Rules of Origin (RoO) should be made simple and business friendly for the gains expected from the African Continental Free Trade Area (AfCFTA) to be realised.
RoO are the criteria which establish the nationality of a product, and the United Nations Conference on Trade and Development (UNCTAD) report cautions that they could "make or break" the AfCFTA.
The rules 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.
They 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.
The Economic Development in Africa Report 2019 launched last week at the African Capacity Building Foundation's head office in Harare 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 whether preferential trade liberalisation under the AfCFTA can be a game changer for Africa's industrialisation," says Executive Director, Zimbabwe Policy Analysis and Research Unit (ZEPARU) Dr Gibson Chigumira.
He emphasised that RoO should be simple, transparent, predictable and trade-facilitating. They should be designed and implemented to reduce compliance costs. And simple and transparent RoO will reduce origin fraud.
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.
Currently, intra-African trade is a mere 15 percent, compared to around 47 percent in America, 61 percent in Asia and 67 percent 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 one to three percent once all tariffs are eliminated, according to UNCTAD estimates.
The AfCFTA is expected to boost intra-African trade by 33 percent once full tariff liberalisation is implemented, attracting additional intra-African investments and creating market opportunities to foster Africa's industrialisation 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 liberalisation.
Preferential trade liberalisation is the reason 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 liberalisation, the critical policy tool needed to make any FTA operational and are of vital importance in creating opportunities for African Least Developed Countries (LDCs) to boost trade," said Dr Chigumira.
At the launch, Acting Secretary of Foreign Affairs and International Trade Dr Thando Madzvamuse weighed in saying the country is committed to the AfCTA process and has demonstrated this by ratifying the agreement establishing the AfCTA.
"Zimbabwe appreciates the progress made to date on the implementation of the 32nd Ordinary Summit of the African Union decision to operationalise the AfCTA Internal Market.
"It is in that context that I commend the organisers of this timely event and note that this launch coincides with the preparations for this 7th of July 2019 on AfCTA that will realise its launch and operationalisation phase.
"The ultimate objective is to have an agreement that ensures mutual benefit for all member states. Thus the Modalities for Tariff Liberalisation should take into account the special economic circumstances for all African countries and accommodate concerns by Zimbabwe in its endeavour to improve productive capacity and reindustrialise. These are important pillars of the AfCTA," said Dr Madzamuse.
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 industrialisation 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 industrialisation 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 utilise 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 utilisation rate of 4,6 percent), Burkina Faso (0 percent), the Central African Republic (0 percent), Djibouti (3,5 percent), Equatorial Guinea (6,8 percent), Guinea (0 percent) and Guinea-Bissau (0 percent).
Others are Liberia (0 percent), Libya (0 percent), Mali (0,4 percent), Seychelles (0 percent), Sierra Leone (0 percent), Somalia (1,1 percent), Togo (0 percent) and Tanzania (6 percent).
In addition, 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.
However, the report also noted that RoO tend to be particularly daunting for smaller firms, which is a concern as the private sector in Africa is mainly comprised of small businesses and informal enterprises.
Similar challenges are faced by customs authorities, in particular in LDCs, in which administering RoO may divert scarce customs resources from other tasks, such as trade facilitation or tax collection (Brendon Imagawa, 2004).
Current RoO regimes in Africa are at the regional community level and therefore regulate intra-regional economic community level.
Therefore, it will be desirable to achieve some regulatory convergence of RoO in the regional economic communities and the AfCTA, to make better use of intra-African trade opportunities compared to intra-regional economic community trade.
Intra-African trade will also benefit if RoO were not overly restrictive, as this would enable all countries to benefit from the agreement.