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KENYAS STATE OF AGRICULTURAL TRADE REFORM IN THE FRAMEWORK OF

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KENYAS STATE OF AGRICULTURAL TRADE REFORM IN THE FRAMEWORK OF ...

    Kenya’s State Of Agricultural Trade Reform In The

    Framework Of World Trade Organization

    (SHORT VERSION)

    PREPARED FOR

    THE WORLD BANK AND AFRICAN ECONOMIC

    RESEARCH CONSORTIUM

    BY

    Hezron Omare Nyangito

    KENYA INSTITUTE FOR PUBLIC POLICY RESEARCH

    AND ANALYSIS (KIPPRA)

    BISHOPS GARDEN TOWERS 2

    ND FLOOR

    BISHOPS ROAD

    P.O. BOX 56445

    NAIROBI

    TEL. 254-2-719933/4

    FAX: 254020719951

    E-MAIL: hnyangito@kippra.or.ke

    KENYA’S STATE OF AGRICULTURAL TRADE REFORM IN THE

    FRAMEWORK OF WORLD TRADE ORGANIZATION

I.0 INTRODUCTION

This paper analyzes Kenya’s state of agricultural trade reform in the framework

    of the World Trade Organization (WTO). The paper addresses two main

    issues, namely; (a) impact of implementation of the Uruguay Round of

    Agreement on Agriculture (URAA) focusing on where the country currently

    stands and evaluation of domestic adjustments arising from URAA

    changes in applied protection and other trade related barriers, and (b)

    analysis of the country interests and options for the new WTO round of

    negotiations focusing on market access, domestic support and export

    competition; and the new trade agenda.

I.1 IMPACT OF URUGUAY ROUND AGREEMENTS ON AGRICULTURE

    (URAA) IN KENYA

The Uruguay Round (UR) of multilateral trade negotiations which were

    completed in 1993 brought radical changes in the global environment for

    agriculture in terms of both institutional setting and the rules which govern

    broad agricultural production policies and agricultural trade relations

    among countries. For the first time, agriculture was fully embraced and the

    sector was formally brought under a more formal and relatively

    comprehensive multilateral set of disciplines through the approval of the

    Agreement on Agriculture (AA). The main objective was to remove past

    production-and trade-distorting practices and to facilitate a fair and

    market-oriented agricultural trading system. The main elements of the

    URAA are to improve market access; reduce domestic support measures;

    and to reduce export subsidies.

I.1.1 Implementation Status of URAA and Experiences in Kenya

Kenya became a signatory to the URAA in 1995 while it was in the process of implementing the

    structural adjustment programs (SAPs) which started in early 1980s. The SAPs are

    closely related to the AA particularly the principle of improved market access, which is

    closely linked to market liberalization. Thus, by the time of signing the AA, the county

    had already liberalized its markets and eliminated subsidies on agricultural production.

    However, the level of subsidies on agricultural production and exports was minimal even

    before the SAPs. Instead, it is argued that the government overtaxed producers rather

    than subsidizing them (Swamy, 1994). Therefore, it can be argued that Kenya found it

    easy to make commitments to AA because it was already implementing related policy

    reforms. The status of implementation of the specific AA for the country are outlined

    below.

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Market Access

Under these agreements, all member countries of WTO are required to tarifficate quantitative

    trade restrictions, to bind their tariffs against further increases and to reduce them over

    time (by 24% for developing countries). As a commitment to the WTO requirements, the

    government of Kenya gave a tariff ceiling binding of 100% for all agricultural commodities

    and has reduced all non-tariff barriers. Besides, the country had undertaken substantial

    trade liberalization since 1993 under the auspices of the SAPs and the Kenyan market is

    easily accessible to its trading partners. However, there are fears that the country does

    not have similar market access for its exports to its trading partners both in the developed,

    developing and least developing countries (LDCs). It is felt that the use of non- trade

    barriers such as the Sanitary and Phytosanitary Standards (SPS) by developed countries

    limits Kenya's access to such markets. Similarly, the special and differential (S&D)

    provisions used by developing countries and LDCs also limits Kenya's access to such

    markets.

