Advancement in technology and communication has enabled organizations to engage in international markets; the growth of global market is facilitated by improvement in international relations among nations. With economic globalization, organizations continue trading and exchanging factors of trade across the borders.
Trade among nations prevails through the operations of absolute and comparative advantage paradigms of trade; the country with an advantage in production of certain commodities or services becomes the exporter and imports those commodities/services that its trading partner can produce more effectively (East African Community Official Website n. p.).
This paper evaluates the effect that improved international relations among countries have on international trade; it will address the topic using the EAC agreement among Uganda, the Republic of Tanzania, Rwanda, Burundi and Kenya as a sample trade agreement.
Explain why two or more countries signed a particular trade agreement
A trade agreement is defined as a contact between two or more countries that define the nature and policies of trade that the parties to the contract will adhere to; it offers the framework of trade among the partner countries. The agreements are engaged in order to facilitate business among the partners while creating some preferential treatment of the partner’s goods and services in the efforts of facilitating trade (Timmons and Hite 43-67).
The East African Community agreement (EAC) (comprises of Rwanda, Burundi, Tanzania, Kenya, and Uganda) is a regional intergovernmental organisation mandated with the role of facilitating trade among the nations, it has its headquarters in Arusha, United republic of Tanzania.
The history of EAC Agreement can be traced from the good neighbourhood and trading relations that had existed among Kenya, Tanzania, and Uganda. The three nations had been trading among each other as they were joined by road network, air transport and lake transport routes through Lake Victoria. The EAC agreement was signed in 1977; however, the final implications of the agreement were expected to take effect in 1999.
The agreement was established, and finally signed by the countries’ head of states on 30th November 1999 to take effect from 7th July 2000 after the completion of its ratification and deposit of the Instruments of Ratification with the Secretary General by all the three Partner States (East African Community Official Website n. p.).
The main reasons the signing of EAC Agreement
The main reason that triggered the need to have a common trading block in the form of an agreement among the three countries was to facilitate trade among them, as well as trade with other nations. All the five countries are developing countries that are in need of mobilizing their resources for economic development and improving living standards of their citizens.
Trade was seen as the right method that the nations would use after considering the fact that they produce primary materials from agriculture; they were willing to mobilize their efforts and come up with the processes that facilitated making manufactured products and exporting them to their trading partners. With this in mind, the countries tried to facilitate the movement of people (labors) and other factors of production to removing tariff and non-tariff barriers.
With the agreement, there were other agreements that have been made in line with the original one in the efforts to reinforce it; the trading agreement was signed to establish a Common External Tariff (CET) on import from nonmembers; this means that nonmembers trading with the countries are likely to be subjected to high taxes; making them expensive in the country of exportation.
When such products from a third party country are made expensive, then the EAC countries are able to nature and assist their local companies and industries growth.
When trading among each other, the countries set the maximum tariff chargeable on imports to either country as 25; the above rates are only applicable to member countries while individual countries are free to make their prescribed rates to goods/services from other countries.
The agreement establishes that some goods of high importance among the countries can be allowed to move freely on the territory; the products are occasionally established by the council of ministers with the aim of assisting local companies get the products they would require for their continued production. Some products that have been exempted from payment of taxes among the countries include raw materials, and machinery. With the agreement, the member countries are able to get an improved demand for their products, as they have the entire community as their selling base.
The trade agreement was meant to facilitate the flow of factors of production among the member states, movement of factors of production meant that a resource in any of the countries can be invested in either of the countries without being subjected to restrictions either bureaucratic or tariff. When factors of production are able to move freely in a region, they facilitate investment which subsequently has an effect on people’s living standards and the economic development of the region.
What are the major theoretical debates about the causes and consequences of this trade agreement?
The EAC agreement has been noted as one intergovernmental invention with the aim of addressing poverty in the region. According to the structure and the nature of the agreement, it was made to facilitate the usage of local commodities and the resources at the disposal of the nations to eradicate poverty in them.
The agreement aimed at aligning the countries with their vision 2030 where they look forward to be among the industrialized countries. The move aims at ensuring that all countries have accumulated enough wealth and infrastructures that can facilitate the development of the economy as a whole.
