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Benefits of a Customs Union

On the average, the size of EAC countries is around 20 million people in population with a GDP of around US $20 billion.  Such economies on their own are too small to attract any major meaningful investment in today’s globalized economy, where mass production is vital to reduce unit costs.

In 2000, with their total GDP of US$25.553bn (Kenya-$10.357bn;Tanzania-$9.027bn; and Uganda-$6.17bn) and a combined population of around 86 million people, the 3 countries combined compared unfavourably with Vietnam with a total GDP of $31.344bn and a population of 79 million people.  Vietnam would have been more attractive to investors since it is one customs territory.

By moving towards the creation of one economic region through the Customs Union, EAC created a single market of over 143 million people and a combined GDP of around US$ 110.3 billion (EAC Facts & Figures Report 2014). This large economic region can only be meaningful if it is more than a simple aggregation of neighboring countries.  Before the Customs Union, trade in the region was carried out under different external tariffs; customs regulations, procedures and documentation.

The EAC Customs Union has assisted to level the playing field for the region’s producers by imposing uniform competition policy and law, customs procedures and external tariffs on goods imported from third countries, which has supported the region to advance its economic development and poverty reduction agenda.

Further to this, the Customs Union has promoted cross-border investment and served to attract investment into the region, as the enlarged market with minimal customs clearance formalities, it is more attractive to investors than the previously small individual national markets.  In addition, the Customs Union offers a more predictable economic environment for both investors and traders across the region, as regionally administered Common External Tariff (CET) and trade policy tend to be more stable.

Private sector operators based in the region with cross-border business operations are able to exploit the comparative and competitive advantages offered by regional business locations, without having to factor in the differences in tariff protection rates, and added business transaction costs arising from customs clearance formalities. The regionally based enterprises are also getting better protection, as enforcement of the CET is at a regional level.

Most importantly, however, is the signaling effect that arises from the Partner States agreeing to implement a common trade policy in their relationship with the rest of the world? This is important in view of the developments at the global level, where countries are entering into economic partnership as regional groupings.

Adjustment of the national external tariffs to the common external tariff has resulted into major welfare gains for consumers, if the CET on finished goods will be lowered as a result of such adjustment.