THE IMPLICATIONS OF INTERNATIONAL

TRADE RESTRICTIONS ON KENYA:

A PRELIMINARY ANALYSIS

by

John Thinguri Mukui

[email: jtmukui2000@yahoo.com]

Report prepared for the United Nations Development Programme

(UNDP), Nairobi

25 November 2003
A

ABBREVIATIONS
ACP
AERC
AGOA
AMS
ATPSM
CAP
CARICOM
CGE
CIDA
CIF
COMESA
DAC
EBA
EU
FAO
FTA
GATT
GDP
GNI
GSP
GTAP
HACCP
HIPC
HS
IMF
ISO
KIPPRA
LDC
LDNFIDC
MDG
MFA
MFN
MUB
N.E.S.
NFIDC
NTB
NTR
ODA
OECD
QUAD countries
SDT
SITC
SPS
SSA
TBT

African, Caribbean and Pacific countries

African Economic Research Consortium
African Growth and Opportunity Act (US)
Aggregate Measure of Support (in Agreement on Agriculture)
Agricultural Trade Policy Simulation Model
(European Unions) Common Agricultural Policy
Caribbean Community and Common Market
Computable General Equilibrium (model)
Canadian International Development Agency
Cost, Insurance and Freight
Common Market for Eastern and Southern Africa
Development Assistance Committee of the OECD
(European Unions) Everything But Arms
European Union
Food and Agriculture Organization of the United Nations
Free Trade Agreement
General Agreement on Tariffs and Trade
Gross Domestic Product
Gross National Income
Generalized System of Preferences
Global Trade Analysis Project
Hazard Analysis and Critical Control Points
Heavily Indebted Poor Countries initiative
Harmonized Commodity Description and Coding System
International Monetary Fund
International Organization for Standardization
Kenya Institute for Public Policy Research and Analysis
Least Developed Countries
Least Developed and Net-Food-Importing Developing Countries
Millennium Development Goals
Multifibre Arrangement
Most Favored Nation
Manufacturing Under Bond
Not elsewhere specified (jargon for other)
Net-Food-Importing Developing Country
Nontariff Barriers
Normal Trade Relations (US)
Official Development Assistance
Organization for Economic Cooperation and Development
Canada, European Union, Japan and USA
Special and Differential Treatment
Standard International Trade Classification
Sanitary and Phytosanitary measures
Sub-Saharan Africa
Technical Barriers to Trade

TRIPS
TRQs
UN
UNCTAD
UNDP
UNIDO
VAT
WTO

Trade-Related aspects of Intellectual Property Rights

Tariff Rate Quotas
United Nations
United Nations Conference on Trade and Development
United Nations Development Programme
United Nations Industrial Development Organization
Value Added Tax
World Trade Organization

ii

THE IMPLICATIONS OF INTERNATIONAL TRADE RESTRICTIONS ON KENYA:

A PRELIMINARY ANALYSIS1
John Thinguri Mukui

There are no statesmen in this business. Trade theory is about identifying whose hand
is in whose pocket and trade policy is about who should take it out Joseph Michael
Finger (1981)

Its hard to convince a layman of the advantages of free trade since it is easy to see
where the dollars go, but difficult to see where they come from. People have personal
experience with imports of foreign goods; but they rarely encounter their own
countrys exports unless they travel abroad extensively. Only by abstracting from
introspection can we see the total picture. Hal R. Varian (1989; 2000)

1.

INTRODUCTION

1.
The World Trade Organization (WTO) agreement, signed in Marrakesh on 15th April 1994,
defines the new international framework for trade including a more effective and reliable dispute
settlement mechanism; global reduction by 40% of tariffs and wider market-opening agreements on
goods; and a multilateral framework of disciplines for trade in services and for the protection of
Trade-Related aspects of Intellectual Property Rights (TRIPS), as well as the reinforced multilateral
trade provisions in agriculture and in textiles and clothing (World Trade Organization, 2001a). The
main means for accomplishing this task are the adoption of tariff bounds, the dismantling of
nontariff barriers (NTBs) in the near future, and a full coverage of all sectors and activities
(including agriculture and services). The WTO mission also includes strengthening each countrys
domestic policies, supply capabilities, and institutional frameworks so as to facilitate compliance
with the requirements of the WTO agreement. The GATT/WTO has had a powerful and positive
impact on trade except in sectors of particular export interest to developing countries (such as
agriculture, textiles and clothing) but also largely exempted developing countries from the
obligations to liberalize under the principle of Special and Differential Treatment (SDT), which
includes longer periods to phase in obligations and more lenient obligations (Whalley, 1999;
Subramanian and Wei, 2003; Hoekman, Michalopoulos and Winters, 2003). As observed by
Frederic Jenny, achieving free trade and competition is like going to Heaven: on the one hand,
there are many ways to get to heaven; on the other hand, everybody wants to get there, but not too
soon (Hawk, 1998).
2.
The purpose of this study is to provide some indicative figures on the impact to Kenya of
the current trade restrictions imposed in the developed countries, as a contribution to Goal eight of
1 A few footnotes have been added to the original text. These include (a) footnote 8 on the Swiss formula, (b)
footnote 12 on the use of the consumer surplus approach to analyze the impact of policy changes, and (c)
footnote 13 on the association between trade policy reform and growth.

the Millennium Development Goals (MDG). The study will focus on the cost of excluding Kenya
from substantial trade opportunities due to the constriction of productive capacity and investment
as a result of domestic support, market access and export subsidies in the rich countries. The trade
opportunities include exports of goods and services that Kenya may have comparative advantage in
producing, while imports would be from both industrial and agricultural sectors. In addition, local
industrial production and exports might prove relatively weak in the face of increased international
competition that will result from the new global trading system. In such a situation one should
think about the appropriate corrective policies required to help domestic production activities to
face these new challenges.
3.
The first seven millennium development goals focus on outcomes, identifying standards of
wellbeing to be achieved by 2015 and concern both the nature of the lives individuals lead and the
environment in which they live (Gore, 2003). Goal 8 focuses on relationships, identifying various
aspects of the global partnership for development that should be forged to support the realization of
these standards. The study will limit itself to Indicators 38-41 of Goal 8 dealing with market access,
namely, (a) proportion of total developed country imports (by value, excluding arms) from
developing countries and from Least Developed Countries (LDCs) admitted free of duties and
quotas, (b) average tariffs and quotas imposed by developed countries on agricultural products and
textiles and clothing from developing countries, (c) domestic and export agricultural subsidies in
OECD countries as percentage of their GDP, and (d) proportion of Official Development Assistance
(ODA) provided to help build trade capacity (United Nations Development Group, 2003).
4.
Due to time constraints, the study does not introduce new evidence, but summarizes the
results of studies undertaken to estimate gains from global liberalization of merchandise trade. The
study does not investigate the links between trade liberalization and poverty reduction factor
prices, income and employment on the income side; and cost-of-living on the household
expenditure side provide some of the linkages (see McKay, Winters and Kedir, 2000; Reimer, 2002;
Winters, 2002; Winters, 2003; Winters, Mcculloch and Mckay, 2002; Hertel, Ivanic, Preckel and
Cranfield, 2003; Brooks, 2003). A review of the literature on trade liberalization and poverty by
Winters, Mcculloch and Mckay (2002; 2004) in four key areas (economic growth and stability,
households and markets, wages and employment, and government revenue) concludes that there is
no simple generalizable conclusion about the relationship between trade liberalization and poverty,
and the picture is much less negative than is often suggested. Finally, the study does not analyze the
role of complementary policies to ease the adjustment strains e.g. infrastructure support (including
telecommunications, reliable and affordable energy sources, and functioning credit markets),
development of market institutions, and measures to reduce transaction costs (Ng and Yeats, 1997;
Ng and Yeats, 2000). For example, high transport costs could also translate into relatively high
tariffs since they raise the CIF value of imports, and thus tariffs levied on the total value of imports
(African Development Bank, 2004).
5.
The 19-country study on Developing Countries and the Uruguay Round commissioned by
the Canadian International Development Agency (CIDA, 1996a) assesses the implications of the
Uruguay Round for countries who are significant recipients of CIDA assistance to better understand
the impacts of the Round at an individual country level, as distinct from the more aggregate
regional bloc level employed in model-based evaluation work. The 19 countries (or country groups)
are Jamaica, Guyana, Costa Rica, CARICOM, Peru, Bolivia, Ecuador, Mozambique, Zambia,
Zimbabwe, South Africa, Ghana, Cte dIvoire, Egypt, Thailand, India, Bangladesh, Indonesia and
China. The Caribbean Community and Common Market (CARICOM) currently comprises of 13
member countries, namely, Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica,

Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, and Trinidad and Tobago. Since Kenya is not included in the country-level studies,
apart from Mwega (2000) and Mwega and Muga (1999), the study tries to infer the possible effects
of global trade reform on Kenya based on global or regional-level impacts.

2.

THE PERFORMANCE OF THE EXPORT SECTOR

6.
The share of exports in GDP has stagnated around 26% for the last two decades, with
merchandise exports representing about 16% and services exports representing about 10%. The
share of manufactured exports in GDP has, however, registered a marginal increase from 1.9% to
2.4% between 1980-89 and 2002, reflecting the low international competitiveness of the
manufacturing sector. During the same period, Kenyas share in world exports declined from
0.049% to 0.023%, mainly due to the sharp fall in coffee exports (World Bank, 2003a). The only
remarkable performance is the increase in exports of cut flowers, vegetables, and outer garments.
The latter increased greatly in 2002 due to response to the US African Growth and Opportunity
Act.
7.
The contribution of coffee to total merchandise exports declined from 17.9% in 1990 to
about 6.1% in 2001, while that of tea increased from 25.5% to 28.4%, and horticulture increased
from 13.0% to 17.5%. In 2001, Kenya was the largest tea exporter in the world, the fourth largest
exporter of cut flowers, the twelfth largest exporter of vegetables, while its position in coffee
exports moved from 9th to 20th between 1980 and 2001 (World Bank, 2003a).
8.
Tea production increased from 197,000 tons in 1990 to an estimated 294,600 tons in 2001,
with most of the increase emanating from the smallholder sector. During the same period, export
volume increased from 178,100 tons to 268,500 tons, the price declined from US cents 164.2 per
pound to 162.0, while the value of tea exports increased from $292.4 million to $435.0 million
(International Monetary Fund, 2003). The increase in export revenue was therefore on account of
change in export volume, other than for the short surge in international tea prices in 1997 and
1998.
9.
Coffee production declined from 197,000 tons in 1990 to 52,000 tons in 2001. The volume
of exports declined from 115,000 tons to 62,000 tons, while the average price dropped from US
cents 75 per pound to 69, and the value of exports declined from $192 million to $94 million
(International Monetary Fund, 2003). Coffee has therefore experienced reduction in both export
volumes and prices.
10.
The value of horticultural exports increased from $83 million in 1990 to $276 million in
2002. The share of coffee, tea and horticulture combined decreased from 56.8% to 40.9% between
1990 and 2001. The share of petroleum products (net of aircrafts and ships stores) in total exports
increased from 5.9% to 9.4% during the same period (International Monetary Fund, 2003).
11.
Kenyas export performance has been disappointing, as measured by export growth and
composition of exports. For example, the export products concentration index (using a modified
version of the Herfindahl-Hirschman index computed on the 239 products at three-digit SITC,
Revision No. 2 level) increased from 0.233 in 1990 to 0.297 in 2000, where a country with a
preponderance of trade value concentrated in very few products will have an index value close to