To facilitate trade, the EAC agreement was concerned about political rivalry that existed among the nations, as well as it existence within boundaries. The agreement held the different countries accountable of maintaining peace and enabling environments that would facilitate the maintenance of peace in the region.
The above notion has been supported by the belief that economic prosperity of a nation can only be possible if the country is at peace. With the EAC, member countries are called upon first to offer solution to challenging political uncertainty in their member countries, they are willing to offer much need assistance and ensure they maintain order and peace within their boundaries.
A recent case happened in Kenya in December 2007 and early years of 2008 when the country experienced ethical conflicts (post-election conflicts), the conflicts made trade within the community reduce with approximately 30%, to cure the situation, head of state and security officers were deployed from the member countries to keep peace and offer business men an opportunity to do business without fear or favor; this aims at facilitating good and friendly business among the countries.
The EAC agreement was formed to improve the small scale business sector, commonly referred as “Jua Kali” among the nations, the move was facilitated by the realization that the country’s economic drivers are the small scale people/business men who are not favored by the system. With the move, the governments supported by council of ministers in the community were made policies that protected the small scale traders from high unfavorable competition from multinationals.
For example, the cotton industry in the country had been highly affected by second hand market (commonly referred to as Mutumba in the region); the high competition meant that the communities’ cotton industry never grew as the market was saturated by cheap second hand commodities.
With the situation, the agreement realized that the poor in the community are getting high access to clothing, but at the same time, the country’s economic situation is deteriorating. A decision was made to enact very high taxation rates on Mutumba imports.
The net effect was that some people could still get the Mutumba at relatively low costs, but also the cotton industry has not been fully hit. EAC agreement was aimed at creating a uniform payment system where either countries currency would be used to buy from either country. With such moves, the countries were able to get free people movement and flow of currency across the community was facilitated.
With facilitated movement of currency, capital and other factors of production get the chance to move to their neighboring countries and enhance trading. The five EAC countries, before enacting the agreement, were suffering from high foreign currency deficits (their balances of trade were negative); the situation had been made so by high importation of finished products and exportation of raw materials.
The countries thought that they can manage their resources together and probably come with manufacturing plants that would assist them export finished products. Although this move has not fully attained its desired results, the countries are still optimistic that they will have manufacturing commodities. When developing the idea, it came from concerns of Kenya, that it has the best coffee in the world; however the country’s coffee producing regions are still living in poverty.
With the thought it was realized that the coffee never benefit the people because it is exported in its raw state then after refining its exported back at a higher cost. The net effect from that single product becomes a loss; the countries were of the view that with combined resources, they would be able to combine the resources for the good of the country.
Education was another focus that the agreement seek to address; it had been noted that poverty rate in the EAC community had continued to grow because of the rate of illiteracy that prevailed among the community. With the realization, the agreement was of the opinion that it would offer training facilities to its citizens on the right way to produce and manage their businesses.
It started from the basics where it addressed basic education in the countries (all the five countries enacted free primary education). With the basic education, the ministries of agriculture and special programs are mandated with the role of establishing the need areas that the citizens would like to be offered some education to facilitate their production. With the moves people were expected to be able to trade freely and improve their efficiency which was an agenda of the agreement.
The five nations have had some history of war; Rwanda has the most renowned one with the so called Rwanda Genocide, with the situation, the country would handle develop. The other four countries were aimed to come to the rescue of the nation and offer some insights and progress pathways to recover from the effects of war.
Another area that EAC agreement aimed at focusing was corruption, all the five countries are performing poorly when their corruption index is evaluated; with this realization; the nation were seen to join efforts and enact policies that reduced corruption among the people for sustained development.
Among the citizens of the EAC, the people have been the target; the governments are working hand to change the perception of the people towards their mates in the other nations. In the event that a Kenya (who are regarded as most entrepreneurial) is doing business in Uganda (who are seen as a slow country), the Ugandans should embrace him as a brother with the mind of developing them as he gets some benefits from the trade (World Bank 1-12).
Despite the success and the good objectives, goals and agendas that the EAC agreements aimed at attaining, the agreement is faced with a number of challenges. The challenges are on technical issues or they have emanated from the nature and personality of the people. Issues of governance have been the main challenge that the EAC agreement is facing, of the five countries, each country is feeling the need to be the main beneficiary and acts in suspicion that the other country may be earning higher than it is earning.
