Rules of Origin (RoO) are guidelines that are used to determine the country of origin of a product. Broadly, there are two common types of RoO and these depend on how the guidelines determining country of origin are applied. These include: (i) the preferential and (ii) non-preferential rules of origin. The latter applies when a country is participating in a trade agreement. The exact rules vary from product to product country to country, from agreement to agreement.
The Tripartite Free Trade Area is a preferential trade agreement under negotiation in Africa, and its purpose is to create a single market consisting of a total of three trading regions (i.e. Southern African Development Community (SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA)). All in all, the negotiation is supposed to combine 26 countries into one single market in which 80% of products are traded across countries without any tariff barriers.
Rules of Origin are important in that they help to determine whether a product ‘originates’ from a country that is a member of the Free Trade Area, so that the product qualifies to receive preferential (or zero) tariffs. Therefore Rules of Origin act as “gate keepers” that prevent products from outside the Free Trade Area to enjoy the same level of preferential tariffs as the ones that are produced by member countries.
The basis for the preferential rules imply that if a product is wholly obtained or produced completely within South Africa, the product shall be deemed as having originated from South Africa. In this case, the product will qualify for lower tariffs in the other 25 countries that are participating in the Tripartite Free Trade Area.
For a product which has been partly produced in another country outside the Free Trade Area, and then further processed and value added in South Africa, the product shall be determined to have originated in the country where the last substantial transformation or processing took place. For example, for some products, the “rule of origin” stipulates that South African companies can source raw materials from elsewhere in the world, but the value added to the product should be at least 60% of the “ex-works” or “ex-factory” price. From a technical point of view, three general rules are being considered:
1. Change of tariff heading
2. Value added-rule (ad valorem)
3. Special processing rule, in which a minimum transformation guideline is described.
A typical scenario is the RoO negotiation for a product such as “sugars” (i.e. HS1702 products such as lactose, glucose, fructose, sugar syrups etc.).The RoO in the manufacture of these materials differs between SADC, COMESA, and the EAC. Whereas COMESA and SADC accept that raw materials for the manufacture of this product can be sourced from and “wholly produced” by any of the 26 countries that are participating in the TFTA; the EAC stipulates that the weight of the raw materials should not exceed 30% of the final product. COMESA and SADC RoO focus on wholly produced raw materials, while EAC places weight limits.
Rules of Origin can determine whether it is more profitable for an agribusiness to establish a processing plant in a particular country, rather than exporting from South Africa. Rules of origin also guide your sourcing decisions and manufacturing processes. This is because, the Rules of Origin can potentially exclude your exported product from a particular market in the same way it provides preferential market access for your product in a particular country. As such, Rules of Origin can serve as a guide to investment decisions. It is therefore important to understand Rules of Origin and strategically align your business accordingly, in order to tap into particular lucrative country markets that might be of interest to you.
It is important for your company to understand the Rules of Origin for the above stated strategic reasons. Therefore, production managers and strategy analysts need to understand how Rules of Origin might affect their day-to-day decisions when considering African markets of interest, especially given that these Rules are likely to change after the tri-partite negotiations are complete.
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