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UNIVERSITY OF NAIROBI
INSTITUTE OF DIPLOMACY AND INTERNATIONAL STUDIES
AN ANALYSIS OF EXTERNAL TRADE BETWEEN KENYA AND THE U.S
(2000-2015)
GATOBU Y. KINYA
R50/74926/2014
A Research Project Submitted To Institute of Diploma and International Studies In
Partial Fulfillment For The Requirement Of The Degree Of Masters of
International Studies at The University of Nairobi
OCTOBER 2016
DECLARATION
I, the undersigned, declare that this research proposal is my own original work and does
not include any material already submitted for a degree at the University of Nairobi, or
any other degree at any other university.
SIGNED:
GATOBU Y. KINYA: ........................................DATE: ...........................................
R50/74926/2014
This research project has been submitted for examination with my approval as the
university appointed supervisor.
SIGNED:
GERRISHON IKIARA: ...................................................
DATE: .............................................
SENIOR LECTURER,
INSTITUTE OF DIPLOMACY AND INTERNATIONAL STUDIES,
UNIVERSITY OF NAIROBI
ii
DEDICATION
My deepest gratitude go to my parents who through their sage wisdom and life
experiences acquired through the years, frequently advised, counseled, encouraged and
supported me during the entire duration of this challenging undertaking.
This project is dedicated to my father, who taught me that the best kind of knowledge to
have is that which is learned for its own sake.
It is also dedicated to my husband who always encouraged me and took care of the
children while I was busy with the studies and my children who could not understand
why I always went home late.
iii
ACKNOWLEDGEMENTS
Mr. Gerrishon Ikiara has been the ideal project supervisor. His thoughtful advice, creative
criticism and patient encouragement greatly aided the writing of this project. I have
emerged from his tutelage as a transformed individual with a steely resolve and ability to
critically analyze complex issues.
iv
ABBREVIATIONS AND ACRONYMS
GDP - Gross Domestic Product
U.S – United States
MTS - Multilateral Trading System
TIFA - Trade and Investment Framework Agreements
EAC - East African Community
COMESA - Common Market for Eastern and Southern Africa
EPA - Economic Partnership Agreement
RTAs - Regional Trade Agreements
SADC - Southern Africa development Community
SACU - South Africa Customs Union
ECOWAS - Economic Community of West Africa States
EU – European Union
UAE – United Arab Emirates
USAID - United States Agency for International Development
SSA - Sub-Saharan African
AGOA - African Growth and Opportunity Act
GSP - Generalized System of Preferences
GATT - General Agreement on Tariffs and Trade
ITO - International Trade Organization
GDP – Gross Domestic Product
FTA - Free Trade Agreement
NAFTA - North American Free Trade Agreement
v
USDA - United States Department of Agriculture
KNBS - Kenya National Bureau of Statistics
EPZs - Export Processing Zones
WTO - World Trade Organization
IBM - International Business Machines
ASEAN - Association of Southeast Asian Nations
TABLE OF CONTENTS
DECLARATION............................................................................................................... ii
ACKNOWLEDGEMENTS ............................................................................................ iv
ABBREVIATIONS AND ACRONYMS ......................................................................... v
LIST OF TABLES ........................................................................................................... xi
ABSTRACT ..................................................................................................................... xii
CHAPTER ONE ............................................................................................................... 1
IMPACT OF EXTERNAL TRADE BETWEEN KENYA AND THE U.S (20002015) ................................................................................................................................... 1
1.1 Introduction and background to the Study .................................................................... 1
vi
1.2 Statement of the Problem .............................................................................................. 3
1.3 General Objective ......................................................................................................... 5
1.3.1 Specific Objectives .............................................................................................. 5
1.4 Literature Review.......................................................................................................... 6
1.4.1 Economic Interactions between Kenya and the U.S ............................................ 6
1.4.2 Challenges and Opportunities of External Trade ................................................. 8
1.4.3 Trend of Kenya and U.S imports and exports and the significance of this trade
in the economies of the two countries......................................................................... 12
1.4.4 Research Gap ..................................................................................................... 15
1.4.5 Justification of the Study ................................................................................... 16
1.5 Theoretical Framework ............................................................................................... 16
1.5.1 Comparative Advantage Theory ........................................................................ 17
1.6 Hypotheses .................................................................................................................. 19
1.7 Research Methodology ............................................................................................... 19
1.8 Chapter Outline ........................................................................................................... 20
CHAPTER TWO ............................................................................................................ 21
OVERVIEW OF KENYAN TRADE AND THE WORLD ........................................ 21
2.0 Introduction ................................................................................................................. 21
2.1 Overview of Kenyan trade and the world ................................................................... 21
2.1.1 Kenya trade with East African Countries .......................................................... 21
2.1.2 Kenya Trade with African Countries ................................................................. 24
2.1.3 Kenya Trade with European Union and the rest of the world ........................... 25
2.2 U.S trade with the world (continents) including Africa .............................................. 29
vii
2.2.1 U.S trade with Africa ......................................................................................... 30
2.2.2 U.S Trade with Other Countries of the World ................................................... 32
2.3 Kenyan Trade with the U.S ......................................................................................... 37
2.4 Conclusion .................................................................................................................. 40
CHAPTER THREE ........................................................................................................ 42
AN OVERVIEW OF ECONOMIC INTERACTIONS BETWEEN KENYA AND
THE U.S. .......................................................................................................................... 42
3.0 Introduction ................................................................................................................. 42
3.1 Historical Background of Economic Interactions between Kenya and the U.S. ........ 42
3.2 Determinants of Bilateral Trade flows between Kenya and the U.S. ......................... 45
3.3 Factors Influencing Trade Flows between Kenya and the US .................................... 50
3.3.1 Influence of Exchange Rate on Trade Flows ..................................................... 51
3.3.2 Influence of Competition on Trade Flows ......................................................... 52
3.3.3 Influence of Globalization on Trade Flows ....................................................... 54
3.4 Current Emerging Relations between Kenya and the US ........................................... 56
3.5 Conclusion .................................................................................................................. 60
CHAPTER FOUR ........................................................................................................... 62
ANALYSIS AND PRESENTATIONS OF THE IMPACT OF EXTERNAL TRADE
BETWEEN KENYA AND THE U.S (2000-2015)........................................................ 62
4.1 Introduction ................................................................................................................. 62
4.2 Economic Survey of External Trade between Kenya and the U.S ............................. 62
4.2.1 Exports from Kenya to U.S during the period 2000 – 2015 .............................. 62
4.2.2 Imports to Kenya from U.S during the period 2000 – 2015 .............................. 65
viii
4.3 Current Trade Relations between Kenya and the U.S ................................................ 67
4.3.1 Trade in Goods between Kenya and China during the period 2000-2015 ......... 68
4.3.2 Trade in Goods between Kenya and Thailand during the period 2000-2015 .... 70
4.4 Influence of Competition on Trade between Kenya and U.S ..................................... 71
4.4.1 US trade in Goods with China during the period 2000-2015 ............................ 73
4.4.2 US Trade in Goods with India during the period 2000-2015 ............................ 75
4.5 Policies that need to be adapted in order to improve trade relations .......................... 76
4.6 Challenges faced by Kenya and U.S in the process of trade ...................................... 78
4.7 Ways that international trade between Kenya and the U.S can be strengthened ........ 80
CHAPTER FIVE ............................................................................................................ 82
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION .......... 82
5.1 Introduction ................................................................................................................. 82
5.2 Summary of Findings .................................................................................................. 82
5.3 Discussion of the Findings .......................................................................................... 84
5.3.1 Current Trade Relations between Kenya and the U.S ....................................... 84
5.3.2 Influence of Competition on Trade between Kenya and U.S ............................ 85
5.3.3 Policies that need to be adapted in order to improve trade relations ................. 85
5.3.4 Challenges faced by Kenya and U.S in the process of trade ............................. 86
5.3.5 Ways that international trade between Kenya and the U.S can be strengthened 87
5.4 Conclusion .................................................................................................................. 88
5.5 Recommendations ....................................................................................................... 89
5.5.1 Recommendation for Further Studies ................................................................ 89
5.5.2 Policy Recommendations................................................................................... 89
ix
BIBLIOGRAPHY ........................................................................................................... 91
APPENDICES ............................................................................................................... 105
x
LIST OF TABLES
Table 4.1: Exports from Kenya to U.S during the period 2000 – 2015 ............................ 62
Table 4.2: Imports to Kenya from U.S during the period 2000 – 2015 ............................ 65
Table 4.3: Trade in Goods between Kenya and China (£ million) ................................... 68
Table 4.4: Trade in Goods between Kenya and Thailand (£ million) .............................. 70
Table 4.5: US trade in Goods with China (£ million) ....................................................... 73
Table 4.6: US Trade in Goods with India (£ million) ....................................................... 75
xi
ABSTRACT
External trade is the exchange of capital, goods and services across the international
borders or territories. International trade has been regarded as an engine of growth, which
leads to steady improvement in human status by expanding the range of people's standard
and preferences. Since no country has grown without trade, international trade plays a
vital role in restructuring economic and social attributes of countries around the world,
particularly, the less developed countries. The main objective of this study was to analyze
the impact of external trade between Kenya and the U.S 2000-2015. The study is a
qualitative research and uses the Survey Research Design to explain the impact of
external trade between Kenya and U.S 2000-2015. This research was based on primary
and secondary data. Primary data was collected by the use of an interview guide.
Secondary data was gathered from Kenya National Bureau of Statistics, journal articles
and public documents. The population of the study was employees working with the
Ministry of Foreign Affairs and International Trade, U.S embassy in Kenya and Kenya
Private Sector Alliance (KEPSA) in Nairobi County offices. The data collected using
interview guides was analyzed using content analysis. The findings of the study indicated
Kenya and the U.S have been improving their existing trade agreements since
independence. It was also found that bilateral trade affairs have helped minimize trade
deficits through negotiating free trade agreements with Kenya. The study concluded that
the countries should encourage free trade since specialization and free trade would allow
them to become more competitive and innovative. The study recommends that there is
need for the Kenya and U.S government to formulate new trade policies that will analyze
the short-term incentives of a proposed agreement for the potential partner.
xii
CHAPTER ONE
IMPACT OF EXTERNAL TRADE BETWEEN KENYA AND THE U.S (2000-2015)
1.1 Introduction and Background to the Study
This chapter presents the proposal which includes the background of the study,
statement of the problem, the objectives, literature review, theoretical framework, the
hypothesis, the research methodology and finally the chapter summary on analysis of
external trade between Kenya and the U.S during the period (2000-2015).
External trade is the exchange of capital, goods and services across the
international borders or territories. In most countries such trade represents a significant
share of Gross Domestic Product (GDP). It enables nations to sell their domestically
produced good to other countries of the world.1 International trade has been regarded as
an engine of growth, which leads to steady improvement in human status by expanding
the range of people's standard and preferences. Since no country has grown without trade,
international trade plays a vital role in restructuring economic and social attributes of
countries around the world, particularly, the less developed countries.2
Furthermore, over the years, development economists have long recognized the
role of trade in the growth process of national economies as trade provides both foreign
exchange earnings and market stimulus, for accelerated economic growth. International
trade includes not only trade of goods and services, but also foreign investment.
International business has gained wide popularity, because of the growing rate of
multinational enterprises. The flows of goods, services, technologies, resources, people,
1
Otsuki, T., Wilson, J. S., & Sewadeh, M. (2011). Saving two in a billion:: quantifying the trade effect of
European food safety standards on African exports. Food policy, 26(5), 495-514.
2
Ibid
1
and ideas among markets have major effects on countries and their governments,
companies, and individuals.3
International business provides a way through which products and services are
more available to various customers. It encourages and facilitates the exchange of scarce
resources between countries. It involves exchange of products which are scarce between
countries, and this exchange can be seen to be mutually beneficial to countries.
Consumers are therefore provided with an opportunity to access services and goods
which may not be present or may be limited in their own country. This is beneficial to the
economy since it increases the level of GDP, encourages investment and leads to
economic growth in a country. It therefore translates to better living standards of citizens
if the resources are managed effectively by the government.4
International trade plays a significant role in the country's growth and
development through its links with all other sectors of the economy. Trade also plays a
critical role in poverty reduction through employment creation. For these reasons,
significant attention has been directed towards the review of the effects of international
trade on economic growth. The importance of international trade on economic growth
was first highlighted in economic literature by classical economists Smith and Ricardo
who strongly believed that trade surpluses were the most favourable returns that could be
derived from international trade relations. According to Smith, this meant that nations or
regions should specialize in producing goods for which they particularly had an absolute
advantage on.
3
Ademola, O. T., Bankole, A. S., & Adewuyi, A. O. (2013). U.S–Africa trade relations: insights from
AERC scoping studies. The European Journal of Development Research, 21(4), 485-505.
4
Brookes, P., & Shin, J. H. (2012). China‘s influence in Africa: Implications for the United States.
Backgrounder, 1916, 1-9.
2
The United States established diplomatic relations with Kenya in 1964, following
the December 1963 Kenya independence from the United Kingdom. The United States
and Kenya have enjoyed cordial relations and an enduring strategic partnership since
Kenya's independence5. Relations became closer after Kenya's democratic transition of
2002 and subsequent improvements in civil liberties. In the wake of widespread violence
following the disputed 2007 presidential election, the United States has supported the
sweeping political and institutional reform agenda adopted by the coalition government,
the centerpiece of which was constitutional reform. Kenyans adopted a new constitution
in a national referendum in August 2010 and held its first elections since the 2007/08
post-election violence in March 2013. President Obama visited Kenya in July of 2015,
the first sitting United States President to ever visit the country. His travel underscored
the strength of the relationship between the United States and Kenya.6
1.2 Statement of the Problem
Kenya has been enjoying international relations with the West including the US
since Independence. Kenya - U.S. relations have been induced by bilateral trade relations
that characterize all interstate relations globally. The response of Kenyan leaders largely
depends on what they would gain from a relationship that would foster national
development politically, economically and socially.7 Relations became closer after
Kenya's democratic transition of 2002 and subsequent improvements in civil liberties. In
the wake of widespread violence following the disputed 2007 presidential election, the
5
Brookes, P., & Shin, J. H. (2012). China‘s influence in Africa: Implications for the United States.
Backgrounder, 1916, 1-9.
6
Were, M. (2015). The impact of external debt on economic growth in Kenya. UNU-WIDER Research
Paper, DP, 116.
7
Asiedu, E. (2012). On the determinants of foreign direct investment to developing countries: is Africa
different?. World development, 30(1), 107-119.
3
United States has supported the sweeping political and institutional reform agenda
adopted by the coalition government, the centerpiece of which was constitutional reform.
Several studies have been done on the impact of trade between Kenya and other
countries. Kiarie researched on factors that have influenced trade between Kenya and
Thailand.8 The study found that politics, economy, social and cultural aspects and
technology influence trade between the two countries. On the other hand, Ntara carried
out a research on factors influencing bilateral trade between Kenya and India9 and found
that there is a widening trade imbalance between Kenya and India. Culture, bilateral trade
agreements and economic factors were some of the issues highlighted. Similarly, Saoke
researched on the Japan – Kenya Bilateral Relationship; examining trade and
development assistance for the period 1998-2014.10 The findings indicated that Japan was
a major source of investment and the largest donor of assistance to Kenya. Mahmud
carried out a study on Kenya and Yemen relations, trade and its security implications11
and found that the historical/cultural/economic relations existing between the two
countries had helped Kenya to access the Middle East markets. Daumal carried a research
on the impact of International Trade Flows on Economic Growth in Brazilian States
1989-2002.12 The econometric results showed that in Brazil the growth effect of trade
openness is conditioned by the level of initial income. Yakubu carried out a study on the
8
Kiarie, C. W. (2015). Factors that influence trade between Kenya and Thailand (Doctoral dissertation,
University of Nairobi).
9
Ntara, C. K. (2011). Factors influencing bilateral trade between Kenya and India (Doctoral dissertation,
University of Nairobi, Kenya).
10
Saoke, C. O. (2015). Japan–Kenya bilateral relationship; examining the trade and development
assistance for the period 1998-2014 (Doctoral dissertation, University of Nairobi).
11
Mahmud, K. A. (2013). Kenya and Yemen Relations: Trade and Security Implications (Doctoral
dissertation, INSTITUTE OF DIPLOMACY AND INTERNATIONAL STUDIES, UNIVERSITY OF
NAIROBI).
12
Daumal, M., & Özyurt, S. (2010). The impact of international trade flows on economic growth in
Brazilian states. Review of Economics and Institutions, 2(1).
4
impact of international trade on economic growth in Nigeria: 1981 – 2012.13 The results
of the analysis showed that all the variables except interest rate were statistically
significant.
All the above studies have covered trade in goods and services between different
countries in the world. While a fair amount of ground-work of the extent to which Kenya
has been engaging in trade with other countries has been, there remain a gap in the
external trade between Kenya and the U.S. The proposition for Kenya is that economic
growth in the country is best served through more liberal trade, enabling Kenyan
commodity exports to enjoy preferential access to the United States market. Therefore,
this study seeks to answer the question; what is the analysis of external trade between
Kenya and the U.S during the period 2000-2015?
1.3 General Objective
The overall objective of the study is to analyze the impact of external trade between
Kenya and the U.S during the period 2000-2015
1.3.1 Specific Objectives
The following specific objectives guided the study:
i.
To assess the economic interactions between Kenya and the U.S during the period
2000-2015
13
Yakubu, M. M., & Akanegbu, B. N. THE IMPACT OF INTERNATIONAL TRADE ON ECONOMIC
GROWTH IN NIGERIA: 1981–2012.