1.0 (United Nations Conference on Trade and Development, 2002) 2. As argued by Rodrik (1998),
countries that export only a few commodities (high export products concentration) are presumably
more exposed to external risk than countries with a diversified set of exports.
12.
The international prices of Kenyas exports have on the whole been on a declining trend.
According to the World Banks World Development Indicators (World Bank, 2003b), the price of
cotton declined from US cents 225 per kg in 1970 to 110 in 2001, coffee arabica declined from US
cents 409 per kg to 143, and tea declined from US cents 298 per kg to 167. The international prices
of import-competing crops also declined, with maize from $208 per metric ton in 1970 to $93 in
2001, rice from $450 per metric ton to $180, wheat from $196 per metric ton to $132, and sugar
from US cents 29 per kg to 20. The data also shows that, in 2001, the EU domestic price of sugar
was comparatively high at US cents 55 per kg and 49 in the US, courtesy of the trade distortions in
the form of domestic support and import quotas in the EU and US.
13.
Nontraditional exports is a commonly used phrase today. According to Barham, Clark,
Katz and Schurman (1992) [also cited in Thrupp, Bergeron and Waters (1995) and Murray (1999)],
an agro-export is considered nontraditional if it (a) was not traditionally produced in a particular
country (e.g. snow peas in Guatemala), or (b) was traditionally produced for domestic consumption
but now is exported (e.g. flowers in Costa Rica, apples in Chile), or (c) is a traditional product now
exported to a new market (e.g. Caribbean bananas to Russia). The definition thus stresses that the
crop may be newly introduced, or was traditionally produced for domestic consumption but has a
high exchange value in the global economy. In general, these crops share characteristics of high per
unit value and high intensity in production. The use of the concept is relative, as an export product
could be traditional in one country and nontraditional in another, for example, grapes are
traditional in Chile but not in other Latin American countries. Given this complexity, some
analysts prefer to use the term high value exports when referring to these emerging diversified
crops (Barham, Clark, Katz and Schurman, 1992).
14.
Kenyas exports can be divided into traditional and nontraditional exports. Most empirical
studies distinguish between traditional and nontraditional exports by employing export share
thresholds (Balassa and Associates, 1971; Balassa, 1977; Blackhurst and Lyakurwa, 1998; Ng and
Yeats, 2002). The World Banks World Development Indicators (1997) definition of traditional
exports includes the top 10 three-digit SITC commodity groups in a base year, unless they total less
than 75% of exports, in which case more three-digit groups are added until 75% is reached (see also
Mwega and Muga, 1999). Nontraditional exports are, by implication, all of the rest. Based on this
definition, Kenyas traditional exports (taking 2000 as the base year) comprise the following 13
commodity groups accounting for 75.79% of total exports: fish SITC-034 (2.30% of total exports),
vegetables SITC-054 (6.58%), fruits SITC-057 (1.11%), fruit preserved or fruit preparations SITC058 (2.17%), coffee (9.80%), tea and mate (29.75%), tobacco-manufactured SITC-122 (1.32%), other
crude materials SITC-278 (2.37%), crude vegetable materials n.e.s. which include cut flowers SITC292 (7.49%), heavy petroleum/bitumen oils SITC 334 (7.86%), medicaments including veterinary
SITC-542 (1.87%), lime/cement/construction materials SITC-661 (1.40%), and articles of plastics
SITC-893 (1.76%). The most important traditional exports are therefore tea, coffee, petroleum
2 See, United Nations Conference on Trade and Development (2002) on computation of the HerfindahlHirschman index to measure (a) dispersion of trade value across an exporters products (product
concentration index) and (b) dispersion of trade value across an exporters partners (market concentration
index) see Hirschman (1945; 1964) and Herfindahl (1950) on the paternity of the Herfindahl-Hirschman
index.

products, and vegetables. However, the contribution of petroleum products to foreign exchange
earnings is small as the country mainly re-exports imports after processing (Mwega and Muga,
1999).
15.
Several studies have explored the impact of export platforms in promoting export trade.
Glenday and Ndii (2000) covers three export promotion schemes, or platforms, introduced to
promote labor-intensive manufactures: bonded warehouse or manufacturing under bond (MUB),
export processing zones (both targeting new investments), and a duty and VAT exemption scheme
targeting existing manufacturers. An export compensation scheme was introduced in 1974 and
phased out in September 1993. Its implementation and misuse is the subject of an ongoing judicial
commission of inquiry. Alemayehu (1999) and Were, Ndungu, Geda and Karingi (2002) indicate
the need for adopting policies which enable Kenyas utilization of productive capacity. Among
these are improvements of infrastructure (the poor transport system, power and water rationing,
insecurity and other bottlenecks) so as to increase the competitiveness of exports.

3.

KENYAS DIRECTION OF TRADE

16.
Kenyas main destination of exports in 1990 was Western Europe at 46.5%, followed by
Africa (21.6%), Asia (12.5%), Middle East (3.7%), Eastern Europe (3.4%) and United States (3.4%).
In 2001, the shares were Africa (49.0%), Western Europe (28.1%), Asia (11.7%), Middle East
(6.0%), and United States (2.3%). However, the main sources of imports in 2001 were Western
Europe (28.5%), Middle East (25.3%), Asia (23.6%), Africa (11.7%), and United States (7.7%)
(International Monetary Fund, 2003). In the last decade, exports to developed countries are
declining while imports, particularly cereals from developed countries, are increasing (Nyangito,
2003). Consequently, the balance of trade between Kenya and the developed countries is
increasingly becoming worse against Kenya.
17.
Most of Kenyan exports to Africa were to countries under the Common Market for Eastern
and Southern Africa (COMESA), mainly Uganda, Tanzania and Egypt in that order. The main
exports to COMESA are tea (mainly Egypt and Sudan), followed by refined petroleum products
(Uganda, Tanzania, Rwanda, Burundi, Comoros and Mauritius), oils, perfumes, polishing and
cleansing preparations (Tanzania, Uganda and Ethiopia), paper and paperboard (Tanzania and
Uganda), and cement for building purposes (Uganda).
18.
As shown in the Statistical Abstract 2002, the main destinations for coffee (not roasted) in
2001 were Germany (31.59%), USA (10.03%), Sweden (7.81%), Netherlands (7.11%) and UK
(6.13%). The share of European Union was 56.94%, making it the single largest importer of coffee
from Kenya. However, the share of European Union in tea exports was 22.06%, the bulk of which
was to UK (21.13%), while the share to Egypt was 19.75%. The main country destination for cotton
(raw) was USA at 3.62%, while the balance was for aircrafts and ships stores (56.60%) and 39.78%
to other countries including COMESA.

19.
The destinations of coffee and tea exports and the applied tariff rates in these export
markets in 1995 were as follows (%):
EU

USA

Canada

Egypt

Other

Coffee

68.1

5.6

1.3

25.0

Tariff

3.3

N/A

33.8

1.4

0.8

15.8

48.2

30.0

N/A

Tea
Tariff

Source: Mwega and Muga (1999)

4.
20.

TYPES OF TRADE RESTRICTIONS

The barriers to market access are mainly:

a) Import tariffs and other price-based border measures that include import duties, tariff
quotas, and other border duties, levies, and charges;
b) Nontariff border measures/non-price instruments that include quantitative restrictions
(import quotas, direct prohibitions, domestic content requirements, licensing); contingency
measures (antidumping, countervailing, and safeguard measures); technical barriers to trade
(regulations, standards, testing and certification procedures); and sanitary and phytosanitary
measures (food, animal and plant health and safety); and
c) Domestic policy measures that are not applied uniformly to domestic and imported goods
and services, including trade-distorting export subsidies and domestic support
(International Monetary Fund and the World Bank, 2002) 3.

21.
One of the important outcomes of the Uruguay Round (1986-1994) agreements was to bring
agriculture under the normal WTO disciplines as the original GATT excluded much of agriculture
from liberalization 4. The Agreement on Agriculture covers three main areas, namely, market
access, domestic support to producers, and export subsidies. Under the Uruguay Round, all
countries were to convert quantitative restrictions and other nontariff barriers into simple tariffs (a
process known as tariffication), to bind the tariffs against further increases, and to reduce them
over time (by 36% across the board over a six-year period for developed countries or a minimum
cut of 15% for each tariff line, and 24% for developing countries or a minimum cut of 10% for each
tariff line over a period of ten years). For the least developed countries, these tariff reductions are
not required, although they can bind their tariffs. The WTO reduction commitments are applied on
bound rates rather than applied rates (what countries actually charge on imports). The
restrictions that were subject to tariffication include quantitative import restrictions, variable
import levies, minimum import prices, discretionary import licensing, nontariff measures
maintained through state-trading enterprises, voluntary export restraints, and similar border
measures other than ordinary customs duties.

3 See Bora, Kuwahara and Laird (2002) for definition and classification of nontariff measures, and their
measurement for use in the formulation of trade policy.
4 See also World Bank (1986; 1987) on trade and pricing policies in world agriculture and the threat and costs
of protectionism to both developing and industrial countries.

22.
The new discipline requires a reduction in the total Aggregate Measure of Support (AMS) to
producers especially in the agricultural sector. Total Aggregate Measurement of Support (Total
AMS) is the sum of all domestic support provided in favour of agricultural producers, and is defined
in the Agreement on Agriculture to include both budgetary outlays and revenue transfers from
consumers to producers as a result of policies that distort market prices. Developed countries were
to reduce AMS by 20% and developing countries by 13.3% from the 1986-88 levels. Least
developed countries are again exempt. Many forms of assistance that have minimal effects on trade
are also exempt from this commitment. Developing countries were given the flexibility to
implement reduction commitments over a period of up to 10 years from 1995, and least developed
countries were not required to undertake reduction commitments.
23.
The Agreement on Agriculture (World Trade Organization, 1999) covered the following
products: HS (Harmonized System/ Harmonized Commodity Description and Coding System)
chapters 1 to 24 less fish and fish products, HS code 2905.43 (mannitol), HS 2905.44 (sorbitol), HS
33.01 (essential oils), HS 35.01 to 35.05 (albuminoidal substances, modified starches, glues), HS
3809.10 (finishing agents), HS 3823.60 (sorbitol n.e.p.), HS 41.01 to 41.03 (hides and skins), HS
43.01 (raw furskins), HS 50.01 to 50.03 (raw silk and silk waste), HS 51.01 to 51.03 (wool and
animal hair), HS 52.01 to 52.03 (raw cotton, waste and cotton carded or combed), HS 53.01 (raw
flax), and HS 53.02 (raw hemp).
24.
The Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) takes the
form of inspection of products, permission to use certain additives, determination of maximum
levels of pesticides, and designation of disease (e.g. quarantine requirements). Member countries of
WTO are encouraged to adopt SPS measures that are less trade restrictive, technically defensible
and economically feasible. The SPS agreement can result in very high levels of protection,
especially where there is no justification based on assessment of risk to human life.
25.
The Uruguay Round explicitly recognizes Special and Differential Treatment for developing
and least developed countries. The applicable reduction commitments are ten years in the case of
developing countries, while LDCs are not required to undertake reduction commitments in any of
the three areas of market access, domestic support to producers, and export subsidies 5. Finally the
Marrakesh declaration noted the special difficulties of Least Developed and Net-Food-Importing
Developing Countries (LDNFIDC) who may suffer sharply increased food import bills following
reduction in food export subsidies by developed countries and possible increase in food import
prices (Oyejide, 1998; World Trade Organization, 1999). Kenya is not classified as a least developed

5 Bernal (2003) argues that most of the SDT provisions are meaningless for the large majority of developing
countries, which do not have the right to provide export subsidies or the means to do so, or administer Tariff
Rate Quotas (TRQs) or provide trade distorting domestic support to their agricultural sectors as most
developed countries do. Only those countries that provided export subsidies at the time of the Uruguay
Round and inscribed export subsidy commitments in their schedules of commitments have the right to
provide those subsidies. In addition, it was agreed that only those countries that undertook tariffication were
given the option to establish commitments on TRQs, but most developing countries did not tariffy but rather
established tariff ceilings. For example, Kenya chose a high uniform ceiling tariff binding of 100% for all
items included in Annex 1 of the Agreement on Agriculture, which exceeds the currently applied rates for all
agricultural imports (Harrold, 1995; Chanda, 1996). Sorsa (1995; 1996) concludes that Sub-Saharan Africa
failed to use the Uruguay Round to lock domestic reforms to an international anchor since most SSA
countries made no substantial liberalization commitments on border protection in agriculture, industry or
services.

country, but is rated as a Net-Food Importing Developing Country (NFIDC) by the WTO in
accordance with Article 16 of the Agreement on Agriculture (World Trade Organization, 1999).

5.

