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I am grateful for the unfailing support of Mr. Olivier Jammes (World Bank) and Marcelo Olarreaga (World Bank) for their assistance in conducting the SMART simulation using the WITS software. Mr. Yongzheng Yang (African Department) and my colleagues Mr. Kevin Cheng (Africa Department) and Ms. Lynn Aylward (Policy Development and Review Department) provided valuable comments.
EAC exports to the EU are principally agricultural commodities and minerals. Kenya’s exports are coffee, tea, cut flowers, and vegetables; Tanzania’s are gold, fish fillets, nuts (coconuts, brazil nuts and cashews), and coffee; and Uganda’s are fish fillets, gold, tobacco, and tea.
Generally, it is felt that such a tariff structure promotes anti-export bias in the structure of economic incentives. This is one aspect of the general distortion to relative domestic prices, and hence to resource allocation, caused by differentiated tariff rates. In theory, a uniform tariff applied to all imports or all exports (or both) will minimize domestic distortions, particularly if the exchange rate is market-determined. But the preferential rates accorded to consumer goods at the expense of capital goods and intermediate inputs will tend to bias domestic production toward consumer goods and away from exports, capital, and intermediate goods.
These are applied rather than bound rates, which are typically higher.
As illustrated in Figure 1, EAC members also belong to other regional trade arrangements including COMESA (Kenya and Uganda) and SADC (Tanzania), and this could create conflicting commitments with the EAC customs union.
The CET was introduced on January 1, 2005 but has not been fully implemented because the countries needed additional time to finalize the administrative arrangements including reprinting and circulating the ‘tariff books’ to reflect the new rates.
A 1999 report adopted by the EAC Secretariat had recommended that EAC countries adopt the Uganda tariff structure (of 0, 7, 15).
These temporary protection arrangements are designed to allow producers in Tanzania and Uganda sufficient time to restructure their operations to face increased competition from Kenyan imports.
Based on 2001 data the sensitive items are 16.1 percent of total imports in Kenya, 25.9 percent for Uganda, and 30.0 percent for Tanzania.
With a maximum tariff rate of 25 percent and low (or zero) rates on inputs, combined with the possibility that many sensitive goods may have higher rates, the distortions in the effective rate of protection can be large. This represents a major step backwards for Uganda.
This means that while tariffs are currently lower in Tanzania and Uganda, the nominal rates of protection may not vary considerably among EAC members.
Kenya imposes excise taxes on 459 items in the top tariff bracket with peaks of 50 and 70 percent. Suspended duties are applied to sugar, maize flour, and milk in the top tariff bracket.
The WTO agreement on customs valuation aims for a fair, uniform, and neutral system for the valuation of goods for customs purposes. The agreement provides a set of valuation rules, expanding and giving greater precision to the provisions on customs valuation in the original GATT.
Rules of origin are the criteria used to define where a product is made. Typically, they require that sufficient transformation occurs so that a product changes tariff line or a minimum of value added (for example, 35 percent within the region).
The economies of members of an RTA can also be both competitive and complementary. For example, in the North American Free Trade Agreement (NAFTA), the United States and Mexico have important industries but compete directly against each other; for example, textiles and clothing and consumer electronics. To some extent, the two economies are also complementary. In these circumstances, members can derive efficiency gains from an RTA but, to avoid trade diversion, must keep their external tariffs low.
The index is a measure of similarities between the export basket of one country and the import basket of another country. The value of the complementarity index can range from 0, which represents no complementarity between the exports and imports of two countries, to 100, which implies a perfect match. The higher the index between two countries, the greater the product complementarity.
SMART was jointly developed by the United Nations Conference on Trade and Development (UNCTAD) and the World Bank and has been widely used by negotiators of both bilateral and multilateral trade agreements.
SMART is a static partial equilibrium model operable under strict ceteris paribus conditions. It provides a snapshot of the projected impact of tariff reductions while disregarding any adjustment process accompanying this change. Thus, the dynamics that affect the change are not explicitly modeled, nor can complex variations in the setup be considered.
Some partial equilibrium models—e.g., Hoekman and others (2001)—assume products imported from different regions are perfect substitutes. In these models, the number of parameters to be estimated is smaller than in SMART. SMART provides baseline estimates of the elasticity of substitution of imports from different sources.
I am grateful to Olivier Jammes of the World Bank for helping me use WITS to conduct the simulations. In addition, Marcelo Olarreaga (World Bank) assisted in the derivation of the SMART equations for trade creation and trade diversion.
HS 1 (1996) nomenclature.
The EAC CET will significantly increase tariffs in Uganda and to some extent Tanzania and may not have a similar positive trade impact.
Note that the simulations are intended to analyze the effects on trade flows, and the results should not be used to make judgments about the potential impact on welfare.
A lot of these products are raw materials, capital goods, and to a lesser extent intermediate goods that moved from 5 percent and 10 percent to 0 percent.
This finding illustrates a weakness of static partial equilibrium because with higher tariff rates one would expect this would encourage regional producers to move into some of these product lines over time.
Such an approach has been characterized as a strategy of “open regionalism.”
World Bank (2003) estimated the revenue effects calculating a baseline using data on import flows, tariff schedules, excises, and VAT rates. The SMART simulations only used import flows and the tariff schedule for Kenya.
Tanzania has not publicly expressed its intention to join COMESA.
The Cotonou Agreement replaced the Lomé Convention after the latter expired in 2000. The agreement provides for the continuation of nonreciprocal trade preferences between the EU and the African, Caribbean, and Pacific countries until 2008, when they will be replaced by EPAs to be negotiated between 2004-2007.
World Bank (2000) argued that RTAs between developed and developing countries were potentially the most developmentally advantageous for developing countries.
Recall that world prices are assumed to be fixed given the assumption of perfectly elastic export supplies in every country c for every good g.