, without having to factor in the differences in tariff protection rates, and added business transaction costs arising from customs clearance formalities. The regionally based enterprises are also getting better protection, as enforcement of the CET is at a regional level.
Most importantly, however, is the signalling effect that arises from the Partner States agreeing to implement a common trade policy in their relationship with the rest of the world. This is important in view of the developments at the global level, where countries are entering into economic partnership as regional groupings.
Adjustment of the national external tariffs to the Common External Tariff has resulted into major welfare gains for consumers, if the CET on finished goods will be lowered as a result of such adjustment.
Scope of co-operation
The co-operation applies to any activity undertaken by the Partner States in the field of Customs Management, and includes the following:Customs administration; Matters concerning trade liberalisation; Trade related aspects including the simplification and harmonisation of trade documentation, customs regulations and procedures; Trade remedies; National and joint institutional arrangements; Training facilities and programmes on customs and trade; Production and exchange of customs and trade statistics and information; and The promotion of exports
The EAC Customs Union Protocol
The Protocol consists of nine parts as follows: Part A: Interpretation; Part B: Establishment of the East African Community Customs Union; Part C: Customs Administration; Part D: Trade Liberalisation; Part E: Trade Related Aspects; Part F: Export Promotion Schemes; Part G: Special Economic Zones; Part H: Exemption Regimes; and Part I: General Provisions.
The Protocol provisions on customs administration cover the following areas:
i) Communication of customs and trade information: Partner States shall exchange information on matters relating to customs and trade. A harmonised system to facilitate the sharing of information will also be operated.
ii) Trade facilitation: To facilitate trade, Partner States shall reduce the number and complexity of the documents required in respect of trade among the Partner States. Common standards of trade documentation and procedures within the community will be adopted.
iii) Simplification, standardisation and harmonisation of trade information: Partner States agreed to design and standardise their trade information in accordance with internationally accepted standards, including statistics.
iv) Commodity Description and Coding System: Partner States adopted the Harmonised Commodity Description and Coding System.
v) Prevention, Investigation and Suppression of Customs Offences: Partner States agreed to cooperate in prevention, investigation and suppression of Customs Offences thorough according each other mutual assistance, exchange of information, and consultations on establishment of common border posts.
Trade liberalisation refers to the removal of obstacles to free trade.
With the coming into force of the Customs Union Protocol, Partner States agreed to eliminate all the internal tariffs and other similar charges on trade between themselves. It was further agreed that the establishment of a Customs Union would be progressive in the course of a transitional period of 5 years.
Partner States immediately agreed that goods to and from Uganda and Tanzania shall be duty free. Goods from Uganda and Tanzania into Kenya shall be duty free; however goods from Kenya into Uganda and Tanzania were grouped into two categories: Category A goods were eligible for immediate duty free treatment; and Category B goods from Kenya into Uganda and Tanzania had the then present tariffs phased out over a 5 year period.
A 3-band Common External Tariff (CET) was also established with a minimum rate of 0%, a middle rate of 10% and a maximum rate of 25%. Partner States undertook to review the maximum rate of the common external tariff after a period of 5 years from the coming into force of the Customs Union.
Partner States agreed to remove all non-tariff barriers, and that no new non-tariff barriers would be imposed. They also undertook to formulate a mechanism for identifying and monitoring the removal of all these non-tariff barriers. This mechanism is currently in place.
Trade related aspects
a) Rules of Origin:
Rules of Origin are the laws, regulations and administrative procedures which determine a product’s country of origin. The Protocol provides that trade within the EAC will be conducted in accordance with agreed East African Rules of Origin. The EAC Rules of Origin form Annex 111 of the Protocol. A manual to guide the application of the EAC rules of origin has been developed. (Refer: EAC Rules of Origin)
b) National treatment:
This is the obligation that each nation must give imported goods the same treatment that they give to domestic or “national” products, i.e. there should be no discrimination. In this respect, Partner States agreed not to enact legislation, or apply administrative measures, which directly or indirectly discriminate against the same or similar products of other Partner States.
c) Anti-dumping measures:
Dumping occurs when imported merchandise is sold in the domestic market (or exported) at less than the normal value of the merchandise, i.e. a price that is less than the price at which the merchandise is sold in its home market. Partner States recognised the challenges dumping imposes on the domestic market. Anti dumping measures regulations form Annex IV to the Protocol. (Refer: Anti-Dumping Regulations)
Partner States that grant any form of subsidy that directly or indirectly distorts competition are required to notify the other Partner States in writing. (Refer: Subsidies & Countervailing Measures Regulations)
e) Countervailing measures:
For purposes of offsetting the effects of subsidies, a countervailing duty may be levied on any product of any foreign country imported into the Customs Union. (Refer: Subsidies & Countervailing Measures Regulations)
f) Safeguard measures:
Partner States agreed to apply safeguard measures to situations where there is a sudden surge of a product imported into a Partner State, under conditions which cause or threaten to cause injury to domestic producers.They undertook to cooperate in detection and investigation of dumping, subsidies and sudden surge of imports, and in imposition of agreed measures to curb such practices. (Refer: Safeguard Measures Regulations)
The Partner States agreed to prohibit any practice that adversely affects free trade, including any kinds of agreement (undertaking or practices that involve working in concert) that prevent competition.
