The interrelationship between rules of origin and the value chain

Rules of origin have an important impact on the formation, growth and efficiency of regional value chains (RVCs), as well as on the capacity of RVCs to act as an engine of business growth, industrialization and sustainable development. To forge development-driven rules of origin in regional trade, RVCs need to be taken into consideration.Footnote ¹¹ However, it is possible to design value chain trade independent of rules of origin. Accordingly, the production networks of value chains can be fragmented across many frontiers and jurisdictions, with the rules of origin largely playing a subsidiary role. In this circumstance, however, the regions that benefit more from the value chain trade are mostly those jurisdictions where more inputs and materials originate, especially intermediate and finished products. Consequently, rules of origin and value chain trade could have both separate and mutually reinforcing objectives. In light of the development constraints in Africa, rules of origin and value chain trade should be mutually reinforcing, even if their separate objectives are retained.

Rules of origin cover the laws and regulations implemented to determine the origin of goods and services.Footnote ¹² Rules of origin distinguish between the most favoured nations (MFN) rate and the rate under the preferential trade regime for the purpose of granting a preferential tariff rate to state parties. A practical illustration is a hypothetical trade between Nigeria and South Africa as state parties to the AfCFTA Agreement vis-à-vis South African trade with a third party or a non-member of the AfCFTA (eg Indonesia). South Africa could import plates from Nigeria at a zero tariff rate (because both parties are members of the AfCFTA and therefore benefit from the preferential trade regime), while the same or a similar brand of plates hypothetically imported into South Africa from Indonesia (or any other non-member of the AfCFTA) could attract an MFN tariff rate of, say, two per cent, in accordance with the WTO rules of origin. This holds true in the absence of a free trade agreement (FTA) between South Africa and Indonesia (or the third party) providing for a lower or zero tariff.

In trade in services, the rules of origin for service suppliers are usually prioritized, mainly because physical proximity is necessary between the service supplier and the consumer of the service. A practical illustration is a barber (ie the service supplier) and his / her client (ie the consumer of barbering services). A barber needs the physical presence (the “physical proximity”) of the client in order to barb. It is vital for state parties to the AfCFTA Agreement not only to abide by their services liberalization commitments but also to further liberalize service sectors. This will help to deepen entrepreneurship, strengthen the rights of businesses and foster the diversification of consumer preferences.

In reality, divergences underlie the design and implementation goal of rules of origin.Footnote ¹³ Rules of origin have been ascribed the sole role of authenticating the origin of goods, rather than being used as a protectionist instrument and an industrial policy tool. Conversely, rules of origin have been situated within industrial policy and protectionism to facilitate the development outcomes of the country applying them.Footnote ¹⁴ In reality, rules of origin perform many of these roles: they facilitate the growth of business and industrial links;Footnote ¹⁵ they prevent non-members from benefiting from preferential treatment; they authenticate goods;Footnote ¹⁶ and they may be used to protect the economy of applying member countries, depending on the implementation design.

Taxonomically, rules of origin are either preferential or non-preferential. The preferential rules of origin stipulate the conditions required before a product qualifies as originating in an exporting country before benefiting from preferential treatment, while non-preferential rules of origin involve trading based on an MFN rate.Footnote ¹⁷ A practical illustration is a hypothetical trade between a state party to the AfCFTA Agreement (eg Kenya) and a third party (eg India). The AfCFTA Agreement provides for the conditions required before a product acquires an originating status (ie a benefit from the AfCFTA Agreement preferential rules of origin). Once the product satisfies the conditions, it would benefit from a low or zero tariff rate if traded within Africa. However, the MFN rate (ie a possibly higher tariff rate, in accordance with WTO rules) would apply to the same or a similar product from a third party (eg India) if exported to Africa (eg Kenya). This holds true in the absence of an FTA between the African country (Kenya) and the third party (India) providing for similar preference benchmarks.

In regional trade agreements (RTAs), preferential rules of origin could lead to either trade creation or trade diversion.Footnote ¹⁸ The former occurs upon an increase in trade volume within the free-trade zone, while the latter happens when there is a decrease in trade volume between the free-trade zone and the rest of the world. From an economic perspective, preferential rules of origin are required to counter trade deflection. Hence, rules of origin ensure that goods exported at a preferential rate from one state party to another state party originate from the trading area and are not assembled from materials that originate from non-parties.Footnote ¹⁹ This effectively promotes the regional sourcing of materials and inputs by firms and businesses trading within the region, and boosts the growth of businesses and economic activities that facilitate development.

