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Thesis

Understanding the Impact of Economic Diplomacy on the Economies of Developino^ Cnnntrips: A Case Study of Kenya

U S U - A

400000028812

By

Milton^Lucheri

A Thesis Submitted in Partial Fulfillment of the Master of Arts in International Relations Degree Course.

Summer, 2013

Student Declaration

I , Milton Lucheri, student registration number 635020, solemnly declare that the content of this Thesis is original and that any third party's opinion and/or source of information has been duly acknowledged.

Milton Lucheri Student

Dr. Victoria N. Muindi Supervisor Signaturem' Date: . S \1

Prof Munyae Mulinge, Ph.D. Dean School of Huirianities and Social Scienajs, /

Signature: • •<^M^i^>^^-• Date: ..?^/.!./.7:^/./..

Prof Mathew Buyu

Understanding the Impact of Economic Diplomacy on the Economies of

Developing Countries: A Case Study of Kenya

Abstract

Efforts at economic diplomacy by states and other developmental agencies reap economic

benefits. As a developing country in Sub-Saharan Africa, Kenya has bom witness to these

benefits, becoming a frontier market and an economic hub for East African states. These benefits

have led to major modifications of Kenya's foreign policy at large, specifically the renaming of

its Ministry of Foreign Affairs to the Ministry of Foreign Affairs and International Trade. The

focal point of economic diplomacy is international trade in which exchange of capital, goods and

services across the national borders takes place. Thus, for national trade to be enhanced, Kenya

has engaged in multi-lateral agreements to boost trade. The country has also recently witnessed a

shift in its international trade approach by engaging in trade agreements with regional trading

blocs such'as the East Africa Community ( E A C ) , Common Markets for Eastern and Southern

Africa (COMESA) , The Free Trade Area ( F T A ) among others. Furthermore, Kenya's recent

intensification of trading activities with emerging economies such as Brazil, China and India is

of a keen interest. Economic diplomacy entails negotiations, bargaining and power-play in the

international political economy. This paper therefore is an exploratory attempt to establish the

nexus between these heightened activities of economic diplomacy and Kenya's national

economy. It wil l analyze the impact, i f any, of such diplomacy and eventually attempt to

establish the economic outlook of Kenya on the backdrop of these diplomatic ventures.

i

Dedicated to:

Linet Musimbi Wetundu, my beloved mother and Sylvia Mdenyo, my sister.

TABLE OF CONTENTS

UNDERSTANDING THE E F F E C T OF ECONOMIC DIPLOMACY ON THE ECONOMIES OF DEVELOPING COUNTRIES: A CASE STUDY OF KENYA

Abstract

List of Acronyms and Abbreviations

T A B L E O F C O N T E N T S

C H A P T E R ONE

Introduction 1

L I Baclcground of the Study 1

L2 Statement of the Research Problem 3

1.3 Objectives of the Study 5

1.4 Significance of the Study 5

1.5 Literature Review 6

1.6 Theoretical Framework 13

1.7 Research Questions 19

1.8 Hypotheses 19

1.9 Research Methodology 19

2.0 Chapter Outline 20

CHAPTER T W O

2.0 Kenya's Foreign Trade Policy and International Trade 21

2.1.0 Background of Kenya's Trade Policy 21

2.1.1 Evolution of Trade Policy in Kenya 22

2.2.0 The National Trade Policy 25

2.2.1 Current Trade Policy Dispensation 25

2.2.2 Policy on International Trade 27

iii

2.3.0 Import Policies, Procedures and Institutions 28

2.3.1 Goods Trade 28

2.3.2 Trade in Services 32

2.4.0 Export Policies and Measures Affecting Exports 32

2.4.1 Goods Trade 32

2.4.2 Trade in Services 36

2.5.0 Strategies and Program for Promotion of International Trade 37

2.5.1 Market Access Strategies and Programs 37

2.7.0 An Export-Oriented Strategy has Improved Kenya's Economy 38

CHAPTER T H R E E

3.0 Kenya and Regional Trading Blocs 41

3.1.0 Trade Agreements 41

3.1.1 .Regional Trade Agreements •. ; 41

i) East African Community 42

ii) Common Market for Eastern and Southern Africa ( C O M E S A ) 46

iii) Kenya and the Sudan Economic Ties 48

3.1.2 Non - Reciprocal Market Access Arrangements 50

i) The African Growth and Opportunity Act ( A G O A ) 50

ii) A C P / E U Cotonou Partnership Agreement 54

iv

CHAPTER FOUR

4.0 Kenya and Emerging Marlcets 59

4.1 Kenya and China Trade Relations 59

4.1.2 Policy Frameworks Underlying China-Kenya Relations 60

4.1.3 Trade, Investments and Development Co-Operation 62

4.2.0 Foreign Direct Investment 64

4.2.1 Manufacturing and Construction Investment 65

4.3.0 Kenya and India Relations 65

4.4.0 Kenya and Brazil Trade Relations 68

4.5.0 Overall Data Review 71

CHAPTER F I V E

5.0 Conclusion and Recommendation 72

B I B L I O G R A P H Y

V

List of Acronyms and Abbreviations

ACP/EU Africa Caribbean Pacific European Union

AGOA Africa Growth Opportunity Act

ATIA African Trade Insurance Agency

BIS Bank for International Settlement

CBIK Center for Business Information in Kenya

CET Common External Tariff

CITES Convention on International Trade on Endangered Species

COMESA Common Markets For Eastern and Southern Africa

COMESA Common Markets For Eastern and Southern Africa

DET Department of External Trade

DET Department of External Trade

EAC East African Community

EPC Export Promotion Council

EPZ Export Processing Zones

EPZA Export Processing Zones Authority

ERS Economic Recovery Strategy

FDI Foreign Direct Investment

FPEAK Fresh Produce Exporters Association of Kenya

FTA Free Trade Area

FTA Free Trade Area

GATT General Agreements on Trade and Tariffs

GDP Gross Domestic Product

V I

GNI Gross National Income

ICT Information Communication Technology

lEA Institute of Economic Affairs

IGA Intergovernmental Authority on Development

IMF International Monetary Fund

IPAR Institute of Policy Research Analysis

KAM Kenya Association of Manufacturers

KARI Kenya Agricultural Research Institutes

KEBS The Kenya Bureau of Standards

KEPHIS Plant Health Inspectorate Service

KIA Kenya Investment Authority

KIPPRA Kenya Institute of Public Policy and Research Analysis

KIRDI Kenya Industrial Research and Development Institute

KNCCI Kenya National Chamber of Commerce and Industry

KNTC Kenya National Trading Corporation

KRA Kenya Revenue Authority

MEAC Ministry of East Africa Community

MFN Most Preferred Nation

MIGA Multilateral Investment Guarantee Agency

MSME Micro, Small and Medium-sized Enterprises (MSMEs)

MUB Manufacturing Under Bond

NCPB National Cereals and Produce Board

NES National Export Strategy

NGO Non-Governmental Organization

NOCK National Oil Corporation of Kenya

OECD Organization for Economic Co-operation and Development

PERP Public Enterprises Reform and Privatization

RoO Rules of Origin

SAPs Structural Adjustment Policies

SPS Sanitary and Phyto-sanitary

SSA Sub-Sahara Africa

SSC South-South Cooperation

STEs States Trading Enterprises

TBTs Technical Barriers to Trade

TRIPS Trade Related Aspects of Intellectual Property Rights

VAT Value Added Tax

V l U

Acknowledgement

I wish to acknowledge the unwavering support of Dr. Victoria N . Muindi, my supervisor, in

conceptualizing, writing and editing of this work. Her mastery of the subject matter was nothing

short of inspirational. I also wish to recognize the invaluable counsel of Prof Kennedy M. Agade

in the development of this paper. Finally, Victor Omondi Wara, my friend, for his moral and

material support in the course of this work.

ix

C H A P T E R ONE

Introduction

1.1 Background of the Study

Globahzation has virtually transformed the international political and economic

affairs of virtually every country in the world. It has transcended political, social, cultural

even environmental aspects of the citizens in the world. Just like industrial revolution of

the late 1700s and early 1800s was a force to reckon with, so is globalization in the

present day world affairs. The coming of a vast and rule-based global trading system

under the World Trade Organization and other trade agreements has created new

opportunities in the world trade. It is this emergence that has pushed countries into a

various international agreements through bilateral, regional and multilateral fora.

Therefore, these negotiations have aroused the need to better appreciation of the science

and skills of economic diplomacy. Even as Spero points out "international economic

relations has itself become a political arena in which both governments and non-state

actors (like multinational corporations and transnational environmental groups) try to

manage conflicts and seek cooperative outcomes'" (Spero & Hart, 2003, p. 386).

Berridge & Allan describe economic diplomacy as being concerned with

economic policy issues, e.g. work of delegations at standard setting organizations such as

WTO and B I S . Economic diplomats also monitor and report on economic policies in

foreign countries and give home government advice on how best to influence them. It

employs economic resources, either as rewards or sanctions, in pursuit of a particular

foreign policy objective. This is sometimes called 'economic statecraft' (G.R Berridge &

Allan James, 2001, p. 81.).

There exists a multitude of justifications for states to engage in economic

diplomacy. According to Adede, one of the factors that may push or pull a country into

negotiating a trade agreement is the underlying rationale of the traditional G A T T practice

of holding rounds of trade negotiations which allow for trade-offs between different areas

of negotiation, thus making it possible to the negotiators to reach compromises and

achieve progress towards a desired goal. And to make it more specific he asserts that this

is especially the case when developing countries entered the T R I P S agreement i.e. Trade

Related Aspects of Intellectual Property Rights (Adede, 2001).

Kenya is the regional trade and financial hub in the East Africa region. Its

economy, however, is constrained by effects of -among others- corruption, and an

overdependence on low-priced primary agricultural goods in world markets, (C IA ,

2011). Its foreign policy is actively directed toward the region through economic

diplomacy in pursuit of its domestic development goals. As clearly stipulated in Kenya's

Vision 2030: a Globally Competitive and Prosperous Country ('Vision 2030'), the

country seeks to achieve those targets within the next 18 years, (Kenya, Ministry of

Planning and National Development, 2007).

Against this background, this study wil l examine the nature of Kenya's economic

diplomacy in the East Africa region. It wil l particularly do so on the role of foreign policy

in advancing Kenya's commercial interests while offering a perspective on the countries

contribution to the region's development and economic stability. It wi l l also analyze how

this kind of diplomacy has become a cornerstone in its approach to foreign policy; how

Kenya has involved itself in International Corporation, especially with neighboring states

and other states in the Sub-Sahara Africa, within the framework of common markets.

1.2 Statement of the Research Problem

With the achievement of Independence at the end of 1963, the Kenya Government

was faced with a challenging array of problems connected with economic and social

development of the country (Barve, 1983, p. 45). The government inherited widespread

unemployment and biting poverty. It was vital then to create new employment

opportunities and this would involve the government expanding trade with other states,

both in the region and globally. The economic and social philosophy which guided the

Kenyan planners and policy makers then was based upon the concept of African

Socialism. The basic tenet of this philosophy as they applied to planning in Kenya was

outlined in Sessional Paper No. 10 1963 entitled: "African Socialism and its Application

to Planning in Kenya." As far as international trade relations were concerned, the paper

stated: "Kenya Places no ideological barriers on trade and expects that trade relations

should be conducted in general on the basis of economic considerations." The Paper also

affirms that Kenya was prepared to seek or accept technical and financial assistance

from any source, provided that no strings were attached. It was Kenya's intention to

participate fully in world trade provided that such commerce did not lead to political

domination by any other nation (Ibid, 22). Consequently, Kenya's trade regime evolved

from an inward looking strategy, which emphasized restrictions on imports, to one with

open trade policies, which emphasized free trade. The regime has undergone great

changes since independence in 1963. The metamorphosis can be traced to later years of

the colonial era (Mwega, 2005, p. 8).

-3 -

In living up to this goal, Kenya ambitiously participated in a number of

diplomatic activities. Upon obtaining independence, it became a Contacting Party to the

General Agreement on Tariffs and Trade ( G A T T ) (Barve, 1983, p. 34). This is a Multi­

lateral treaty subscribed to by over a fifth of the world's states. Its objective is to

liberalize the world trade and to place it on a secure basis, thereby contributing to

economic growth and development and the welfare of the world. It is also a Contracting

Party to Arusha Agreements. This was exploratory talks with European Economic

Communities (now the European Union) and the final agreement was based on the

principle of reciprocity in tariff concession. After Arusha Agreement, came The Lome

Convention in which Kenya, alongside 50 other states in Africa, the Caribbean and the

Pacific (known as A C P countries), became a signatory to a more far-reaching trade,

financial and industrial co-operation agreement with the nine members of the European

Economic Community. In addition, like all other developing countries, Kenya also

benefits from preferential treatment for her industrial exports to the markets of most of

industrialized countries under the Generalized System of Preferences negotiated under

the auspices of the United Nations Conference on Trade and Development ( U N T C A D ) .

In Africa, Kenya trade volumes of Kenya shillings in conduct of trade under

membership of severally established trading blocks. These include the Common Market

for Eastern and Southern Africa (COMESA) , Free Trade Area ( F T A ) , East Africa

Community ( E A C ) , Intergovernmental Authority on Development ( IGAD) .

Furthermore, there is the Kenya's participation in the World Trade Organization (WTO) ,

Africa Growth and Opportunity Act (AGOA) , New Partnerships for Africa's

Development (NEPAD) etc.

Have these international trade pursuits brought gains of significant levels to the

economy and the general development in Kenya? This study is an exploratory attempt to

establish the link between these activities and the economic growth of Kenya, a third

world country, and further determine the extent to which such diplomatic ventures have

contributed to the Kenyan Economy.

