Summary
With nearly 40% of Kenya’s direct exports to the UK currently benefitting from significant margins of tariff preferences, concerns have arisen around the UK’s current MFN tariff review and the future basis for Kenya’s continued duty-free access to the UK market after 1st January 2021. In addition, there are growing concerns about the future commercial viability of the use of triangular supply chains for the delivery of Kenyan short shelf life products to the UK market if no comprehensive EU/UK trade agreement is in place by 1st January 2021. Any future EU/UK trade agreement would need, as far as possible, to replicate the current frictionless trade, on which the operation of these triangular supply chains depends. This is looking increasingly unlikely. The Government of Kenya thus faces a triple challenge in ensuring a continuation of current patterns of exports to the UK market into 2021.
- Kenya is Triply Vulnerable
Given the structure of Kenyan exports to the UK which are dominated by agri-food products (85% of total exports), Kenya’s current trade with the UK is vulnerable to either an erosion of the current margins of tariff preferences enjoyed on the UK market (linked to the UK’s current MFN tariff policy review) (1) and/or the loss of current duty free-quota free access to the UK market, as the existing EU trade agreement will no longer apply once the UK leaves the EU customs union and single market on 1st January 2021.
In addition, given the dominant role played by Dutch traders in the European horticulture and floriculture import/export trade, Kenyan exports to the UK market will also be vulnerable to any disruption of EU/UK trade flows arising from the creation of customs border between the EU and the UK. This needs to be seen in the context of the extensive use made of the specialist logistical services offered by Dutch fruit, vegetable and cut flower traders by Kenyan exporters serving what to date has been a single EU market of 28 member states.
- The MFN Tariff Issue and Kenya
In terms of the erosion of the existing margins of tariff preferences enjoyed by Kenyan exporters, the outcome of the UK’s current MFN tariff policy review will be of critical importance (2). In October 2019 under the UK governments ‘no-deal’ Brexit MFN tariff proposals the abolition of MFN import tariffs on all fruit vegetables and cut flowers was envisaged (except for fresh beans and bananas) (see companion epamonitoring.net article ‘UK to Strike Out on Bold New Trade Policy but Will Africa and the Caribbean Take the Hit?’ 10th February 2020).
The adoption of this proposal would have impacted adversely on the market position of around €100 in Kenyan direct exports to the UK market and a substantial, but still to be determined value of Kenyan indirect exports to the UK market. This relates to Kenyan exports which are destined for the UK market, but which are traded through intermediaries largely in the Netherlands (this is particularly important for cut flowers).
However, in February 2020, at the time of the launching of the on-line consultation on the UK’s future MFN tariff schedule, it was announced the UK’s October 2019 ‘no-deal Brexit’ MFN tariff proposal had been withdrawn. In its place the UK government planned to undertake a review of ALL tariff lines, based on the currently applied MFN tariffs. Depending on the outcome of this review the market position of up to €150 million in Kenyan direct exports to the UK market could be adversely affected. This needs to be seen in a context where the vast majority of Kenyan fruit, vegetable and cut flower exports to the UK enjoy significant margins of tariff reference over MFN suppliers. This arises from the application of high ad valorem duties or a combination of ad valorem duties and supplementary levies (see table below).
The concerns arising from the UK’s current MFN tariff review were such that Fresh Produce Exporters Association of Kenya (FPEAK) engaged with the UK consultation process by making a formal on-line submission. FPEAK sought to highlight both the significance of the current margins of tariff preferences over MFN suppliers and the socio-economic development significance of these tariff preferences in Kenya.
