The Effectiveness of AfCFTA Rules of Origin as a Build-up from Different Existing RECs in Africa

With the desire to have a united Africa emanating from the Abuja Treaty (1991) and Lagos Platform of Action (1980), the heads of state have been in frantic efforts to realise a continental free trade area. Inroads have been made, especially under the leadership of Paul Kagame, who envisioned establishing and surviving the African Continental Free Trade Area AfCFTA. The AfCFTA comes against a background of gradual integration, which promoted the establishment of regional economic communities at different stages of integration across the continent. The literature discusses that multiple memberships that member states obtain from different regional trade blocs complicate the trading atmosphere and create more delays in the implementation of integration efforts. The idea of a free trade area is to have increased intra-regional trade among the members as both tariff, and non-tariff barriers are removed. Preference is given to goods and services perceived to have originated within the designated area as a free trade area. Granting of preference is governed by what is referred to as Rules of Origin (RoO), which distinguish between goods to have access to reduced or eliminated tariffs and to have these privileges.

The complexity of rules of origin under the existing RECs has derailed the concept of regional integration. Studies have captured and assessed the impact of different types of rules of origin on trade, both theoretical and empirical. With eight African Union recognised Regional Economic Communities (RECs) and over five not yet recognised RECs in its five regions, Africa has unparalleled overlapping membership worldwide. The African Continental Free Trade Area (AfCFTA), one of the fifteen African Union’s flagship programs under Agenda 2063, aims to integrate the RECs and come up with a single RoO for the efficiency of intra-African trade. Does AfCFTA have the capacity to smoothen and remove the complexity of existing RoO for an integrated, peaceful, prosperous, and internationally efficacious Africa? With the world disintegrating and trade wars and standoffs becoming the order of the day, it is imperative to understand how AfCFTA, through its RoO, will be able to keep the continent united and increase intra-regional trade, which has remained low. However, multiple agreements, each with its own RoO and tariff reduction schedules, complicate the production and trade calculus. These overlapping agreements in Africa and worldwide are labeled as spaghetti-bowl or noodle-bowl effects.

The spaghetti bowl effect refers to the complication arising from the application of domestic rules of origin in signing free trade agreements. It is often used as a metaphor for African countries’ overlapping memberships in regional economic communities. African RTAs are characterised by multiple and overlapping memberships, exemplifying a classic case of the spaghetti bowl. In each new Preferential Treatment Agreement (PTA), considerations relating to ‘‘rules of origin’’ multiply and become more complex, and if left unchecked, their continued growth can hinder the development of the global and regional production system. Thus, when applying extended cumulation to countries that form part of a dense network of overlapping FTAs, there will be difficulties with different rules of origin. According to a survey administered by the World Customs Organisation to customs officials in developing economies, 67 percent of respondents in sub-Saharan Africa agree that dealing with rules of origin under overlapping trade agreements causes problems, and a majority also agree that rules of origin are more labour-intensive. Administering rules of origin detracts from other objectives of tax collection and trade facilitation. The Economist indicates that: bilateral deals come laden with complicated rules about where products originate—rules which impose substantial costs of labelling and certification on firms. The more overlapping deals there are, the more complex the rules are and the higher the costs are.

Challenges

The image of the spaghetti bowl, often used to illustrate the situation where too many crisscrossing and unaligned free trade agreements can lead countries to adopt discriminatory trade policies and reduce the economic benefits of free trade, may well summarise what can happen with the AfCFTA if adequate harmonisation and mitigation measures are not implemented. According to the Assessing Regional Integration in Africa VIII: Bringing the Continental Free Trade Area Report and ECA and FES, the AfCFTA, like the Tripartite Free Trade Area (TFTA), seeks to address challenges, such as the difficulties caused by overlapping membership in RECs and expedite the regional and continental integration processes through harmonising these RECs into a single market. However, the failure of the TFTA to harmonise the RoOs, overlapping sub-regional Intellectual Property (IP) organisations, and the proliferation of Intellectual Property matters in RECs means that the AfCFTA may also need help to harmonise the same. The Preamble and Article 3(h) of the Agreement Establishing the AfCFTA stipulate that the AfCFTA is conscious and it is within its objectives to resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes. Whenever anyone member of a Customs Union or Free Trade Area negotiates individual trade agreements, the whole group has to bear the costs of administering several trade regimes within the same REC. Generally, this implies maintaining border controls and enforcing rules of origin (RoO) to prevent preferential trade from entering countries that are not party to the agreement.