5
ii.
To analyze challenges and opportunities of external trade between Kenya and the
U.S during the period 2000-2015
iii.
To assess the trend of Kenya and U.S imports and exports and the significance of
this trade in the economies of the two countries.
1.4 Literature Review
This section reviews the literature consulted during the research process and focus
on the concepts important for this study such as external trade.
1.4.1 Economic Interactions between Kenya and the U.S
This section focuses the attention on the implications of economic factors on
Kenya - U.S. relations. The major contention is that economic intercourse between the
two countries express a mutually beneficial relationship and fosters cooperation between
them. Central to the analysis are the aspects of investments, trade and aid. Investments,
being a U.S. undertaking in developing countries, and Kenya in particular, serve the
national interests of the two states. U.S capital investments contribute immensely to
Kenya‘s economic development endeavor. This is in respect to their contribution to the
development of physical infrastructure, development of roads and improvement of
accessibility, with subsequent ease in exploiting economic resources; creation of
employment opportunities and technology transfer.14
In the United States, the Office of Bilateral Trade Affairs helps minimize trade
deficits through negotiating free trade agreements with new countries, supporting and
improving existing trade agreements, promoting economic development abroad and
more. The goal of bilateral trade agreements is expanding access between two countries‘
14
Wilhite, A. (2011). Bilateral trade and ‗small-world‘networks. Computational Economics, 18(1), 49-64.
6
markets and increasing the countries‘ economic growth.15 Business operations are
standardized in five general areas as a method of preventing one country from stealing
another‘s innovative products, dumping goods at a small cost or using unfair subsidies.
Bilateral trade agreements standardize regulations, labor standards and environmental
protections.
Relations became closer after Kenya's democratic transition of 2002 and
subsequent improvements in human rights.16 This was preceded by sometimes frosty
interludes during President Moi's regime when the two countries often clashed over bad
governance issues, resulting in aid suspension and many diplomatic rows. Following the
election of the new government of Uhuru Kenyatta in 2013, relations somewhat took a
dip when the new president forged a new foreign policy looking east away from
traditional western allies.17 US - Kenyan relations have been cemented through
cooperation against Islamist terrorism and a visit by President Obama to Kenya, which is
the homeland of his father.
The Kenya-U.S relationship is a vast and dynamic web of cooperative linkages
and undertakings, dating from well before the establishment of diplomatic relations in
1970 and growing continuously year on year.18 U.S long-standing and comprehensive
relationship
with
Kenya
including trade, governance
operates
and
at
many
levels
and
values, health, education and
15
in
many
culture.
areas,
Bilateral
Drysdale, P., & Garnaut, R. (2012). Trade intensities and the analysis of bilateral trade flows in a manycountry world: a survey. Hitotsubashi Journal of Economics, 62-84.
16
Blanes, J. V., & Martín, C. (2010). The nature and causes of intra-industry trade: Back to the
comparative advantage explanation? The case of Spain. Weltwirtschaftliches Archiv, 136(3), 423-441.
17
Ibid
18
Erez, M., & Gati, E. (2009). A dynamic, multi‐level model of culture: from the micro level of the
individual to the macro level of a global culture. Applied Psychology, 53(4), 583-598.
7
cooperation is strong – many U.S government departments have productive cooperation
programs and memoranda of understanding with their Kenyan counterparts, and hold
regular exchanges at various levels.19
U.S just like any other developed nation in the world is concerned with increased
bilateral trade and investment opportunities in Africa which will help grow their
economy.20 Economic diplomacy is a key focus of Kenya‘s new foreign policy.
Diversification of the export market and tourism sources; alternative sources of foreign
direct investment, energy and technology; and engagement of both traditional partners
and emerging economic powers have become the central pillars of the country‘s foreign
economic relations.21 On the other hand, the U.S. seems to be shifting its engagement in
Kenya by integrating its traditional core priorities with new ones. Overall, as Kenya
deepens its economic cooperation with the emerging economies, including middle-sized
economies, the U.S. is progressively ―mainstreaming‖ trade and business cooperation in
its overall policy towards it.22 Kenya needs not be merely a recipient of preferential trade;
it has potential as a rapidly evolving market and investment destination.
1.4.2 Challenges and Opportunities of External Trade
Countries that engage in international trade are on average larger, productive and
often foreign owned than countries that service the local economy.23 Nevertheless, there
are vast opportunities for services to engage in international trade. It takes substantial
19
De Groot, H. L., Linders, G. J., Rietveld, P., & Subramanian, U. (2009). The institutional determinants
of bilateral trade patterns. Kyklos, 57(1), 103-123.
20
Srivastava, R. K., & Green, R. T. (2012). Determinants of bilateral trade flows. Journal of Business,
623-640.
21
Gagnon, J. E. (2013). Exchange rate variability and the level of international trade. Journal of
International economics, 34(3-4), 269-287.
22
Ibid
23
Gereffi, G., & Frederick, S. (2010). The global apparel value chain, trade and the crisis: challenges and
opportunities for developing countries. World Bank Policy Research Working Paper Series, Vol.
8
scale to service international markets. But in the digital economy the additional cost of
adding a new customer can be tiny and even start-up services firms can enter
international markets being born global. Export growth increases jobs by generating new
business for manufacturers, service providers and farmers. Imports support jobs and keep
costs low, helping businesses compete and saving families real dollars at the cash
register.
Trade-supported jobs are not just at companies that export and import. Trade
supports higher wages for workers and lower costs for companies and consumers,
providing them with more money to spend on other things. This spending supports
additional jobs throughout a country‘s economy in sectors like entertainment, education,
health and construction. Gereffi asserts that Investment follows trade.24 Many foreign
companies invest in an office, factory, or distribution warehouse to simplify their trade
and reduce cost. This investment also creates more jobs. It also attracts international
investors.
In addition, new technology promotes competitiveness and profitability. If a
business could create a machine that works better, faster, or cheaper (or all three), then
the business will have produced a more competitive product for national and international
markets.25 The biotechnology industry in Canada is second only to the U.S. New services
such as banking, travel, and consultation are also available now. Business competition is
no longer on a city scale; instead, businesses compete against worldwide businesses. The
result is better quality goods, lower prices, and functional design.
24
25
Ibid
Ibid
9
Although the opportunities are many, and it has been argued that the 21st century
belongs to the micro multinational, the challenges and obstacles are also numerous.26
First, it is always more difficult for some developing countries to absorb burdensome
regulations and red-tape than developed countries. Second, staying in power requires
keeping abreast with rapidly changing technology and consumer tastes, which require
significant human and financial resources. Some developing countries are born small, and
a few are also born global. The vast majority of services countries that manage to survive
in international markets grow rapidly to reach a sustainable scale.27 Some grow
organically, some integrate into international networks and many are acquired by larger
firms.
The world faces many problems and challenges. Experts and economists have on
several occasions attempted to figure out which are the most important ways to deal with
the challenges and in what order.28 Whereas the costs of introducing free trade reforms
would be rather modest, the benefits however would be massive. It is therefore largely
agreed that the multilateral trading system (MTS) should be based on free trade market
forces, which in more than one way would benefit the developed as well as developing
countries. In addition, trade liberalization may imply greater means and resources to cope
with other crucial problems and challenges of the international agenda. However, free
trade may also imply consequences. Besides the difficult task facing the currently most
protected industries, some critics claim that the introduction of free trade will increase
26
Sakakibara, E., & Yamakawa, S. (2013). Regional integration in East Asia: challenges and
opportunities (Vol. 3078). World Bank, East Asia and Pacific Region, Poverty Reduction and Economic
Management Sector Unit.
27
Ibid
28
Oviatt, B. M., & McDougall, P. P. (2007). Challenges for internationalization process theory: The case
of international new ventures. MIR: Management International Review, 85-99.
10
social and environmental problems in particular harming the poorest countries.29 If fair
trade is not offered to the developing world in the form of industry protection and gradual
liberalization while the developed countries are forced to eliminate their trade barriers, it
will once again be the elite that is to gain most from trade liberalization and developing
countries become the losers.30
There are various factors which tend to hamper smooth trade especially between
Kenya and the trading partners. These factors may be economic, socio-cultural or
political. Every type of economic union shares the development and enlargement of
market opportunities as a basic orientation; usually markets are enlarged through
preferential tariff treatment for participating members, common tariff barriers against
outsiders or both.31 Enlarged, protected markets stimulate internal economic development
by providing assured outlets and preferential treatment for goods produced within the
customs union, and consumers benefit from lower internal tariff barriers among the
participating countries. In many cases, external as well as internal barriers are reduced
because of the greater economic security afforded domestic producers by the enlarged
market.32
Kenya has bilateral trade agreements with many world countries including the
U.S and under these agreements, Kenya and its contracting partners accord each other
mutual trade relations.33 These agreements have been used as instruments for promoting
trade and improving economic relations between Kenya and these countries. However, it
29
Auffret, P. (2013). Trade reform in Vietnam: Opportunities with emerging challenges (Vol. 3076).
World Bank Publications.
30
Root, F. R. (2014). Entry strategies for international markets. Jossey-Bass.
31
Ibid
32
Ibid
33
Oviatt, B. M., & McDougall, P. P. (2007). Challenges for internationalization process theory: The case
of international new ventures. MIR: Management International Review, 85-99.
11
has been observed that the nature and type of bilateral trade between Kenya and other
world countries seem to be changing in terms of the content and actors. Exports from
Kenya enjoy preferential access to world markets under a number of special access and
duty reduction programmes. Kenya is signatory to various agreements aimed at
enhancing trade amongst member states.
According to Collier, today‘s global economy is dynamic and increasingly
interdependent.34 International trade and investment flows are of an order of magnitude
never seen before, even if in relative terms the global economy is not as interlinked as it
was at the end of the nineteenth century. Integration (that is, the formation of
relationships between states for mutual economic benefit) affords those countries that are
linked into mobile flows of trade and investment the opportunity to leverage external
resources for domestic development.35 The issue that faces each state is how to access
external resources on a sustainable basis, in a manner that complements domestic
development strategies.
1.4.3 Trend of Kenya and U.S imports and exports and the significance of this trade
in the economies of the two countries
The U.S. signed Trade and Investment Framework Agreements (TIFA) with the
East African Community (EAC) in 2008, and with the Common Market for Eastern and
Southern Africa (COMESA) in 2001.36 Kenya–United States relations are bilateral
relations between Kenya and the United States. The United States and Kenya have long
been close allies and have enjoyed cordial relations since Kenya's independence.
34
Collier, P., & Gunning, J. W. (2012). Trade policy and regional integration: implications for the relations
between Europe and Africa. The World Economy, 18(3), 387-410.
35
Justice, D. W. (2012). Corporate social responsibility: Challenges and opportunities for trade unionists.
36
Onjala, J. (2012). A scoping study on U.S-Africa economic relations: the case of Kenya. Nairobi: AERC
(mimeo).
12
Relations became even closer after Kenya's democratic transition of 2002 and subsequent
improvements in human rights.37
The trade balance in the economy helps to determine the macroeconomic
performance of the economy like the balance of payment, investments and savings in
both the developed (U.S) and the developing economy (Kenya).38 Kenya is a developing
country that has experienced both trade surplus and deficit in different periods of time.
However, the trade extends the market of the country‘s output beyond national frontiers
and ensures better prices through exports.39 Through imports, it makes available
commodities, inputs and technology which are either not available or are available only at
higher prices, thus taking consumers to a higher level of satisfaction. The foremost
principle of foreign trade signifies that what a country exports and imports is determined
not by its character in isolation but only in relation to those of its trading partners.40
According to Samuelson, foreign trade offers a consumption possibility frontier
that can give people more of all goods than can own domestic production possibility
frontier.41 The extension of foreign trade, according to Ricardo, powerfully contributes to
increase the mass of commodities, and therefore, the sum of enjoyments.42 This is true for
each trading nation. International trade is also concerned with allocation of economic
resources among countries. Such allocation is done in the world markets by means of
37
Ibid
Gould, D. M. (2014). Immigrant links to the home country: empirical implications for US bilateral trade
flows. The Review of Economics and Statistics, 302-316.
39
Keeney, R., & Hertel, T. W. (2009). The indirect land use impacts of United States biofuel policies: the
importance of acreage, yield, and bilateral trade responses. American Journal of Agricultural Economics,
91(4), 895-909.
40
Ibid
41
Samuelson, F., & Lastrapes, W. D. (2009). Real exchange rate volatility and US bilateral trade: a VAR
approach. The Review of Economics and Statistics, 708-712.
42
Ricardo, B., & Irwin, D. A. (2008). The role of history in bilateral trade flows. In The regionalization of
the world economy (pp. 33-62). University of Chicago Press.
38
13
international trade under the concept of free trade, the best products are produced and
sold in competitive market, and benefits of efficient production like better quality and
lower price are available to all people of the world.43
According to Gould, the issues of international trade and economic growth have
gained substantial importance with the introduction of trade liberalization policies in the
developing nations across the world.44 International trade and its impact on economic
growth crucially depend on globalization. As far as the impact of international trade on
economic growth is concerned, the economists and policy makers of the developed and
developing economies are divided into two separate groups. One group of economists is
of the view that international trade has brought about unfavorable changes in the
economic and financial scenarios of the developing countries. According to the
economists, the gains from trade have gone mostly to the developed nations of the world.
Liberalization of trade policies, reduction of tariffs and globalization have adversely
affected the industrial setups of the less developed and developing economies.45 As an
aftermath of liberalization, majority of the infant industries in these nations have closed
their operations. Many other industries that used to operate under government protection
found it very difficult to compete with their global counterparts.
The other group of economists, which speaks in favor of globalization and
international trade, come with a brighter view of the international trade and its impact on
economic growth of the developing nations.46 According to this economists developing
43
Evenett, S., & Venables, A. J. (2013). Export growth in developing countries: Market entry and bilateral
trade. working paper, London School of Economics.
44
Ibid
45
Ibid
46
Daumal, M., & Özyurt, S. (2010). The impact of international trade flows on economic growth in
Brazilian states. Review of Economics and Institutions, 2(1).
14
countries, which have followed trade liberalization policies, have experienced all the
favourable effects of globalization and international trade. China and India are regarded
as the trend-setters in this case. There is no denying that international trade is beneficial
for the countries involved in trade, if practiced properly. International trade opens up the
opportunities of global market to the entrepreneurs of the developing nations.47
International trade also makes the latest technology readily available to the businesses
operating in these countries. It results in increased competition both in the domestic and
global fronts. To compete with their global counterparts, the domestic entrepreneurs try
to be more efficient and this in turn ensures efficient utilization of available resources.48
Open trade policies also bring in a host of related opportunities for the countries that are
involved in international trade.
1.4.4 Research Gap
Much has been said about the bilateral trade between U.S and other countries both
Western and Africa Countries and the need to sustain the global economy. Trade between
Kenya and U.S is becoming important. Moreover by growing their domestic market and
pursuing regional economic integration the two countries can diversify their production
away from other countries. Most literature on external trade addresses determinants of
bilateral trade flows and factors that influence bilateral trade with limited literature on
impact of external trade. Furthermore, other studies have been carried out in analyzing
the relationship of external trade between Kenya and other countries and the findings
were different. Such studies include; Guachari in Algeria, Arize in nine Asian countries,
47
De Groot, H. L., Linders, G. J., Rietveld, P., & Subramanian, U. (2009). The institutional determinants
of bilateral trade patterns. Kyklos, 57(1), 103-123.
48
Ibid
15
Bahmani-Oskooee in USA, and Shao in Japan. This implies that there is still debate in
this area of study and this study contributes to this debate and adds to the existing new
knowledge.
1.4.5 Justification of the Study
This study has a practical significance as little have been done on external trade
between Kenya and the U.S. The study was therefore, important in filling this
information gap, as well as contributing more towards scientific knowledge with regard
to Kenya‘s external trade position. The world economy is getting highly integrated to the
extent that a country cannot do without trade partnerships. The study is expected to
generate both academic and policy-relevant debate that potentially lead to understanding
the impact of external trade in the modern world. The study provides empirical
information to policy makers for development of trade towards the achievement of the
Kenya vision 2030. This study will be useful to the Ministry of Foreign Affairs and
International Trade as a source of information for making sound decisions on trade. The
study also contributed to the existing literature to other researchers on the development of
external trade in the country. It also stimulated further research on the impact of trade and
economic growth in Kenya. The study further added knowledge to the academicians by
contributing to the existing knowledge in the area of external trade in general.
1.5 Theoretical Framework
The study was based on the following theory:-
16
1.5.1 Comparative Advantage Theory
This theory was postulated by Dornbusch and Fischer.49 The theory is also known
as the classical theory of international trade or the comparative cost theory. According to
the theory, a country tends to specialize in the production and export of those
commodities in which it has a maximum comparative cost advantage. Similarly a country
will import that good which is having relatively less comparative cost advantage.50 A
country will export the good that uses its abundant factor intensively i.e. under free trade,
the capital abundant country is expected to produce relatively more of the capital
intensive good than the other country.
Due to the unrealistic assumptions of the comparative advantage theory, Eli
Heckscher and Bertil Ohlin came up with the Hecksher-Ohlin theory to address this.51
The Heckscher-Ohlin model assumes that the countries have identical technologies;
different factor endowments, identical and homothetic tastes, free trade, but not free
factor movements. According to the model, countries will export products that utilize
their abundant factor endowments and import products that utilize the countries' scarce
factor endowments.52 A capital-abundant country will therefore export products from its'
capital-intensive industries to labour abundant countries and the labour-abundant
countries by importing capital-intensive goods will in return export labor-intensive
49
Dornbusch, R., Fischer, S., & Samuelson, P. A. (1977). Comparative advantage, trade, and payments in
a Ricardian model with a continuum of goods. The American Economic Review, 67(5), 823-839.