The AfCFTA Agreement certainly recognizes the imperative for African development through regional sourcing of materials and inputs. Accordingly, it provides for the following as part of its objectives: the promotion of industrial development through diversification and RVC development; the development and promotion of regional and continental value chains; the stimulation of the participation of African services suppliers in regional and global value chains; and the acceleration of efforts on industrialization to promote the development of RVCs.Footnote ²⁰ Above all, article 3 of annex 2 to the AfCFTA rules of origin explicitly recognizes as a part of its objectives the need to promote regional and continental value chains. However, it equally incorporates other objectives, including the need to deepen market integration at the regional and continental levels, to boost intra-African trade and to foster the economic transformation of the continent through industrialization. The implication of this is that the rules of origin have the capacity to unlock these opportunities with or without being linked to regional and continental value chains.

Arguably, proper design and implementation of the rules of origin can unlock the development potential of RVCs and hasten their integration with GVCs. Hence, the sourcing of materials and inputs within Africa can trigger many businesses to participate in the diverse networks of the supply chain. Both existing businesses and newly formed firms have the opportunity to participate in the supply chain trade in order to satisfy the demands of those firms sourcing materials and inputs. This has positive externalities (attendant benefits) for the region in the form of increased employment generation, increased revenue for firms and government and an overall improvement in the living standards of the African people.

The term “value chain” covers a wide range of activities that firms and workers undertake to get a product from its conception to end use and beyond. This includes research and development (R&D), design, production, marketing, distribution and consumer support.Footnote ²¹ The activities that compose value chains may be divided among different firms or undertaken by a single one. Indeed, value chains have become a dominant feature of world trade and investment, affecting developing, emerging and developed economies.Footnote ²² Production processes (from raw materials to finished products) are increasingly fragmented across many jurisdictions depending on the cost implications, availability of materials and capacity.Footnote ²³ A practical illustration of such fragmentation is a car made in Nigeria: though the finished product bears the mark “Made in Nigeria”, various components of the car could hypothetically come from many jurisdictions – the tyres could be made in France, the battery could be made in South Korea, the engine could be made in Nigeria and China, the aluminium panels could be made in Turkey, the sensor could be made in Taiwan (possibly with US technology) and the radio components could be made in Japan. It is also possible for the various components that make up the finished product (eg the radio) to themselves be made in many jurisdictions (eg Germany, Finland and finally Japan). The AfCFTA Agreement should be implemented to insert Africa within these GVC networks.

Certainly, if Africa is deeply inserted into production networks, the region will benefit massively in terms of business and economic growth and an attendant improvement in the living standards of the people. This partly explains why the development of RVCs is important in reaping development-driven trade and investment liberalization. The sector- or product-specific rules and regime-wide rules – the two main standards employed to determine the rules of origin in trade in goods and in services – have an important influence on the development of RVCs and ultimate integration into GVCs, as well as the overall improvement in the growth of businesses and the employment rate.

Criteria for rules of origin in trade in goods

Article 4 of annex 2 to the AfCFTA rules of origin provides the preconditions before a product is considered as originating from a state party to the AfCFTA Agreement. Accordingly, a product is considered as originating from a state party if it is “wholly obtained” in that state party or has undergone substantial transformation in that state party.Footnote ²⁴ The AfCFTA Agreement is largely influenced by the regional economic communities (RECs) and the global practice in the incorporation of “wholly obtained” and “substantial transformation” requirements as the two main criteria to assess the origin of products. Consequently, similar standards are replicated in the rules of origin of the Tripartite Free Trade Area (TFTA) (article 3 of annex 4), rule 2 of the Common Market for Eastern and Southern Africa (COMESA) Protocol on Rules of Origin, rule 4 of the East African Community (EAC) Rules of Origin, rule 2 of annex 1 to the Southern African Development Community (SADC) Rules of Origin, and article 38 of the Economic Community of West African States (ECOWAS) Trade Liberalization Scheme (Protocol and Regulations).

This similarity in standards provides an opportunity for seamless implementation at both the REC and the AfCFTA levels. Specifically, one of the principles of the AfCFTA is the preservation of the acquis.Footnote ²⁵ This means that the AfCFTA will complement best practices at the REC level rather than jettisoning them. Consequently, the similarity in rules of origin between the RECs and the AfCFTA will promote coherence in norm generation and the growth of case law through adjudication, interpretation and implementation. This makes it easier for business enterprises to trade at both the REC and the continental levels. Above all, it assists businesses to contribute to development-driven liberalization (ie the expansion of their business activities is positively correlated to development).

