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Trade Agreements, Technical Regulations, and Standards: Competitiveness Implications for Kenyan Exporters to European Union

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Abstract

The European Union imports over 22.4% of total Kenyan exports and is market to over 51.3% of Kenya’s untapped export potential. However, there is a dearth of knowledge on how trade agreements, technical regulations, and standards influence competitiveness of firms exporting to the market. This study uses customs firm-product (HS 2 digit)-destination data ranging from 2007 to 2020 to examine the competitiveness implications of trade agreements and the resultant technical regulations and standards on firms that export to the European Union. The stylized facts demonstrate that countries offering the largest preferential margin to exporting firms are the very same countries with the largest number of technical regulations and standards faced by exporters. Controlling for potential simultaneity, results from random and fixed-effects models demonstrate that higher preferential margins emanating from trade agreements are associated with increases in market power and the number of products per exporter. However, higher preferential margins emanating from trade agreements are associated with a decline in the number of exporters per product driven by internal economies of scale, specialization, product differentiation, and technological advantage among firms. Higher technical regulations are associated with improvement in market competitiveness and number of products per exporter. Higher number of standards is associated with a rise in market power, but a decline in the number of products per exporter and the number of exporters per product. The findings have policy implications to developing countries especially those within the African, Caribbean, and Pacific bloc which has an existing trading arrangement with the EU and touch on a need to strengthen domestic technical and administrative capacity to comply with existing technical regulations and standards especially among MSEs, cooperation in quality management and assurance, strengthening of institutional links for information exchange, and credit support targeting exporting MSEs which have comparative disadvantage in technology and economies of scale.

Résumé

L'Union européenne importe plus de 22,4% du total des exportations kényanes et est un marché pour plus de 51,3% du potentiel d'exportation inexploité du Kenya. Cependant, il y a un manque de connaissances sur la façon dont les accords commerciaux, les réglementations techniques, et les normes influencent la compétitivité des entreprises exportatrices. Cette étude utilise des données douanières de destination des entreprise-produit (en anglais: « HS 2-digit») entre 2007 à 2020 afin d’examiner les implications sur la compétitivité des accords commerciaux, et des réglementations techniques et normes qui en résultent, sur les entreprises qui exportent vers l'Union Européenne. On trouve que les pays offrant la plus grande marge préférentielle aux entreprises exportatrices sont les mêmes pays avec le plus grand nombre de réglementations techniques et de normes auxquelles sont confrontés les exportateurs. Contrôlant pour une simultanéité potentielle, les résultats des modèles à effets aléatoires et fixes démontrent que des marges préférentielles plus élevées dus aux accords commerciaux sont associées à une augmentation du pouvoir de marché et du nombre de produits par exportateur. Cependant, des marges préférentielles plus élevées dus aux accords commerciaux sont associées à une diminution du nombre d'exportateurs par produit, entraînés par des économies d'échelle internes, la spécialisation, la différenciation des produits, et l'avantage technologique parmi les entreprises. Des réglementations techniques plus élevées sont associées à une amélioration de la compétitivité du marché et du nombre de produits par exportateur. Un nombre plus élevé de normes est associé à une augmentation du pouvoir de marché, et à une diminution du nombre de produits par exportateur et du nombre d'exportateurs par produit. Les résultats ont des implications politiques pour les pays en développement, en particulier ceux de la bloc africain, caribéen et pacifique (en anglais: « ACP») qui a un arrangement commercial existant avec l'UE. Ces implications touchent à la nécessité de renforcer la capacité technique et administrative domestique pour se conformer aux réglementations techniques et normes existantes, en particulier parmi les PME, la coopération en matière de gestion et d'assurance de la qualité, le renforcement des liens institutionnels pour l'échange d'informations, et le soutien au crédit ciblant les PME exportatrices qui ont un désavantage comparatif en technologie et en économies d'échelle.

Resumen

La Unión Europea importa más del 22.4% del total de las exportaciones kenianas y es el mercado de más del 51.3% del potencial de exportación no explotado de Kenia. Sin embargo, existe una falta de conocimiento sobre cómo los acuerdos comerciales, las regulaciones técnicas y los estándares influyen en la competitividad de las empresas que exportan al mercado. Este estudio utiliza datos de aduaneros del destino de empresas-productos (HS 2 dígitos) que abarcan los años 2007-2020 para examinar las implicaciones de competitividad de los acuerdos comerciales y las consecuentes regulaciones técnicas y estándares en las empresas que exportan a la Unión Europea. El estudio demuestra que los países que ofrecen el mayor margen preferencial a las empresas exportadoras son los mismos países con el mayor número de regulaciones técnicas y estándares a los que se enfrentan los exportadores. Controlando la simultaneidad potencial, los resultados de los modelos de efectos aleatorios y fijos demuestran que los márgenes preferenciales más altos derivados de los acuerdos comerciales se asocian con aumentos en el poder de mercado y el número de productos por exportador. Sin embargo, los márgenes preferenciales más altos derivados de los acuerdos comerciales se asocian con una disminución en el número de exportadores por producto, impulsado por las economías de escala internas, la especialización, la diferenciación de productos y la ventaja tecnológica entre las empresas. Las regulaciones técnicas más altas se asocian con una mejora en la competitividad del mercado y el número de productos por exportador. Un mayor número de estándares se asocia con un aumento en el poder de mercado, pero también con una disminución en el número de productos por exportador y el número de exportadores por producto. Los hallazgos tienen implicaciones políticas para los países en desarrollo, especialmente aquellos dentro del bloque de África, Caribe y Pacífico (en ingles: “ACP”) que tienen un acuerdo comercial existente con la UE, y tocan la necesidad de fortalecer la capacidad técnica y administrativa doméstica para cumplir con las regulaciones técnicas y estándares existentes, especialmente entre las empresas de tamaño medio, la cooperación en la gestión y garantía de calidad, el fortalecimiento de los vínculos institucionales para el intercambio de información y el apoyo crediticio dirigido a las empresas de tamaño medio exportadoras que tienen una desventaja comparativa en tecnología y economías de escala.