    Domestic Support

Kenya presented a detailed Schedule on domestic support measures under URAA under the

    Green Box but not under Amber and Blue Boxes. However, it had already reduced its

    support on agriculture spending particularly on extension, research and delivery of

    services to farmers such as animal health, mechanization and credit under the SAPs.

    Available evidence indicates that Kenya used to spend about 10% of its total government

    budget on agriculture in the 1980s but this dropped to about 5% in 1990s (Nyangito,

    1999). The amount spent by the government on agriculture has been consistently lower

    (about 40%) for agricultural development services while recurrent expenditures

    dominated by salaries takes the largest share (about 60%). The worst hit services in

    agriculture are direct production services such as farm planning, artificial insemination,

    tractor hire, aerial spraying and animal clinical services. The low level of funding for these

    direct services means that the costs of these inputs to farmers for agricultural production

    have increased.

    Export Subsidies

Export subsidy commitments were introduced with a major objective of restricting

    disposal of subsidized surpluses of agricultural commodities in the world

    market, particularly from developed countries, which accentuate world

    price instability.

    These must be reduced from the base (1986-1990) by 24% in value (for

    developing countries) over an eight-year period, during which the

    subsidies cannot be increased. However, Kenya and many developing

    countries underused these provisions (Oyejide, 1997). Subsidized exports

    of several products are fairly small relative to what were allowed. The

    main reason for this is that few developing countries provide export

    subsidies and so the disciplining of this practice has no direct

    consequence for the country.

I.1.2 Impact of URAA on Price Stability and Agricultural Trade

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    The impact of URAA on agricultural trade can be illustrated using the effects on domestic price

    stability and patterns of trade in exports and imports. The case for Kenya is outlined below.

    Price Stability

    Price trends for agricultural commodities in Kenya show mixed trends. In real terms, the domestic

    prices for cereals (maize, wheat and rice) have increased since 1995, the prices of export crops (tea and coffee) fluctuated between 1995 and 1999, while the prices of industrial crops (sugar, sisal, pyrethrum and cotton) have remained almost constant during the period. The domestic prices for cereals have increased because of market liberalization policies, which removed the previous government controls and although the trade in cereals has increased food imports into the country, it is apparent that these have not depressed domestic prices. This is because of the government’s use of tariffs on food imports that help to keep domestic prices higher than the world market prices. The fluctuations in the prices for the export crops are due to movements in world market prices, which are determined by international supply and demand forces. The price of industrial crops depends on the local demand for the commodities, which is also derived from the demand for the manufactured products. Thus, the prices of these commodities is affected by the free trade in manufactured products such as textiles to which the increased supply into Kenya has reduced the demand for commodities (e.g. cotton) and therefore the low domestic prices for the commodities. Patterns of Trade

    The major trading partners for agricultural commodities for Kenya are the European Union (EU)

    countries for coffee, horticulture and tea, Asian countries for tea and coffee, and COMESA countries for tea and processed food products. The implementation of URAA

    has not greatly changed the trading patterns. This is partly because Kenya had a special trading relationship with the EU under the African Caribbean and Pacific (ACP)-EU Lome agreement, which, gave special treatment for exports (lower tariffs) from the ACP countries including Kenya. The COMESA countries have also special preferential trade arrangements amongst the members. Thus, the URAA enhanced the already existing

    market access for Kenya to EU and COMESA. However, for countries which Kenya did

    not have any preferential trade treaties before URAA, the rules can make it possible for the country to access these markets and therefore increase exports into these countries. But this has yet to happen on a large scale.

    Exports

    Kenya’s exports can be divided into traditional and non-traditional exports.

