Africa and the world trading system: a case study of Kenya (стр. 5 )

Response to questions by delegations

The Department of External Trade in conjunction with relevant government ministries has responded on a regular basis to questions and issues raised by various country delegations in Geneva. Some of these questions relate to laws and administrative arrangements that are inconsistent with the requirements of WTO. The Kenya Permanent Mission to the United Nations in Geneva has acted as the link between the WTO Secretariat and the concerned government departments. A commercial attaché posted to Geneva by the Ministry of Trade provides the backstopping functions and also attends meetings that are of importance to Kenya.

Adapting legislation and administrative arrangements

In order to benefit from the provisions of several WTO agreements, it is necessary to ensure that the right institutional mechanism is established. This includes adopting domestic legislation, rules and procedures for implementing the agreements. Kenya has made some progress in this direction.

Anti-dumping and countervailing duties and justification

The WTO agreement on anti-dumping and countervailing duties (ADCD) allows member governments to impose measures in the form of quotas or tariffs to deal with serious injury to a domestic industry caused by underpriced or subsidized imports. Kenya's anti-dumping law, which is contained in the sections 125 and 126 of the Customs and Excise Act, was enacted in 1984, long before the WTO agreement came into force. It was therefore not possible for Kenya to continue using this legislation in its existing form since some of its provisions did not conform to the requirements of the WTO agreement. The act, for instance, made no mention whatsoever of the procedures to be followed in determining the presence of dumping or subsidies and the calculation of the duties to be imposed.

The government with the assistance of a legal expert from WTO embarked on an exercise to overhaul the existing legislation and make it compatible with the WTO requirements. The draft legislation, which was completed during the 1996/97 financial year, basically replaced the two sections (125 and 126). The aim of the legislation was to ensure that any action taken by Kenya to counter the effects of dumped or subsidized imports was done in conformity with the WTO agreement and ensured transparency and legal certainty for trading partners. The law also clearly defined anti-dumping and the circumstances under which the government could take decisive action.

The anti-dumping section of the legislation initially failed to go through parliament due to minor issues. The legislators felt that the amendments did not confer on the minister sufficient powers to deal with dumping and subsidization. The concern of parliament did not greatly compromise the need to bring the law into conformity with the requirements of WTO. The contention was simply whether the legislation should give the minister freedom to decide to initiate investigation upon receiving a complaint, or require that investigations be commenced immediately. Since this did not constitute a serious departure from the requirements of the WTO, the amendments were effected and the legislation was passed in the 1998/99 budget.

In the course of preparing the anti-dumping legislation, it also transpired that there are many forms of unfair trading practices that cannot be addressed through the anti-dumping or countervailing duty instrument, and that in any event the agreement could only apply to imports that had occurred after the initiation of an investigation. This meant the legislation could not be applied retroactively. The need has therefore been felt to prepare legislation on safeguards agreement that will address other circumstances not covered by the anti-dumping agreement. The safeguards agreement will complement the anti-dumping and countervailing duty instrument. Its advantage is that it does not require the identification of unfair trading practices and it does not contain as detailed procedural requirements. It is therefore intended that after the necessary ministerial regulations have been gazetted, work will begin on the preparation of an agreement on safeguards.

When Kenya embarked on its economic liberalization programme in 1993, no transition period was given to the industrial sector to allow it to adjust to a highly competitive environment. Import controls were liberalized at the same time as exchange controls, while tariffs were substantially adjusted downwards. This was against a background of high tariff protection and quantitative restrictions that had made industry uncompetitive, producing at high cost. There was subsequently rapid and substantial increases of imports at lower prices, which led manufacturers to press for protection. The need to have an anti-dumping and countervailing duties legislation that could be used without contravening the requirements of WTO was subsequently borne out of this development.

Discussions held with key government ministries, organizations and representatives of private sector organizations such as Kenya Association of Manufacturers reveals that the concept of dumping as defined in the WTO legal text is not fully appreciated. Lower market prices and increased imports seem to have been equated with unfair trade practices that result from injurious dumping or subsidization. In fact, evidence suggests that situations cited as dumping have simply resulted from the reduction of customs duties and the deregulation process which made imported products more available and affordable and exacerbated competition on the domestic market.

If this observation is true, then there are serious doubts as to the extent which anti - dumping and countervailing duties legislation will be useful or even implemented to the letter and spirit of the agreement.

