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It has been reported that the Rules of Origin (the “RO”), set forth in Annex 2 of the African Continental Free Trade Area Agreement (the “AfCFTA” and “Treaty,” respectively) and the accompanying Appendix IV constituting the tariff schedule (“Appendix IV”), are close to finalisation, bringing the trade pact’s signatory states a step closer to commercially meaningful trade.
The Rules of Origin provide a framework for identifying products or components that are eligible for preferential market access. Under the Treaty, up to 97% of tariff lines are eligible for a gradual phase-out of customs duties. An eligible item that is wholly or partially produced in the AfCFTA countries shall benefit from reduced customs duties upon fulfilment of the requisite formalities with the appropriate customs authority.
The RO are complex, particularly for manufactured goods, where product type, inputs and production processes are evaluated to determine if a product has undergone substantial transformation within the AfCFTA countries, to be availed of Treaty benefits. In determining substantial transformation, Article 6 of Annex 2 states that products that are not “wholly obtained” from the AfCFTA countries are considered to be originating from the trade area if they are “sufficiently worked or processed” in at least one signatory state. This could be achieved through value addition, incorporating only such permitted amounts of non-originating material, transforming the item enough to cause a change in tariff classification, or complying with specific processes.
For example, processed agricultural products, such as sugar and cereals, must be produced from materials that are wholly obtained from the AfCFTA countries. However, intermediate and finished goods of a more complex nature, such as chemicals, require a multi-factor analysis to determine on which basis origin could be conferred. By way of example, where the chemical reaction, purification, mixing, blending, separation or modification in particle size occurs in a signatory state, origin could be conferred regardless of where the input materials come from, assuming that all other related requirements are met. In the alternative, under the available copy of Appendix IV which is still in draft form, origin could be conferred if the materials used do not exceed 60 per cent of the “ex-works price” of the product, which essentially grants origin based on the value-added labour in a signatory state.
Valuation is a critical element of origin determination. Annex 2 provides various defined terms relating to valuation, including (i) “value added” as the difference between the “ex-works price” of a finished product and the “customs value” of the material imported from outside the AfCFTA that is used in the production, (ii) “ex-works price” as the price paid for the input materials prior to value addition by the manufacturer, subject to certain adjustments for taxes paid, and (iii) “customs value,” which is determined in accordance with certain World Trade Organization (WTO) rules. It is worth noting that harmonisation of valuation practices may be needed if a signatory state has its own valuation policy for imported goods that diverge from those outlined in Annex 2.
A nettlesome issue that is often encountered in component valuation seems to have been left out of the RO for a wide range of products. Taking a tractor as an example, the manufacturing of which starts from completely knocked down kits, the RO do not distinguish between originating and non-originating parts. Rather, the RO apply a single percentage to the ex-works price of all materials used in the manufacturing to determine the value addition. In contrast, under Article 14 of Annex 2, when a set is composed of originating and non-originating products, the set as a whole is regarded as originating provided that the value of non-originating products does not exceed 15% of the ex-works price of the set. The RO seem to acknowledge the current state of heavy industry in Africa, which is nascent and relies largely on the assembly of imported materials. The practice of valuing non-originating products may still be employed in other more established and competitive industries, such as the textile industry, for which rules of origin have not yet been agreed upon.
With respect to customs declaration of the origin of a product, the Treaty provides that only designated competent authorities of signatory states or “Approved Exporters” can produce documentation attesting to the origin of the product. This means that certification methods used in other preferential trade agreements, such as self-certification by exporters or an industry group to which the government has conferred certificating power, are not available at this time. An Approved Exporter, as described in Articles 19 and 20 of Annex 2, must frequently export products and meet qualifications prescribed by the designated competent authority of the exporting state. Only a handful of states currently have enabling legislation that allows an exporter to become approved to issue a Certificate of Origin without the involvement of a designated government body.
The administrative ease of filling out the required forms must also be considered. A set of standardised forms have been developed for trade under the Treaty, which may be filed in hard copy or electronically in accordance with each signatory state’s national legislation. Knowledge of internal legislation is, therefore, key to ascertaining compliance with applicable rules. It should also be noted that origin declarations may be made using one of the AU official languages for which the applicable designated competent authority must provide translation services.
The pilot implementation phase for trade under the Treaty launched on October 1st with participation by Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, Tanzania and Tunisia. The learnings from the pilot phase should lead to better localisation policies and provide practical insight into the Treaty’s interaction with other more established regional trade agreements. As a general matter, whether a party benefits from a free trade area is determined primarily by the preference margin. A preferential trade scheme is beneficial where the reduced tariffs outweigh the cost of sourcing products from within the preferred trade area and certifying that the products comply with the applicable rules of origin.
Micro, small and midsize enterprises (“MSMEs”), which make up over 80 per cent of the business sector in Africa, lack the scale to absorb the cost of an extended and complicated customs clearance process. On the flip side, due to the complexity of cross-border trade, there is a limit to how much customs processes can be relaxed without risking trade diversion that unduly confers Treaty benefits on ineligible goods. As this exciting chapter in the AU 2063 agenda unfolds, private sector engagement in further rule-making and localisation initiatives might be the way to advance the Treaty’s aim to accelerate industrial development.
Pomy Ketema, Special Counsel at A.Y. Strauss, contributed to this thought leadership opinion. A.Y. Strauss is an American commercial transactions and litigation firm with offices in Roseland, New Jersey and New York, NY.