h) Restriction and prohibitions to trade:
Partner States may introduce or continue with restrictions or prohibitions involving: the application of security laws and regulations; the control of arms and ammunition; the protection of human life, the environment and natural resources, public safety, public health and public morality; the protection of animals and plants It was agreed that goods to be restricted and prohibited from trade be specified in the Customs Law of the Community. (Refer: Prohibited & Restricted Goods)
i) Re-exportation of goods:
Partner States agreed to ensure that re-exports from their countries shall be exempt from the payment of import or export duties.
j) East African Community Committee on Trade Remedies:
The Protocol established the above committee. This committee handles any matters relating to the rules of origin, anti-dumping measures, subsidies and countervailing measures and any safeguarding measures that are provided for under the East African Community Customs Union. The committee is composed of nine members, three from each Partner State and its functions are clearly provided in the Protocol.
Export Promotion schemes
Partner States agreed to support export promotion schemes in the community for the purposes of accelerating their development, promoting and facilitating export-orientated investments, producing export competitive goods, and attracting foreign direct investment. Goods benefiting from export promotion schemes shall be primarily sold for export. In the event that such goods are sold in the community, the goods attract the full duties, levies and other charges provided for in the common external tariff. The sale of these goods within the Customs Union is subject to the authorisation by a competent authority, and such sales will be limited to 20% of the annual production of the company.
Other export promotion schemes provided for in the Protocol include:
a) Duty drawback scheme: Upon the exportation of goods to a foreign country, the drawback of import duties may be allowed in such amounts and on conditions prescribed in the Protocol.
b) Duty and VAT remission schemes: Partner States agreed to support export promotion by facilitating duty and value added tax (VAT) remission schemes. (Refer: EAC Duty Remission Regulations)
c) Manufacturing under bond schemes: This scheme allows imported goods to be used within the EAC territory for processing or manufacture. Duty and taxes are subsequently payable on compensating products at the rate of import duty appropriate to them. (Refer: Manufacture Under Bond)
d) Export processing zones: This scheme allows for the total relief from the payment of duty on imported goods used directly in the production of goods for export. Such firms are specifically authorised to carry out these activities in the zones. The Protocol allows for the approval of other export promotion schemes that may be deemed necessary. (Refer: Export Processing Zone Regulations)
Special economic zones
Freeports: The protocol provides that Partner states may provide for the establishment of freeports for the purpose of facilitating and promoting international trade and accelerating development within the Customs Union. Functions of the freeports are provided. The provisions further state that goods entering a freeport shall be granted total relief of duty and any other import levies except where the goods are removed from the freeport for home use. An authority to manage freeports will be established. The Protocol further provides for the establishment of other special economic arrangements for purposes of development of the economies of the Partner States. (Refer: Freeport Operations Regulations)
Partner States have agreed to harmonise their exemption regimes in respect of goods that are excluded from the payment of import duties. A harmonised list of exemption regimes was adopted as specified in the Customs law of the Community.
Partner States affirmed their adherence to the principles for the administration and management of disputes. Annex IX provides the EAC Customs Union Dispute Settlement mechanism. (Refer: Dispute Settlement)
Challenges of the Customs Union
While the Customs Union is generating major benefits, it has also brought about greater competition among domestic firms. In the short run, the firms that stood to gain most were those that were already competitive. It is with this consideration that the principle of asymmetry was adopted in the phasing out of internal tariffs, in order to provide firms located in Uganda and Tanzania with an adjustment period of five years. Nevertheless, such firms have in the medium term overcome lack of competitiveness, through:
(a) additional investment in newer production technologies;
(b) specialization in activities where they have a competitive advantage;
(c) Re-training of human resources; and
(d) Forming strategic alliances with their competitors
Another implication of the Customs Union is that it is minimising discretionary powers earlier enjoyed by Partner States, and which sometimes had created uneven playing ground for firms. Such powers, in particular, related to granting of exemptions from customs duties. The Partner States have undertaken harmonisation of their exemption regimes which shall be administered regionally. In some cases, this has been viewed negatively as reduction of national sovereignty.
In view of the current global trend where trade negotiations are increasingly being carried out under regional blocs, formation of a Customs Union in East Africa was not a matter of choice but a necessity. It would have been difficult for Partner States to negotiate a Free Trade Area (FTA) with other regional blocs unless they had liberalised trade among themselves. Due to the multiple memberships of the Partner States in other regional organisations, the EAC Customs Union could enter into a FTA with other trading blocs, or in the extreme circumstance, merge with them to make a larger trading bloc.
It is worth noting that countries which on their own have strong competitive economies such as Germany, France and the United Kingdom are strong supporters of the European Union (EU), which is still expanding, taking on board former less developed countries of Eastern and Central Europe. The USA together with Canada and Mexico have come together under the North American Free Trade Agreement (NAFTA), and want to expand taking on board countries of Central and Latin America. In Asia, the countries of South East Asia are revolving around Japan. Therefore, it will be difficult for small countries such as those of Africa to negotiate with such giants on their own.
The process of regional integration as stipulated in the Treaty for the Establishment of the East Africa Community aims at creating opportunities for the East African people. However, it will be difficult for the East Africans to realize such opportunities without deepening economic integration through formation of a Customs Union. Therefore, formation of the EAC Customs Union is a necessary step towards translating provisions of the Treaty into economic opportunities for the East Africans.