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Rules of origin, tariffs and the AfCFTA

By Willemien Viljoen
17 May 2019
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Rules of origin, tariffs and the AfCFTA

Article XXIV of the GATT requires that ‘duties and other restrictive regulations’ on ‘substantially all trade in products originating in such territories’ of the contracting parties of a preferential trading arrangement (free trade area or a customs union). Preferential Rules of origin[1] and preferential tariffs are essential elements of a free trade area such as the African Continental Free Trade Area (AfCFTA). Without preferential rules of origin, it is impossible to discriminate against imports from third countries and levy preferential tariffs or implement policies such as anti-dumping duties and quotas. Rules of origin ensure the preferential market access negotiated is granted to goods wholly produced or ‘substantially transformed’ in an FTA member state and not somewhere else and simply transshipped through a member state (trade reflection).

Although rules of origin are a practical necessity for the functioning of a preferential trading arrangement, the design of these rules is vital to ensure the rules themselves do not become a barrier to trade and frustrate the arrangement’s integration objectives. If the cost of compliance outweighs the benefits afforded by the tariff preferences the rules of origin can have a negative effect on the utilisation of the tariff preferences. If the cost of compliance with the rules of origin exceeds the benefit of the lower tariffs, the firms will choose to operate under a business as usual scenario ( and pay Most Favoured Nation – MFN rates of duty) and forgo potential tariff preference benefits.

In the case of the AfCFTA, the rules of origin negotiations have made significant progress, but they are still ongoing. Outstanding issues include product-specific rules and the treatment of goods coming from Special Economic Zones. In the Road Map for Finalization of Outstanding Work on AfCFTA Phase I Negotiations adopted by the Assembly of the African Union in February 2019, the date set for the final consideration of outstanding issues regarding Rules of origin is May 2019. By July 2019, Member States are expected to submit their tariff offers for the negotiation of tariff concessions (negotiated tariff offers are expected to be submitted for approval by February 2020).

Countries have agreed that 90% of tariffs on trade in goods will be eliminated. Of the remaining 10%, 7% may be designated as sensitive and 3% of the tariff lines can be excluded from liberalisation. Developing economies must liberalise sensitive products over 10 years, while least developed countries have 13 years over which to liberalise. However, if needed, countries can also take advantage of the available 5 year or less transition period before liberalising sensitive products.

The criteria for determining the origin of a product are contained in Annex 2 to the AfCFTA Agreement: wholly obtained or substantial transformation in a party to the Agreement. Article 6 of Annex 2 allows for determining substantial transformation if the product fulfils the criteria of value added, non-originating material content, change of tariff Heading or specific processes. The Article also states that goods listed in Appendix IV will qualify as being originating goods if the specific rules for that product stated in the Appendix are met. These product specific rules are currently still under negotiation but are likely to reflect the 7% of tariff lines deemed sensitive by member states. These can be expected to include products that are important for domestic policy objectives like industrialisation, economic growth and employment creation. These products are likely to have higher MFN applied tariffs, and will include products where the AfCFTA can make a significant contribution through flexible product specific rules of origin and lower tariffs to increase intra-Africa trade.

 

[1] Preferential Rules of origin are set out in preferential trade agreements and enables the parties to the agreement to benefit from the preferential market access afforded in the agreement. Non-preferential Rules of origin are necessary to apply WTO rules on anti-dumping, countervailing, safeguards and origin labelling and for the collection of trade statistics.


Sources:

tralac; Updates from the 7th African Ministers of Trade Meeting (12-13 December 2018) (https://www.tralac.org/blog/article/13854-updates-from-the-7th-african-ministers-of-trade-meeting-12-13-december-2018.html)

tralac; African Union Ministers of Trade conclusively reach consensus on all outstanding issues on AfCFTA modalities for tariff liberalization (https://www.tralac.org/news/article/13824-african-union-ministers-of-trade-conclusively-reach-consensus-on-all-outstanding-issues-on-afcfta-modalities-for-tariff-liberalization.html)

tralac; Compiled Annexes to the AfCFTA Agreement (https://www.tralac.org/documents/resources/cfta/1999-compiled-annexes-to-the-afcfta-agreement-legally-scrubbed-signed-16-may-2018/file.html)

World Customs Organization, Rules of Origin Handbook (http://www.wcoomd.org/~/media/wco/public/global/pdf/topics/origin/overview/origin-handbook/rules-of-origin-handbook.pdf)

About the Author(s)

Willemien Viljoen

Willemien Viljoen

Willemien Viljoen holds a Master’s degree in Economics and a Bachelor of Laws degree (LLB) from the University of Stellenbosch. Her research interests are in regional integration and international trade policy, and specifically in issues pertaining to non-tariff barriers to trade, trade data analysis and modeling and trade and climate change.

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