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EAC “trade wars” demonstrate importance of market integration agenda for regional industrial development

EAC “trade wars” demonstrate importance of market integration agenda for regional industrial development

02 Sep 2015

William Mwanza, tralac Researcher, discusses the ongoing “trade wars” amongst East African Community (EAC) member states

Industrial development has attained renewed focus across regional integration frameworks in Africa. In recent years, regional industrialisation policies and strategies have been developed and are being implemented. Although this is the case, the interaction between market integration and the attainment of industrial development on a regional level is not a straightforward affair. This is mainly because individual member countries are prone to implementing measures that run counter to their regional integration obligations as they pursue their national industrial policy objectives. This is in part due to private sector interests within national jurisdictions.

Recent media reports on “trade wars” between Uganda on the one hand and Kenya and Tanzania on the other are indicative of the tension in this nexus. In the first instance, difficulties have been faced with regard to restrictions on Ugandan exports of sugar to Kenya. In the second, challenges have also been encountered with exports of Tanzanian rice to Uganda.

Sugar is a heavily protected sector in the East African Community (EAC), with a 100% duty in the common external tariff (CET), on imports from outside the region. This is a sector in which Uganda has made efforts to develop its local production in recent years and has now said it has turned from a net importer to a net exporter of the product – a fact disputed by other quarters in the region. Challenges with sugar trade within the region date back to 2011 when a shortage was experienced throughout the EAC, affecting domestic prices in the respective countries. To address this challenge, Uganda, Tanzania and Rwanda are reported to have negotiated concessions to import sugar from outside the region at lower tariffs. Tariff quotas were hence granted variably by the EAC Council of Ministers. It is, however, reported that the import licensing system that was put in place to facilitate these imports has been abused by unscrupulous traders, who have imported far above the allowances that they were granted. It is alleged that sugar sourced cheaply from outside the region has been repackaged and re-exported within the region, particularly to Kenya, where sugar prices have remained high.

It was on this premise that Kenya barred imports of sugar from Uganda, resulting in an uneasy state of diplomatic relations with threats by Uganda to retaliate by restricting imports from Kenya. This matter was recently resolved in a meeting between the Presidents of Kenya and Uganda. Details on the discussions and how the matter was resolved are not clear. However, there are a number of important considerations in the market integration-industrial development nexus that immediately become clear.

First, there is a challenge for countries in the EAC customs union to make sure that their CET is designed and implemented in a way that enhances industrial development in different sectors across all the countries. Second, the import licensing system that was administered is not regulated by the EAC’s legal regime – including the EAC Treaty and Customs Union Protocol. As has been noted, the ad hoc administration of the licensing scheme is prone to abuse, which upsets market dynamics and adversely affects development of the sector in the respective territories. This is an aspect that would need to be addressed primarily through clear provisions in the grouping’s legal instruments. Third, the simple repackaging of imported sugar from outside the EAC for further export within the region is prohibited by the EAC’s rules of origin regime. It is through more effective implementation of the rules of origin and also development and implementation of a regional anti-counterfeit law (already in the plans of the EAC) that such illicit trade can more effectively be stemmed.

In the second matter, it has been reported that imports of rice from Tanzania have faced difficulties entering Uganda mainly due to an 18% value added tax (VAT) imposed on them by the latter. This is also a sector in which Tanzania has made efforts to bolster local production in recent years. However, there have also been allegations of illicit trade, whereby rice imported cheaply from outside the region is said to be repackaged in Tanzania and exported further into the region, including to Uganda. A government official of that country was quoted as stating that since the five EAC countries have not yet harmonised their tax laws, it is Uganda’s domestic tax laws that must apply, and under this, imports of rice from Tanzania attract VAT of 18%. He further went on to state that such a tax is important in the protection of domestic rice producers in Uganda.

The issues of rules of origin and a regional anti-counterfeit law discussed in the Uganda sugar scenario apply in this case as well. It is through more effective implementation of such measures that the alleged illicit trade can be curbed. However, there are other important aspects that this Tanzania rice case also highlights.

Importantly, as earlier stated, national governments are prone to protecting their domestic industrial sectors from imports as they seek their development. However, all measures that are implemented to develop these local industries have to be in line with their commitments under regional and global trade rules. With particular regard to the EAC market integration agenda, article 10 of the EAC Customs Union Protocol provides for the elimination of internal tariffs “and other charges of equivalent effect”. By 2010, internal tariffs among EAC countries had been totally eliminated. However, imposition of VAT on imports with the aim of protecting domestic industries would see such a tax having the equivalent effect of a tariff, in direct contravention of article 10 of the Customs Union Protocol. For such internal taxes to be administered on imports correctly, they would also have to similarly be applied on the same or like domestic products, as stipulated by the national treatment provision in article 15 of the Customs Union Protocol.

The supply of cereals grown, milled or produced in Uganda (which includes rice) was exempt from VAT until 2014 when this exemption was removed. The exemption was, however, reinstated in 2015. Hence, for as long as local rice in Uganda attracts a VAT rate of zero while that imported from Tanzania attracts the VAT rate of 18%, the latter tax being imposed on the imports is not in line with the national treatment provision of the EAC Customs Union Protocol. This should be rectified by ensuring that the rate of VAT imposed on local rice and imported rice is the same. Harmonisation of domestic tax laws of the EAC countries can play an important part in addressing such disparities, particularly where they may exist with respect to other products imported into Uganda or the other EAC countries. This is an aspect that is yet to be implemented within the framework of the EAC Common Market. In any case, the absence of such harmonisation cannot be used as a basis to implement domestic tax laws at the expense of regional commitments. Article 8 (4) of the EAC Treaty provides that “the Community organs, institutions and laws shall take precedence over similar national ones on matters pertaining to the implementation of [the] Treaty”. Hence, the national treatment provision needs to be observed by ensuring that national tax laws are in line with its requirements.

The two foregoing cases indicate how industrial development efforts are being made in different sectors by EAC countries, but how illicit trading and protectionist tendencies can undermine their effective development. Far from being a stumbling block or source of confrontation, the market integration framework of the EAC exists to ensure that such industrial development is well attained, particularly on a regional level. Difficult as they may be, the challenges being encountered present opportunities for greater cooperation between EAC countries, which through the effective use of respective instruments and provisions of the market integration agenda, can ensure that different sectors in different countries are being developed more effectively.

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Sources:

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EAC. (2012). EAC Industrialisation Policy. [Online]. Available at: http://www.tralac.org/images/Resources/EAC/EAC%20Industrialization%20Policy%202012.pdf

EAC. (2000). Treaty Establishing the East African Community. [Online]. Available at: http://www.eac.int/treaty/

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Government of Uganda. (1996). Value Added Tax Act 1996. [Online]. Available at: http://www.ulii.org/ug/legislation/consolidated-act/349

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Government of Uganda. (2015). Value Added Tax (Amendment) Act. [Online]. Available at: https://www.ura.go.ug/openFile.do?path=//webupload//upload//download//staticContent//TOPMENU//9287//9291_9261_Vat_Amendment_Act_2015-2.pdf

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