    Traditional exports include industrial supplies, coffee, tea and crude vegetable materials while, non-traditional exports include most of the horticultural products including flowers. The current structure of Kenya’s trade in exports indicates that there has been no marked difference in its composition since the country became a WTO member. Agricultural trade in food and beverages has not changed and it continues to dominate Kenyan exports constituting an average 53% of total exports over the period 1994 to 1998. An analysis of market access conditions for Kenyan exports indicates that the major traditional exports for Kenya (tea an coffee) do not have a problem of accessing markets in developed

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    countries. This is partly because, most Kenyan agricultural exports (73.2%)

    are exported into the EU where the applied tariff and non-tariff barriers

    were low. The schedule of tariff barriers in 1996 for the EU market

    indicates that they are higher for Food and Live Animals and Alcoholic

    Beverages (Mwega, 2000). These products are also subject to stricter

    non-tariff measures. Crude Vegetable materials, Animal and Vegetable

    Oils and Manufacturers had relatively lower tariff charges and less strict

    non-tariff barriers (NTBs). The reduction of tariffs and trariffication under

    URAA is therefore likely to benefit Kenya’s exports. However, erosion of

    the General System of Preferences (GSP) and those preferences that

    have been provided for LDCs (Kenya is considered a developing country)

    in the WTO Agreements are likely to hurt the country’s exports.

    Imports

    Industrial supplies dominate imports with a share of 36% of total imports into

    Kenya followed by machinery and capital equipment at about 15%. Food

    and beverage constitute an average of 8%. Imports into Kenya are less

    dispersed than exports. The EU imports accounted for about 33% in 1999

    having declined from 36% in 1994 while the rest of Africa accounted for

    about 10% and the rest of the World 41%. Imports have also remained

    relatively constant for USA while there has been a decline for Japan.

    Manufactured goods dominate the imports from EU, USA and Japan while

    African countries (South Africa for processed agricultural products and

    maize, and Uganda and Tanzania for maize and beans). Australia,

    Argentina, USA and Canada dominate imports of wheat. Given that

    developed countries export relatively low levels of unprocessed

    agricultural products, the threat of subsidized commodities from these

    countries to suppress domestic production (mainly food commodities) is

    lower.

    I.2 KENYA’S INTERESTS AND OPTIONS FOR THE NEW ROUND OF

    NEGOTIATIONS

    The URAA was a turning point in the history of agricultural trade, which has led to improved

    access to markets, and therefore expansion of trade opportunities worldwide. However,

    differences persist in the level of market access as committed by various members. The

    causes of the differences include border protection levels, discrepancies between applied

    and bound rates, trade-weighted and single average tariffs, tariff peaks, tariffication, high

    seasonal tariffs, application of tariff quotas and scope of special safeguards. As a result

    of the above differences, barriers to trade are still very high and a lot remain to be done

    before agricultural trade is as liberal as world trade in manufactures.

    I.2.1 Market Access

    Experiences of implementation of the rules so far identified by FAO (1999)

    indicates the following:

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    ? bound tariffs still remain high on sensitive products;

    ? tariff peaks are still important and widespread;

    ? actual border protection tariffs may have increased;

    ? the tariff structure is complex especially for the case of developing

    countries because of the increase in tariff lines;

    ? safeguards are used less than expected by developing countries;

    ? tariff escalation has been observed particularly for processed tropical

    products; and

    ? Sanitary and Phytosanitary measures (SPS) or technical barriers to

    trade (TBT) have nullified access to markets. These experiences raise concerns that Kenya and other developing countries

    should address in future negotiations.

