Summary
An ongoing dairy sector trade war in the EAC over accusations of the use of imported milk powders in value added products exported regionally, is seeing non-tariff barriers being used to block the free movement of dairy products within the EAC. The situation in the dairy sector is complex, with the conflict reflecting wider trade tensions. At heart there would appear to be a need to deepen regional economic integration if such trade conflicts are not to periodically flare up. The simmering trade war makes it particularly difficult for the EAC to reach agreement on ‘green lane’ protocols to keep trade moving in the face of the Covid-19 pandemic. This could potentially carry serious economic and food security consequences. In addition, regional trade tensions could well be exacerbated by the UK’s final departure from the EU customs union, which in the face of Covid-19 disrupted trade discussions could present the Government of Kenya with some very difficult choices between losing duty free access to the UK market at considerable cost to the Kenyan economy or going it alone with tariff liberalisation commitments to the UK which would impact on the whole of the EAC and exacerbate existing intra-regional trade tensions. The only way out of this bind would be for the UK governments to unilaterally extend the Transitional Protection Mechanism initially proposed for an 18-month period in October 2019.
There is an evolving dairy sector trade war in East Africa underway, driven in part by the use of imported milk powders in the production of low cost reconstituted dairy products which are then traded regionally. With Kenyan dairy milk processors witnessing lower sales in Western Kenya which border Uganda (1), in December 2019, the Kenyan authorities sent a delegation to Uganda to verify if milk imports coming into Kenya were of Ugandan origin and did not originate in a third country (2).
This followed a sudden ‘surge in volumes of imported milk purportedly from Uganda’ and growing complaints from Kenyan dairy companies operating in the border region. Kenyan data suggested ‘milk imported from East African Community (EAC) member States hit 110.7 million litres between January and September from three million litres in 2016’, with most of these imports coming from Uganda. It was felt Uganda lacked the production capacity to generate such export volumes from domestic production (2).
Following the December 2019 Kenyan government mission to Uganda the imposition of a 16% duty on imports from Uganda was recommended. While this specific duty on Uganda dairy products was rejected, it was agreed to levy a duty on milk products coming from outside the East African Community (EAC)’. Alongside this measure the Kenyan President, Uhuru Kenyatta, instructing police to ‘impound any powdered milk or dairy products that do not meet Kenyan standards’ (1). This rapidly saw 54.3 tonnes of milk powder and 262.6 tonnes of UHT milk seized, while other consignments were turned back at the border.
In response the Ugandan authorities claimed all consignments had been ‘cleared by the Kenya Revenue Authority, Kenya Bureau of Standards and Kenya Plant Health Inspectorate Service’ prior to the seizures by the police (3).It was argued the Kenyan actions were in contravention of ‘the principle of good neighbourliness and Kenya’s obligation under the treaty establishing the East African Community, Customs Union protocol, Common Market protocol and World Trade Organisation trade facilitation agreement’ (1).
With the aim of protecting ‘local farmers from dumping of milk’, the Kenya government is now considering introducing a 10% levy on imports of milk products from EAC member states, despite the existence of the East African Customs Union. Imports of milk will in future only be allowed with a valid import permit issued by the Kenya Dairy Board. The duty will be levied at the point of entry with additional charges of up to 21% if payments are delayed (4).
This needs to be seen in a context where the price paid to local farmers In Kenya for a litre of milk had fallen to Sh19 at the end of 2019 from a high of Sh37 in January 2019 (2). However, this decline in the farm gate price of milk of 33% was attributed by milk processors to ‘a sharp increase in production’ (1). This situation has seen the Kenyan government advance proposals to introduce ‘price controls to protect farmers from exploitation by processors’ (5).
According new proposed regulations, ‘the Agriculture cabinet secretary in consultation with the Kenya Dairy Board will determine the minimum farm-gate prices based on factors such as cost of production, transport and statutory deductions’ (6). The Chief Executive of the Kenya Dairy Farmers Association highlighted how the association had been ‘pushing for predictable pricing for raw milk’, with farmers certainly being unlikely to complain about the initiative ‘if the prices are set fairly’. At the beginning of April Kenya’s leading dairy company Brookside Dairy ‘adjusted raw milk prices upward by one shilling per litre to Ksh36 ($0.34) from Ksh35 ($0.33) to cushion farmers from the effects of the Covid-19 pandemic’. This needs to be seen in a context where despite their being around 40 milk processors in Kenya ‘the top three—Brookside, New KCC and Githunguri Dairy—control about 80 per cent of the formal milk industry’ (5).