With the feeling, the countries are handing some unseen hindrance of trade that benefit their countries at the expense of the other. In the same line of governance, each country feels it should be the controlling authority; this results to kind of power competition that works negative for the community (Mol 12-123).
Although the agreement offered the framework for legal and regulatory frameworks to be followed, the administration of the legal and regulatory policies has become a challenge to the five nations.
The structure of the agreement was promoting having an economy where legal and regulatory frameworks are similar or the same such that a trader in one country need not to learn what the other nation handles issues but will be enlightened from how issues are handled in his country. Such moves are important in the fact that they would help reducing bureaucracy among the nations.
The challenge that is facing this move is that the countries still are adopting different policies’, structures, and legislations. With the differences the effects and the advantages that were targeted from the agreement have not been attained. Enlightenment of the people has also hampered the attainment of the agreements objectives and aims; the communities living in the EAC seem not to be aware of how they can take advantage of the agreement and in turn foreigners and multinationals are taking advantage of the situation.
Multinationals in the region are able to extend their businesses further from one country to the other and seems to have a wide understanding of the benefits; with the move they are getting a chance to develop their home countries and individuals at the expense of the nations (World Bank 1-12).
Another challenge faced by EAC is low government expenditure and the fact that they produce the same products. The nations have low development in infrastructures, thus trading among them and with non-members have been hampered. The governments have been challenged by the expenditure requirements of the agreements that they are using public resources to finance them instead of making infrastructure developments.
To trade effectively, there is the need to have comparative and absolute advantage that the country with an advantage gets the upper hand to produce the commodity, this is not the case of the five nations. The nations produce almost the same agriculture products, thus their trade is hampered.
Insecurity and the lack of strong institutional frameworks also works for the disadvantage of the community; the nations have not set aside the time to make frameworks that can facilitate doing business effectively. With the move the countries are finding themselves continuously competing for scarce policies to offer them guidance.
For example, in the Jua Kali industry, Kenya has developed more than the other countries; when the countries import the products from Kenya, there have been challenges whether to consider them as machineries, or as finished products. The security of the area has been threatened by volatile borders and lack of well-funded military operations; the nations are also suffering attacks from unstable Somalia (EAC 1-23).
The effect of multinationals in the EAC has had a negative effect on the development of local industries in the EAC; the multinationals offer high competitions to the nations industries that they can hardly develop. The strutting that the agreement was made facilitates trading across the border; when multinationals get to the ground, they take advantage of the situation limiting the growth of local industries and the net effect of their trade is accumulated in their home countries.
Among nations, there have been some stereotypes that have existed in the communities that have affected them negatively; the Kenyans have been taken as entrepreneurs that other nations seem to shy away from engaging into trading activities with the country. The Tanzanians are still affected by the communism policy that lived in the nation (the policy is referred to as Ujamaa); this means that the people are not pure capitalists but have elements of communism (East African Community Official Website).
The EAC agreement is a negotiated trade agreement among five East-African states (Uganda, Kenya, Burundi, Republic of Tanzania, and Rwanda); the agreement was signed in 1999 to facilitate trade among the member countries. With the agreement, trade barriers (tariff and non-tariff) among the countries were removed to facilitate the movement of goods and services, as well as factors of the trade. Through the agreement, the nations were able to enact policies that addressed poverty reduction in the region.
Despite the successes that the agreement has facilitated to be attained, it was challenged by the lack of proper governance and differences in legal and regulatory policies among the member nations.
EAC. Report of the Committee on Fast Tracking East African Federation, EAC Secretariat. Duruma PublisherS: Arusha, 2010. Print.
East African Community Official Website. East African community, 2011. Web. 05th November. 2011.
Mol, Arthur. Globalization and Environmental Reform: The Ecological Modernization of the Global Economy. New York: MIT Press, 2003. Print.
Timmons, Roberts, and Hite Amy. From modernization to globalization: perspectives on development and social change. New Jersey: Wiley-Blackwell, 2000. Print
World Bank. African Development Indicators. Washington DC, The World Bank, 2004. Print.