While the AfCFTA Agreement espouses product-specific rules of origin, the regime-wide rules remain relevant.Footnote ²⁶ Under the RECs, ECOWAS and COMESA incline towards across-the-board rules, while the EAC and SADC follow tailor-made rules which are the closest to the EU model on rules of origin in terms of drafting style and content.Footnote ²⁷ The adoption by the AfCFTA Agreement of product-specific rules of origin together with regime-wide rules implies that a product may be required to satisfy both standards before being conferred with preferential status in intra-African trade (ie before the product enjoys a low or zero tariff on import within Africa).

Criteria for rules of origin in trade in services

The main objective of the rules of origin for services, like trade in goods, is to ensure that non-treaty parties (third parties) do not freeride on preference-giving members by accessing the latter’s market on a preferential basis through their companies (or companies incorporated in their country). Consequently, the criteria for rules of origin in trade in services draw a distinction between juridical persons (companies) and natural persons. For juridical persons, a number of criteria are employed by the AfCFTA Protocol on Trade in Services, namely the incorporation requirement, the substantive business operations, the threshold of domestic employment, and domestic ownership and control.Footnote ³⁷

Like most FTAs, article 24 of the Protocol on Trade in Services on “denial of benefits” affords the parties the right to deny the benefits of the Protocol to service suppliers of another state party where the service is being supplied by a juridical person of a non-state party without any real and continuous link with the economy of the state party or with negligible or no business operations in the territory of the other or any other state party. The scope of benefits that can be denied covers the whole provision of the Protocol on Trade in Services. Although the principal criteria for the rules of origin for natural persons cover nationality, residency and centre of economic interest, the Protocol prioritizes the first two of these and seems to forgo the last.Footnote ³⁸ This is explained by the fact that the centre of economic interest requirement equates to the substantive business operations criterion, which is mainly covered under juridical persons, as above. In any case, the criteria for rules of origin in trade in services, like trade in goods, are aimed at ensuring the growth of African business enterprises (particularly the services sector) in the implementation of the AfCFTA Agreement. Such growth has positive knock-on effects on development, eg an increase in employment opportunities and overall improvement in the aggregate welfare of the populace.

Value chain integration and underlying benefits

The development of RVCs in Africa and the participation of the region in the GVCs are unenviable when compared with related regional economic integrations such as the Association of Southeast Asian Nations (ASEAN) and the Southern Common Market (Mercosur).Footnote ³⁹ The share of African participation in GVCs is abysmal compared to Asia and high-income countries.Footnote ⁴⁰ African RECs have participated mainly in non-regional value chains, in contradistinction to ASEAN and Mercosur where supply chain trade is integrated with RVCs.Footnote ⁴¹ Indeed, only between 0.5 per cent and 3 per cent of total gross exports from African RECs are related to RVCs, compared to 17.2 per cent and 4.6 per cent of RVC participation rates for ASEAN and Mercosur respectively.Footnote ⁴² This low participation has impeded not only business expansion in this sector but also the capacity of the continent to fully reap the development dimension of value chain trade.

While the integration of African economies and RECs into GVCs is hugely beneficial to African development, there must be other complementarities. These include: investment in institutional strengthening, the creation of a conducive atmosphere for locating R&D in Africa and absorbing the local workforce, and the incremental building of knowledge reservoirs across all frontiers of the economy. Thus the AfCFTA provides opportunities for African countries to produce and export higher-value products and boost their competitiveness. Similarly, well-developed RVCs in Africa offer an opportunity to the region to integrate into GVCs and increase the bargaining power of their firms. While the risk involved in the value chain trade extends to sustainability constraints (eg environmental damage), the benefit of the trade arguably outweighs the cost (eg it stimulates productivity, economic growth and aggregate welfare).

Obviously, Asian and Latin American countries, which are significantly integrated into GVCs, have reaped huge benefits in terms of increased productivity, job creation and poverty reduction.Footnote ⁴³ On the other hand, African countries, which generally have weak links to GVCs and mostly operate at the lower end of the value chain typified by trade in primary raw materials, have largely failed to benefit from GVC-led growth and any associated improvement in income levels. This has impacted negatively on the development aspects of economic liberalization in the region. In fact, there have been many failed initiatives to develop RVCs in Africa as well as to integrate the region into GVCs. These initiatives range from the Industrial Development Decade for Africa (IDDA) 1 of 1980–90 and the IDDA 2 of 1993–2002 to African Industrialization Week.Footnote ⁴⁴ These initiatives failed to transform Africa into an industrial economy or engender transformative development in the continent.