There have been long standing concerns in Kenya over the functioning of milk supply chains and the danger of abuse of a dominant market position, given the market concentration in the Kenyan dairy sector. However, the Kenyan government to date has struggled to get to grips with the policy framework and support measures required to ensure fair and more stable milk prices. Consequently, trade wars periodically flare up despite an EAC Customs Union Treaty which bans ‘any form of non-tariff barriers by member states’ (3)
In January 2020, the Executive Director of the Private Sector Foundation Uganda blamed the escalating dairy sector trade dispute on ‘a breakdown in the communication to the relevant technical authorities’, Uganda and Kenya (3). However, the dairy dispute also needs to be seen against the background of ‘Uganda and Tanzania…levying duty on some goods from Nairobi’ (4) and an increased use of non-tariff barriers in trade between EAC Customs Union members which is ‘not good for trade and the region’ (3).
Indeed, overall trade disputes are now multiplying in East Africa. According to press reports ‘Uganda’s trade with Rwanda is down to a trickle after a year-long of frosty relations; Tanzania has locked out Ugandan timber, sugar and maize; while Kenya, which has been open to imports of maize and beans from Uganda has been reluctant to open its market to manufactured products from Uganda’. It is reported use of ‘non-tariff barriers have intensified as member countries become competitors amid regional protocols that eliminate taxes on goods originating from within the economic bloc as conceived under the EAC Treaty (6).
| Comment and Analysis The introduction of lockdowns, movement restrictions and border closures, while temporarily distracting attention from this emerging dairy sector trade war, will throw up new challenges for intra-regional trade relations within the East African Customs Union. Ideally, before the wave of peak Covid-19 infections strikes Africa in July/August 2020, EAC governments will need to have set in place protocols for facilitating cross-border freight movements, modelled on the EU’s ‘green lane’ scheme. This is likely to be a tricky process, given the evidence emerging of the impact of internal Kenyan movement restrictions and social distancing requirements on the movement of high value fruit and vegetables for export. A night-time curfew has already disrupted necessary fruit and vegetable freight movements essential to making full use of available air freight capacity which has been severely restricted by the impact of the Covid-19 pandemic. Against this background establishing by remote teleconferencing regional protocols on everything from cross border movements of goods and health protocols for the treatment of infected transport sector workers, to safe handling and non-discrimination protocols for port operations on regionally critical transport routes, could prove extremely difficult. Yet these issues will need to be expeditiously dealt with if the adverse economic consequences of the Covid-19 peak of infection in July/August 2020 are to be minimised. EAC rules related to cross border freight movements are already under strain in the face of escalating trade disputes, focussed on the use of non-tariff trade policy measures which restrict the free flow of goods in what is nominally a single customs territory. This raises the complex issue of the need to create single market, with a single set of rules and regulations uniformly applied, as a necessary complement to the smooth functioning of a customs union. To the extent this issue is not effectively addressed, then disputes around the use of non-tariff measures will continue to occur. This is recognised in the region. According to Dr Fred Muhumuza an economist at Uganda’s Finance ministry, these enduring trade disputes reflect ‘a shallow integration in which politics and business are not completely married to a common objective’, with this giving rise to ‘a weak trade arrangement’. It is argued the EAC needs to go to ‘a higher level of political integration’ if trade and economic integration is to work (5). The dairy sector can be seen as flash point for these types of non-tariff disputes given the way international trade in dairy products interacts with local dairy sector development via the trade in milk powders. This trade in low priced milk powders can come to constitute an important benchmark for local fresh milk prices, given they are extensively used in the production of long-life milk and other simple value-added dairy products. There use can come to fundamentally distort the process of price formation for fresh milk. Currently, Kenyan politicians are claiming cross border sales of reconstituted dairy products based on imported milk powders are undermining Kenyan diary markets and are in violation of EAC rules of origin. It is claimed that under these rules of origin if Ugandan dairy companies produce milk from imported milk powders then it should attract a duty in Kenya. However, this is a complex issue, since the price of imported milk powders is only one factor bearing on price formation in the milk sector, with important issues related to the functioning of local diary supply chains also playing an important role. In addition, it is difficult to verify that Ugandan milk products exported to Kenyan were not produced using locally sourced milk. It is argued the Ugandan dairy company Pearl Dairies ‘produces only powdered and long-life milk to mitigate potential losses from the limited market for fresh milk in their domestic market’, with these products being exported. This needs to be seen in a context where ‘only 33% of Uganda’s milk is processed due to a combination of low purchasing power and limited farm-to-market infrastructure’ (5). The need to export due to limited