Kenya Implements Tariffs to Protect Domestic Steel Industry
The Kenyan government has taken steps to shield its domestic steel industry from cheaper imports by increasing tariffs on steel and iron products. The policy aims to support local manufacturers, reduce dependency on foreign suppliers, and stimulate job creation.
In 2014, a government official announced a tariff hike on steel and iron imports, raising rates from 0% and 10% to a uniform 25%. "Our domestic steel mills are struggling due to unfair competition from low-cost imports," the official stated. "Our domestic steel mills furthermore provide employment to large populations. They have also been ensured to follow sustainable measures throughout the production chain", he added. The new tariffs are projected to generate an additional 2.6 billion Kenyan shillings in government revenue, fostering economic growth and industrial expansion.
Kenya’s manufacturing sector has long faced structural challenges, including high production costs and bureaucratic hurdles. To address these, the government has introduced measures such as reducing non-tariff barriers, streamlining business registration, and expediting cargo clearance at ports. Importers of refined industrial sugar and wheat have also benefited from the elimination of excessive administrative fees.
However, local manufacturers argue that further deregulation is necessary to enhance efficiency and lower costs, ensuring the long-term competitiveness of the industry.
Kenya’s Economic Growth and Trade Deficit Challenges
Strong economic growth in neighboring Uganda has increased demand for Kenyan exports, especially in agriculture, which constitutes nearly 25% of Kenya’s GDP. Nevertheless, concerns persist over slow economic recovery in key export markets and Kenya’s substantial current account deficit, which has remained above 10% of GDP for three consecutive years. Policymakers fear that this could hamper sustained economic expansion and depreciate the Kenyan shilling.
Table 1: Tariff Revenue from Steel and Iron Imports
| Year | Steel Imports (Million Tons) | Average Price per Ton (KSh) | Tariff Revenue (KSh Billion) |
|---|---|---|---|
| 2013 | 1.2 | 50,000 | 6.0 |
| 2014 | 1.1 | 55,000 | 7.6 |
| 2015 | 1.0 | 60,000 | 8.5 |
| 2016 | 0.9 | 65,000 | 9.2 |
Table 2: Kenya’s Current Account Deficit
| Year | Current Account Deficit (% of GDP) | Kenyan Shilling Exchange Rate (KSh/USD) |
|---|---|---|
| 2013 | 9.8% | 85 |
| 2014 | 10.2% | 88 |
| 2015 | 10.5% | 92 |
| 2016 | 10.7% | 95 |
[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com, 25 July 2014; www.cnbcafrica.com, 25 November 2013]
Define the term tariff.
Taxes
imposed on imported goods.
List two other forms of trade protection other than tariffs.
- Quotas.
1 mark - Production subsidies.
1 mark - Export subsidies.
1 mark - Administrative barriers.
1 mark
Using information from Table 1, calculate Kenya’s government revenue from the increased tariffs.
- Correct approach and value substitution:
- Correct final answer:
Draw a diagram to show the impact of an import tariff on the market for steel and iron in Kenya.
- Correct supply and demand diagram with world price / supply below domestic equilibrium price.
1 mark - Upwards shift in world supply curve, change in imported quantity shown (student may also add the exact quantities from the text).
1 mark - Axes and curves correctly labeled, government revenue, and welfare loss.
1 mark
Using a market failure diagram, explain why there is a need for government’s intervention in the domestic steel and iron industry.
- Since the production of steel brings employment to regions and ensures environmental sustainability, it has positive production externalities: spillover benefits passed on to third parties, from the production of a good, which is not reflected in the market price.
- Hence, the marginal private cost (MPC) producers pay for producing a good is higher than the real marginal social costs (MSC) society faces.
- This is reflected in the diagram below. The supply curve represents the marginal private costs, whereas the marginal social cost curve is higher, separated by the spillover benefits.
- The marginal private benefits (MPB) and marginal social benefits (MSB) are represented by the demand curve, assuming no consumption externalities.
- Since allocative efficiency occurs when MSB = MSC, but market equilibrium is dictated by MPB =MPC, the socially optimum quantity () is higher than the quantity produced by the market (). Therefore, there is under production of resources, welfare loss (WL), allocative inefficiency, and hence market failure.
- This justifies the need of government intervention in order to address the market failure.
Using a market diagram, explain how deregulation could help increase manufacturers' production.
- Removing non-tariff barriers, excessive administrative fees, and streamlining processes lowers firms' costs, making production more efficient.
- With fewer regulatory burdens, firms can produce more at every price level while maintaining profit levels, shifting the supply curve rightward (S1 to S2).
- With a constant demand (D), this establishes a new market equilibrium (A to B), at a lower price (P1 to P2) and higher quantity (Q1 to Q2).
- Hence, derregulation has the impact of increasing manufacturers' production.
Using an AD-AS diagram, explain how an increase in government revenue from tariffs could impact Kenya’s gross domestic product (GDP).
- An increase in government revenue increases the government budget.
- With a greater government budget, the government can increase its spending.
- Since government spending is one of the components of aggregate demand (AD = C+I+G+(X-M)), increased government spending increases the aggregate demand at all possible price levels.
