Case study 1: Uganda’s export diversification

Uganda is a landlocked LDC that has seen positive changes in trade outcomes in recent decades, with some diversification of its exports towards higher value products. The country’s trade policy space is legally constrained by its membership in WTO, which rules out a number of options, but the Ugandan authorities have expanded the political–economic aspects of policy space through a prolonged period of macroeconomic stability, efforts at industrial policy, and participating in a project of integration into growing regional markets. However, the analysis suggests that Uganda could do more to use and expand the trade policy space available to support industrialization.

After major losses of industrial capacity under the Idi Amin regime of the 1970s, the political instability of the early 1980s and structural adjustment in the late 1980s and early 1990s, 91 per cent of Uganda’s merchandise exports were primary products in 1995 (Shinyekwa et al., 2016). By 2016, this figure had fallen to 51 per cent, while resource-based, low-technology and medium-technology manufactured products reached 18 per cent, 10 per cent and 8 per cent of exports, respectively (UNCTAD, 2018).¹² As well as this product diversification, Uganda’s end markets also became more diversified. The share of exports sold to Europe was nearly 80 per cent in 1995, but by 2016 this figure had fallen to less than 40 per cent, with the difference being sold to markets in Africa, Asia and the Middle East (Atlas of Economic Complexity, 2017). Uganda’s manufactured exports per capita increased from $1 in 1990 to $74 in 2016 (UNIDO, 2016).

Standards and non-tariff barriers

Align domestic with foreign standards to enable export of domestic produce. Use non-tariff barriers (e.g. quality requirements) to protect domestic producers from foreign competitors.

Trade facilitation

Streamline administrative requirements (e.g. export licenses), eliminate unnecessary procedures, operate administration offices at border posts (to save travel costs), operate a ‘one-stop shop’ for exporters, improve logistics performance.

12 For more detailed discussion of industrial policies in Africa and LDCs see UNCTAD (2018) and UNIDO and UNCTAD (2011).

(a) Instruments

As in many LDCs, tariff policy in Uganda was significantly liberalized as part of its structural adjustment reform programme, with the simple mean tariff applied to imported manufacturing products cut from 16 per cent in 1994 to 8 per cent in 2000 (IMF, 1998; World Bank, 2018). The figure increased again to 12 per cent with the implementation of the East African Community (EAC) common external tariff (CET) in 2005. Overall, it can be said that Uganda is not using much of its tariff policy space, given its minimal commitments in WTO – only 16 per cent of tariff lines are bound at an average rate of 73 per cent, largely consisting of agricultural products bound at 80 per cent (WTO, 2013).

The limited use of tariff policy space in Uganda partly reflects the small size of the domestic market, which would make an import substitution strategy based on high tariff protection unlikely to succeed. Gaining duty free access to larger markets is a strategic way to expand broader policy space, by making industrial policy feasible in manufacturing sectors with scale economies where domestic firms can gain competitiveness through producing for export. Uganda has pursued this objective through regional free trade agreements, particularly the EAC and the Common Market for Eastern and Southern Africa (COMESA).

Since EAC is a customs union, Uganda’s access to that market comes at the price of a loss of policy space to autonomously set its own national tariffs via the requirement to apply the CET. This is mitigated by flexibilities built in to the EAC CET that allow some room for manoeuvre. Stay applications allow EAC members to disregard the CET rate and apply a different tariff, while duty remissions allow companies to pay lower import duties or none at all (Mshomba, 2017).

Membership of both the EAC and COMESA requires liberalization of internal trade from all countries participating in those agreements, which limits policy space because building an infant industry in a sector where EAC/COMESA countries are already competitive would be more difficult without the possibility of tariff protection.

Also, the proper enforcement of rules of origin by other COMESA countries (and the United Republic of Tanzania, which is in the EAC and also the Southern African Development Community free trade area) is critical to the integrity of the EAC CET and therefore also to Uganda’s trade policy. Fortunately, it appears to be possible for Uganda to impose some tariffs on “sensitive items” from COMESA and EAC countries.

Export taxes are permitted under WTO rules and can be a useful instrument to incentivize the processing of commodities domestically (Chang et al., 2016). The WTO (2013) Trade Policy Review reports that Uganda maintains a tax of 1 per cent

on exports of coffee (used for coffee development activities), 2 per cent on cotton and US$0.8/kg on raw hides and skins (equivalent to around 35 per cent ad valorem, according to Shepherd et al, 2017). Uganda’s own National Export Development Strategy 2015–2020 emphasizes the importance of export taxes and suggests applying them at higher rates and to a wider range of products (MTIC, 2015).

As an LDC, Uganda is permitted under WTO rules to use export subsidies, e.g.

subsidies that require recipients to meet certain export targets, whether in the form of direct payments, low-cost loans, export loan guarantees, tax relief, etc. (Chang et al, 2016). This is a valuable policy instrument, heavily used in the United Kingdom, China and the Republic of Korea (see below) during their industrialization periods, which at present is not being utilized in Uganda. According to WTO (2013), Uganda’s Export Promotion Fund is no longer operational, but the Government has proposed the establishment of a new Export Development Fund to finance export activities (MTIC, 2015). The Uganda Export Promotion Board is the State institution responsible for promoting exports, but is inadequately resourced (MTIC, 2015).

(b) Evaluation

By participating in a project of regional integration involving a customs union and free trade agreements, Uganda has chosen to give up the possibility of an autonomous national trade policy, but gained enhanced access to regional markets and made new sectoral industrial policies feasible. This purposeful reconstruction of policy space occurred alongside great improvements in the diversification of Uganda’s exports, both in terms of products and export markets.

This correlation may reflect a tendency for trade between African countries to involve higher value products, with manufactured goods accounting for 42 per cent of intra-African exports in 2014 compared with 15 per cent of exports outside the continent (ECA, 2017). One explanation offered is that regional value chains (RVCs) offer better upgrading prospects for African firms because markets are characterized by similar consumer tastes, less sophisticated marketing and distribution channels, less stringent standards, and fewer information asymmetries (Fessahie, 2018).

It remains to be seen whether further regional integration – such as the proposed Tripartite Free Trade Area between COMESA, EAC and Southern African Development Community or the eventual Continental Free Trade Area – will on balance enhance Uganda’s policy space by expanding market access or limit the efficacy of industrial policy by opening domestic firms up to competition from regional industrial powers such as South Africa. In any case, more strategic use of

currently underutilized policy instruments like export taxes and export subsidies could help build the capacities of Ugandan firms to increase domestic value addition and compete in regional and international markets.