Will AfCFTA survive beyond heavy US tariffs?

Jeff Gable, Head of Financial Intelligence Centre Absa Group, is quick to dismiss the effect of United States’ 10 per cent tariff on Kenyan exports.

“Whereas it is uncomfortable, it is probably not enough  that people are going to move their textile machines to Alabama,” he says, referencing Kenya’s major export to the US, textiles and apparel.

He adds “The US is responsible for well under 10 per cent of the country’s exports. Tea and coffee are difficult to grow in the US so 10 per cent on cargo trousers is not going to move the needle.”

For Gable, amidst the tariffs, Kenya still has an upper hand in the region particularly when the conversation involves the African Continental Free Trade Area (AfCFTA).

“Kenya has a place as an East African manufacturing hub. We have seen it already and it is only going to deepen going forward,” he said during the International Housing Solution conference on affordable housing. “The challenge that we have globally is how China reacts to the change in relations with the US. It could just be what it means to be globally competitive just got harder again.”

From the domestic lens, the US tariffs have done more than just disrupt trade. To some extent, it is causing a rift in the region considering the fate of the African Growth and Opportunity Act (Agoa) that is expiring next month. Agoa handed countries from Africa duty-free access to the US market. 

Even with AfCFTA in place, a deal that is supposed to encourage African countries to trade within themselves, the strategy by nations such as Kenya seeking bilateral deals with the US raises the question of how this 1.4 billion population market will be actualised.

On August 20, Kenya, represented by Cabinet Secretary of the Ministry of Investments, Trade and Industry, Lee Kinyanjui, will be meeting with US Trade representatives for a bilateral deal that Kenya is seeking with the President Donald Trump-led economy.

It is one of the moves that Kenya is employing, as it seeks favourable terms with the US, amidst the 10 per cent tariff imposed, in the absence of Agoa.

Uganda is also seeking a deal with the US amid a 15 per cent tariff, same with South Africa whose tariff is 30 per cent.

In the East African Community (EAC), only Uganda and the Democratic Republic of Congo (DRC) have a tariff higher than 10 per cent; at 15 per cent.

Kenya has touted itself as favoured by the US  due to the lower tariff. This is even as President William Ruto recently revealed that the country has already struck a deal with China to ferry agricultural products to the Chinese market duty-free, possibly viewed as a retaliatory move by both countries against the US tariffs.

“Some of our friends are complaining that we are doing too much trade with China,” he said during a recent sit-down with the private sector.

Dealing with tariffs

He however insisted that Kenya’s stand with the US is firm.

“Our engagement with the US is a robust, and we’re going to see how we can progress either as a continent using the Agoa infrastructure or bilaterally using the trade agreement that is already in negotiations,” he said during a recent sit down with the private sector. 

As African countries go it alone with the US, the fate of Agoa may be obvious. Even if some countries have a higher tariff imposed, and would largely benefit if Agoa is renewed, some of the deals being sought with the US transcend trade issues.

For example, Uganda and South Africa are on the US radar due to human rights issues. Uganda, Tanzania, DRC and South Sudan are among countries being considered by the US for a possible travel ban.

As such, some countries have bigger issues to deal with the US compared to others and this makes bilateral talks with the US more important, and an Agoa renewal even more challenging since most of these nations are in Africa.

So, what then happens to AfCFTA in the wake of this rift? How can it be leveraged amidst the tariffs? And can African countries work together for its survival?

Gable notes that the challenge in accessing markets such as the US lies in value addition. A country may not be able to produce a certain product but it can source parts of it from other markets, value-add it and then export.  He gives an example of vehicle assembly.

“We have an assembly of kits here in Kenya,” he said. “But your ability to produce a vehicle here in East Africa and send it to the US under 10 per cent tariff is going to be very difficult because you need enough value addition.”

He gives an example of South Africa, known for its robust automobile industry with access to the European market. He says for the country to get access to the European market, they must show the local value add.

Gable said it is more complex than just getting parts and bolting them together.

“You need not just the final assembly but all the stream services: People producing tyres, batteries and glass,” he said. “We can get there. When we think about AfCFTA, that creates reasonable value chains. Not all of us can produce cars but we can produce components of cars, so we will have an African value add that is very high.”

Kenya Private Sector Alliance (Kepsa) Board Chair Jas Bedi cautions that even if Kenya seems to have a competitive edge at the moment with a lower tariff, the trend in global trade is that of transactional relations, and puts the country at risk.

“Our competing countries is what we need to be worried about,” he says. “I don’t worry about the US tariff anymore. More worry should be on what is going to happen to us. Our competitiveness and comparative advantage right now is brilliant but it might diminish very quickly.”