1.3 Objectives of the Study

1. To interrogate the nature of the correlation between the activities of economic

diplomacy and economic development.

2. To explore and analyze the impact that such diplomatic pursuits have had on the

Kenyan economy under the period of investigation.

1.4 Significance of the Study

Trade negotiations as well as other diplomatic activities constitute a veritable

means of linking the global economy. Kenya, like many other developing countries,

faces daunting challenges integrating into the global system. On the one hand, there is an

urgent need to acquire capacity to effectively negotiate at regional and multilateral

levels. This requires clear understanding of issues, drawing appropriate relationship

between issues under negotiation with national development strategies, and recognizing

the importance of complementary economic and other development polices. On the other

hand, there is even a greater need to develop capacity to implement the agreements

(Mwega, 2005, p. 8). As such, this necessitates the development of capacities to

implement agreements with a bid to realize economic gains from such. This study shall

validate or invalidate the impact that such activities have had on the Kenya's domestic

- 5 -

development goals.

The evolutionary process of economic development itself demands trade

expansion. Essential requirements of new technology, capital equipment, raw materials

and other supplies for both development and to keep the wheels of current domestic

industry turning, call for vast amounts of foreign exchange. Foreign exchange, however,

has to be earned. Certainly, much accrues from 'invisibles'- the net revenue from

tourism and international services- but the greater share derives from the exports of

commodities and manufactured goods. For such trading activities to take place amongst

states, multinational corporations (MNCs), international development agencies etc, there

has to be already diplomatic engagement before the process can commence. However,

no accord can be arrived at where prospects of economic gains, amongst others, are

remote. Hence, this study wil l be of profit in pin-pointing the dividends realized by

developing countries, especially Kenya, in engagement in economic treaties,

membership in trading blocks, state visits just to mention a few. Recent developments in

Kenya's political landscape have arguably had a fascinating bearing on the international

relations, not to mention Kenya's diplomatic engagements in the global affairs. In an

unprecedented case of election of a State president and his deputy, facing charges of

crimes against humanity at the International Criminal Court ( ICC) , Netherlands, an

understanding wil l automatically be sought as to how such events shall affect Kenya in

entrance of diplomatic binding agreements that have, by extension, economic

dimensions. This study wil l attempt to hypothesize the impact of such events on Kenya's

economic gains.

1.5 Literature Review

Berridge & Allan describe economic diplomacy as being concerned with

economic policy issues, e.g. work of delegations at standard setting organizations such as

WTO and B IS . Economic diplomats also monitor and report on economic policies in

foreign countries and give home government advice on how best to influence them. It

employs economic resources, either as rewards or sanctions, in pursuit of a particular

foreign policy objective. This is sometimes called 'economic statecraft' (G.R Berridge &

Allan James, 2001, p. 81.). Economic diplomacy, however, should not be misconstrued

for commercial diplomacy. Jan Aart Scholte describes commercial diplomacy as the task

of mission diplomats to support the home country's business and finance sectors in their

pursuit of economic success and the country's general objective of national development.

He adds that commercial diplomacy includes the promotion of inward and outward

investment as well as trade (Jan Aart Scholte, 2000, pp.38-39). In fact, central to

commercial diplomat's work is the supplying of information about export and investment

opportunities and organizing and helping to act as hosts to trade missions from home.

However, in simplistic terms, Bayne & Woolcock say that economic diplomacy is the

process of decision-making and negotiation (Bayne & Woolcock, 2007, p. 30).

A paramount, time and labor intensive task of a nation's foreign policy is

propagating its all-important agenda: economic prowess. This is the essence of economic

diplomacy. Nicholas Bayne, a British diplomat and an authoritative figure on the subject,

defines economic diplomacy as the "method by which states conduct their external

economic relations. It embraces how they make decisions domestically, how they

negotiate internationally and how the two processes intersect."(Bayne, 2008, p. 1). In

economic arena, than in any other poHcy issue, the lines between foreign and domestic

policy are more blurred. In the same breath, the actors in economic diplomacy are more

diverse than in traditional diplomacy as they frequently advocate for domestic interests

within and without the government.

Charity begins at home. The role of enhancing economic prowess is first directed

at the home country. To have a robust and flourishing home economy, there ought to be

sound monetary and fiscal policies for which no brilliant and astutely articulated foreign

policy can suffice as a subsfitute. Having said this, trade and financial integrafion is

heavily dependent on events outside a country's borders. However, this prompts one to

ask: In the case of Private-private transactions, why do commercial activities between

mostly private companies ofte call for the intervention of diplomats? As is the case with

their domestic equivalents. International trade and capital flows, need a host of rules,

regulations, and agreements for them to operate effeciently. The task of negotiating rules

among different industries, states, and pertinent government entities, can be a complex

affair. Its complexity increases logarithimically.... domestically, the ultimate comprise

among economic actors wil l be in accord with national law, internationally the most

adept or powerful nation wil l win. And who makes the rules, rules (Philipot, 1999, p.

187).

In simple terms, the objective of economic policy is to articulate and outline the

operating frame work with an inte of pursuing economic interests as effortlessly as

possible. In ther broad defitinion; these interests are access to export markets for exports.

Number two, sustance of order in international systems that is not vulnerable to criminal

and terrorist elements. Lastly, promotion of economics all over the world. Therefore, the

major component of economic diplomacy is international trade, which in itself involves

the trade of capital, goods and services across national borders.

A nascent phenomenon in globalization is regional integration. This is a major

component of Kenya's foreign policy and is pursued through various regional initiatives,

such as the East Africa Community ( E A C ) ; Intergovernmental Authority on

Development ( IGAD) ; Common Market for Eastern and Southern Africa ( C O M E S A ) ;

Africa Caribbean and Pacific-European Union (ACP-EU) , and Indian Ocean Rim-

Association for Regional Cooperation... This posifion reflects realizaUon that Kenya's

development is tied to that of its regional neighbors, as well as that of the global

economic system (Wanyama, 2013, p.6). Kenya, apart from being the regional economic

hum, it also has high diplomatic standing arising from its hosting some of the largest

diplomatic missions and international agencies in sub-Saharan Africa,' while maintaining

a moderate profile in international politics by adopting a posture of 'Silent diplomacy'.

The Kenyan High Commissioner to South Africa, Ambassador Tom Amolo,

opines that a process of greater democratization helped shift the priorities of foreign

engagement towards economic diplomacy, which became an important instrument in

pursuing growth; hence its description by government officials as a principal pillar on

which the country's foreign policy is grounded^ in pursuit of its development objecfives

of becoming a middle-income and industrialized economy by 2030. Economic

diplomacy, in the Kenyan Context, is not a notion that describes distinctions of policy

' The US embassy is the largest in sub-Saharan Africa and the UN headquarters is the main office in Africa for UN agencies such as UN-Habitat, UN-Habitat, UN-Environmental Program(UNEP) among others. It also hosts large missions from the UK, E U , China, Canada, Belgium, Russia, India, Iran, Brazil, and Pakistan. "Amolo T, Some Thoughts on Economic Diplomacy and Its Impact on Economic Relations, 27 May 2009, http://www.titiic.co.za/HE%20Tom%20Amolo%20-%20Economic%20Diplomacy.pdf

- 9 -

and practice, but rather a reaction to changes in the global environment. The main

motivation for conducting foreign policy in this way is the search for increased capital

flows into the country - and the region, given Kenya's commitment to integration

initiatives-through exploring alternative sources of development assistance and by

promoting itself as a favorable destination for foreign direct investment (FDI ) , tourism

and conferencing. Wanyama further argues that the necessity to support Kenyan

investment within the region and beyond is motivated by a need to expand access to

established markets worldwide. He derives thus, "Economic Diplomacy is therefore an

avenue through which to promote impartial rules of international trade while

strengthening R E C s (Regional Economic Communities), especially the E A C and

COMESA, to serve as competitive springboards to emerging and global markets".

He further argues that sound economic policies and record of pragmatism in

foreign policy and regional affairs have brought Kenya to a position of relative leadership

that makes it highly adaptable to global changes. He advances:

"Since independence in 1964 this pragmatism has taken the form of'positive neutrality' in foreign

relations. Initially, this was seen as a means to safeguard Kenya's national integrity in a world

where greater power domination of weaker states was the main characteristic of international

affairs. Subsequently, it became a position through which Kenya seeks to preserve that character

in an environment in which global events have significant national and regional repercussions.'' In

following this policy the country has eschewed ideological and geopolitical alliances; pursuing

'Wanyama's Personal Interview, MFA (Ministry of Foreign Affairs), Nairobi, 14 October 2011 •"Mboya expresses the sentiments of President Modibo Keita of Mali, on positive neutrality as the foundation for developing country's foreign policy as did President Julius Nyerere of Tanzania, who warned poor African countries against becoming tools of rich countries.

- 10-

peaceful non-aligned co-operation without regard for other nations' political or economic

inclinations, while avoiding open military confrontation."

John Howell in his article titled ''An Analysis of Kenyan Foreign Policy", The

Journal of Modem Africa Studies, states of regional integration in the East Africa region,

"Yet, while Kenya has not taken any initiative towards political integration, she

constantly advocated closer economic co-operation. Industrially more advanced than

Uganda and Tanzania, Kenya has sought to maintain the highly favorable level of inter­

regional trade, and to preserve the monetary and banking system inherited after

independence." (Howell, 1968, pp 29-48).

Howell in his article predicted that i f the Treaty for Co-operation'' was looked as a

landmark in East African affairs, then Kenyan energies would be exerted towards

economic expansion (the common market) or altematively the next logical step would be

a wider system of economic co-operation, with Zambia as a likely addition. He posited

that this would appeal to Kenya, with her growing manufacturing industry which needed

markets in surrounding areas, and she could be expected to press for wider economic co­

operation as well as a full common market. It is interesting to note the hand that aid

givers have in the foreign trade policy. As Howell says, "pressure directed at influencing

foreign policy through economic levers is in the hands of aid-givers on whom

development aspirations rely. This holds particularly tme in East Africa, both because of

the strength of nationalist feeling and because of the peripheral interest the area occupies

in the strategies of the major powers." Goldin is attests to this fact by stating, "With the

ending of the Cold War, aid has been increasingly allocated to countries able to use it

' A treaty between Kenya, Uganda and Tanzania signed in 1965 in an attempt to reshape East Africa economic co­operation. This was undertaken by a special commission under a Danish economist Kjeld Philip.

more effectively" (Goldin & Reinhert, 2003, p. 17). The judicious utilization of this aid

by the countries awarded the same(main developing countries) has brought about a

spectacular reduction in poverty levels even as noted by Goldin "Not surprisingly, the

impact of aid on growth and poverty reduction has more than doubled over recent

years"(Goldin et al, 2002, p.25). Howell, however, doubted whether Kenya had felt the

need to make foreign policy conform to imagined pressures of international finance.

Kenya's foreign policy of non-alignment has come under criticism. Makinda

wonders whether Kenya's non-alignment is a quiet diplomacy or dependence (Makinda,

1983, p. 301). Professor John Okumu noted that one of the three factors that motivated

her was that a policy of vigorous economic development at home and economic

cooperation and cultural exchange with her neighbors would strengthen her position in

Africa a fact that Makinda contends. He asserts that professor Okumu discusses the so-

called 'good neighbor policy' as i f it had no connection with the multinational capital that

was, and still is, operating in Kenya which was a policy dictated by Kenya's economic

and industrial infrastructure itself dominated by foreign capital.

Makinda acknowledges that from independence, Kenya's foreign policy was

shaped by the need to attract more foreign capital, maintain commercial links with

neighboring states and ensure security of her borders, and consolidate the domestic

political power base. He argues that in pursuance of these goals it manifested dependence

in various ways, that is, there was dependence on foreign investment and aid, which

ultimately meant the predominance of Western, particularly British, capital and influence.

Secondly, there was a dependence on the wider East African market, which meant

Kenya's continued domination of the East African common market.

- 12 -

According to Swainson, Kenya's overwhelming dependence on Western capital is

partly a result of her historical past and partly a function of the local ruling class

(Swainson, 1975). He advances that she inherited an economic infrastructure developed

along capitalist's lines and those leaders who took power at independence worked for the

consolidation of that system. He adds that in an effort to attract more foreign capital into

the country, the new leaders passed a law guaranteeing protection to foreign investment^

and set about wooing Western investors. Those leaders who resisted the urge to

encourage investment by foreign capital were later removed from power.^ Owing to this

dependence on the wider East African Market, Kenya adopted a cautious approach to

East African Community issues for fear that any disruption of that market might cause

her considerable losses.

Another important aspect of foreign policy and especially in regards to trade

would be leadership turnover, that is, the change in country's leadership. As noted by

Fiona McGillivray in "The Impact of Leadership Turn-over on Trading Relations

between States", that when a leader is replaced, the new leader may change policy.

However the extent to which we should anticipate policy shifts depends on domestic

political institutions (McGillivray & Smith, 2007, pp. 567-600). She suggests that a

decline in trade accompanies leadership turn over in small coalitions systems, but not in

large coalition systems and that trade and industrial policy is one mechanism that allows

leaders to direct resources toward their supporters. Fiona points out that Kenyan president

Jomo Kenyatta drew his support from the rich agricultural lands of the Central Highlands

and the Kikuyu tribes. His agriculture friendly policies reflected this support base. After

' This was the Foreign Investment Protection Act of 1964. ' Some politicians initially resisted the urge to go for Western capital, but they were later removed from power.