    I.2.2 Domestic Support Measures

Domestic support provisions were a major innovation in the URAA and have been welcomed by

    many countries but there is a general consensus that these provisions have not been

    effective in reducing trade distortions and the impact has been limited (Pearce and

    Haddock, 1999). The majority of developed countries managed to package substantial

    previous support commitments into the blue and green box categories. Developing

    countries on the other hand were less adept at using opportunities for AMS exemptions,

    and many underplayed the importance of AMS by excluding, measures which should

    have been included either in green box submission or as part of the de minimis

    exemption. The SAPs programs, which many developing countries including Kenya were

    implementing before URAA commitments have also made many not to benefit from the

    provisions under the domestic support measures. Given the role agriculture plays in the

    economic development of many developing countries, a special clause may need to be

    introduced in the URAA to provide for provisions for development (Development Box)

    which will allow developing countries to support the agricultural sector more.

I.2.3 Export Subsidies

The reduction of export subsidies by developed countries that used this discipline more was

    initially significant and this led to a surge in international market prices, particularly for

    cereals. However, in 1998, there was an increase in the level of subsidies on food

    commodities because most developed countries used the provision within the URAA

    which allows for a “roll-over” of the value of permitted subsidies that are unused in

    subsequent years (UNCTAD, 1999). The impact of subsidized food imports from

    developed countries, particularly cereal grains, have been substantial in Kenya since the

    liberalization of the economy and implementation of the URAA which opened up the

    market for imports. The level of food imports has been substantial and this may be part of

    the reason for the decline in food production. As a result of this, there is a concern that

    export subsidies should be eliminated or prohibited.

    I.2.4 New Trade Agenda on Food Security Issues

As indicated above, the liberalized trade of the commodities and URAA has led to an increase of

    imports of foodstuffs mainly maize, rice, wheat, sugar and dairy products into Kenya. The

    impact of this on food security can be positive or negative. First, positive in the sense that

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     food imports can help to enhance access to food for the majority of the people in the The impact of reduced food export subsidies on Kenya, as a net food importing country through easy physical availability. Second, negative in the sense that the food developing country (NFIDC) is not clear and can be ambiguous. Since imports can dampen agricultural production and therefore limit access to food through

    limited income generation opportunities for purchase of the food. most food consumers in Kenya (about 80%) depend on agriculture (mainly

    food based activities) for their incomes, reduced subsidies on food imports

    are likely to raise domestic food prices, which will also lead to increased

    incentives to food producers. This is likely to benefit Kenyans in the long

    run as it can lead to increased food production, which can benefit both

    producers and consumers.

I.3 Specific Policy Concerns for Future Negotiations

Kenya’s concerns with respect to the new rules are presented below under the three main

    disciplines; market access, domestic support, and export subsidies. I.3.1 Market access

The major concern in market access for Kenya is to establish rules and disciplines that are

    genuinely fair for both food-importing and food-exporting countries, as well as for

    developed and developing countries. The objective of negotiations should be to maximize

    improvements in market access opportunities and to make the structure of tariff bindings

    for WTO members more uniform. In general, the URAA reinforces inequities in favor of

    developed countries because of numerous loopholes, which allow for tariff peaks to be

    set at high levels and tariff escalation to take place. Furthermore, there is a tendency to

    minimize tariffs for sensitive products while reducing tariffs on those products, which do

    not have high tariffs in the first place. These issues necessitate the need to review market

    access rules.

    I.3.2 Domestic support

The main issues for future negotiation on domestic support measures for Kenya are: First, there

    is need for establishment of a “development box" or flexibility within the “green box” which

    can allow developing countries to use domestic support measures and import controls as

    national government see fit to encourage food production for domestic consumption.

    Second, developed countries should be transparent and provide full information on what

    is actually included in the green box. Third, developed countries should undertake AMS

    reductions of measures in the green box. Fourth, the status of the blue box should be

    reviewed and done away with as most of the domestic support measures in it apply to

    developed countries.

I.3.3 Export subsides

Two major issues should be of concern for developing countries including Kenya. The first is the

    relatively small number of WTO members, which are now permitted to use export

    subsidies, and are therefore subject to reduction commitments. The second is the

    concentration of subsidy permits currently provided by the URAA whereby only 19% of

    the members are allowed to implement export subsidies and more than half of these

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    countries use subsidies for a narrow range of products. Because of the above reasons,

    Kenya’s concerns should be:

    (i) The need for further reductions or abolition of subsidies because they effectively

    give advantages to those countries, which have been prior users of export

    subsidies but they hurt those countries, which did not subsidize exports, or did so

    only minimally.