50
Evans, D. (1989). comparative advantage and Growth: Trade and Development in Theory and practice.
Harvester Wheatsheaf.
51
Eli, H. E., & Bertil, J. (1995). International trade theory: the evidence. Handbook of international
economics, 3, 1339-1394.
52
Ibid
17
products to the capital-abundant countries. The H-O theorem thus demonstrates that even
if technology between two countries is the same, they can still engage in trade and have
mutual benefits.53 Allocative efficiency is a complementary force and can be achieved by
countries specializing according to their comparative advantage.
Trade generates a static improvement in output, but it does not induce any
additional economic growth. In other words, openness improves the allocative efficiency
of the economy. According to the Ricardian model, as trade becomes more open, the
country specializes in the production of the good in which it has a comparative labour
productivity advantage; this product is exported.54 In the Heckscher-Ohlin model, the
country exports the good which uses its abundant factor more intensively. 55 As the
economy opens, there is a shift in resources toward the sectors that draw upon the
abundant factor and the value of total production increases. An increase in total output,
following a movement from autarky to free trade, can be also found in some models of
economies of scale with monopolistic competition.
This study borrowed the assumptions of no barriers to trade, no transport cost,
different factor endowments, identical and homothetic tastes from the theory of
comparative advantage and the Heckscher-Ohlin theorem to estimate the impact of trade
between Kenya and the U.S, the level and nature of bilateral trade, opportunities and
challenges, the trend of exports and imports and the significance of the trade between the
two countries.
53
Ruffin, R. (2002). David Ricardo's discovery of comparative advantage. History of political economy,
34(4), 727-748.
54
Ibid
55
Ibid
18
1.6 Hypotheses
i.
There are no economic interactions between Kenya and the U.S during the period
2000-2015
ii.
There are no challenges and opportunities of external trade between Kenya and
the U.S during the period 2000-2015
iii.
There is no relationship between the trend of Kenya and U.S imports and exports
and there is no significance of this trade in the economies of the two countries.
1.7 Research Methodology
This section explains the study‘s research design, population and sampling, instruments
of data collection and data collection and data analysis.
This research is based on primary and secondary data. The primary data was
collected by the use an interview guide. Interview guide was used since it generally
yields highest cooperation and lowest refusal rates, offers high response quality, takes
advantage of interviewer presence and it's multi-method data collection. Secondary data
was gathered from Kenya National Bureau of Statistics, journal articles and public
documents on the subject for the relevant concepts and current opinions. The interview
guide with open-ended questions was administered to employees working with the
Ministry of Foreign Affairs and International Trade, U.S embassy in Kenya and Kenya
Private Sector Alliance (KEPSA) in Nairobi County offices as the respondents. This is
because the ministry and the private sector are the ones vested with designing the foreign
policy for international and regional organizations and also non-interference in the
internal affairs of other states.
19
The study employed both qualitative method of data analysis. The qualitative data
was coded thematically and then analyzed. The data collected using interview guides
which is qualitative in nature, was analyzed using conceptual content analysis which is
the best suited method of analysis.
1.8 Chapter Outline
This project is organized into five chapters with an introduction and conclusion of the
themes discussed in every chapter.
Chapter one gives a general introduction to the study. It provides the background of the
study, the problem statement, objectives, hypothesis, theoretical framework, literature
review and methodology in relation to the impact of external trade between Kenya and
the U.S 2000-2015.
Chapter two presents an overview of Kenyan trade and the world, US trade and the
worlds (continents) including Africa and Kenyan trade and the U.S
Chapter three presents an overview of economic interactions of trade between Kenya and
the U.S. It is organized in the following sub-topics: determinants of bilateral trade flows
trade between Kenya and the U.S., factors influencing trade flows between Kenya and the
U.S. It also looks at the emerging relations between the two countries.
Chapter four analyses the research findings on the impact of external trade between
Kenya and the U.S 2000-2015
Chapter five presented the discussion, conclude and recommend on the findings.
20
CHAPTER TWO
OVERVIEW OF KENYAN TRADE AND THE WORLD
2.0 Introduction
This chapter presents an overview of Kenyan trade and the world. It is organized in
the following sub-topics: US trade and the worlds (continents) including Africa and
Kenyan trade and the U.S.
2.1 Overview of Kenyan Trade and the World
Kenya is one of the African countries that was quick to embrace the global market
and business ideology. Kenya and several countries of the world diplomatic relations
have significant historical dimensions. Kenya maintains trade relations with various
countries around the world. The trade involves East Africa, Africa and European Union
and the rest of the world.
2.1.1 Kenya trade with East African Countries
Regional trade arrangements are instrumental in promoting global trade and
foreign direct investment.56 The East African Community (EAC), one example of such an
agreement, is comprised of Burundi, Kenya, Rwanda, Tanzania and Uganda. In 2010, the
EAC included an estimated population of more than 130 million people; and in 2001 it
had a combined gross domestic product of $74.5 billion.57 The EAC was revived in 1999
after having been dissolved for a number of years. It established a customs union in 2005
56
Edwards, S. (2013). Openness, trade liberalization, and growth in developing countries. Journal of
economic Literature, 31(3), 1358-1393.
57
Asiedu, E. (2012). On the determinants of foreign direct investment to developing countries: is Africa
different?. World development, 30(1), 107-119.
21
and a common market in 2010. Its next phases involve the creation of a monetary union
in 2012 and a political federation in 2015.
Trade among the five EAC partner states grew from $1.81 billion in 2004 to $3.54
billion by the end of 2009, an increase of 96 percent.58 This growth can be attributed to,
among other factors, the establishment of the customs union. However, intra-EAC trade
remains low and currently stands at 13 percent of the total trade volume.59 This compares
poorly with other regional trade arrangements such as the European Union and the North
America Free Trade Agreement, where intraregional trade accounts, respectively, for 60
percent and 48 percent of total trade portfolios. Agricultural commodities and
manufactured products, to some extent, form the bulk of intra-EAC trade; food, live
animals, beverages, tobacco and inedible crude materials dominate its trade. Kenya‘s
exports to the region, however, are more diversified and include chemicals, fuels and
lubricants, machinery and transportation equipment.60
The EAC is a major destination for Kenya‘s exports. For instance, in 2010 the
EAC accounted for 53 percent of Kenya‘s total exports to the rest of Africa and 24
percent of its total exports to the world. In the same year, Uganda was Kenya‘s leading
export destination, absorbing 12.7 percent of total exports, while Tanzania and Rwanda
came in fourth (8 percent) and 10th (2 percent), respectively.61 Overall, Kenya‘s trade
value in the region has grown significantly, from $1.2 billion in 2008 to $1.52 billion in
58
Ibid
Mitullah, W. V. (2014). Street vending in African cities: a synthesis of empirical findings from Kenya,
Cote D‘Ivoire, Ghana, Zimbabwe, Uganda and South Africa. Background paper for the WDR.
60
Ibid
61
Otsuki, T., Wilson, J. S., & Sewadeh, M. (2011). Saving two in a billion:: quantifying the trade effect of
European food safety standards on African exports. Food policy, 26(5), 495-514.
59
22
2010, representing a 26.7 percent increase. Kenya accounts for about 45 percent of the
total intra-EAC trade.
Kenya's exports to neighboring countries declined for the fourth year in a row in
2014, trade data show, casting a shadow over the East African Community integration
process.62 A comparison of 11-month data since 2011 shows sales to Uganda, Tanzania
and Rwanda for which statistics readily available shrunk by more than a fifth over the
period. Cumulatively, the total export value to the three countries slumped to Sh85.95
billion last November, a 21.1 per cent slice from Sh108.93 billion over the same period in
2011. While appetite for Kenyan goods has slackened uniformly, Uganda's purchases
from Kenya have dipped the most over the period, down by 29.1 per cent to Sh43.31
billion from Sh61.08 billion in 2014.63
The EAC‘s deepening and expansion have widened the scope of trade
opportunities for Kenya‘s businesses during the last 10 years. The EAC negotiates with
trade partners on behalf of all member countries. Negotiations in 2014 for an EU-EAC
Economic Partnership Agreement (EPA) ran into difficulties with the January 2014
negotiating session failing to conclude the negotiations, which were scheduled to be
completed before 1 October 2014. This caused tensions between Kenya and other
countries as Kenya, which is not a Least Developed Country, stood to lose most from the
failure to reach agreement. However, trade in goods and services has already increased as
service provision to Kenyans and Tanzanians is already important for Uganda (in
62
Lloyd, T., McGillivray, M., Morrissey, O., & Osei, R. (2010). Does aid create trade? An investigation
for European donors and African recipients. The European Journal of Development Research, 12(1), 107123.
63
Ibid
23
education and in health).64 Kenya exports financial services, for example via the Kenya
Commercial Bank and purchase and upgrading of local operators in Tanzania, Uganda
and Sudan. Uganda hopes integration will help support its tourism potential through
integration with established regional circuits.
2.1.2 Kenya Trade with African Countries
Since the early 1990s, many countries in Africa have made significant progress in
opening up their economy to external competition through trade and exchange rate
liberalization, often in the context of IMF and World Bank‘s support programs. 65 At the
same time, with the creation or expansion of a number of regional trading arrangement in
other parts of the world, several African nations have also worked towards this, resulting
in the establishment or renewal of such trading arrangement in Africa too. 66
The
continent is now home to some regional trade agreements (RTAs) or trade blocs, many of
which are part of deeper regional integration schemes.
Africa‘s growth continued to increase rising from 3.7 per cent in 2013 to 3.9 per
cent in 2014.67 The performance was underpinned by improved macroeconomic
management, diversified trade and investment ties with emerging economies among other
factors. Trade continues to play a major role in Africa‘s economic growth performance
and it has potential to promote trade-induced industrialization of the continent provided it
64
Asiedu, E. (2012). On the determinants of foreign direct investment to developing countries: is Africa
different?. World development, 30(1), 107-119.
65
Jawara, F., & Kwa, A. (2012). Behind the scenes at the WTO: The real world of international trade
negotiations. Zed Books.
66
Ibid
67
Zepeda, C., Salman, M., & Ruppanner, R. (2011). International trade, animal health and veterinary
epidemiology: challenges and opportunities. Preventive veterinary medicine, 48(4), 261-271.
24
is deliberately directed at industrialization.68 For this purpose, trade policy must be
consciously designed, effectively implemented and managed with regular monitoring and
evaluation. Such a policy must recognize and key into developments in the global
production system especially internationalization of production system with a view to
promoting value addition through processing and manufacturing.
The major trading agreements in Africa include: Common Market for Eastern and
Southern Africa (COMESA), Southern Africa development Community (SADC), South
Africa Customs Union (SACU), West Africa Economic and Monetary Union (UEMOA)
and
Economic Community of west Africa States (ECOWAS). 69 These trading
arrangements are envisaged to foster trade and investment relation amongst member
countries by removal of tariffs and other impediments to intra-regional trade flows. In
some cases, the arrangement also aims at fostering common economic and monetary
union amongst member states, as well as a common currency.70 The success of these
arrangements in fostering intra-regional trade has been diverse, with SADC, ECOWAS,
COMESA, Cross Border Initiative and UEMOA being the more successful ones.
2.1.3 Kenya Trade with European Union and the Rest of the World
Kenya has enjoyed a longstanding cordial association and trade relations with the
European Communities, under the framework of the successive Lomé Conventions and
the Cotonou Agreement.71 The cooperation began in the 1960‘s, prior to the Lomé
Convention, and has been in the areas of, inter alia: development finance, trade, political,
68
Asiedu, E. (2012). On the determinants of foreign direct investment to developing countries: is Africa
different?. World development, 30(1), 107-119.
69
Ibid
70
Ibid
71
Rose, D. A. (2010). An overview of world trade in sharks and other cartilaginous fishes. Traffic
International.
25
industrial development, energy, socio-cultural, regional cooperation development,
agriculture and environment, with the objective to increase exports income, promote
industrialization, and promote economic growth of developing countries.72
To achieve these objectives, the European Union provided Kenya and other ACP
countries preferential market access for primary products, essentially agriculture and
other agro-based products, together with funds and other forms of assistance towards
trade and private sector development.73 The preferences have been non-reciprocal, and
are in the form of lower tariffs and/or tariff exemption in value-added (manufactured)
products and agricultural products, provided they pose no direct competition with the
Community products and do not discriminate among EU member states in terms of tariffs
charged on their imports to Kenya.
According to Acker, the arrangement has benefited Kenya, particularly in the
areas of horticulture and fisheries, due to the production and supply capacity potentials,
and other agricultural products like tea, coffee, and sugar.74 ACP member states benefited
at different levels, depending on their production and supply capacities. Surveys carried
out show that ACP states that had production and supply capacity performed better in
terms of exports compared with non-ACP developing countries that are at the same level
of economic development.
Kenya‘s exports to the EU are mainly agricultural commodities such as cut
flowers, fruits and vegetables, which account for over 90% of total export value. Others
72
Becchetti, L., & Costantino, M. (2008). The effects of fair trade on affiliated producers: An impact
analysis on Kenyan farmers. World Development, 36(5), 823-842.
73
Jaffee, S., & Masakure, O. (2014). Strategic use of private standards to enhance international
competitiveness: Vegetable exports from Kenya and elsewhere. Food Policy, 30(3), 316-333.
74
Acker, R. H., & Kammen, D. M. (2011). The quiet (energy) revolution: analysing the dissemination of
photovoltaic power systems in Kenya. Energy Policy, 24(1), 81-111.
26
are tea, coffee, fish and fisheries products, sugar, semi-processed tobacco, textile and
clothing, coffee and handicrafts, among others.75 Though trade with the EU is heavily in
its favor, it remains Kenya‘s second largest market after COMESA. The United
Kingdom, Germany, the Netherlands and France are leading EU destinations of Kenyan
exports.
The EU is Kenya‘s major single source of imports, mainly industrial (finished)
products such as motor vehicles and parts, aircrafts and associated equipment,
medicaments, iron and steel products, data processing instruments, rubber tyres and other
articles of rubber and plastic, medical and veterinary instruments, motor machinery,
telecommunication equipment, electrical and electronic goods, refrigeration equipment,
food processing machinery, refrigeration equipment, paper and paperboard, farm
chemicals, textiles and clothing, and hides and skins.76
The Kenyan government also trades with China, India, Russia and Brazil. It also
maintains relations with Western countries, particularly the United Kingdom, although
political and economic instabilities are often blamed on Western activities (e.g.
colonialism, paternalistic engagement and post-colonial resource exploitation).77
In
1980, Kenya and the US signed an agreement to permit the American military to use
Kenyan sea and air bases in exchange for economic and military assistance. The US
presence in Kenya now consists of over 5,000 American citizens. An active USAID and
Peace Corps program in Kenya has further increased this presence, as have growing
75
Willer, H., Yussefi, M., & Sorensen, N. (2010). The world of organic agriculture: statistics and
emerging trends 2008. Earthscan.
76
Ibid
77
Dolan, C., & Humphrey, J. (2010). Governance and trade in fresh vegetables: the impact of UK
supermarkets on the African horticulture industry. Journal of development studies, 37(2), 147-176.
27
American business interests. Over 125 US firms are represented in Kenya, bringing in an
investment of over $200 million.78 Past relations with the Soviet Union and China, by
contrast, have been cool and tentative, and have been marred by a number of diplomatic
incidents.
India remains Kenya‘s largest source of imports a spot it has in the past competed for
with China and UAE. Kenya‘s major imports from India include textile, three wheel tuk
tuks vans, pharmaceuticals and motorcycles while the UAE is Kenya‘s main source of
petroleum products.79 It was possible to get a breakdown of the key items that Kenya
imported from the US but America‘s stride to the second slot comes on the back of bigticket investments in energy and transport sectors by local firms using sophisticated US
services and goods.80
Between 2014 and 2015, the value of China‘s exports to Kenya grew by 62 per cent
to reach Sh120.6 billion or 12.7 per cent of total imports, relegating India which exported
goods worth Sh103.2 billion or 10.8 per cent to the third position.81 The United Arab
Emirates, with goods worth Sh126 billion or 24.3 per cent of total imports, was the
largest source of imports to Kenya in the first eight months of year 2015 a position it
holds mainly because of the large quantities of petroleum it supplies to East Africa.
Kenya mainly imports textiles, pharmaceuticals, industrial machinery, vehicles,
electronic and semi processed goods from India while key items in the list of China‘s
exports to Kenya include heavy machinery, electronics, vehicles, textiles and a range of
78
Marshall, N. T. (2008). Searching for a cure: conservation of medicinal wildlife resources in East and
Southern Africa. Traffic International.
79
Kjekshus, H. (2009). Ecology control & economic development in East African history: the case of
Tanganyika 1850-1950. Ohio University Press.
80
Edwards, S. (2013). Openness, trade liberalization, and growth in developing countries. Journal of
economic Literature, 31(3), 1358-1393.
81
Ibid
28
household goods. The two Asian tigers have deepened their presence in Kenya with
intense economic diplomacy since President Kibaki came to power in 2003.82 The rivalry
has benefitted Kenya in terms of foreign direct investments, a wider variety of consumer
goods and as new sources of technical and financial assistance.
