Rules of Origin key to success of African Continental Free Trade Area
Rules of origin should be made simple and business friendly for the gains expected from the AfCFTA to be realized.
Rules of origin – the criteria needed to determine the nationality of a product – could make or break the African Continental Free Trade Area (AfCFTA) that entered into force in May, says a new UNCTAD report.
The Economic Development in Africa Report 2019 notes that rules of origin could be a game changer for the continent as long as they are simple, transparent, business friendly and predictable.
“The AfCFTA is a landmark achievement in the continent’s history of regional integration and is expected to generate significant gains. But it is the rules of origin that will determine whether preferential trade liberalization under the AfCFTA can be a game changer for Africa’s industrialization,” UNCTAD Secretary-General Mukhisa Kituyi said.
Currently intra-African trade is a mere 15%, compared to around 47% in America, 61% in Asia and 67% in Europe, according to UNCTAD data for 2015 to 2017, but the AfCFTA could radically change that.
If the agreement is fully implemented, the gross domestic product of most African countries could increase by 1% to 3% once all tariffs are eliminated, according to UNCTAD estimates.
Boost to intra-African trade expected
The AfCFTA is expected to boost intra-African trade by 33% once full tariff liberalization is implemented, attracting additional intra-African investments and creating market opportunities to foster Africa’s industrialization through regional value chains, according to the report.
However, many of these gains could be undermined if rules of origin are not appropriately designed and enforced to support preferential trade liberalization.
Preferential trade liberalization is the raison d’être of a free trade area (FTA), whereby member countries scrap import tariffs and quotas among themselves on most traded goods, in order to confer a competitive advantage to firms within the FTA.
But to qualify for such preferences, firms within the FTA must meet rules of origin requirements.
These define the conditions that firms must comply with in order to authenticate that their goods originate from the FTA and are thus eligible for preferential treatment within the FTA.
“Rules of origin are the cornerstone for the effective implementation of preferential trade liberalization, the critical policy tool needed to make any FTA operational and are of vital importance in creating opportunities for African LDCs to boost trade,” Dr. Kituyi said.
How rules of origin would work
By granting each other trade preferences, AfCFTA member countries would source more intermediate and final goods among themselves rather than import from abroad.
By doing so, more trade would be created within the AfCFTA, serving as a base to support the development of regional value chains and the building of manufacturing capacities in Africa.
Trade and industrialization are closely intertwined, as spurring regional integration is likely to boost domestic and regional value addition.
By supporting intra-African trade, the AfCFTA would also advance Africa’s industrialization agenda through regional value-chain development, reduce Africa’s dependence on commodities and generate the jobs needed to harness Africa’s demographic dividend.
But whether in practice firms within the AfCFTA utilize trade preferences and the extent to which they would do so depends on the way rules of origin are designed and implemented.
Rules of origin should neither be costly nor complex
The report warns that if rules of origin are made too costly or complex to comply with, firms may instead forego these preferences and choose to trade with partners outside the AfCFTA.
Equally, the status quo may prove more appealing; for example, they may stick to trading only within existing regional economic communities, with few incremental gains arising from consolidating the regional market.
While rules of origin should be context specific, UNCTAD recommends that they are kept simple, transparent, business friendly and predictable.
Also, the rules should take into account the level of productive capacities and structural asymmetries across the broad set of countries, including the Least Developed Countries (LDCs), which face challenges in making use of preferential tariffs, let alone implement demanding origin requirements.
Countries unable to tap preferential treatment
The report shows that some African LDCs and non-LDCs are largely unable to make use of preferential treatment for their exports to external partners.
These countries include Benin (preference utilization rate of 4.6%), Burkina Faso (0%), the Central African Republic (0%), Djibouti (3.5%), Equatorial Guinea (6.8%), Guinea (0%) and Guinea-Bissau (0%). Others are Liberia (0%), Libya (0%), Mali (0.4%), Seychelles (0%), Sierra Leone (0%), Somalia (1.1%), Togo (0%) and Tanzania (6%).
To make AfCFTA rules of origin accessible to firms, an online intra-African trade platform serving as a repository for rules of origin in multiple local languages could be created, the report recommends. Simple rules of origin make it easier to detect origin fraud.
Further, to make AfCFTA rules of origin less costly for firms to comply with, the capacities of customs authorities in enforcing them should be built and cross-border cooperation among customs authorities fostered.
The report also notes that establishing regular platforms for public-private dialogues can help in identifying any challenges to implementation of rules of origin within the AfCFTA to keep them business friendly and supportive of trade for the private sector.
What are rules of origin?
Rules of origin are a “passport” enabling goods to circulate duty-free within a free trade area (FTA) as long as these goods qualify as originating within the FTA.