We have examined the extent to which the 1984 Act was used to combat dumping activities, and our findings are that such actions have been erratic and not determined scientifically. The seventh schedule of the Customs and Excise Act, which contains a list of items subject to dumping and the dumping duty rates, so far has only used motor vehicles, which are subjected to a dumping duty of 20% or KSh30,000 for vehicles more than five years old and KSh60,000 for vehicles older than eight years.

The complexities of the anti-dumping agreement create doubts as to the capacity of Kenya to utilize its dumping law effectively. Among the detailed procedures of the agreement are determination of injurious dumping, causal link between injury and dumped imports, determination of existence and amount of subsidies, the conduct of investigation, imposition and collection of duties, and administrative and judicial review.

The current legislation that has been passed in parliament is only a bare bones law that will be complemented by ministerial regulations. The regulations have already been drafted with the assistance of the World Trade Organization but have yet to be finalized. During discussions with the WTO legal experts assisting the drafting team, the view was expressed that any attempt to shorten the broad law and the 52-page regulations may raise suspicion among the other WTO members who will scrutinize the Kenyan legislation within the framework of the WTO anti-dumping and countervailing measures committee once the legislation is notified.

The issue of the advisory committee to be set up by the minister to investigate dumping was also raised on several occasions. The main question was finding the appropriate institution to house the committee. The closest institution is the Prices and Monopolies Commission, which is responsible for investigating restrictive trade practices and unfair market prices. This commission only deals with matters affecting trade, production and prices among locally incorporated companies and enterprises. It therefore may not have the capacity and experience to conduct the detailed investigations required by the WTO agreements. Some of its functions have also become redundant, since it was created during the price control days.

Other instruments that could be used to address the problems faced by industry

Since the workability of the anti-dumping and anti-subsidy legislation appears to be in question, it may be important for the authorities to exploit fully other instruments that can be used more easily. The government can primarily have recourse to the following unilateral tools.

• Increase tariffs: Customs duties can be freely increased as long as the increase does not exceed the rate bound in Kenya's GATT schedule of commitment. The only disadvantage is that tariff increases can only apply on a most favoured nation basis and cannot target one or few countries.

• Use of suspended duties: Currently Kenya has a suspended duty structure that allows the minister to raise duties on certain items without going back to parliament to seek approval. This duty is only provided for in law and is not applied until the situation warrants. Kenya could identify products suspected to be dumped and provide for suspended duty, which can be applied without undertaking detailed and lengthy investigations. (A major concern raised by Kenyan authorities during drafting was that the WTO procedures required that provisional anti-dumping duties be applied only after 60 days, and that this must also be subject to preliminary investigations. The concern is that if an industry is in serious problems as a result of unfairly priced imports, 60 days would be too long, and an industry may have collapsed by the time anti-dumping measures are implemented.)

• Seek recourse to safeguard measures: The administrative procedures required under the safeguard agreement are not as complex as those required by the anti-dumping law. In fact, it appears that this would have been a more relevant law given the problems faced by the Kenyan industries. Safeguard measures do not require the existence of unfairness in international trade practice, which would be difficult to determine. There is currently no law on safeguard measures and the government is considering enacting one.

• Levy excise duties: Kenya could also increase the use of excise duty as a means of protecting domestic industry. The WTO act appears to be passive on other charges whose effects are equivalent to customs duty, such as excise duty and VAT on imports.

Our conclusion is that although there appear to be daunting difficulties in using the provisions of the anti-dumping law, there may be advantages in having it in place. First, it acts as a deterrent measure to exporters who would consider sales to Kenya or subsidizing exports to Kenya. Second, in the event that it became necessary to use it in the future, it would provide an opportunity to build capacity in this area. The World Trade Organization has offered to work with Kenyan investigators as part of technical assistance on the first few cases of dumping or subsidization. There is, for instance, a strong feeling in manufacturing circles that several products from South Africa are subsidized. Third, it creates an environment of confidence among local businesses and prospective investors.

Customs valuation

Prior to the coming into force of the World Trade Organization, the Excise and Customs Department applied the Brussels definition of value, which is the price the good would fetch if sold in an open market. The WTO system of customs valuation provides for the use of new valuation procedures, the main standard being the transaction value. The transaction value is based on the price actually paid or payable when sold for export to the country of exportation. The valuation system limits the discretion available to customs to five other standards in the event that the transaction value declared by the importer is disputed. These are the transaction value of identical goods, the transaction value of similar goods, deductive value, computed value, and fallback method. The notification submitted basically invokes delayed application of the provisions of Article 20.1 and informs the Secretariat that Kenyan customs will continue applying the Brussels Definition of Value due to revenue consideration for the next five years. WTO provides for a grace period of delayed implementation of the valuation code for five years starting from 1 January, 1995 when the WTO came into force. This is not supposed to be a period of inactivity, however. The reason for the grace period is to allow time to make the necessary administrative and legal changes that enable a country to comply with this requirement. Kenya has sought and received assistance from the World Customs Organization to assess the current capacity of the Customs and Excise Department to comply with the new valuation procedure. Necessary changes will include amending the relevant section of the Customs and Excise Act to provide for consistency with WTO valuation standards. The amendments will include declaration and clearance procedures, importers' responsibilities in making declarations, penalty provisions, and the right of the importer to appeal to judicial authorities.

