Complex and stringent rules of origin can prevent businesses from taking advantage of trade preferences, according to a new study by UNCTAD and the Common Market for Eastern and Southern Africa (COMESA) secretariat.
Rules of origin are the “passport” for goods, determining whether they can be exempted from taxes or taxed less under a preferential trade arrangement or free trade area (FTA).
They can be complex to comply with – especially for products made using materials from different countries through global value chains – and can make it difficult for products to qualify for trade preferences.
This complexity can hinder African businesses from benefiting from preferential trade agreements that the continent’s governments have increasingly signed to increase intra-African trade or exports to partners like the European Union (EU).
Utilization rates measure the extent to which firms are using FTAs. The study uses rates reported by COMESA countries to examine how effectively firms in those nations are using trade preferences offered by FTAs.
“Making utilization rates publicly available will help governments monitor the effectiveness of trade agreements,” says Paul Akiwumi, director of UNCTAD’s division for Africa and least developed countries.
“And understanding which trade agreements are working better for African firms will help the continent’s governments improve the outcome of trade negotiations and ensure better trade deals,” he adds.
Underutilized potential of free trade agreements
The study compares the utilization rates of COMESA members under FTAs with other African countries and preferential agreements with Canada, the EU, Japan and the United States (collectively known as QUAD countries).
The study finds that, for example, utilization rates of trade preferences with the EU are more than 30 percentage points higher than those under COMESA, East African Community (EAC) and Southern African Development Community (SADC) trade arrangements.
Causes of low utilization rates
According to the study, utilization rates in intra-African trade are low mainly because their rules of origin are generally more stringent than those applied under preferential trade agreements with the QUAD countries.
For example, Uganda is a major exporter of animal or vegetable oils and related products. In 2018, Uganda used about 92% of its trade preferences with the QUAD countries for the duty-free export of these products, compared to only 5.1% with COMESA member states.
This example highlights the need for COMESA member states to consider reforming their rules of origin to align them with international best practices. The same would be true for other African regional economic communities like EAC and SADC, the study says.
Low utilization rates show the unused potential of free trade in Africa, hampering the establishment of regional value chains and stifling commerce. They highlight the need for careful implementation of trade agreements and supportive polices to make sure trade and economic goals are met.
Uneven distribution of benefits
The study also reveals that while utilization rates are higher for the QUAD countries, significant pockets of underutilization exist. For example, out of $7 million vanilla exports from Comoros in 2018, $3 million was not utilized under trade preferences, hence duty savings of around $250,000 were possibly missed.
The study recommends a detailed roadmap for COMESA trade policymakers and the private sector to address such underutilization.
UNCTAD and COMESA are leading a series of actions to disseminate the findings of the study and hold consultations at firm level.
“If certain industries or regions are not able to take advantage of the opportunities provided by the preferential trade agreement, it could lead to job losses and economic decline in those areas, which could have wider economic and political ramifications,” the study says.