Implications of the Uruguay Round for Kenya

This paper studies the implications of the Uruguay Round for Kenya’s own trade regime and its external trading environment. The analysis indicates that Kenya did not undertake significant liberalization commitments under the Uruguay Round. There are however, several effects on Kenya’s external trading environment due to most-favored nation tariff cuts, erosion of preference margins, and changes in food prices. These effects are determined using simple computational techniques in a partial equilibrium framework. Overall, the results indicate that the effect on Kenya’s balance of payments in the medium-term may be negative but modest, and can be offset by pursuit of appropriate structural adjustment policies.

Abstract

This paper studies the implications of the Uruguay Round for Kenya’s own trade regime and its external trading environment. The analysis indicates that Kenya did not undertake significant liberalization commitments under the Uruguay Round. There are however, several effects on Kenya’s external trading environment due to most-favored nation tariff cuts, erosion of preference margins, and changes in food prices. These effects are determined using simple computational techniques in a partial equilibrium framework. Overall, the results indicate that the effect on Kenya’s balance of payments in the medium-term may be negative but modest, and can be offset by pursuit of appropriate structural adjustment policies.

I. Introduction

The Uruguay Round is in many respects one of the most far-reaching GATT rounds ever. its main achievements include improved market access for industrial and agricultural products, the inclusion of agriculture and textiles and clothing in the multilateral framework of rules and disciplines, integration of new areas such as services and intellectual property into the multilateral framework, and strengthened rules, procedures, and institutions.

Various studies have assessed the potential impact of the Agreement on different groups of countries. 2/ While the results vary across studies, all point to gains in real income for the world economy as a whole and for developing countries in general. Developing countries are expected to gain from increased market access due to reductions in most-favored nation tariffs, elimination of various quantitative restrictions, liberalization of agricultural trade, and phasing out of the Multi Fiber Agreement (MFA) governing trade in textiles and clothing and removal of other restrictions in this sector. 3/ Moreover, the binding of tariffs and other commitments made by developing countries themselves in the Round provide for more stable and transparent trade regimes.

There are, however, two potential adverse effects of the Uruguay Round Agreement that concern developing countries. The first relates to net food importing countries which may be hurt by higher prices of food imports following the liberalization of agricultural trade. 4/ The second relates to erosion of preference margins for developing countries in the markets of industrial countries due to increased competition from previously restricted, nonpreferred sources in these markets following generalized MFN tariff cuts and phasing out of the MFA. 5/ According to some estimates, these effects could be significant for some developing countries.

This paper studies the implications of the Uruguay Round agreement for Kenya. The choice of Kenya is motivated by the fact that it provides a good case study for illustrating some of the common concerns of developing countries, in particular, preference erosion. The analysis indicates that the main implications of the Round are in the context of Kenya’s external trading environment, mainly due to the erosion of preference margins in major industrial markets for some of Kenya’s key exports. Simple computational techniques are used to demonstrate these effects in a partial equilibrium, static framework. 6/ The study also examines the implications of the changes in world agricultural prices, expected as a result of the Agreement, for Kenya’s trade in agricultural products. The analysis reveals that agricultural price effects will have virtually no impact on Kenya’s import costs but may have adverse implications for Kenya’s export earnings due to lower prices for some key agricultural exports. Overall, the study suggests that the net impact on Kenya’s balance of payments in the medium-term will be negative but not large.

The paper is organized as follows. Section II examines the commitments made by Kenya in the Uruguay Round and their implications for its trade regime and imports. Section III analyses the effects of the Agreement on Kenya’s external trading environment. It discusses the structure of Kenya’s trade, the expected impact on Kenya’s exports due to changes in market access and preference conditions, the effect on Kenya’s food exports and imports due to changes in agricultural commodity prices, and the overall balance of payments impact. Section IV briefly discusses the status of Kenya’s commitments with regard to services, subsidies, trade related investment measures, and intellectual property rights. The concluding section provides a preliminary assessment of the Uruguay Round’s significance for Kenya and its importance relative to recent unilateral trade liberalization in the country.

II. The Uruguay Round and Kenya’s Trade Regime

The analysis in this section focuses on Kenya’s liberalization commitments with respect to trade in goods in the Uruguay Round and their implications for its trade regime. 7/ It focuses primarily on Kenya’s commitments in the form of tariff bindings for agricultural and industrial products.

