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Challenges abound as Africa seeks to penetrate global markets

Published date:
Monday, 10 August 2009

The expiry of the trade protection that has ushered in stiff competition from low-cost producers in Asia and US-originated trade barriers are the two major reasons Kenyan textile exports to the world’s largest economy are low.

The end of the multi-fibre agreement (MFA) trade quotas for textiles opened the US market to exporters of cheaper products from India, Bangladesh and Vietnam – who have now taken a bigger chunk of the US market.

The final nail in the coffin of textile manufacturers in Kenya’s Export Processing Zones (EPZ) was the removal in 2008 of safeguards against China textiles in the US.

Despite the US-pioneered African Growth and Opportunity Act (Agoa), Kenya’s main export to the United States remains textiles whose total value has fallen in time in absolute dollar terms.

At the end of 2008, total exports to the US were valued at about $246 million, a nine per cent fall from $270 million in 2005, the year in which the MFA came to an end, ushering in new competition.

The composition of Kenya’s exports world-wide, the US included, has changed little since 1976 except for increased clothing exports to the US.

The EPZ model itself was not adapted to the liberalisation of trade that occurred around the world since the conclusion of the General Agreements on Tariffs and Trade (GATT) in 1995.

Further many countries formed regional integration schemes that removed barriers to trade, drastically reducing the relevance of the EPZ model in Kenya.

The inability to compete with strategic competitors in Asia has wreaked havoc on local textile industry and led to the collapse of many textile firms.

After conducting a study titled Kenya Export Prospects and Problems, two economists from the World Bank, Francis Ng and Alexander Yeats, concluded that “aggregate United States import statistics suggest Agoa has not yet had a major expansionary influence on most African countries’ exports.”

It would appear that Agoa may have been targeted at increasing African oil exports to the US which has shown great thirst for the commodity as it is the world’s largest energy consumer.

According to data gathered by the World Bank researchers, over 80 per cent of the exports under Agoa were petroleum and oils with apparel and clothing come a distant second at just six per cent.

Significantly, another beneficiary of Agoa is the German car manufacturer, BMW. About five per cent of the exports under Agoa to the US were from South Africa’s BMW assembling plant.

The researchers said “Eighty per cent of the recent Agoa eligible exports consisted of petroleum products whose exports are highly concentrated in a relatively few African countries.

US import tariffs on oil are generally modest, except on gasoline, so it is unlikely that Agoa had a major expansionary effect here.

Second, about five per cent of Agoa non-oil exports consist of passenger motor vehicles.

These shipments originate almost exclusively in the Republic of South Africa and are the result of the recent opening of a local BMW automobile assembly plant.”

Trade and Finance ministers Amos Kimunya and Uhuru Kenyatta respectively are in agreement that Agoa has increased trade, but it has generally had limited impact on trade between Africa and the US.

They spell out three key challenges, namely, the inability to deliver the demanded products, strict quality standards and lack of direct flights to the US.

Speaking at the Agoa conference, Mr Kimunya conceded that “we need to address supply side constraints, product diversification and value addition,” especially in light of the fact that “the expiration of textile quotas and the end of safeguard measures to China have affected our textile exports to the US.”

In addition, there are measures being taken by Congress to extend trade preferences to Least Developed Countries (LDCs) and other war-afflicted countries, that may erode the gains due to Kenya under Agoa.

“Sub-Saharan Africa is the only region that has experienced a serious decline in apparel market share in the United States. This has forced the closure of dozens of factories and the loss of an estimated 100,000 jobs [on the continent].”

The textile and apparel sector faces challenges that include the restrictive rules of origin and high production costs.

Given that African textile mills cannot in general produce yarns or fabric in sufficient variety and quality, their ability to meet the requirements of developed country retailers remains a daunting task,” said Mr Kenyatta.

In a separate and revealing study nine years ago, Export Platforms in Kenya, a former adviser at the ministry of finance Graham Glenday and economic policy analyst Dr David Ndii found that Kenyan exports sunk to an all-time low of about 11.5 per cent of GDP in 1987 but began to rise again in 1992 following initiatives directed at increasing them.

While Kenya has increased its exports to the regional east Africa and Comesa markets, it has had limited success with initiatives such as EPZ and Manufacturing Under Bond (MUB).

Export schemes

The government introduced three export promotion schemes to promote labour-intensive manufacturers including MUB and EPZs as well as a duty and VAT exemption scheme known as EPPO (Export Promotion Programmes Office). While MUB and EPZs targeted new investments, EPPO was targeted at existing manufacturers.

MUB was set up in 1988 and refers to the bonded factories that are allowed duty-free import of plant equipment, spares and raw materials to manufacture goods for export as well as favourable income tax treatment of capital expenditures and zero-rating of input purchases.

The economy had performed poorly from the early 1990s and was virtually in a coma by 1992.

