Cumulation provisions in the SADC EPA
Earlier this week, visiting officials from the European Commission provided insight at a Business Unity South Africa (BUSA) workshop into the cumulation provisions contained in the SADC-EU Economic Partnership Agreement (EPA). These provisions form part of the Protocol on Rules of Origin and expand on those under the previous trade regime between South Africa and the EU (TDCA), and the Cotonou Agreement for ACP countries.
Cumulation is a principle that allows, within a set of conditions and limitations, materials originating elsewhere to be counted as local materials for purposes of meeting the relevant local content and local processing requirements as specified by the respective Rules of Origin (RoO). Simply put, it permits imported materials to be classified as local content provided these are further processed locally, allowing the final product to be exported under preference to its final destination. This is not to be confused with imported materials that become substantially transformed locally in order to meet, in their own right, all relevant local content requirements as stipulated by the RoO.
Cumulation is a potentially valuable provision for producers and traders in that it can provide much greater flexibility to the relevant local content and processing obligations; it does so by significantly expanding the international scope of input-material sourcing available to producers (making goods for export under preference). Cumulation reduces the restrictiveness of RoO across the board without undermining the integrity of a particular RoO regime. It is also a convenient provision that allows trade negotiators, for example, to reduce the effective restrictiveness of RoO without necessarily having to open line-by-line negotiations.
Under the TDCA, the cumulation facility was available on a bilateral basis between South Africa and the EU and vice versa, as well as on a diagonal basis between South Africa and the ACP States, where South Africa could further process originating goods and materials obtained in the ACP without fully meeting the RoO itself.
The SADC-EU EPA goes significantly further than this. While retaining the basic bilateral cumulation, the agreement amends the diagonal cumulation facility with the ACP and introduces what is often referred to as an extended cumulation facility.
>> Diagonal cumulation is between the SADC EPA States, the EU, and the ACP EPA States as well as the EU’s twenty-five Overseas Countries and Territories (OCT). Unlike the TDCA, this cumulation only includes those ACP countries that have concluded an EPA with the EU, and there is explicit reference to ACP EPA States.
>> Two forms of extended cumulation have been introduced (this follows a trend set earlier in the EU’s overhauled Generalised System of Preferences, albeit in a far more restrained format).
Cumulation with respect to materials originating in countries benefiting from duty and quota free access to the EU (i.e. GSP/EBA arrangement)
Cumulation with respect to materials that are subject to MFN duty free treatment in the EU
The first of these provisions essentially brings the GSP/EBA beneficiaries into the global sourcing game for SADC EPA countries. Whereas the diagonal cumulation facility alluded to earlier relates only to materials originating in the ACP EPA countries, the extended cumulation with GSP beneficiaries essentially covers most ACP countries that have not concluded an EPA (key differences between GSP and EBA include some differences in the RoO, product coverage, and tariffs, the latter enjoying duty and quota free access for all products apart from arms). SADC EPA States can thus source any such materials from GSP/EBA beneficiaries (that would otherwise enjoy duty and quota free access if exported to the EU directly) and consider these as their own local content for purposes of absorbing them into local SADC EPA qualifying products. Such materials need not be substantially transformed locally but have gone beyond the minimal (‘insufficient’) processing conditions that are defined in Article (9)1 of the RoO Protocol.
The second of these two types of extended cumulation is a logical and attractive extension to the cumulation provisions; any materials sourced anywhere in the world, provided such a good or materials is subject to MFN zero access to the EU, can be used in the local production of qualifying products and absorbed as local content for purposes of fulfilling any RoO requirements of the final product seeking preferential status under the EPA. It shall not be necessary for the local processing and value addition to represent substantial transformation in line with the rules, but merely that the local processing in the SADC EPA State goes beyond the minimal processing, as per the previous extended cumulation provision. The combined local inputs and imported (cumulated) inputs must then jointly meet the EU-SADC RoO.