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Notes

  1. The EAC-EU Economic Partnership Agreement meant to operationalize the African, Caribbean, and Pacific (ACP)/Cotonou Agreement with EU within the eastern bloc of the African continent.

  2. The study considers all the 27 members of the European Union that existed by December 2020 including the United Kingdom but excluding Croatia which joined way later in 2013.

  3. See Article 19(2) (b); Article 32(2) (a); Article 42(1); Article 48(1) of the EU-EAC EPA for instance.

  4. By this period, the 27 countries considered excluding Croatia had joined the Union.

  5. This is so because the EU has a trade arrangement with African, Caribbean, and Pacific (ACP) countries. These are largely developing countries.

  6. Especially ACP countries.

  7. Kenya is a developing country.

  8. The rise in market power makes export activity attractive mainly among large firms which enjoy internal economies of scale.

  9. Technological innovations are a key component of internal economies of scale and are dominant among large firms.

  10. Appreciation to Ana Fernandes and Bishakha Barman from World Bank for sharing the current Exporter Dynamics Dataset spanning 2006–2020. The transaction-level customs data was collected by the Trade and Integration Unit of the World Bank Research Department, as part of their efforts to build the Exporter Dynamics Database described in Fernandes et al. (2016). Variables used from the data obtained from World Bank include HHI, number of exporters per product, and the number of products per exporter.

  11. Weighted distance is obtained from CEPII.

  12. Data on per capita GDP and population is obtained from WDI.

  13. Variables obtained from ITC relate to preferential margin, technical regulations, and standards. ITC updates the data from time to time to reflect emerging information. The variables can be obtained from https://standardsmap.org/en/identify and https://www.macmap.org/en/query/compare-product?reporter=276&partner=404&product=All&level=2

  14. Internal economies of scale give large firms a cost advantage over small firms and lead to an imperfectly competitive market structure.

  15. See Tables 6 and 7 in Appendix.

  16. Article 6 on customs duty.

  17. As such, heterogeneity across sectors and firms is expected to manifest. The results in Table 3 and 4 confirm presence of sectoral and within firms heterogeneity which has been controlled for.

  18. The United Kingdom emerges as the only country with almost no technical regulations on Kenyan exports.

  19. The differences in the effectively applied tariff rates among individual EU countries are small, indicating a move towards convergence in the common external tariff for EU. The small differences are, however, adequate to drive variations in export attractiveness of individual EU countries for Kenyan exporters.

  20. These sectoral variations make certain products exported by Kenyan firms competitive in certain EU countries and drive specialization.

  21. In this study, technical regulations and standards are components of non-tariff measures which have been disaggregated for purposes of examining their individual effects on export competitiveness of Kenyan firms exporting to the European Union.

  22. The 2-digit HS codes for these products are 17, 04, 16, 02, 34, 20, 11, 01, 07, 10, 61, 64, 63, 08, and 03, respectively.

  23. The 2-digit HS codes for these products are 14, 26, 30, 36, 47, 48, 49, 80, 93, and 97, respectively.

  24. The 2-digit HS codes for these products are 12, 35, 25, 07, 15, 28, 09, 08, 21, 03, 17, 38, and 10 respectively.

  25. Tariff rate that would exist in absence of a free trade agreement (FTA).

  26. Tariff rate that would exist in presence of a free trade agreement (FTA).

  27. Fernandes et al. (2016) provide the comprehensive methodology on the construction of the HHI.

  28. When a market is highly concentrated, market power is high and anti-competitive concerns arise.

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  1. Kenya Institute for Public Policy Research and Analysis (KIPPRA), Nairobi, Kenya

    Shadrack Muthami Mwatu, Charity Kageni Mbaka & John Gakuu Karanja

  2. IDinsight, Nairobi, Kenya

    Grace Mukami Muriithi

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Appendix

Appendix

See Tables 

Table 5 Kenya’s untapped export potential in EU
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5,

Table 6 Preferential margin, technical regulations, and standards faced by Kenyan exporters to the EU
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Table 7 Average preferential margin, technical regulations, and standards for each exported product
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Mwatu, S.M., Mbaka, C.K., Karanja, J.G. et al. Trade Agreements, Technical Regulations, and Standards: Competitiveness Implications for Kenyan Exporters to European Union. Eur J Dev Res 36, 381–410 (2024). https://doi.org/10.1057/s41287-023-00606-9

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  • DOI: https://doi.org/10.1057/s41287-023-00606-9

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