Concurrent memberships in RTAs allow for additional rules of origins of varying nature that make implementation problematic and bulky, as one country would have to adhere to two or more rules of origin with a conflicting nature. Regional trade agreements usually adopt distinct and unique mechanisms in legislating their rules of origin as they deal with different circumstances involving the origin of goods. Thus, the impact of overlapping membership in the implementation of rules of origin adds hurdles to the process and invokes inconvenience to all stakeholders, such as traders and customs officials, discouraging trade flow in the process. There are fourteen RECs in Africa (8 recognised by AU) at different integration stages, imposing overlapping memberships and conflicting trade rules on African countries. Under AfCFTA, firms involved in multiple FTAs will likely face complicated ROO requirements and cumbersome procedures in complying with the requirements. With a growing number of FTAs, the international and intra-African trading system is likely to become chaotic. Scholars also suggested coping with multiple tariffs and RoOs in FTAs can raise transaction costs for enterprises, particularly SMEs. The additional costs associated with these activities related to complying with ROO may discourage the firms from utilising the FTA, resulting in paying the standard tariffs instead. The underdevelopment and regional integration problems still exist in Africa, which hosts various regional economic organisations with overlapping memberships, which are more integrated with Europe than among themselves.

Prolonged delays in trade flow due to various rules of origin would eventually sabotage integration and cooperation efforts. Jakobeit, Hartzenberg, and Charalambides (2005) state that agents of the private sector and customs officials can get confused over which regime and rules of origin to apply at borders due to the overlapping membership. The problem with too many and too strict rules of origin is that the trade procedures become complicated, as the product often is localised in different areas. The complicated RoO results in a decreased intra-RTA trade flow due to the complexity brought by overlapping rules of origin and the ensuing policy frictions. For instance, the market for Eastern and Southern Africa (COMESA) and the Southern Africa Development Community (SADC), which encompass a significant geographical area that overlaps, have ten member states. However, these two trade blocs continue to employ an incompatible set of rules that deal with the origin of goods coming into the RTAs market. For the countries that are members of both COMESA and SADC, the increased intricacy of rules might make it hard for policymakers to implement the integration agreements properly and make it hard to reap benefits from preferential integration and AfCFTA.

COMESA’s rules of origin are established as a wide-ranging rule-to-all given under these circumstances, while SADC’s RoOs are good-explicit without setting a real cut-off point for the value addition and foreign content when permitting goods to be admitted into the trading bloc. This can be problematic during customs procedures for member states of both trade blocs in terms of which rules to apply and, thus, can be assumed to have contributed to the stagnation of intra-RTA trade growth in the trading blocs. Regarding the AfCFTA, the rise in the number of rules of origin can cause additional difficulties in trade deflection. Trade deflection is a loophole for exporters that want to take advantage of different tariff rates within the AfCFTA by imports to the country with the lowest tariff for further re-exportation to other FTA members.

Way Forward

In dealing with these side effects, member states belonging to two or more RTAs will then have to introduce new or amended policy measures to mitigate the conflicts resulting in policy frictions and added trading costs. Hence, the Spaghetti Bowl Effect reduces the applicability of FTAs and increases the costs of participating firms. The RoOs, tariff schedule, and implementation period are the three parameters where the spaghetti bowl muddles the trade flow as they are differently set across each REC and thus inhibit the progress of trade flow inside the RTA. The Agreement Establishing the AfCFTA acknowledges the Regional Economic Communities (RECs) Free Trade Areas as building blocs towards establishing the African Continental Free Trade Area (AfCFTA). In Article 8, the agreement points out that State Parties that are members of other RECs, which have attained among themselves higher levels of elimination of customs duties and trade barriers than those provided for in this Protocol, shall maintain and, where possible improve upon, those higher levels of trade liberalisation among themselves. Undeniably, differences in the rules of origin (RoO) may undermine the effectiveness of the RTAs by creating inconsistent red tape and overlapping. Multiple memberships may undercut member states’ commitment which is a necessary condition for the success of any RTA. Hence, member states of the AfCFTA must agree on common RoO, custom declaration forms, and compensation mechanisms to escape the calamities of spaghetti bowl effects.

In summary, many African countries try to reap benefits from preferential integration by entering several agreements. Nevertheless, as the rules of the agreements overlap, the multiple memberships are likely to limit the implementation of preferential integration and increase transaction costs in trade. Multiple rules of origin instituted due to overlapping memberships can negatively affect the trade-creating function of the AfCFTA. PTA proliferation makes trade procedures more complicated by increasing the number of tariffs and rules of origin. The unintended effect it could have on intra-regional trade flow can also adversely impact the impetus of regional integration, which is vital to the region and the continent in general. The ensuing duplication and complication of trade relations by overlapping memberships and RoOs exacerbate the prevailing delay in implementation and lack of commitment by member states of the AfCFTA, defeating the agenda 2063 vision of an integrated, peaceful and prosperous continent.

Dr. Levious Chiukira
Dr. Levious Chiukira
Managing Director at Gleam Consultancy | + posts

Ph.D. in Political science, University of Johannesburg, Managing Director @Gleam Consultancy, Zimbabwe

LEAVE A REPLY

Please enter your comment!
Please enter your name here

six + twenty =