- 13 -

Kenyatta's death in August 1978, Moi rose to leadership. Although he initially relied on

Kenyatta's traditional support base, Moi set about replacing this coalition with supporters

from the Kalenjin tribes of the Central Rift region. So Moi refomied Kenya's political

economy leading to large net outflows from the central provinces to other regions. Moi's

policies radically shifted the focus of Kenya's trade. In the year following Moi's

ascension to power, U.S. trade with Kenya dropped nearly 32 percent. Of course such

policy variance is unattractive to actors in international trade, and they wi l l be unwilling

to establish trade relations with such economies. However McGillivray is quick to add

that just because small coalition leaders can abrogate agreements and international norms

does not mean that they wil l . As the liberal paradigm suggests, cooperation is often

possible even without the threat of domestic audience costs.

1.6 Theoretical Framework

To maximize our understanding of the concept economic diplomacy and the

theoretical approaches that relate directly to it, I have chosen to look at Rationalist model,

two-level game theories and constructivist approaches to economic diplomacy.

1.6.1 Rationalist model

Rationalist models have provided a valuable contribution to understanding the

dynamics of negotiations. These can integrate realist and societal approaches, but are

generally based on the assumption of a unitary state aggregating domestic interests in

order to maximize utility in the shape of retaining power (Tollison & Willet 1979).

Rationalist models of negotiation essentially build on the concept of the 'principal-agent'

model, in that the government is seen as the actor and a set of national interests as the

principals. Governments maximize their utility by sei-ving the most powerful interests

- 14-

(defined as 'the national interest') who wil l determine their re-election (Bayne &

Woolcock, 2007, p. 30).

Rationalist models often draw heavily on concepts borrowed from economics

(ibid. p. 30). Thus models of negotiation can be constructed in which the parties seek to

maximize their mutual gains by moving towards a pareto optimum beyond which it is no

longer possible for one party to improve its benefits without the other parties being worse

off (Sebenius, 1983). As single issue negotiations tend to be more zero-sum games,

negotiators are expected to add issues in order to ensure that all parties can benefit from

the negotiation. This adding of issues or linking of negotiations then provides scope for

integrative negotiations in which all parties gain and reduces the distributive element in

any a negotiation. Most authors have argued that economic diplomacy is generally a

mixture of distributive and integrative strategies, or using the terms borrowed from

negotiation theory, a mixture of value claiming and value creating strategies (Odell,

2000).

One does not have to look very hard to find the use of policy linkage or adding

issues in negotiations. This is reflected in the well-established rationale for multilateral

rounds as means of promoting trade liberalization, such as the DDA. The rationale is that

linkage enables each party to come away with something and for the trading system as a

whole to move towards the pareto frontier. I f only agricultural trade were on the agenda

in the DDA the E U would have to make extensive concessions, getting little in return. E U

trade negotiators would be unwilling and probably unable to do this, given the

expectation that trade negotiations are based on reciprocity (Bayne & Woolcock, 2007, p.

30).

- 15 -

Technical working groups are usually established once the negotiations have been

launched. In the example, the D D A includes Working Groups or Committees on all the

issues involved in the negotiation. These working or specialist groups are used to sound

out the position of the other parties or to explore potential deals or value creation moves.

But they also provide a forum in which persuasion and credible argument are used to get

the negotiating partner to shift position. The same can of course occur the higher,

political level in negotiations, but these meetings are usually much shorter in duration and

the ministers involved tend to arrive with a brief to defend. Having said this, meetings of

heads of state or government in the G8 or other summit settings sometimes involve the

use of persuasion and argument. This can be especially effective when the people

concemed have been in power for some time and know their colleagues from other states

(Bayne, 2000).

Persuasion has the advantage over bargaining or coercion in that the negotiating

partner 'buys in' to the agreement. This is important when it comes to implementation.

For example, obliging developing countries to sign up to high standards of protection for

intellectual property rights in the Uruguay Round by using inducements and threats may

not have paid off in the end, since many countries have not felt committed to

implementing the agreement. If, on the other hand, governments can be persuaded that

the reform involved in implementing a trade agreement is beneficial, they wi l l be more

committed to full implementation of the agreement (Fasan, 2006).

1.6.2. The Two-Level Game Perspective

Sometimes referred to as the Domestic Approach. Economic diplomacy is shaped

by domestic level preferences which are in turn shaped by interest groups and the

institutions that aggregate the specific and define the national interest. As increased

economic integration or globalization has eroded the distinction between the national and

international levels of policy-formal law or even constitution, or may be based on the de

facto functioning of decision making (Bayne & Woolcock, 2011, p. 33). Professor

Robert Putnam developed a two-level game approach from observing the complex

negotiations on microeconomic policy, trade and energy linked to the Bonn G7 Summit

of 1978 (Putman 1988; Putman and Henning 1989). His metaphor thus fits economic

diplomacy very well, though it can also be applied to non-economic contexts. The value

for the Putnam metaphor is that it addresses directly the dynamic interaction between the

domestic and international levels involved in any negotiation. Its central concern is to

explain how this interaction shapes the negotiation process. In common with the

constructivist approaches, the Putnam model assumes that preferences are mutable,

although it does not stress the role of persuasion in bringing about change. Change is

rather brought through strategic use of linkage by negotiators seeking to find an outcome

that will satisfy both their international partners (the level I game) and their domestic

principals (the level I I game). This means changing the preference or the 'win-set' of the

other party, by a variety of means. It can also mean using the pressure to find agreement

in international negotiations strategically to promote their cause in preference to that of

other departments or branches of government. This was the kind of process that Putnam

observed at working the 0 7 (Putnam and Bayne, 1987).

Putnam's 'win-set' defines the range of outcomes that each party wil l accept.

Negotiators can seek to manipulate the size of their own win-set or that of their

negotiating partner. B y narrowing the domestic win-set, such as by encouraging action by

key actors (principals) that forecloses certain options, a negotiator might be said to

strengthen his or her position, because a narrower win-set limits the scope for

concessions because congress or the E U council of Minister wi l l not accept this or that

outcome. In doing so they are trying to give the impression that they have a narrower

win-set than they really have, in order to strengthen their position. This is something that

trade negotiators habitually do and can give rise to the 'negotiators dilemma'.

Negotiators may also seek to influence the size of another country's win-set by

engaging in the domestic debate in other countries. This can be done by commissioning

reports to show that the stated policy aims of the other country are counter-productive

and clearly pointing out that those interests in the other country are carrying a

disproportionate cost. This kind of public diplomacy can have unpredictable results. It is

however, something that goes on a lot in trade policy. At regular interval there are reports

quantifying the costs of agricultural support programs in an effort to shift the balance of

option against continued support for farming. Developing countries have also begun to

make common cause with development ministries in the O E C D countries, in their effort

to moderate the pressure from trade ministries in these countries that typically work on

the principle of reprocity in trade.

The Putnam approach, like other approaches, acknowledges that negotiators are

working in bounded rationality. In other words they do not have perfect knowledge of the

win-set of their opposite numbers or for that matter of their own win-set. In terms of

identifying the national win-set, negotiators with the capacity to do so undertake

consultations with a wide range of interest and throughout all govermnent departments, in

order to get as clear a view as possible of the various positions.

1.6.3 The Constructivism Perspective

This approach demonstrates how core aspect of international relations are, as

opposed to the assumptions of neo-realism and neo-liberalism, socially constructed, that

is, they are given their fonn by ongoing process of social practice and interaction. One

writer, Allexander Wendt, calls two increasingly accepted basic tenets of constructivism

"that the structures of human association are determined primarily by shared ideas rather

than material forces, and that the identities and interests of purposive actors are

constructed by these shared ideas rather than given by nature". Wendt, 1999, p. 1).

Martha Finnermore has been asserted some degree of authority in constructivism by

examining the way in which international organizations are involved in the processes of

social construction of actor's perceptions of their interests. Finnermore has attempts to

"develop a systemic approach to understanding state interests and state behavior by

investigating an international structure, not of power, but of meaning and social value"

(Finnermore, 1996, p. 2). "Interests", she explains, "are not just "out there' waiting to be

discovered; they are constructed through social interaction"(Ibid.).

With bounded rationality being, in practice, the nonn and negotiators obliged to

make judgments on whether a potential agreement meets national interests, there enters a

degree of subjectivity into negotiations. This in turn opens the way for persuasion in

place of or alongside bargaining. This is where constructivist approaches to international

negotiation find application because they stress how interests and identities can be

changed over time through discussion and dialogue (Risse, 2000).

Constructivists would argue that persuasion plays a central role in everyday life

- 1 9 -

and in national level politics, where political parties and interest groups (in democracies)

use persuasion much of the time. It is only natural therefore that it would also be used in

international negotiations. In representing a national interest, negotiators almost always

seek to justify their position, and seldom make bold demands based entirely on self-

serving interests. Few negotiators enter a negotiation suggesting that those around the

table should make compromises in order to enhance the wealth of that negotiator's

country or ensure that its government gets re-elected. Negotiators wil l tend to suggest

others compromise for the greater good of all, or indeed, for their own benefit (Ulbert and

Risse, 2005).

Negotiators may also seek to persuade their negotiating partners of the value of

certain norms like liberal trade and investment policies, especially when this fits with

their home country's policies or interests. Almost all negotiations in economic diplomacy

start with technical working groups, fact-finding or shopping exercises. These seek to

establish some basic facts concerning the issues under negotiation and the positions of the

various parties. Such occasions also provide an opportunity for 'knowledge broker' to put

the case for a particular approach or set of norms that could govern the policy concemed

(Bayne & Woolcock, 2011, p. 36). Negotiators may therefore feel they also need to

engage in a public debate. Such public debate enhances transparency, which will

generally reduce the scope for parties in a negotiation to further their own narrow self-

serving interests. But transparency can also have the effect of reducing the ability of the

parties to be flexible and make compromises. I f a government has made public policy

statements it wil l be harder for it to change its position that when negotiations take the

form of less transparent 'quiet diplomacy' (Ibid. p.37).

- 2 0 -

1.7 Research Questions

1. Under the period of investigation, has economic diplomacy had an impact on Kenya's

economy?

2. If economic diplomacy has had an impact on Kenya's economy, can it be clearly seen

by looking at the trends in Kenya's GDP?

3. Does Kenya's foreign trade policy favor one country/group of country/region over

another? If so, has this influenced the impact economic diplomacy has had on Kenya's

development?

1.8 Hypotheses

1. There is an apparent and inextricable link between activities of Kenya's economic

diplomacy and its economic development.

2. Economic diplomacy activities tend to have positive impact on the economic status of

any given country, including Kenya.

3. With world affairs tending to globalization, Kenya's economic diplomacy pursuits are

set to intensify to reap economic benefits.

1.9 Research Methodology

In order to sufficiently answer the research questions above, an evaluative

methodology shall be adopted. The approach of the investigation shall be multi-pronged

in the sense that it shall have a blend of primary and secondary sources of information

-21 -

and data. It shall also incorporate critical review of secondary materials such as books,

journals, articles, search engines and publications from governmental and non­

governmental organizations.

3. Chapter Outline

Chapter two of this research shall be titled, "Kenya's Foreign Trade Policy and

International Diplomacy". This chapter shall seek to maximize understanding of Kenya's

policy frameworks as regards foreign trade and finance, that is, capital inflows and

outflows especially in the period after the Bretton Woods Insfitutions came into

existence. It shall also seek to interrogate whether such policies have been sufficiently

applied by the pertinent players and whether at all, there are empirically testable

dividends gained by employment of such policies. Chapter three shall be titled,

"Kenya and Regional Trading Blocs". In this Chapter, the study shall explore the nature

of trade relations between Kenya and its regional counterparts and whether such trade

relations bear on its economic prowess. It shall further assess the impact of its regional

membership in trading blocks, inter alia. Common Markets for East and Southern Africa

(COMESA), East African Community ( E A C ) , Intergovernmental Development Authority

(IGAD), Free Trade Area ( F T A ) .

Chapter four shall take the fitle, "Kenya and Emerging Markets". This chapter

shall address itself to the economic diplomatic activities between Kenya and countries

considered as emerging economies. Brazil, Russia, India, China and South Africa

commonly known as the B R I C S are notable examples. The study shall seek to appreciate

the economic gains by Kenya in engaging with these emerging economies. Of specific

interest shall be Brazil, China and India.

-22 -

The last chapter, chapter five, shall be "Conclusion and Recommendations". This

segment shall serve as a recap of the study and give recommendations on findings

thereof The recommendations wil l , i f adopted, help in appreciation of the correlation

between economic diplomacy and economic growth and by extension help foster Kenya's

strategic advantage in its transaction both regionally as well as globally.

-23 -

Chapter Two

2.0 Kenya's Foreign Trade Policy and International Trade

As Kenya seeks to regain its position as an economic giant in Eastern and

Southern Africa, the Government has introduced a number of policies aimed at

supporting the vision for a dynamic export-led economy. The publication of a National

Export Strategy (NES) and Economic Recovery Strategy ( E R S ) is a classic examples of

government's efforts to consolidate export promotion and an a portray of its increasingly

visible presence in international discussions on trade facilitation.

The E R S identifies trade and, in particular, export expansion as one of those

activities that wil l assist in economic recovery and growth. It is with this rationale that the

National Export Strategy (2003-2007) was prepared and the Cabinet of Kenyan

government approved it. It encourages more Kenyans to engage in international trade and

identifies prospective sectors and products for expansion.

2.1.0 Historical Background of Kenya's Trade Policy

With the coming of liberalization and globalization, Kenya has since focused its

trade policy on moving its economy towards a more open trade regime with increased

access to its products and services in overseas markets. Promoting trade is key to Kenya's

development in an environment characterized by rapid technology progress and

globalization. This therefore has been the basis for fonnulation of a National Trade

- 2 4 -

Policy. There's also the pressure that comes from competition in liberalized regimes

which necessitates such a trade policy. This is the reason that prompted Kenya to pursue

an export-led growth strategy from the early 1990s. It has allows most imports into the

country with minimum restrictions provided all regulations and standards are adhered to

leading to cut-throught competition to the local producers. This came with good tidings to

consumers as they have benefited from reduced prices and improved quality of products.

