Effects of Trade Liberalization on Household Welfare in Kenya: a Case of the East African Community Common External Tariff

Abstract

This study examines how the Common External Tariff (CET) of the East African Community (EAC) affects household welfare in Kenya. The inception of the CET saw a significant reduction in import tariffs, henceforth defined as a trade liberalization regime for Kenya. The price effect is looked at first in the analysis then the labor income effect of the price change is estimated. The interaction of price and income effects is the equivalent the welfare effect of trade liberalization. The analysis uses data from the Kenya Integrated Household Budget Surveys conducted in 2005/2006 and 2015/2016. Goods are classified as agricultural or manufactured. Households are classified as rural versus urban, and strictly urban households. In terms of labor incomes, the households are classified as; skilled versus unskilled, formal versus informal, and workers in agricultural sectors compared with those in non-agricultural sectors. Additionally, households are tracked based on where they live relative to the EAC borders. The price effect is estimated using a tariff pass-through equation while the labor income effect is estimated using a Mincerian earnings equation. Welfare is estimated using a negative compensation variation equation that evaluates the effect of price changes on households' income and expenditure. A significant pass-through is observed on manufactured goods while an incomplete pass-through is observed on agricultural goods. Tariffs are incompletely transmitted to rural and urban prices. Welfare estimations show that households in both urban and rural areas only slightly benefit from trade liberalization. Rural households gained from agricultural product protection. Urban households saw more gains from tariff pass-through of manufactured goods. Trade liberalization benefits were greater for rural households. Comparable to their contemporaries, skilled, formal, and non-agricultural sector workers benefited more from trade liberalization. Furthermore, male workers earn and gained more than female workers. Finally, households in the EAC borders and large cities gained more than households in other parts of the country.