SUPPORT PROVIDED TO AGRICULTURE IN DEVELOPED COUNTRIES

26.
In the OECD countries, total agricultural production in 2000 was valued at farm-gate at
$632 billion, but to encourage this production, agriculture received support of $323 billion, close to
$1 billion per day or over $300 per capita (Vanzetti and Peters, 2003b). The major beneficiaries are
producers in the European Union (35% of OECD receipts), USA (27%) and Japan. In 2002, total
support to agriculture was $318.3 billion, of which around three quarters ($234.8 billion) went to
producers, and 17% ($55.3 billion) to general services support (OECD, 2003) 6. In addition, total
support to agriculture accounted for 1.2% of GDP in the OECD area in 2001 and 2002, compared
with 2.3% in 1986-88, but with wide variations across countries. The measures appear to increase
global production, forcing down world prices. This benefits net food importers in developing
countries at the expense of net exporters. The negotiations in the September 2003 Ministerial
Conference held by the WTO in Cancun, Mexico, collapsed after a group of 20 developing
countries refused to negotiate on the so-called Singapore issues (investment, competition,
transparency in government procurement, and trade facilitation or easing cross-border movement
of goods) in the absence of greater commitments by the developed countries to reduce agricultural
subsidies and lower import barriers on agricultural products.
27.
Of the current 146 WTO members, 25 countries have scheduled export subsidy reduction
commitments for various groups of products (World Trade organization, 2001b). An estimated 90%
of all agricultural export subsidies are provided by the European Union. On the basis of enlightened
self-interests, USA therefore proposes elimination of direct export subsidies over five years, while
the European Union suggests a modest reduction of an average of 45% of budget outlays on export
subsidies. Several imports to EU are subject to expenditure or volume constraints including rice,
sugar, cheese and other milk products, poultry, fresh fruits and vegetables and incorporated
products (Peters and Vanzetti, 2003; Peters and Vanzetti, 2004).
28.
The most protected segments are agriculture (mainly grains, dairy, livestock and sugar) and
textiles and apparel. In general, there is tariff escalation where processed agriculture is more
protected than primary agriculture 7. This may cause difficulties to commodity-dependent
developing countries in their attempt to establish processing industries for higher value export
commodities. A further issue concerning market access is the special agricultural safeguards.
Safeguards are contingency restrictions on imports taken temporarily to deal with special
circumstances such as a sudden surge in imports. Textiles and clothing are particularly affected by
6 General Services Support is the monetary value of gross transfers to general services provided to agriculture
collectively, and includes research and development, agricultural schools, inspection services, infrastructure,
marketing and promotion, and public stockholding (OECD, 2003).
7 Tariff escalation refers to a situation where tariffs are zero or low on primary products and then increase, or
escalate, as the product undergoes additional processing (World Trade Organization, 1996; Gibson, Wainio,
Whitley and Bohman, 2001). When tariffs on products escalate with the stage of processing, the effective rate
of protection, or the tariff expressed as fractions of value-added after deducting intermediate inputs from
product value, also increases. Lindland (1997) presents a detailed discussion of the measurement of tariff
escalation (the difference in nominal tariffs between the output commodity and the input
commodity/commodities), Yeats (1984) discusses the link between tariff escalation and bias in trade
protection, while Yeats (1977) shows that shipping rates vary on a product-by-product basis, and transport
costs may fall or remain the same over different levels of fabrication or processing.

the use of antidumping duties and special safeguards (Cernat, Laird and Turrini, 2002). The pricebased and volume-based special safeguards (sharp fall in import prices or surge in volume of
imports) are designed to add extra import duties to the existing ordinary customs duties if a
specified trigger level is breached. The aim of the measures was to address concerns of importing
countries about the potential for major disruptions to their domestic market from external market
instability and surge in imports (World Trade Organization, 2002).
29.
As a result of producer support in OECD countries, average price received by producers (at
farm-gate) were 31% above border price in 2002 or a nominal protection coefficient of 1.31 (ratio
of farm-gate producer price to border price before the application of any customs duties). The
nominal protection coefficients were particularly high for rice (4.61), sugar (1.97), milk (1.83), beef
and veal (1.31), pig meat (1.27), poultry (1.17) and eggs (1.08). This means that the prices received
by producers (at farm gate) were on average twice the border price (measured at farm gate) for
sugar and milk, and about five times for rice (OECD, 2003).

6.

6.1

THE COST OF PROTECTION TO RICH AND POOR COUNTRIES

A PROFILE OF SELECTED STUDIES

30.
The emerging empirical work demonstrates that, in general, the bulk of the costs of
agricultural support fall on the country that imposes such policies and not on other countries;
agricultural subsidies benefit poor net food-importing countries through depressed world prices;
and tariff barriers inflict more damage to developing countries than subsidies since subsidies are
applied mostly on OECD exports that are not important sources of export earnings for developing
countries, with exceptions such as rice and cotton (Tokarick, 2003). Within the OECD countries,
import tariffs are highest in Japan for some specified products e.g. wheat, rice, milk and refined
sugar (Tokarick, 2003). In addition, only a quarter of imports to Japan from developing countries
are duty-free (Vanzetti and Peters, 2003b).
31.
An important source of estimates on the impact of agricultural policy reform is the
Agricultural Trade Policy Simulation Model (ATPSM), initially developed by UNCTAD and further
refined by FAO and UNCTAD (Vanzetti and Graham, 2002; Peters and Vanzetti, 2003; Vanzetti
and Peters, 2003a; and Vanzetti and Peters, 2003b). The results are based on the simulations of the
likely impact of the US proposal, the EU proposal, and the Stuart Harbinson compromise proposal
for agricultural trade policy reform.
32.
The US proposal (United States Department of Agriculture, 2002; United States Trade
Representative, 2003a) is to reduce applied tariffs according to a harmonizing Swiss Formula by

which higher tariffs are reduced more than proportionately, with no tariff greater than 25% 8;
reduction in domestic support for nonexempt categories to at most 5% of average value of
agricultural production in the base period 1996-98; and elimination of direct export subsidies over a
five-year period. The EU proposal (European Commission, 2002) is a 36% average cut in bound
tariffs with a minimum 15% cut in each tariff line; reducing the Aggregate Measure of Support by
55%; and reduction of 45% of budget outlays on export subsidies. The Harbinson proposal (World
Trade Organization, 2003b) is to reduce out-of-quota bound tariffs by a simple average for all
agricultural commodities subject to a minimum reduction per tariff line, with higher reductions for
developed than developing countries; reduce AMS by 60% in developed countries and 40% in
developing countries; and abolish export subsidies over a five-year period for developed countries
and 10 years for developing countries. Most of the agricultural export subsidies are provided by the
EU, hence the insistence by EU for a modest reduction in budget outlays on export subsidies.
33.
The ambitious scenario in the Agricultural Trade Policy Simulation Model is reduction in
applied tariffs as per the US proposal, elimination of in-quota tariffs, a 20% expansion of import
quotas, and elimination of domestic support and export subsidies in all countries and all
commodities. The conservative scenario (an extension of the Uruguay Round approach) is a
reduction in bound out-quota tariffs of 36%, a 55% reduction in domestic support and 45%
reduction of export subsidy equivalent in developed countries, with two thirds of these cuts in
developing countries, and no reductions in least developed countries (Peters and Vanzetti, 2003;
Peters and Vanzetti, 2004).
34.
Under the ambitious scenario, the estimated increase in world prices of Kenyas exports and
import-competing crops would be wheat (14%), rice (3%), maize (5%), sugar (11%), coffee roasted
(1%), tea (5%), and cotton linters (2%). Kenyas net gain in welfare is estimated at $15 million under
the ambitious scenario, compared with $25,766m for all countries (Vanzetti and Peters, 2003a;
Vanzetti and Peters, 2003b). Under the conservative scenario, the estimated increase in world
prices of Kenyas exports and import-competing crops would be wheat (5%), rice (1%), maize (2%),
sugar (3%), coffee roasted (0%), tea (1%), and cotton linters (1%). Kenyas net loss in welfare is
estimated at $9 million under the conservative scenario, compared with a net gain of $12,096m for
all countries (Vanzetti and Peters, 2003b). The expected changes in world prices of Kenyas exports
and import-competing crops reported in Chanda (1996) and Vanzetti and Peters (2003a; 2003b)
under the conservative scenario are fairly close as they are an extension of the Uruguay Round
approach. Increases in world prices are a gain to food exporters and hurt importers, and thus net
food importing developing countries like Kenya would face higher food prices from an ambitious
agreement.

8 The Swiss formula reads: t1=( t0)/( + t0), where t1 is the resulting lower tariff rate, t0 is the initial tariff
rate, and is both the maximum final tariff rate and the coefficient to determine tariff reductions in each
country (Goode, 2003; World Trade Organization, 2003c). The coefficient can be negotiated. The Swiss
delegation proposed a coefficient of 14, which meant that the formula would not leave any duty in excess of
14%. The difference between the new and the old tariff is given by t 1 - t0 = [( t0)/( + t0)] - t0 = -(to)2 /( +
t0). A coefficient of 30 (representing a final maximum tariff of 30%) applied to an initial tariff of 100%
produces a final tariff of about 23%, and an initial tariff of 15% produces a final tariff of 10%. The formula
was originally suggested by Switzerland during the Tokyo Round (1973-79) of negotiations for tariff
reductions in manufactured products (GATT, 1976a; GATT, 1976b; GATT, 1976c; Hoda, 2001), but it is not
supported by the Swiss in the current agricultural negotiations. The formula was defended by the Swiss
delegation for its simplicity as it involves three simple operations one multiplication, one addition and one
division (GATT, 1976b).

10

35.
Chanda (1996) examines the implications of the Uruguay Round for Kenya, and concludes
that it will not lead to any major changes since there could be some export losses arising from
erosion of preference margins (the difference between MFN tariff and preferential tariff) in key
export markets like the EU as a result of multilateral tariff liberalization, and lower world prices of
important agricultural exports 9. However, Kenyas agricultural imports constitute a mere 2% of
total imports consisting mainly of wheat, rice, cotton, rubber, and vegetable and vegetable
materials, and the increase in world prices following trade liberalization will not lead to a
significant increase in the total import bill (Chanda, 1996) 10.
36.
The study undertaken by the Centre for the Study of International Economic Relations,
University of Western Ontario, for the Canadian International Development Agency (CIDA,
1996a) shows that the impacts of the Round across regions, and even across countries within
regions, are uneven, with the largest gains appearing to accrue to the Asian economies (largely from
removal of restraints on textiles and apparel), while African and Caribbean economies tend to be
restrained by domestic supply bottlenecks and many have preferential trade arrangements of
various kinds which will be eroded by the decisions in the Round. The net food importers among
African and Caribbean economies will lose due to expected increases in agricultural prices. Finally,
Latin American economies have less to gain on the access side, and have fewer preference-related
concerns. The study also suggests some degree of ambiguity on the significance of the effects from
the Round since OECD tariff cuts are from a low base, and thus give the appearance of large
percentage cuts; and tariffication in agriculture may have raised rather than lowered some barriers
11. The study argues that the earlier model-based studies have largely been limited to aggregated
regional blocs and to a subset of quantifiable issues from the Round (textiles, agriculture, tariffs),
and some studies did not give sufficient focus on the negative effects due to a concentrated
economic structure and the concomitant adjustment costs for such economies (e.g. on importcompeting firms and tax/public expenditure reforms due to reduction in tariff revenues).
37.
While various studies (e.g. Harrold, 1995) show that preference erosion resulting from the
Uruguay Round produces relatively small losses on exports from sub-Saharan African countries,
CIDA (1996b) shows that the effects for particular countries can be both significant and adverse.
For example, Zambia could face significant losses in exports of metals and face higher prices in
imports of cereals. Cte dIvoire is expected to suffer reductions in export earnings for cocoa, coffee,
and tropical nuts and fruits, while experiencing potential increases in the cost of imported cereals,
live animals, and dairy products. Mozambique is a least developed country and a large net food

9 Preference erosion refers to the gradual disappearance of or reductions in margins of preference as countries
proceed with nondiscriminatory trade liberalization (Goode, 2003). If an exporting country (or group of
countries) enjoys duty-free access to a market for a particular product with 20% Most-Favoured Nation
(MFN) tariff, the 20% margin of preference will be eroded if the importing country agrees to reduce its MFN
tariff to, say, 10%. In the WTO, MFN is the principle of treating trading partners equally.
10 See also Eiteljrge and Shiells (1995) for projected changes in world food prices and net food import costs,
due to implementation of the Uruguay Round Agreement on Agriculture, for a sample of 57 developing
countries including Kenya.
11 Hathaway and Ingco (1995) also examines the Agreement on Agriculture, and concludes that the tariff
bindings agreed in the Round were well above those previously prevailing, so that little liberalization will be
achieved despite the substantial cuts agreed in the Round, while developing countries were effectively
allowed to set their agricultural tariffs at any level they liked, using so-called ceiling bindings, and many
countries chose to set them at very high levels. The headroom between the legal ceilings and applied
protection was probably to provide negotiation margins for the WTO member country.