Value of Kenyan Duty Free-Quota Free Access for Cut Flowers and other Fruit and Vegetable Exports to the UK Market – 2018 (€ millions)
| Tariff Code | Product Description | Current MFN Tariffs Applied by the UK | Exports to UK 3018 |
| 060311 | Roses | 8.5% | €53.8 million |
| 070820 | Beans | 10.4% min €1,600/100 kg +€178.68 UP /100 kg | €51.5 million |
| 07041000 | Broccoli | 9.6% + €1010/100kg | €20.5 million |
| 070810 | Peas | 8% | €7.2 million |
| 060312 | Carnations | 8.5% | €4.7 million |
| 070930 | Eggplants | 12.8% | €3.7 million |
| 070960 | Peppers/Pimento | 6.4% to 7.2% + €91.11 UP / 100 kg | €2.1 million |
| 060319 | Other cut flowers | 8.5% | €1.8 million |
| 080440 | Avocados | 4.0% + €329.51 UP / 100 kg | €1.8 million |
| 081020 | Raspberries | 8.8% + €698.39 UP / 100 kg to 9.6% | €1.2 million |
| 060315 | Lilies | 8.5% | €0.9 million |
| 060314 | Chrysanthemums | 8.5% | €0.4 million |
| 070310 | Onions/shallots | 9.6% to 9.6% + €224.11 UP / 100 kg | €0.3 million |
| 070390 | Leek & Other alliaceous vegetables | 10.4% | €0.19 million |
| 071390 | Other legumes (dried) | 3.2% | €0.13million |
| 070610 | Carrots/turnips | 13.6% (7% TRQ) | €0.03 million |
| 080290 | Other nuts | 2% | €0.002 million |
| Sub-Total | €150.252 million | ||
| % Total | 38.9% | ||
| Total | All Products | €386.5 million | |
| Other products | Zero MFN Tariffs | ||
| 090240 | Black Tea | 0% | €148.0 million |
For example, as is widely known, over the past 25 years substantial investment has taken place in the Kenyan cut flower sector, with the sector becoming Kenya’s second largest export (after tea), contributing around 1% of the country’s GDP and providing by far the largest source of employment, with over 100,000 people working directly in the cut flower industry and an estimated two million indirectly.
FPEAK was not alone in making submissions to the UK MFN tariff review process, with COLEACP, Afruibana, the ACP Sub-Committees on Sugar and Banana and a range of other concerned stakeholders and governments making similar submissions to the on-line consultation on the UK’s MFN tariff review.
The on-line consultation on the UK MFN tariff review is now closed and the UK government is reviewing the submissions made. An announcement of the UK’s future MFN tariff regime which will apply from 1st January 2021, is expected in April 2020.
- The Future of Kenyan Duty-Free Access to the UK Market
However even if the UK broadly maintains its MFN tariffs, Kenyan exporters still face the prospect of a loss of their current duty free access to the UK market, if arrangements are not set in place to replicate the current duty free access enjoyed under EU trade arrangements.
The Government of Kenya find itself in a difficult position regarding the ‘rolling over’ of the EU-EAC EPA into a UK-only Continuity Agreement. The EU-EAC EPA process remains incomplete because of the unwillingness of certain EAC governments to sign and ratify the EU-EAC trade agreement in its presents form. In this context the Government of Kenya is reluctant sign on to a ‘Continuity Agreement’ with the UK based on the EU-EAC EPA, for fear this could serve to undermine the East African Customs Union, which is predicated upon the application of a single common external tariff.
Against this background the Government of Kenya warmly welcomed the UK’s decision in October 2019 to establish a Transitional Protection Measure, which would have extended existing duty-free access to the UK market for an 18-month period, while the ongoing regional uncertainties in East Africa were resolved.
Unfortunately, from a Kenyan perspective, the UK government has now withdrawn this Transitional Protection Measure proposal for the treatment of Kenya and other similarly placed other countries facing regional trade agreement complications (notably Ghana and Cote d’Ivoire in West Africa and Cameroon in Central Africa) in concluding ‘rolled over’ Continuity Agreements with the UK.
This UK decision was taken on the basis that a ‘no-deal Brexit’ had been averted and the remaining months of 2020 provided enough time to complete the process of ‘rolling over’ the existing EU EPAs into UK-only Continuity Agreements. Unfortunately, while a ‘no-deal Brexit’ may have been averted, the regional complications faced in East Africa remain unresolved and furthermore appear as intractable as ever.
- Kenyan Vulnerability to Triangular Supply Chain Disruptions
Not only will Kenyan direct exports to the UK market be adversely affected by the UK’s future MFN tariff schedule for fruit, vegetable and floriculture exports and the future basis for Kenya’s exports to the UK beyond 2021, but so too will Kenyan exports along triangular supply chains. Significantly these exports are also vulnerable to the potential disruptions of EU/UK trade flows arising from the UK’s withdrawal from the EU customs union and single market and the uncertainties around the future basis for the handling of UK imports from the EU along the short-sailing cross channel roll on-roll of routes, which play such a critical role in the triangular trade in short shelf life exports from Kenya to the UK.
The threat to the functioning of these triangular supply chain has been heightened since January 2020 by the positions being taken by the UK government in its approach to future trade relations with the EU27. The approach envisaged by Prime Minister May in the event of the UK leaving the EU without an alternative preferential trade arrangement in place with the EU was referred to a ‘maximum facilitation’. This approach would have involved limiting controls on imports from the EU along short sailing cross channel roll on-roll off routes, in order to keep imports flowing into the UK.
