Nairobi, the capital city of Kenya

Kenyan trade deals with UK and EU face tariff dispute

What’s happened?

Kenya’s Economic Partnership Agreement (EPA) with the EU, which was signed on December 18th but is not yet ratified, and its EPA with the UK, which came into force in March 2021, both face a fresh challenge in the form of an import-tariff dispute that erupted in January. Finding a solution will be tricky, but we expect the EPAs to remain in place.

Why does it matter?

The main point of contention—which prompted a formal complaint by the UK to a bilateral EPA council in January—is the import duty charged by Kenya on imported alcoholic beverages, including wine and whisky. The two EPAs are based on a 25% import tariff for the affected products, but the East African Community (EAC) increased the level to 35% in mid-2022 under its Common External Tariff (CET) to boost local industry. In contrast to the UK EPA, which pre-dated the tariff rise, the EU EPA was signed in June 2023, after the upward CET adjustment, but the deal, negotiated over several years, failed to incorporate the higher duty regime. Assuming both sides ratify the EU EPA, the EU is likely to follow the UK by making a formal complaint under the deal’s dispute resolution procedures.

One of Kenya’s key objectives in negotiating the EPAs was to ensure their compatibility with the EAC’s CET, to avoid potential distortions in the EAC’s internal market, but the latest dispute underlines the difficulties, especially as the EAC’s CET is adjusted annually. Kenya now faces the difficulty of reconciling the disconnect between its primary commitment to the EAC’s integrity and the long-term deals negotiated with the UK and the EU. As a first step towards tackling the UK’s complaint, Kenya will establish a technical working committee and consult key agencies such as the Kenya Revenue Authority and the National Treasury, but there are no clear-cut remedies.

Chart shows the value of Kenya's imports from and exports to the UK and the EU in 2022

One solution would be for Kenya to persuade its EAC partners to adjust the CET to match the EPAs, but there is no certainty of an agreement. Alternatively, the EAC could give Kenya a special dispensation to revert to a 25% tariff for the affected products. It seems unlikely that the UK and the EU will simply drop the dispute and accept the higher tariffs.

What next?

From our perspective, the tariff dispute could be productive, by testing the efficacy of the dispute-settlement mechanisms embodied in the EPAs, which will undoubtedly be needed again in the future. Being able to resolve disagreements is also a prerequisite for the medium-term goal of other EAC members signing up to the EPA.

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