2.1.1 Evolution of Trade Policy in Kenya

The following is summary of trade policy evolution in Kenya.

Import Substitution Policies (1960-80's)

This came immediately after independence. Sessional Paper number ten of 1965

mainly focused on trade development and pursued enhanced protection of the domestic

market to help develop industries. This influenced the development of trade in Kenya

over the first decade from independence. Main goals of the policy were; accelerated

growth of trade, easing balance of payment pressure, improved domestic control of the

economy and creation of employment.

Trade Liberalization: The Structural Adjustment Policies (1980s)

These were incepted in the early 1980s to address the Structural rigidities, price

instability and macro-economic imbalances that had become embedded in the economy

and led to poor delivery of services by the public sector. SAPs were instituted with a

view of effecting a shift from a closed domestic economy to an open one that would

- 2 5 -

facilitate increased use of local resources, outward oriented policies that would promote

employment creation and export expansion.

Export-Oriented Policies (1990s)

These policies were adopted in the early 1990s and their main focus was on

promoting export of goods and services. To attain this, there had to be refonn in the

institutions, reduction and restructuring of tariffs, elimination of export duties,

introduction of export retention schemes, improvement of foreign exchange and

insurance regulations and the establishment of the National Export Credit Guarantee

Corporation. At the center of these policies was the incentives that it offered to industries

start think of exportation of their products. These policies were aimed at improving

efficiency, stimulate private investment and boost the sector's foreign exchange revenue.

National Trade Policy and Vision 2030 (2004 to-date)

Vision 2030 is geared towards making Kenya a globally competitive and

prosperous nation with high quality of life. A National Trade Policy is an integral

component of the Vision and is intended "to transform the economy from a supply

constrained outfit responsive to enhanced domestic integration and wider participation in

the global economy for national and international trade expansion". The policy is to attain

its objectives through the following:

o Encouraging informal sector trade that is decent and protected,

o Inception of robust businesses that is supported by good infrastructure and

other social frameworks.

- 2 6 -

o Promotion of Kenya's export trade hence creating employment

opportunities and enhancing the general living standards form Kenyans,

o Turning Kenya into the service hub for the region.; and

o Facilitation of opportunities and increase the digital opportunity index

from access to medium access.

The Kenyan government realized that trade was an integral component in

realisizing economic recovery as envisaged in E R S W E C (2003-2004). In that connection

therefore, there have been instituted several measures to improve Kenya's competitive

niche in the international trade. Among such measures are: incentive for the

manufacturing sector such as duty/VAT exemptions and remissions on imported inputs;

institution of Export Processing Zones (EPZ) which provide attractive incentives for

businesses in the export sector and has accuanted participation in regional and

international integration and cooperation.

Within the context of E A C and C O M E S A , the country has embarked on

comprehensive trade reforms. In 2005, Kenya, as part of the East Africa Community,

adopted the Customs Union within which non-tariff barriers between Partner States were

abolished, custom duties were eliminated except for some exports from Kenya to Uganda

and Tanzania, and a three-band common external tariff in respect of all goods imported

into the Community from foreign countries was established. It is anticipated that these

initiatives will expand Kenya's market for its exports. The country is also a member of

FTA (Free Trade Area) instituted by some members states of C O M E S A . Here, there is no

levy of tariffs on products originating from C O M E S A . However, each countries

- 2 7 -

individually determines its own regime of tarrifs on goods imported from outside the

region.

From the recommendations of the E R S W E C , a National Export Strategy was

developed. The paper suggests strategies to improve national export through increased

national competitiveness in the global arena. The policy's particular objectives include

deepening its existing export markets, opening up new markets, diversifying the export

mix away from a limited number of traditional exports, enhancing market access for

Kenyan exports, strengthening the institutional export support networks through trade

facilitation and enhancing the competitiveness of Kenyan exports through value addition,

improved quality and reduced cost of production. The initial areas of focus were ten

priority sectors, which ranged from agriculture, manufacturing and service sector.

2.2.0 The National Trade Policy

As the country tends to towards liberalization of markets, it has witnessed drastic

reduction in tariff levels, abolition of price controls and licensing requirements.This has

brought forth modest growth in export markets. Nevertheless, in spite of the open trade

policy undertaken, the trade structure of Kenya remains concentrated in primary products

and traditional markets due to limited capacity for value addition in the manufacturing

sector and the relatively underdeveloped intermediate and capital goods industries. On

the other hand, with the onset of regional integration initiatives and multi/bilateral trade

agreements have opened new winders for Kenyan enterprises. This potentially makes

Kenya a more competitive player in the region and global economy.

- 2 8 -

It is on the basis of this realization that The National Trade Policy was

established. Hence, the importance of the Trade policy on international trade was to put

in place modalities for export growth through value addition on export oriented

enterprises as well as diversification to maximize on opportunities that emerging markets

offered.

2.2.1 The Instruments of Current Trade Policy

The instruments of the current Trade policy are contained in various policy

documents and legislations. These provisions are administered by various institutions.

Part of these provisions are: management of import and export, taxation, trade facilitation

and promotion, licensing and registration, production and productivity, skills

development and labour laws impacting on trade, investment and privatization incentives,

Government procurement, intellectual property rights, competition and consumer

protection, financial services, ICT , trade in services, governance (arbitration, bankruptcy

etc.). These instruments are brought into operations through crucial Acts which are:

Companies Act, Local Government Act/By-laws, Customs and Excise Act, E A C

Customs Management Act, Weights and Measures Act, Trade Descriptions Act, Hotels

and Restaurant Licensing Act, Investments Act, Standards Act, Environment Act,

Industrial Property Act, Liquor Licensing Act and various consumer protection acts

among others.

Due to a mass body of current legal and regulatory framework, and trade policies

scattered in different documents, legislations and institutions, the NTP undertook to has

sought to amalgamate existing ones and come up with a comprehensive trade policy. The

- 2 9 -

NTP endeavors to produce a policy environment necessary for robust trade, learning from

success stories.

It is also aware of Kenya's commitments to the multilateral, regional and bilateral

agreements. The C O M E S A and E A C are particularly taken note of in coming up with the

NTP. In addition, the essence of issues raised by the private sector and civil society for

Kenya to retain its competitiveness and accountability respectively also inform this

Policy. When developing this policy international practices was considered, and also it

takes into account the needs of micro, small and medium-sized enterprises (MSMEs) ,

which are emergent in the current international business affairs... This, besides, takes into

account new developments and trends in international and domestic trade such as

expansion of world merchandise trade, a surge in trade between economic blocs, rise in

South-South trade, containerization, intra-firm trade, global production networks,

growing trade in professional services, rapid advances in ICT and wider use of e-

commerce(National Trade Policy, Efficient, Globally Competitive Economy, 2008).

The NTP Vision is for "Kenya to become an efficient domestic market and export

led globally competitive economy"". (National Trade Policy, 2008, p. 7 ) . In order to

attain the aspiration of the Vision, the entire trade sub-sector is expected to play a critical

role both in terms of vibrant domestic and international trade. (Ibid, p. 7).

The Mission of National Trade Policy (NTP) is "to facilitate Kenya's transformation into

a competitive export led economy, enhance regional integration and widen participation

in both domestic and international trade'.(National Trade Policy, 2008, p. 8 ) .

- 3 0 -

2.2.2 International Trade Policy

The main pillars of this policy is liberalization and globalization which in and of

themselves are propelled by competitiveness. It is quite clear that in advanced economies,

industrialization and rapid economic growth have been due to export-led strategies and

international trade. Therefore, to fiilly maximize on the the existing and expanding

opportunities in international trade that liberalization and globalization brings, states have

created into regional trading areas along the lines of common interest and competitive

edge.

The country is an active member of World Trade Organization (WTO) where it

has binding agreements in both goods and services. In addition, it is member-state of

COMESA Free Trade Area and E A C Custom Union. Further, it is involved in bilateral

trade arrangements with a number of countries. These commitments have are the

founding blocks for the country's international trade policy. This regime plus

institutional arrangements include international trade agreements, policies and procedures

for imports and for exports, in addition to other measures that bear on production. It it the

aim of this policy turn Kenya into a more open, competitive and export-led market.

The NTP is pillared on the principles^ and objects of the World Trade

Organisation. Its is committed to gradual reduction and eventual elimination of Tariff

and Non-Tariff barriers and gradually liberalizing of trade in services.

*The WTO fundamental principles of the Most Favoured Nation ( M F N ) . National Treatment , Prohibition of Quantitative Restrictions (QRs) ,Tarriff Bindings/Commitments and Transparency

-31 -

2.3.0 Kenya's Institutions, Policies and Procedures on Importation

2.3.1 Trade of Goods

a) Applied Tariff Structure - After the entrance into force under the E A C Protocol

establishing the E A C Custom Union on January 1, 2005, the E A C Common External

Tariff ( C E T ) has been Kenya's main instrument of import policy. The E A C Custom

Union Protocol establishes a three band common external tariff with zero percent on raw

material imports; ten percent on intermediate goods imports and twenty-five percent on

finished imports C I F in respect of all goods imported into the Community. Import of

commodities from E A C members are zero rated while some of Kenya's exports to

Uganda and Tanzania are charged duties under a transitional arrangement ending in 2009.

With an interval period of five years, the C E T is normally revised to a maximum rate by

the member states (Handbook on Exporting and Importing, 2005).

I)) Tariff Bindings - Kenya's tariff bindings cover fifteen percent of its total tariff lines.

Tariffs are bound at a ceiling rate of hundred percent for all agricultural products. For

non-agricultural products, Kenya has bound six tariff, equivalent to one and half percent

of non-agricultural tariff lines; sixty-two percent on fresh, chilled, or frozen, excluding

fish fillets and other minced fish meat; thirty-fvie percent on medicaments; eighteen

percent on pharmaceutical goods; sixty-two percent on mineral or chemical fertilizers

containing two or three of the fertilizing elements, potassium, phosphorus, and nitrogen;

thirty-one percent on polymers of ethylene in primary form. "Other tractors" tariff is at

sixty-two percent (Handbook on Exporting and Importing, 2005).

- 3 2 -

c) Waivers and Duty Exemptions - Currenty, the government accords tariff exemptions

on goods used by charitable bodies, churches, and approved educational institutions; men

in military and police; projects flinded on aid and officially recognised; situations of

emergency; international organizations and diplomacy. Furthermore, exhibits and

samples for trade fairs may be imported into Kenya duty free (Handbook on Exporting

and Importing, 2005).

There is an exception to this. After it usage, the items should be re-exported or

done away with. I f relevant customs documentations that the goods have been re­

exported or destroyed are not produced, the pertinent duties are imposed on the fair value

of the commondities. Nevertheless, the introduction of the C E T , with its increased share

of zero tariffs, has rendered a number of previous concessions redundant.

d) Internal Duties

(i) Value Added Tax ( V A T ) - V A T is levied at a standard rate of 16% on the sale

price of locally produced goods and services, or on the customs value (plus border

charges) of imports. There is a decreased rat of fourteen percent which is applied on

certain services; hotels and restaurants to be specific. While the Kenyan government uses

the Value Added Tax to support policy priorities, it does so to both protect "strategic"

sectors such as transportation and agriculture and to address short-term needs. It is also

worth noting that, for on imports and purchases by designated persons or organizations,

the Customs and Excise Act also provides for zero-rated V A T (Handbook on Exporting

and Importing, 2005).

-33 -

(ii) Excise Taxes - These taxes are applicable to both imports and locally

produced goods including alcoholic beverages, tobacco products, petroleum products,

motor vehicles, carbonated drinks and mineral water, cosmetics, jewelry and cell phone

airtime. The excise tax are levied on the ex-factory price of the domestic goods and the

imports value of the imported items. These levies on imports are collected at the time of

imports together with import duties and V A T (Handbook on Exporting and Importing,

2005).

e) Import Prohibition and Quantitative Restrictions - The E A C Customs Management

Act provides for quantitative restrictions and controls on some imports on grounds of

security, health, morals and environment. They take the form of import quotas, licensing

requirement and imposition of import ban. Commodities are categorized into three main

groups in the import prohibition regime namely: i ) . prohibited goods, i i ) . restricted goods

and ii i) . those that must meet technical, phyto-sanitary, health and environmental

standards. As for animals and animal products, their imports are passed through permits

issued by the Department of Veterinary Services (Handbook on Exporting and Importing,

2005).

f) Remedies for Trade - Kenya's national legal basis for the imposition of anti-dumping

and countervailing measures is in the Customs and Excise Act. I f importation of

particular commodities causes or threatens to cause material injury to an established

industry or is such as to retard materially the establishment of an industry in Kenya a duty

- 3 4 -

may be imposed on dumped or subsidized goods (Handbook on Exporting and Importing,

2005).

g) Technical Regulations and Standards - These stards are in place to ensure that

products and of good quality and safe for consumption. In Kenya, they are developed

through consensus by the pertinent stakeholders. Hence, the Kenyan government has

ensured that competent authorities are in place to perform standardization, testing and

certification. Just to mention but a few of them: The Kenya Bureau of Standards ( K E B S ) ,

Kenya Plant Health Inspectorate Services ( K E P H I S ) , Weights and Measures Department.

