Kenya and the United States officially launched the start of negotiations for a Free Trade Agreement (FTA), arguably the most significant innovation in US-Africa trade relations since the passage of the African Growth and Opportunity Act in 2000. This makes Kenya the first country in sub-Saharan Africa to negotiate a free trade agreement with the US. If successful, it will become the model for future US bilateral free trade agreements with other African countries.
FTAs were established as tools for driving economic growth through trade and investment, enabling countries to enter into long-term, stable and predictable, rules-based system of governing trade. Under an FTA, goods and services from trading partners can be bought and sold across their borders with little to no tariffs, quotas or prohibitions.
As a start, access to a ready market with minimal restrictions can rapidly ignite an increase in production of goods and services that are in demand.
A comprehensive FTA can also help improve and streamline the business and regulatory environment that often impedes trade and investment, kickstarting reforms that lead to improved ease of doing business.
A rules-based system creates stability and predictability–key considerations for long-term capital intensive investment and risk management for business. Rules also create fairness and level the playing field.
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The true benefits of an FTA, however, accrue over time and can only be realised when countries take a long-term view and focus on the bigger picture.
For example, on the surface, free-market access can be perceived as detrimental to uncompetitive local industries due to the threat of more competitive, higher quality products and services. However, the drive to be competitive can lead businesses and workforces to innovate or adapt to shifting market demands.
Over time, each country may focus its capital and labour to specialising in the trade of goods and services where they have a comparative advantage or can be most competitive, leading to improved efficiency and innovation.
This leads to a more robust and dynamic economy that continually delivers high-quality jobs and opportunities for even the most vulnerable of its people, including women and the youth is created.
Kenya has a unique opportunity through the FTA to position as a production hub with significant opportunities in the agricultural value chain and manufacturing.
Lessons from the Covid-19 pandemic have created global demand for diversified supply chains.
Kenya’s geostrategic positioning, being East Africa’s largest business, financial and transportation hub, with 80 per cent of East Africa’s trade flowing through the Port of Mombasa is well placed to meet this growing demand.
By creating the right business environment, locally produced value-added products can become more competitive. Kenya can create a situation where instead of only being a source of inputs for US-based, entire manufacturing operations could relocate here to take advantage of lower production costs and free market access to the US, creating greater value for the country in terms of jobs and industrial development.
Overall, the domino effect of this would be spectacular, including increased FDI and partnership opportunities for SMEs with both big and small US companies looking for partners with knowledge of the local market and supply chain systems. If the SMEs grow, so does the economy and jobs. Kenya also stands to benefit from the transfer of knowledge, expertise and technology.
More jobs and better incomes would push a higher standard of living and increase consumer purchasing power, ultimately sparking the country’s economy and helping to grow locally owned businesses.
A great example is Mexico. From the 1930s through part of the 1980s, Mexico maintained a strong protectionist trade policy. In the mid-1980s, however, Mexico’s economy was on the verge of collapse and at that point faced little choice but to liberalise trade.
To date, Mexico has 11 free trade agreements involving 46 countries, including the US its largest trading partner. Its exports to all countries increased 515 per cent between 1994 and 2016, from $60.8 billion to $373.9 billion.
Therefore, an early sector analysis with input from the private sector and key stakeholders would help identify Kenya’s areas of strength that can be groomed to take advantage of the FTA and ensure a win-win scenario, with a focus on the bigger picture to drive the economic transformation we all yearn for.
Mr Okello is the CEO of the American Chamber of Commerce in Kenya.