11

importer, and the increase in the price of cereals would have an acute impact since cereal imports
account for about 60% of total agricultural imports.
38.
Hertel, Anderson, Francois and Martin (2000) find the implications of a 40% reduction in
post-Uruguay Round agricultural tariffs and export subsidies to be an increase in global welfare of
about $60bn per year. This figure increases by $10bn if production subsidies are also reduced by
40%. Measured in dollar amounts, developed countries capture the largest gains from liberalization,
reflecting the reduction in the cost of agricultural support policies for OECD consumers. Virtually
all developing regions experience overall gains, other than some net food-importing countries (see
also Anderson, Francois, Hertel, Hoekman and Martin, 2000; and Hertel, Hoekman and Martin,
2002).
39.
A study by Diao, Somwaru and Roe (2001) shows that removing trade barriers, subsidies,
and other distorting forms of support would cause aggregate prices of agricultural commodities to
rise by almost 12% relative to an index of all other prices; and the price of wheat by about 18.1%,
rice (10.1%), sugar (16.4%), livestock and products (22.3%) and processed foods (7.6%). Elimination
of tariffs alone will have the greatest effect on livestock and sugar prices, while elimination of
domestic support will affect mainly wheat and other grains. Export subsidies have depressed global
prices mainly for sugar, livestock and products (including dairy products), vegetables and fruits, and
wheat.
40.
The Australian Department of Foreign Affairs and Trade (Commonwealth of Australia,
2003) estimate that trade barriers and subsidies by developed countries depress world agricultural
prices across the board by a massive 12%. The agricultural polices of developed countries represent
a huge tax on African agricultural producers of up to $7.1bn per year, or over 85% of 2001 bilateral
aid flows to Africa of $8.3bn. In addition, developed country trade barriers and subsidies encourage
African governments to implement their own import restrictions, and as a result African economies
impose average tariffs of 75% on food imports, thus raising prices for local consumers and removing
farmers incentives to boost productivity (Commonwealth of Australia, 2003).
41.
According to Tokarick (2003), the estimated effects on world prices from multilateral
agricultural trade liberalization would be an increase in wheat prices of 3.9%, milk (23.6%), rice
(2.3%), maize (3.1%), cotton (2.8%), refined sugar (8.0%) and sheep meat (22.2%). The results also
shows that market price support (i.e. tariffs and export subsidies) have the largest distortionary
impact in comparison with production and input subsidies. In the case of Kenya, removing
agricultural support (tariffs and subsidies) in OECD countries would lead to an increase in annual
import costs of $2.93 million, mainly wheat ($1.21m), refined sugar ($0.77m) and maize ($0.58m)
Tokarick (2003). The increase in import costs would be mostly felt in the net food-importing
countries, especially in North Africa and Middle East. However, results of the Global Trade
Analysis Project (GTAP) general equilibrium model shows that liberalization of agricultural trade
by both developed and developing countries would raise real incomes in all countries by $128bn or
0.4% of world GDP (Tokarick, 2003).
42.
Using GTAP general equilibrium model, Anderson, Dimaranan, Francois, Hertel, Hoekman
and Martin (2001a; 2001b) estimated that if all merchandise trade restrictions were removed

12

globally, an aggregate welfare gain of more than $250 billion per year could be expected 12. A
reported 64.8% of the gains would come from liberalizing agriculture and food (48.0% from
liberalization in high income countries and 16.7% from low income countries). A further 6.8%
would come from liberalizing textiles and clothing and 27.3% from other manufactures. In total,
54.9% of the gains would come from liberalization in high income countries and 45.1% from
liberalization in low income countries. An estimated 57.5% of the gains would accrue to high
income countries and 42.5% to low income countries. Sixty six per cent of the gains to high income
countries are from liberalization within high income countries, while 60% of gains to low income
countries are from liberalization in their own countries. The results of the study therefore provide
support for liberalization in both developed and developing countries.
12 See, Huff and Hertel (2000), Hanslow (2000), Brockmeier (2001) and McDougall (2003) for definition and
derivation of welfare decomposition in the GTAP model, which includes resulting changes in allocative
efficiency, terms of trade effects, technical change, and per capita endowment to the representative regional
household of non-tradable goods (that includes agricultural land, labor and capital). As shown by Corden
(1957), the net change in welfare from any change in trade policy is comprised of a change in producer
surplus, consumer surplus, and net government revenue see also Lloyd (1834), Jules Dupuit (1844)
[reviewed in Hicks, 1939; Stigler, 1950; Scitovsky, 1954; Ekelund, 1972; Hines, 1999; and Rima, 2001],
Fleeming Jenkin (1870;1872) [reviewed in Brownlie and Prichard, 1963; and Hines, 1999], Jevons (1871)
[reviewed in Hines, 1999], Marshall (1890), Cunynghame (1904), Hotelling (1938), Corden (1975; 1997),
Harberger (1959; 1971), Johnson (1960; 1965), Anderson (2003) and Tokarick (2003). Students of the history
of economic ideas may also want to consult the relevant sections of some references cited by Jevons (1866;
1871) e.g. Dalrymple (1764), Davenant (1771), Henry Thornton (1802), Chalmers (1802), Lauderdale (1819),
Newman (1851), Thomas Tooke and William Newmarch (1857), and William Thomas Thornton (1869).
Cunynghame (1904) observed that the doctrine of final utility was clearly seen by Lloyd (1834) and Jules
Dupuit (1844); Gossen (1854) had not carried the matter any further; and that Richard Jennings (1855) did
not expound anything that Cournot (1838) had not already seen. The discovery of these and other 18th and
19th century studies has sparked debate on the paternity of the supply-demand curves, utility and value
theory, and marginal cost pricing e.g. Ekelund (1968; 2000), Ekelund and Hebert (1976; 1985; 1999; 2002),
Ekelund and Thornton (1991), Groenewegen (1973), Gordon (1982), Thweatt (1983), Humphrey (1992),
Blackorby and Donaldson (1999), and Mosselmans (2000). The GTAP model derives welfare decomposition
using the concept of equivalent variation which dates back to Hicks (1939; 1942; 1956) see also
Henderson (1941), Mishan (1947), Friedman (1949), Houghton (1958), Willig (1976), Chipman and Moore
(1980), Hausman (1981) and Haveman, Gabay and Andreoni (1987); and especially Harberger (1971) on the
use of the consumer surplus approach to analyze the impact of policy changes. The 19th century literature on
free trade and protection had already anticipated some of the recent debate on the merits of free trade and
the cost of protection (see, for example, Grosvenor, 1871; Byles, 1872; Cyrus Elder, 1872; Butts, 1875;
Fawcett, 1878; Hawley, 1878; Cairnes, 1878; Henry George, 1886; Bastiat, 1888; and Sumner, 1888). The socalled protectionists included Alexander Hamilton (Lodge, 1904), Hezekiah Niles (cited in Abbott, 1906;
Stone, 1933; and Normano, 1943), Henry Carey (1848; 1851), Colton (1848), Smith (1853), Bowen (1856;
1890), Greeley (1871), and Dixwell (1882; 1883a; 1883b; 1885-1886). For example, Henry Carey (1848) had
argued that war is an evil, and so are tariffs of protection: yet both may be necessary, and both are sometimes
necessary. The American writers were mainly concerned about economic exchanges between America and
England, and were also unwilling to embrace the entire science of English Political Economy (Bowen, 1890;
Normano, 1943). As argued by Sumner (1888), the protectionist school sometimes started with a priori
assumption in regard to the kind of world they would like to make and then set to work to force it into that
form. The protectionists engaged in fallacious economic reasoning (sophisms), which enabled the advocates
of free trade to counter their arguments, blow-by-blow (see, especially, Bastiat, 1888, on sophisms of
protection; and Guthrie, 1971, and Waterfield, 2000, on sophism in Greek philosophy). For example, Fawcett
(1878), chapter 4, considers the arguments of the protectionists under thirteen headings, and concludes that
(a) industrial development of a country would be far more surely promoted by freedom than by restriction,
and (b) when the paths of restriction have once been entered upon, it becomes increasingly difficult for a
nation to retrace her steps.

13

43.
Using the static GTAP model, Cernat, Laird and Turrini (2002) report an aggregate welfare
gain of $21.5 billion arising from a worldwide reduction of 50% in all agricultural tariffs, taking
into account the existence of preferential tariff schemes (e.g. GSP and regional trade arrangements).
The estimated gains for sub-Saharan Africa (SSA) and Latin America is lower than in other studies,
mainly because of inclusion of tariff preferences the regions already enjoy under existing
preferential schemes. A 50% reduction of all merchandise tariffs (in both agriculture and
manufacturing) almost doubles the global welfare gains to $39.6 billion. The simulations also show
that Africa and Latin American regions would be the main beneficiaries of liberalization in
processed agriculture because of the heavy protection faced by their processed agriculture and food
exports, especially in Western Europe and Japan.
44.
Brenton (2003) argues that the EUs Everything But Arms (EBA), which came into effect in
March 2001, will not have significant incremental effect as the majority of imports from LDCs were
entering the EU duty and quota free. The EBA initiative is provided to the UN-defined Least
Developed Countries, and is more generous in terms of duty reduction than the Cotonou
Agreement with ACP countries. Liberalization under EBA was immediate except for three products
(fresh bananas, rice and sugar) where tariffs will be gradually reduced to zero (in 2006 for bananas
and 2009 for rice and sugar). There are duty-free quotas for rice and sugar, which will be increased
gradually. However, unlike AGOA, the EBA preferences are not time limited, and thus provide
greater certainty for investors and traders.
45.
Bora, Cernat and Turrini (2002) assess the effects of trade policy initiatives aimed at
improving market access for LDCs in Quad countries (Canada, European Union, Japan and United
States). This policy simulation refers to a hypothetical situation in which all Quad countries import
all goods from LDCs quota-free and duty-free as if the EU-EBA initiative would be adopted
together by all Quad countries. The first experiment was the elimination of all tariff and nontariff
barriers against LDCs in the EU to simulate the effects of the already approved Everything But
Arms initiative. The EBA extends duty-free and quota-free access to the EU, other than for
bananas, rice and sugar, which face safeguards measures and whose duties will be liberalized
gradually according to a set timetable. In this scenario, the gains mainly accrue to SSA countries
and are mostly explained by improved terms of trade for beneficiaries, and the key sectors are
paddy and processed rice, and sugar. LDC export gains are also expected in meat and meat products
and dairy products. When duty and quota-free market access occurs in all the Quad countries for
all goods from LDCs except arms, the benefits are ten times higher compared with EU-EBA, the
gains to SSA increase substantially, and additional products (in addition to rice and sugar) that
benefit include wearing apparel, and dairy products and other food exports. Kenya is not classified
as an LDC, and is not therefore included in the analysis, although the findings of the study should
broadly be applicable to Kenya.
46.
Ianchovichina, Mattoo and Olarreaga (2001) assess the impact of the ongoing initiatives to
improve market access for 37 sub-Saharan African countries (SSA-37) in the EU, Japan and USA
using the GTAP model. The policy experiment is similar to Bora, Cernat and Turrini (2002), other
than that preferential market access is targeted to Sub-Saharan African countries only. The SSA-37
does not include the Southern African Customs Union (Botswana, Lesotho, Namibia, South Africa
and Swaziland) since these countries are neither LDC nor HIPC. The gains to SSA-37 from
unrestricted access to the US market for apparel are small: $33.7 million or a 0.2% increase in nonoil export revenue. This reflects the fact that exports of apparel from SSA-37 account for a small
share of African exports (less than 3%). If the US were to grant duty-free access to all SSA-37

