African countries are known to export largely primary products only to turn around to import processed goods. This has led to perennial trade deficits and a continuous decrease of Africa’s share of the global value chain. Examples abound. Crude oil represents over 75% of Nigeria’s exported goods but the country relies on the importation of refined petroleum products for its local needs. The same can be said of the global cocoa industry which is worth more than USD100 billion and largely fed by the 70% of world cocoa exports that come from Africa, whilst the continent has less than 8% of the market share.
Many believe that the AfCFTA rules of origin will be the game changer if properly crafted and implemented. These will stimulate local production and increase regional value chains. The rules of origin set the criteria for determining the nationality of goods that will be eligible for tariff concession and duty-free export within Africa. The private sector being the key driver of industrialization stands to benefit through value addition which will lead to topline growth.
However, for this to happen, the rules of origin have to be transparent and predictable and business-friendly. It will hurt business if they are too restrictive, or rigid given that manufacturers may still require to import some of the materials used in producing these goods from other continents. On the other hand, overly liberal rules will encourage undue recourse to foreign added values thereby defeating the underlying objectives of the free trade regime. According to the past Secretary-General of the United Nations Conference on Trade and Development (UNCTAD), Mr Mukhisa Kituyi:
“The AfCFTA is a landmark achievement on the continent’s history of regional integration and is expected to generate significant gains. 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.”
What the AfCFTA rules of origin entail
The Harmonized System (HS) Codes are used to classify the export process of goods in international trades and serve as a key indicator for assessing duties and tariffs. There are over 6000 tariff lines under the HS Code system and the AfCFTA ambition is to liberalize over 90% of those tariff lines. What this means is that over time, the duty payable on goods traded within the AfCFTA member states will go down to zero. The AfCFTA rules of origin require that only made in Africa goods will benefit from the tariff concession. The exporters of such goods will be required to prove that the products meet the requirements provided under the rules.
There are two categories of goods envisaged under the rules. The first covers products that are wholly made in Africa 100% – meaning that all the component values must be sourced from Africa. The second category relates to products that have undergone significant transformation. Regarding the latter, the rules will determine the percentage of local value inputs that will qualify such products for tariff concession.
For instance, a car assembling plant in Nigeria that relies wholly on foreign spare parts may not qualify as significantly made in Africa goods unless it is shown that significant portions of the spare parts or raw material used in manufacturing the car are sourced locally. To guide the users, it is important that the rules are made accessible to the public when negotiation is concluded.
There should equally be a regional depository of the rules within each regional economic community to guide investors.
Opportunities for Private Sector
The full implementation of the AFCFTA, is expected to give Nigerian firms preferential access to markets in Africa worth $504.17 billion in goods and $162 billion in services. The average tariff paid on products in Africa is 6%. This is in addition to other port charges that importers of goods are expected to pay which often increase the cost of doing business making it cheaper to import goods from Europe, China and the USA than from African countries.
Although there are other factors such as lack of infrastructure and non-tariff barriers that contribute to this high cost, there are indeed huge opportunities for private sector participants to scale their production and benefit from value addition. One lesson that Covid-19 pandemic has taught us is the need for African countries to look inward and rely less on outsiders.
With the border closure and restrictions imposed by developed countries, African countries that depend mainly on imports from these countries were left stranded. A case in point is the hoarding and stockpiling of covid-19 vaccine by wealthy countries which has left Africa grasping for help in search of vaccines. It is expected that the private sector will take the advantage provided by the rules of origin and drive industrialization and value creation on the continent.
What Nigeria should be doing
The AfCFTA has provided an opportunity for Nigeria to diversify its economy and move away from over-reliance on oil. Nigeria should start putting in place policies that will support private sector participation. Harmonization of the rules of origin across the regional economic communities (RECs) will boost the ease of doing business across the regions and aid the implementation.
Investment in infrastructure is equally needed to enable our local industries compete with more industrialized nations. Other countries are already taking measures that will lead to value creation. For instance, Ghana which exports over 40% of the world’s cocoa beans recently banned the export of cocoa to Switzerland and other countries. This has been interpreted as a move towards cocoa processing and chocolate manufacturing in the country.
For the private sector to benefit from the rules of origin and drive African value, policies should be put in place to provide the necessary incentives to local manufacturers. As noted by Mr Kituyi:
“If the promise of the free trade area is not just about the mercantile movement of goods from one part of Africa to another but Africa’s route to industrialization, then there must be a purposeful value chain addition and cross-border value chain aggregation that will lead to industrialization. The process of creating rules of origin should be such that you do not disincentivize cross border movement of intermediate goods relevant to prioritize value addition of the manufacturing sector on the continent. This is the only way you can make competitive production in Africa and start being relevant in the global market.”
Lastly, to ensure that our local firms benefit under the tariff concession, Nigeria should strengthen its borders to checkmate the smuggling of goods produced in non-African countries into the country. The rule of origin will be counterproductive if measures are not put in place to prevent its abuse as non-compliance will turn Nigeria into a dumping ground and lead to significant job losses and displacements of workers in key sectors of our economy such as agriculture and manufacturing.