Financial services negotiations

Negotiations on financial services came to a successful conclusion in December 1997. Kenya's participation in these negotiations involved reviewing the offers made in the 1995 schedule of commitments, and bringing more areas into the schedule. In 1995, services such as supply of maritime air and transport insurance and reinsurance remained unbound, implying that Kenya could introduce restrictions in those areas if circumstances demanded. In the schedule of commitments submitted to the Secretariat, some of the market access commitments were improved and bound, permitting supply on a non-discriminatory basis.

Seminars and workshops

Various seminars and workshops have been organized by the Department of External Trade with assistance from the WTO Secretariat. These workshops have familiarized both government officials and private sector players with the concepts and agreements of the WTO. Four seminars were held in : The outcome of the Uruguay Round and its benefits to Kenya; WTO and the Uruguay Round; Guide to Uruguay Round; and Pre-shipment inspection, textiles and clothing and customs valuation.

Capacity constraints and capacity building needs: the public sector

Limitations of the permanent inter-ministerial committee and capacity building needs

The terms of reference provided for the PIMC at its launching took into account the need to effectively translate and implement the provisions of the WTO. The five sub-committees established were to assist the committee to analyse new market access conditions and identify immediate and potential trading opportunities, as well as to assist in identifying the obligations that require changes in legislation or administrative practices to enable the country to implement the Uruguay Round agreements.

Since the PIMC was launched in 1995, its main preoccupation has been with fulfillment of notification obligations. The committee has not achieved much in terms of analytical work. Part of the reason for this is the way the committee is constituted. The committee has about 26 members drawn from government ministries and departments as well private sector organizations and associations. This makes the committee too large, and so it can only address issues of a more general nature. The subcommittees, which should have been more analytical in their work, have concentrated more on notification requirements. In addition, members of these subcommittees were engaged elsewhere in their respective institutions and can only spend a limited amount of time to attend to WTO matters. Several meetings of the subcommittees have suffered from lack of a quorum.

The External Trade Department of the Ministry of Trade acts as the secretariat to both the committee as well as the subcommittees. The Commonwealth (1995) study observed that this department "does not possess adequate capacity to advise the government on complex issues such as the effects of the phasing out of MFA on Kenya's textiles exports over a period of 10 years, the erosion of preferences under the EU/ACP arrangements with the reduction of tariffs consequent to the implementation of the Uruguay Round", and concluded that "a greater capacity needs to be built up in the division to handle trade policy issues". The recent change in name from the Permanent Inter-ministerial Committee to National Committee on WTO, which was partly intended to enhance the status of the committee, is not likely to achieve much unless the committee is entrusted with a clearer mandate. The PIMC was to be an authoritative committee to be taken seriously by policymakers. This has not happened and there are instances of policy pronouncements that go against GATT rules, such as import bans and other quantitative restrictions which the committee has advised against.

The WTO is set to become a very pervasive organization in the international trading environment. Its rules and requirements will affect every facet of the economies of its member states. There is definitely need to strengthen Kenya's capacity to participate actively in the remaining areas of negotiations, which include trade and labour standards, trade and investment relations, and foreign direct investment and competition. In addition, new problems and issues will emerge in trade relations among countries that will have to be discussed on a continuous basis. Building this capacity is critical if Kenya is to protect her trading rights and maximize trading opportunities created by the Uruguay Round.

Kenya's participation in the Uruguay Round reflected a lack of commitment and an apathetic attitude towards the negotiations. First, adequate preparations were lacking and representation at the discussions were at the embassy level. Since the negotiations basically involved the exchange of tariff concessions by member countries, it was necessary at the outset that countries identify their interests in terms of competitive advantage that they possessed and negotiate with their trading partners the levels of concessions that would be accorded. Also, given that most agreements were specialized, it was not possible for the embassy staff to contribute in a meaningful way towards the country's interests. Kenya's passive participation may have therefore resulted from a lack of negotiating agenda.

