The impact of trade liberalisation on Kenya

This study examined the impact of trade liberalisation on Kenya. It analysed the influence of trade liberalisation on trade creation, trade diversion, exports, imports, revenue effects and welfare effects. The developments in trade liberalisation and free-trade economic arrangements were introduced in Kenya and many developing countries in the early 1980s and strengthened from 1990s onward. The short term effects of the structural-adjustment programs were characterised by poor balance of payment conditions, high levels of unemployment, contraction of the imports from other countries, and government revenue losses, among other social problems. Notwithstanding the dismal performance of the Kenyan Economy after liberalisation, the Kenyan government continued to liberalise its trade under various frameworks such as the Economic Partnership agreements (EPAs) with the European Union, the World Trade Organization (WTO) and various bilateral free-trade agreements (BFTA) with its largest trading partners. This study used the World Integrated Trade Solutions-Software for Market Analysis and Restrictions on Trade (WITS/SMART) using 2008 as the base year. This method was used mainly because of its strengths to analyse the tariff effects of a sole market on disaggregate product lines. In addition the WITS/SMART model is able to analyse the impact of trade liberalisation in scenarios of imperfect substitutes. Hence, this study used the WITS/SMART Model to examine the trade liberalisation framework for Kenya under comprehensive implementation of COMESA customs Union, COMESA FTA, WTOFTA and the EPAs. The comparative valuation of the trade-creation effects reveals that the WTOFTA expected the highest trade-creation effects of US$995.16 million. This was followed by the various bilateral free-trade agreements which had a trade-creation effect of US$333.04 million, then COMESACU which had a trade-creation effect of US$310.50 million followed by the EPAs with a value of US$129.45 million. COMESA FTA was expecting trade-creation effects valued at US$15.51 million. These trade-creation effects are expected to cause unemployment through de-industrialisation. This study has also noted that WTO FTA and COMESA CU had no evidence of trade diversion. However, BFTA, EPAs and COMESA FTA showed evidence of trade diversion of US$134.88 million, US$89.28 million and US$2.61 million respectively. This study also examined the possible revenue effect from the free-trade agreements and customs union. It was noted that most losses emanated from the WTOFTA, which was valued at US$817.15 million. This was followed by the COMESACU protocol, which is expected to register a loss amounting to US$327 million. The third free-trade agreement with the highest losses comprised the various BFTAs amounting to US$304 million. The forth probable losses were anticipated from EPAs amounting to US$142 million. The free-trade agreement with the least losses is COMESA FTA with an expected loss of US$7.88 million. The consumer welfare effect was done to assess if consumers benefitted from trade agreements. This study observed that the WTOFTA expected the highest consumer welfare effect of US$103.98 million. This was followed by the various COMESACU with an expected consumer welfare effect of US$56.27 million. The BFTA were the third with a consumer welfare effect of US$ 41.82 million. This was followed by the EPAs with a consumer welfare value of US$ 17.56 million. The trade protocol with the least-expected consumer-welfare effect was the COMESA FTA valued at US$ 1.60 million. Although welfare gains resulting from the anticipated trade agreements were an indication of potential benefits to Kenyans, they were insignificant. This study also analysed the export performance from five different trade agreements and their impact on Kenya. The BFTA expected an export value US$4.63 billion, followed by the EPAs with an expected export value of US$2.18 billion. The third largest export values was WTOFTA with an export value of US$12.12 billion, the fourth being COMESAFTA having an export value of US$ 434.28 million and finally COMESACU with an expected export value of US$394.14 million. The study showed that major exports were composed of minerals, tobacco and agricultural products dominating the export basket. The export destinations were expected to be the WTO members, which include Uganda, Congo, Egypt, Rwanda, Sudan and Zambia. Kenya expected an increase in imports mainly from the WTO amounting to 8.95 per cent. This was followed by the BFTA rated with an expected 3.2 per cent growth in imports. The third protocol expecting import growth was the COMESACU of 2.8 per cent import growth and the EPA with 1.16 per cent import growth, and finally, 0.07 per cent import growth from the COMESA FTA. The expected increase in imports is anticipated to create balance of payment problems for Kenya. The results of the study show that the welfare gains from trade liberalisation were not able to compensate for the revenue losses. The study also showed that Kenya was not able to make optimal use of trade liberalisation to expand its export destinations; as the COMESACU was expected to reduce exports. In light of these findings, the study recommends that measures aimed at boosting exports like strengthening of the Export Processing Zones, export subsidies, the establishing of supply-side facilities, trade financing plus strengthening of the export-supporting institutions. It is important to note that the findings of this study provide an opportunity for Kenya, and other developing countries, to implement measures to ensure that they achieve optimal benefits from the various regional trade agreements