EAC : a possible model for implementing other Customs Unions in Africa?

A paper from the Overseas Development Institute helps to understand how the EAC Customs Union model works, so to draw lessons for other Regional Economic Communities (RECs) wishing to undertake steps in the establishment of similar forms of economic integration.

As it is known, the Abuja Treaty at article 6 envisages the creation of an African Economic Community (AEC) through a gradual process of co-ordination, harmonization and progressive integration of the activities of RECs in Africa, both existing and future, which is articulated in six stages. The stage n. 3 of such process foresees the establishment of Free Trade Agreements (FTAs) in each REC, followed by their further transformation in Customs Unions. At the moment, however, only few RECs, among the 8 ones that are officially recognized by the African Union, have achieved functional Customs Unions. These are the East African Community (EAC) and ECOWAS. Other Customs Unions existing in the continent such as SACU, CEMAC and WAEMU, are not in the list of the officially-recognised RECs.

The East African Community (EAC) formed a customs union on 1^st July 2005, with the signature by its Partner States of the Protocol for the establishment of the EAC Customs Union (which however became fully operational in 2010). This REC is also currently in the process of consolidating its Common Market, formally established in 2010, when the EAC Common Market Protocol entered into force following ratification by all the (then) five EAC Partner States. Two of its members (South Sudan and the Democratic Republic of Congo) are not yet fully participating in the Customs Union as they are still developing the relevant framework based on specific roadmaps adopted by the EAC Secretariat. In the case of South Sudan, the roadmap implementation has encountered significant delays, as the process of convergence of laws, regulations, standards and practices to those applicable in the EAC region is still far from being completed.

To operationalise the Customs Union, in 2012 the EAC decided to set up a Single Customs Territory (SCT), i.e., a geographical space where internal border controls on the circulation of goods are reduced to a minimum. The SCT creates a common system of clearance for goods moving in and out of the EAC, by establishing rules on when and how to clear goods going in and out of the region or in transit, where to pay customs duties and how to deal with goods destined for warehouses.

The EAC path for the establishment of the Customs Union has been progressive. Its member States decided a transition period of five years from the coming into force of the EAC Customs Union Protocol which included the following milestones:

• elimination of internal tariffs for goods traded among Partner States that qualify under the Rules of Origin
• implementation of a Common External Tariff and
• enactment and implementation of the Customs Management Act and supporting regulations

In 2012, as the transition period for the Customs Union implementation was coming to an end, the EAC Summit of Heads of States adopted the so-called Destination Model (DM), whereby the import declaration is submitted in the country of destination of goods, and the destination Partner State deals with the assessment, payment and collection of duties on imported goods while they are still at the first point of entry. This is possible because customs officers of such Partner State are deployed at ports of first entry who materially collect the duties. From the point of arrival of goods to the destination point, goods move under a customs bond to avoid to be diverted while they move in transit.

The mechanisms adopted by the EAC is different from other Customs Unions in Africa. At its extreme, there is the Southern African Customs Union (SACU), which has adopted a revenue-sharing arrangement similar to the one used by the European Union (EU), where revenues are collected at the external borders (at the point of entry), transferred on a quarterly basis into a common revenue account of the Union, called “Customs Revenue Pool” (CRP) which is currently managed by South Africa on a transitional basis. Subsequently, such amount is redistributed between SACU member states according to a predetermined formula provided in art. 34 of the SACU Agreement.

Interestingly, the study notes that the revenue-sharing arrangement of SACU was possible because of the existence of form of monetary coordination among its members, based on a regime of pegging of their currencies to that of a reference economy (South Africa), which assumes the responsibility for formulation and implementation of the monetary policy in the region. As in the EAC all countries have different currencies, the implementation of such solution in such a REC would have been more problematic. Accordingly, the Destination Model (DM) mechanism was adopted. Moreover, the SACU members managed to accept a revenue-sharing mechanism where the smaller members receive more revenue than South Africa when considered in relation to their economic size, while a similar agreement was not possible in the EAC.

This is a period of heated discussions on the future evolution of the African Continental Free Trade Agreement (AfCFTA) into a Customs Union. The next UNECA Assessment Regional Integration in Africa (ARIA) report will include a part dedicated to the analysis of the steps necessary to achieve a continental customs union and a common market (an analysis already anticipated in the ARIA IX report published in 2019). Keeping in mind these challenges is therefore important, as an adequate mechanism will need to be developed at continental level to distribute revenues collected by coastal countries with landlocked ones (which in Africa are almost 1/3 of its States, the highest number of each continent in the world). Having no external borders, such countries risk to incur in huge revenues losses when (and if) the project of establishment of a continental Customs Union will become a reality.

In theory, the EAC system could be a model, but how the countries of destination of goods imported through the external borders of the Union will assess and collect duties on goods introduced in the customs territory? Is the secondment of customs officers from destination countries to the ports of entry possible in a continent of 54 States? And how avoid the diversion of goods during the path between the point of entry to the point of destination of goods? A continental transit bond system with electronic cargo tracking devices monitoring the movement of cargo would help, but how practical is its implementation in a continent of such huge dimensions, like Africa?