Like many developing countries, Kenya chose a high uniform ceiling tariff binding of 100 percent for all items included in Annex I of the Agreement on Agriculture, to take effect with the entry into force of the Uruguay Round agreement. However, since this exceeds the currently applied rate for all agricultural imports, it has no significance for actual liberalization in this sector. For instance, applied tariffs on agricultural products are in the range of 0 to 45 percent and the average applied tariff in this sector has been in the range of 40 to 50 percent, significantly below the level at which agricultural tariffs have been bound under the Uruguay Round. 8/ Similarly, for the few industrial products bound under the Round, Kenya’s bound rates exceed the ad valorem base rates of duty, often by a significant margin (Table 1). Even where the bound rate lies below the base rate, the reductions are generally small and to be phased over five years. 9/

Table 1.

Kenya: Tariff Bindings in the Uruguay Round

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Source: GATT commitment schedulesNote: U indicates unbound duties.

Kenya has made no other commitments with regard to tariff reductions or concessions relating to quantitative restrictions. 10/ In this respect, Kenya’s unilateral steps to liberalize trade through general reductions in tariff levels, tariffication of quantitative restrictions, homogenization and simplification of the tariff structure, and removal of foreign exchange and import licensing restrictions and future trade reforms that are envisaged, are much more significant. 11/ These unilateral measures rather than the few and arbitrary tariff bindings that Kenya has committed to in the Round have been instrumental in creating a more liberal and open trade regime and also in terms of their impact on imports and customs revenues in Kenya.

III. The Uruguay Round and Kenya’s External Trading Environment

The Uruguay Round Agreement will affect Kenya’s exports in important industrial markets by changing conditions for market access and preferential treatment. These changes will result from tariff and nontariff liberalization commitments made by industrial countries in the Round. This section provides a brief discussion of the structure of Kenyan trade to highlight the key products and export markets that are relevant to assessing the impact of the Uruguay Round. Following this is a discussion of the methodology and results of the partial equilibrium analysis that was undertaken to quantify the effects on Kenya’s exports to selected destination markets.

1. Kenya’s export structure and the Uruguay Round

Kenya’s exports consist mainly of agricultural products, accounting for about 50 percent of total export earnings 12/ Among agricultural products, coffee and tea are the main export crops, accounting for over one-third of total export earnings, while the horticultural sector has become increasingly important in recent years. Manufacturing exports are about 46 percent of total exports with refined petroleum and food products accounting for almost half of total manufactured exports and the rest consisting of machinery, metals, chemicals, and textiles and leather products. 13/

The direction of Kenya’s trade is quite diversified as both industrial and neighboring African countries constitute important export markets. Industrial countries account for more than 50 percent of Kenya’s exports, with the EU comprising the largest share (about 39 percent). More than 70 percent of Kenya’s agricultural exports—mainly coffee, tea, and horticultural products- and about 40 percent of Kenya’s manufactured exports-mainly food and beverages, and leather, hides, and skins are directed to industrial markets. Neighboring African countries have grown increasingly important in recent years, accounting for about one-third of Kenya’s total exports and over half of Kenya’s manufactured exports, including refined petroleum, metals, cement, and machinery. 14/

Given the country’s export structure, the effects of the Uruguay Round agreement are likely to be concentrated in agricultural exports, particularly, coffee, tea, and horticultural products, and to a much smaller extent in industrial exports. The effects are also likely to be concentrated in industrial markets like the EU, since they absorb the bulk of Kenyan exports and also account for the main tariff and nontariff concessions in the Round relevant for Kenya. The impact on Kenya’s exports to developing country markets is likely to be limited despite their growing importance as trade partners, since the latter as a group have made no major concessions in the Uruguay Round that would substantially alter access to these markets. These observations on the product and market concentration of the effects on exports are broadly confirmed by Table 2 which summarizes the concessions received on Kenyan products in industrial and developing country markets. 15/

Table 2.

Kenya: Concessions Received on Exports

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Source: Finger, M. and U. Reinke (1994).Note: Agriculture includes estimated tariff equivalents of tariffied nontariff barriers.

