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You are here: Home/News/Article/Potential US-Kenya trade pact meets with muted response

Potential US-Kenya trade pact meets with muted response

Potential US-Kenya trade pact meets with muted response
Published date:
Thursday, 20 February 2020
Author:
ELEANOR WRAGG
Source:

Following a meeting between US President Donald Trump and his Kenyan counterpart Uhuru Kenyatta earlier this month, Washington has officially initiated trade agreement negotiations with the East African country.

While United States Trade Representative Robert Lighthizer has hailed the “enormous potential” for the two sides to deepen their economic and commercial ties, the extent to which any eventual deal would boost trade is under question.

Kenya is far from the US’s biggest export market in Africa – South Africa holds that title. Indeed, it is currently the US’s 98th largest goods trading partner overall, with just US$1bn in annual two-way trade.

US imports from Kenya include apparel, tree nuts and coffee, many of which fall under the duty-free African Growth Opportunity Act (Agoa), which ends in 2025. Kenya’s imports are dominated by oil, chemicals, machinery and transport equipment – mostly from China, from which it buys around US$3.8bn of goods each year.

For Scott Eisner, president of the US-Africa business centre at the US Chamber of Commerce, a potential trade deal could open new doors for US exporters. “We have seen a long track record with the Kenyans, whether it be in the agriculture space or processing for companies in the horticultural processing space,” he says. “Beyond that, we have seen diversification on a number of fronts, whether you look at the digital economy and the Silicon Savannah, or at investments in medical devices and other industries involved in the health and wellness of the Kenyan population.”

He adds that the Kenyan market offers an “interesting solution” for US companies as the cost of doing business in Asia increases, particularly for the textile and garment industry.

Kenya’s growing middle class is also attractive to investors selling consumer goods. Research firm Oxford Economics ranks the country among the fastest-growing consumer markets on the continent, with consumer spending forecast to climb by 6.2% this year, after growing by 9.5% from 2015-2019.

However, Jacques Nel, the firm’s head of Africa macro research, cautions that these remarkable growth figures should be put into context. “In 2019, total consumer spending in Kenya amounted to around US$76bn. South Africa, with a population size similar to that of Kenya, recorded private consumption of around US$211bn last year,” he says.

Unlikely partners

As neither the largest nor the fastest-growing African economy – those titles are held by Nigeria and Ethiopia, respectively – and not even ranking in the top five US export markets in the continent, it is not immediately obvious why the US would choose Kenya for its first Sub-Saharan African trade deal.

“One reason for the likely US focus on Kenya lies with the heavy influence of China inside the country,” say IHS Markit analysts John Raines and William Farmer. The research firm considers Kenya to be China’s only ‘core’ Belt and Road Initiative (BRI) partner in sub-Saharan Africa, where strategic Chinese infrastructure investments are likely to be made.

Raines and Farmer also proffer that Kenya probably is seeking to re-engage with the US after it failed to secure from Chinese investors the required US$3.8bn billion in funding for stage 2B of its Standard Gauge Railway (SGR) project, first in September 2018 and again in June 2019.

For Eiser, the rationale may be more pragmatic still: “A couple of years ago, when Ambassador Lighthizer said that the US had an interest in negotiating a bilateral FTA with a country in Africa, the stated position was that the US was not going to go out and find suitors, but instead welcomed conversations with those who thought they had the potential to enter an agreement,” he says. “Quite frankly, I think there were a few countries that raised their hand with an interest, but Kenya was the one that might have raised its hand first or at least spoke loudest.”

Another blow to multilateralism?

A trade deal with a single African country also seems to fly in the face of progress made by the African Union and the nascent African Continental Free Trade Area (AfCFTA) to bring together the whole continent as one, unified trading bloc. A meeting between deputy United States Trade Representative C.J. Mahoney and African Union Commissioner for Trade and Industry Albert Muchanga last year seemed to indicate that talks might begin on a deal for US-AfCFTA trade, but it would appear that all bets are now off, with Muchanga stating to the media recently that the proposed new trade arrangement might break the terms of Kenya’s commitment to AfCFTA.

“We have provisions in the AfCFTA which require a country to notify us when it intends to enter into a free-trade agreement. Any preferences given to a third party must also be accorded to other members of the continental trade body,” he said.

If Kenya were to be found to have broken the terms of the AfCFTA, African trading partners would probably impose tariffs on imports from Kenya in retaliation, delay cargo at border crossings, and seize goods on the grounds of being substandard or smuggled, say IHS Markit’s Raines and Farmer. They add this would also increase the likelihood of other AfCFTA members breaking the terms of the agreement, including adhering to tariff liberalisation schedules.

“If anything, the US-Kenya trade agreement clearly reflects the Trump administration’s intention to move away from the multilateral approach to trade agreements to rather bilateral deals with countries in Africa, especially the fast-growing countries,” points out Vincent Phiri, economist at NKC African Economics. He says that the talks “undermine African leaders’ efforts to boost regional integration”, and put African manufacturers at risk: “US companies could almost certainly produce at lower costs and therefore offer cheaper products to local consumers, effectively crowding out local manufacturers. This will, in practice, work against the goals of AfCFTA,” he says.

For its part, the US is keen to downplay any allegations that a deal with Kenya would threaten the AfCFTA. “We believe this agreement with Kenya will complement Africa’s regional integration efforts, including in the East African Community and the landmark AfCFTA, and the US pledges its continued support to help the AfCFTA achieve its fullest potential,” says Ambassador Lighthizer, in a statement.

The US Chamber of Commerce’s Eiser agrees: “The juxtaposition of a US bilateral FTA coming in to support a broader regional approach for American investments and then overlay that with the African continental free trade area, the objective of which is to bring down trade barriers between markets, is really complementary, which is why we are supportive of both actions.”

 

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