One of the AfCFTA’s ambitions is to create new continental markets for African-produced goods. Many African countries principally produce untransformed, resource-based goods. On their own, these countries do not necessarily have the capacity to transition to more complex production and manufacturing. The AfCFTA can help by creating an environment that encourages the development of regional value chains. Regional value chains spread the production of goods across different countries within a broad geographic area, with businesses at different locations specializing in different parts of the production process.
Regional value chains need certain conditions to succeed. Three of the most essential concern tariffs, rules of origin, and the movement of people.
Services account for over half of Africa’s GDP and are key to fostering the development of regional value chains. The AfCFTA prioritizes several important service sectors for liberalization, notably communications, business services, transportation, financial services, and tourism.
Trade in services cannot develop in a meaningful way unless people are free to move across borders. Truck drivers transport goods from one region to the next. Engineers work on infrastructure projects in countries where critical skills are in shortage. International specialists are seconded to local institutions, and professors teach at foreign universities.
Rules of origin are criteria that specify how much local working or processing is required on materials and intermediate goods sourced from abroad for a product to obtain “local origin” status and access markets on preferential terms. Negotiating rules of origin is complex and time-consuming, not least because the rules often greatly affect countries’ trade and industrial activity. The rules may also stimulate or stifle regional value chains, depending on how they are designed.
Rules of origin that require a large share of originating content (content that originates within the region) may encourage regional production and sourcing, but could curb trade if the region does not produce enough competitively priced inputs with the features required. Rules of origin that allow a large share of non-originating content may encourage trade, but could discourage local and regional production and the formation of regional value chains for “made in Africa” products.
The AfCFTA negotiations recognize this dilemma by proposing transitional rules in certain sectors. In these sectors, the rules of origin allow a larger share of non-originating content at first. After three or five years, the rules become more restrictive, requiring products to use entirely African-made content to qualify for “local origin” status under the AfCFTA.
In the short-to-medium term, the AfCFTA will not harmonize rules of origin across the continent but will apply rules that encourage trade between countries not already trading on a preferential basis within a regional economic community. Similarly, tariff offers under the AfCFTA are being exchanged between countries and blocs that do not already offer each other preferential tariffs. In some sectors, the AfCFTA’s rules require more originating content than the rules agreed within the regional economic communities.
AfCFTA signatories have largely agreed on the AfCFTA’s rules of origin: only a few rules on certain products and sectors are still being negotiated. One of these sectors is the automotive sector, where the rules will weigh heavily on whether preferential trade and investment are likely to flourish. Another sector is textiles and clothing, which is of keen interest to many African countries in terms of industrializing and creating formal employment.
While the AfCFTA's Protocol on Trade in Goods is being finalised, the AfCFTA's recent Guided Trade Initiative is allowing a selection of products to be traded under AfCFTA rules between a small number of countries that have already agreed on tariffs and rules of origin between each other. Meanwhile, regional economic communities continue to play an important role in regulating—and liberalizing—trade.