There was a need to improve the situation especially in view of the prevailing widespread poverty and the increase in political discontent that would culminate in the re-introduction of multi-party politics. However, it is not clear whether these three schemes were what caused the post-1992 success.

Environmental concerns

Currently, Uganda is Kenya’s largest destination of exports followed by Tanzania, the UK and the Netherlands in that order. Kenya’s exports to the EU are constantly hampered by reasons ranging from standards to environmental concerns.

Following independence in 1963, the model of development that the state had pursued was that of import-substitution with the intention to produce locally what would otherwise have been imported.

In this endeavour, the state created many parastatals in the 1960s and 1970s.

The intention was both to save foreign exchange and to increase the number of local jobs for a populace with high post-independence expectations.

It was not long, however, before the shortcomings of import-substitution became clear.

All it did was protect poorly performing, ineffective and non-competitive companies.

Although the factories could produce goods for local consumption, these goods were not competitive internationally.

Now, some experts are calling for subsidies to enable Kenya and other African countries compete for a sizable share of the American market.

Africa’s competitiveness

Said Dr Samuel Nyandemo, an economist at the University of Nairobi: “Farmers ought to be given subsidies as other countries are doing. They cannot compete in the American market where there are subsidies for farmers. I have listened to [US Secretary of State Hillary] Clinton discuss how we have access to sell 6000 products in the American market. That is fine but without value addition and subsidies that markets will remain difficult to access.”

Ms Clinton dished out $2.6 billion in total to 40 eligible African countries which amounts to an average of Sh5 billion per country.

The money is supposed to facilitate trade by increasing the continent’s competitiveness.

The major issue with African producers reaching the American market appears to be inability to compete with low-cost producers in Asian countries.

Even President Kibaki, while appreciating that trade between Africa and the US had increased six-fold between 2001 and 2007, observed that it still faces several challenges among them inadequate financing for exporters, stringent standardisation certification procedures, high transport costs and inefficient production procedures.

The Ng and Yeats study notes that infrastructure is a major impediment to Kenya’s competitiveness.

Quoting a 2003 research of more than 200 enterprises in the country’s main industrial towns, they noted that the state of the country’s infrastructure, especially with regard to electricity, water, freight transport, port-handling facilities, telephones, waste disposal, and security, had deteriorated substantially compared to a few years earlier.

There has been some improvement since 2003, but they have not been drastic, and their conclusions remain highly relevant.

The United States government has stressed the importance of improvements and modernisation in air freight services to enable African countries fully utilise Agoa preferences.

In a June 28, 2001 speech announcing the creation of the “Open Skies for Africa” programme, the then US Secretary of Transportation Norman Mineta observed that “without effective transportation links, national or global economies cannot continue to develop, function and expand.

Without a responsive transportation system, tourism and trade cannot develop to their full potential.” With specific regard to air travel, he noted that “Safe, secure and dependable air transportation is vital to the economic development and well being of the countries of Africa.

Developing a safe and secure aviation infrastructure is essential if African countries want to develop strong economic and trade relationships with the United States and other nations and regions.”

Clearly, as Ng and Yeats point out, higher transport costs including freight charges have negated the potentially positive effects of Agoa tariff preferences.

For example they pointed out that “Kenya appears to be at a transport cost disadvantage vis-a-vis other countries as its overall nominal transport costs are more than three percentage points higher than those of its global competitors.”

Trade efforts

As a result “Kenya’s transport cost disadvantage for apparel products is about three per cent higher than its competitors. This adverse margin offsets some of the positive effects associated with Kenya’s Agoa tariff preferences.”

The fact that increasingly trade efforts have been targeted at the East African Community and Comesa has further taken attention away from the Agoa opportunities.

The failure of EPZ and MUB schemes has not helped. The study by Glendy and Ndii found that they were not successful between 1993 and 1998, suggesting that they were stillborn.

Glenday and Ndii noted that “The export-dedicated MUB and EPZ platforms, targeting overseas markets, have been inconspicuous, with their combined cumulative share of exports over 1993-1998 amounting to just over one per cent of total exports. By contrast, exporters using the more flexible duty exemption programme have averaged 35 per cent of total exports, or over 50 per cent of the eligible processed and packaged exports, and over 75 per cent of exports of manufactures, largely targeted at the regional market.

Regional focus

These unfavourable macro-economic conditions have largely kept Kenya out of the labour-intensive manufacturing, notably garments, footwear and light assemblies.”

In 2008, Kenya exported 24 per cent of its goods to EAC countries and 32 per cent within the Comesa region.

This high regional orientation of Kenyan exporters is a recent development.

In the 1990-92 period, only 15 per cent of Kenya’s total exports were to Comesa, with figure rising above 30 per cent in the late nineties.

According to Glenday and Dr Ndii: “Besides the regional economic integration initiative, this trend is also a reflection of economic recovery and trade liberalisation in the region, hence an overall increase in import demand, alongside a down turn in the Kenyan economy, hence an added impetus for Kenyan firms to seek external markets.”

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