A Master’s degree Dissertation presented in partial Fulfilment for the Award of Master of Management in Public Policy at University of Witwatersrand, Wits School of Governance (WSG), 2016 / As a result of the dependency created during the colonial period and later through preferential trade initiatives, Europe has been and continues to be Kenya’s major trading partner. The current trade relationship between Kenya and Europe was recently formalised after the signing of the Economic Partnership Agreements (EPAs), a reciprocal and comprehensive free trade agreement that is legal under Article XXIV of General Agreement on Tariff and Trade (GATT). The agreement has caused great debate on whether it is truly beneficial to Kenya in light of the asymmetrical levels of development, with many questioning what role the agreement will play towards sustainable growth and development and specifically in the horticultural sub-sector. Sharing the pitfalls of both the Lomé Convention and Cotonou Agreement that failed to deliver the expected development there is reason to believe that few gains will be made by signing the EPAs as they are today. The horticultural sub-sector is a major provider of employment, especially in the rural areas, and is the second largest foreign exchange earner for Kenya. Facing increasing domestic and international demand, coupled with continued and enhanced market access to Europe, participation in the highly profitable sub-sector has the potential of transforming rural agriculture by presenting an opportunity for small-scale farmers to increase their income and reduce poverty. As a non-Least Developed Country (LDC) country, the loss of trade preference for Kenya could severely undermine export competitiveness and damage the horticultural sub-sector which is heavily dependent on exports to the European Union (EU). The main objectives of the Kenyan government for signing the EPAs include sustaining the current market preferences, avoiding macroeconomic instability and the disruption of economic activities in the agricultural sector. The study found that, given Kenya’s substantial dependency on the horticultural sub-sector and the limited trade schemes options available to engage in trade with the EU, the government had no option but to sign the EPAs. The failure to diversify the economy, inadequate public institutions, insufficient human and financial capacity, declining public investments in agriculture and limited intra-African trade and the failure to seek other market destinations are some of the reasons why the government entered into the agreement. The Kenyan government needs to aggressively increase investments in the agricultural sector in order to enable transformation and promote diversification through value addition. Manufacturing should be prioritised as this will enable the economy to become less exposed to commodity price fluctuations. The government should seek to develop and increase intraAfrica trade as well as explore other market options in Asia, North America and South America in efforts to lessen Kenya’s dependency on Europe. Further, Kenya and other African Caribbean and Pacific (ACP) countries should, instead of signing a Free Trade Agreement (FTA) such as an EPA, collectively call for an improved EU General Scheme of Preference (GSP) tailored for both LDC and non-LDC countries that would provide real cooperation and development. / XL2018

This study examined the impact of trade liberalisation on Kenya. It analysed the influence of trade liberalisation on trade creation, trade diversion, exports, imports, revenue effects and welfare effects. The developments in trade liberalisation and free-trade economic arrangements were introduced in Kenya and many developing countries in the early 1980s and strengthened from 1990s onward. The short term effects of the structural-adjustment programs were characterised by poor balance of payment conditions, high levels of unemployment, contraction of the imports from other countries, and government revenue losses, among other social problems. Notwithstanding the dismal performance of the Kenyan Economy after liberalisation, the Kenyan government continued to liberalise its trade under various frameworks such as the Economic Partnership agreements (EPAs) with the European Union, the World Trade Organization (WTO) and various bilateral free-trade agreements (BFTA) with its largest trading partners. This study used the World Integrated Trade Solutions-Software for Market Analysis and Restrictions on Trade (WITS/SMART) using 2008 as the base year. This method was used mainly because of its strengths to analyse the tariff effects of a sole market on disaggregate product lines. In addition the WITS/SMART model is able to analyse the impact of trade liberalisation in scenarios of imperfect substitutes. Hence, this study used the WITS/SMART Model to examine the trade liberalisation framework for Kenya under comprehensive implementation of COMESA customs Union, COMESA FTA, WTOFTA and the EPAs. The comparative valuation of the trade-creation effects reveals that the WTOFTA expected the highest trade-creation effects of US$995.16 million. This was followed by the various bilateral free-trade agreements which had a trade-creation effect of US$333.04 million, then COMESACU which had a trade-creation effect of US$310.50 million followed by the EPAs with a value of US$129.45 million. COMESA FTA was expecting trade-creation effects valued at US$15.51 million. These trade-creation effects are expected to cause unemployment through de-industrialisation. This study has also noted that WTO FTA and COMESA CU had no evidence of trade diversion. However, BFTA, EPAs and COMESA FTA showed evidence of trade diversion of US$134.88 million, US$89.28 million and US$2.61 million respectively. This study also examined the possible revenue effect from the free-trade agreements and customs union. It was noted that most losses emanated from the WTOFTA, which was valued at US$817.15 million. This was followed by the COMESACU protocol, which is expected to register a loss amounting to US$327 million. The third free-trade agreement with the highest losses comprised the various BFTAs amounting to US$304 million. The forth probable losses were anticipated from EPAs amounting to US$142 million. The free-trade agreement with the least losses is COMESA FTA with an expected loss of US$7.88 million. The consumer welfare effect was done to assess if consumers benefitted from trade agreements. This study observed that the WTOFTA expected the highest consumer welfare effect of US$103.98 million. This was followed by the various COMESACU with an expected consumer welfare effect of US$56.27 million. The BFTA were the third with a consumer welfare effect of US$ 41.82 million. This was followed by the EPAs with a consumer welfare value of US$ 17.56 million. The trade protocol with the least-expected consumer-welfare effect was the COMESA FTA valued at US$ 1.60 million. Although welfare gains resulting from the anticipated trade agreements were an indication of potential benefits to Kenyans, they were insignificant. This study also analysed the export performance from five different trade agreements and their impact on Kenya. The BFTA expected an export value US$4.63 billion, followed by the EPAs with an expected export value of US$2.18 billion. The third largest export values was WTOFTA with an export value of US$12.12 billion, the fourth being COMESAFTA having an export value of US$ 434.28 million and finally COMESACU with an expected export value of US$394.14 million. The study showed that major exports were composed of minerals, tobacco and agricultural products dominating the export basket. The export destinations were expected to be the WTO members, which include Uganda, Congo, Egypt, Rwanda, Sudan and Zambia. Kenya expected an increase in imports mainly from the WTO amounting to 8.95 per cent. This was followed by the BFTA rated with an expected 3.2 per cent growth in imports. The third protocol expecting import growth was the COMESACU of 2.8 per cent import growth and the EPA with 1.16 per cent import growth, and finally, 0.07 per cent import growth from the COMESA FTA. The expected increase in imports is anticipated to create balance of payment problems for Kenya. The results of the study show that the welfare gains from trade liberalisation were not able to compensate for the revenue losses. The study also showed that Kenya was not able to make optimal use of trade liberalisation to expand its export destinations; as the COMESACU was expected to reduce exports. In light of these findings, the study recommends that measures aimed at boosting exports like strengthening of the Export Processing Zones, export subsidies, the establishing of supply-side facilities, trade financing plus strengthening of the export-supporting institutions. It is important to note that the findings of this study provide an opportunity for Kenya, and other developing countries, to implement measures to ensure that they achieve optimal benefits from the various regional trade agreements.