2. Estimating the Uruguay Round’s impact on Kenya’s exports

This section presents the results of a partial equilibrium simulation exercise that was used to estimate the potential effects of the Uruguay Round on Kenyan exports. The exercise consisted of analyzing detailed commodity level data on Kenya’s exports to selected industrial markets, namely, the European Union, the United States, and Japan, and comparing the pre and post-Uruguay Round tariff and nontariff environment facing Kenya’s exports to these markets. 16/ Simple computational techniques were next used to quantify the implications of these changes in Kenya’s external environment for the value of Kenya’s exports to these markets, both at an aggregate level as well as for specific products of export interest and potential.

The analysis reveals that there are essentially two types of effects on Kenyan exports to industrial countries. The first relates to products on which Kenya faces MFN tariffs in industrial countries. For these products, the generalized MFN tariff cuts following the Uruguay Round will lower tariff protection and increase Kenya’s exports of these items. The increase in exports termed in this study as the MFN effect is calculated as the percentage change in price in the importing market times the import demand elasticity for the product. 17/ Data on Kenyan exports indicate that MFN tariffs are applicable to less than 5 percent of exports to the EU, Japan, and the United States. Hence, the MFN effect does not play an important part in the post-Uruguay Round period. 18/

The second effect pertains to Kenyan exports that currently receive preferential treatment in industrial markets under arrangements such as the Lomé protocol in the EU and the Generalized System of Preferences in the United States and Japan. 19/ For products subject to preferential or below-MFN rates, the generalized MFN tariff reductions will lead to an erosion of preference margins. This will result in a loss of exports as some trade will be diverted to previously non-preferred and efficient suppliers of these products. The preference erosion effect is calculated as the percentage change in the price of the product in the import market times the cross-price elasticity of demand for the import. 20/ The disaggregated commodity level data used for the analysis indicates that more than 90 percent of Kenya’s exports to the EU, Japan, and the United States enter under preferential rates, usually of zero. Hence, preference erosion is likely to be the dominating and deciding effect in the post-Uruguay Round period. 21/

Both MFN and preference erosion effects were quantified separately for Kenya’s exports to the EU, Japan, and the United States using the methodology described above. The results obtained for each market are provided in Tables 3 to 5, respectively, and the net impact on Kenya’s main exports across all three industrial markets is summarized in Table 6.

Table 3.

Kenya: Impact of EU Tariff Cuts on Exports 1/

(In thousands of U.S. dollars)

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Sources: IMF; GATT schedules of country offers.

Note that only exports exceeding US$1 million in value are shown in this table, but market access effects include all export items.

Table 4.

Kenya: Impact of Japan’s Tariff Cuts on Exports 1/

(In thousands of U.S. dollars)

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Source: IMF; GATT schedules of country offers.

Note that only exports exceeding US$100,000 are listed in this table, but market effects include all export items.

Table 5.

Kenya: Impact of U.S. Tariff Cuts on Exports 1/

(In thousands of U.S. dollars)

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Source: IMF; GATT schedules of country offers.

Note that due to data accessing problems for the U.S. in the Harmonized System, the data could not be obtained at the same level of disaggregation as for the EU and Japan. More broad product category level information is thus provided in this table.

Table 6.

Kenya: Summary Impact on Exports to the EU, Japan, and the U.S.

(In thousands of U.S. dollars)

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Source: GATT schedules of country offers.

3. Discussion of results

The results of this study indicate that the main impact of the Uruguay Round on Kenya will be in the form of preference erosion effects on Kenyan exports, with an estimated net decline of about US$7 million across the three markets, or 1.5 percent of the value of Kenya’s total exports to the three markets. These effects are likely to be spread out over the next five or six years.

Market-wise the impact is heavily concentrated in the EU. The EU accounts for 97 percent of the total impact with Kenya’s export earnings in this market estimated to decline by US$6.7 million compared to relatively minor declines of US$0.2 million in the United States, and virtually no impact in the case of Japan. In terms of the share of Kenya’s exports to each market that will be affected, these estimated declines translate into losses of 1.7 percent, 0.4 percent, and 0.5 percent in the EU, Japan, and the United States, respectively.

The effects are also highly concentrated in a few products. Agricultural products dominate, accounting for 85 percent or US$6 million of the total preference erosion effects. Within agriculture, two categories of products, namely tropical products which include coffee and tea and horticultural products which include cut flowers and bulbs, vegetables, and fruits, constitute the bulk of the affected products. In particular, preference erosion effects in tropical products account for nearly US$5 million or 70 percent of the total impact, primarily due to significant reductions of 50 percent or more in Kenya’s preference margins for coffee and tea in the EU.

