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Tax Application Stays Are Distorting Intra-EAC Trade, EAC Secretariat Nduva Cautions

The East African Community (EAC) Secretariat has raised concerns over the growing trend of partner states requesting stays of application of tax on products that are readily available within the region. This practice, while addressing immediate economic needs, is increasingly distorting intra-regional trade and complicating the implementation of the Common External Tariff (CET).

Background and Context

Since its establishment, the EAC Customs Union has been central to promoting economic integration across East Africa, aiming to eliminate tariffs on intra-regional trade and establish a uniform external tariff. The CET is structured under four bands—35 percent for products on the sensitive list, 25 percent for finished goods, 10 percent for intermediate goods, and 0 percent for raw materials and capital goods.

However, over the years, partner states have increasingly sought stays of application and duty remissions for specific products. These measures, although intended to support local industries and manage economic shocks, have led to inconsistencies in the application of the CET. Veronica Nduva, the EAC Secretary-General, highlighted this issue during the Kenya Private Sector Alliance (KEPSA)-EAC Roundtable in Nairobi, noting that these requests are undermining the very principles of the Customs Union.

The Impact of Stays of Application

Stays of application allow EAC partner states to temporarily suspend the agreed CET rates on certain products, either to impose higher duties to protect local industries or to lower duties to support imports of essential goods. While these measures can be crucial for addressing specific economic needs, they create significant challenges for regional trade.

Distortion of Trade: The frequent use of stays of application distorts the level playing field that the CET is supposed to create. Products that benefit from these stays cannot access the regional market at preferential tariff rates, which undermines the competitiveness of local industries within the EAC. This inconsistency in tariff application disrupts supply chains, increases business costs, and complicates trade logistics across the region.

Increased Business Costs: As highlighted by Ms. Nduva, the inconsistent application of the CET due to stays of application and duty remissions has led to increased business costs. Companies face uncertainty when planning their operations, as they cannot rely on a stable tariff regime. This uncertainty is particularly detrimental to small and medium-sized enterprises (SMEs), which are less equipped to absorb sudden changes in tariffs and duties.

Erosion of the CET: The continued requests for stays of application erode the effectiveness of the CET as a uniform policy against imported products into the EAC market. This erosion weakens the Customs Union’s ability to foster regional integration and economic growth.

Duty Remission and Its Consequences

Duty remission is another tool that has been widely used by EAC partner states. This measure allows local manufacturers to import raw materials and industrial inputs that are not readily available within the region at reduced tariff rates. While this supports local production, it also presents challenges.

Gazetted Manufacturers: Duty remission is typically granted to specific manufacturers who apply for the importation of a defined quantity of inputs at reduced rates. While this helps lower production costs and boosts local industries, it also creates disparities between manufacturers who receive duty remission and those who do not.

Market Distortion: Similar to stays of application, duty remission can distort the market by giving certain manufacturers a competitive advantage. Products produced under duty remission schemes may be cheaper than those produced without such benefits, leading to an uneven playing field within the region.

EAC’s Efforts to Address the Challenges

Recognizing the challenges posed by stays of application and duty remission, the EAC Secretariat is advocating for a more consistent application of the CET. Ms. Nduva emphasized the need for continued engagement between the private sector and governments to find solutions that safeguard regional trade and development.

Product Diversification and Value Addition: One of the key strategies proposed by Ms. Nduva is to focus on product diversification, specialization, and value addition in manufacturing. By developing industries that produce a wider range of goods, the EAC can reduce its reliance on imports and decrease the need for duty remission and stays of application.

Research and Market Assessment: The EAC Secretariat is also calling for more research and assessment of regional demand, local production capacity, and product quality. This would help identify gaps in the market and ensure that duty remissions and stays of application are applied only when absolutely necessary.

E-Tariff Tool: The introduction of an e-tariff tool integrated with customs systems is another significant step toward promoting the uniform application of the CET. This tool aims to streamline the management of duty remissions and stays of application, making the process more transparent and reducing the potential for market distortions.

The Role of KEPSA and Private Sector Engagement

During the roundtable, KEPSA Chairperson Jas Bedi expressed support for reducing stays of application, noting that the four-band CET structure is one of the simplest in the world. However, he acknowledged that non-tariff barriers (NTBs) have become a significant challenge, often complicating trade more than the tariffs themselves.

NTBs and Their Impact: NTBs, such as import bans, quotas, and complex customs procedures, are increasingly hindering trade within the EAC. These barriers not only increase costs but also create delays and uncertainties for businesses operating in the region. Addressing NTBs is therefore critical to enhancing intra-EAC trade and realizing the full benefits of the Customs Union.

Private Sector Involvement: Mr. Bedi urged the private sector to take full advantage of the CET and engage actively with governments to address the challenges posed by NTBs and stays of application. He emphasized the importance of collaboration between the public and private sectors in creating a more conducive environment for trade and investment in the EAC.

The Bigger Picture: Intra-EAC Trade and Economic Growth

Despite the challenges posed by stays of application, duty remission, and NTBs, intra-EAC trade has shown significant growth in recent years. According to Ms. Nduva, the value of intra-EAC trade increased by 14 percent to $12.2 billion in 2023, up from $10.7 billion in 2022. This growth is a testament to the success of the EAC Customs Union in fostering regional economic integration.

Trade Growth and Regional Integration: The EAC Customs Union has eliminated tariffs on intra-regional trade since 2005, resulting in a remarkable over 60 percent increase in trade within the region. The introduction of the non-tariff barriers reporting platform has also been transformative, helping to address and resolve NTBs more effectively.

Standard Harmonization: With over 1,000 standards harmonized across the region, intra-EAC trade has been significantly streamlined, ensuring consistent quality and safety of products and services. This harmonization has also facilitated the movement of goods across borders, reducing delays and lowering costs for businesses.

Conclusion: The Path Forward

The EAC’s efforts to promote regional integration and economic growth are commendable, but the challenges posed by stays of application, duty remission, and NTBs cannot be overlooked. To ensure the long-term success of the Customs Union, it is crucial that partner states commit to a more consistent application of the CET and work together to address the root causes of market distortions.

Policy Harmonization: Moving forward, greater policy harmonization is needed to reduce the reliance on stays of application and duty remission. This will require close collaboration between governments, the private sector, and regional bodies to develop strategies that support local industries while maintaining a level playing field.

Investment in Infrastructure: Addressing the broader challenges of industrialization, such as low electricity access, high costs, and poor infrastructure, will also be critical. By investing in these areas, the EAC can create a more competitive and resilient regional economy that is better equipped to handle global economic challenges.

Continued Engagement: Finally, continued engagement between the EAC Secretariat, partner states, and the private sector will be essential in finding sustainable solutions to the challenges facing intra-EAC trade. By working together, the region can unlock its full economic potential and achieve greater prosperity for all its citizens.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

19th August, 2024

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