Speaking at the launch of the United Nations Economic Commission for Africa (Uneca) report dubbed Transformative Industrial Policy for Africa in Kampala last week, Ms Serwadda said that the three-year grace period would also allow the region to take stock of which countries have the capacity to produce which products.
While experts at the meeting termed the EAC’s focus on its textiles sector as a step in the right direction, they said that there is a need for the region to do more than just take stock of its production capacities.
Rogers Mukwaya, an economic affairs officer at Uneca, said that imposing the ban without improving the production capacity for industries would hand the garments market, currently dominated by North America and Europe for used items, to China and other Southeast Asia nations whose textiles are cheaper than those produced locally.
According to Uneca, the region can draw lessons from Ethiopia, which is boosting its leather and garments industry through incentives.
For example, the government has invited foreign investors to provide capital and technology. It also subsidises land rents for manufacturers and has waived duty on all imported capital goods and raw materials that are not produced locally. Investors also receive five-year tax holidays on profits.
Uneca said that such incentives would boost the region’s textile and leather industries given that finished products have major export potential, low entry barriers and are labour intensive in nature.
This means that the textiles and leather industries would help to alleviate the unemployment problems in East Africa.
These industries also have strong linkages to the agricultural sector, as inputs used include cotton and livestock hides and skins.
These benefits are however only possible where the government has put in place a mechanism to withdraw the incentives, if the investors fail to deliver, Uneca warned.
On its part, Kampala offered Phenix Logistics Uganda Ltd government-guaranteed loans as well as land and structures to operate, that would have enabled the company to become profitable by producing garments for export to the US under the African Growth and Opportunity Act, but it continued to make losses.
The Ministry of Finance and Economic Development has since given up on the perennially loss-making company and handed its assets to Fine Spinners (U) Ltd. The government has promised Fine Spinners a market for its products.
The company will supply uniforms for the police, the army and the prisons department.
Dr Isaac Shinyekwa a research fellow at the Economic Policy Research Centre said that apart from pegging incentives on delivery, the EAC will also need to invest in the production of raw materials.
“How much do we harvest from an acre of cotton and how much does China or Malaysia harvest? They use improved varieties of cotton; that’s why those countries can still sell cheaper cloth than Nytil [a garments manufacture in Uganda],” he said.
The price for cloth imported from Malaysia or China includes a 25 per cent import duty and transport costs. In East Africa the high costs of capital, electricity and other infrastructure make garments produced locally expensive.
Asia dominance
Dr Shinyekwa added that without addressing the structural problems of the garments and leather industries, Asian countries will control these markets in East Africa even if governments choose to increase taxes.
According to Ms Serwadda, the EAC heads of state summit slated for November is likely to approve an increase in taxes for second-hand clothes and shoes aimed at boosting revenue and the competitiveness of the local industries ahead of the ban.
But Dr Shinyekwa said that increasing import duty on goods considered to be sensitive alone without helping affected industries to improve efficiency will not work.
He said that EAC producers had failed to take over the sensitive products markets, despite protection from the Custom Union. Importers of sensitive products like sugar pay 100 per cent import duty, while the tariff on rice is 75 per cent. For cement, import duty stands at 35 per cent.
A preliminary paper from the Economic Policy Research Centre shows that imports of sensitive products into the EAC rose from $700 million in 2005 to $1.7 billion in 2013
Dr Shinyekwa said that increasing such taxes reduces the welfare EAC citizens, as people are forced to pay more for these products.