However only a day after the UK’s formal departure from the EU it was announced the UK government is ‘planning full checks on all EU imports – export declarations, security declarations, animal health checks’ and will require ‘all supermarket goods to pass through border inspection posts’ (3). This was confirmed following a meeting of the UK Border Delivery Group at the beginning of March, when hauliers and freight forwarders were informed the UK government ‘will not seek a waiver for safety and security declarations for ALL goods’ traded across the UK-EU border(4).
These safety and security declarations will require the compilation of 31 items of information for goods exiting the UK for the EU and 45 items of information on goods entering the UK, at an estimated cost of £15 per shipment. This will be required on some 220 million shipments in and out of the UK. This will create a significant additional burden of administration for hauliers moving goods across EU/UK borders.
This needs to be seen in a context where a container traded across an EU border to the UK may contain hundreds of different shipments, each of which will require a safety and security declaration. This is particularly the case for ACP short shelf life products traded along triangular supply chains into the UK market. Documentation shortcomings in any of the shipments in the container would result in the whole container being held up (4). ACP exporters to date have had little need to pay attention to this onward trade, since it was entirely frictionless and a simple process of moving goods from A. (e.g. the Netherlands) to B (e.g. the UK). UK hauliers and logistics companies are concerned the UK governments decision not to seek a waiver of safety and security declarations (entry summary declarations to give them their correct designation) could place a massive burden on their operations.
| The Significance of Triangular Supply Chains: The Case of Cut Flowers
While Kenya has a direct export trade in cut flowers to the UK market, this generally serves the dominant supermarket component of the UK flower market. For the wider UK cut flower market, Dutch traders still play an important role. The Netherlands takes fully 86% of Kenyan cut flower exports to the EU28 market by volume, with the Netherlands accounting for around 80% of cut flowers subsequently imported into the UK for sale by UK florists. It is estimated annual UK imports of cut flowers from the Netherlands are valued at between £800 to £900 million, in a context where Kenya accounts for 43.7% of the value of extra-EU cut flower imports into the Netherlands. The volume of Kenyan cut flower exports to the Netherlands is thus around 10-times larger than the volume of cut flower exports to the UK, with direct exports to the UK being dominated by directly contracted supplies to UK supermarkets. There are very real concerns, given the recent position adopted by the UK government in trade negotiations with the EU, that the functioning of triangular supply chains for short shelf life products like cut flower exports from Kenya could face costly delays and disruptions. There are very real fears disruptions of triangular supply chains, alongside the sudden removal of MFN import duties on products such as Roses could see the emergence of new supply chains sourced from MFN suppliers. Countries like India are only 90 minutes flying time further away than Kenya in a context where substantial private sector investment has taken place in protected Rose production for export in recent years. This has taken place alongside substantial Indian government investment in the establishment of cold chains capable of supporting a major expansion of Rose exports focused on the UK market. Currently the principal constraints on such an expansion are the 8.5% MFN tariff applied to Indian Roses and the high shipment costs given the relatively low volumes currently being exported. Were the MFN tariff to be removed the issue of high shipment costs would be resolved, as volumes increased and the unit cost fell, with their being no shortage of flights from the rose growing areas of India to the UK. There are therefore growing concerns that UK trade policy changes could profoundly transform the context for future investment and growth in the all-important cut flower sector in Kenya. |
Since 1992 the daily volume of trucks entering the UK along short sailing cross channel routes has grown 5-fold (7-fold at peak times), in a context where safety and security declarations were not required the last time border controls were applied on EU/UK trade. While both Switzerland and Norway have reached agreements with the EU waiving the need for such safety and security declarations, the UK appears determined not to replicate the arrangements the EU has in place with either Switzerland or Norway (4).
ACP goods exported to the UK along triangular supply chains will inevitably be caught up to some degree in these border clearance congestion and traffic delays, with potentially short shelf life ACP agri-food exports from countries like Kenya being worse affected. Border clearance congestion and traffic delays are increasingly seen as being inevitable by both the EU and the UK, if a comprehensive EU/UK trade agreement cannot be set in place in the next 9 months (5).
These border clearance congestion and traffic delays could be on such a scale as to make the continued use of triangular supply chains in serving the UK market commercially non-viable in 2021, with this situation only easing if a comprehensive EU/UK trade agreement is eventually concluded.
