Dissecting The East Africa Community (EAC) Customs Union: How Has It Benefited EAC Citizens?
The East African Community Series (Part Two)
Hello rafiki 😊
Apologies that it has been while. I was unwell
Welcome to the Not an Afterthought newsletter, where we lead the conversation on how to accelerate Africa’s socio-economic development and how to use technology to drive effective change that makes Africa not an afterthought.
Today we continue with the East African Community series. The EAC motto is One People, One Destiny because regional integration is integral to Africa’s socio-economic development.
In 1996, three Heads of State—President Daniel Toroitich Arap Moi, President Yoweri Kaguta Museveni and President Benjamin Mkapa sat down to discuss how to revive the East African Community.
After multiple meetings and public participation, the three Heads of State launched the Treaty of Establishment of the East African Community in 2000.
The first pillar of this newly-minted Community was a Customs Union—a protocol that would make it easier for the people of East Africa to trade with each other.
Seventeen years later, the Customs Union is fully operational. Let’s analyze its impact.
What Exactly is a Customs Union?
A Customs Union is an agreement between countries that neighbor each other to do away with anything that might hinder trade.
Hindrances to trade include custom duties and tariffs (direct taxes on goods and services) and non-tariff barriers (things like licensing that make trade difficult).
Typically, when countries trade with each other, their governments often impose these taxes for several reasons.
1. To prevent an influx of cheap imported products that negatively affect the local producers and lead to unemployment.
If the cost of manufacturing a laptop is, say, $2000 locally and the cost of an imported laptop is $1500, the government might impose a $300 tax to raise the price of the imported laptop to $1800. Because of the little difference in cost, more people will opt for the locally manufactured laptop.
2. Discourage the over-consumption of imported goods. Sometimes, imported products have harmful elements. Imposing a tax discourages the citizens from consuming the imported products because of the high cost.
3. To boost self-reliance in sensitive industries. Some industries affect sensitive sectors such as national security or food security. The government might want to reduce over-dependence on imports in case something happens in the world that makes importing difficult.
4. To protect emerging industries. If a country is trying to enter a particular market, say cooking oil, it will impose taxes on imported cooking oil. As a result, the new local manufacturers will have a larger market which will encourage growth.
5. To raise money for the country. The tax collected on imported goods and services goes directly to the government to help run the country.
With All These Benefits, Why Would Neighboring Countries Choose to Eliminate Tariffs and Trade Barriers?
Because a whole will always be greater than the sum of its parts!
Kenya experiencing all these benefits is incredible, but there is a ceiling beyond which Kenya cannot penetrate. Why? Because Kenya has a population of only 50 million people.
Assume Kenya has a dream of becoming the greatest cooking oil producer. It goes ahead and encourages farmers to plant sunflowers, launches programs to educate farmers on best practices, and provides support through the Ministry of Agriculture.
Voila! The program succeeds, and Kenya starts producing high-quality cooking oil. Even if every single person in Kenya chooses to buy that oil which goes for, say, $2 per liter, the maximum value of that industry will be approximately (50,000,000 x 2) = $100,000,000 only.
This value is on the higher side because the simple math does not incorporate liabilities such as the cost of production and assumes a lot.
Now imagine Tanzania and Kenya have eliminated trade barriers, and the oil manufacturers can easily sell their oil to Tanzanians. The value of the industry rises from $100,000,000 to (110,000,000 x 2) = 220,000,000.
The more countries you add, the bigger the cooking oil industry becomes.
Someone may say, "Kenya does not need Tanzania or other EAC countries; she can sell to the outside market!" True, but do you think China, the largest cooking oil producer globally, will step aside and allow Kenya to dominate the market?
For an industry to succeed, it must first be able to sustain itself locally.
Kenya, Tanzania, Uganda, Rwanda, Burundi, South Sudan, and the Democratic Republic of Congo are the parts that make up the whole that is the East African Community, which is infinitely greater.
What are The Other Benefits of the EAC Customs Union?
The EAC Countries Still Experience All the Benefits of Trade Barriers and Tariffs but as a Region
Under a Customs Union, the region that constitutes all the partner States imposes a Common External Tariff (CET).
The East African Community region has imposed a CET on all goods and services sold to any partner State from countries outside the region.
All EAC countries collectively enjoy the tariff benefits mentioned above, such as boosting local industries.
Recently, for instance, EAC increased tariffs for meat and alcohol imports. Starting 1st July 2022, meat, alcohol, and other fourth band products entering the region will attract a tariff of 35%.
It is an attempt to boost local industries across the region. It is also an opportunity for EAC citizens in these industries to increase production and dominate the market.
Other goods classified as fourth band products include edible oils, cotton and textiles, cereals, dairy products, iron and steel, furniture, sugar, nuts, fruits, leather and fresh-cut flowers.
Sustainable and Comparative Growth Across All EAC States
EAC countries have enjoyed a GDP growth rate of approximately 6% per annum for the past ten years.