    (ii) Provision for prohibitions of export taxes as they received relatively little attention

    during the Uruguay Round negotiations.

    (iii) The need for transparency or prohibition of export credits since they provide a

    possibility of concealing export subsidies (e.g. low interest rates on capital value

    of exports or use of a low price at delivery date rather than the one prevailing at

    the payment period or vice versa).

    (iv) Clarifications of definitions regarding the status of subsidies which are not listed

    in Article 9:1 of the URAA to reduce uncertainty regarding the status of the various incentive arrangements aimed at agricultural exporters, including direct The agricultural sector in Kenya has shown mixed performance with liberalisation of the and indirect tax incentives.

    I.4 Conclusions economy and implementation of the URAA. Agricultural markets are fully

    liberalised and there is access to the Kenyan market with low tariff barriers.

    Liberalisation has also led to abolition of the marketing monopolies that existed

    for agricultural commodities resulting in low marketing costs and in some cases

    permitting increased prices to farmers but not in other cases. In some cases,

    uncontrolled imports have depressed incentives for production of some

    commodities and reduced incomes to farmers. Besides, under the liberalisation

    programmes, the government has reduced expenditure on the agricultural sector

    and encouraged cost sharing in the provision of services such as animal health

    and research. This is partly responsible for the poor performance of the sector.

    Given the importance of the agricultural sector in Kenya, the WTO rules will play an

    important role in its development. The domestic support measures are important

    with respect to determining an appropriate level of government support to the

    sector. Market access rules are important to allow Kenya sell its agricultural and

    agro-processed products to other countries. Finally, a reduction of export

    subsidies on agricultural products (mainly cereal grains and livestock products) in

    developed countries will ensure that such imports into Kenya do not depress the

    domestic prices, which provide incentives to farmers for increased agricultural

    production. The impediments that have been observed in the URAA should be

    removed in the next round of negotiations for the agreements to play a

    meaningful role in the development of the agricultural sector in Kenya.

    REFERENCES

Food and Agriculture Organization (FAO). 1999. Multilateral Trade Negotiations on Agriculture: A

    Resource Manual. Rome, Italy.

    Mwega, F.M. 2000. The GATT/WTO Agreements, Domestic Trade Policies and External Market

    Access: The Kenyan Case. Paper Presented during AERC-KIPPRA Workshop on WTO

    Agreements. September 11-12, Nairobi.

    Nyangito, H.O. 1999. “Agricultural Sector Performance in a Changing Policy Environment”. In

    Kimuyu, Wagacha and Abagi (Editors). Kenya’s Strategic Policies for 21st Century:

     8

    Macroeconomic and Sectoral Choices. Institute of Policy Analysis and Research (IPAR),

    Nairobi.

    Oyejide T. A. 1997. Africa’s Participation in the Post-Uruguay Round World Trading System.

    PSID Occasional paper, WTO Series No. 6. The Graduate Institute of International

    Studies.

    Pearce, R. and J. Haddock. 1999. Study on Agriculture in the Context of Preparation by Member

    States of the Islamic Development Bank for the Third WTO Conference and Future

    Multilateral Trade Negotiations. A paper presented for the United Nations Conference on

    Trade and Development (UNCTAD).

    Swamy, G. 1994. “Kenya: patchy, intermittent commitment.” In Husain and Faruqee, eds.,

    Adjustment in Africa . Lessons from Country Case Studies. World Bank. Oxford

    University Press. Washington D.C.

    UNCTAD. 2000. Current Developments on Issues of Interest to African Countries in the

    Context of Post-Seattle WTO Trade Negotiations.

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