14

products (the most generous interpretation of AGOA), the gains are only about twice the gains
arising from free access for apparel. The expansion is mostly in apparel and a small increase in value
added in the sugar-related sectors, as these are really the only sectors where SSA-37 faces
significant barriers in the US market.
47.
The proposed liberalization of access to the EU market for all products except arms could
lead to higher gains: an increase of around $513 billion (2.8% of SSA-37 non-oil exports) in export
revenue and $317 million (0.2%) in welfare, or six times larger than the gains from free access to
the US market (Ianchovichina, Mattoo and Olarreaga, 2001). The largest expansion is in plantbased fibers, livestock, meat and dairy products, followed by sugar-related sectors. The most
substantial gains for SSA-37 would arise from liberalization of the Quad markets: a $2.5 billion or
13.9% increase in non-oil export revenue, and $1.8 billion (1.2%) increase in welfare. This would
also lead to diversion of agricultural exports (mainly from EU) to Japan. The relative importance of
the industrial sector in SSA-37 would decline as resources are drawn into the agricultural sectors,
and would also lead to expansion in contributions of cereal grains, plant-based fibers, and livestock,
and meat and dairy products to agricultural value-added. If all agricultural subsidies (export and
producer) were removed in the Quad countries subsequent to giving preferential access, this would
generate additional benefits of around $412 million for the SSA-37 region.
48.
Hoekman, Ng and Olarreaga (2003) assess the impact of reducing tariffs and domestic
support for a sample of 119 countries including Kenya using a partial equilibrium model. The
analysis excludes export subsidies as they represent only 8-10% of total domestic support. The
results show that a 50% cut in tariffs has a higher net gain in welfare than a similar reduction in
domestic support. A 50% tariff reduction leads to increase in exports of developing countries
(excluding LDCs) by $4.2 billion (or 6.7% of initial export revenue for the 158 product categories),
by $116 million in LDCs (or 3.7%) and $3.3bn in industrialized countries (4.7%). There is also an
increase in the import bill following the 50% tariff reduction. In industrial countries, the increase
in imports is double the increase in exports (due both to an expansion in demand and higher world
prices), while the increases in exports and imports are roughly equal in developing and least
developed countries. A 50% cut in domestic support has less dramatic effect than a cut in tariffs.
49.
For example, a 50% tariff cut would increase Kenyas export revenue by 4.0% compared
with 1.4% for a similar cut in domestic support. The Kenyas terms of trade would improve by 0.9%
for reduction in tariffs and 0.3% for reduction in domestic support. The change in welfare per
capita would be 0.3% for tariff cut and 0.1% for reduction in domestic support (Hoekman, Ng and
Olarreaga, 2003).
50.
The simulation results of full and global tariff liberalization of agricultural and industrial
goods estimate net increase in world welfare at $1,212 billion (in 1995 prices) in the year 2010
which is equivalent to a 3% gain in world GDP (OECD, 1999). OECD would net $757 billion (2.5%
of GDP) and non-OECD economies $455 billion (4.9% of GDP). SSA countries as a group stand to
improve their GDP by 3.7% through annual gains of $11bn, which is almost equal to OECD Official
Development Assistance (ODA) to Africa in 1997 ($11.37bn). The estimated benefits are higher
than those generated by most authors because the model incorporates dynamic gains from tariff
liberalization, mainly from reductions in production costs following increased competition, and
from increases in imported technology that is embodied in non-substitutable intermediate and
capital goods following relaxation of foreign exchange constraints.

15

51.
Hoekman (2002) reports that OECD countries currently impose costs on developing
countries that exceed official development assistance (some $45 billion), benefits to developing
countries from abolishing their own protection are over $60bn, and global protection of
merchandise costs the world economy some $250bn. He stresses the need to address supply-side
constraints e.g. human capital (health and education) and infrastructure and cost of key inputs
(transport, telecommunications, insurance, finance) to provide the necessary complementarities
between trade and development agenda. Hoekman (2002) notes that improving domestic policies,
strengthening institutions, and enhancing domestic supply-side trade capacity are necessary if a
country is to benefit from improved market access, but are not negotiating issues and therefore
require action outside the WTO framework.
52.
Anderson, Dimaranan, Francois, Hertel, Hoekman and Martin (2001a; 2001b) and Scollay
and Gilbert (2001) provide synopses of results from various studies. Generally, models which are
dynamic, incorporate capital accumulation and induced productivity increases that result from
liberalization, or account for increased capital mobility, tend to predict larger gains than the more
traditional static models (Scollay and Gilbert, 2001). In addition, studies which consider the
elimination of a wider range of barriers (tariffs, nontariff barriers, liberalization of services and
investment) or which assume reductions in transaction costs due to trade and investment
facilitation measures, also produce larger estimates of potential gains.
53.
The World Banks Global Economic Prospects and the Developing Countries 2001 (Chapter
3: Standards, Developing Countries, and the Global Trade System) provides a summary of
economy-wide studies assessing the impacts of trade liberalization on pollution. There are several
studies on environmental effects of trade liberalization (Ferrantino and Linkins, 1999; Jenkins,
1998; and Vasavada and Nimon, 1999) whose findings are of relevance to MDG Goal Seven (ensure
environmental sustainability) vis--vis competitive performance. As argued by Esty (2001), trade
and environmental policies are inescapably linked as a matter of descriptive reality and normative
necessity, and the reliance on a distinction between product standards imposed on imports
(generally acceptable) and production process or methods restrictions (generally unacceptable)
makes little sense in a world of ecological interdependence. This also implies that there is need to
analyze how the various MDGs interact, either to reinforce each other (e.g. global trade
liberalization and reduction in poverty) or to impose extra costs of attaining other goals (e.g. global
trade liberalization and environmental sustainability).

6.2

A SYNTHESIS

54.
The World Banks Global Economic Prospects and the Developing Countries 2002 (Chapter
6: Envisioning Alternative Futures: Reshaping Global Trade Architecture for Development)
provides a synthesis of major studies undertaken to estimate the impact of global trade
liberalization see also Whalley (2000), Francois (2000) and International Monetary Fund and the
World Bank (2002). The lowest estimate of world gains from full liberalization of merchandise
trade are $254.3bn, excluding any gains from services trade and investment liberalization, from
economies of scale and reductions in imperfect competition, and from dynamic effects of reform on
investment (Anderson, Francois, Hertel, Hoekman and Martin, 2000). The results of removing all
distortions in all sectors (excluding trade in services) reported by Goldin, Knudsen and
Mensbrugghe (1993) show that total global income gains sum to $450bn (1992 dollars) per annum,
with gains of OECD countries adding up to $290bn; and positive gains in non-OECD countries at
$201bn and aggregate losses at $40bn. The highest estimates of world gains from liberalization

16

reported in the World Banks Global Economic Prospects and the Developing Countries 2002 are
$1,212bn (Dessus, Fukasaku and Safadi, 1999) and $1,857bn (Brown, Deardorff and Stern, 2001).
55.
The study by Dessus, Fukasaku and Safadi (1999) presents a scenario of full tariff
liberalization (complete elimination of tariffs for agricultural and industrial products for both
OECD and non-OECD economies) with dynamic gains in productivity, where estimated global
increase in welfare would be $1,212bn (3.1% of GDP), with $757bn (2.5% of GDP) accruing to
OECD countries and $455bn (4.9% of GDP) accruing to non-OECD countries. An estimated $11bn
would accrue to sub-Saharan African countries (3.7% of its GDP).
56.
A study conducted by the Australian Department of Foreign Affairs and Trade
(Commonwealth of Australia, 1999) estimates that a 50% cut in trade barriers would generate
additional annual welfare gains to the world economy of over US$400bn (US$90bn from
agriculture, US$66bn from manufactures, and US$250bn from services) and US$380bn from a 50%
cut in protection across the three sectors; and full liberalization of agriculture, manufactures and
services would take the gains up to US$750bn. Finally, a study by Brown, Deardorff and Stern
(2001) shows the global gains from global free trade with all post-Uruguay Round trade barriers
completely removed to be around $1,857bn, mainly from industrial products and services
liberalization rather than agricultural liberalization. The studies by Australian Department of
Foreign Affairs and Trade (Commonwealth of Australia, 1999) and Brown, Deardorff and Stern
(2001) include services trade liberalization in the complete package.
57.
The World Banks Global Economic Prospects and the Developing Countries 2002 presents
its own estimates of the impact of global liberalization of merchandise trade (phased elimination of
all import tariffs, export subsidies and domestic production subsides). Measured in static terms,
world income in 2015 would be $355bn more with trade liberalization assuming fixed productivity.
In the simulation with fixed productivity, $248bn would result from liberalization of agriculture
and food, $41bn from textiles and clothing, and $70bn from all other sectors. The introduction of a
link between openness and productivity increases the static gains, with global gains jumping to
$832bn. In the dynamic scenario (simulations with endogenous productivity), $587bn would result
from liberalization of agriculture and food, $189bn from textiles and clothing, and $62bn from all
other sectors. In both static and dynamic simulations, agricultural reform accounts for 70% of the
global gains. The differences in results using applied general equilibrium models are essentially
explained by three factors: (a) the base from which the reform is simulated, together with its
assumptions about initial levels of trade barriers (for example, pre- or post-Uruguay Round), (b)
whether productivity is fixed or responsive to trade opening, and (c) whether service sector
liberalization is included (World Bank, 2002). The World Bank (2002) report notes that the studies
do not necessarily report the same indicator as a measure of the gains from trade (e.g. real GDP, or

17

some measure of welfare such as equivalent variation), and the units of measurement are not always
identical (e.g. different base year dollars, or some cumulated discounted value) 13.
58.
The studies on the impact of global trade liberalization are not necessarily linked to the
millennium development goals on aid, debt and trade. They are, however, important for several
reasons. First, they estimate global parameters on changes in prices of export and import items that
can be used to estimate changes at the national level. Secondly, they provide estimates of lost
opportunities which would otherwise have assisted in attaining the goal of reducing poverty. The
lost opportunities include the cost of extra debt incurred that might have been unnecessary if the
developing country was getting the full benefits of free trade. Finally, the studies show the
importance of the World Trade Organization (in reforming the world trading system) on the
achievement of the MDGs. In particular, studies akin to those conducted on Developing Countries
and the Uruguay Round for CIDA (CIDA, 1996a), augmented by simulated price changes on
exports and imports from global modeling, could provide the clue to costing lost opportunities of
trade restrictions at the individual country level.

7.

THE AFRICAN GROWTH AND OPPORTUNITY ACT

59.
The African Growth and Opportunity Act (AGOA) was signed into law on May 18, 2000 as
Title 1 of The Trade and Development Act of 2000 as an initiative in United States trade policy

13 Rodriguez and Rodrik (2001) have criticized these studies on methodological grounds (e.g. their measures
of openness, causation between openness and growth, and other supportive policies and institutions required
in order to realize the benefits of trade liberalization), but the World Bank (2002) report notes that the
preponderance of evidence points rather consistently to the fact that countries with more open trade and
financial regimes, complemented with other appropriate macroeconomic and social policies, have improved
growth performance. Harrison and Hanson (1999) also note that the studies on the association between trade
reform and growth capture many other aspects of openness than pure trade policy. Perhaps the reportedly
low impact of trade policies on economic growth lies in what Rodriguez and Rodrik (2001) refer to as scarce
administrative capacity and political capital, which could include rent seeking and other types of
governmental corruption that normally accompanies trade barriers, and trade restrictions affecting imports of
capital goods. In his comments on Rodriguez and Rodrik (2001), Chang-Tai Hsieh (2001) notes that a
country in which trade barriers are set in a discretionary manner with rampant rent seeking will probably
have poor growth performance, and restrictions on capital-good imports are even more harmful in a
developing country that has little domestic production of capital goods and would thus benefit the most from
purchasing capital goods embodying the most advanced technologies; while Daron Acemoglu pointed out
that the correlation between restrictive trade policies and corrupt, rent-seeking governments means that one
benefit of more open trade is that it may reduce the scope for governmental corruption. See also Bhagwati
(1982) on rent-seeking and trade policies (e.g. tariff evasion and import licensing); Ades and Di Tella (1999)
on corruption and barriers to trade, in economies dominated by a few firms, or where antitrust regulations
are weak; Knack and Keefer (1995) on the impact of property rights on economic growth; De Long and
Summers (1991) and De Long (1992) on a strong association between equipment investment and growth; and
Jones (1994) on the negative relationship between growth and the price of machinery and equipment relative
to non-machinery component of capital. (Hill, 1964) had noted that in so far as any general association exists
between growth and investment, it is largely due to investment in machinery and equipment, and the
composition of capital formation therefore matters. De Long (1992) acknowledges that the link between
investment in machinery and productivity has a long tradition that includes Andrew Ure (1835), Babbage
(1846) and Blanqui (1880). Torrens (1834) had also observed that machinery augment the funds for the
maintenance of labour, and have the effect of increasing both maximum and actual wages. However, there
were also skeptics on the effects of machinery on wages, e.g. Nicholson (1878) who states that his book
devoted greater space to the evil than to the good results of machinery.

