EAC – an authentic customs union will end transshipment
The East African Community (EAC) is arguably the most ambitious of all the regional economic blocs currently in existence in Africa, if not in the world. The ultimate goal of the EAC is to form a political federation. However, the EAC must first become an authentic customs union. The EAC officially became a customs union in 2010, and that was after a transitional period of five years. Yet, the EAC does not operate as a full-fledged customs union. Headlines like “Tanzania slaps 25 per cent tax on Ugandan sugar” (Daily Monitor, August 6, 2018), “Kenya’s persistent trade squabbles with Tanzania” (Business News, August 8, 2018), and “Museveni to meet Magufuli as sugar war rages” (The East African, August 8, 2018) reveal an economic bloc unable to function as a genuine customs union.
Recently, Tanzania alleged that some of the sugar entering Tanzania from Uganda is transshipped from outside the EAC. Not too long ago, Kenya and Uganda were at odds with each other – Kenya claiming Uganda was charging a 100 percent tariff rate on rice grown in Kenya, and Uganda arguing that rice from Pakistan was being transshipped into Uganda from Kenya. At the same time, seemingly in retaliation, Kenya restricted imports of sugar from Uganda, saying that Uganda was simply repackaging sugar that it had imported from outside the EAC. So Tanzania is not the first country to accuse Uganda of transshipping sugar.
Transshipment in violation of a trade agreement involves two steps. First, the product is exported from a non-member country to a member country with relatively low external protection. Second, the product is re-exported to another member country that has higher external protection. This type of “cheating” in trade must not be confused with benign and transparent transshipment of goods from one country to another through an intermediary country, for example, from South Africa to Rwanda, through Tanzania, which is not in violation of any trade agreement.
When the EAC is able and willing to establish an authentic customs union, where all member countries have common external trade barriers, transshipment will be a non-issue. It is hard to predict when the EAC will be a full-fledged customs union. As it is right now, countries are still allowed “stay applications” and duty remissions. A stay of application allows a country to disregard a given common external tariff and apply a different tariff rate. A duty remission allows a company to pay lower import duties or be exempted from paying duties altogether. These exceptions were put in place as temporary safeguard measures during the transition period, but they seem to have become permanent features in the EAC. No country has been bashful in using these loopholes, which themselves have been a source of contention.
Duty remissions are rather complex for various reasons, including: (a) the lack of uniformity in granting them, and (b) an inability to verify which inputs were actually used to produce the final product. A company might import some inputs under duty remission and at the same time use similar inputs (perfect substitutes) acquired from the domestic market or from a partner state. Both imported and domestic inputs can be used to produce the same final product. Suppose the share of the product produced using imported inputs is exported outside the EAC and the share of product produced using local inputs is sold to other countries in the customs union. Should there still be a full duty imposed on the amount sold within the customs union? This is not an implausible scenario.
There was a claim that some companies such as British American Tobacco Kenya Ltd., manufactured goods for the EAC market using local inputs. That is, while British American Tobacco Kenya Ltd. imported some inputs under the duty remission scheme, those specific inputs were used only for the production of cigarettes and other tobacco products exported outside of the EAC. Tanzania did not accept that argument, saying that it could not verify which cigarettes were produced using imported inputs and which ones were produced using local inputs. Tanzania applied a full duty on products produced by British American Tobacco Kenya Ltd., irrespective of the source of inputs.
A preemptive measure to prevent these types of disputes and transshipment is for the EAC to operate as a genuine customs union.
Mshomba is Professor of Economics, La Salle University, Philadelphia, Pennsylvania, US