- This shifts the AD curve rightwards (AD1 to AD2), establishing a new macroeconomic equilibrium (E1 to E2). With a constant aggregate supply, this new macroeconomic equilibrium occurs at a higher level of real output (Y1 to Y2).
- Hence, the increased government revenue from tariffs may have the impact of increasing Kenya's real GDP.
Using a foreign exchange market diagram, explain how Kenya’s current account deficit might affect the value of the Kenyan shilling.
- A current account deficit occurs when a country imports more goods and services than it exports, leading to a net outflow of foreign currency.
- A current account deficit occurs when a country imports more goods and services than it exports, leading to a net outflow of foreign currency, and decreasing the demand for Kenyan shilling (D1 to D2).
- Therefore, the Kenyan shilling weakens (depreciates) relative to other currencies.
(A correct diagram must include the Kenyan shilling currency).
Using information from the text/data and your knowledge of economics, discuss the advantages and disadvantages of trade protectionism in Kenya.
Answers may include:
Definition
- Trade protectionism: The use of tariffs, quotas, or other barriers to restrict imports and protect domestic industries from foreign competition.
Supporting Domestic Industry and Employment
Increased Competitiveness of Local Steel Producers
- The tariff on steel and iron imports was raised to 25% in 2014, aiming to protect domestic steel mills from cheaper foreign imports.
- Local producers benefit from reduced competition, allowing them to expand production, maintain operations, and preserve or create employment.
- The steel industry is labor-intensive, and its preservation helps support large populations dependent on industrial employment.
Diagram: Tariff on Imports
- A tariff shifts the supply curve upward, raising the domestic price, reducing imports, and increasing domestic output.
- Producer surplus rises, but consumer surplus falls due to higher prices.
Limitations
- Protectionism may lead to inefficiencies if firms face less pressure to innovate or cut costs.
- Domestic prices rise, which hurts consumers and increases input costs for downstream industries such as construction and manufacturing.
Revenue Generation for Government Spending
Increase in Tariff Revenue
- Tariff revenue from steel imports increased from KSh 6.0B in 2013 to KSh 9.2B in 2016, despite falling import volumes (Table 1).
- This provides the government with fiscal space to invest in infrastructure, education, or support policies for industrial development.
- Revenue can also fund regulatory reforms, helping reduce non-tariff barriers and improve the ease of doing business.
Limitations
- Dependence on tariff revenue may be unsustainable if import volumes continue to fall or if global prices fall significantly.
- Tariffs may provoke retaliation from trade partners, reducing Kenya’s access to export markets.
Reducing Import Dependency and Current Account Pressures
Mitigating External Vulnerability
- Tariffs aim to reduce steel imports, easing the current account deficit, which increased from 9.8% to 10.7% of GDP between 2013–2016 (Table 2).
- Import reduction could relieve pressure on the Kenyan shilling, which depreciated from 85 to 95 KSh/USD, raising the cost of foreign debt and imports.
- Import substitution through domestic production can improve balance of payments sustainability in the long term.
Limitations
- Kenya’s current account deficit is driven not only by steel imports but also by other structural factors, such as reliance on imported capital goods, fuel, and weak export diversification.
- A weaker shilling, while helpful for exports, also makes imported inputs more expensive, raising cost-push inflation risks.
Stimulating Industrialization and Development
Encouraging Domestic Value Addition
- Protecting the steel industry supports Kenya’s industrial base, which is vital for economic transformation and long-term development.
- Backward and forward linkages from steel (e.g., to construction, manufacturing, and engineering) can lead to positive multiplier effects across the economy.
Structural Support Through Deregulation
- The government has also reduced non-tariff barriers (e.g., port clearance times, registration), aligning with tariff protection to support business growth.
- Local manufacturers still argue for further deregulation to lower costs, indicating that trade barriers alone are not sufficient for sustained industrial development.
Limitations
- Protection without structural reform, investment in technology, and skill development risks creating dependency on government support.
- Long-term development requires building competitive industries, not just sheltered ones.
Risks to Consumer Welfare and Inflation
Rising Costs to Consumers and Industries
- Tariffs raise the price of steel from abroad, which may increase costs for construction, infrastructure, and manufacturing.
- These higher costs are passed on to consumers, reducing purchasing power and potentially contributing to inflationary pressures, particularly harmful for low-income households.
Diagram: Cost-Push Inflation (AD/AS)
- A rise in input costs due to tariffs shifts the SRAS curve leftward, leading to higher prices (P1 to P2) and lower output (Y1 to Y2), potentially stalling growth.
Overall Evaluation
Advantages
- Tariffs support job preservation, domestic industry growth, and fiscal revenue generation.
- Can help reduce import dependency, ease external deficits, and promote industrial development if combined with regulatory reforms.
Disadvantages
- Tariffs raise consumer prices, reduce competitiveness, and risk inefficiencies in protected industries.
- They may not address deeper issues like weak export capacity, bureaucracy, and infrastructure bottlenecks.
- Long-term growth and development require investment in skills, innovation, and competition, not prolonged protection.
Conclusion
Trade protectionism in Kenya offers short-term support to struggling industries and can contribute to economic growth if used strategically. However, its benefits are limited without structural reform, cost reduction, and industrial upgrading. A balanced approach—combining temporary tariffs with deregulation, public investment, and trade diversification—is essential for sustainable economic development.
