Discussion Paper No. 346 of 2024 on An Assessment of the Economic Impact of the Kenya-USA Free Trade Area

Abstract

Kenya has been accessing the United States export market through the African Growth Opportunity Act (AGOA) Framework since 2000. The framework provides access to over 6,700 tariff lines, which is an improvement over the previously used General Systems of Preferences (GSP) and the Most Favoured Nation (MFN) programmes. However, AGOA is set to expire in 2025, and there is uncertainty about its renewal. In such a scenario, Kenya can still access the US market through the Generalized System of Preferences (GSP) and the MFN basis or negotiate a Free Trade Agreement (FTA) with the United States. This paper provides an analysis of two options: when Kenya concludes an FTA with the US, and option two on the effects of Kenya's exports to the United States when AGOA is not renewed, and there is no FTA in place. The study uses the WITS-SMART model and highly disaggregated data at the 6-HS level to provide insights at the tariff line. On the first option with Kenya concluding an FTA with the US, the findings show that elimination of tariffs could result in tariff revenue losses of approximately US$ 8.4 million at 80 per cent, US$ 13.3 million at 90 per cent, and US$ 28.4 million at 100 per cent. However, it is evident that if 80 per cent and 90 per cent of tariff lines are liberalized, it could create trade worth approximately US$ 8.4 million and US$ 13.1 million, respectively. Moreover, complete tariff elimination would result in trade creation worth US$ 24.4 million and further trade diversion of US$ 17.7 million. Considering the second option when Kenya does not have an FTA and the AGOA is not renewed, there will be a significant reduction in the number of products eligible for duty-free access to the US market. In this scenario, Kenya could export to the US but the market access will shrink from 909 product lines offered under AGOA to about 120 and 11 product lines offered by GSP and MFN, respectively. The study recommends that policy makers need to take targeted measures to address