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Africa’s overlapping trade blocs trigger illegal trade

Africa has a number of trade blocs offering members different benefits through various agreements. These are meant to streamline and assist intra-African and regional trade, a necessity considering cross-border trade on the continent is but a fraction of what it is in other regions.

Africa's “spaghetti bowl” of cross-over membership between trade blocs can – and is – causing problems with illegal trade, highlighted Edward George, Ecobank’s head of research.

Africa’s “spaghetti bowl” of cross-over membership between trade blocs can – and is – causing problems with illegal trade, highlighted Edward George, Ecobank’s head of research.

Some African countries form part of multiple trade blocs. For example, Uganda and Kenya are both members of the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC). Tanzania is not a member of COMESA, but is of both the EAC and the Southern African Development Community (SADC).

And this is where things can get tricky.

According to Ecobank’s head of research, Edward George, this almost “spaghetti bowl” of cross-over membership between trade blocs can – and is – causing problems with illegal trade.

One prominent example can be seen in Kenya’s sugar sector which suffers under high production costs that make it difficult to compete with imports from neighbours. The country has imposed a quota on how much sugar can be imported duty-free from other EAC and COMESA countries, the idea being to limit the volumes of cheaper imports and enable the reform its own sugar industry.

However, a severe drought a few years ago led to a drop in production and supply in the region. “So a deal was done, allowing members of COMESA to import sugar from the world market duty-free to make up for the shortfall,” explained George, adding there is normally a large duty on these imports.

“The problem was that some traders, unscrupulous traders, imported duty-free into countries like Uganda and Tanzania and then re-bagged the sugar, claiming it was Ugandan and Tanzanian sugar before exporting it duty-free to Kenya under the EAC. And by doing this you can avoid taxes of between 20% and 40%.”

Kenya’s sugar sector, already struggling to be commercially viable, quickly experienced an influx of cheap imports which resulted in the government banning all sugar imports from Uganda in 2012.

But Uganda argued this was a violation of EAC trade rules. “Uganda took them to the tribunal of the EAC about this, saying it was unacceptable,” recalled George.

The dispute has only recently been resolved, with Kenya agreeing to raise its quota for sugar imports from Uganda to 97,000 metric tonnes, equal to nearly half of its import requirement, according to Ecobank’s research.

A challenge for business

This illegal trade has been triggered by the abuse of overlapping trade regimes, which can be difficult to deter. And George noted it can be a huge threat to companies operating throughout the supply chain. “If you have heavy investments in projects to produce a certain amount of sugar for a country, and suddenly there are illegal imports flooding in, it can blow you out of the water.”

At last month’s Africa Trade & Export Finance Conference in Cape Town, Ian Henderson – a metals consultant at commodities trader Gunvor – said similar illegal trade takes place with minerals being smuggled across borders and smelted elsewhere. He argued there needs to be formal processes of tracking the origin of material, and checking the certificates of country origin for authenticity.

According to Olam’s CFO for southern and eastern Africa, Bikash Prasad, informal trade makes up around 43% of the continent’s GDP and imposes numerous challenges to the viability and sustainability of genuine corporations. Issues regarding transfer pricing, under-declaration of quantities, under-invoicing, and non-payments of output VAT by informal traders remain a concern for both the authorities and legitimate companies.

He added there are two things countries should do to reduce this ‘trigger’ for illegal trade. First implement the correct policy framework, and second ensure strict adherence to those policies by the individual authorities.

“If these two things are in place, then I think that informal trade can be significantly reduced.”

*CORRECTION: This article previously stated that Tanzania is not a member of the EAC. It is in fact a member of the EAC, but not of COMESA.

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