WIDER Working Paper 2020/113 Impact of a Single Customs Territory in the East African Community on Tanzania’s exports Anne Kamau and Maureen Odongo* September 2020 In partnership with This publication results from Sustainable development solutions for Tanzania – strengthening research to achieve SDGs, a collaborative project between the UONGOZI Institute in Dar es Salaam, Tanzania, and UNU-WIDER in Helsinki, Finland, with a main research objective of informing the development and implementation of policies aiming for economic transformation and sustainable development in Tanzania and the East African region. With financial support provided by the Ministry for Foreign Affairs of Finland, the joint project launched in 2018 with key questions giving the partners a framework for collaboration and the research work to be undertaken. The project focuses on macroeconomic perspectives, domestic resource mobilization, extractives, industrialization, sustainable livelihoods, and gender as a cross-cutting issue. The project provides local stakeholders a platform for research and policy discussions on Tanzania and bridges these discussions to the regional and international development debate. About UONGOZI Institute ‘Uongozi’ means leadership in Kiswahili, and inspiring and strengthening leadership is the core purpose of our organization. UONGOZI Institute is dedicated to supporting African leaders to attain sustainable development for their nations and for Africa. This is done through the provision of high-quality executive education (leadership competencies), facilitation of policy dialogues, action-oriented research and technical assistance for public and private institutions. UONGOZI Institute, Magogoni Street, Kivukoni, P.O. Box 105753, Dar es Salaam, Tanzania Abstract: The implementation of a Single Customs Territory by East African Community countries is intended to ease the movement of goods across borders by cutting costs and time through harmonization and simplification of customs documents, removal of burdensome customs procedures, and automation of customs systems. Using descriptive statistics and an econometrics estimation method, this study examines the impact of a Single Customs Territory on Tanzania’s exports from 2004 to 2018. The key findings reveal that Tanzania’s merchandise exports to East African Community countries have remained low under the Single Customs Territory. Challenges persist as trade costs remain high and it takes a significant amount of time to export goods. Policy proposals include relaxation of border costs and time required, expeditious harmonization of customs systems and documentation, investment in cargo-related infrastructure, value addition of exports, and ratification of agreements. Key words: Single Customs Territory, trade costs, East African Community JEL classification: F13, F14, F15 Acknowledgements: We would like to acknowledge and thank UNU-WIDER and UONGOZI Institute for giving us the opportunity to undertake this study and for supporting it. The paper has undergone several iterations, benefiting immensely from comments given by participants at the workshop in Dar es Salaam and by Mr Mugisha Kamugisha who first reviewed the paper. In addition, Prof. Joseph Semboja from UONGOZI Institute and Maureen Were from UNU- WIDER gave us very useful and insightful comments. We are grateful for all your comments and for enabling us to improve the quality of the paper. All inadvertent errors and omissions are solely ours. *Central Bank of Kenya, Nairobi, Kenya, corresponding author: [email protected] This study has been prepared within the project Sustainable development solutions for Tanzania – strengthening research to achieve SDGs funded by the Ministry for Foreign Affairs of Finland. Copyright © UNU-WIDER 2020 Information and requests: [email protected] ISSN 1798-7237 ISBN 978-92-9256-870-2 https://doi.org/10.35188/UNU-WIDER/2020/870-2 Typescript prepared by Lesley Ellen. United Nations University World Institute for Development Economics Research provides economic analysis and policy advice with the aim of promoting sustainable and equitable development. The Institute began operations in 1985 in Helsinki, Finland, as the first research and training centre of the United Nations University. Today it is a unique blend of think tank, research institute, and UN agency—providing a range of services from policy advice to governments as well as freely available original research. The Institute is funded through income from an endowment fund with additional contributions to its work programme from Finland, Sweden, and the United Kingdom as well as earmarked contributions for specific projects from a variety of donors. Katajanokanlaituri 6 B, 00160 Helsinki, Finland The views expressed in this paper are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors. 1 Introduction Trade facilitation is widely recognized as an essential factor in enhancing competitiveness as it allows for the timely flow of goods and services at low transaction costs, thereby increasing trade flow and gross domestic product (GDP) (World Bank 2019a; WTO 2015).1 It is for this reason that the international community and regional economic blocs have made significant progress in dismantling barriers to trade by reducing tariff and non-tariff barriers which hinder movement of goods across borders. In the East African Community (EAC) region, implementation of the Single Customs Territory (SCT) aims to facilitate the flow of goods in order to enhance intra-EAC trade. The removal of burdensome customs procedures, harmonization and simplification of customs documents, and automation of customs information has been observed to have the greatest impact on reducing trade costs by between 10–18 per cent and increasing trade flows across borders (OECD 2018). The largest gains are expected to accrue to low income countries since these measures are aimed at facilitating trade in perishable agricultural goods and intermediate manufactured goods, which feature prominently in global value chains where lead-time and predictability in delivery time are critical (OECD 2018; World Bank 2019a; WTO 2015). Despite progress made in implementing trade facilitation agreements, most countries in sub-Saharan Africa (SSA) lag behind, as the cross-border flow of goods is hampered by trading costs and time related to border and document compliance, which are relatively high compared to other countries in the world. The World Bank (2020b) Doing Business Report revealed that, on average, SSA is ranked 140 out of 190 in the ease of trading across borders indicator. According to the report, the SSA average border compliance time for exports is 97.1 hours (four days) compared to 12.7 hours (half a day) in OECD countries, while the border compliance cost is US$603.1 compared to the OECD average cost of US$136.8. Burdensome procedures have also added to the cost of trading in SSA, with document compliance taking 71.9 hours (three days) to clear and costing US$172.5 compared to 2.3 hours and US$33.4 in OECD countries. At the regional level, the EAC countries, whose members include Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda, launched the SCT in 2013.2 The initiative was aimed at facilitating trade across EAC countries by harmonizing and simplifying internal regulatory procedures and streamlining border documentation to ensure the timely release of goods across borders. In addition, modernization of customs programmes was aimed at reducing costs and the number of documents required for clearance across borders (EAC 2014). Following this initiative, notable progress has been recorded across EAC countries, with the export time dropping from an average of 28 days in 2013 to about three days in 2019 (World Bank 2013, 2020b). However, implementation of the SCT has been uneven across EAC countries and significant challenges remain, in particular in relation to coordination between domestic and cross- border agencies and the timely release of goods across the border. Comparison across countries reveals that the border compliance time for clearance of export goods is on average four days for 1 Trade facilitation is defined as the ‘simplification and harmonization of international trade procedures’, including the ‘activities, practices, and formalities involved in collecting, presenting, communicating, and processing data and other information required for the movement of goods in international trade’ (WTO 1998 as cited in Grainger 2012: 17). 2 EAC Partner States include Burundi, Rwanda, Kenya, South Sudan, Tanzania, and Uganda. South Sudan joined the EAC in 2016 and therefore has been excluded from the study. 1 Tanzania, three and a half days for Rwanda, two and a half days for Burundi, and 16 hours for Kenya (World Bank 2020b). Costs related to border compliance and documentation also vary, with the country with the highest border compliance cost being Tanzania at US$1,175, above the SSA average of US$603, and the lowest being Burundi at US$109. Whereas trade facilitation measures under the SCT are intended to ease the movement of goods across borders by cutting trade costs and time, and harmonizing and simplifying trade procedures, this has not been the case in all the EAC countries. The high cost of exporting across borders may discourage small exporters who may not be well versed with complicated cross-border trade procedures. In addition, long