Second, there was no effective backup from home. The staff at the Kenyan embassy in Geneva were not experts and they had to rely occasionally on feedback from home to express Kenya's position on various issues. When the information was not forthcoming, no responses were provided. Things do appear to have changed since the coming into force of the World Trade Organization in 1995. It became apparent that the negotiations will affect the way the country conducts international trade, and the need has increasingly been felt to enhance Kenya's capacity to understand the agreements and to prepare for more effective participation in the future agenda of the World Trade Organization.

Capacity to conduct anti-dumping legislation

Once the anti-dumping and countervailing duty legislation went through, a competent authority was designated by the government to handle complaints of dumping. Given the complex procedures to be observed, initial cases were likely to be difficult. With trade liberalization, complaints of dumping and subsidization have increased. The rules division of the WTO has offered to work with the investigating authority on the first few cases to help build capacity. The Prices and Monopolies Commission is likely to play a key role in this area and its human and institutional capacity should be identified and revamped.

Capacity for customs valuation

After the expiry of the five-year grace period for the use of Brussels Definition of Value, Customs and Excise Department must begin applying the GATT valuation code. Although some assistance has been received on identifying capacity needs, no action seems to have been taken to prepare for the application of the new system except for computerization and tighter control procedures to reduce fraud.

Capacity for asserting and defending rights

• Scheduling of commitments

The outcomes of previous negotiations concluded between the Government of Kenya and other trading partners raise questions on the capacity of Kenya to effectively

negotiate and defend country rights enshrined in the WTO and other agreements. When Kenya, for example, submitted to the GATT Secretariat schedules of commitments in services, no exemption was sought to the GATS annex on computer reservations system (CRS). The consequence was that Kenya would grant unrestricted market access to foreign computer reservation systems. CRS basically enhances the distribution networks of airlines and interconnects airlines to local travel agents. It was only later that the Kenya national carrier, Kenya Airways, which was a member of the Gabriel Extended Travel System(GETS), realized that allowing access to other CRS would seriously undermine the carrier's market share at home at a time when it was contemplating privatization. The Ministry of Commerce and Industry initiated the process of filing an exemption to the MFN treatment for a grace period of five years. At this time, it was decided that Kenya's offers should be revisited with a view to filing more exemptions if found necessary.

• Kenya-U. S. Textile agreement

This agreement provides an important insight into Kenya's capacity both to comply with the provisions of agreements it negotiates with trading partners and to negotiate and defend her rights.

Under the current GATT rules, quotas would be prohibited, but under the Multi-Fibre Agreement, several industrial countries including the United States have restricted imports though bilateral quotas in addition to maintaining high tariffs in this sector. It is widely believed that the imposing of export quotas in the United States for certain categories of textile products from Kenya has adversely affected the textile industry in general and led to closures of a large number of firms engaged in exports of textile products. In 1995, more than 12 textile based manufacturing under bond (MUB) firms collapsed, an event which was largely attributed to the limitations in the quota agreement. This section of the study looks at the available evidence and attempts to establish possible linkages between the Kenya-U. S. textile agreement and the collapse of several of these exporting firms. Also considered is the justification for the imposition of the quota as well as Kenya's preparedness to negotiate. The conclusions are arrived at, first, by looking at the quota levels, product coverage and production capacity of the firms that were involved in exports of garments to the U. S. and other distant markets. We have also held interviews with personalities who were involved in the negotiation process, and some key officials of the Ministry of Trade, Export Processing Zones Authority, Investment Promotion Centre and the Export Promotion Council.

The Kenya/U. S. Textile Agreement was signed in July 1994. Even though the agreement originally covered only two years, it was mutually agreed that the provisions would remain after the Uruguay Round came into force. The negotiated agreement sets limits to annual exports of two categories of textile products; boys' and men's T-shirts made of cotton and man-made fibres are limited to 384,600 dozens and pillow cases made of cotton and man-made fibres to 2,600,000. The Ministry of Commerce (at the time, the Ministry of Trade) indicated that the agreement was negotiated when the U. S. Customs administration became concerned with the rapid increase of the exports of shirts and pillow cases from Kenya. Within a space of one year, the exports of these products had risen seven times, exceeding the 1% level of the domestic U. S. market requirement. This position has actually been contradicted by a fact finding mission by the U. S. State Department which observed that in 1996, the entire sub-Saharan Africa exports of textiles to the U. S. were less than 1%. This, by implication, means that the negotiation of this agreement could not have been optimal. It is not clear whether Kenya was forced into negotiating the quotas and whether there could have been recourse to the dispute settlement mechanism of the WTO, but the fact that quotas were imposed on several other large textile exporting countries including Mauritius (the only other country in Africa) suggests that Kenya could not have gone away with unfettered exports of these products to the United States. The WTO has nevertheless indicated that, if Kenyan authorities had sought assistance from WTO in preparing for the negotiations, that assistance would have been availed. The negotiating team did not benefit from this assistance. Representatives of textile firms believe that Kenyan negotiators lacked experience, technical expertise and the right preparation for the negotiations. No representative of the textile industry was involved in the negotiating process.