For both imports and locally produced commodities, compulsory standards apply

equally.

h) Customs: Valuation, Classification and Procedures of Implementation - Kenya has

notified its legislation on customs valuation to the WTO. Customs valuation in Kenya,

commencing January 2000, has been based on the Agreement on Implementation of

Article V I I of G A T T 1994, which provides the rules for the customs value for the

imported goods. When it comes to administering of customs collection, each member of

the Union does its own (Handbook on Exporting and Importing, 2005).

i) Domestic Content Requirement and Rules of Origin (RoO)- Amongst a host of trade

policy instruments, the RoO is one of them. Many trade agreements call for different

Rules of Origin and content requirements. The goal of the E A C Rules of Origin which is

similar to that of C O M E S A which is to implement the provisions of Article 14 of the

- 3 5 -

Protocol to ensure that there is uniformity among Partner States in the application of the

Rules of Origin and that to the extent possible, the process is transparent, accountable,

fair, predictable and consistent with the provisions of the Protocol (Handbook on

Exporting and Importing, 2005).

2.3.2 Trade of Services

Services form the most crucial sector of the Kenyan economy today, with its share of

GDP and employment larger than the combined share of agriculture and industry (Ibid.).

In terms of employment creation, contribution to GDP and foreign earnings, the services

sector has been the biggest contributing sector to Kenya's economy with its contribution

to real GDP at about sixty percent in 2007. Tourism, transport and communication,

financial services and business services are the most crucial subsectors. lUustrive of this,

with the inclusion of government services, this sector absorbs about sixty eight percent of

the labor force in Kenya.To the WTO, the government has made a number of

commitments in this sectors. They cover areas around: finance and financial services;

Communication services; game, tourism and travel related; transport services; other

services innclusive (Ibid.)

2.4.0 Policies and Measures on Exports

2.4.1 Trade In Goods

The trade policy instruments available for exports include

a) Export Taxes and Charges - The E A C Customs Management Act provides flexibility

for member countries to impose export taxes and charges on a selected range of products

- 3 6 -

for the development of sectors which are critical in addressing key national issues of

industrial development, income inequalities and unemployment (Ibid.).

b) Prohibition of Export, Restrictions, and Licensing - The government imposes

restriction on the exportation of certain products such as the firearms and ammunition. A

permit is required for exports of most agricultural products, food, minerals, and mineral

products. Similarly, there are bans of on exports of certain agricultural and food products

to ensure that the country remains self-sufficient in these products. To this list also, the

products considered as having aesthetic value or security importance to the country, and

products covered by international convenfions to which Kenya is a signatory e.g.

Convention on International Trade on Endangered Species ( C I T E S ) require prior

authorization by the Government before exportation. In the case of export of plants, a

phytosanitary certificate from Kenya Plant Health Inspectorate Service ( K E P H I S ) is

required, while export of animals and animal products require a health and sanitary

certificate from the Department of Veterinary Services (Ibid.).

c) Subsidies to Export and Incentives - Under the current regime, there exist no export

subsidies whatsoever, nonetheless, three incenfives schemes are available to Kenyan

companies to encourage export-oriented activities. They include Export Processing Zones

(EPZ) Scheme, the Manufacturing under Bond Scheme (MUB) , and the Duty Remission

Scheme (Ibid.).

- 3 7 -

(i) Export Processing Zones Scheme

The E P Z scheme was set up in 1990 and allows for duty and V A T exemption on

imported machinery (except motor vehicles) and raw materials. Besides high-quality

infrastructure, companies located in EPZs benefit from a ten-year corporate tax, income,

and withholding tax holiday; exemption from stamp duties; and a 100% investment. The

Export

Processing Zones Authority ( E P Z A ) acts as the primary licensing and regulatory agency

on behalf of the Government with the objective of rapid project approval and facilitating

licensing (Ibid.).

(ii) Manufacturing under Bond (MUB)

This scheme was introduced in 1989 where firms exporting their total output are

exempted from payment of import duties and V A T on inputs, including plant, equipment,

and raw materials subject to the posting of a customs bond. Enterprises that qualify are

enjoy an investment allowance of hundred percent on immovable fixed assets (Ibid.).

(iii) Duty Remission Scheme (DRS)

This scheme came into existence in 1990 and is administerd by The Trade

Remission Exports Office ( T R E O ) . Through it, Kenyan government grants remission of

duties and V A T on goods imported for use in the production of manufactured goods for

export or for the production of raw materials for use in manufactured products for export,

or for the production of "duty-free items" for sale domestically. The DRS is subject to the

posting of a bond to cover the amount of unpaid duty

- 3 8 -

d) Finance, Insurance, and Guarantees for Export -Kenya does not have any pubHc

export finance, insurance or guarantee schemes. Nevertheless, African Trade Insurance

Agency ( A T I A ) and the Multilateral Investment Guarantee Agency ( M I G A ) provide

multilateral import and export credit and political risk insurance guarantee. Finance and

insurance for export must be taken with private companies whose prices are market-

determined (Ibid.).

e) Marlceting Assistance and Export Promotion - The E P C is mandated to promote and

develop Kenya's export activities. Its activities revolve around export market

development, product development and adaptation, trade infonnation and delivery

services; facilitation of trade policy and development of exporting skills. Another crucial

role for EPC is that it maintains a Centre for Business Infonnation in Kenya ( C B I K ) ,

which provides business information and support services, and houses a W T O reference

center for the business community. To add to that, the National Export Strategy (NES)

which is currently under review has been the government's crucial policy paper on export

promotion pursuit. There exist other such agencies, e.g. the Export Processing Zones

Authority (EPZA) , the Kenya National Chamber of Commerce and Industry ( K N C C I ) ,

and sect oral producer and exporter associations such as the Kenya Association of

Manufacturers ( K A M ) and the Fresh Produce Exporters Association of Kenya ( F P E A K )

Sectoral Parastatals such as the Horticultural Crops Development Authority are also

involved in export promotion activities (Ibid.).

- 3 9 -

f) Research, Development and Other Extension Services- Among many others the

following provide important research, development and extension services to the

productive sectors and trade in Kenya: Kenya Agricultural Research Institutes ( K A R I ) ,

the Kenya Industrial Research and Development Institute ( K I R D I ) Kenya Institute of

Public Policy and Research Analysis ( K I P P R A ) , Institute of Policy Research Analysis

(IPAR), Institute of Economic Affairs ( l E A ) and Tegemeo Institute of Egerton University

(Ibid.).

g) The STEs (State Trading Enterprises) - The government maintains state trading

enterprise as regulatory authorities to manage liberalized markets and correct market

failures when need arises. In 1992, the Government launched the Public Enterprises

Reform and Privatization (PERP) program. Under this program, most of the

commercially oriented enterprises were privatized except a few which were excluded

from privatization due to their strategic importance such as National Cereals and Produce

Board (NCPB), National Oil Corporation of Kenya (NOCK) and Kenya National Trading

Corporation ( K N T C ) among others. Nevertheless, as a result of liberalization and

privatization, their role was drastically reduced (Ibid.).

2.4.2 Trade in Services

National Treatment and transparency also apply to trade in services same way the

GATTs apply to trade in goods of MFN. The difference lies in this: unlike trade in goods,

where the market access restriction is through tariffs, and market access restriction on

trade in services is through regulations that include foreign equity restrictions,

educational qualifications, economic needs tests and licensing among others. The

- 4 0 -

GATTs specific to trade in services nevertheless does not force countries to liberalize

their services sector but they do realize the special needs of the developing and least

developed countries to liberalize services according to their levels of development. Its

noteworthy that Kenya's export of trade in services is quite competitive in the African

region but limited in the developed countrieswhere their sector is highly competitive and

regulated making Kenya's potential to export difficult. E U limitations to export are; the

economic needs test which has often been used as a market access barrier. Others include

high financial requirements, recognition of educational qualifications and Visas and work

permits (Ibid.).

2.5.0 International Trade Promotion: Strategies and Programs

Kenya's international trade strategies, therefore, aim at ensuring that Kenyan

business enterprises especially the MSMEs get the necessary support to be competitive

and achieve their full potential. More emphasis is placed on export-driven growth in line

with Vision 2030.1t realizes that intemadonal trade as a strategic priority in realizing

some of the following main goals: augmenting enterprise; facilitating augmented

intemational trade and investment; to sfimulate and support MSMEs to participate more

in intemational trade; ameliorating the compefitive niche of Kenya local and intemational

markets; addressing market distortions; promoting value additions and diversificafion;

and ameliorating market access. The policy has identified various programs for

implementation in order to address the constraints and challenges affecting the

development of intemational trade in the country.

There has a been several constraints and challenges facing Kenya in it bid to

penetrate foreign Markets. To this effect, this policy has identified several roadmaps to

address these drawbacks.

2.5.1 How Kenya has addressed Market Access Constraints

This has been done through:

(a) Facilitation of Participation in International Trade Negotiations

Kenya's participation in multilateral, regional and bilateral trading arrangements in the

recent past has experienced a number of challenges that have constrained Kenyan

enterprises to fully exploit the markets realized through these trading arrangements. This

calls for enhancement of participation in the Multilateral, Regional and Bilateral Trade

Agreements Programmes.

(b) Diversifying Export Range and Value-Addition

The country is yet to fully maximize on the opportunity in the intemational markets. This

has been as a resultant of limited capacity to add value to existing products and diversify

the export base. To exploit the existing potential in export markets there is need to

identify and develop new export products and also increase value-added content. The

government will facilitate diversification of export base and value-addition.

(c) Enhancing Export Penetration in Priority Markets

Its export market share has been declining over the years. In order to achieve desirable

export targets envisaged in this National Trade Policy, there is need to explore new

markets and sustain the current markets.

(d) Firmly Securing Sensitive Sectors and Industries

- 4 2 - United States International University Africa - Library

The sensitive products are strategic for the purpose of safeguarding national interest such

as employment, livelihoods, rural development revenue losses, and protection of some

strategic industries. It necessitates the government to develop mechanisms for

safeguarding sensitive sectors and industries against unfair competition.

2.7.0 An Export-Oriented Strategy has Improved Kenya's Economy

Kenya has had market access to other countries through bilateral and regional

trading arrangements. The E U - A C P agreement, through the successive Lome

conventions, provided Kenya with duty free access to the E U market. The agreement also

provided market access for other products including beef, sugar and bananas on a quota

basis.

Despite this market access, many A C P countries, Kenya included, did not

increase their trade with the E U substantively. Indeed, Kenya did not meet its quota

provisions for sugar and its beef quota remained unexploited. This was mainly due to

Sanitary and Phyto-sanitary (SPS) and other technical barriers to trade ( T B T s ) which

prevented many A C P countries from accessing the E U market.

With the advent of trade liberalization especially through the WTO, preferential

market access arrangements are increasingly being challenged. This has led to

renegotiation of the A C P - E U agreement in the current Cottoned agreement. This

agreement will be based on reciprocal arrangement and negotiations wil l be based on

regional initiative. Implementation of this trading arrangement means increased

competition for Kenyan products in the region, especially the manufactured goods. There

is need therefore for Kenya to increase efficiency in its manufacturing industry and raise

the quality of manufactured products to gear up for greater competition in the region.

-43 -

Since the launch of the C O M E S A Free Trade Area, Kenya's exports have

continued to grow; the country now has a sizeable trade surplus within C O M E S A and is

still a major beneficiary of the integration arrangement. C O M E S A has overtaken the E U

as Kenya's leading export destination and unlike exports to the E U , which are

predominantly agricultural products, exports to the C O M E S A region comprise mostly of

manufactured products.

Under the E A C trade arrangement, the three partner states are already accessing

trade benefits. As a result, Kenya's exports to this region have risen from Kshs 1.93

billion inl990 to Kshs 43.5 billion in 2001. This is 79% of Kenya's total exports to

COMESA region, making the region the single most important market for Kenya.

It is also expected that Kenya's exports, especially manufactured goods, wi l l face

competition from Tanzania and Uganda since both countries are members of the A C P -

EU, and Uganda is also a member of C O M E S A .

A G O A provides eligible SSA countries with access to the US market in any

country or region where the US does not have a Free Trade Agreement. Duty free

treatment under GSP to AGOA-eligible countries has been extended to about 4,600 items

available to non-AGOA GSP beneficiary countries. This implies that sub-Saharan

African countries, Kenya included, wi l l face competition in the US market from non-

AGOA eligible countries with GSP benefits in the US market. Kenya therefore has a

challenge to increase the efficiency of production and the quality of its goods to better

prepare for the competition. The additional GSP line items include footwear, luggage,

handbags, watches, and flatware. The GSP for eligible sub-Saharan beneficiaries is

extended until 30, 2008, seven years.

- 4 4 -

C H A P T E R T H R E E

3.0 Kenya and Its Regional Trading Blocs

One of the crictial components for a country's foreign poHcy is it position in the

global and regional arena; otherwise called Intemational and Regional Co-operation

respectively.To this end, Kenya has exhibited prowess. To beging with the country is a

member of East African Community, Common Market for Eastem and Southern Africa,

ACP-EU, Intergovernmental Authority on Development ( I G A D ) , Indian Ocean Rim

Association for Regional Co-operation, amongst others. This co-operation is home out of

the realization that the development and prosperity of Kenya are intimately tied with her

neighbors in the region. With the advent of globalization and liberalization, the country's

extemal relations are being govemed more and more by the need to promote a favorable

environment for trade and investment. Consequently, there are a number of bilateral,

regional and intemational trade agreements to which Kenya is a signatory, some of which

are discussed as under.

3.1.1. Trade Agreements for Regional Trading

As mentioned earlier one, Kenya is a member-state of the E A C and C O M E S A trade

agreements within the Easter and South African Region. The benefits of membership

include extending preferential tariffs to goods imported from member states subject to the

Rules of Origin. Conversely, commodities of Kenyan origin also enter into the other

member countries at preferential rates. This kind of arrangement promotes trade amongst

member-states in the region.