Chinese firms have, however, been the main beneficiaries of the Kenyatta
government‘s multi-billion shilling infrastructural projects, having only recently inked a
Sh327 billion standard gauge railway line deal whose construction is expected to begin
later in the year.83 Top bureaucrats in Mr. Kenyatta‘s government have maintained that
the preference for Chinese contractors is informed by pure economic considerations,
including better bargains and fast execution of projects. China has also emerged as a
major supplier of consumer goods such as shoes, textiles, batteries, electronics and motor
vehicle parts, gaining significant market share with its low pricing of mass market goods
strategy that has caused disquiet among local traders dealing in rival merchandise.84
2.2 U.S Trade with the World (continents) Including Africa
U.S has bilateral trade agreements with many world countries and under these
agreements, U.S and its contracting partners accord each other mutual trade relations.
These agreements have been used as instruments for promoting trade and improving
economic relations between US and these countries. It is in the interest of the United
States to improve the world‘s trade competitiveness, encourage the diversification of
82
Asiedu, E. (2012). On the determinants of foreign direct investment to developing countries: is Africa
different?. World development, 30(1), 107-119.
83
Henson, S., Brouder, A. M., & Mitullah, W. (2014). Food safety requirements and food exports from
developing countries: the case of fish exports from Kenya to the European Union. American Journal of
Agricultural Economics, 82(5), 1159-1169.
84
Ibid
29
exports beyond natural resources, and ensure that the benefits from growth are broadbased.
2.2.1 U.S Trade with Africa
The United States Congress passed the African Growth and Opportunity Act into law
in 2000 in order to promote US and African trade relations and contribute to economic
development on the African continent through export-led growth.85 A key element in
U.S. policy toward Africa is the potential benefit from increased trade and commercial
ties between the United States and Africa. Interest in increasing bilateral commerce
began after the end of the apartheid era in South Africa in the early 1990s. In 1993,
Congress approved the end of anti-apartheid restrictions, and later that year thenCommerce Secretary Ron Brown led a business delegation to South Africa. In subsequent
years, the Administration has also instituted several measures to help Sub-Saharan
African (SSA) countries and increase U.S. trade and investment in the region.86
At the same time, Congress developed legislation that sought to improve U.S.-Africa
trade relations. In the 1994 legislation to implement the Uruguay Round of multilateral
trade agreements, Congress directed the President to develop and implement a
comprehensive trade and development policy for the countries of Africa, and
subsequently introduced legislation to authorize a new trade and investment policy for
sub-Saharan Africa.87 In 2000, Congress approved the African Growth and Opportunity
Act (AGOA; Title I, P.L. 106- 200). AGOA offers trade preferences and other economic
benefits to African countries that meet certain criteria, including progress towards a
85
Sarkar, P., & Singer, H. W. (2011). Manufactured exports of developing countries and their terms of
trade since 1965. World development, 19(4), 333-340.
86
Wacziarg, R., & Welch, K. H. (2008). Trade liberalization and growth: New evidence. The World Bank
Economic Review, 22(2), 187-231.
87
Ibid
30
market economy, respect for the rule of law, and human and worker rights. In AGOA,
Congress also declared that free-trade agreements should also be negotiated, where
feasible, with interested African countries.
The African Growth and Opportunity Act (AGOA) underpins U.S. trade with Africa.
AGOA has been extended and reauthorized on four occasions, most recently in 2015 until
2025. AGOA provides exports from Africa preferential access to the U.S. market.88 The
U.S. also provided preferential access for Africa exports under its Generalized System of
Preferences (GSP), a program that applies to exports from most developing countries.
The GSP expired in 2013, but under AGOA GSP preferences remain available for
AGOA-eligible countries. AGOA, combined with the GSP, provides duty-free access to
the U.S. for 6,400 product lines from 38 countries in sub-Saharan Africa. Of total U.S.
imports from AGOA countries, around 70 percent enter under AGOA.89
From 2001 to 2013, exports under AGOA increased from $7.6 billion to $24.8 billion
but declined over 50 percent in 2014 to $11.6 billion mainly due to reduced petroleum
exports to the U.S.90 Anecdotal and survey-based evidence has found that African
businesses view AGOA as very important for their trade with the U.S. By enabling
increased trade, AGOA supports local businesses and their integration into the global
economy. AGOA has also stimulated foreign investment in Africa, often by companies
taking advantage of the new market access opportunities back in the U.S. For instance,
U.S. retailers such as Gap, Target, and Old Navy source goods in Africa for export to the
U.S.
88
Lloyd, T., McGillivray, M., Morrissey, O., & Osei, R. (2010). Does aid create trade? An investigation
for European donors and African recipients. The European Journal of Development Research, 12(1), 107123.
89
Singh, M. (2013). History of Kenya's trade union movement, to 1952 (No. 9). East African Pub. House.
90
Ibid
31
AGOA-eligible countries in Africa are making significant economic reforms that are
improving their capacity to grow and providing new opportunities to deepen their
economic relationship with the U.S.91 The 2015 World Bank Ease of Doing Business
Report found that sub-Saharan Africa accounted for the largest number globally of
regulatory reforms that reduced the cost of doing business.92 Notwithstanding the growth
in U.S.-African trade since AGOA, there remains significant scope to increase its depth
and range. For instance, Africa exports 10 times as much to Europe as it does to the U.S.
The European ―equivalent‖ trade scheme the ―Everything but Arms‖ initiative has a
higher utilization rate than AGOA and is estimated to have generated almost twice as
many exports than AGOA.93 The conclusion by the European Union of Economic
Partnership Agreements with a number of countries in Africa is also providing enhanced
market access.
2.2.2 U.S Trade with Other Countries of the World
The expansion of global trade in the past half century is one of the signature
accomplishments of modern U.S. foreign policy. Out of the wreckage of the Great
Depression and World War II, American leaders and their allies in Europe, Japan,
Canada, and elsewhere established international rules for commerce that allowed for an
unprecedented growth in the exchange of goods and services across borders.94
91
Ibid
Ibid
93
Hoyle, B., & Charlier, J. (2014). Inter-port competition in developing countries: an East African case
study. Journal of Transport Geography, 3(2), 87-103.
92
94
Bond, M. E. (2012). Agricultural responses to prices in Western countries. Staff Papers, 30(4), 703-726.
32
Foreign trade comprises the international imports and exports of the United States,
one of the world's most significant economic markets.95 The country is among the top
three global importers and exporters. The regulation of trade is constitutionally vested in
the United States Congress. The country has emerged among the most significant global
trade policy-makers, and it is now a partner to a number of international trade
agreements, including the General Agreement on Tariffs and Trade (GATT) and the
International Trade Organization (ITO). Gross U.S. assets held by foreigners were $16.3
trillion as of the end of 2006 (over 100% of GDP).96
The country has trade relations with many other countries. Within that, the trade with
Europe and Asia is predominant. To fulfill the demands of the industrial sector, the US
has to import mineral oil and iron ore on a large scale. Machinery, cotton yarn, toys,
mineral oil, lubricants, steel, tea, sugar, coffee, and many more items are traded. The
country's export list includes food grains like wheat, corn, and soybean. Aero plane, cars,
computers, paper, and machine tools required for different industries.97
Liberalization of trade and investment over the past half century has made Americans
wealthier than they could have become in a closed economy. Opening the U.S. market to
imported goods has strengthened U.S. foreign policy by improving living standards in
allied countries in Europe, Asia, and Latin America.98 It has fostered deep engagement
with many countries in which the United States has strategic interests but no military
presence. It has promoted core U.S. beliefs about how societies are best structured to
95
Hummels, D., Ishii, J., & Yi, K. M. (2011). The nature and growth of vertical specialization in world
trade. Journal of international Economics, 54(1), 75-96.
96
Ibid
97
Trefler, D. (2013). The case of the missing trade and other mysteries. The American Economic Review,
1029-1046.
98
Ibid
33
benefit their citizens, including free enterprise, democratic governance, open markets,
respect for workers‘ rights and the environment, and transparent regulation.99
The world is in the midst of a historic transition that has been called the great
convergence, in which many developing economies are growing at rates that are
propelling hundreds of millions of people into Western, middle-class standards of
living.100 Most of the world‘s economic growth is now taking place in these countries not
in the older, advanced economies of Europe, North America, and Japan. In the five years
from 2005 to the first quarter of 2010, output in emerging economies rose by 41 percent
(including 70 percent in China and 55 percent in India), but in advanced economies by
only 5 percent.101 Even as emerging countries are producing and exporting more, their
demand for goods and services from advanced economies is exploding, creating
enormous opportunities for the increased mutual benefits that trade offers.
According to Feenstra, Euro-American relations are primarily concerned with trade
policy.102 The EU is a near-fully unified trade bloc and this, together with competition
policy, are the primary matters of substance currently between the EU and the USA. The
two together represent 60% of global GDP, 33% of world trade in goods and 42% of
world trade in services.103 The growth of the EU's economic power has led to a number of
trade conflicts between the two powers; although both are dependent upon the other's
economic market and disputes affect only 2% of trade. While the United States receives
substantial benefits from trade, the international playing field is sometimes tilted unfairly
99
Vernon, R. (2009). The product cycle hypothesis in a new international environment. Oxford bulletin of
economics and statistics, 41(4), 255-267.
100
Ibid
101
Ibid
102
Feenstra, R. C. (2012). Integration of trade and disintegration of production in the global economy. The
journal of economic perspectives, 12(4), 31-50.
103
Ibid
34
against American workers. The U.S. market is largely open to imports from around the
world, but many other countries continue to levy steep tariffs on U.S. exports, and foreign
governments have erected other kinds of barriers against U.S. goods and services. 104 For
American farmers and ranchers, America‘s FTAs have been a bonanza. According to the
U.S. Department of Agriculture, exports of U.S. farm and food products to FTA partner
countries increased by more than 130% between 2003 and 2013, increasing from $24
billion to $56 billion.105 As noted, America‘s recent FTAs are front-loaded to eliminate
foreign tariffs rapidly, particularly in the case of key exports.
Under the U.S.‐Chile Free Trade Agreement (FTA), U.S. agricultural exports to Chile
grew by more than 525%, increasing from less than $145 million in 2003 to more than
$900 million in 2013.106 Under the U.S.‐Peru FTA, U.S. agricultural exports to Peru have
grown by 230%, rising from less than $215 million in 2005 to more than $700 million in
2013. Under the U.S.-Central America-Dominican Republic FTA (CAFTA‐DR), U.S.
agricultural exports to Costa Rica, the Dominican Republic, El Salvador, Guatemala,
Honduras, and Nicaragua doubled from $1.9 billion in 2005 to $3.8 billion in 2013.107
Under the U.S.‐Australia FTA, U.S. agricultural exports to Australia have risen by nearly
240%, increasing from $410 million in 2004 to $1.4 billion in 2013. Under the North
American Free Trade Agreement (NAFTA) which maintained significant agricultural
tariffs for some products until 2008. U.S. exports to Canada and Mexico rose by nearly
50% between 2007 and 2013, increasing from less than $27 billion to nearly $40 billion.
104
Ibid
Havrylyshyn, O., Pritchett, L., & Mundial, B. (2011). European trade patterns after the transition (No.
748). Country Economics Department, World Bank.
105
106
Sarkar, P., & Singer, H. W. (2011). Manufactured exports of developing countries and their terms of
trade since 1965. World development, 19(4), 333-340.
107
Ibid
35
In the year 2011, US sold $2.1 trillion in goods and services to corporations and
consumers in other countries. Goods and services sold to other countries. In 2011,
Americans also bought roughly $2.66 trillion in goods and services from other countries.
Purchases from other countries are called imports.108 The sum of U.S. exports and
imports, $4.76 trillion, represents the total of U.S. international trade for 2011. Each day,
Americans buy and sell more foreign goods and services than are produced annually in
more than 80 countries around the world. That means that U.S. companies, and the
average American citizen, are avid consumers. The U.S. is one of the top five exporters
worldwide.
The share of U.S. agricultural exports destined for Canada and Mexico grew from
21% in 1993 to 27% in 2011, according to USDA.109 The American Farm Bureau
Federation makes the point that 1 in 3 acres on American farms is planted for export, so
roughly in 10 acres is planted to feed hungry Canadians and Mexicans. Canada was the
largest agricultural export market of the United States in 2012, and U.S. farms and
ranches supplied 59% of Canadian imports.110 In 2013, China, with its population of 1.3
billion, overtook Canada, population 35 million, as the top market for U.S. agricultural
exports. Meat, grains, fruit, vegetables, and related products make up about 60% of U.S.
agricultural exports to Canada in 2012.
The integration of North America‘s agricultural markets exemplifies the value of
America‘s FTAs. However, U.S. goods arriving in foreign markets face an average tariff
of 5.9%, according to the World Economic Forum‘s Global Enabling Trade Report 2014.
108
Ibid
Lloyd, T., McGillivray, M., Morrissey, O., & Osei, R. (2010). Does aid create trade? An investigation
for European donors and African recipients. The European Journal of Development Research, 12(1), 107123.
110
Ibid
109
36
That‘s more than four times the U.S. level, but tariffs often average in the double digits in
emerging markets, particularly for key U.S. manufactured goods and agricultural
exports.111
2.3 Kenyan Trade with the U.S
According to Ademola, the United States and Kenya have long been close allies
and have enjoyed cordial relations since Kenya's independence.112 Relations became even
closer after Kenya's democratic transition of 2002 and subsequent improvements in
human rights. Kenya, a leading developing country in East Africa, has been a significant
beneficiary under AGOA and is one of the leading apparel exporters to the US in subSaharan Africa.113
Onjala states that U.S. trade with Kenya is substantial.114 It promotes broad-based
economic development as the basis for continued progress in political, social, and related
areas of national life. The U.S. assistance strategy is built around five broad objectives:
Fighting disease and improving healthcare; fighting poverty and promoting private
sector-led prosperity; advancing shared democratic values, human rights, and good
governance; cooperating to fight insecurity and terrorism; and collaborating to foster
peace and stability in Kenya. The Peace Corps, which has 150 volunteers in Kenya, is
integral to the overall U.S. assistance strategy in Kenya. The US Commercial Service, a
111
Ibid
Ademola, O. T., Bankole, A. S., & Adewuyi, A. O. (2013). U.S–Africa trade relations: insights from
AERC scoping studies. The European Journal of Development Research, 21(4), 485-505.
113
Ibid
114
Onjala, J. (2015). A scoping study on U.S-Africa economic relations: the case of Kenya. Nairobi:
AERC (mimeo).
112
37
trade promotion unit, said the growth reflects Kenya‘s pace of expansion since the bulk
of the imports were capital goods, machinery and equipment.115
In 2014, the United States of America overtook China to become Kenya‘s secondlargest source of imports, defying cooling diplomatic relations with East Africa‘s largest
economy and Nairobi‘s decade-long policy of looking east.116 According to Kenya
National Bureau of Statistics (KNBS) data, the value of US exports to Kenya rose to
Sh29.5 billion in May 2015 compared to China‘s Sh21.1 billion.117 America also rose to
become the largest consumer of Kenyan exports during the same month, overtaking
Uganda which has held the top spot in the past six years. KNBS data shows that
American consumers took in Sh3.6 billion worth of Kenyan goods in 2015 ahead of
Uganda‘s Sh3.5 billion. Kenyan trade experts see the shift in commercial interests in
favor of the US as a positive development with high-value potential. Nevertheless, the
rise in imports from the US has, however, seen Kenya‘s trade deficit grow to over Sh100
billion for the first time which could pressure the local currency. In 2011, East Africa‘s
biggest economy was cleared to begin exporting fresh green beans, runner beans, baby
carrots, baby corn and shelled beans into the US market opening up new avenues for
growth in trade volumes.118
In addition, the promotion unit is being used to discover and exploit business
opportunities for American companies in Kenya and other African nations.119 Kenya
115
Mitullah, W. V. (2014). Street vending in African cities: a synthesis of empirical findings from Kenya,
Cote D‘Ivoire, Ghana, Zimbabwe, Uganda and South Africa. Background paper for the WDR.
116
Ibid
117
Kenya National Bureau of Statistics. (2011). Economic survey. Government Printer.
118
Ibid
119
Trefler, D. (2013). The case of the missing trade and other mysteries. The American Economic Review,
1029-1046.
38
Airways‘ fleet modernization plan was the key driver of the growth in Kenya‘s trade with
the US in 2015. The national carrier imported five Dreamliner jets from Seattle-based
Boeing last year, earning it recognition by the American embassy in Nairobi. The
purchase of General Electric locomotives by Rift Valley Railways was also a factor. The
list of companies feted by the US mission in Nairobi were largely made of agricultural
and construction sector players.
According to Ackello, The US has in the past decade used initiatives such as the
Africa Growth and Opportunity Act (Agoa) to boost its commercial relations with
Africa.120 In 2015, Kenya‘s exports to the US grew by 26 per cent to Sh47.3 billion ($520
million), only second to Cote d‘Ivoire‘s 32 per cent growth. The growing business
interest has helped improve political relations between the two countries that began on
sour terms with the election of Uhuru Kenyatta, who was facing a case at the
International Criminal Court, as president. The case against President Kenyatta has since
been withdrawn, opening the door for closer diplomatic interaction between the two
nations. Kenya is also seen as a key ally to the US in the fight against terrorism.121
Kenya, being a growing economy, is expected to continue importing increasing amounts
of capital and intermediary goods to support production a space that should interest
American companies.
American companies are showing a vote of confidence for Kenya as an
investment hub. Led by a US organisation, the Corporate Council on Africa (CCA)
120
Ackello-Ogutu, C., & Echessah, P. (2015). Unrecorded trade between Kenya and US. Technical Paper,
59.