Against this background Kenya faces considerable uncertainty around its future export trade to the UK market
| Comment and Analysis
– The MFN Tariff Issue Kenyan exporters, through FPEAK, have sought to engage with the UK on-line MFN review consultation process, with the aim of making known Kenyan concerns. The Kenyan government is also understood to have made direct representations to the UK government in regard to their concerns around the MFN tariff review. Until the UK governments’ future MFN tariff schedule is announced, the Government of Kenya, in cooperation with other concerned ACP exporters, will need to continuously reiterate their concerns over the UK’s future MFN tariff policy. Given the level of concerns expressed to date, less dramatic changes to UK MFN tariffs than proposed in October 2019 would appear likely. This should bring some relief to those officials in the UK government tasked with negotiating new ‘UK-only’ trade agreements, since in the highly protected agri-food product sector the UK will have held on to a range of important bargaining chips (high MFN tariffs) for use in bilateral trade negotiations with countries such as India. However, the situation remains uncertain and hence individual Kenya exporters will need to review their vulnerability to the increased competition which could arise from the removal of current UK MFN tariffs. This may require market repositioning strategies on the UK market or export diversification strategies to focus more on EU27 markets, where high margins of tariff preference over MFN suppliers will continue to be enjoyed. – Kenya’s Future Duty-Frees Access to the UK Market In regard to the future basis for Kenya’s continued duty free-quota free access to the UK market, it should be noted Kenya is the only East African Customs Union member vulnerable to loss of such preferential access. All other EAC members are classified as least developed countries, and hence have no need of a Continuity Agreement with the UK (or EPA with the EU) to ensure continued duty-free access to the UK market. In the case of the UK market this continued duty free will be assured through the UK’s parallel scheme in favour of LDCs which was announced as early as June 2017 (see companion epamonitoring.net article ‘UK government commits to extending EBA access for LDCs post Brexit’, 30 June 2017). It is thus only Kenya which would have its trade affected by the absence of Continuity Agreement with the UK. However, concluding a Continuity Agreement with the UK (as with the EU EPA) would drag the least developed country members of the EAC into reciprocal preferential trade arrangements, despite the recognised right of LDCs enshrined in the WTO, to non-reciprocal preferences. This needs to be seen in a context where Kenya accounts for less than 30% of the total population of the East African Customs Union. Given the existence of the East African Customs Union, the integrity of which would be fundamentally undermined by Kenya bilaterally signing and applying a reciprocal preferential trade agreement with the UK (or EU), in terms of access to the UK market a case can be made for the UK finding a mechanism to treat the EAC as whole as a least developed region. If this should not prove to be possible, a mechanism should be sought which preserves Kenya’s duty-free access the UK market, without compromising the right of LDC EAC members to non-reciprocal trade preferences. One option in this regard would be the adoption of an extended interpretation of the coverage of EBA style preferential arrangements along the lines of an earlier ‘Norway-style EBA+’ arrangement. This added countries to the EBA beneficiary list on the basis that they were lower middle-income countries (LMICs) and had populations under 75 million. What is clear is that if the rights of EAC LDCs are not to be compromised, then the UK government should not push Kenya into concluding bilaterally a reciprocal preferential trade agreement which would automatically (and without their sovereign consent) bring EAC LDC governments into a reciprocal trading arrangement with the UK. A solution needs to be found which does not force the Government of Kenya into choosing between continued regional market integration in East Africa and its existing trade relationship with the UK. In this context the UK’s withdrawal of its Transitional Protection Measure proposal simply complicates matters. It serves to intensifying pressure to negotiate a UK only trade arrangement in a context where the UK itself it poorly placed to devote the necessary attention to an issue which could carry profound socio-economic consequences for those individuals and communities in Kenya whose livelihoods are dependent on UK export markets. In this context reinstating and extending the Transitional Protection Measure tabled in October 2019 would give priority to ensuring additional time is made available to find appropriate solutions to the dilemma faced in East Africa, rather than simple ‘box ticking’ in a context where UK government trade officials are increasingly under pressure to take short cuts in dealing with complex trade policy issues. In this context it should be noted that to date the Government of Kenya has not begun any tariff phase downs on imports from EU27 member states, with the EU continuing to de facto extend non-reciprocal duty free-quota free access to