The rules define the criteria that must be met for a product to be considered as having its origin in an exporting country within the FTA and qualify for preferential treatment (zero import tariffs) inside the FTA. In other words, they determine the economic origin of goods within an FTA.
A committee on rules of origin will be set up under the AfCFTA agreement to annually review the implementation of the rules, its transparency provisions and submit reports and recommendations to a committee of senior trade officials.
Facts & Figures
State of regional trade in Africa
Total trade from Africa to the rest of the world averaged US$760 billion in current prices in the period 2015-2017, compared with $481 billion from Oceania, $4,109 billion from Europe, $5,140 billion from America and $6,801 billion from Asia.
The share of exports from Africa to the rest of the world ranged from 80% to 90% in 2000-2017. The only other region with a higher export dependence on the rest of the world is Oceania.
Intra-African exports were 16.6% of total exports in 2017, compared with 68.1% in Europe, 59.4% in Asia, 55.0% in America and 7.0% in Oceania.
Intra-African trade, defined as the average of intra-African exports and imports, was around 2% during the period 2015–2017, while comparative figures for America, Asia, Europe and Oceania were, respectively, 47%, 61%, 67% and 7%.
Since 2008, Africa, along with Asia, is the only region with a rising trend in intraregional trade.
In 2016, intra-regional economic community trade was highest in SADC ($34.7 billion), followed by CEN–SAD ($18.7 billion), ECOWAS ($11.4 billion), COMESA ($10.7 billion), AMU ($4.2 billion), EAC ($3.1 billion), IGAD ($2.5 billion) and ECCAS ($0.8 billion).
With regard to the share of intra-regional economic community trade in total trade in Africa, in 2016, there were deeper levels of integration in SADC (84.9 per cent), followed by COMESA (59.5 per cent), CEN–SAD (58.4 per cent), ECOWAS (56.7 per cent), AMU (51.8 per cent), IGAD (49.0 per cent), EAC (48.3 per cent) and ECCAS (17.7 per cent).
The 10 leading intra-African exporters in 2015–2017 were Eswatini (70.6%), Namibia (52.9%), Zimbabwe (51.6%), Uganda (51.4%), Togo (51.1%), Senegal (45.6%), Djibouti (41.9%), Lesotho (39.9%), Kenya (39.3%) and Malawi (38.3%).
The 10 countries with the lowest share of intra-African exports were Chad (0.2%), Guinea (1.6%), Eritrea (2.3%), Equatorial Guinea (3.5%), Cabo Verde (3.6%), Angola (3.9%), Libya (4.5%), Guinea Bissau (4.7%), Liberia (5.1%) and Algeria (5.5%).
State of trade facilitation
On average, applied tariff rates to intra-regional economic community members amount to 7.4% in CEN-SAD, 5.6% in ECOWAS, 3.8% in SADC, 2.6% in AMU, 1.89% in COMESA, 1.86% in ECCAS, 1.80% in IGAD and zero in EAC.
Sub-Saharan Africa has the highest cost to export compared with all other regions and the highest cost to import with the exceptions of Latin America and the Caribbean based on border compliance, and South Asia, based on documentary compliance.
In 23 developing countries (13 in Africa) and LDCs during 2010-2013, 35% of the most difficult non-tariff measures applied by partner countries to manufacturing exports concern rules of origin and related documentation.
The most frequent complaints registered on the non-tariff barriers reporting, monitoring and eliminating mechanism of the Tripartite Free Trade Agreement relate to rules of origin (11% of filed complaints).
Rules of origin
Prior to the 2011 Generalized System of Preferences (GSP) reforms, the more flexible rules of origin under the African Growth and Opportunity Act of the United States (requiring single transformation) have been found to stimulate exports from LDCs in Africa rather than the more restrictive rules of origin under the Everything but Arms initiative of the European Union.
Based on a gravity model for 155 countries and about 100 preferential trade agreements, Estevadeordal and Suominen (2005) find: (i) that preferential trade agreements with restrictive rules of origin tend to depress aggregate trade flows; (ii) regime-wide rules of origin that allow for flexibility in the application of product-specific rules of origin facilitate trade; (iii) restrictive rules of origin in final goods encourage trade in intermediate goods; and (iv) the negative effects of stringent product-specific rules of origin dissipate over time.
Intra-African trade values (in terms of both imports and exports) of the 20 products with the highest preference margins were relatively low, with the exception of tobacco products, beer and spirits, knit T-shirts, wine and women’s suits and pants, reflecting in part the difficulty of sourcing these products from within Africa.
François et al. (2006) find that exporters start to request preferences when preferential margins are around 0% and 4.5%. For the 20 products in Africa with the highest export values, preferential margins exceed 4.5% for 11 products, including five of the six top export products, namely, petroleum gases; gold; petroleum oils, refined; diamonds; and cars.