121
Dale, I. R., & Greenway, P. J. (2015). Kenya trading with its partners. Kenya trade.
39
devoted to US-Africa business relations which represent nearly 85 per cent of total US
private sector investments in Africa, the companies will not deter from investing in
Kenya. According to Hayes, the American investors are angling to explore business
opportunities in sectors like agribusiness, energy, infrastructure and health.122 ―Kenya is
attractive, we expect in the next three years, more than 90 companies from our group will
have invested in various sectors of the economy. It [Kenya] is an investor friendly
climate and it has a healthy climate. Kenya is a diversified economy and a linchpin to
Eastern African countries,‖ Hayes said. Hayes however called on the Kenyan government
to fast-track the ease of doing business in the country and transparency in systems. In
2014, the government in conjunction with the private sector initiated favorable business
reforms and policies that will enable investors in Kenya to take only a day to register
their business, file taxes electronically and access both regional and international markets
easily.
2.4 Conclusion
This chapter has reviewed literature on Kenya trade with other countries which
includes the East Africa Countries, Africa, European Union and the rest of the world. On
Kenya trade with East African Countries, it has stated that the EAC is a major destination
for Kenya‘s exports. The EAC‘s deepening and expansion have widened the scope of
trade opportunities for Kenya‘s businesses during the last 10 years.
Many countries in Africa have made significant progress in opening up their
economy to external competition through trade and exchange rate liberalization, often in
the context of IMF and World Bank‘s support programs. The major trading agreements in
Africa include: Common Market for Eastern and Southern Africa (COMESA), Southern
122
Ibid
40
Africa development Community (SADC), South Africa Customs Union (SACU), West
Africa Economic and Monetary Union (UEMOA) and
Economic Community of west
Africa States (ECOWAS). These trading arrangements are envisaged to foster trade and
investment relation amongst member countries by removal of tariffs and other
impediments to intra-regional trade flows. In some cases, the arrangement also aims at
fostering common economic and monetary union amongst member states, as also a
common currency.
Kenya has enjoyed a longstanding cordial association and trade relations with the
European Communities, under the framework of the successive Lomé Conventions and
the Cotonou Agreement. Though trade with the EU is heavily in its favor, it remains
Kenya‘s second largest market after COMESA. The United Kingdom, Germany, the
Netherlands and France are leading EU destinations of Kenyan exports. The Kenyan
government also trades with China, India, Russia and Brazil. It also maintains relations
with Western countries, particularly the United Kingdom, although political and
economic instabilities are often blamed on Western activities. India remains Kenya‘s
largest source of imports a spot it has in the past competed for with China and UAE.
U.S. trade with Kenya is substantial. It promotes broad-based economic development
as the basis for continued progress in political, social, and related areas of national life.
The U.S. assistance strategy is built around five broad objectives: Fighting disease and
improving healthcare; fighting poverty and promoting private sector-led prosperity;
advancing shared democratic values, human rights, and good governance; cooperating to
fight insecurity and terrorism; and collaborating to foster peace and stability in Kenya.
41
CHAPTER THREE
AN OVERVIEW OF ECONOMIC INTERACTIONS BETWEEN KENYA AND
THE U.S.
3.0 Introduction
This chapter analyzes the historical background of economic interactions of trade
between Kenya and the U.S. It is organized in the following sub-topics: determinants of
bilateral trade flows trade between Kenya and the U.S., factors influencing trade flows
between Kenya and the U.S. It will also look on the current emerging relations between
the two countries and finally the conclusion.
3.1 Historical Background of Economic Interactions between Kenya and the U.S.
In 2000, President Bill Clinton signed into law the Africa Growth and Opportunity
Act (AGOA) as a non-reciprocal trade preference programme to sub-Sahara Africa
(SSA).123 The rationale behind AGOA was coined in the mutual interest between the
United States (US) and SSA to promote a stable and sustainable economy for
development and growth in SSA. The enactment of AGOA also effectuated high-level
dialogues which are annually alternated between US and any SSA beneficiary.124 The
core issues at the annual AGOA forum are meant to enhance trade and investment in
SSA. AGOA was introduced as a Trade and Development Act of 2000 to boost open and
free markets for SSA beneficiaries who do not have any Free Trade Agreement with
US.125 Consequently, the dispensation of AGOA allows into US duty-free treatment and
123
Gagnon, J. E. (2013). Exchange rate variability and the level of international trade. Journal of
International economics, 34(3-4), 269-287.
124
Connolly, M. (2013). The dual nature of trade: measuring its impact on imitation and growth. Journal
of Development Economics, 72(1), 31-55.
125
Ibid
42
quota free exports from SSA for items specified such as footwear, cashmere, and handloomed and hand-made artifacts.
Under the Generalized System of Preferences (GSP), AGOA expands a list of items
subject to zero import duty to eligible SSA to the US market for 6,400 items (GSP
AGOA), whereas general GSP only covers 4,600 items.126 The additional GSP items
include items previously excluded items such as footwear, watches and handbags. SSA
member states are eligible for AGOA incentives after an eligibility review process which
necessitates that the beneficiaries demonstrate their commitment to making substantial
progress to combat corruption; protection of human rights issues and labor rights, efforts
to a market-based economy and reduced poverty levels.127 Beneficiaries who do not meet
the criteria are eliminated by the President of the US designate and can be reinstated once
they demonstrate continuing progress to the aforementioned criterion.
Since 2000, Kenya has remained eligible for duty free quota free market access of
exports to the US market.128 An analysis of the 15 years existence of AGOA shows that
Kenya has not fully utilized the preferential programme. The exports to the US have been
dominated by a single item (i.e. textile and apparel) up to 70 percent of all the total
exports. The stakeholders in this sector have been unanimous to sensitize exporters to
increase the utilization of AGOA through diversification of items as one of the remedies
to increase the utilization rate in Kenya.129 Among other products exported to the US
126
Blum, B. S., Claro, S., & Horstmann, I. (2009). Intermediation and the nature of trade costs: Theory and
evidence. University of Toronto, mimeograph.
127
Groot, J. C., Rossing, W. A., Jellema, A., Stobbelaar, D. J., Renting, H., & Van Ittersum, M. K. (2007).
Exploring multi-scale trade-offs between nature conservation, agricultural profits and landscape quality—a
methodology to support discussions on land-use perspectives. Agriculture, Ecosystems & Environment,
120(1), 58-69.
128
Ibid
129
Ibid
43
include; tea, coffee and leather products. Hand loomed and handmade products. AGOA
has contributed to improve the livelihoods of over 190,000 Kenyans through job creation,
skills and technology transfer, improved bilateral relations with the US and increased
foreign direct investments in Kenya.
Some of the constraints that hinders Kenya‘s higher utilization rate of AGOA include;
trade logistical challenges, stringent requirements to the US markets, inadequate
financing for exporters, value addition related challenges, the demand of export items to
the US market is higher than the capacity to produce.130 Kenya can mitigate these
challenges to increase the utilization of AGOA maximally. Some of these suggested
measures include diversification and sensitization of products as earlier indicated;
increased recognition and empowerment of the handcraft sector; quality assurance;
capacity building of exporters; establishment of an association of exporters to curb rogue
exporters and ease of doing business.
The objective to improve sub-Saharan Africa (SSA) trade capacity has fairly been
achieved even though development analysts opine that the maximum potential of the
AGOA Act remains underutilized.131 To achieve the maximum efficiency of the Act, a
mix of right policy interventions need to be implanted. The trade benefits under AGOA
present opportunities that can elevate poverty levels and provide employment
opportunities.
130
Keller, W., & Yeaple, S. R. (2013). Multinational enterprises, international trade, and productivity
growth: firm-level evidence from the United States (No. w9504). National Bureau of Economic Research.
131
Kenen, P. B. (2014). Nature, capital, and trade. The Journal of Political Economy, 437-460.
44
According to Wang, before AGOA was signed into law the balance in trade of goods
(exports -imports) between Kenya and US was valued at $127.3 million.132 Less than a
year to the 2015 AGOA expiry date, trade balance gap multiplied eight fold. Even though
AGOA is a non-reciprocal trade programme, the US is equally benefiting from this
programme. According to the US Department of Commerce, there are 250,000 AGOA
generated jobs in the US alone and close to 1 million indirect jobs in SSA. 133 Reviewing
the earlier trend when AGOA III was amended, there was a lot of anxiety among
investors; this resulted in the decline of the value of exports particularly in 2004 to 2005.
The AGOA has had positive impact on the Kenyan economy. On employment, there
is an estimated 32,516 direct jobs at EPZ as of 2012 and another estimated 190,000
employed Kenyans in different sectors.134 Whereas trade between Kenya and US
increased from $163Million to $875Million in 2000 and 2010 respectively, US foreign
direct investments in Kenya (stock) was $259 million in 2012 (USTR). AGOA has
attracted a significant increase in FDI in the export processing zones (EPZs) and
specifically the textile and apparel sector. Given that most of these firms are foreign
owned, it is expected that programmes that transfer skills and technology to the local
people be put in place.
3.2 Determinants of Bilateral Trade flows between Kenya and the U.S.
Economists have, for a long time been preoccupied with analyzing the
determinants of trade flows between nations. During the mercantilist era for example it
132
Wang, C., Wei, Y., & Liu, X. (2015). Determinants of bilateral trade flows in OECD countries:
evidence from gravity panel data models. The World Economy, 33(7), 894-915.
133
Representative, U. T. (2014). National Trade Estimate Report on Foreign Trade Barriers. Washington,
DC.
134
Blonigen, B. A. (2012). A review of the empirical literature on FDI determinants. Atlantic Economic
Journal, 33(4), 383-403.
45
was argued that since gold and other precious metals were generally accepted as global
currencies, a country which was able to accumulate large reserves of such metals was
able to pay for imports from other countries using such a reserve. 135 Thus, trade surplus
countries were synonymous to countries with large reserves of the precious metals. The
reverse was also true, that is trade deficit countries were countries which were deficient
on such metals. It was Smith and later Ricardo who laid the foundations for analyzing the
determinants of trade flows between nations using the absolute and comparative
advantage concepts.136 In a nutshell, while absolute advantage refers to a country‘s ability
to produce certain commodities more effectively than another country, comparative
advantage refers to a country‘s ability to produce a particular commodity with a lower
opportunity cost than another.
Many factors determine bilateral trade flows. In addition to supply and demand
factors, government policies, trade costs, geography, cultural links and past experience in
trade relationships also play an important role as determinants of international trade.137
Periods of declining international demand can relate to new and traditional bilateral trade
flows in several ways. For example, to the extent to which new export flows stem from
exporters with higher costs for instance because these exports filled the marginal demand
in the previous period of economic growth these flows are likely to be the first to
disappear when global demand shrinks. However, new export flows could be the
reflection of changes in global production chains with new, more efficient exporters
135
Östgaard, E. (2012). Factors influencing the flow of trade. Journal of Peace Research, 2(1), 39-63.
Smith, R., & Ricardo, A. K. (2012). Does a currency union affect trade? The time-series evidence.
European Economic Review, 46(6), 1125-1151.
137
Baltagi, B. H., Egger, P., & Pfaffermayr, M. (2013). A generalized design for bilateral trade flow
models. Economics Letters, 80(3), 391-397.
136
46
replacing traditional ones.138 If so, new export flows will be less likely to be affected by
shrinking demand. Past trade relationships may also play an important role. In periods of
economic downturn, firms may tend to engage in business relationships solely with
proven partners, as uncertainty and risks are generally higher. In this regard, firms that
have just entered a determined market or started exporting a new product can find
themselves in a more difficult position in competing with firms that have already
established trade relationships.139
Trade flows between nations are said to be determined by the respective country‘s
state of either capital or labour abundance. In this setting, with the exception of where the
Leontief paradox holds, a capital abundant country will tend to produce and export capita
intensive goods.140 The same country will import labour intensive goods from the rest of
the world. Several variants of the Heckscher- Ohlin model have been suggested including
the Linder hypothesis which has suggested that countries with similar demands tend to
develop similar industries and would then trade with each other in similar but
differentiated goods. The level of financial development or access to finance, which is a
major part of the overall domestic business or investment environment, can potentially
affect international trade. Duval found that improving credit information can raise exports
of merchandise goods by up to 16%.141 Beck provides evidence for a sample of 65
138
Ibid
ibid
140
Mansfield, E. D., & Pevehouse, J. C. (2009). Trade blocs, trade flows, and international conflict.
International organization, 54(04), 775-808.
141
Duval, R., & Vilja, V. (2011). Changing ecological and cultural states and preferences of nature
conservation policy: the case of nature values trade in South-Western Finland. Journal of Rural Studies,
25(1), 87-97.
139
47
countries indicating that financial development has a large causal effect on exports and
trade balances of manufactured products.142
Overall, bilateral trade flows in Kenya are influenced by time delays in trade, the
quality of port infrastructure, telecommunications services, and depth of credit
information.143 The potential impact of these "behind-the-border" measures vary across
product groups or sectors. Bilateral trade in food and beverages as well as in transport
equipment are sensitive to time delays, as food and beverages reflect issues on
perishability and maintaining quality, while transport equipment makes use of just-intime production practices and are involved in production sharing. Also, the quality of port
infrastructure is found to be a major determinant of trade in industrial supplies, fuels and
lubricants, capital goods (including parts and accessories), and consumption goods,
suggesting that these products are relatively dependent on maritime transport.144
Grunfeld and Moxnes identified the determinants of service trade and foreign
affiliate sales in a gravity model, using recently collected bilateral data for the OECD
countries and their trading partners, as well as new indicators for barriers to service
imports and foreign affiliate sales.145 The study found that trade barriers and corruption in
the importing country have a strong negative impact on service trade and foreign affiliate
sales. The study also found a strong home market effect in service trade, and rich
countries do not tend to import more, which may indicate that rich countries have a
competitive advantage in service trade. The study suggested that free trade agreements
142
Beck, B., & White, R. (2010). Cultural distance as a determinant of bilateral trade flows: do immigrants
counter the effect of cultural differences?. Applied Economics Letters, 17(2), 147-152.
143
Mansfield, E. D., & Pevehouse, J. C. (2009). Trade blocs, trade flows, and international conflict.
International organization, 54(04), 775-808.
144
Ibid
145
Grunfeld, A. C., & Moxnes, M. (2008). The impact of regulations on agricultural trade: evidence from
the SPS and TBT agreements. American Journal of Agricultural Economics, 90(2), 336-350.
48
contribute to increased service trade. A full liberalization of international trade in services
lifts exports by as much as 50% for some countries, and no less than 30%.
A study by Korinek and Melatos on what determines bilateral trade flows
undertook an exhaustive search for robust determinants of international trade, where
robustness was tested using three empirical methods.146 This was a theoretical paper with
the goal of solely establishing statistically robust relationships. The study found that
robust variables included a measure of the scale of factor endowments; fixed exchange
rates; the level of development; and current account restrictions. Variables that were
robust under certain methods and sample periods included exchange rate volatility, an
index of sectoral similarity, and currency union. However, the estimated coefficient in
currency union was much smaller than estimates obtained by prior researchers.
Other researchers including Tinbergen have attributed the flow of trade between
nations to the gravity concept borrowed from natural sciences.147 According to this model
factors like the sizes of countries, distance as well as other cultural factors are important
determinants of trade flows between them. A modified version of the gravity model of
trade can be used to analyze the determinants of trade between Kenya and US which are
members of the World Trade Organization (WTO).
Kenya and U.S has witnessed a surge in trade flows among member states
particularly after the establishment in 1st July, 2010 of the common market. 148 The WTO
common market has provided for four freedoms namely; free movement of goods, labour,
services and capital all of which are expected to boost trade and investment within the
146
Korinek, J., & Melatos, M. (2008). A review of methods for quantifying the trade effects of standards in
the agri-food sector.
147
Tinbergen, M. J., & Protopapadakis, A. A. (2012). Macroeconomic factors do influence aggregate stock
returns. Review of Financial Studies, 15(3), 751-782.
148
Ibid
49
region.149 From the US point of view, the creation of the WTO fulfilled two longstanding goals of its trade policy. First, the greater legalization of trade practices. The
inclusion of the new trade agenda promised the US firms with new opportunities in the
services sector. Moreover, it also provided the US government a unique opportunity to
modify existing institutional arrangement. The US feared that many countries would not
be able or willing to implement their duties related to new agenda of services, investment,
and intellectual property rights.150 Interest in analyzing the trade flows between U.S and
Kenya is based on economic as well as non-economic factors. The essence of focusing on
trade flows between Kenya and the U.S is that currently the two countries dominate the
economy of the sub-region, in many aspects.
3.3 Factors Influencing Trade Flows between Kenya and the US
According to Linders, various factors, such as political, economic, and practical
factors can affect the growth of international trade.151 Exchange rates, competitiveness,
growing globalization, tariffs and trade barriers, transportation costs, languages, cultures,
various trade agreements affect companies by its decision to trade internationally.
Political policies and other government concerns, such as the relationships between
trading nations, are highly important to the growth of international trade. A politically
stable nation with few policies restricting international trade will likely be able to expand
its worldwide trade rapidly.152 Political instability, however, particularly when it leads to
violence, can be a major barrier to trade growth. Many nations place steep tariffs on
149
Ibid
Head, K., & Ries, J. (2008). Immigration and trade creation: econometric evidence from Canada.
Canadian journal of economics, 47-62.
151
Linders, G. J., Rietveld, P., & Subramanian, U. (2009). The institutional determinants of bilateral trade
patterns. Kyklos, 57(1), 103-123.
152
Ibid
150
50
exports or imports from certain nations or industries for such reasons. While such tariffs
can be used to protect fledgling industries or to place political pressure on some nations,
their overall effect on international trade is often negative.
