Rules of Origin Key to Success of African Continental Free Trade Area

26 June 2019

Rules of origin should be made simple and business friendly for the gains expected from the African Continental Free Trade Area 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.

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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.