TRALAC - Trade Law Centre

A deal is as good as local content laws that back it

Saturday, 22 February 2020 Published: | TOM MSHINDI

Source: Daily Nation (Kenya)

There has been disquiet over the fact that Kenya and the US have initiated talks that should culminate in the signing of an exclusive trade deal between the two, an agreement touted as the model the US will adopt in its trade relations with other African countries after the African Growth and Opportunity Act (Agoa) rolled out by President Bill Clinton in 2000 ends in 2025.

The unease is unnecessary. With the end of Agoa imminent, the US has to start thinking about what will replace it and piloting a model in one territory before rolling it out to others.

That it is Kenya being given that opportunity is not a privilege. The US simply has chosen a country that ticks most of the boxes for suitability.

Kenya is suitable because of its infrastructure, its human resource pool, its information technology base, which allows efficient exchange of information, and its location as a regional hub. The fact that it has agreed to house America’s counter-terrorist activities in the region helps a lot.

But what should worry Kenya and other regional countries is whether they are prepared to benefit from a post-Agoa deal. The 40 countries that have at one time or another been eligible have not earned much from the 20-year-old pact, which gives preferential (tax-free or reduced tax) access of designated goods into the US market.

A set of conditions attach to the qualification and retention in Agoa, including a country’s progress towards improving or entrenching rule of law, human rights, and respect for core labour standards.

Nairobi, which is generally seen as a better performer on the Agoa index, in 2018 exported goods worth about Ksh41 billion to the US. This is out of a total export value of about Ksh150 billion. The US, therefore, while an important trading partner, could benefit Kenya a lot more if the latter had fully exploited opportunities provided under Agoa.

In fact, more than 80 per cent of the value that the country has earned from Agoa is attributed to the textiles and apparel industry.

This is because this industry is the one that has largely met the Rules of Origin criteria of eligibility of entry into the US market: that the cost of the materials used plus the direct cost of processing must be equal to or more than 35 per cent of the total value of the product. This is based on the logical assumption that such preferential treatment should benefit industries in the originating country.

Rules of Origin form the bedrock of many, if not all, trade agreements. They apply in the East African Community and other regional blocs and will still apply in the African Continental Free Trade Area. And the fact that Kenya still does not have a Local Content Management regime is what should worry us as we start engaging the highly experienced US negotiators on a bilateral deal that will be applied more broadly after Agoa.

The country continues to improve its ease of doing business and this should trigger an increase in the flow of foreign direct investment. There is plenty more to be done and the recently launched Kenya Investment Policy is well detailed on this.

However, the value that is promised in any trade agreement with an external partner or bloc will only be fully unpacked if the country increases the amount or value of local content in its products. Without an improvement in this, it does not matter how attractive a trade pact you negotiate.

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