Other exports also experience preference erosion effects on net, with an estimated decline in export earnings of US$1 million across the three markets. This decline is mainly concentrated in some food and leather products exports. There are small market access gains in the U.S. market, particularly in textiles and clothing, reflecting the present exclusion of certain manufactures from the GSP system of preferences and the gains to be realized from tariff reductions on these products.

Overall, the results of the simulation exercise reflect Kenya’s export structure and orientation. The dominance of the EU in these results is explained by the latter’s importance as an export market for Kenya. The dominance of agricultural products and especially tropical products in the total impact is explained by their importance in Kenya’s total exports as well as in Kenya’s exports directed at industrial markets in particular. The results also reflect the depth and coverage of preferences currently received in different industrial markets. Preference erosion effects are strongest where current preferences cover a wider range of products and at significantly below-MFN rates such as in the EU under the Lomé Protocols, compared to the less extensive preferences received in the United States and Japan under the GSP. 22/

In sum, the overall effects of the Agreement on Kenya are rather small both in absolute terms and as a percentage of Kenya’s exports to these markets, notwithstanding the fact that several of Kenya’s main export items such as coffee and tea will experience considerable reductions in preference margins. The significance of these losses is further reduced by the fact that they are likely to be spread out over a period of five or six years. Thus, given measures that can be undertaken over this transition period to improve capacity and competitiveness, to promote exports and diversify the export structure, and to continue the trade reforms of recent years, the preference erosion effects are likely to be dwarfed.

4. Impact of changes in world agricultural prices

The liberalization of trade in agriculture under the Uruguay Round is expected to cause changes in world agricultural prices. As noted earlier, several developing countries, particularly in Africa, have voiced concerns about higher prices of agricultural imports, especially food imports following the Round. In the case of Kenya, the analysis indicates that there is virtually no impact on the agricultural import bill. Instead, Kenya presents an interesting case where the price effects are felt mainly on the export side due to declines in prices of important agricultural export items.

Agricultural imports

Kenya’s agricultural imports constitute a mere 2 percent of total imports consisting mainly of wheat, rice, cotton, rubber, and vegetable and vegetable materials. 23/ Using recent estimates of the changes in the prices of these products following the Round and assuming a full pass through of these price effects to Kenya’s import bill, the impact on the value of Kenya’s agricultural imports was derived. 24/ These results are summarized in Table 7 and indicate that there is a very limited impact on Kenya’s costs of importing agricultural products. There is an increase of less than US$1 million across all of Kenya’s principal agricultural imports, mainly due to slightly higher cost of wheat imports. 25/ This constitutes less than 1 percent of Kenya’s total imports. The significance of this impact is further reduced by the fact that these price effects are not immediate but spread out over the transition period of the agreement in agriculture.

Table 7.

Kenya: Impact of Changes in World Agricultural Prices

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Source: Staff estimates, Goldin, I. and van der Mensbrugghe (1995), and GATT, Kenya TPRM (1993).

Agricultural exports

On the export side, the impact of these price effects is slightly larger. Using the same methodology as for imports, the impact of agricultural price changes on export earnings was derived. The results summarized in Table 7 indicate an estimated loss of US$6 million in export earnings due mainly to the expected decline in coffee and tea prices with minor declines in export earnings for the other products. 26/ This represents less than 1 percent of the value of total exports. However, the Kenyan case is useful for illustrating that the concern over agricultural price effects does not solely concern food importing countries but may also be important for developing countries that rely heavily on agricultural exports.

5. Overall balance of payments effect

The overall balance of payments effect is derived by combining the effects on imports and exports stemming both from the market access and agricultural price related effects discussed in the preceding sections. These results are summarized in Table 8. They indicate that on net there is a deterioration of about US$13 million in the current account balance mainly due to negative effects from preference erosion and reduced prices for major exports. This amounts to a little over 2 percent of the current stock of Kenya’s international reserves.

Table 8.

Kenya: Overall Balance of Payments Effect

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Source: The agricultural price effect related numbers are obtained from Table 7 and the export numbers are obtained from Tables 3 to 6.

The timing of these effects varies depending on the transition period for phasing in the commitments. For the most part, the full effects of preference erosion and agricultural price changes are likely to be felt in 2000/2001, five to six years after the entry into force of the WTO.