3.3.1 Influence of Exchange Rate on Trade Flows
Exchange rate volatility determines the overall dynamics of pass-through effects
and associated absorption capability of exchange rate. Ability of exchange rates to
transmit external (price) shocks to the national economy represents one of the most
discussed areas relating to the current stage of the monetary integration in the European
single market. New European Union (EU) member countries that accepted the obligation
to adopt euro have to consider many positive and negative aspects of the euro adoption
especially in the view of time they need for the implementation of all necessary actions to
be ready to give up their monetary sovereignty.153
Each country‘s currency is valued in terms of other currencies through the use of
exchange rates, so that currencies can be exchanged to facilitate international
transactions. The influence of currency misalignment on international trade is largely
driven by its impact on relative import prices.154An undervalued currency, whether
determined by exogenous shocks or by policy, increases the competitiveness of the
export- and import-competing sectors at the expense of consumers. Exchange rates are
determined by factors, such as interest rates, confidence, current account on balance of
payments, economic growth and relative inflation rates. For example: If US business
became relatively more competitive, there would be greater demand for American goods;
this increase in demand for US goods would cause an appreciation (increase in value) of
153
Eichengreen, B., & Irwin, D. A. (2008). The role of history in bilateral trade flows. In The
regionalization of the world economy (pp. 33-62). University of Chicago Press.
154
Ibid
51
the dollar. However, if markets were worried about the future of the US economy, they
would tend to sell dollars, leading to a fall in the value of the dollar.
3.3.2 Influence of Competition on Trade Flows
In current environment, with growing interdependence between the markets and
in increasing competition, it is more difficult to maintain current enterprise market
position.155 Competitiveness is a measure of the relative ability of different countries to
provide different products or services. Competitiveness takes into account the efficiency,
costs of employment, level of government regulation and the ease of doing business.
Competitiveness affects international trade because the more competitive countries will
tend to attain a higher level of global trade.156
International competition is a fact of life for today's companies. Manufacturers in
the United States, for example, must compete not only with exports from other countries,
but also with American subsidiaries of foreign corporations.157 The same is true for
manufacturers and other companies in Japan and the European Union (EU). Newly
industrialized countries such as China, Singapore, South Korea, Taiwan, Brazil, and
Mexico are also competing for a share of the international marketplace. In short,
international competition is the driving force behind the globalization of production and
markets.
155
Baltagi, B. H., Egger, P., & Pfaffermayr, M. (2013). A generalized design for bilateral trade flow
models. Economics Letters, 80(3), 391-397.
156
Pollins, B. M. (2012). Conflict, cooperation, and commerce: The effect of international political
interactions on bilateral trade flows. American Journal of Political Science, 737-761.
157
Sanso, M., Cuairan, R., & Sanz, F. (2013). Bilateral trade flows, the gravity equation, and functional
form. the Review of Economics and Statistics, 266-275.
52
Portes states that cutting through most of the issues is whether it is actually trade
which has caused profound economic changes.158 Free trade represents competition and
competition drives the economy. Individual trade policies and agreements may not matter
much but greater competition through trade has an important impact. Competing against
firms and workers from overseas is painful for some US firms and workers.159 Also,
being able to choose foreign goods and services is wonderful for US and Kenya
consumers. What countries often miss is the longer-term effect of trade, as the increased
competition spurs faster technological progress. It isn‘t just more companies making cell
phones, competition causes the company‘s domestic and foreign to create better phones
faster. That‘s why many poor Americans and Kenyans today can afford phones far
superior to those only the rich could afford 10 years ago. U.S and China have been
severally competing over Kenya. However, when asked which country, the U.S. or China
is more important to have strong ties with, several nations are usually divided between
favoring a good relationship with the U.S. and volunteering that a partnership with both
powers is more important.
Kenya is one of the African countries that was quick to embrace the global market
and business ideology. In the early 1990s, Kenya embarked on structural and
macroeconomic reforms, including trade in order to establish a more growth-conducive
economic environment.160 Kenya's main exports to the United States are garments traded
under the terms of the African Growth and Opportunity Act (AGOA). Despite AGOA,
Kenya's apparel industry is struggling to hold its ground against Asian competition and
158
Portes, R., & Rey, H. (2012). The determinants of cross-border equity flows. Journal of international
Economics, 65(2), 269-296.
159
Ibid
160
Pollins, B. M. (2012). Conflict, cooperation, and commerce: The effect of international political
interactions on bilateral trade flows. American Journal of Political Science, 737-761.
53
runs a trade deficit with the United States. Many of Kenya's problems relating to the
export of goods are believed by most economists to be caused by Kenya's export of
inexpensive goods that saturate the global market but do little to substantially raise the
amount of money coming into the country.161 However, if US goods become more
attractive and competitive this will cause the value of the exchange rate to rise. For
example, if the US has long-term improvements in labour market relations and higher
productivity, good will become more internationally competitive and in long-run cause an
appreciation of the dollar. This is a similar factor to low inflation.
3.3.3 Influence of Globalization on Trade Flows
Globalization is the term used to describe a general tendency for national
economies to become more integrated with each other.162 This happens because of a
combination of advanced communication technologies, logistic technologies, increased
capital flows and reduction of trade barriers by national governments. Globalization is a
general trend that has caused an increase in international trade over the last three or four
decades.163 Global tendencies and movements in the world are great challenges and also
important opportunities for individual economies. Globalization of the markets and the
internationalization of the production present the most significant features of the world
economic development during the last decades. Globalization impacts have changed the
rules of the world competition. Global strategy is based on the search of the balance
161
Ibid
Levitt, T. (2013). The globalization of markets. Readings in international business: a decision
approach, 249.
163
Amin, A., & Thrift, N. (2014). Globalization, institutions, and regional development in Europe. Oxford
university press.
162
54
between the local adaptation and global standardization.164 Globalization as an economic
phenomenon has significantly affected the growth of the international trade.
The tremendous growth of international trade over the past several decades has
been both a primary cause and effect of globalization. The volume of world trade
increased twenty-seven fold from $296 billion in 1950 to $8 trillion in 2005. Although
international trade experienced a contraction of 12.2 percent in 2009 the steepest decline
since World War II trade is again on the upswing. As a result of international trade,
consumers around the world enjoy a broader selection of products than they would if they
only had access to domestically made products. Also, in response to the ever-growing
flow of goods, services and capital, a whole host of U.S. government agencies and
international institutions have been established to help manage these rapidly developing
trends. Although increased international trade has spurred tremendous economic growth
across the globe raising incomes, creating jobs, reducing prices, and increasing workers‘
earning power trade can also bring about economic, political, and social disruption.
One of the biggest stories of the past 20 years has been the successful integration
of many countries into the global economy and their emergence as key players in
international trade. Most countries are diverse in the quality of their political and
economic institutions but there are strong reasons to believe that ―better‖ institutions give
countries a competitive advantage and produce better trade outcomes. 165 It is not clear,
however, whether developing country growth will continue at the same rapid pace or
taper off. Improving the quality of institutions would provide developing countries with a
way of ensuring that growth continues.
164
Ibid
Bowen, H. P. (2014). On the theoretical interpretation of indices of trade intensity and revealed
comparative advantage. Weltwirtschaftliches Archiv, 119(3), 464-472.
165
55
Globalization brings lots of benefits, but it also brings additional volatility and
demands on governments. For countries that aren't integrated into the global economy,
the costs of making macroeconomic policy mistakes are not that consequential.166 In
Chad, if the finance ministry blows the fiscal account, it's bad but not disastrous. But for
countries like Kenya, which is actually integrated, the banking sector matters. Kenya is
trying to compete in the global economy, and if the fiscal policy is a mess, it has very
negative consequences.
Current globalization literature cites that pressure of capital mobility, technological
progress and intense market competition describes an irreversible force beyond the
influence of domestic policy makers. In this policy context globalization is often used as
a synonym for greater openness and closely linked to the liberalization of domestic and
foreign transactions.167 Trade between the countries considering comparative advantage
promotes growth, which is attributed to a strong correlation between the openness to
trade flows and the effect on economic growth and economic performance. Likewise
capital flows and their impact on economic growth adhere to each other with a significant
relationship.
3.4 Current Emerging Relations between Kenya and the US
The visit to Kenya by President Obama was a milestone in deepening Kenya-U.S.
bilateral relations. The visit encompassed important meetings between Kenya and U.S.
administrations as well as his participation in the Sixth Global Entrepreneurship
166
Ibid
Borjas, G. J., Freeman, R. B., Katz, L. F., DiNardo, J., & Abowd, J. M. (2007). How much do
immigration and trade affect labor market outcomes?. Brookings papers on economic activity, 1997(1), 190.
167
56
Summit.168 Obama‘s participation in the summit gave the summit more prominence and
opened an opportunity for Kenyan entrepreneurs to showcase their innovative skills,
entrepreneurial spirit, and potential to the world especially as Kenya is a country with an
emerging culture of entrepreneurship.
Nairobi approached the talks with the intention of prioritizing key issues that might
bring more tangible results in line with the Vision 2030, foreign and diaspora policies and
other development programs. Trade, investment, energy, tourism, science and
technology, human capital development, health, and agriculture are some of the core
issues critical in realizing the country‘s development goals.169 How to align the myriad of
U.S. programs intended to spur economic growth, trade, and investment such as the New
Alliance for Food Security and Nutrition, Open Government Partnership, African Growth
and Opportunity Act (AGOA), Partnership for Growth, Trade Africa, and Power Africa
with Kenyan priorities. As Kenya deepens its economic cooperation with the emerging
economies, including the BRICS and middle-sized economies, the U.S. is progressively
mainstreaming trade and business cooperation in its overall policy towards Kenya. Kenya
needs not be merely a recipient of preferential trade; it has potential as a rapidly evolving
market and investment destination.
Major project opportunities for American firms exist in the following areas;
geothermal energy development, the telecommunications sector, the lease and/or
purchase of commercial aircraft, and a new Kenyan export processing zone with an
168
Carotenuto, M., & Luongo, K. (2016). Obama and Kenya: Contested Histories and the Politics of
Belonging. Ohio University Press.
169
Chinn, M. D. (2014). A primer on real effective exchange rates: determinants, overvaluation, trade
flows and competitive devaluation. Open economies review, 17(1), 115-143.
57
emphasis on textile equipment.170 Current plans call for the development of an additional
280 megawatts (MW) of generating capacity for geothermal energy generation. In the
telecommunications sector, Kenya Posts and Telecommunications Corporation may
procure several new systems in the coming years. The Kenya Wildlife Service will also
be purchasing a number of aircraft and helicopters for its game parks. Several local and
international companies have indicated interest in establishing wearing apparel
manufacturing operations once the export processing zones are established.171 Best export
prospects to Kenya are telecommunications equipment, aircraft and parts, agricultural
chemicals, electrical power systems, industrial chemicals, agricultural machinery and
equipment, plastic materials and resins, food processing and packaging machinery,
computers and peripherals, and medical equipment.
U.S. companies appear to see potential in Kenya more than 60 American companies,
including General Electric and IBM, have operations in the country and many of them are
expanding. Nascent oil exploration in northern Kenya also shows signs of promise.172
Kenyan firms have led the way in developing mobile phone-based banking systems that
have revolutionized financial transactions for increasing numbers in the developing
world. U.S. foreign direct investment in Kenya has grown in recent years, and the U.S.
government has proposed a new trade and investment partnership with the East African
Community (EAC), of which Kenya is a member.
170
Ibid
Baxter, M., & Kouparitsas, M. A. (2013). What determines bilateral trade flows? (No. w12188).
National Bureau of Economic Research.
171
172
Blanchard, L. P. (2013, September). US-Kenya Relations: Current Political and Security Issues. In CRS
Report for Congress, Sep-tember (Vol. 23, p. 17).
58
According to the U.S official documents, Kenya is currently their 96th largest
goods trading partner with $1.1 billion in total (two way) goods trade during 2013. Goods
exports totaled $651 million; Goods imports totaled $451 million.173 The U.S. goods
trade surplus with Kenya was $201 million in 2013. U.S. goods exports to Kenya in 2013
were $651 million, up 14.5% ($83 million) from 2012, and up 232% from 2003.The top
export categories (2-digit HS) for 2013 were: Aircraft ($217 million), Machinery ($104
million), Optic and Medical Instruments ($45 million), Electrical Machinery ($37
million), and Cereals (grain sorgham) ($26 million). U.S. exports of agricultural products
to Kenya totaled $81 million in 2013. Leading categories were: coarse grains ($22
million) and vegetable oil (excluding soybeans) ($15 million). In 2014, U.S. goods
imports from Kenya totaled $451 million, a 15.7% increase ($61 million) from 2012, and
up 81% from 2003. The five largest import categories in 2014 were: Knit Apparel ($160
million), Woven Apparel ($148 million), Spices, Coffee, and Tea (coffee) ($39 million),
Edible Fruit and Nuts (macadamia nuts) ($29 million), and Electrical Machinery ($22
million). U.S. imports of agricultural products from Kenya totaled $90 million in
2014. Leading categories include: coffee (unroasted) ($33 million), and tree nuts ($30
million). The U.S. goods trade surplus with Kenya was $201 million in 2014, a 11.9%
increase ($21 million) over 2013.174
Kenya‘s imports from the US more than doubled in 2015, marking the fastest
growth in trade with the world‘s largest economy in Africa. US exports to East Africa‘s
largest economy rose to $1.5 billion (Sh137.46 billion) from $594.5 million (Sh54.4
173
Brookes, P., & Shin, J. H. (2014). U.S influence in Africa: Implications for the United States.
Backgrounder, 1916, 1-9.
174
Hirschman, A. O. (2015). American Economic Association. The American Economic Review, 38(5),
886-892.
59
billion) in 2014 representing a 165.3 per cent growth, according to newly released data
from the US Department of Commerce. The growth, which was the highest among
America‘s top 10 trading partners in Africa, enabled Kenya to dislodge Ghana from
position eight by value of imports. The rapid growth of exports to Kenya is set to catch
the eye of the world‘s largest economy, which is aggressively expanding its commercial
presence in Africa where China has become predominant. This demonstrated growing
trade relations between U.S and Kenya.
3.5 Conclusion
This chapter has reviewed literature on level and nature of bilateral trade between
Kenya and the U.S., determinants of bilateral trade flows trade between Kenya and the
U.S., factors influencing trade flows between Kenya and the U.S. and the current
emerging relations between the two countries.
On the level and nature of bilateral trade between Kenya and the U.S, It concludes
that, Kenya has remained eligible for duty free quota free market access of exports to the
US market since the year 2000. Trade flows between nations are said to be determined by
the respective country‘s state of either capital or labour abundance. It also states that the
trade benefits under AGOA present opportunities that can elevate poverty levels and
provide employment opportunities.
Many factors determine bilateral trade flows. In addition to supply and demand
factors, government policies, trade costs, geography, cultural links and past experience in
trade relationships also play an important role as determinants of international trade.
Overall, bilateral trade flows in Kenya are influenced by time delays in trade, the quality
of port infrastructure, telecommunications services, and depth of credit information. The
60
potential impact of these "behind-the-border" measures vary across product groups or
sectors. Kenya and U.S has witnessed a surge in trade flows among member states
particularly after the establishment in 1st July, 2010 of the common market.
Political, economic, and practical factors can affect the growth of international trade.
Exchange rates, competitiveness, tariffs and trade barriers, transportation costs,
languages, cultures, various trade agreements affect companies by its decision to trade
internationally. The tremendous growth of international trade over the past several
decades has been both a primary cause and effect of globalization. As a result of
international trade, consumers around the world enjoy a broader selection of products
than they would if they only had access to domestically made products. Also, in response
to the ever-growing flow of goods, services and capital, a whole host of U.S. government
agencies and international institutions have been established to help manage these rapidly
developing trends.
U.S. companies appear to see potential in Kenya more than 60 American companies,
including General Electric and IBM, have operations in the country and many of them are
expanding. Nascent oil exploration in northern Kenya also shows signs of promise. As
Kenya deepens its economic cooperation with the emerging economies, including the
BRICS and middle-sized economies, the U.S. is progressively ―mainstreaming‖ trade and
business cooperation in its overall policy towards Kenya. U.S. foreign direct investment
in Kenya has grown in recent years, and the U.S. government has proposed a new trade
and investment partnership with the East African Community, of which Kenya is a
member.
61
CHAPTER FOUR
ANALYSIS AND PRESENTATIONS OF THE IMPACT OF EXTERNAL TRADE
BETWEEN KENYA AND THE U.S (2000-2015)
4.1 Introduction
This chapter presents analysis and findings of the study as set out in the research
methodology. The study findings are presented on the analysis of external trade between
Kenya and the U.S 2000-2015. The data was collected using interview guides. The
instruments were guided and designed in line with the objectives of the study.
4.2 Economic Survey of External Trade between Kenya and the U.S
4.2.1 Exports from Kenya to U.S during the period 2000 – 2015
Table 4.1: Exports from Kenya to U.S during the period 2000 – 2015
NOTE: All figures are in millions of U.S. dollars.