The share of imports of goods from Africa that is eligible and makes use of external preferential treatment varies greatly between trading partners, and is highest in Chile, the Republic of Korea and the United States.
With regard to the use of external preferential schemes by countries in Africa, some countries are largely unable to make use of preferential treatment for their exports to external partners, namely, Benin (underutilization rate of 95.4%), Burkina Faso (100%), the Central African Republic (100%), Djibouti (96.5%), Equatorial Guinea (93.2%), Guinea (100%), Guinea-Bissau (100%), Liberia (100%), Libya (100%), Mali (99.6%), Seychelles (100%), Sierra Leone (100%), Somalia (98.9%), Togo (100%) and the United Republic of Tanzania (94%).
Underutilization rates are low for: Botswana (1.1%), Cabo Verde (3.6%), Chad (0.1%), Côte d’Ivoire (2%), the Comoros (4.3%), Ghana (2.3%), Kenya (4.5%), Lesotho (1.7%), Madagascar (4.9%) and Mauritania (3.1%).
In 2016, unused preferences were highest for mineral products, amounting to $2.3 billion, followed by precious materials ($1.4 billion) and vegetable products ($0.6 billion). In terms of shares of underutilization in 2016, precision instruments had the highest, followed by chemicals, wood and hides and skins.
Kenya is one of the most successful examples of the inclusion of smallholder farmers in the tea value chain, owing to deliberate efforts to enhance their stake in the governance of the processing and marketing stages (FAO, 2014). They account for over 70% of national tea production, with half a million people deriving their livelihood from this cultivation.
Africa accounted for over 20% of global tea exports and 12% of imports in 2015–2017. In this respect, Kenya is by far the leading African country as the world’s third-largest tea exporter, with a market share of approximately 17 per cent during the same period. Between 2015 and 2017, about 43% of tea imports to Africa was sourced from China, another 40% from within Africa; the rest originated primarily from India and Sri Lanka.
Overall, the intra-African market accounts for roughly 25% of tea exports from Africa.
Although exports of cocoa and related products from Africa to the rest of the world dwarf the intra-African market – on average $7.8 billion per year, compared with $170 million in the 2015-2017 period – the latter’s composition is primarily higher value added products, with chocolate accounting for nearly 60% of the total.
There is a possible dichotomy concerning Africa’s participation in the cocoa value chain. On the one hand, most cocoa-producing countries are integrated through the supply of raw materials and semi-processed intermediates (forward participation) embodying limited value added and are directed mainly to developed markets. On the other hand, a few manufacturing hubs – for example, Egypt and South Africa – supply final chocolate products for their domestic and subregional markets, but predominantly source their intermediate inputs (backward participation) from outside the continent.
The cocoa-chocolate sector remains heavily protected in Africa, with median most-favoured nation tariffs ranging from roughly 5% to 25%, depending on the HS heading. There is clear evidence of tariff peaks – tariff rates of 15% or more – and tariff escalation.
70% of cotton exports from Africa are primary intermediates embodying limited value addition, such as cotton fibres (whether carded or not); only 12% take the form of yarn, and 18% of cotton fabrics. Conversely some 12% of Africa’s cotton imports is accounted for by primary intermediates; 16%, by yarn; and as much as 72%, by cotton fabrics.
Intra-African trade accounts for only 15% of cotton exports and 12% of imports and for 10% of the continent’s apparel exports, and 17% of its imports.
In 2001–2017, LDCs benefited from duty-free, quota-free market access to the European Union under the Everything but Arms initiative. However, since the 2011 reform of the Generalized System of Preferences, the new rules of origin approach applicable to textiles and apparel originating from LDCs switched from double to single transformation. This reform was accompanied by a significant boost to the market share of LDCs in the European Union, as well as by improvements in the rate of preference utilization.
Anecdotal evidence suggests that even in countries with reasonably vibrant apparel industries such as Mauritius, SMEs often find it more difficult to maintain competitiveness than larger firms, when having to comply with double transformation requirements.
If a double-transformation approach is considered, full cumulation might be crucial in ensuring that preferences applying to the Continental Free Trade Area remain commercially valuable and do not excessively hamper the strategies of African firms.
Reliance on intra-African imports is comparatively higher for beer (44%) and soft drinks (39%), than for spirits (14%). Leading importers in the region are Namibia, Mozambique, Uganda, Lesotho, the United Republic of Tanzania, Ghana, Rwanda, Mauritius, Mali, Benin and Tunisia.
Beverage exports in the region are subject to substantial tariffs, considering that most countries within Africa trade with one another at most-favoured nation rates. In 2014-2016, the median rates for countries in sub-Saharan Africa ranged from 20% to 30%, depending on the tariff heading.
- The automotive industry in Africa remains extremely outward-oriented, especially in relation to passenger cars, where the regional market accounted for less than 10% of exports and 2% of imports.