18

based on the general philosophy of trade, not aid (VanGrasstek, 2003). The scheme provides dutyfree access for almost all exports other than oil, certain textiles and apparel, most leather products
and a few other exceptions (Bora, Cernat and Turrini, 2002). AGOA is in the second tier of
preferential treatment, below free trade agreements (FTA) but above the generalized system of
preferences (GSP). In comparison with an FTA, there are a few products that AGOA does not cover
and the benefits are not permanent; and AGOA is more generous than GSP in product coverage and
other limitations that may be included in a GSP (e.g. restrictive quantitative restrictions to protect
domestic producers in the country granting the GSP). The preference margins (tariff revenues for
AGOA products divided by the values of imports for the period 2000-2002) were estimated at about
15.7% for apparel and footwear, 8.9% for all agricultural products, 4.8% for all manufacturing and
mineral products, and 9.8% for all commodities excluding oil products (Shapouri and Trueblood,
2003). Within the agricultural commodity subgroup, the preference margin was highest for fruits
(10.5%), followed by vegetables (8.5%) and food (7.2%).
60.
AGOA is a nonreciprocal regional preference that gave sub-Saharan African (SSA)
countries duty-free access for nearly all goods, and duty and quota-free access for textiles and
apparel from some designated SSA countries. Prior to AGOA, only Kenya and Mauritius were
subject to quotas on textile and apparel imports, and these were lifted in January 2001. The export
quotas imposed on Kenya by the US came into force in July 1994 and covered exports of two
categories of textile products: boys and mens T-shirts made of cotton and manmade fibers, and
pillow cases made of cotton and manmade fibers (Mwega and Muga, 1999). The probable impact of
AGOA will be analyzed using the composition of SSA exports to USA, the Normal Trade Relations
(NTR) prior to AGOA, the types of preferences given under AGOA, and the relative importance of
tariffs vis--vis domestic support to US cotton producers 14.
61.
SSA exports are primarily agriculture and natural resource-based. Oil accounts for close to
50% of exports, agriculture and other commodities for about 36%, and manufacturing for a meager
12% (Mattoo, Roy and Subramanian, 2002). Nearly half of the oil is exported to USA and about a
third to the EU. However, oil is subject to hardly any protection in Quad countries. About 67% of
SSA non-oil exports are to the EU and 7% to USA. Textiles and clothing represent only 3% of SSAs
non-oil exports.
62.
The US imported $7.6bn worth of goods under AGOA in 2001, of which $3.7bn (48.7%)
was liquid natural gas, $2.8bn (36.8%) was crude oil, $0.27bn (3.6%) was refined petroleum
products, while all other products accounted for less than 10% of the total (VanGrasstek, 2003). Oil
is subject to a low tariff which amount to about 0.2-0.4% ad valorem at recent prices, and its
designation as duty-free therefore extended a very small margin of preference. Many of the
products US imports from SSA were already duty-free on NTR and GSP basis, and those that were
dutiable were subject to relatively low duties. For example, in 2001, US imports from Kenya were
$128.6m, of which 50.1% were textiles and apparels and 49.9% were classified under other,
mainly coffee, tea and pyrethrum which were already duty-free on NTR basis (VanGrasstek, 2003).
63.
However, the conditions are different for textile and apparel products. The tariffs range
from 16.8% to 17.3% ad valorem, which are quite high by US standards (VanGrasstek, 2003). The
14 The term Most Favored Nation (MFN) is no longer used in the United States, as it was replaced by
Normal Trade Relations (NTR) through section 5003 of the Internal Revenue Service Restructuring and
Reform Act of 1998, which also required the new term to be used in all subsequent trade legislation. From a
practical perspective, there is no difference between NTR and MFN (United States Congress, 1998).

19

benefits for these products are therefore substantial, provided that the exporting country is certified
for the benefits and meets the programmes rules of origin. The rules require that the apparel be
assembled in eligible SSA countries and that yarn and fabric be made either in USA or in African
countries (this does not apply to the LDCs in Africa until 2004). The apparel exports made from
African fabric and yarn are subject to a cap of 1.5% of overall US imports, growing to 3.5% of
overall imports over an 8-year period (Mattoo, Roy and Subramanian, 2002). As demonstrated in
the UNCTADs preliminary assessment of AGOA (VanGrasstek, 2003), the additional benefits of
the AGOA preferences represent a modest expansion over the preferential treatment that SSA
countries already enjoyed under the GSP, apart from the textile and apparel sector where
substantial trade barriers imply equally substantial margins of preference for AGOA beneficiary
countries. Indeed, the United States International Trade Commission in 1997 estimated that quotafree treatment would not have a very significant impact (given the fact that only two countries
were then subject to quotas), and US imports of apparel from SSA would increase between 0.4%
and 0.6%. However, if both quotas and tariffs were eliminated, imports of apparel from the region
would increase by 26.4% to 45.9%, while textiles imports would increase by 10.5% to 16.8%
(United States International Trade Commission, 1997).
64.
The Cotonou Agreement rescinded the one-way preference that Europe gave countries in
Africa and the Caribbean under the Lom Convention, and replaced them with free trade
agreements involving reciprocal obligations (Freund, 2003). In addition to reciprocity, ACP LDCs
are to be treated differently from ACP non-LDCs since LDCs are unlikely to have to reciprocate
and open their markets to EU exports as much as the non-LDCs in order to maintain their
preferential access to EU markets. The Cotonou rule of origin is based on the concept of double
transformation, i.e. if two of the processing stages (yarn to fabric weaving; and fabric into
apparel assembly) are done in the beneficiary country, duty free entry into the EU can be
enjoyed. Under Cotonou rule of origin, yarn can be sourced from anywhere in the world, whereas
under AGOA the yarn must come from a beneficiary SSA country or from the US (Mattoo, Roy and
Subramanian, 2002). According to Mattoo, Roy and Subramanian (2002), the costs of complying
with the rule of origin include (a) the incremental cost of switching purchases of inputs
(yarn/fabric) away from the cheapest source (when the rule of origin does not apply) to the AGOAdesignated source (Africa or US), and (b) the incremental transport cost (which could be positive or
negative) of switching purchases of inputs (yarn/fabric) away from the cheapest source (when the
rule of origin does not apply) to the AGOA-designated source (Africa or US).
65.
According to WTO Agreement on Textiles and Clothing, the Multifibre Arrangement
(MFA) quota regime is scheduled to vanish in 2005, after which the only protection in major
import markets will be tariffs and the contingent and trade-remedy laws e.g. safeguards and
antidumping duties (World Trade Organization, 1999). This means that preferential quota
treatment will no longer be possible. The AGOA beneficiaries will still enjoy preferential tariff
treatment, subject to their meeting the strict rules of origin (VanGrasstek, 2003). In addition, the
provision on Lesser Developed Beneficiary Country use of third country fabrics, allowed under
AGOA, comes to a close in September 2004.
66.
While African countries strongly support special trade preferences, studies show they
generate few benefits and could impose many long-term costs, mainly because (a) income gains
from preferences are trivial and a small fraction of the gains possible from eliminating developed
country agricultural trade distortions, (b) preferences only remove some of the tariff barriers to
African trade, but do nothing to address the damage caused by subsidies, (c) preferences are
incomplete, excluding many goods which Africa produces competitively, (d) preferences often are

20

changed or revoked arbitrarily, (e) preferences are nonreciprocal, discouraging trade liberalization
and reducing exporters exposure to competition, and (f) along with tariff escalation, preferences
can lock producers into unprocessed, low value-added export lines, where long-run prices are
declining (Commonwealth of Australia, 2003; Ozden and Reinhardt, 2003). As observed in
Commonwealth of Australia (2003), preferences cannot overcome the much larger income loss
caused by reduced world agricultural prices due to domestic support and export subsidies, and only
liberalizing multilaterally and winding back subsidies can overcome this major tax on agricultural
producers 15. In addition, Ozden and Reinhardt (2003) argue that nonreciprocal preferences have
the perverse effect of delaying trade liberalization by recipients.

8.

THE COTTON TRADE IN A GLOBAL PERSPECTIVE

67.
The cotton global trade is governed by a bizarre set of public policies, built on an Alice in
Wonderland economics and driven by powerful vested interests (Oxfam, 2003). The major obstacle
is not import tariffs but the heavy use of subsidies by the US.
68.
The major cotton producers (China, US, India and Pakistan, in descending order) account
for about two-thirds of global production. The Central and West African countries account for
about 5% of world production (Badiane, Ghura, Goreux and Masson, 2002). Most cotton is
consumed in the country that produces it, other than US, which exports half of its cotton
production. The US is therefore the worlds largest exporter.
69.
Every acre of cotton farmland in the US attracts a subsidy of $230, or around five times the
transfers for cereals. In 2001/02 farmers reaped subsidies amounting to $3.9 billion. The American
government has sought to promote free-market reforms in Africa. Paradoxically, trade preferences
under AGOA are conditioned on African governments liberalizing agricultural markets, including
the cotton sector. African cotton farmers are still expected to compete against heavily subsidized
American exports. As observed by Khor (2003), developing countries are asked to bear for a little
while the pain of rapid adjustment that will surely be good for them after a few years, whereas the
developed countries ask for more time to adjust in agriculture and textiles, which have been
protected for so many decades.
70.
The EU consumes twice as much cotton as it produces, since cotton growing is only of
significance in southern Greece and southern Spain. Greece exports two-thirds of its production,
whereas Spain imports more or less as much as it exports (Goreux, 2003). Greece and Spain, which
account for only 2.5% of world production, received 16% of all the cotton subsidies paid in
2001/02. The subsidies awarded to cotton farmers in the three countries (USA, Greece and Spain) in
2001/02 amounted to $4.5 billion, which is equivalent to three-quarters of the value of world
cotton exports in that year.
71.
The subsidies have had the effect of forcing down world prices, and therefore reducing
export income of SSA cotton-exporting countries (Oxfam, 2003; Goreux, 2003). World cotton
15 The effects of preferential trade agreements (and regional trading blocs) normally involve two important
sets of questions: (a) how they alter trade, production, and consumption patterns of the partner countries and
the rest of the world; and (b) how they affect the open multilateral trading system and, in particular, whether
they hinder or advance further multilateral trade liberalization (Krueger, 1999) see also Ethier (1998) and
Bagwell and Staiger (1998; 2001). Vamvakidis (1999) also shows that economies grow faster after broad
liberalization, in both the short and the long run, but slower after participation in regional trade agreements.

21

prices have fallen by half since the mid-nineties, and when adjusted for inflation are currently
lower than at any time since the Great Depression (Oxfam, 2003). As observed by Goreux (2003),
it is obvious that such huge subsidies have had the effect of forcing down world prices and
therefore of reducing the export income of the African countries, which export 95% of their cotton
production.
72.
In several countries of Central and West Africa (mainly Benin, Burkina Faso, Mali, Chad
and Togo), cotton accounts for 5-10% of GDP, and exports of cotton fiber account for over onethird of all export income and for over 60% of income from agricultural exports. According to
Goreux (2003), the subsidies granted by USA, China and EU caused the five African countries
direct loss in net export income (net of additional inputs and shipping) of about $250 million in
2001/02.
73.
According to an assessment conducted by the International Cotton Advisory Committee
(2002), the withdrawal of US subsidies is expected to translate to an increase in world prices by
almost 26%, taking into account decline in production in subsidized developed countries and
increased production by lower-cost exporters (also cited in Oxfam, 2003). In 2001, SSA exporters
lost $320 million as a direct consequence of US cotton subsidies. Two-thirds of this loss ($191m)
was sustained by eight countries in West Africa, with Benin, Burkina Faso, Mali, Cameroon and
Cte dIvoire the worst affected. The estimate for Kenyas potential increase in export earnings with
the withdrawal of US cotton subsidies was $1 million (Oxfam, 2003) see also Goreux and Macrae
(2003).