Year
Coffee
Tea
Sisal
Sugar
Cement
2000
10.7
8.1
14.9
6.6
12.4
2001
7.6
5.9
10.1
6.7
6.6
2002
8.7
11.8
5.2
7.2
12.1
2003
6.6
7.7
13.8
9.4
8.1
2004
7.0
9.0
7.5
5.9
10.7
2005
119.6
13.6
9.2
5.7
13.6
2006
12.4
8.1
5.9
8.2
11.8
2007
16.3
8.1
12.0
6.2
12.1
2008
5.0
5.1
10.7
7.0
5.9
2009
9.7
10.4
17.1
5.1
7.5
2010
10.9
12.0
10.2
8.0
10.4
2011
15.9
11.5
7.9
5.6
13.8
2012
10.6
6.9
7.7
10.1
2013
9.0
13.0
15.7
6.4
9.0
2014
14.9
7.5
17.5
9.3
7.7
2015
17.2
5.9
16.2
9.3
9.0
Mean
10.72
18.81
12.05
7.62
9.86
10.2
Source: United States Census Bureau (2016)
62
Based on the above data on exports from Kenya to U.S, coffee exports are
estimated to have increased to US$ 119.6 million in 2005 compared to US$ 5.0 million in
2008. This was due to the Great Depression of the 1930s. The contagion, which began in
2007 when sky-high home prices in the United States finally turned decisively
downward, spread quickly, first to the entire U.S. financial sector and then to
financial markets overseas.175 Tea exports are estimated to have increased from US$ 13.6
million in 2005. The lowest recorded amount of exports was in the year 2008 where the
exports decreased to US$ 5.1 million.
Under sisal, the highest recorded amount was US$ 17.5 million in 2014 compared
to US$ 5.2 million in 2002. Sugar exports are recorded to have increased to US$ 9.4
million in 2002 compared to a decrease of US$ 5.1 million in 2009. Cement exports are
recorded to have increased to 13.6 in 2005 compared to a decrease of 5.9 in 2008. The
increase in 2009 was supported by increased government and private final consumption
low prices increase in exports of goods and services.176 Also, the stability of the Kenya
Shilling against major currencies was a factor despite slight depreciation against the US
dollar.
Between 2000 and 2015, tea exports are estimated to have been higher with a
mean of 18.81, followed by sisal exports with a mean of 12.05. Coffee exports with a
mean of 10.72, cement exports with a mean of 9.86 while sugar exports had the lowest
with a mean of 7.62. According to Mwangi, Kenya is the 3rd leading producer of black
tea in the world accounting for 10% of the total world tea production and the largest
175
Gagnon, J. E. (2013). Exchange rate variability and the level of international trade. Journal of
International economics, 34(3-4), 269-287.
176
Ibid
63
exporter of tea in the world accounting for 22% of the total world tea exports.177 10% of
the Kenyan population depend on tea and tea contributes 4% of the country‘s GDP and
26% of the country‘s export earnings. The tea industry has also contributed significantly
to rural development in the country.
Agricultural productivity is central to Kenya's export industry. More than 75% of
the population is engaged in agriculture and allied activities, which contribute almost
25% to the national production.178 Horticultural produce and tea are the major items of
export for Kenya. In 2006, the combined share of these two products was 10 times higher
than the share of the other export items. The country has subsistence petroleum
production, which is consumed internally and exported to neighboring countries. Apart
from horticulture and tea, other major items of export are coffee, fish and cement. In
2009, Kenya‘s exports grossed over US$4.9 billion.
177
Ibid
Feenstra, R. C. (2012). Integration of trade and disintegration of production in the global economy. The
journal of economic perspectives, 12(4), 31-50.
178
64
4.2.2 Imports to Kenya from U.S during the period 2000 – 2015
Table 4.2: Imports to Kenya from U.S during the period 2000 – 2015
NOTE: All figures are in millions of U.S. dollars.
Year
Machinery
Transport
Plastics
Aircrafts
Equipment’s
Electrical
Machinery
2000
27.3
22.4
38.1
19.2
26.1
2001
20.3
29.1
24.5
29.1
30.9
2002
26.1
22.6
29.7
39.7
24.9
2003
27.2
30.9
33.1
23.5
28.2
2004
21.8
41.2
29.2
27.3
24.5
2005
32.8
24.9
26.9
31.7
27.1
2006
22.8
30.6
27.1
22.4
34.7
2007
24.9
28.2
33.2
30.1
33.2
2008
25.0
11.8
23.7
26.8
38.8
2009
32.7
21.9
29.6
29.7
29.7
2010
29.1
34.7
25.3
18.6
29.8
2011
44.4
29.5
29.8
22.6
30.9
2012
22.8
33.7
38.8
21.8
10.1
2013
24.1
20.4
41.0
32.7
37.2
2014
33.8
19.5
37.2
29.1
39.7
2015
41.4
25.9
27.9
17.5
22.6
Mean
30.43
38.49
33.00
29.16
31.27
Source: United States Census Bureau (2016)
65
Based on the above data on imports to Kenya from U.S, import of machinery was
estimated to have increased to US$ 44.4 million in 2011 compared to US$ 20.3 million in
2001. Transport equipment‘s raised to US$ 41.2 million in 2004 compared to US$ 11.8
million in 2008. Import of plastics increased to US$ 41.0 million in 2013 compared to
24.5 in 2001. Aircrafts import increased to US$ 39.7 million in 2002 compared to a fall
of US$ 17.5 million in 2015. In 2015, the aircraft sector registered a significant decline in
market size due to the massive losses incurred by national carrier Kenya Airways which
has resulted in reduction in investments by Kenya Airways. Importation of electrical
machinery increased to US$ 39.7 million in 2014 compared to a fall of 10.1 in 2012.
Between 2000 and 2015, importation of transport equipment‘s is estimated to have
been higher as indicated by a mean of 38.49, followed by plastics as indicated by a mean
of 33.00. Import of electrical machinery as indicated by a mean of 31.27, machinery as
indicated by a mean of 30.43 and aircrafts imports as indicated by a mean of 29.16. In
terms of absolute value, the growth in U.S. exports of transportation equipment in 2012
was led by aircraft equipment, increasing $13.2 billion (16 percent) to $95.2 billion,
followed by exports of motor vehicles, which rose by $6.2 billion (11 percent). U.S.
exports of aircraft equipment, which accounted for 33 percent ($95.2 billion) of sector
exports, grew largely on the strength of Boeing, one of the world‘s leading large civil
aircraft producers.179 U.S. exports of motor vehicles continued to recover from the
economic recession, accounting for 23 percent ($65.7 billion) of total export value in
2012. Other leading exports in 2012 included motor vehicle parts, which rose by
6 percent, and construction equipment, which increased by 7 percent.
179
Ibid
66
According to Mitulla, Kenya‘s imports from the US more than doubled in 2014,
marking the fastest growth in trade with the world‘s largest economy in Africa.180
US exports to East Africa‘s largest economy rose to $1.5 billion (Sh137.46 billion) from
$594.5 million (Sh54.4 billion) the previous year representing a 165.3 per cent growth,
according to newly released data from the US Department of Commerce. The growth,
which was the highest among America‘s top 10 trading partners in Africa,
enabled Kenya to dislodge Ghana from position eight by value of imports. The rapid
growth of exports to Kenya is set to catch the eye of the world‘s largest economy, which
is aggressively expanding its commercial presence in Africa where China has become
predominant.
4.3 Current Trade Relations between Kenya and the U.S
Under this question, the interviewees from the Ministry of Foreign Affairs and
International Trade indicated that Kenyan entrepreneurs have had an opportunity to
showcase their innovative skills, entrepreneurial spirit, and potential to the world since it
is a country with an emerging culture of entrepreneurship. Kenya has been in a position
to align the myriad of U.S. programs which are intended to spur economic growth, trade,
and investment such as the New Alliance for Food Security and Nutrition, Open
Government Partnership, African Growth and Opportunity Act (AGOA), Partnership for
Growth, Trade Africa, and Power Africa with Kenyan priorities. Major project
opportunities for American firms exist in areas of geothermal energy development, the
telecommunications sector, the lease and/or purchase of commercial aircraft, and a new
Kenyan export processing zone with an emphasis on textile equipment.
180
Ibid
67
According to Blanchard, U.S. companies appear to see potential in Kenya more than
60 American companies, including General Electric and IBM, have operations in the
country and many of them are expanding.181 Nascent oil exploration in northern Kenya
also shows signs of promise. The interviewees from U.S embassy in Kenya indicated that
U.S. foreign direct investment in Kenya has grown in recent years, and the U.S.
government has proposed a new trade and investment partnership with the East African
Community (EAC), of which Kenya is a member.
4.3.1 Trade in Goods between Kenya and China during the period 2000-2015
Table 4.3: Trade in Goods between Kenya and China (£ million)
Year
Exports
Imports
2000
4,651.3
20,225.2
2001
6,634.7
19,012.5
2002
2,796.7
12,838.0
2003
3,620.7
7,838.4
2004
7,514.2
11,802.5
2005
3,654.5
5,513.4
2006
4,507.3
7,521.0
2007
3,526.1
2,460.9
2008
1,689.4
3,344.9
2009
8,642.6
6,178.6
2010
6,738.4
12,515.0
2011
9,645.8
8,275.6
2012
8,676.7
1,985.3
2013
4,815.8
17,645.9
2014
3,646.3
22,134.5
2015
10,815.8
28,777.2
Source: Kenya National Bureau of Statistics (2016)
181
Ibid
68
Based on the above data on trade in goods between Kenya and China, the amount
of exports is estimated to have increased from US$ 10,815.8 million in 2011 compared to
a decrease of US$ 1,689.4 million in 2008. The amount of imports was high in 2015 as
shown by US$ 28,777.2 million while the lowest year was 2007 with an estimated
amount of US$ 2,460.9 million.
Despite China‘s slowing economic growth rate, Chinese trade with Kenya has
continued to expand at a rapid clip, reaching a total value of US$170 billion in 2013.
China has recently overtaken Europe as Kenya‘s largest export partner, and regional
economies are becoming increasingly vulnerable to changes in international commodity
prices and Chinese demand conditions. The composition of China- Kenya trade is not
symmetric, with Kenya importing a wide variety of consumer and capital goods and
overwhelmingly exporting primary commodities, especially oil, minerals, and other
natural resources. This pattern has become even more extreme during the past five years;
agricultural goods now represent a mere 5 percent of Kenya‘s total exports to China.
69
4.3.2 Trade in Goods between Kenya and Thailand during the period 2000-2015
Table 4.4: Trade in Goods between Kenya and Thailand (£ million)
Year
Exports
Imports
2000
2,756.0
5,496.9
2001
4,629.9
7,374.9
2002
1,692.0
11,382.0
2003
4,536.5
2,543.6
2004
3,569.6
6,408.9
2005
2,514.3
3,473.0
2006
1,453.8
4,695.5
2007
1,532.0
9,359.5
2008
1,203.4
5,693.0
2009
2,781.4
21,040.1
2010
7,531.7
11,802.1
2011
2,643.4
8,229.9
2012
5,654.9
12,032.3
2013
1,610.1
11,928.2
2014
4,521.6
8,369.5
2015
2,769.2
10,369.5
Source: Kenya National Bureau of Statistics (2016)
70
International treaties, laws and regulations, for instance tariffs play a key role in
determining how much a country is able and willing to trade with its partner. Another key
factor is the comparative advantage the ability of a country to produce and export goods
and services at a relatively cheaper rate than its trading partners. The table above,
illustrates the trend in the exports [from Kenya] and imports [from Thailand] from 2000
to 2015. This is aimed at analyzing the favorability of the terms of trade. The amount of
exports is estimated to have increased from US$ 7,531.7 million in 2010 compared to a
decrease of US$ 1,203.4 million in 2008. The amount of imports was high in 2009 as
shown by US$ 21,040.1 million while the lowest year was 2003 with an estimated
amount of US$ 2,543.6 million.
The current economic growth rates for Kenya and Thailand as revealed in the
table above show that the economies for these countries is positive and increasing in
momentum. It is however noted that Thailand has relatively higher growth rates.182
Higher GDP growth rates, though not sufficient, nonetheless, are an important indicator
of a country‘s prosperity and hence ability of honoring its bilateral agreements.
4.4 Influence of Competition on Trade between Kenya and U.S
The interviewees were asked to indicate the effects of competition in the trade
between Kenya and U.S. The interviewees from U.S embassy in Kenya indicated that
U.S has been competing with several countries so as to become Kenya‘s first trading
partner. Some of these countries that it competes with are China, India, Russia and Brazil.
India remains Kenya‘s largest source of imports a spot it has in the past competed for
with China and UAE. It was possible to get a breakdown of the key items that Kenya
182
Ibid
71
imported from the US but America‘s stride to the second slot comes on the back of bigticket investments in energy and transport sectors by local firms using sophisticated US
services and goods. The interviewees indicated that the rivalry has benefitted Kenya in
terms of foreign direct investments, a wider variety of consumer goods and as new
sources of technical and financial assistance.
The interviewees from the Ministry of Foreign Affairs and International Trade stated
that in the current government, Chinese firms have, however, been the main beneficiaries
of the government‘s multi-billion shilling infrastructural projects, having only recently
inked a Sh327 billion standard gauge railway line deal whose construction is expected to
begin later in the year. China has also emerged as a major supplier of consumer goods
such as shoes, textiles, batteries, electronics and motor vehicle parts, gaining significant
market share with its low pricing of mass market goods strategy that has caused disquiet
among local traders dealing in rival merchandise with countries such as U.S. More active
participation in the international market by promoting exports leads to more intense
competition and improvement in terms of productivity. Trade between China and Africa,
valued at $222 billion in 2014, has been rising swiftly and is now about three times the
amount of trade between the United States and the African continent, according to figures
from the World Bank and the American government.
The findings are in line with Hummels who stated that the increase in competition
coming from foreign firms puts pressure on profits, forcing less efficient firms to contract
and making room for more efficient firms.183 Expansion and new entry bring with them
better technologies and new product varieties. Likely the most important is that trade it
enables greater selection across different types of goods. This explains why there is a lot
183
Ibid
72
of intra-industry trade (for example, countries that export household refrigerators may
import industrial coolers), which is something that the factor endowment approach does
not encompass.
4.4.1 US trade in Goods with China during the period 2000-2015
Table 4.5: US trade in Goods with China (£ million)
Year
Exports
Imports
2000
118,212.1
237,145.7
2001
110,048.7
436,160.8
2002
208,952.3
529,852.7
2003
218,667.1
232,973.2
2004
458,518.3
137,535.2
2005
228,822.7
138,579.0
2006
219,156.9
539,487.1
2007
109,393.9
243,247.3
2008
108,559.9
242,022.7
2009
519,481.5
538,588.4
2010
119,882.0
341,139.2
2011
239,306.7
736,115.8
2012
196,262.9
638,377.8
2013
492,292.9
340,323.4
2014
691,513.6
241,216.4
2015
116,071.3
483,022.2
Source: United States Census Bureau (2016)
73
The data above shows trade between US and China. Exports are estimated to have
been high in 2014 with an estimated amount of US$ 691,513.6 million. The year 2008
recorded the lowest amount of exports with an estimate of US$ 108,559.9 million. The
amount of imports was high in 2011 as shown by US$ 736,115.8 million while the lowest
year was 2011 with an estimated amount of US$ 137,535.2 million.
The expansion of China's participation in international trade has been one of the
most outstanding features of the country's economic development. Chinese exports rose
on average 20.3 percent between 2000 and 2015. By 2015, China's export growth rate
was seven times higher than the export growth rate recorded by the world as a whole.184
Foreign direct investment has also soared, and currently over a billion dollars in FDI are
invested in China each week. Thanks to this remarkable economic growth, China no
longer belongs to the group of low-income developing countries in the world and, since
the end of the 1970s, some 400 million people have been lifted out of poverty.
184
Auffret, P. (2013). Trade reform in Vietnam: Opportunities with emerging challenges (Vol. 3076).
World Bank Publications.
74
4.4.2 US Trade in Goods with India during the period 2000-2015
Table 4.6: US Trade in Goods with India (£ million)
Year
Exports
Imports
2000
3,734.3
3,123.9
2001
1,020.1
3,633.5
2002
2,896.7
6,338.7
2003
1,820.1
7,761.2
2004
1,877.4
5,995.2
2005
1,658.6
4,023.0
2006
4,583.0
3,411.1
2007
2,685.8
5,851.2
2008
806.0
9,826.1
2009
3,689.0
8,373.4
2010
4,636.2
3,035.6
2011
1,770.5
13,012.1
2012
2,795.0
12,857.3
2013
5,578.9
9,092.3
2014
5,546.0
3,615.7
2015
8,930.8
13,336.2
Source: United States Census Bureau (2016)
75
Based on the data above, it has been recorded that year 2015 had the highest
amount of exports as indicated by US$ 8,930.8 million. The year with the lowest amount
of exports was 2008 as shown by US$ 806.0 million. Under imports, the year which had
the highest amount was 2015 with an estimated amount of US$ 13,336.2 million. The
year 2010 had the lowest amount of imports with an estimated amount of US$ 3,615.7
million.
There are significant opportunities for India and the U.S. to deepen the bilateral
trade and investment relationship. While the economic relationship has seen impressive
growth over the last 10 years, this has been off a low base and there remains significant
room for improvement.185 For instance, U.S. goods trade with China, a country with a
comparable population, was over $560 billion in 2013—almost nine times U.S. trade
with India. Another instance: South Korea, a country whose GDP is 60 percent that of
India‘s, in 2013 had a similar level of goods trade with the U.S. as did India.
4.5 Policies that need to be adapted in order to improve trade relations
The interviewees from Kenya Private Sector Alliance indicated that Kenya is one
of the key logistical conduits into East Africa and a regional financial hub. Many foreign
companies operating in Kenya do business under their own name to manage penetration
into the larger, regional market. Companies with strong corporate social responsibility
(CSR), education, and training programs are warmly welcomed. The respondents
indicated that Kenya and U.S. firms should analyze the short-term incentives of a
proposed agreement for the potential partner, and assume that recourse under Kenyan law
is either impractical or extremely expensive. For example, agreement on what law
185
Blum, B. S., Claro, S., & Horstmann, I. (2009). Intermediation and the nature of trade costs: Theory and
evidence. University of Toronto, mimeograph.