Currently, the RECs and the AfCFTA are promoting industrialization policy, partly driven by the ambition to promote RVCs and integrate these into GVCs.Footnote ⁴⁵ The members of the TFTA, for instance, seek to strengthen coordination in industrial policy that includes developing and upgrading RVCs. This is expected to boost productive capacity and competitiveness among the state parties. Similarly, the AfCFTA industrial policy (a part of the objective) seeks to “promote industrial development through diversification and regional value chain development, agricultural development and food security”.Footnote ⁴⁶ Together with the uptick in value chain trade, the policy offers a significant opportunity for the growth of businesses and economic activities. This will have the intended effect of making Africa the hub for global sourcing of value content and integrating African firms into the global supply chains.

Nevertheless, Africa still lacks important fundamentals for optimizing these opportunities, as several factors impede its participation in value chain trade and reaping the underlying development dimension. Specifically, Africa has not measured up to basic dimensions of value chain methodology, namely: (1) an input–output structure, transforming raw materials into final products; (2) the geographic scope – industry dispersion and GVC concentration; (3) a governance structure – firms’ control of the value chain; (4) product and services upgrading; (5) institutional efficiency; and (6) industry stakeholders’ role in a shared vision of conformance.Footnote ⁴⁷ This has equally affected the growth of businesses involved in GVC trade and has undermined the development of critical areas that enhance the region’s competitiveness. Furthermore, the quality of African exported goods (derived from price differences within specific product categories) and the complexity of exports (measured in terms of the diversity and sophistication of products and inputs) have not been improving over the years to take advantage of GVC integration.Footnote ⁴⁸ Unlike what happens in other regions, exports from sub-Saharan Africa feature merely at the commencement of GVCs in the form of commodities (raw materials) for inputs to other countries’ exports.Footnote ⁴⁹ Practical illustrations of commodity goods are the trades in African crude oil and natural gas and in unprocessed minerals such as gold and lithium. Many of these products are extracted from Africa and processed entirely outside it, without the region participating in the intermediate and final processing.

Certainly, countries that export raw materials do not benefit maximally from the development dimension of value chain trade compared to countries whose GVC integration ranges from the processing of intermediate products and services to finished products. Moreover, while African countries have comparative advantages in value addition in such sectors as agribusiness and textiles, the environment for doing business (infrastructure connectivity, rule of law and cost competitiveness) remains poor. Consequently, rather than trade in commodity products, African countries should improve their trade in intermediate products and value addition in pre-manufacturing and post-manufacturing services (such as designing, branding and marketing).

A practical illustration of improving trade in an intermediate product is the steel industry (processing and production). A number of state parties to the AfCFTA Agreement have iron ore deposits (eg Angola, Cameroon, Nigeria and Uganda) but still import steel. An innovative implementation of value chain trade under the AfCFTA Agreement could enable these countries to process iron ore into steel products, which can then be exported to countries that need them to make finished products (eg cars, rail infrastructure and bridges). By extracting the iron ore and adding value to it through processing, these countries benefit from the skill base and employment of their nationals along the value chain (ie extraction, processing stages and transportation), in addition to expansion of their GDP upon export of the (processed) steel. Such initiatives will help state parties to the AfCFTA Agreement climb onto the upper level of the value chain trade, improving their competitiveness and reaping the development benefits of value chain trade. Therefore, African countries should exploit the opportunities offered by the AfCFTA rules of origin and value chain trade. This will help the region to boost the growth of businesses, participate in GVCs and benefit maximally from value chain-driven aspects of development.

To achieve this, however, action plans are needed at the national and regional levels in many areas.Footnote ⁵⁰ These would cover a robust data storage and tracking system; strengthening the quality of institutions with a vision for development; coordinated policies on value chain development; infrastructure investment and connectivity; private-sector involvement in value chain policy design and implementation; a favourable investment climate driven by economies of scale, specialization, cost and the availability of labour and capital; developing a knowledge economy to attract investment in GVCs in the higher stages of manufacturing or services; robust clusters to foster the growth of RVCs; improvement of standards and quality control systems; and addressing wrong price incentives.Footnote ⁵¹ Arguably, these action plans should be implemented with a focus on stimulating the growth of businesses and the economy and the realization of the attendant development benefits. Additional prerequisites requiring national and regional priority attention to promote trade-driven development include: strengthening funding sources (banks, capital markets and fiscal policy) for businesses; building data infrastructure reinforcement and improving cross-border data flow; bolstering industrial links with RVCs; formulation of a procurement regime that recognizes the development of RVCs; and instituting modalities for monitoring, assessment and responses.Footnote ⁵² Addressing these defects provides an important basis for nurturing RVCs, inserting them into GVCs and achieving structural transformation and export diversification.Footnote ⁵³

