Implications Of The Tripartite Free Trade Area Agreement On Kenya

Abstract

This study explored the implications of the Tripartite Free Trade Area (TFTA) Agreement on Kenya’s products using the Software for Market Analysis and Restrictions on Trade (SMART) Model. It undertook simulations to examine the trade creation, diversion, revenue and welfare effects of the TFTA. The study findings revealed that the TFTA will create approximately USD 1.53 billion worth of trade, with DR Congo as the largest beneficiary. Under the TFTA arrangement, Kenya’s trade creation is estimated at USD 51.81 million representing 3.38% of the total trade created. Trade diversion effect is estimated at USD 706.14 million with DR Congo having the largest share at USD 185.78 million. Trade diversion effect for Kenya is estimated to be USD 77.23 million representing 10.94% of the total trade diversion. The simulation results further show that USD 754.21 million would be lost in tariff revenue with DR. Congo recording the largest loss of USD 337.09 million. Kenya’s revenue loss is approximately USD 59.88 million. TFTA will generate an overall welfare gain of USD 163.19 million with DR Congo enjoying 40.38% of the total welfare while Kenya’s share is USD 7.59 million representing 3.65% of the total net welfare gain. The study recommends greater specialization in the identified trade creating products for Kenya to cushion less efficient domestic producers from being replaced by cheap imports from more efficient TFTA members. To avert the effect of tariff revenue loss, broadening of the tax base especially targeting Value Added Tax (VAT) as a complementary source of revenue to trade taxation is recommended. Kenya should also increase its regional integration engagements to minimize the effects of further losses in tariff revenue.