The Commonwealth Secretariat has published a report in its Trade Hot Topics series that explores the implications and subsequent costs of the possible loss of duty-free access to the EU market arising from a non-conclusion of the EPA process before 1 October 3014, examining in particular how the changes would affect Kenya’s exports of cut flowers to the EU.
The analysis, by the Overseas Development Institute (ODI), notes that, without an EPA in place between Kenya and the EU, the lapsing of market access regulation (MAR) 1528/2007 would lead to an increase in import duties on cut flowers of between 5 and 6.5%, in a context where suppliers from LDCs would continue to enjoy duty-free access under the ‘Everything But Arms’ (EBA) agreement. It is unclear to what extent the differences in tariffs charged on imports would immediately impact on cut flower sourcing, given a range of other advantages that Kenya enjoys as a result of its long-established presence in the EU market.
The ODI report reviews the role played by different types of cut flower sector companies serving in the EU via two principal routes to market:
sales through the Dutch auction houses; and
direct sales to UK multiple retailers.
The report highlights how “lead firms… exert a high degree of explicit control on their suppliers” and that over time the “share of global trade of lead firms has increased.” It maintains that overall “80% of global trade is now coordinated by transnational corporations, including through intra-firm trade as well as non-equity modes and under contractual relationships.”
ODI also notes that while lead firms source from multiple locations and countries, there is a tendency for the lead firms to bias sourcing towards producers where they have ownership interests.
The analysis remarks that in Kenya there are many types of operational firms producing and trading in cut flowers. These firms have different ownership structures, having to meet different challenges and options in the face of trade policy changes. It maintains that any increase in tariffs arising from a failure to complete the EPA process “may not be such a challenge for large vertically integrated firms that deal directly with retailers”, because tariff increases are “more likely to be a challenge for smaller and more medium sized firms”, which are probably “domestic rather than foreign owned”. The analysis adds that “smaller and more medium sized firms… already face particular challenges related to meeting private voluntary standards and obtaining mutual recognition within developed country markets.”
The Trade Hot Topics report also argues that “larger firms and those more directly integrated with buyers may be better able to absorb any increase in tariffs,” since “the tariff margin increase could potentially be borne by buyers rather than producers.” Against this background, “should there be a failure to reach agreement on an EPA… these changes could prompt the downgrading of some firms within the cut flower GVC [global value chain] as opposed to facilitating the social and economic upgrading currently being promoted by donors.”
The fact that larger firms, and those more directly integrated with buyers, are better placed to absorb increased costs through sharing the burden applies not only to potential tariff increases, but also to current increases in sanitary and phytosanitary (SPS) inspection fees, arising from moves to full cost recovery in the UK and the Netherlands.
Anecdotal evidence suggests that the financial burden along these supply chains, arising from the 236% increase in UK SPS inspection fees, is in fact being shared (see Agritrade article ‘ UK moves to full cost recovery for SPS inspections, but no agreement yet...’, 9 June 2014). It is unclear whether this is equally the case for smaller and medium-sized firms with less integrated supply arrangements.
In addition, the informal granting of “assured trade status” in the UK for reputable traders with a proven good record of compliance can serve to reduce inspection costs faced by established large-scale traders that operate vertically integrated supply chains.
The ODI analysis thus implicitly suggests that increased costs of accessing the EU market (whether arising from tariffs or increased inspection charges) may well fall more heavily on small and medium sized firms that are locally owned, rather than large firms that are vertically integrated, foreign owned or firms that are integrated into direct retailer supply relationships.
The fact that Kenya has a long-established track record of exporting cut flowers to the EU means Kenyan exports are currently subject to lower levels of SPS inspection than non-traditional suppliers, who have not yet built up a track record on which a risk assessment can be made. This may result in Kenyan exporters facing total inspection costs as low as approximately 5% of those levied on non-traditional exporters. This factor may play a role in short-term sourcing decisions, should GSP tariffs be imposed on Kenyan cut flower exports.