Historically, a lack of political will hampered the implementation of commitments and recommendations by African leaders, and this partly led to the suboptimal performance of many RECs. Unlike RECs, the AfCFTA Agreement constitutes the first trade agreement of continental magnitude. Accordingly, the state parties cannot afford to make the trade agreement an object of scorn for stakeholders and observers by refusing to implement commitments. The pan-African nature of the agreement and its orientation towards development should constitute a sufficient push factor to implement it. Secondly, the avowed interest of major trading nations and blocs (eg the EU) in the success of the agreement should prod the state parties to adhere to timelines and fulfil milestones and overall implementation. In all cases, the private sector (enterprises) must be mainstreamed in design and implementation agendas, in light of their positive role in job creation and employment and as partners with the government in facilitating development.

Participation of enterprises

The participation of business enterprises (eg transnational corporations, or their subsidiaries or partners, and micro, small and medium-sized enterprises (MSMEs)) in the rules of origin utilization and the value chain trade promotes developmental outcomes. This happens with businesses employing more people along the supply chain, the expansion of businesses to take advantage of trading opportunities from local sourcing of inputs and materials, and the positive effect on the country’s GDP through reserves from export. Indeed, transnational corporations and MSMEs would be important players in the execution of trading and investment opportunities under the AfCFTA Agreement. However, African economies are dominated by MSMEs, which implies that strategies that work for transnational corporations may not be suitable for MSMEs’ trading and investment opportunities under the AfCFTA Agreement. Accordingly, MSMEs require more support to internalize the opportunities afforded by rules of origin and value chain trade if their development impact is to be optimized. Support for MSMEs is further justified by their competitive disadvantage vis-à-vis transnational corporations (eg market share, innovation and economies of scale and scope). At the same time, MSMEs and transnational corporations can be joint partners in the execution of the AfCFTA strategies for development.

To highlight the significance of MSMEs, and particularly in the execution of the AfCFTA project, the UN Economic Commission for Africa projects that 80 per cent of African economies are MSMEs, with 70 per cent of them located in the informal sector.Footnote ⁵⁴ Consequently, the major employers of labour in Africa are MSMEs, which is likely to continue under the AfCFTA. Also, the current contribution of MSMEs to employment generation, exports and economic growth will double upon judicious articulation of the AfCFTA implementation. MSMEs are crucial for the uptake of preferences afforded by the rules of origin. Similarly, MSMEs’ participation in value chain trade will enhance the structural transformation of African economies. This happens when existing firms and new enterprises employ more people to meet increasing demand for supply of inputs or materials from the industrial sector. Equally, industrial expansion occasioned by a higher volume of trade increases the propensity for more employment, increased revenue for government (ie from taxes and charges), export growth with overall improvement in the GDP, and underlying development.

However, MSMEs face varying degrees of difficulty in complying with the rules of origin requirements, trading under the AfCFTA Agreement and fulfilling their roles as agents of development (in partnership with government). Indeed, a major constraint in this regard is access to finance. Most MSMEs operating on the continent have a low financial base, necessitating secure access to finance to fund their business operations. Unfortunately, most banks are unwilling to grant credit to MSMEs on account of potential business failures and the resultant loss of the underlying credit. Capital-market finance constitutes an attractive fallback, but most African capital markets are defined by an inability to fully discharge their institutional financing role, onerous regulatory compliance, occasional illiquidity and a poor investor-protection regime.Footnote ⁵⁵ Worse still, most MSMEs are not listed on the securities exchange because they cannot meet the conditions for share issuance. They also cannot issue debt instruments because of low reputational capital, which disincentivizes investors. Thus, the possibility for MSMEs to resort to capital-market financing is largely nugatory. However, public companies quoted on the securities exchange are not expected to encounter similar difficulties in accessing capital-market finance, particularly if they are a going concern. Contextually, MSMEs bear the greater burden of the constraints in the face of the opportunities provided by the rules of origin and value chain trade, because they constitute the dominant business model in Africa. This could limit their capacity to participate in the value chain trade and fulfil their role as agents of development under the AfCFTA Agreement.

