Fact Sheet: Customs Union

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1.0 Definition

A Customs Union is a free trade area with a Common External tariff and no internal tariffs. The participant countries set up common external trade policy but in some cases, they use different import quotas. Common competition policy is also helpful to avoid competition deficiency.
The purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries.

1.1 Existing Customs Union arrangements

A Customs Union is established through trade pacts. There are a number of existing Customs unions in Africa and globally and some of these are listed below:

  • Southern African Customs Union - this is the oldest Customs Union in existence
  • East African Community
  • Gulf Co-operation Council
  • EU-Turkey Customs Union
  • EU-San Marino Customs Union
  • Economic and Monetary Community of Central Africa (CEMAC)
  • West African Economic and Monetary Union (UEMOA)

1.2 Other proposed Customs Union initiatives

Some other Customs Union initiatives are expected. These include:

  • Customs Union of the Economic Community of West African States (ECOWAS), due in 2007
  • Customs Union of the Common Market for Eastern and Southern Africa (COMESA), due in 2008
  • Customs Union of the Southern African Development Community (SADC), due in 2010
  • Customs Union of the African Economic Community (AEC), due in 2019
2.0 The East African Customs Union

The East African Community (EAC) consists of Kenya, Uganda and Tanzania. It was founded in January 2001 in the Tanzanian city of Arusha, which is also its headquarters, reviving an earlier effort abandoned in 1977. This new EAC treaty paved the way for an economic and, ultimately, Political Union of the three countries. A further treaty signed in March 2004 set up a Customs Union which commenced on 1 January 2005. Under the terms of the treaty, Kenya will pay duty on its goods entering Uganda and Tanzania until 2010. A common system of tariffs (0% on raw materials, 10% on intermediate goods and 25% on finished goods) will apply to other countries supplying the three countries with goods.
Consensus has been reached on various areas which include among others; harmonized commodity description and coding system, rules of origin, disputes settlement, export promotion schemes, anti dumping regulations, subsidies and countervailing measures, and regulation on free ports among others. There are plans to introduce a common currency, the East African Shilling by 2009. Also envisaged is the Political federation by 2012. EAC is one of the pillars of the African Economic Community.

2.1 Achievements of the Customs Union

The Customs Union is well over one and a half years in implementation. Despite its certain teething implementation problems, the Customs Union has realized some milestones and it clearly remains the litmus to the attainment of the other stages leading to a Political federation.

  • By moving towards the creation of one economic region through the Customs Union, EAC creates a single market of over 90 million people and a combined GDP of around US$30 billion.
  • It is expected to lead to liberalization of cross-border trade and the adoption of common policies to minimize customs clearance formalities. Some of this is already on-going.
  • Increase in predictability of economic policies
  • EAC has in place a development strategy which it sets out priority programmes to be implemented.
  • It has also commenced on the negotiations of the Protocol on the EAC Common market including free movement of persons, labour services and rights of residence.
This large economic region can only be meaningful if it is more than a simple aggregation of neighbouring countries. The EAC Customs Union will assist to level the playing field for the region's producers by imposing uniform competition policy and law, customs procedures and external tariffs on goods imported from third countries, which should assist the region to advance its economic development and poverty reduction agenda.

2.2 Challenges

The Customs Union is faced with a number of challenges it needs to overcome as it moves on. While the Customs Union will generate major benefits, it will also bring about greater competition among domestic firms. In the short run, the firms that stand to gain most are those that are already competitive. It is with this consideration that the principle of asymmetry was adopted in the phasing out of internal tariffs, in order to provide firms located in Uganda and Tanzania with an adjustment period of five years. Nevertheless, such firms may in the medium term overcome lack of competitiveness, through:

  • additional investment in newer production technologies;
  • specialization in activities where they have a competitive advantage
  • Re-training of human resources
  • Forming strategic alliances with their competitors
  • Encouraging East Africans to have a stake in the community affairs – being people-centered.
Another implication of the Customs Union is that it will minimize discretionary powers earlier enjoyed by Partner States, and which sometimes had created uneven playing ground for firms. Such powers, in particular, relate to granting of exemptions from customs duties. The Partner States have undertaken harmonization of their exemption regimes which shall be administered regionally. In some cases, this has been viewed negatively as reduction of national sovereignty. In addition, there are a number of logistical challenges and these include
  • Inadequate information and knowledge on the part of customs officials at the borders, business people and citizens of the three Partner States
  • Existence of non tariff barriers thereby increasing the costs of doing business
  • Lack of the necessary infrastructure

2.3 Contentious issues

  • The ongoing debate about member states negotiating separately with the EU
  • Partner States belong to different trading blocks, i.e. COMESA for Kenya and Uganda, and SADC for Tanzania. This creates problems on the implementation of EAC integration and customs union.
  • Uganda's list of raw materials
  • Different excise duty structures amongst member states, for example; Tanzania's duty on cigarettes depending on local tobacco content

    3.0 CONCLUSION

    In view of the current global trend where trade negotiations are increasingly being carried out under regional blocs, formation of a customs union in East Africa is not a matter of choice but a necessity. It would be difficult for Partner States to negotiate a Free Trade Area (FTA) with other regional blocs unless they have liberalized trade among themselves. Due to the multiple memberships of the partner states in other regional organizations, the EAC Customs union could enter into a FTA with other trading blocs, or in the extreme circumstance, merge with them to make a larger trading bloc. For more information on the Customs union, please visit EAC Website on www.eac.int