76
governs a contract, the timing of payments, and credit terms can form the foundation for
negotiations on delivery quantities, price, shared marketing expense, or training.
The countries should also encourage free trade. According to Baltagi, some
groups in the United States blame free trade for the loss of manufacturing jobs, while
others blame it for exposing some U.S. producers to foreign competition.186 Free trade,
however for various number of reasons allows workers to specialize in goods and
services that they produce more efficiently than the rest of the world and then to
exchange them for goods and services that other countries produce at higher quality and
lower cost. Also, specialization and free trade allow the U.S. to become more competitive
and innovative. Innovation constantly provides new technologies that allow Americans to
produce more, cure more diseases, pollute less, improve education, and choose from a
greater range of investment opportunities. The resulting economic growth generates
better-paying jobs, higher standards of living, and a greater appreciation of the benefits of
living in a peaceful society.
U.S. and Kenyan firms are encouraged to maintain close communication with
distributors and customers to exchange information and ideas on market trends,
opportunities, and strategies.187
The principles of customary business courtesy,
especially delivering a prompt response to requests for price quotations and orders, are a
prerequisite for exporting success. The interviewees stated that the two countries should
first become friends since friendship and mutual trust are highly valued. There is no
substitute for face-to-face contact, and the use of first names at an early stage of a
186
Ibid
Blanchard, L. P. (2013, September). US-Kenya Relations: Current Political and Security Issues. In CRS
Report for Congress, Sep-tember (Vol. 23, p. 17).
187
77
business relationship is acceptable. Buyers from both countries appreciate quality and
service, and they can pay a premium if convinced of a product's overall superiority and
the reliability of customer service. U.S. exporters should allow for additional shipping
time to Kenya and ensure that Kenyan buyers are continuously updated on changes in
shipping schedules and routing. Shipment times from the United States average eight
weeks, and customs irregularities are not unusual. If market size warrants, U.S. firms
should consider warehousing in Kenya for prompt supply and customer service.
In agreement with this Hussein in his study of ASEAN countries stresses that the
exchange rate alone should not be used in managing the external balances of these
ASEAN countries as exports in Kenya have been found to relate more strongly with
GDP.188 In addition, America's ability to compete and innovate derives from its open
markets and from the continual search for new markets through the expansion of free
trade. Goods and services flowing across borders foster new ideas and allow U.S.
producers to learn about the market through the failure and success of traded products. As
they learn more, they are able to innovate to remain competitive.
4.6 Challenges faced by Kenya and U.S in the process of trade
There are various factors which tend to hamper smooth trade especially between
Kenya and the U.S. These factors may be economic, socio-cultural or political. The
interviewees from Kenya Private Sector Alliance stated that every type of economic
union shares the development and enlargement of market opportunities as a basic
orientation; usually markets are enlarged through preferential tariff treatment for
participating members, common tariff barriers against outsiders or both.
188
78
According to Hummels, protected markets stimulate internal economic
development by providing assured outlets and preferential treatment for goods produced
within the customs union, and consumers benefit from lower internal tariff barriers
among the participating countries.189 In many cases, external as well as internal barriers
are reduced because of the greater economic security afforded domestic producers by the
enlarged market.
The interviewees from the U.S embassy in Kenya stated that economic factors in
the global, home and host country are challenges to trade between the two countries, in
these aspects economic growth, exchange rates, interest rate and the inflation rate. Also,
socio-cultural factors such as income distribution are challenges of trade between the two
countries. More specifically, cultural aspects include aesthetics, education, language, law
and politics, religion, social organizations, technology and material culture, values and
attitudes. Social factors refer to reference groups, family, role and status in the society.
The availability of technological infrastructure and technical capacities being at different
levels between the two countries is a challenge as well.
According to Collier, it is always more difficult for some developing countries to
absorb burdensome regulations and red-tape than developed countries.190 Second, staying
in power requires keeping abreast with rapidly changing technology and consumer tastes,
which require significant human and financial resources. Some developing countries are
born small, and a few are also born global. The vast majority of services countries that
manage to survive in international markets grow rapidly to reach a sustainable scale.
189
Ibid
Collier, P., & Gunning, J. W. (2012). Trade policy and regional integration: implications for the
relations between Europe and Africa. The World Economy, 18(3), 387-410.
190
79
Some grow organically, some integrate into international networks and many are
acquired by larger firms.
4.7 Ways that international trade between Kenya and the U.S can be strengthened
The interviewees were asked to indicate how Kenyan and U.S business ties can be
strengthened. They stated that the standards of negotiations between the two countries
need to be revised and favorably set up for both countries to effectively trade among
themselves. They also stated that this can be done through better governance and policies
creation. Laws and policies that directly influence trade should be created in ways that
accommodate and support trade between countries. Both Kenya and U.S governments
need to invest more in their infrastructure since better infrastructure will facilitate
economic growth that is directly linked to trade between the two countries.
Also the configuration of the population for different markets need to be revised
and composition of exports reviewed by Kenya. Another key way of strengthening the
ties between the two countries is the review and conclusion of bilateral agreements. A
trade balance in the economy will help to determine the macroeconomic performance of
the economy like the balance of payment, investments and savings in both the developed
(U.S) and the developing economy (Kenya).
The interviewees from the Ministry of Foreign Affairs and International Trade
indicated, for the countries to compete with their global counterparts, the domestic
entrepreneurs should try to be more efficient and this will in turn ensure efficient
utilization of available resources. There is need for better technological infrastructure in
Kenya. Establishing and maintaining good technological infrastructure will go a long way
to effectively give Kenya a competitive edge. Mutual acceptance of socio-cultural
80
differences between the two countries will help to run trade smoother and will be
beneficial. Trading events such as business matching, that directly involve importers and
exporters of a country are also a way through which ties can be strengthened.
81
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Introduction
This chapter presents summary of the findings, conclusions based on the findings
and recommendations there-to on the impact of external trade between Kenya and the
U.S (2000-2015). The chapter also presents recommendations for further studies.
5.2 Summary of Findings
The study aimed at assessing the impact of external trade between Kenya and the
U.S (2000-2015). The study established that trade relations between Kenya and U.S are
good. It was also found that the establishment of a Kenya diplomatic mission in U.S
would help in promoting trade. The research findings showed that U.S is concerned with
increase of investment opportunities in Kenya which will help grow their economy. Also,
Kenya and the U.S have been supporting one another in trade which has increased the
countries‘ economic growth. Trade agreements have expanded access between the two
countries‘ markets. Kenya and the U.S have been improving their existing trade
agreements since independence. It was also found that bilateral trade affairs have helped
minimize trade deficits through negotiating free trade agreements with Kenya.
The study found that two-way trade between Kenya and the United States nearly
tripled in 2014, as exports grew by a third and imports tripled. Total trade between the
two countries increased by 143.6 per cent in 2015, to Sh206.92 billion from Sh84.94
billion in 2014. Data collected from Kenya National Bureau of Statistics show sales to
USA touched Sh38.20 billion, having increased by Sh8.57 billion over the previous year,
a 28.9 per cent growth. The study established that the emergence of new technology
82
promotes competitiveness and profitability in trade. It was also found that trade offers a
consumption possibility frontier that can give people more of all goods than can own
domestic production possibility frontier. Also, export growth has increased jobs in Kenya
and U.S by generating new business for manufacturers, service providers and farmers.
However, free trade has increased social and environmental problems in particularly
harming the poorest countries. The study established that trade balance in an economy
helps to determine the macroeconomic performance of the economy.
Through the economic survey data on exports from Kenya to U.S, the study found
that tea exports are estimated to have been higher with a mean of 18.81 while sugar
exports had the lowest with a mean of 7.62. Kenya is the 3rd leading producer of black tea
in the world accounting for 10% of the total world tea production and the largest exporter
of tea in the world accounting for 22% of the total world tea exports.191 10% of the
Kenyan population depend on tea and tea contributes 4% of the country‘s GDP and 26%
of the country‘s export earnings. The tea industry has also contributed significantly to
rural development in the country.
The data on Kenya imports from US show that importation of transport equipment‘s is
estimated to have been higher as indicated by a mean of 38.49. Importation of aircrafts
was the lowest as indicated by a mean of 29.16. In terms of absolute value, the growth in
U.S. exports of transportation equipment in 2012 was led by aircraft equipment,
increasing $13.2 billion (16 percent) to $95.2 billion, followed by exports of motor
vehicles, which rose by $6.2 billion (11 percent). U.S. exports of aircraft equipment,
which accounted for 33 percent ($95.2 billion) of sector exports, grew largely on the
191
Ibid
83
strength of Boeing, one of the world‘s leading large civil aircraft producers.192 U.S.
exports of motor vehicles continued to recover from the economic recession, accounting
for 23 percent ($65.7 billion) of total export value in 2012. Other leading exports in 2012
included motor vehicle parts, which rose by 6 percent, and construction equipment,
which increased by 7 percent.
5.3 Discussion of the Findings
5.3.1 Current Trade Relations between Kenya and the U.S
The study found that Kenyan entrepreneurs have had an opportunity to showcase their
innovative skills, entrepreneurial spirit, and potential to the world since it is a country
with an emerging culture of entrepreneurship. The study findings indicated that Kenya
has been in a position to align the myriad of U.S. programs which are intended to spur
economic growth, trade, and investment such as the New Alliance for Food Security and
Nutrition, Open Government Partnership, African Growth and Opportunity Act (AGOA),
Partnership for Growth, Trade Africa, and Power Africa with Kenyan priorities.
Major project opportunities for American firms exist in areas of geothermal energy
development, the telecommunications sector, the lease and/or purchase of commercial
aircraft, and a new Kenyan export processing zone with an emphasis on textile
equipment. The study also established that U.S. foreign direct investment in Kenya has
grown in recent years, and the U.S. government has proposed a new trade and investment
partnership with the East African Community (EAC), of which Kenya is a member.
192
Ibid
84
5.3.2 Influence of Competition on Trade between Kenya and U.S
It was found that U.S has been competing with several countries so as to become
Kenya‘s first trading partner. India remains Kenya‘s largest source of imports a spot it
has in the past competed for with China and UAE. The findings indicated that it was
possible to get a breakdown of the key items that Kenya imported from the U.S but
America‘s stride to the second slot comes on the back of big-ticket investments in energy
and transport sectors by local firms using sophisticated U.S services and goods. The
study found that the rivalry has benefitted Kenya in terms of foreign direct investments, a
wider variety of consumer goods and as new sources of technical and financial assistance.
The study also found that U.S have had several competitors which include China
which has recently emerged as a major supplier of consumer goods such as shoes,
textiles, batteries, electronics and motor vehicle parts, gaining significant market share
with its low pricing of mass market goods strategy that has caused disquiet among local
traders dealing in rival merchandise with countries such as U.S. The study indicated that
more active participation in the international market by promoting exports leads to more
intense competition and improvement in terms of productivity. China has had the
attention of most of the world because of its emergence from autarky and into the global
economy, its continental scale, and its extraordinary economic growth and
transformation.
5.3.3 Policies that need to be adapted in order to improve trade relations
The study found that Kenya and U.S. firms should analyze the short-term
incentives of a proposed agreement for the potential partner. It was also found that the
countries should encourage free trade. Also, specialization and free trade would allow the
85
countries to become more competitive and innovative. Innovation constantly provides
new technologies that allow Americans and Kenyans to produce more, cure more
diseases, pollute less, improve education, and choose from a greater range of investment
opportunities.
The study findings indicated that U.S. and Kenyan firms should maintain close
communication with distributors and customers to exchange information and ideas on
market trends, opportunities, and strategies. The principles of customary business
courtesy, especially delivering a prompt response to requests for price quotations and
orders, are a prerequisite for exporting success. It was established that the two countries
should first become friends since friendship and mutual trust are highly valued. There is
no substitute for face-to-face contact, and the use of first names at an early stage of a
business relationship is acceptable. Also, U.S. exporters should allow for additional
shipping time to Kenya and ensure that Kenyan buyers are continuously updated on
changes in shipping schedules and routing. If market size warrants, U.S. firms should
consider warehousing in Kenya for prompt supply and customer service.
5.3.4 Challenges faced by Kenya and U.S in the process of trade
The study found that factors which tend to hamper smooth trade between Kenya
and U.S. are economic, socio-cultural and political factors. It stated that every type of
economic union shares the development and enlargement of market opportunities as a
basic orientation; usually markets are enlarged through preferential tariff treatment for
participating members, common tariff barriers against outsiders or both.
The study further established that economic factors in the global, home and host
country are challenges to trade between the two countries, in these aspects economic
86
growth, exchange rates, interest rate and the inflation rate. Also, socio-cultural factors
such as income distribution are challenges of trade between the two countries. More
specifically, cultural aspects include aesthetics, education, language, law and politics,
religion, social organizations, technology and material culture, values and attitudes.
Social factors referred to reference groups, family, role and status in the society. The
availability of technological infrastructure and technical capacities being at different
levels between the two countries was indicated as a challenge as well.
5.3.5 Ways that international trade between Kenya and the U.S can be strengthened
The study found that the standards of negotiations between the two countries need
to be revised and favorably set up for both countries to effectively trade among
themselves. This can be done through better governance and policies creation. Laws and
policies that directly influence trade should be created in ways that accommodate and
support trade between countries. It was found that both Kenya and U.S governments need
to invest more in their infrastructure since better infrastructure will facilitate economic
growth that is directly linked to trade between the two countries.
The study further found that the configuration of the population for different
markets need to be revised and composition of exports reviewed by Kenya. Another key
way of strengthening the ties between the two countries is the review and conclusion of
bilateral agreements. A trade balance in the economy will help to determine the
macroeconomic performance of the economy like the balance of payment, investments
and savings in both the developed (U.S) and the developing economy (Kenya).
It was also found that for the countries to compete with their global counterparts,
the domestic entrepreneurs should try to be more efficient and this will in turn ensure
87
efficient utilization of available resources. There is need for better technological
infrastructure in Kenya. Establishing and maintaining good technological infrastructure
will go a long way to effectively give Kenya a competitive edge. Mutual acceptance of
socio-cultural differences between the two countries will help to run trade smoother and
will be beneficial.
5.4 Conclusion
In conclusion, the study notes that trade relations between Kenya and U.S is good.
This is because Kenya and the U.S have been supporting one another in trade which has
increased the countries‘ economic growth. Also, export growth have increased jobs in
Kenya and U.S by generating new business for manufacturers, service providers and
farmers. The adoption of various policies has streamlined mutual cooperation between
the Kenyan and U.S investors.
U.S has been competing with several countries so as to become Kenya‘s first trading
partner. The competition and rivalry has benefitted Kenya in terms of foreign direct
investments, a wider variety of consumer goods and as new sources of technical and
financial assistance. In addition, more active participation in the international market by
promoting exports leads to more intense competition and improvement in terms of
productivity.
Countries should encourage free trade since specialization and free trade would
allow them to become more competitive and innovative. Innovation constantly provides
new technologies that allow Americans and Kenyans to produce more, cure more
diseases, pollute less, improve education, and choose from a greater range of investment
opportunities.
88
The study also concludes that U.S. and Kenyan firms should maintain close
communication with distributors and customers to exchange information and ideas on
market trends, opportunities, and strategies. The principles of customary business
courtesy, especially delivering a prompt response to requests for price quotations and
orders, are a prerequisite for exporting success. Also, laws and policies that directly
influence trade should be created in ways that accommodate and support trade between
countries.
5.5 Recommendations
The study makes the following recommendations:5.5.1 Recommendation for Further Studies
The study recommends future researchers in this field to look into several areas.
First, a study should be carried out to determine the factors that limit or improve
international trade within Kenya and U.S. Also the study suggests that further research
should be done on the impact of external trade relations between Africa and Kenya.
Another study should also be done on external trade and its effects on economic growth
in Kenya and the U.S.
5.5.2 Policy Recommendations
Based on the findings, this study comes up with the following recommendations;
countries should encourage free trade since specialization and free trade would allow
them to become more competitive and innovative. Firms in various countries that engage
in trade should maintain close communication with distributors and customers to
exchange information and ideas on market trends, opportunities, and strategies.
89
Countries that want to engage themselves in international trade should first
become friends since friendship and mutual trust are highly valued. There is no
substitute for face-to-face contact, and the use of first names at an early stage of a
business relationship is acceptable. In addition, the standards of negotiations between
countries need to be revised and favorably set up for the countries to effectively trade
among themselves. This can be done through better governance and policies creation.
The study observes that there is need for the Kenya and U.S government to
formulate new trade policies that will analyze the short-term incentives of a proposed
agreement for the potential partner. This will ensure that vast transformation of both
economies will be gained by two partners. The two governments through the Ministry of
Foreign Affairs need to look at the external environmental factors that will not transform
the economy of U.S solely but both partners bearing in mind that the trend has favored
the investments.
90
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APPENDICES
Interview Guide
1. What are the current trade relations between Kenya and the U.S?
2. How does competition from other countries affect how trade is carried out
between U.S and Kenya?
3. What are some of the policies Kenya and the U.S need to adapt in order to
improve their trade relations?
4. What challenges do you think exist between Kenya and the U.S that are hindering
maximum trade between the two countries?
5. In what ways can international trade between Kenya and the U.S be strengthened?
105