- 4 5 -

4. The East African Community ( E A C )

One of the most formidable and success stories of regional integration is the E A C .

Having instituted by Article 2 of the E A C Treaty of 1999, its partner states are Republic

of Kenya, the Republic of Uganda and the United Republic of Tanzania; and recently.

Republic of Rwanda, Republic of Burindi and South Sudan. These States may grant

membership to other countries subject to specified terms and conditions. This Treaty

cleariy articulates that the East African Customs Union and a Common Market be

established as transitional stages to and integral parts of the Community. This is good for

Kenya since its goods enter the member countries at preferential tariffs while similar

treatment is extended to goods imported from E A C member states via the principle of

reprocity. The E A C countries are Kenya's largest buyers, with Uganda and Tanzania

importing approximately Kshs 55 billion worth of goods in 2004. Trade with E A C

countries has been growing over the years with exports to this region increasing by

around 21 percent from 2003.

EAC Customs Union

It was brought into existenc by Protocol in 2004. Its main goals are to:

• Facilitate trade in the region through further liberalization of markets on the

principle of reprocity amongst member states.

• Encouragement of economies of scale within the bloc

• Further encourage economic prosperity and diversity within the bloc. The features

of the Customs Union include common import duty rates applied to third party

goods (Common Extemal Tariff), a common set of customs mles and procedures

including documentation, a common trade policy that guides the trading

- 4 6 -

relationships with third countries or trading blocs outside the Customs Union and

duty free and quota-free movement of tradable goods within the constituent

customs territories.

The Union is being undertaken over a transitional period of five years. The

level of development of each of the Partner States was taken into consideration

and the principle of asymmetry adopted in the phasing out of internal tariffs, in

order to provide firms located in Uganda and Tanzania with an adjustment period.

Non-tariff barriers have been eliminated. Policies relating to trade between the

Partner States and other countries have been harmonized and a Common Extemal

Tariff has been adopted. This wi l l facilitate formation of one large single market

and investment area. A single customs territory wil l enable the member countries

to enjoy economies of scale with a view to bringing about faster economic

development.

Kenya's Economy has Benefited from the Community

Through the formation one economic region through the Customs Union, the

community created a single market of over ninety million people and a combined Gross

Domesfic Product of around thirty billion US dollars. The benefits of this are clear: there

has been promotion of investment in the region as the larger market with less customs

clearance formalities has attracted investors.

• There is a level playing field as uniform competition policy and law, customs

procedures and extemal tariffs on goods imported from developing countries

and/or non-member countries have been be implemeted.

- 4 7 -

• There exists a more predictable economic environment for both investors and

traders across the region, as C E T and trade policy administered regionally has

tended to be more stable.

• There is also the comparative and competitive advantage for business operators in

Kenya with enterprises across the borders without netting in the tariff protection

rates and formalities of custome clearing.

• Due to Common Extemal Tariff upgrading to a regional level, Kenyan based

business have been protected better

Table 1 Kenya's Trade with E A C Partner States 2005-2008 (US$ million)

Percentage

Change

2005

2008

2007

2006 2007 2008 2006 2007 2008

Inipoi'ts 18.5 14 88.8 75.5 -24.5 536.7 -15

Exports 566.6 387.1 498.8 612.9 -31.7 28.8 22.9

Total T rade 585.1 401.1 587.6 688.4 -31.5 46.5 17.2

T rade Balance 548,1 373.2 409.9 537.5 -31.9 9.9 31.1

Uganda

Tanzania

Imports 41 62.7 99.2 105.6 53.1 58.1 6.4

F.xports 264.6 253.9 331.7 *

423.6 ^ . 1 30.7 27.7

Total T rade 305.6 316.6 430.9 529.2 3.6 36.1 22.8

Trade Balance 223.6 191.1 232.5 318.1 -14.5 21.7 36.8

Imports 59.5 76.7 188 181 29 145.2 -3.7

Exports 831.2 641 830.4 1036.6 -22.9 29.6 24.8

Total Trade 890.7 717.7 1018.4 1217.6 -19.4 41.9 19.6

Trade Balance 771.8 564.3 642.4 855.5 -26.9 13.9 33.2

Intra-

E A C

Source: KRA. CBKand KNBS

- 4 8 -

Figure I Impor t /Expor ts

Source: KRA, CBK and KNBS

5. The Common Market for Eastern and Southern Africa (COMESA)

h came into existence in 1994 to take after Preferential Trade Area well known as

PTA. The market has twenty-one member-states with a total population of over three

hundred and eithty five million, making it a major market place for both internal and

extemal trade. The main objective of cooperation in Trade, Customs and Monetary

Affairs is to achieve a fully integrated, intemationally competitive and unified single

economic space within which goods, services, capital and labour are able to move freely

across national borders. For Kenya, her goods enter the member countries at preferential

tariffs while similar treatment is given to goods imported from the Market's member-

states. To empahasize on the essence of C O M E S A to Kenya, it absorbed Kenyan exports

worth almost Kshs seventy-five billion. Trade with C O M E S A countries has been growing

over the years, with exports to this region increasing by around twenty-one percent

- 4 9 -

between 2003 and 2004 period. Expori:s within it (or Intra C O M E S A exports) amounted

to US $ 3,480 million in 2006, comprising 29% of total exports, with an ever growing

demand for Kenya's manufactured products (Kenya: Regional perspective, 2007).

COMESA is involved in a program of cooperation in Trade, Customs and Monetary

Affairs which has the objective of creating a fully integrated region where goods,

services, capital, labour and persons move freely by removing all physical, technical,

fiscal and monetary barriers to infra-regional trade and commercial exchanges.

Kenya attaches great significance to the Common Market for Eastem and Southern

Africa, as it provides a market for its manufactured product. The C O M E S A region is a

vibrant economic area and membership to the Free Trade Area ( F T A ) launched in

October 2000, is expected to boost trade and investment. C O M E S A is the leading

destination of Kenya's export, constituting over 40% of the total exports.

Tabic 2 Kenya's Trade with COMESA, (2000-2006)

2000 2001 '2002 2003 2004 "2005 2006

Total Exports 595.6 672 826.7 780.9 943.7 1330.6 1041.7

Imports 77.3 144.3 117.2 144,6 173.7 175.7 243,3

Trade Balance 518.3 527.7 709,5 636.3 770 11.54.9 798,4

Source: Com.stat Database

- 5 0 -

Figure 2 Kenya's Trade with COMESA

3000

Q _j J J. J J J f

2000 2001 2002 2003 2004 2005 2006

Source: Comstat Database

From the data above:

Kenya's exports to the C O M E S A region amounted to US $ 1,042 million in 2006.

Kenya's imports from the C O M E S A region increased by 38.1% to US $243 in 2006 from

US$ 176 million in 2005

The demand for manufactured products from Kenya within the C O M E S A region has

continued to grow.

iii). Kenya and the Sudan Economic Ties

The relations between Kenya and the Sudan has always been in the sweet waters.

Several reasons point to this: firstly, there myriads of refugees from South Sudan and

Darfur Region; secondly, Kakuma Camp acts as a home to countless of Sudanese

migrants; thirdly, and the booming trade between Kenya and Sudan. In view of this, the

ties can only be described as cordial and that of reciprocity.

The warrant of arrest issued by the Intemational Criminal Court ( ICC) A l Bashir,

Sudanese President, happened to be a game-changer and threatened to adversely affect

the close ties these two countries had. Kenya was thrown in a dilemma. It had to juggle

between having to obey an order by its own courts and taking advantage of the oil that

Sudan produces. Kenya was therefore unwilling to risk a total diplomatic impasse in its

relations with Sudan. This is because benefits greatly in trade with Sudan. To achieve a

sustainable regional trilateralism proved elusive as during the same time Kenya's rapid

expansion of diplomatic and trade ties with the South post-independence, and its apparent

pre-secession supply of arms to Juba, were a clear signs of where her loyalty was.

Meanwhile, when oil-related tensions between Sudan and its southern neighbour boiled,

there was need fort interventions, by neighbouring states. For Kenya, it was about

maximization of opportunities on both fronts: taking cognizance of potential of South

Sudan as a key partner and agreeing to various infrastructural investments with the

country, including the recent pipeline agreement between the south and the Kenyan port

of Lamu, which impliedly bypasses the need for a Sudan's role in the production of South

Sudan's oil reserves, whilst seemingly placating Khartoum by ignoring its own High

Court's ruling demanding the arrest of Bashir. Regarding the Sudanese President, Kenya

found itself in a unique geopolitical predicament - facing the choice of either alienating

itself from Khartoum and rejecting the African Union's call for member states to

disregard the ICC decision, or ignoring its own judiciary.

The current major regional infrastructural investment - the Lamu Port and Lamu-

Southem Sudan-Ethiopia Transport Corridor, otherwise called the L A P P S E T project, is a

harbinger of Kenya's preference of the South to the North. The project involves airports,

railways, roads and importantly, an oil pipeline between and South Sudan. Transport links

will connect cities in Kenya, Ethiopia and South Sudan. The rift valley transport corridor

- 5 2 -

connects Mombasa and Uganda, leaving Sudan from Kenya's infrastructural investment

aimed at promoting regional trade. This project could precipate change in dynamics East

African extractives industry; emerging oil players Uganda and Kenya could feasibly

export through the same pipeline, leaving out Sudan.

There's no clear pointer as to why the project is deemed a public-private

partnership in the silar manner of the proposed Kenya-Uganda pipeline or the Chad-

Cameroon Development Project. With the Gross National Income of South Sudan's per

capita of around nine hundred and eithty four USD, the suspected pipeline cost of 1.5

billion US dollars would be an arguably large infrastructural investment.

Kenya and South Sudan, apparently, were playing a lethal game with Sudan, but

to a bipartisan observers the apparent bipartite manner of the Kenyan government's

relationship with Sudan was as laborious as frustrating. Needless to say, the judiciary's

view was clear, as opposed to the government's mix of reticence and appeasement. The

backdrop to that dispute is Sudanese criticism of former South African President Thabo

Mbeki's role as Chairman of the African Union ( A U ) High-Level Panel on Sudan.

Inspite of the fact that Kenya has a more diversified economy than the South,

Sudan was extremely reluctant to lose its stake in South Sudanese oil, revenues from

which were split 50-50 pre-independence. As for South Sudan, its viability as an

independent state depends not only on getting oil flowing again with reasonable transit

fees but also on economic diversification beyond the exploitation of its natural resources.

US accused Sudan of bombing its own South Kordofan region, hence, Kenya might not

be alone in choosing S. Sudan over Sudan.

- 5 3 -

3.1.2 Non - Reciprocal Market Access Arrangements

These are trade preferences that may not be mutually applying, such as the

preferences extended to Kenya under the African Growth and Opportunity Act ( A G O A )

of the USA, the Africa, Caribbean and Pacific/ European Union ( A C P / E U ) Cotonou

Partnership Agreement and the Generalized System of Preferences (GSP). Goods

originating from Kenya and other developing countries are attractive since they enter

USA and E U at lowver taruffs.

The African Growth and Opportunity Act (AGOA)

This Act is contained in the United States of America Trade and Development Act

of 2000, and its main goal is to facilitate increased trade and economic cooperation

between the United States and eligible sub-Saharan countries. The criteria democracy,

good governance and economic openness. The main objectives of this Act are:

• Augment investment and trade between sub-Saharan African states and the US

providing eligible countries US market access.

• Fast-track economic development and institutioinal reforms in sub-Saharan

Africa,

• Promote increased access and opportunities for U.S. investors and businesses in

sub-Saharan Africa.

It is interesting to note that the first country in the Sub-Sahara Africa to be designated

a beneficiary of the A G O A was Kenya. This initiative has revitalized the once dormant

textiles and apparel industry. Export flows of apparel to the U S A grew from Kshs 2.3

billion in the year 2000 to Kshs 17.6 billion in 2004. Investment in this sector also

- 54 -

expanded in the same period, from Kshs 1.2 billion to Kshs 9.7 billion.

It also became the first country to qualify to export to the U S under A G O A .

Consequntly, the US market has become a crucial market for Kenya's products. In a

snapshot, the valuation of the total exports by Kenya in 2007 was 326 million US dollars,

while imports were valued at US 576 million US dollars. The total value of AGOA/GSP

exports in 2007 to the US amounted to US 255 million US dollars . This exports was

composed of tea, coffee, apparel and pyrethrum. Conversely, the major imports from the

US entailed aircrafts and spare parts, chemical products and fertilizers.

The textile sector has particularly benefited from the A G O A initiative with exports to

the US market increasing from US$ 39.5 million in 1999 to US$ 44 million and doubled

to US $ 126 million by the end of 2002. In 2007 the total exports of textiles to the U S

from Kenya was valued at US $ 250 million. It is noteworthy that since the enactment of

AGOA, textiles and apparels have dominated the composition of Kenya's exports to the

US and constituted about 76% of the total exports in 2007.

Kenya's Economy Grown from A G O A

AGOA's impact on Kenya's exports has been nothing short of impressive.

Growing at an average of 2% a year before AGOA's passage, Kenya's exports to the US

exploded to a growth level of 28% a year unfil 2005.

Most of this growth was fueled by the textiles and apparel sector, which grew

annually by as much as 44% between 2001-05,with the number of garment factories

jumping from six in 2000 to 35 in 2003. Employment grew 500% in the Kenya's export

processing zone (EPZ) to about 36,000 jobs during the same period.

- 5 5 -

However, the end of the MFA in 2005 led to a collapse in growth, culminating in a

full-on decline in textile and apparel exports with the onset of the US's recession in 2009.

