From The Business Daily
May 12, 2008: A tactical manoeuvre by Pakistan into bilateral free trade arrangements with several Asian neighbours is threatening to throw its multi-billion shilling-a-year-tea trade with Kenya into a spin.
For many years, Pakistan has been the single largest buyer of Kenyan tea, taking up more than 28 per cent of its total exports worth an estimated Sh12 billion a year.
But in a surprise twist, the tea trade between the two nations has been on a slump over the last three years with analysts warning that the trend is likely to carry on.
“The trend has been noted over the years and the trade in tea between the two countries is slumping further,” Dr Amjad Iqbal, the head of trade affairs at the Pakistani High Commission in Kenya told Business Daily in an interview.
Statistics obtained from the Tea Board of Kenya (TBK) confirmed the decline, both in value and volume. For instance in 2005, Kenya exported 98 million kilogrammes of tea worth Sh12 billion to Pakistan, but this gradually shrunk to 80 million kg worth Sh10 billion in 2007.
The trend was evident over the first quarter of 2008 when Kenya tea exports to Pakistan dropped 52 per cent, confirming fears that commodity trade ties between the two countries were getting loose.
Analysts trace the weakening to a decision by Pakistan to enter into Free Trade Area (FTA) pacts with several of its neighbours under the ambit of the South Asian Association for Regional Cooperation (SAARC).
An FTA is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most if not all goods between them.
SAFTA involves the free movement of goods, between countries through elimination of tariff and non-tariff restrictions on the movement of goods, and other equivalent measures.
A section of members of South Asian Free Trade Area (SAFTA) such as India and Sri Lanka directly rival Kenya in the tea business.
Other member nations in the SAFTA pact are Bangladesh, Bhutan, Maldives and Nepal. The SAFTA pact was signed in Islamabad, Pakistan in January 2004 during the 12th Summit of SAARC. It came into force on January 1, 2006. Member countries have up to January 1, 2016 to comply with the entire SAFTA deal.
Seeking to take an early ride on the FTA, Pakistan and Sri Lanka struck a deal soon after the pact came into force exchanging preferential market access to each others’ exports by way of tariff concessions.
Sri Lanka would be able to enjoy duty free market access on 206 products in the Pakistani market including tea, rubber and coconut. Pakistan, in return, would gain duty free access on 102 products in the Sri Lankan market. These products include oranges, basmati rice and engineering goods.
Pakistan also has an FTA arrangement with China that is also elbowing Kenya out of the vintage position in tea business. The Pakistan-China FTA was signed in November 2006 between Presidents Pervez Musharraf and Hu Jintao with Pakistan winning an overall market access at zero duty on industrial alcohol, cotton fabrics, bed linen and other home textiles, leather articles, mangoes, citrus, fruits and vegetables, iron and steel products among others.
In the deal China also promised to reduce its tariff by 50 per cent on fish, dairy sectors, frozen orange juice, plastic products rubber products, knit wear and woven garments.
In return Pakistan gave market access to China mainly on machinery; organic; and inorganic chemicals, fruits & vegetables, medicaments and other raw materials for various industries including engineering sector, intermediary goods for engineering sectors. As the new FTA arrangements take shape, Kenya’s traditional tea trade with Pakistan is already feeling the pinch.
“It is definite that one would turn to the best partners and the existing FTA arrangements are doing quite well. Much of the business is going to nations with which Pakistan has FTA arrangements,” Dr Iqbal told Business Daily. For instance, statistics from the Sri Lanka Commerce Department showed that the FTA deal had prompted growth in tea exports to Pakistan.
As at 2006, the value of Sri Lankan tea shipments to Pakistan climbed 13 per cent to $8 million, just one year after the free trade pact was penned on to paper.
“The tariff rate quota of 10,000 metric tonnes granted by Pakistan for export of tea at zero duty under the FTA would help Sri Lanka to regain its market share over time,” the Sri Lankan Commerce Department said in a statement. Pakistan is already courting upcoming tea producers in Africa such as Rwanda and Malawi for possible FTA arrangements that would ease trade ties.
“We are in negotiations with Rwanda for an FTA because their tea production is improving both in terms of quantity and quality,” revealed Dr Iqbal “I believe a similar efforts is on going with Malawi”.
He said tea exports from Rwanda to the Pakistani market had climbed impressively and now accounted for about eight per cent of the total market share compared to six per cent three years ago.Malawi today enjoys seven per cent of the total Pakistani tea market share compared to five per cent in 2005. “Kenya should see the sense in this and enter an FTA with Pakistan. Our proposal for an FTA has been pending with the Kenya Government since 2001. Seven years is not a long time and we are hopeful,” Dr Iqbal said.
Analysts however said though Kenya had the provisions to negotiate an FTA with Pakistan it would be difficult to find one that doesn’t infringe on the current FTA it has with other member countries of the Common Market for Eastern and Southern Africa (Comesa).
“The WTO does not bar a nation from entering more than one FTA arrangement but any such new arrangements must not be better than the existing ones because that would be tantamount to short-circuiting those already in existence,” a senior official at the Trade Ministry in Nairobi told Business Daily.
But apart from the threats of Pakistan’s new FTA partners, Kenya faces another major hurdle in protecting its prime tea market next year should the East African Community (EAC) change the import duty currently charged on Pakistani rice shipments into the country.
For many years, Kenya and other EAC nations pegged the common external tariff (CET) on rice imports from Pakistan at 75 per and an extra 35 import duty in line with the provisions of the harmonised community description and coding system. But in a surprise move, Kenya, Tanzania and Uganda unsuccessfully tried to start charging all rice imports at 75 per cent duty from January 1, 2005.
This drew the wrath of Pakistani rice exporters who then pressured their Government to arm-twist Kenya into deferring the duty or slap them with a reciprocal raise in the import duty of tea.
Faced with a limbo over its tea exports Kenya sweet-talked other members of the EAC into deferring the new import tariff for another two years. The deferment is set to expire by June next year, raising fresh fears that trade between the two countries could be hard hit should the tariff structure for rice change.
Kenya Tea Development Agency (KTDA) managing director Lerionka Tiampati said urgent consultations were needed between EAC members states to avoid hurting bilateral trade ties like those between Kenya and Pakistan. “If it (changes in rice import tariff) were to happen, it would be really bad on us. I hope it does not happen,” he told Business Daily. Mr Tiampati felt Kenya should negotiate another extension with its EAC partners.
Dr Iqbal said though the EAC import tariff issue was futuristic, failure to address it on time would have great impact on the bilateral pact of Kenya and Pakistan. “We hope that Kenya will ensure regular and sufficient supply of rice to its consumers when this time comes.
Kenya produces about a third of its annual rice demand of 250,000 tonnes with a bulk of the shipments coming from Pakistan alone. Statistics showed that IRRI-6 rice shipments to Kenya accounted for about 70 per cent of the Pakistan market share.