The Customs Union fostered robust trade that has fueled the growth.
The consistent and roughly similar growth rate ensures that the entire region grows together without leaving any partner State behind.
The desire to continue rising together as a region is expressed in the EAC's motto, "One People, One Destiny."
When a region grows together, it eliminates a situation where one country rises and has to carry the burden for the entire region.
EAC Customs Union Has Increased Trade Among Member States
The most immediate benefit of a Customs Union is increased trade. When you lower trade barriers, countries will automatically trade more.
Increased trade has two primary advantages.
1.      Better allocation of scarce resources
2.      Boosts foreign direct investments
Scarce resources are those with high demand and low availability.
Increased trade allows suppliers to decide where to best allocate scarce resources for maximum profit.
It also helps suppliers allocate resources to meet the needs and wants of as many people as possible.
Foreign direct investments are investments from a party in one country to a business in another country to create a lasting relationship or interest.
Because a Customs Union lowers trade barriers, it makes it easier for EAC citizens to invest in countries other than their own.
For example, a Burundian can easily invest in Kenya; a Rwandan can invest in Tanzania and so on.
FDIs benefit all parties involved—the investor and host country.
The Customs Union Has Facilitated Trade Creation and Trade Diversion
Trade creation happens when the more efficient members of a Customs Union sell to the less efficient members, facilitating the better allocation of resources.
A good example is the prevalence of Tanzania's onion in the Kenyan market.
If you visit any Kenyan market, you will hear consumers asking for "kitunguu cha Tanzania." Tanzania is more efficient in farming onions. As such, the onion has dominated the Kenyan market.
In turn, the Kenyan farmers who used to farm onions have shifted to other crops that they can farm more efficiently—better allocation of resources all around.
Trade diversion occurs when efficient countries not in the Customs Union sell fewer goods to members of the Union because of external tariffs.
It gives an advantage to the less efficient members in the Union to maximize their capacity by selling to the Community.
Assume, for example, that Zambia was more efficient than Tanzania in producing rice. Because Zambia is not part of the EAC Customs Union, it will sell less rice to EAC countries because of the tariff restrictions.
Tanzania, which is not as efficient, will have the chance to sell more to EAC countries because it is part of the Union.
Anytime the gains of trade creation are more than the losses from trade diversion, there is an increase in economic welfare.
The EAC Customs Union Has Reduced Trade Deflection
Trade deflection occurs when a country that is not part of a Free Trade Agreement sells to a low-tariff country and then resells to a high-tariff country in the Free Trade Agreement.
A Free Trade Agreement (FTA) is a simple agreement between two or more countries to facilitate increased trade by lowering trade barriers.
To help you understand trade deflection, assume East African Countries had a Free Trade Agreement and not a Customs Union.
If Kenya had a 30% tariff on imported cars from Japan and Rwanda had a 10% tariff, Japan could first export cars to Rwanda, which has a lower tariff, then resell them to Kenya on the free trade basis that exists between Rwanda and Kenya.
It is a workaround against that high 30% tariff that Kenya has imposed on Japanese cars. It creates trade distortions that hurt Kenya or any other country with a high tariff.
A Customs Union solves the problem because all members of the Union have one Common External Tariff (CET) that all other countries must comply with.
Does a Customs Union Have Any Disadvantages?
Of course. It is the nature of things to have disadvantages.
1. The Member States Lose a Bit of Economic Sovereignty
Because of the Union, partner States have to negotiate and agree on everything. One country in the Union cannot just decide to impose specific tariffs because they want to protect a particular industry.
A good example is the new 35% tariff on fourth band products coming into the EAC.
Initially, Member States proposed 30 and 33 per cent tariffs. It took several negotiations for the member States to agree on 35%. If the countries weren't in a Customs Union, each would have set its preferred tariff.
2. Member States Struggle to Forgo Trade of Certain Products
A Customs Union creates an environment for more efficient members to corner the market on certain products.
Sometimes, the less efficient member struggles to give up the trade of a certain item because another country in the Union is producing more efficiently.
Consider Tanzania's onion. When the onion from Tanzania first started to become popular in Kenya, many Kenyans complained because they did not want to give up farming the crop.
Last Word
The best place to end is with the words of Mwalimu Julius Nyerere.
…while they accept philosophically that we must be united, once you have lines on a map and you have created this thing called a nation, it is a big problem.
He was speaking of the difficulty of African nations to unite because they were holding so tight to lines on a map.
56 years after he spoke these words, the EAC has made significant strides in breaking down the barriers that destroy unity. And it all started with this simple protocol, the Customs Union, established in 2005.
It set the foundation for genuine economic cooperation among East African countries. The region is still far from the unity Mwalimu Nyerere envisioned, but what incredible progress!
If this is your first time here, here is Part 1 of the East African Community Series
Frequently Asked Questions About The East African Community
Other issues you may have missed.
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