We also found that even if the quota allocation system was functioning, it would still be possible for Kenya to take advantage of the flexibilities in the agreement, which include using "swing numbers" that increase the base rate of the quotas by an additional 10%. The quota agreement also provided for an automatic 16% increase in exports for the first four years, 26% for the next two years and 27% for the last four years.

The insistence of the Kenyan authorities that the quotas must be lifted against all the odds may be an indication of the inability of authorities to perceive the benefits the WTO may bring. Efforts to renegotiate the quotas have also revealed that Kenya could take advantage of the changes made in the U. *****les of origin on textile/garment trade, which alter the qualifying criteria from where the fabric is cut to where the fabric is assembled.

As for the phenomenal increase in the exports of these items, no explanation was secured from the textile firms or from government officials, but there have been several occasions when the U. S. government accused Kenyan firms of simply being used as transhipment points for products originating from countries that had already exhausted their quotas. Previous discussions with US officials confirm this. We found that this issue has been discussed by the U. S. and Kenyan governments and a text agreement on anti-circumvention has been prepared.

There has been unwillingness on the part of the Kenya government to sign the agreement, however, because of unhappiness with the reluctance of the United States to review the quota agreement. Discussions with Export Processing Zones Authority(EPZA) revealed that there was a time when a few firms within the zones were involved in transhipment, but this had since been addressed by the Authority. Visits by officials of the government to some MUB firms had also revealed that in a few cases there was little evidence of those firms having exported the volumes adduced to them, considering the size and technology of the plant.

In our discussions with officials of the commerce department in the U. S. Embassy, it became apparent that renegotiation or even lifting of the quotas is no longer viable. When the agreement was signed and effected in 1994, the U. S. government notified the WTO as required. It was agreed that the agreement would become part of the WTO Agreement on Textiles and Clothing (ATC) upon entry into force of WTO. After 1995, therefore, the agreement ceased to become bilateral and was now covered in the terms of ATC which Kenya also belongs. There is therefore no basis for bilateral negotiations between Kenya and United States as far as the United States is concerned.

The US Growth and Opportunity Act

The quota agreement between Kenya and the United States was done before the Africa Growth and Opportunity Act was drafted. The act, which seeks among other things to eliminate trade barriers and encourage exports from sub-Saharan Africa to the United States creates provisions for the elimination of quotas from Kenya and Mauritius. Section i(c) of the act says that "Pursuant to the Agreement on Textiles and Clothing, the United States shall eliminate the existing quotas on textile and apparel exports to the United States from Kenya within 30 days after that country adopts an efficient visa system to guard against unlawful transhipment of textile and apparel goods and the use of counterfeit documents".

It is clear that the passing of this act through the senate will not happen soon. In fact, there are doubts if the act will actually survive at all, given the strong lobby against it in the Senate. Discussions with U. S. officials reveals that even if it were to go through, the textile provisions may not be passed.

Linking the quota agreement to the demise of the textile industry

In our discussion, it would appear that there is no direct linkage between the collapsed textile exporting firms and the conclusion of the quota agreement. When the agreement came into effect in early 1995, the association of Manufacturers Under Bond (MUBs) claimed that local capacity to produce and export exceeded 2.8 million dozens compared with the 360,000 negotiated. When the factories were allocated specific export quotas, they claimed that the allocations would keep them going for only three months and requested the government to renegotiate the quotas on improved terms. When the quotas were negotiated, it became apparent that for the orderly functioning of the textile export industry, there was need to have in place an administrative system that would allocate quotas among exporting firms. The system would address concerns such as which firms gets the allocation, which categories of existing exporter and new entrants get allocations, modalities for allocation, percentages to each allottee, etc.

It is evident that after the quotas were allocated, there was no mechanism for establishing the performance of firms and the quota allocation and administration system fell away under the weight of its own bureaucracy. Eventually no firm was actually restricted in terms of export volumes to the U. S. market.