Fortunately, leading non-textile and apparel exports softened the decline in total exports

by steadily growing at between 7-10% over the same 2006-11 period.

Kenya's Exports to the US

400,000

— 350,000 •a

300,000

250,000 13

200,000

>

50,000

US pHssion m

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Source: US Intemational Trade Commission (USITC) data; AAC analysis.

Rising Concerns

Despite these achievements, there have been concerns. In general terms, the

advantages of A G O A - as with all preference systems - are eroding over time, as they

are relative to a most-favoured nation (MFN) tariff that wi l l likely decline with further

multilateral liberalization.

- 5 6 -

More specific concerns relate to:

1. How much benefit Africa is capturing

2. How sustainable is the newly developed apparel sector

3. Why non-apparel sectors' response (other than petroleum-related products) has been so

weak.

While foreign firms employ and skill a lot of people, it is not clear to what

degree profits are reinvested in Africa. In many instances, Africa is being used as a

staging post for what arc fundamentally foreign businesses, little different from their

foreign counterparts against which A G O A is supposed to offer African firms a

competitive edge. In these instances, A G O A is more a way around quota and import caps

for firms from countries that have anyway traditionally been strong in apparel than a

means to growing a local textile and apparel sector.

ii) Cotonou Partnership Agreement (ACP/EU)

The Lome Convention I V - the fourth cycle of the 25-year-old trade and aid

support arrangement between the 15 European Union ( E U ) countries and 70 African,

Caribbean and Pacific (ACP) countries, expired in February 2000. In this contractual

agreement, Europe provided aid to A C P countries and non-reciprocal trade preferences.

One of the most significant trade provisions in the Lome's convention was the non-

reciprocal preference that A C P countries enjoyed in the European market. Certain listed

products enjoy duty free and non-reciprocal access to the E U , while non-ACP producers

of similar products are subjected to tarifi's. In addition under the Lome's commodity

protocol Sugar, Beef and Veal, Bananas and Rum A C P countries are allowed to export

- 5 7 -

fixed quantities of these commodities to the E U free of tariffs and are guaranteed the

same price as European producers as provided by the Common Agricuhural Pohcy.

Outside Africa, the European Union is Kenya's main trading partner The major

destination are the United Kingdom, the Netherlands, Germany and France. According to

the Economic Survey 2005, the E U accounted for 26.45 percent of Kenya's exports in

2004, with a value of nearly Kshs 57 billion. This was made up of mainly agricultural

products, with vegetable products accounting for 72.8 percent of E U imports from

Kenya. The A C P / E U Cotonou Partnership Agreement is a trade, aid and political

agreement signed in Cotonou, Benin, between 77 African, Caribbean and Pacific (ACP)

countries and the European Union. Poverty reduction and the integration of Kenya into

the global market shall be attained through support for economic development, social and

human development, and regional cooperation and integration. The European Union

unilaterally grants trade preferences under the Cotonou Agreement. The RoO (or rules of

origin) articulate the conditions under which this preferential access is to be accessed by

the beneficiary countries. Kenyan exports to the E U have an entitlement to duty

reductions and freedoms from all quota restrictions. Some of the preferences to trade that

Kenya enjoys include entry of all industrial products and a wide range of agricultural

products at duty free rates. It was envisioned that this arrangement would be replaced by

reciprocal Economic Partnership Agreements (EPAs). This EPA that wil l set up an

entirely new framework for trade and investment flows between the E U and ACP. This

was in line with WTO rules. The Lome I V trade preferences,which was hitherto non-

reciprocal in nature, continued to be applied during the interim period (2000-2007).

- 5 8 -

Trade Patterns (EU / Kenya)

Table 3 Total Goods: EU Trade Flows and Balance

Period Imports Exports Total Trade

2002 865 928 1794

2003 810 810 1620

2004 875 959 1834

2005 957 989 1946

2006 1025 1209 2234

2007 1060 1324 2384

2008 1138 1355 2493

2009 1081 1379 2460

2010 1112 1652 2764

2011 1276 1691 2967

2012 1233 1863 3096

Source Eurostat Comext - Statistical regime 4

Figure 4 Total Goods: E U Trade Flows and Balance

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source Eurostat Comext - Statistical regime 4

- 5 9 -

The Generalized System of Preferences (GSP)

This is a non-reciprocal system of providing some countries with preferential

treatment for their goods when exporting to developed countries. This arrangement was

negotiated under the auspices of the United Nations Conference on Trade and

Development (UNCTAD) and its main goals are to augment the export earnings of

member states benefiting from from preferential treatment, promotion of their

industrialization and fast-tract their rate of economic growth. This preferential treatment

has been granted to Kenya by the Orgnaization for Economic and Co-operative

Development countries which include Canada, USA, Australia, Switzerland, Norway,

Sweden, Finland, Austria and Japan.

From the perspective of developing countries as a group, GSP programs have been a

mixed success. On one hand, most rich countries have complied with the obligation to

generalize their programs by offering benefits to a large swath of beneficiaries, generally

including nearly every non-OECD member state. Certainly, every GSP program imposes

some restrictions. The United States, for instance, has excluded countries from GSP

coverage for reasons such as being communist (Vietnam), being placed on the U.S. State

Department's list of countries that support terrorism (Libya), and failing to respect US

intellectual property laws.

Preferences and market access are not enough for increased trade, and

development. Complementary actions by all the parties to trade agreements are needed in

addressing the supply side constrains to preference utilization. While the GSP scheme

offers market access to Least Developed Countries, it is a unilateral agreement that is not

negotiated. An EPA on the other hand has a 'development component' which i f well

- 6 0 -

negotiated can translate to better terms of trade. However, there are fears that most

developing and Least developed countries might not be able to meet the adjustment costs

when EPAs come into force. The true impact of EPAs can be well answered empirical

analysis and trade modeling. In doing so, one can be able to fully advice the state and

non-state actors on the implications of these negotiations. Secondly, stakeholders should

think of alternatives to both EPA and GSP schemes (Institute of Economic Affairs, Trade

Notes, P. 8).

Potential of Regional Trade

Regional trade's potential for significant expansion and diversification appears

limited for a number of reasons: Growth expectations for Kenya's existing regional

exports is limited since Kenyan imports already zero tariffs in these markets, so there is

no further trade liberalization round that could stimulate exports. Hence, any further

demand for Kenyan exports would come from economic growth in the region. Also, the

complementarity between the regional products is low: for Kenya's top exports in

horticulture where the country has developed a competitive edge, its regional neighbors

are competitors, rather than potential markets.

A caution should also be sounded at the possibility of regional exchange of

relatively high cost manufacturing inputs and production equipment for which member

countries do not have a comparative advantage in production, and trade is stimulated by

trade preferences. For some of these products, competitors, in particular from Asia might

soon be able to supply at lower cost. The saine may also be true for some of Kenya's

regional manufacturing exports that are competing with exports from Asia, as well as

with production capacity elsewhere in the region, financed with F D I from Asia (World

Bank Report, 2006).

- 6 2 -

C H A P T E R F O U R

4.0 Kenya and Emerging Markets

An emerging market is a nation with social or business activity in the process of

rapid growth and industrialization. The economies of China and India are considered to

be the largest (Chandra, 2006, p. 384). Dr. Kvint in his book. The Global Emerging

Market: Strategic Management and Economics, defines it as thus: "a society transitioning

from a dictatorship to a free-market-oriented-economy, with increasing economic

freedom, gradual integration with the Global Marketplace and with other members of the

G E M (Global Emerging Market), an expanding middle class, improving standards of

living, social stability and tolerance, as well as an increase in cooperation with

multilateral institutions" (Vladimir, 2009). In 2008 Emerging Economy Report, the

Center for Knowledge Societies defines Emerging Economies as those "regions of the

world that are experiencing rapid infonnationalization under conditions of limited or

partial industrialization." It appears that emerging markets lie at the intersection of non-

traditional user behavior, the rise of new user groups and community adoption of

products and services, and innovations in product technologies and platfonns.'"

In the recent years, there has been increase in Kenya's trade relation with the

emerging markets. This chapter shall seek to address these trade relations with three of

them, namely China, Brazil and India.

4.1 Kenya and China Trade Relations

In recent years, China has increased its involvement in Africa, pursuing market

opportunities and raw materials for its firms. China has made significant loans to

- 6 3 -

countries such as Ethiopia and has extensive oil interests in Southern Sudan, while

Chinese contractors are gaining a dominant position in infrastructural development

projects across East Africa (Patroba, 2012, p. 5). In 1963, when China established

diplomatic relations with Kenya, trade between the two countries was in Kenya's favor at

K E S 2 9.2 million. Since then, a number of Chinese companies have invested in various

projects, and by 2010 China had become the leading source of Kenya's foreign direct

investment (FDI ) , investing K E S 2.5 billion into the country's economy. Currently

Chinese firms have a major stake in Kenya's local infrastructure sector, through projects

such as the expansion of the Jomo Kenyatta Intemational Airport, the constmction of the

Nairobi-Thika superhighway, the upcoming constmction of a second port (Lamu Port)

and the Southern Sudan-Ethiopia Transport Corridor ( L A P S S E T ) project (an ambitious

plan to constmct a port, roads, railway and pipeline connecting the corridor), the

constmction of vehicle assembly plants and oil exploration. Other potential areas of

cooperation are manufacturing and tourism targeting Chinese travelers. Chinese finns

have also invested in Kenya's pharmaceutical, technological and media sectors.

4.1.2 Policy Frameworks Underlying China-Kenya Relations

China and Kenya relations can be divided into three phases: 1963-1977, the

immediate post-independence period under Kenya's first President Jomo Kenyatta;

1978-2002, President Daniel Arap Moi's regime period, or pre-reform Kenya; and 2003-

present, democratic Kenya under President Mwai Kibaki. In the first period, bad blood

characterized relations between China and Kenya, with accusations and counter

accusations of undermining sovereignty: Nairobi accused China of plotting to overthrow

- 6 4 -

the Kenyan government and expelled the Chinese Third Secretary, while China accused

Kenya of vilifying Beijing. In 1966 demonstrations took place outside Kenya's embassy

in Beijing, which led to Kenya recalling its ambassador to China, and the youth wing of

the then ruling party, Kenya African National Union staging a counter-demonstration

outside the Chinese embassy in Nairobi. Both countries expelled the other's charge

d'affaires in 1967.

During the second period (1978-2002), the two governments of former President

Moi and Prime Minister Zhao Ziyang started to rebuild relations. High-level state visits

led to the conclusion of two economic and technical co-operation agreements, which had

been under discussions since 1977 and covered a number of projects. Exchange of goods

between the two governments' state agencies began and, from the beginning of 1990,

Kenya's imports from China steadily picked up. In 1978, agreements on Economic and

Technological Co-operation and on Trade were signed, followed by an agreement on

Promotion and Protection of Investments in 2001.

In the third period, (2003-present), a reform coalition took over Kenya's

leadership and President Kibaki embraced the Chinese partnership approach. Nairobi and

Beijing signed agreements that attracted huge Chinese investments in Kenya, increased

Chinese imports and contracted Chinese construction companies to develop projects in

Kenya. Over the past decade, China and Kenya have signed many bilateral agreements

covering economic, technological, energy, tourism, health, aviation, media, archaeology

and education. For example, in April 2011 the two governments signed 10 agreements,

including a concessional loan to finance a proposed Kenyatta University Teaching and

Referral hospital; solar energy generation; a malaria treatment project; hydropower

-65 -

station construction and upgrading; educational exchange and co-operation; a

Memorandum of Understanding between China State Administration of Radio, Fi lm and

Television and Kenya's Ministry of Information and Communication; and a co-operation

agreement between China Central Telecoms and Kenya Broadcasting Corporation.

Kenya's recent policy of facing east has also contributed to the growth of trade

between the two countries. This policy has been occasioned by the recent developments

in Kenya's political landscape. The I C C case facing the President and the Deputy

President of Kenya has changed the traditional approach of Kenya's trade with the West.

It has therefore forced it to look east for trade. This has seen the growth of trade between

Kenya and the east as shown by the figures below.

China has adopted a unique model for engaging with Kenya. Unlike traditional

partners, whose involvement in Africa is designed to work towards the objectives of the

Millennium Development Goals (MDGs), China promotes South-South co-operation.

4.1.3 Trade, Investments and Development Co-Operation

Trade

In the past decade, exports from the E U , China and India to Kenya have steadily

increased, except in 2009 when trade volumes declined due to the 2008 financial crisis.

Traditional partners such as the US and Japan have moderate trade volumes with Kenya,

while Russia and Brazil are the least significant trading partners.

Despite declining marginally in 2009, China's trade has increased steadily. This

steady growth has translated into a one-sided trade pattern in China's favour and an

increasing trade imbalance that reached a high in 2010. The reason for the higher increase

- 6 6 -

compared to other countries is that Kenya exports unfinished goods to China, whereas

Chinese imports mainly finished manufactured goods in Kenya.