IV. Other Commitments in the Uruguay Round

One of the main achievements of the Uruguay Round is that it brings areas such as services, subsidies, trade related investment measures, and intellectual property rights into the multilateral domain of rules and disciplines. The following discussion examines Kenya’s commitments in each of these areas.

1. Services

The General Agreement on Trade in Services (GATS) requires countries to guarantee transparency and most-favored-nation treatment (nondiscrimination between foreign providers of services). 27/ In addition, countries are obliged to make specific commitments on market access and national treatment (nondiscrimination between domestic and foreign service providers) for services included in their schedule of commitments.

Kenya’s liberalization commitments in services do not significantly alter the present state of regulations and restrictions in this sector. Kenya is one of the seven African countries that have made commitments in more than 10 percent of all service sectors. 28/ In all, it has made 84 commitments across the communications, financial services, tourism, and transport sectors. For the most part it has committed not to impose any restrictions in these sectors. It has also made policy commitments for a given mode of supply within these sectors. 29/ In the tourism, communication, and transport services sectors for instance, Kenya has guaranteed not to impose any restrictions.

The main exception is the financial services sector where some restrictions remain with regard to commercial presence. These are mainly in the form of limits to the share of equity capital that can be held by foreigners such as for brokerage and insurance and reinsurance services. There are however, no restrictions on market access or national treatment in banking and other financial services including lending and financing transactions and consumer and mortgage credit services.

2. Subsidies

The Uruguay Round requires countries to reduce domestic and export subsidies in agriculture by prescribed amounts and over defined periods depending on the income level of the country. 30/ Kenya’s schedules do not contain such reduction commitments as it does not subsidize agriculture. For industrial products, developing countries with per capita GNP above US$1,000 are required to eliminate export subsidies. Kenya is exempt from this requirement as it falls below the threshold per capita income level.

3. Trade-related investment measures

The Uruguay Round Agreement covers some trade related measures such as local content, domestic sales, trade balancing, and foreign exchange balancing requirements. Countries that notified the WTO before March 1995 about their use of these prohibited TRIMs can avail of a transition period to phase them out. 31/ Kenya is among those countries with potentially prohibited TRIMs that failed to notify the WTO in time to avail of the transition period. In principle this implies that Kenya needs to eliminate these restrictions which consist of job creation and local sourcing targets that are used by the Kenyan government in deciding whether to approve foreign investments.

4. Intellectual property rights

The Uruguay Round agreement on intellectual property requires national treatment, high minimum standards of intellectual property protection in the areas of patents, copyrights, trademarks, industrial designs, and trade secrets, and commitments to ensure effective and timely enforcement of intellectual property rights. Kenya has five years to put in place the agreed minimum standards of protection along with an additional five years in areas where no protection had previously existed. The MFN and national treatment provisions however, are to be implemented within the first year of the entry into force of the WTO.

V. Concluding Remarks

This study indicates that the Uruguay Round agreement will not produce major gains for Kenya’s exports in terms of increased market access. For the most part, Kenya’s exports will experience a modest loss in export earnings due to reduced preference margins in key export markets like the EU. The effects will also be heavily concentrated in a few products and in a few markets.

The analysis also indicates that there may be modest adverse effects on Kenya’s export earnings due to a decline in world prices for its main agricultural exports. In the latter regard, the study suggests that changes in world agricultural prices following the Round do not concern only food importing developing countries. Both food exporting and food importing developing countries may stand to gain or lose from the changes in agricultural prices depending on the commodity composition of their agricultural trade and the extent to which there is effective trade liberalization in the agricultural sector.

On the domestic front, the study indicates that the Uruguay Round agreement will have little or no impact on the trade regime. Most changes will be determined by unilateral trade liberalization measures and reforms. The latter will also help mitigate some of the preference erosion effects resulting from the Agreement. Domestic measures to diversify and promote exports, to improve productivity, and other structural adjustment measures to adapt and respond to changes in the multilateral trading system could play an instrumental role in offsetting losses in export revenue due to preference erosion. These unilateral measures may also be important for creating and enhancing opportunities for improved market access.

In sum, given the relatively small magnitudes of the effects found in this study, their phased nature, and the scope for corrective domestic policy responses in the interim, the Uruguay Round Agreement is not likely to have a significant impact on Kenya’s balance of payments.