local marketing infrastructure could well be the case. The situation is further complicated by the fact that the bulk of internationally sourced milk powders entering the EAC do so via Kenya. EU milk powder exports to EAC countries are illustrative in this regard. In 2019 some 69.2% of all EU milk powders exported to the EAC entered through Kenya with a further 22.3% entering via Tanzania. In 2019 milk powders explicitly destined for Uganda increased only 71 tonnes, compared to a 18,728 tonne increase for the EAC as a whole (7). If Ugandan dairy companies are using imported milk powders in reconstituted dairy products serving Kenyan markets, then Kenyan companies are complicit in this practice. While EU exports of milk powders to the EAC region have shown a variable trend over the past six years, by 2019 they were 50% higher than in 2014 and 11.6% higher than highest previous level in 2015, the year immediately following the introduction of the Russian import embargo on EU agri-food products. This increase in EU milk powder exports to the EAC also needs to be seen in a context where towards the end of 2015 the French dairy company Danone purchased a 40% stake in Brookside Dairies, which is 50% owned by the Kenyatta family (7). The situation in the East African dairy sector is thus increasingly complex. EU Concentrated Milk Powder Exports to the EAC (0402) (Tonnes)
EU Fat Filled Milk Powder Exports to the EAC (190190)
Source: EC Market Access Data Base These unresolved regional trade tensions could be exacerbated in the near future given the difficult international trade choices the Government of Kenya could be confronted with as a result of the UK’s impending departure from the EU customs union and single market. The Covid-19 pandemic has frozen the discussions around a future EU-EAC Continuity Agreement and the simple rolling over of the EU-EAC EPA which only Kenya has signed and moved to ratify. Without the establishment of an alternative trade framework with the UK to replace the current EU arrangement which will lapse once the UK leaves the EU customs union, Kenyan exporters seriously will lose their existing duty-free/quota-free access to the UK market from 1st January 2021. This would leave Kenyan exporters trading under UK Standard GSP tariff regime until such time has it has approved all necessary international Conventions required for access to a UK-only GSP+ regime. Kenya would be the only EAC member facing this loss of duty-free/quota-free access to the UK market, since all other EAC members are least developed countries (LDCs) and are hence eligible for the full duty-free/quota-free access for LDCs which the UK announced in June 2017 which would enter into force from the moment the UK leaves the EU customs union (see epamonitoring.net companion article, ‘UK government commits to extending EBA access for LDCs post Brexit’, 30 June 2017). In the coming months, with the Covid-19 pandemic having halted all face to face trade negotiations and with all trade officials preoccupied with dealing with the trade consequences of the Covid-19 pandemic, the Kenyan government will either have to: a) Persuade the UK government to reintroduce the unilateral Transitional Protection Mechanism announced in October 2019 in the face of the prospect of a no-deal Brexit at the end of October 2019, with the aim of averting for an 18 month period a sudden loss of duty free access to the UK market (see epamonitoring.net companion article, ‘Continued Duty Free Quota Free Access to UK Market Secured but the MFN Issue Looms’, 28 October 2019) b) Unilaterally sign a Continuity Agreement with the UK, which will de facto apply to all EAC members, potentially exacerbating intra-regional trade tensions. c) Accept the loss of existing duty-free/quota- free access to the UK market, in a context where for certain export products this would result in a re-imposition of import duties, which would undermine the market position of Kenyan exporters, during the critical period of post-Covid-19 trade recovery period. Only a unilateral decision by the UK government to reinstate the proposed Transitional Protection Mechanism would avert either an exacerbation of trade conflicts within the EAC or the imposition of further damage to a Kenyan economy which is being devastated by the trade consequences of the Covid-18 pandemic. |
Sources:
(1) The East African, ‘Row as Uganda protests milk seizures by Kenya’ 17 January 2020
https://www.theeastafrican.co.ke/business/Row-as-Uganda-protests-milk-seizures-by-Kenya/2560-5421694-14p9gwa/index.html
(2) Business Daily, ‘High Uganda milk imports spark alarm’, 11 December 2019
https://www.businessdailyafrica.com/corporate/companies/High-Uganda-milk-imports-spark-alarm/4003102-5381186-licqklz/index.html
(3) Business Daily, ‘Kenya sends back 19 milk trucks, Uganda plans retaliation’, 23 January 2020 https://www.businessdailyafrica.com/news/ea/uganda/Kenya-sends-back-19-trucks-Uganda-milk-row-deepens/4003148-5428472-y1dr2az/index.html
(4) Business Daily, ‘Kenya seeks 10pc tax on East Africa milk imports’, 13 April 2020
https://www.businessdailyafrica.com/markets/commodities/Kenya-seeks-10pc-tax-on-East-Africa-milk-imports/3815530-5523044-nm4lkn/index.html
(5) The East African, ‘Kenya shields dairy farmers with import levy’, 7th April 2020
https://www.theeastafrican.co.ke/business/Kenya-shields-dairy-farmers-with-import-levy/2560-5514208-awi7lw/index.html
(6) The East African, ‘Uganda-Kenya milk war boils over with no end in sight of regional trade tiffs’, 19 January 2020
https://www.theeastafrican.co.ke/business/Uganda-Kenya-milk-war-boils-over/2560-5423720-rgyjxmz/index.html
(7) Standardmedia.co.ke, ‘French Milk Firm – Danone Milk Comes to Kenya’, 10 October 2015
https://www.standardmedia.co.ke/business/article/2000179149/french-milk-firm-danone-milk-comes-to-kenya