Fiblc 5 Value of Kenya 's trade with Ch ina (Sthousand)

1 2001 2002 2003 2004 2005 2006 2007 2008 2009 201

1 Imports 94,87.5.00 74,956.00 86,513.00 163,335.00 304,058.00 412,441.00 678,736.00 932,203.00 965,179.00 1,57

i Eiport 3,033.00 3,684.00 7,621.00 10,558.00 16,957.00 21,5.54.00 21,859.00 29,432.00 32,180.00 32,9

Trade 4 1 • i lalancc (91.842.00) (71,272.00) (78,892.00) (152,777.00) (287,101.00) (390,887.00) (6S6,877.00> (902,771.00) (932,999.00) (13'

Source: International Trade Centre, http://www.trademap.org/Bilateral TS.aspx

Figure 5 Kenya's Trade with China ($ Thousand) - Imports/Exports

Value of Kenya's Trade with China ($ Thousand) - Imports/Exports 1,800,000.00

1,600,000.00

1,400,000.00

1,200,000.00

1,000,000.00

800,000.00 -

600,000.00

400,000.00

Imports

lmportsl'̂ PO''ts

Imports

200,000.00 Importsimpomlmports

0.00 • B •

Imports I tmports mm 1

Imports • I I ri:tt±: 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: International Trade Centre. http://www.tradeniap.org/Bilatcral_TS.aspx

- 6 7 -

4.2.0 Foreign Direct Investment

China's F D I in Africa is closely linked to trade and development assistance. Thus

F D I has increased over the past 10 years in tandem with increased Sino-African trade,

although China's F D I to Africa remains marginal in terms of China's total outward F D I

flows (0.2% in 1991 and 5.9% in 2007—Kaplinsky and Morris, 2009).

The Chinese government has invested significantly in Kenya's port infrastructure,

supporting a 22 billion US dollar project in 2008 to link neighbouring countries such as

Ethiopia, Southern Sudan and Rwanda to Lamu Port. It is also deemed as being

supportive of cross-border infrastructure projects, as well as regional institutions such as

the East African Community and the Great Lakes Forum. In is anticipated that these

projects wil l serve to thrther integrate African markets, whose consumers are proving

ready customers of Chinese goods.

4.2.1 Manufacturing and Construction Investment

As with most countries in East Africa, most Chinese investment in Kenya

concentrates on the manufacturing sector, notably apparel and motorcycle assembly and

services. It is quite apparent, as the case is in Nigeria, Chinese companies look to invest

in industries where there is a large concentrated domestic population and ready access to

ports for potential export markets. Nevertheless, investments are diversified and range

among retail ventures, tourism, transport, construction, power plants, and

telecommunications. On the biggest Chinese investment in Kenya - 3 million US dollas

in value- is Beijing Transmission and Distribution's cement pole factory, the only one in

East Africa, with annual output of 25,000 units.

- 6 8 -

It is estimated that, in 2009 alone, Chinese companies signed new contracts to the

value of 881 million US dollars, of which 57miIIion have since been completed. Official

figures put officially registered Chinese workers in Kenya at 1,466. At the moment, there

are twenty two Chinese construction companies undertaking fifty two separate projects to

the value of 1.39 billion dollars, according to the C M C . In the same breathe, Kenya has

received several relatively small loans and grants, with total aid amounting to 160 million

US dollars. It is also noteworthy that Kenya was the site of the first Confiacius Institute, a

cultural Centre dedicated to the teaching of Mandarin.

4.3 Kenya and India Relations

As littoral states of the Indian Ocean, and members of lORA, trade links and

commercial ties between India and Kenya go back several centuries (Verinder, 1995, p.

138). Kenya has a large minority of Indians and Persons of Indian Origin who are

descendants of laborers who were brought in by the British to construct the Uganda

Railway and Gujarati merchants'^. After India's independence, it established an Office of

the Commissioner for British East Africa resident in Nairobi in 1948'". Given

deteriorating race relations between Indians and Kenyans, Jawaharlal Nehru, the first

Prime Minister of India, appointed the senior diplomat ApaPantas High Commissioner to

Kenya. Nehru also gave support to Jomo Kenyatta and the Kenya African National Union

party, asking Indians in Kenya to identify themselves with the Africans (Verinder, 1995,

p. 138). Despite worsening race relations in Kenya that led to the exodus of Asians to

India and Britain, economic cooperation between India and Kenya flourished and became

' I N D I A - K F - : N Y A B ILATERAL RELATIONS.High Commission of India, Nairobi.Retrieved 29 December 2012. '""India-Kenya Relations". Ministry of External Affairs, India. Retrieved 29 December 2012.

- 6 9 -

an exemplar of South-South cooperation. Following Kenyan independence in 1963, an

Indian High Commission was established in Nairobi and an Assistant High Commission

set up in Mombasa. Kenya maintains a High Commission in New Delhi that is

concurrently accredited to Bangladesh, Sri Lanka and Singapore.

4.3.1 Trade, Investment and Development Co-operations

Trade

India and Kenya have growing trade and commercial ties. Bilateral trade

amounted to $2.4 billion in 2010-11 but with Kenyan imports from India accounting for

$2.3 billion, the balance of trade was heavily in India's favour. India is Kenya's sixth

largest trading partner and the largest exporter to Kenya. Indian exports to Kenya include

phannaceuticals, steel, machinery and automobiles while Kenyan exports to India are

largely primary commodities such as soda ash, vegetables and tea. Indian companies have

a significant presence in Kenya with Indian corporates like the Tata Group, Essar,

Reliance Industries and BhartiAirtel operating there. The Indian public sector banksBank

of Baroda and Bank of India have operations in Kenya.

T a b i c 6 K e n y a - I n d i a T r a d e (US$ M i l l i o n )

Y e a r

Kenyan Imports Kenyan Expor ts T r a d e Balance

2008-09 1,362.00 82 -1.28

2009-10 1,4.S2.00 79 -1.373

2010-11 2,182.00 124 -2.058

2011-12 2,277.00 119 -2.158

2012-13 3,770.00 105 -3.665

Source : Department of Commerce, India

- 7 0 -

Figure 6

Kenya India Trade

4,000.00

3,500.00

3,000.00

2,500.00

2,000.00

1,500.00 Imports

1,000.00

"Imports"

• Imports

s Exports

2008 2009 2010 2011 2012

Source: Deparlmeni of Commerce. India

Development Cooperation

India offers development assistance to Kenya in the form of loans and credit. This

includes a loan of Rs. 50 million to Government of Kenya in 1982 and Lines of Credit by

E X I M Bank to Industrial Development Bank Capital Ltd. An Agreement on extension of

a Line of Credit of US$ 61.6 million by E X I M Bank of India to the Government of

Kenya Ibr utilization in the power transmission sector was signed during the visit of

Prime Minister Raila Odinga to India in November'2010.In 1998, an MoU was signed

between the National Small Industries Corporation and Kenya Industrial Estates Ltd. In

2003, a MoU was signed between India Trade Promotion Organization and Export

Promotion Council of Kenya.

-71 -

Kenya is among countries planned to be covered by the Pan African e-Network

Project that was launched in 2007. An Agreement was signed in July 2009 between T C I L

and the Kenyan Ministry of Information and Communication regarding the project.

Equipment was delivered by T C I L in 2010. V S A T terminals have been installed at

Kenyatta National Hospital in Nairobi.

4.4 Kenya and Brazil Trade Relations

Ranked the world's seventh wealthiest economy, Brazil 's meteoric rise to a global

power has seen it court Africa in search of raw materials and market for its products and

technology. Now, the South American economic giant has trained its sights on Kenya,

seeking investment deals in sectors such as agriculture, heavy machinery engineering,

construction, auto and healthcare.

The Kenya-Brazil trade relation is an example of South-South Cooperation.

South-South Cooperation inherently means southern countries taking ownership of

development and leading technical cooperation, a goal which is espoused by development

agencies around the world. It promotes the transfer of practical experience among

contexts that, while certainly differing, often share characteristics and constraints.

Southern solutions to development problems can often be better adapted to local

conditions than northern-inspired solutions. (Rosseel et al. 2009 p. 18; Fordelone 2009. p.

7) Perhaps most appealing to some is that, South-South Cooperation - "Lacks the

overtones of cultural, political and economic hegemony that is sometimes associated with

traditional North-South aid." (Rosseel et al. 2009 p. 19). Kenya, as part of the providers

of SSC participating in Triangular Co-operation, has benefited from the SSC though, as

- 7 2 -

figure 6 suggests, there exists a huge negative balance of trade between Kenya and

Brazil.

Kenya's main exports to Brazil are majorly horticultural crops. There are other

product, but to a limited extent, such as sheep and goat leather, wood carvings, handicraft

besides dairy products. It is estimated that the total value of the exports have increased ,

that is, from KSh74.4 million in 2010 to K S h l 10.2 million in 2012.

In return, Brazil, on the other hand, mainly exports aircraft, domestic and

industrial appliances, heavy machinery for mining and construction, agricultural

equipment and tractors, motor vehicles sugar and aluminium wire to Kenya. Kenya

imported goods worth Sh 24.5 billion from Brazil in the same year. The figure stood at

KShl0 .2 billion in 2010, which points to a more than double digit growth over the period.

It is noteworthy that there exists a huge trade imbalance in favour of Brazil a

phenomenon mainly linked to the composition of Brazil 's exports, mainly machinery and

industrial equipment. Kenya is Brazil 's largest African market for the Embraer jets which

are used by Kenya Airways on domestic and regional routes.

Table 7 KENYA IMPORT/EXPORT TRADE STATISTICS

Year Exports in KSH Imports in KSH

1998 6,897,162.00 1,618,840,810.00

1999 5,137,446.00 950,510,709.00

2000 42,498,283.00 974,899,484.00

2001 32,267,781.00 1,103,301,465.00

2002 7,027,745.00 1,077,702,092.00

2003 25,370,366.00 916,906,589.00

2004 28,617,184.00 1,192,292,912.00

2005 55,703,816.00 2,696,431,044.00

2006 36,172,473.00 3,081,475,866.00

2007 174,428,185.00 4,346,990,800.00

Average

Values 41,412,044.00 1,795,935,177.00

Source: Center of Business Information in Kenya

- 7 3 -

Figure 8 KENYA IMPORT/EXPORT TRADE STATISTICS

5,000,000,000

4,500,000,000

4,000,000,000

3,500,000,000

3,000,000,000

^500,000,000

•|ooo,ooo,ooo

|500,000,000 <

1,000,000,000

500,000,000

0

Kenya's Export/Import to Brazil

ImpQrts

Imports

"TmpoTtr̂

Imports

imports imports ""P^^^^ ""P^^s .̂ p^^^^ Tfn ports

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: Center of Business Information in Kenya

4.5 Overall Data Review

Shows the FDI and GDP figures for Kenya from 2000 to 2009 at current prices in

millions of USS

Table 7 Kenya's FDI versus GDP

year FDI Figures (Millions of US$)

GDP Figures (millions ofUS$)

2000 509 12690 2001 466 12990 2002 396 13150 2003 522 14900 2004 658 16100 2005 752 18740 2006 943 22500 2007 1323 27120 2008 1360 30350 2009 1400 30200

Source: Kenya National Bureau of Statistics, Facts and Figures (2009)

-lA-

Figure 9 Kenya F D I versus GDP

Source: Kenya National Bureau of Statistics, Facts and Figures (2009)

- 7 5 -

C H A P T E R F I V E

5.0 Conclusion and Recommendation

Economic diplomacy deals with the nexus between power and wealth in

intemational affairs. It not only promotes the state's prosperity but also, as occasion

demands and opportunity permits, manipulates its foreign commercial and financial

relations in support of its foreign policy. Accordingly, economic diplomacy is a major

theme of the extemal relations of virtually all countries. In Kenya, economic ministries,

trade and investment promotion bodies, chambers of commerce, and of course foreign

ministries, are all participants in economic work. Current trends include increasing

collaboration between the state and non-official agencies, and increased importance given

to WTO issues, the negofiation of free trade and preferential trade agreements, and

accords covering investments, double taxation avoidance, financial services and the like.

Abroad, embassies, consulates, and trade offices handle economic diplomacy. The main

focus is on promotion, to attract foreign business, investments, technology and tourists.

Economic diplomacy connects closely with political, public and other segments of

diplomatic work.

Increased democratization has brought with it a multiplicity of participants in the

conduct of diplomacy at domesfic and regional levels while increasing the complexity of

issues to tackle. This post-modem intemational environment, characterized by

fragmented relationships and socio-economic intricacies, demand sharper definition i f a

concise paradigm on diplomatic relafionships, negotiations, and mediation in conflicts is

to emerge. Kenya's balancing of export and investment promofion, in trade or foreign

- 7 6 -

policy that facilitates new growth, can be efficiently managed only with the application of

precise standards.

Considering the previous failure of East African integration initiatives and the

lack of a common regional political framework; might it be possible that there would be a

repeat of doubts, suspicions, antipathy and stressed relations that could result in a second

collapse? Such questions wi l l continue to emerge and can be best discussed in Kenya

under the prism of an economic diplomacy framework that makes plans for regional

interactions in the promotion of its economic growth.

One of the unintended developments of globalization is the participation of non-

state actors in diplomacy. Traditionally, diplomacy has been the prerogative of

ambassadors and envoys representing Ministries of Foreign Affairs and central

government offices and their mandate were confined to the affairs of the state. Today,

management of intemational economic relations is no longer confined to the state but

rather extended to civil and commercial affairs.

Seen from this perspective, it appears necessary that different actors in the

enlarged sphere of post-modem diplomacy acquire the additional competencies (domain

expertise) to engage constmctively in policy dialogue. Conversely, it should also become

increasingly possible that foreign affairs ministries and state diplomats leam to adapt

their traditional roles and functions from being a more inward looking, exclusive and

secretive actor to becoming a more reachable, outgoing and inclusive diplomat constantly

searching for possible inclusion of other actors be they state or non-state actors.

Sustainable development in the context of globalization and post-modem

environments requires effective representation of the key stakeholders including the

- 7 7 -

ministry of foreign affairs and intemational trade, other ministries with economic policy

competencies, intemationally active enterprises and transnationally active NGOs. Since

the relationship between these multiple stake holders and constituencies can be difficult,

it is of paramount importance that all forms of diplomacies are represented in the most

competent manner possible to ensure sustainable economic development with the highest

possible equity across apolitical and geographical boundaries.

- 7 8 -

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