Discussion Paper No. 175 of 2015 on Implications of Economic Partnership Agreements (EPAs) on Kenya

Abstract

This study sought to examine the economic implication of EPAs on Kenya by analyzing trade relations between Kenya and EU, the implications of EPAs on regional trade and other trade arrangements, and the welfare effects on Kenya. Using trade statistics analysis and partial equilibrium approach, the study found that Kenya’s exports to the EU market are dominated by a narrow range of primary commodity exports that include cut flowers, tea, coffee, vegetables and fish. The perceived preference margins that Kenya is to enjoy with the conclusion of EPAs are declining, and will continue to decline in the future since the EU is also negotiating FTAs with other countries/regions, and that multilateral trade liberalization under the WTO implies continued decline of tariffs and other trade barriers in the future. On trade arrangements, the study found that the conclusion of the WTO Doha Round will increase competition in the EU market and reduce policy space and flexibility that Kenya has negotiated under the EPAs. Although the simulation results show loss of tariff revenue as a result of trade liberalization, these are compensated for through net welfare gains as a result of reduced consumer prices and also increased trade creation. On the policy front, the study recommends that for Kenya to benefit from EPAs, there is need to urgently address supply-side constraints such as inadequate infrastructure and low productive capacity of producers, which limit exportable surplus. Kenya should also enhance export growth and diversification from limited primary and natural resource-based commodities. In addition, Kenya must improve its competitiveness in order to retain and benefit from trade agreements such as EPAs because tariff and other trade barriers are decreasing over time in the international markets.