"A new report, Economic Development in Africa 2019, by the United Nations Conference on Trade and Development (UNCTAD), the Rules of origin may have a deep impact on African Continental Free Trade Area (AfCFTA). As these rules specify the criteria needed to determine the made-in label for a product, they will boost the economic well-being of the continent. However, for this they need to be formulated in a simple, transparent, business friendly and predictable manner."

A new report, Economic Development in Africa 2019, by the United Nations Conference on Trade and Development (UNCTAD), the Rules of origin may have a deep impact on African Continental Free Trade Area (AfCFTA). As these rules specify the criteria needed to determine the made-in label for a product, they will boost the economic well-being of the continent. However, for this they need to be formulated in a simple, transparent, business friendly and predictable manner.

AfCFTA to boost intra-African trade by 33 per cent

The UNCTAD data for 2015-2017 notes AfCFTA has the potential to change the intra-continental trade which currently constitutes only 15 per cent of commerce in Africa, compared to around 47 percent in the Americas, 61 per cent in Asia and 67 per cent in Europe. If fully implemented, it could increase the GDP of most African countries by 1 to 3 per cent once all tariffs are eliminated.

The AfCFTA will also boost the intra-African trade by 33 per cent 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

Rules of origin have ensured the success of many trade agreement negotiations over the years, including the North American Free Trade Agreement and Central American Free Trade Agreement. However, these rules have also at times invited contrasting views from various economists. While some argue that the role of these rules should be confined to the authenticating the origin of goods, others believe that the negotiations for these rules are often inundated by lobbying and protectionist pressures.

Trade preferences to help develop regional value chain

As per the report, the best way to approach this dilemma is to use AfCFTA to enhance the consistency of trade policy with industrial policy objectives and the continent’s transformation agenda. These rules are not an industrial policy tool and should not be crafted or used to build non-tariff barriers around regional suppliers.

Rather than importing, AfCFTA member countries can source more intermediate and final goods among themselves by granting each other trade preferences. This would not only develop regional value chains but also build manufacturing capabilities in Africa.

Proper design and implementation to ensure success of rules

However, for companies to utilise these trade preferences, these rules of origin need to be designed and implemented properly. If they 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.

These rules should also consider the 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.