9.

EFFECTS OF LIBERALIZATION ON AGRICULTURE AND FOOD SECURITY

74.
Kenya is a beneficiary under the African, Caribbean and Pacific countries (ACP) Cotonou
partnership with the European Community and the African Growth and Opportunity Act (AGOA)
with the USA, and enjoys preferential treatment under the Generalized System of Preferences
(GSP) from Belarus, Bulgaria, Canada, Czech Republic, European Community, Hungary, Japan,
New Zealand, Norway, Poland, Russian Federation, Slovak Republic, Switzerland, and United
States (UNCTAD, 2001).
75.
The trade-distorting support to agriculture in OECD countries is likely to affect Kenya
through both restrictions on exports and low prices paid for food imports 16. The biggest share of
merchandise imports in 2000 were machinery and transport equipment (29.1%), followed by
mineral fuels (26.2%), chemicals (13.2%), manufactured goods (11.1%) and food and live animals
(8.6%). The main food imports are wheat, followed by sugar, maize, rice, and fruits and vegetables.
The main sources of wheat and maize imports are the OECD member countries, whose support to
domestic agriculture has created problems for local producers after the liberalization of the
agricultural sector in the early nineties. Kenya is a net importer of food (excluding tea and coffee).
76.
The major importers of specified food items from Kenya that are likely to be affected by SPS
measures are the European Union. For example, UK is the major importer of beans, peas and lentils;
while the major importers of pineapples are Italy, Germany, UK and the Netherlands. There are
also restrictive quotas e.g. of sugar imports from Kenya, health and environmental standards which
16 Shapouri and Trueblood (2001) observe that, although rising food prices would hurt consumers in
developing countries, it would send signals to domestic producers to expand output, which may be beneficial
in the long run in terms of productivity and rural incomes.

22

have affected fish exports to EU, stringent packaging and labeling requirements, and non-trade
restrictions e.g. core labor standards freedom of association and collective bargaining,
nondiscrimination in employment, no exploitative child labor, and no forced labor.
77.
Several authors, notably Nyangito (2003) and Mwega (2000), have highlighted Kenyas
experiences and concerns with implementation of WTO Agreement on Agriculture. The major
export crops (tea and coffee) do not have a problem of accessing markets in developed countries
and over 70% of agricultural exports are to the EU where applied tariffs and NTBs are low.
According to Mwega and Muga (1999), the reduction in tariffs and the tariffication of nontariff
measures under the Uruguay Round is most likely to be beneficial to Kenyas fish industry (SITC034) and horticultural products (SITC 054-062), for which Kenya has a clear comparative advantage
and is a major exporter to the EU.
78.
Apart from tariff barriers, Kenyas exports to developed countries have been barred by
instances of arbitrary imposition of SPS requirements. Market access has been affected by SPS,
where fish exports faced a ban in 1998 and 1999-2000. The minimum residual pesticide
requirement by EU on horticultural produce also poses barriers to trade for Kenyan exports.
Domestic support to OECD agriculture, particularly cereal grains, has depressed world prices and
opened up the market for imports, which has hurt producers of import-competing agricultural
products (mainly wheat, maize and rice).

10.

SANITARY AND PHYTOSANITARY MEASURES

79.
The key objectives of the Agreement on the Application of Sanitary and Phytosanitary
Measures (SPS) are to protect the human, animal or plant life or health of all WTO Member
countries, and to protect Members from arbitrary or unjustifiable discrimination due to sanitary
and phytosanitary standards. The implementation of food safety standards is sometimes based on
the precautionary principle, i.e. in case relevant scientific evidence is insufficient, a Member may
provisionally adopt SPS measures on the basis of available pertinent information, including that
from the relevant international organizations as well as from SPS measures applied by other
Members (World Trade Organization, 1999; Otsuki, Wilson and Sewadeh, 2001). The costs of
compliance with SPS measures mainly fall in two broad groups: (a) the producer or firm-level cost
of compliance, and (b) the administrative and technical costs incurred by the (usually public)
agencies charged with the responsibilities for testing and certification of the established standards
as well as the enforcement and monitoring of compliance by the producers (Oyejide, Ogunkola and
Bankole, 2001). Hoekman (2002) argues that the WTO is not necessarily the right focal point for
harmonization of international product standards set by other organizations e.g. International
Organization for Standardization (ISO); phytosanitary norms established by the Codex
Alimentarius Commission relating to food additives, veterinary drug and pesticide residues,
contaminants, methods of analysis and sampling, and codes and guidelines of hygienic practice;
good practices in customs clearance defined by the World Customs Organization; and financial
standards created under auspices of the Bank for International Settlements.
80.
According to Henson and Loader (2001), it is widely acknowledged that SPS measures can
act to impede trade in agricultural and food products. First, they can prohibit trade by imposing an
import ban or by prohibitively increasing production and marketing costs. Secondly, they can
divert trade from one trading partner to another by laying down regulations that discriminate
across potential suppliers. Third, they can reduce overall trade flows by increasing costs or raising
barriers for all potential suppliers. They can also be a form of protection especially if they impose

23

higher costs of compliance on importers than domestic suppliers. They demonstrate that,
worldwide, SPS measures have been an impediment to exports of (a) fish, (b) livestock products, (c)
spices, (d) oilseeds, oils and fats, and (e) horticultural products. The potential problems associated
with SPS requirements have been inadequate resources (including access to information on SPS
requirements), availability of technical expertise, incompatibility of SPS requirements with
domestic production/marketing methods, and general lack of resources to comply.
81.
Wiig and Kolstad (2003) observe that trade barriers are fungible: a new set of nontariff
barriers replaces old tariff barriers and quotas. This may arise from SPS measures as importing
countries enjoy considerable discretion in imposing SPS regulations. To shift some of the burden
from poor producers to wealthier consumers, the SPS agreement (article 9) provided for developed
countries to facilitate the provision of SPS-related technical assistance to developing countries. One
of their major findings is that decisions on allocation of resources for such technical assistance are
made in an unsystematic manner (Wiig and Kolstad, 2003).
82.
Several import bans have been temporarily imposed on exports of agricultural products
from developing countries based on noncompliance with SPS measures. Examples include shrimp
imports from Bangladesh and fish from Kenya and Tanzania (Grote, 2001). In all three cases, the
imposition of a sudden ban resulted in great losses of export revenues and increasing
unemployment in the sector. (Grote, 2001) observes that some kind of early warning system
should exist that informs developing countries in advance about the shortcomings.
83.
Recent developments indicate that WTO members are only willing to comply with the
letter of the agreement when it does not compromise their national interests (Mwega and Muga,
1999). During January-July 1998, the EU banned the importation of fresh fish and fish products
from Kenya, Uganda, Tanzania and Mozambique ostensibly to safeguard EU consumers from the
risk of cholera. When imposing the ban, the EU made it clear that this was not based on scientific
evidence but rather a lack of credible systems in Kenya to safeguard the products from possible
contamination. The disciplines of the agreement provides that if a member is to apply SPS
measures, it has to prove scientifically that the product in question poses a real threat to the health
of consumers. The ban caused considerable loss to the fish industry in Kenya. However, the ban
was also a wakeup call for the competent authorities in Kenya to undertake remedial measures to
restore confidence.
84.
EU also imposed a ban on fish from East African countries during 1999-2000 because of
inability of the countries to enforce Hazard Analysis and Critical Control Points (HACCP)
management systems as required by the EU. Compliance with the HACCP requirements for
fisheries by the East African countries in 1999-2000 forced governments to invest in new
competent authorities together with equipment and technical capacity to inspect fish and
implement quality control measures (Henson, Brouder and Mitullah, 2000; Nyangito, 2002). In the
case of Tanzania, Musonda and Mbowe (2001) acknowledged that the dominance of artisanal
fishing may have impaired the quality of fish during handling, and recommended that developing
countries should be given enough timeframe between invocation of a TBT or SPS measure and its
implementation, in addition to the necessary funding to set up country and regional testing
laboratories.
85.
Nile perch, which constitutes about 50% of the fish caught in Kenya, is the main export,
earning about $50m annually. The EU and Israel had been the main markets for Kenyas fish
exports, and jointly took up 75% of the countrys fish exports (Ikiara, Ikiara and Odhiambo, 2003).

24

Before the export bans, the EU accounted for about 62% of all fish exported from Kenya. Kenya fish
exports to EU have been strictly on agreements negotiated with individual EU member states.
Among the new markets that have emerged during the ban, Israel became the most prominent
single importer of Kenyas fish, a position it has retained to date (Abila, 2003).
Nile Perch Exports by Market Region, 1996-2001 (metric tons)

European Union
Far East
Israel
Others
Total
Share (%)
European Union
Far East
Israel
Others
Total

1996
10,388
1,801
3,431
1,120
16,740

1997
6,882
2,664
4,244
929
14,719

1998
2,320
2,201
5,252
1,394
11,167

1999
742
2,722
5,529
2,894
11,887

2000
1,680
4,146
7,185
2,468
15,479

2001
3,818
4,650
7,530
1,947
17,945

62.1
10.8
20.5
6.7
100.0

46.8
18.1
28.8
6.3
100.0

20.8
19.7
47.0
12.5
100.0

6.2
22.9
46.5
24.3
100.0

10.9
26.8
46.4
15.9
100.0

21.3
25.9
42.0
10.8
100.0

Source: Kenya Fisheries Department, cited in Abila (2003)

86.
In general, the impacts of SPS measures include compliance costs, impact on employment,
and the possibility of these measures being used as a protectionist device or by way of restraint on
trade in Kenyas horticultural and fishery sectors (Noor, 2000). However, Noor (2000) observes that
it is unlikely that the measures taken by importing countries on horticultural and fish exports could
have been a protectionist device for home producers since no competition threat is posed to them
by the produce under consideration. Nyangito, Olielo and Magwaro (2003) provide estimates of
Kenyas costs of compliance to SPS measures and other international standards (including ISO and
Codex Alimentarius) with respect to coffee, fruits and vegetables, flowers, fish and fishery products,
and on the cotton textile industry. As observed by Ikiara, Ikiara and Odhiambo (2003), although
the EU has played a major role in the rapid growth of Kenyas horticultural and fisheries sectors, (a)
domestic support for European farmers has the effect of reducing agricultural prices, thus leading to
decline in incomes of poor local farmers, and (b) SPS and food safety standards and other Technical
Barriers to Trade are raising costs to the exporters to the extent of driving the small ones out of
business.

11.

CONCLUSION

87.
The first seven millennium development goals focus on outcomes, identifying standards of
wellbeing to be achieved by 2015 and concern both the nature of the lives individuals lead and the
environment in which they live (Gore, 2003). Goal 8 focuses on relationships, identifying various
aspects of the global partnership for development that should be forged to support the realization of
these standards. This study limits itself to Indicators 38-41 of the Millennium Development Goal 8
dealing with market access, specifically the cost to Kenya and ultimately the cost to the rest of the
world, of having Kenya excluded from substantial trade opportunities. The study was only able to
identify possible directions of change in welfare as a result of global trade liberalization, rather than
the exact magnitudes of monetary and welfare estimates associated with such trade policy.

