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Rules of Origin Could Make or Break African Continental Free Trade Area

Rules of origin could make or break the African Continental Free Trade Area (AfCFTA) that entered into force in May, according to a new report from the United Nations Conference on Trade and Development (UNCTAD).

The organization’s “Economic Development in Africa Report 2019” notes that the rules of origin–the criteria needed to determine the made-in label for a product–could make the difference for the agreement in helping to boost the economic well-being of the continent provided 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,” UNCTAD secretary-general Mukhisa Kituyi said. “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.”

Currently intra-continental trade makes up just 15 percent of commerce in Africa, compared to around 47 percent in the Americas, 61 percent in Asia and 67 percent in Europe, according to UNCTAD data for 2015 to 2017, but the AfCFTA could radically change that, the report said. If the agreement is fully implemented, the gross domestic product (GDP) of most African countries could increase by 1 percent to 3 percent once all tariffs are eliminated, according to UNCTAD estimates.

The AfCFTA is expected to boost intra-African trade 33 percent 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.

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Rules of origin have proven to be a sticking point in trade agreement negotiations—and their ensuing success—over the years, including the North American Free Trade Agreement and Central American Free Trade Agreement.

“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,” Kituyi said.

The rules of origin negotiations have at times involved a clash between two contrasting views, the report noted. On the one hand, some economists argue that rules of origin should not be used as a protectionist or policy tool and should be confined to the simple role of authenticating the origin of goods.

“On the other hand, rules of origin negotiations have often departed from orthodox economic stances, showing the lack of progress in rules of origin convergence, and typically been inundated by lobbying and protectionist pressures,” the report said. “In this context, the risk of regulatory capture is exacerbated by the increasingly technical and often opaque nature of rules of origin negotiations, as well as by well-known asymmetric information problems, with results that might derail well-intentioned efforts to deepen regional integration and enhance the development of productive capacities.”

The best way to approach this dilemma, according to the report, is to leverage the AfCFTA “as an opportunity to enhance the consistency of trade policy with industrial policy objectives and the continent’s transformation agenda.” UNCTAD said, “Rules of origin are not an industrial policy tool and should not be crafted as such, nor should they be used as a protectionist tool to build non-tariff barriers around regional suppliers.”

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.

But whether companies within the AfCFTA utilize trade preferences depends in great part on the way rules of origin are designed and implemented, UNCTAD noted. The report warns that if rules of origin are made too costly or complex, firms could choose to trade with partners outside the AfCFTA. Another option is that companies might stick to trading only within existing regional economic communities, with few incremental gains arising from consolidating the regional market.

The rules of origin should also take into account production capacities and infrastructure across the broad set of countries, including the Least Developed Countries (LDCs) that face challenges in making use of preferential tariffs and implementing origin requirements. The report shows that some African LDCs and non-LDCs are largely unable to make use of preferential treatment for their exports.