These forms of cumulation do come with restrictions; including
Materials originating in South Africa that cannot be imported directly into the EU duty and quota free are excluded and cannot be cumulated by other SADC EPA States (this to prevent inter alia undermining tariff schedules and sensitive products lists in other parts of the agreement)
Goods and materials can not be cumulated from countries where such products are subject to anti-dumping or countervailing duties when shipped directly from those countries to the EU
Goods and materials (e.g. from standard GSP beneficiaries) that are not free of customs duties when exported to the EU directly
Goods and materials from SADC FTA States can not be cumulated where these do not enjoy duty and quota free entry under the SADC FTA into the SACU territory
Tuna products (both from chapters 3 and 16) are generally excluded, as are general fish products sourced from the Pacific States (which have a special derogation in place pertaining to fish sourced outside of their territorial waters)
Cumulation already plays an important part for businesses utilising the SADC EPA, and previously the TDCA. Take for example South African auto manufacturing and associated second tier supply industries. The RoO ‘list rule’ for Chapter HS87 products, including motor vehicles, requires that no more than 40% of the value of materials used be non-originating based on the ex works price of the product (i.e. the remainder must be ‘local’ content).
A South African motor vehicle assembly plant may therefore source goods and materials from the EU (bilateral cumulation), eventually from other ACP EPA States (diagonal cumulation), from third countries benefiting from GSP/EBA preferences (extended cumulation) as well from other countries where such materials are already duty and quota free into the EU (extended cumulation); these together may make up the 60% local content requirement and in effect become absorbed as South African originating products provided that some significant processing activity still takes place locally, and that the value added in South Africa is higher than that of individual third (cumulation) partner countries.
Of course, the impact of Brexit remains unquantifiable yet potentially creates serious cumulation (and trade) related issues going forward: South African (automotive) producers utilising UK-originating materials under the bilateral cumulation facility, in the manufacture of qualifying exports back to the EU, could have these components and the final product disqualified for purposes of (not) meeting the 60% local content rule under the EPA.
Other sectors may find the cumulation provisions less attractive, simply because the (revised) RoO are already offering substantial sourcing flexibility. The clothing manufacturing sector, for example, now enjoys single-step transformation type RoO under the EPA, whereby the local making up of a garment is sufficient to confer origin status, irrespective of where the fabric originates from (this is not unlike the rules that most AGOA beneficiaries enjoy). Previously, two-step transformation from yarn was the general required condition under the TDCA.
Notwithstanding its obvious trade-generating benefits, cumulation carries inherent risks that could undermine the integrity of the preferences agreed to between the parties. This is one of the reasons why some trade agreements contain only limited cumulation provisions, such as bilateral cumulation, rather than extending the sourcing scope of the contracting parties in some way or another to third countries not party to the agreement (there are naturally other compelling reasons, such as limiting by design the scale and scope of preferences offered, retaining negotiating leverage, and often some general angst around the protection of national commercial interests going forward).
Conditional on allowing cumulation with non-contracting parties, while preserving the integrity of the agreement, the EPA requires the prior conclusion and notification of administrative cooperation agreements between countries, particularly between the SADC EPA States and ACP EPA States and OCTs. This is to ensure that formal administrative mechanisms are in place to allow the contracting countries to verify compliance with the respective origin requirements, should there be a need. These notification obligations rest with the European Commission, the SACU Secretariat and the Ministry of Trade and Industry of Mozambique respectively, as representative parties of the Member States’. The EU, for instance, would wish to rely on such administrative arrangements that the SADC EPA States have concluded with third countries should it (the EU) launch a verification exercise of certain South Africa shipments claiming local origin status under the EPA while utilising ACP third country content under the relevant cumulation provisions of Articles 3 – 6 of the Protocol.
Despite their legitimate basis, the administrative arrangements that are required have often held back any practical application of the cumulation provisions foreseen by respective agreements. While the EU Member States have the advantage of having such arrangement in place already, by virtue of its political and centralized customs administration setup, the SADC/ACP countries must still put in place the necessary administrative cooperation facilities along with the relevant notification to the EU, on their conclusion and implementation. This process could be shortened significantly through a joint undertaking that SADC/ACP EPA States sign up to (or even use as a blueprint document for any bilateral arrangements); it appears that this is in fact a path that the parties may follow and which would importantly be recognized as fulfilling the relevant administrative obligations under the SADC EPA cumulation provisions.
Cumulation remains a mostly product-neutral, general, under-explored and under-utilised facility, albeit one that has created the potential in the SADC-EU EPA for significant increases in trade amongst the EPA contracting parties, and beyond.
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