25

88.
Agricultural trade barriers and producer subsidies inflict real costs, both on the countries
that use these policies and on their trade partners. Trade barriers lower demand for trade partner
products, domestic support induces oversupply which depresses world prices, and export subsidies
create increased competition for producers in other countries. Krugman (1997) observes that
although estimates of the costs of protection are normally very low, protectionism reduces the
efficiency of the world economy through (a) limiting each others exports and the mutually
beneficial process by which nations specialize in producing goods for which their knowledge and
resources are particularly well fitted, and (b) fragmenting markets by preventing firms and
industries from realizing economies of scale.
89.
The emerging empirical work demonstrates that, in general, the bulk of the costs of
agricultural support fall on the country that imposes such policies and not on other countries;
agricultural subsidies benefit consumers in poor net food-importing countries through depressed
world prices; and tariff barriers inflict more damage to developing countries than subsidies since
subsidies are applied mostly on OECD exports that are not important sources of export earnings for
developing countries, with exceptions such as rice and cotton (Tokarick, 2003). Hoekman, Ng and
Olarreaga (2003) also found that, in welfare terms, tariffs matter significantly more than subsidy
policies as tariff reductions generate welfare gains that are substantially greater than reductions in
support policies. Although developing countries will have to continue their agricultural policy
reforms, the main focus should be the constraints on agricultural trade imposed by developed
countries, where Binswanger and Lutz (2000) argue that export subsidies should be outlawed,
domestic producer subsidies reduced, access under tariff quotas increased, tariff escalation on
processed agricultural products removed, and the level and the dispersion of bound tariffs on
agricultural imports reduced.
90.
Kenya is a beneficiary under the ACP Cotonou partnership with the European Union and
the African Growth and Opportunity Act with the USA, and enjoys preferential treatment under
the Generalized System of Preferences from several countries. The major export crops (tea and
coffee) do not have a problem of accessing markets in developed countries and over 70% of
agricultural exports are to EU where applied tariffs and NTBs are low. Most of the Kenyas export
products have faced declining world prices, partly due to the operations of buyer-driven global
commodity chains see, for example, Charveriat (2001) on the low returns to coffee farmers in
developing countries vis--vis transnational companies which control the international trading and
processing of coffee.
91.
The trade-distorting support to agriculture in OECD countries affects Kenya through both
restrictions on exports and low prices paid for food imports. The main sources of imported wheat
and maize are the OECD member countries, whose support to domestic agriculture has created
problems for local producers in Kenya after liberalization of the agricultural sector in the early
nineties. Kenyas trade is also affected by restrictive quotas, health and environmental standards
(which have affected fish exports to the EU), stringent packaging and labeling requirements, and
non-trade restrictions (e.g. environmental and labor standards).
92.
The empirical work based on global studies indicate that Kenya would make a net gain
from global liberalization of agricultural trade of over $15 million per year (Vanzetti and Peters,
2003b) or about a third of official development assistance to Kenya. The net gain in welfare would
probably rise to over $25 million (or about 0.25% of GDP) if the modeling were to assume total
elimination of applied agricultural tariffs.

26

93.
The low welfare estimate for Kenya from the global studies is due to the fact that the
simulation model that generated the estimates did not include total elimination of applied
agricultural tariffs and did not account for liberalization of manufactures and services, Kenya
already enjoys preferential terms in most of its export destinations (e.g. the EU), the country is a net
food importer (excluding beverages), and does not have substantial production of commodities
currently enjoying high levels of protection in the OECD countries (e.g. textiles and clothing). In
addition, the estimate of changes in welfare from global trade liberalization does not include the
effect of import restrictions imposed due to SPS measures (e.g. on Kenya fish exports to the EU),
and contingent protection (short-term import barriers introduced in response to certain events e.g.
import surges and alleged unfair trading practices).

27

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47

ANNEX 1: GLOSSARY OF TRADE TERMS

Agreement on Agriculture: Part of the Uruguay Round Agreement covering issues related to
agriculture (e.g. market access, exports subsidies, and internal support).
AMS (Aggregate Measurement of Support) is an index that measures the monetary value of the
extent of government support to a sector, and includes both budgetary outlays as well as revenue
transfers from consumers to producers as a result of policies that distort market prices.
Applied tariff rates: The actual tariff rate charged at the border by an importing country, sometimes
differing from the bound rate. The rate is allowable under the rules of the WTO if it is at or below
the bound rate.
Articles (of the GATT): Clauses of the General Agreement that lay out the rules and procedures
that Contracting Parties will observe in their conduct of international trade and trade policy. Each
of the 38 Articles in the GATT deals with a different aspect of trade.
Bound tariff rates: Tariff rates resulting from GATT negotiations or accessions that are incorporated
as part of a countrys schedule of concessions. Bound rates are enforceable under Article II of
GATT. If a GATT contracting party raises a tariff above the bound rate, the affected countries have
the right to retaliate against an equivalent value of the offending countrys exports or receive
compensation, usually in the form of reduced tariffs of other products they export to the offending
country.
Ceiling binding: In cases where an existing tariff was not already bound, developing countries were
allowed to establish ceiling bindings. These ceiling bindings could result in tariffs that were higher
than the existing applied rate. The ceiling bindings took effect on the first day of implementation of
the Agreement.
Country schedules: The official schedules of subsidy commitments and tariff bindings as agreed to
under GATT for member countries.
EU (European Union): Established by the Treaty of Rome in 1957 and known previously as the
European Economic Community (EEC) or the Common Market. Originally composed of 6
European nations, it has expanded to 15. The EU attempts to unify and integrate member
economies by establishing a customs union and common economic policies, including Common
Agricultural Policy (CAP). Member nations include Austria, Belgium, Denmark, Germany, Greece,
Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the
United Kingdom.
GATT (General Agreement on Tariffs and Trade): Originally negotiated in Geneva, Switzerland, in
1947 among 23 countries, including the United States, GATT is an agreement to increase
international trade by reducing tariffs and other trade barriers. The agreement provides a code of
conduct for international commerce and a framework for periodic multilateral negotiations on
trade liberalization and expansion.
In-quota tariff: The tariff applied on imports within the quota. The in-quota tariff is less than the
over-quota tariff.

48

Market access: The extent to which a country permits imports. A variety of tariff and nontariff
trade barriers can be used to limit the entry of foreign products.
Megatariffs: Extremely high tariffs that effectively cut off all imports other than the minimum
access amounts granted under the agreement. Some well-known examples of megatariffs resulting
from tariffication include the base tariffs calculated for EU tariffs on grains, sugar and dairy
products; U.S. sugar, peanuts and dairy products; Canadian tariffs on dairy products and poultry;
and Japanese tariffs on wheat, peanuts and dairy products.
Most-Favored-Nation (MFN) status: An agreement between countries to extend the same trading
privileges to each other that they extend to any other country. Under a most-favored-nation
agreement, for example, a country will extend to another country the lowest tariff rates it applies to
any third country. A country is under no obligation to extend MFN treatment to another country,
unless they are both members of the WTO, or unless MFN is specified in an agreement between
them.
Nontariff trade barriers: Regulations used by governments to restrict imports from, and exports to,
other countries, including embargoes, import quotas, and technical barriers to trade.
OECD (Organization for Economic Cooperation and Development): An organization founded in
1961 to promote economic growth, employment, a rising standard of living, and financial stability;
to assist the economic expansion of member and nonmember developing countries; and to expand
world trade. The member countries are Australia, Austria, Belgium, Canada, the Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg,
Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland,
Turkey, the United Kingdom, and the U.S.
Over-quota tariff: The tariff applied on imports in excess of the quota volume. The over-quota tariff
is greater than the in-quota tariff.
Round: Refers to one of a series of multilateral trade negotiations held under the auspices of the
GATT for the purposes of reducing tariffs or other trade barriers. There have been eight tradenegotiating rounds since the adoption of the GATT in 1947.
Sanitary and phytosanitary (SPS) measures: Technical barriers designed for the protection of human
health or the control of animal and plant pests and diseases.
Special and differential treatment: The provision allowing exports from developing countries to
receive preferential access to developed markets without having to accord the same treatment in
their domestic markets.
Tariff: A tax imposed on commodity imports by a government. A tariff may be a fixed charge per
unit of product imported (specific tariff), a fixed percentage of value (ad valorem tariff), or some
combination of both.
Tariff-rate quota: Quantitative limit (quota) on imported goods, above which a higher tariff rate is
applied. A lower tariff rate applies to any imports below the quota amount.

49

Tariffication: The process of converting nontariff trade barriers to bound tariffs. This is done under
the Uruguay Round agreement in order to improve the transparency of existing agricultural trade
barriers and facilitate their proposed reduction.
Uruguay Round agreement: The Uruguay Round of multilateral trade negotiations, conducted
under the auspices of the GATT, is a trade agreement designed to open world markets. The
Agreement on Agriculture is one of the 29 individual legal texts included in the Final Act under an
umbrella agreement establishing the WTO. The negotiation began at Punta del Este, Uruguay, in
September 1986 and concluded in Marrakesh, Morocco, in April 1994.
World Trade Organization (WTO): Established on January 1, 1995, as a result of the Uruguay
Round, the WTO replaces GATT as the legal and institutional foundation of the multilateral
trading system of member countries. It provides the principal contractual obligations determining
how governments frame and implement domestic trade legislation and regulations. And it is the
platform on which trade relations among countries evolve through collective debate, negotiation,
and adjudication.
Source: Paul Gibson, John Wainio, Daniel Whitley and Mary Bohman, Profiles of Tariffs in Global
Agricultural Markets, Market and Trade Economics Division, Economic Research Service, U.S.
Department of Agriculture, Agricultural Economic Report No. 796, January 2001

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ANNEX 2: MILLENNIUM DEVELOPMENT GOAL EIGHT

Target 12: Develop further an open, rule-based, predictable, nondiscriminatory trading and
financial system (includes a commitment to good governance, development, and poverty reduction
both nationally and internationally)
Target 13: Address the special needs of the least developed countries (includes tariff and quota-free
access for exports; enhanced program of debt relief for HIPC, and cancellation of official bilateral
debt; and more generous ODA for countries committed to poverty reduction).
Target 14 (market access): address the special needs of landlocked countries and small island
developing states (through the Barbados Programme 17 and 22nd General Assembly provisions 18).
The indicators for Official Development Assistance are (a) net ODA as percentage of DAC donors
gross national income, (b) proportion of total, sector-allocable ODA of OECD/DAC donors to basic
social services (basic education, primary healthcare, nutrition, safe water, and sanitation), (c)
proportion of bilateral ODA of OECD/DAC donors that is untied, (d) ODA received in landlocked
countries as proportion of their GNIs, (e) ODA received in small island developing states as
proportion of their GNIs, and (f) proportion of ODA for the transport sector in landlocked
countries.
The indicators for Market Access are (a) proportion of imports (by value, excluding arms) from
developing countries and LDCs admitted free of duties and quotas, (b) average tariffs and quotas on
agricultural products and textiles and clothing from developing countries, (c) domestic and export
agricultural subsidies in OECD countries as percentage of their GDP, and (d) proportion of ODA
provided to help build trade capacity.
Target 15: deal comprehensively with the debt problems of developing countries through national
and international measures in order to make debt sustainable in the long term.
The indicators of Debt Sustainability are (a) proportion of official bilateral HIPC debt cancelled, (b)
debt service as a percentage of exports of goods and services, (c) proportion of ODA provided as
debt relief, and (d) number of countries reaching HIPC decision and completion points.
Other targets are: (a) in cooperation with developing countries, develop and implement strategies
for decent and productive work for youth, (b) in cooperation with pharmaceutical companies,
provide access to affordable drugs in developing countries, and (c) in cooperation with the private
sector, make available the benefits of new technologies, especially information and
communications.

17 United Nations General Assembly, Report of the Global Conference on the Sustainable Development of
Small Island Developing States, Bridgetown, Barbados, 25 April-6 May 1994, United Nations General
Assembly A/CONF.167/9, United Nations, New York, October 1994
18 United Nations General Assembly, Twenty-second Special Session, 27 and 28 September 1999,
Declaration and state of progress and initiatives for the future implementation of the Programme of Action
for the Sustainable Development of Small Island Developing States, United Nations General Assembly
A/RES/S-22/2, United Nations, New York, 12 June 2000

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The indicators are (a) unemployment rate of 15-24 year-olds for each sex and total, (b) proportion
of population with access to affordable, essential drugs on a sustainable basis, (c) telephone lines
and cellular subscribers per 1,000 population, and (d) personal computers in use per 1,000 people
and internet users per 1,000 population.
Source: United Nations Development Group, Indicators for Monitoring the Millennium
Development Goals: Definitions, Rationale, Concepts and Sources, United Nations, New York, 2003

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