imports from Kenya. For as long as the Kenyan government continues not to apply agreed tariff reductions no discrimination against UK exports relative to EU27 exporters can emerge. In this context the UK would do well to mirror the EU’s approach, since no UK interests in trade with Kenya would be affected by the adoption of such an approach. Politically, it would appear important to find a solution to the dilemma faced in East Africa before the Commonwealth Heads of Government Meeting (CHOGM) in Kigali (currently scheduled for the end of June 2020) at which trade will be one of the five themes under discussion (6). Such an early announcement can be seen as essential to averting any disruption of Kenya-UK commercial relations in those products where current tariff preferences are most significant. The hard reality is that uncertainty over the future of Kenya’s duty-free access to the UK market from 1st January 2021 could begin to have real commercial consequences from as early as the second half of 2020, as negotiations get underway for the supply of horticulture and floriculture products to the UK market for 2021. This could generate a downward pressure on prices offered for Kenyan products as UK importers seek to hedge against a possible loss of duty-free access to the UK market. – Triangular Supply Chain Issues In terms of triangular supply chains, individual Kenyan exporters will need to review their exposure to disruptions along such trade routes to the UK market. Where a high degree of exposure is determined to exist, it may be necessary for Kenyan exporters to explore new direct routes to serving UK markets. Initiatives have already been taken in this regard, with the initiation of direct cargo flights from Nairobi to Doncaster/Sheffield airport in the north of England (7), as early as June 2017 (see companion epamonitoring.net article, ‘Hard’ Brexit Could Create Fruit and Vegetable Shortages in the UK’, 23 November 2017). However, the last recorded flight along this route (which at its peak handled 11 flights per month), was in on the 6th August 2019, suggesting there are some operational problems faced in re-directing cargoes directly to the UK, while existing routes via ports of landing in EU27 member states continue to operate without interruption. Nevertheless, this illustrates the potential for the development of new direct routes to the UK in the event of disruptions of triangular supply chains, provided of course other key services can be assured (e.g. SPS clearance on landing). At the policy level the Government of Kenya could potentially play a leading role in initiating a political dialogue with the UK and EU authorities on the need for a clear political commitment to taking all necessary measures to ensure the continued smooth functioning of triangular supply chains serving the UK market via initial ports of landing in EU27 member states. Such a Kenyan government led initiative would be likely to garner support from a wide cross section of ACP countries, whose exporters would be similarly adversely affected by any disruption of current triangular shipment routes. However, in addition to this political dialogue there will need to be a parallel dialogue on the practical logistical and border clearance measures which will need to be put in place to facilitate the continued smooth flow of goods along these triangular supply chains. For short shelf life fruit, vegetable and cut flowers, COLEACP could potentially play a role in coordinating such a technical dialogue process (if the resources are made available). However other bodies will also need to get involved given the specific complications which will arise along other triangular supply chains (e.g. for Caribbean rum exports, where bulk rum is exported to EU27 countries before bottling and re-export to the UK). What is clear is that such initiatives are needed if the existing ACP trade to the UK along triangular supply chains is not to be seriously undermined. |
Sources
(1) parliament.uk, ‘Trade Policy Update: Written statement – HCWS95’, 6 February 2020
https://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2020-02-06/HCWS95/
(2) ‘Approach to MFN Tariff Policy: Designing the UK Global Tariff for 1st January 2021’, February 2020
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/864124/Approach_to_MFN_Tariff_Policy__17_.pdf
(3) Guardian, ‘Johnson to impose full customs checks on goods from EU – report’, 1st February 2020
https://www.theguardian.com/politics/2020/feb/01/johnson-to-impose-full-customs-checks-on-goods-from-eu-report
(4) Twitter feed, ‘Logistics/Freight/Ports/Shipping all FURIOUS & BAFFLED’, Peter Foster, Europe Editor Daily Telegraph
https://twitter.com/pmdfoster/status/1236940282677153798
(5) EC, ‘Future EU-UK Partnership: Question and Answers on the negotiating directives’, 25 February 2020
https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_326
(6) The Commonwealth, ‘Commonwealth heads of government to meet in Rwanda’, 24 September 2019
https://thecommonwealth.org/media/news/commonwealth-heads-government-meet-rwanda
(7) Doncaster/Sheffield Airport, ‘New cargo win for Airport’, June 21, 2017
http://flydsa.co.uk/latest-news/new-cargo-win-for-yorkshire-airport
(8) flightera.net, ‘8V2601 ACG Air Cargo Global Flight from Nairobi to Doncaster and Doncaster to Liege’
https://www.flightera.net/en/flight/ACG+Air+Cargo+Global/8V2601