Trade Agreements, Technical Regulations, and Standards: Competitiveness Implications for Kenyan Exporters to European Union

Abstract

The European Union imports over 22.4% of total Kenyan exports and is market to over 51.3% of Kenya’s untapped export potential. However, there is a dearth of knowledge on how trade agreements, technical regulations, and standards influence competitiveness of firms exporting to the market. This study uses customs firm-product (HS 2 digit)-destination data ranging from 2007 to 2020 to examine the competitiveness implications of trade agreements and the resultant technical regulations and standards on firms that export to the European Union. The stylized facts demonstrate that countries offering the largest preferential margin to exporting firms are the very same countries with the largest number of technical regulations and standards faced by exporters. Controlling for potential simultaneity, results from random and fixed-effects models demonstrate that higher preferential margins emanating from trade agreements are associated with increases in market power and the number of products per exporter. However, higher preferential margins emanating from trade agreements are associated with a decline in the number of exporters per product driven by internal economies of scale, specialization, product differentiation, and technological advantage among firms. Higher technical regulations are associated with improvement in market competitiveness and number of products per exporter. Higher number of standards is associated with a rise in market power, but a decline in the number of products per exporter and the number of exporters per product. The findings have policy implications to developing countries especially those within the African, Caribbean, and Pacific bloc which has an existing trading arrangement with the EU and touch on a need to strengthen domestic technical and administrative capacity to comply with existing technical regulations and standards especially among MSEs, cooperation in quality management and assurance, strengthening of institutional links for information exchange, and credit support targeting exporting MSEs which have comparative disadvantage in technology and economies of scale.