According to the International Finance Corporation (IFC), 65 million firms (or 40 per cent of formal MSMEs) have an unmet financing requirement of about USD 5.2 trillion every year.Footnote ⁵⁶ This figure merely represents formal MSMEs, meaning that the financing need is higher when informal MSMEs are taken into account. The African Development Bank (AfDB) is scaling up the financing of MSMEs’ business operations in many countries across Africa to make them more competitive. In Nigeria, the AfDB has partnered with the First City Monument Bank for a USD 50 million credit facility to support MSMEs and women-driven enterprises. Likewise, the IFC’s Small Loan Guarantee Program provides an innovative financing solution, access to financial services and risk-sharing support to MSMEs. The IFC has committed about USD 172 million to 11 financial institutions through this programme to assist African MSMEs, including the Union Bank of Nigeria, the Société Ivoirienne de Banque Côte d’Ivoire and Atlantic Business International. The latter has subsidiaries in many countries, such as Benin, Burkina Faso, Côte d’Ivoire, Guinea, Mali, Niger, Senegal and Togo.Footnote ⁵⁷ These interventions will certainly reduce the constraints faced by MSMEs, but they will not totally eliminate the financing gap. Most importantly, financing is insufficient unless it is contextualized within the broader constraints (eg multiple taxes, capacity constraints and a difficult business environment) which have a negative bearing on the participation of MSMEs in the uptake of opportunities afforded by rules of origin and the underlying development dimension. Similarly, the constraints undermine MSMEs’ participation in value chain trade and associated development benefits (such as employment and poverty reduction).

Additionally, MSMEs need tax incentives that are pro-business under the AfCFTA Agreement to enable them to optimize the development dimension of the rules of origin and value chain trade. A pro-MSME tax regime (under the AfCFTA) includes, (1) eliminating multiple taxation; (2) the provision of tax incentive schemes; (3) simplified, transparent and predictable payments; (4) pioneer status for qualifying MSMEs in strategic and high-growth sectors; and (5) tax incentives for capital acquisitions, equipment fabrication and import substitution activities.Footnote ⁵⁸ This should be situated within a simplification of overall compliance costs for rules of origin. Excessive charges in the form of taxes or compliance costs for cross-border businesses depress profit margins if prices cannot be readily adjusted upward by relevant businesses. Accordingly, a higher uptake of rules of origin, participation in RVCs and the achievement of the underlying development dimension under the AfCFTA Agreement are deeply intertwined with the viability of businesses, the scale of charges and the resulting profits.

Moreover, capacity building and technical assistance complement MSMEs’ financing and pro-business fiscal policy under the AfCFTA Agreement and ensure that MSMEs meaningfully optimize the opportunities afforded by rules of origin and the value chain trade to engender developmental outcomes. Capacity building is accomplished through training programmes for small business owners on the roles and responsibilities that underpin preference utilization and the underlying opportunities. Capacity building and technical assistance equally extend to advisory services, business planning and the execution of assistance to businesses; they facilitate proper use of the loans granted, a reduction of bank exposures to bad loans, the possibility of a further loan facility in the future, and overall good business management. Above all, these measures ensure that MSMEs fully optimize the rules of origin and participate in the value chain trade so as to fulfil their development role under the AfCFTA Agreement.

Under the ASEAN economic integration, parties are explicitly required to assist MSMEs to participate in and benefit from trading.Footnote ⁵⁹ This comes in the form of capacity building programmes for MSMEs (eg training, workshops and mentoring), facilitation of development programmes, addressing barriers faced by MSMEs and the exchange of information to foster the realization of these objectives. Although the AfCFTA Agreement does not reference MSMEs in detail, the preamble acknowledges their significance for harnessing RVCs.Footnote ⁶⁰ Additionally, article 27 of the Protocol on Services, titled “Technical Assistance, Capacity Building and Cooperation”, emphasizes the commitment of state parties to improve the export capacity of both formal and informal service suppliers. Most importantly, a protocol on MSMEs and related matters cannot be totally precluded in the future.Footnote ⁶¹ Both the Protocol on Trade in Goods and the Protocol on Trade in Services recognize the significance of capacity building and technical assistance to achieving the objectives of the AfCFTA. Hence businesses (not just MSMEs) are encouraged to request assistance (through the AfCFTA secretariat) in this area when necessary to strengthen their participation in the value chain, their returns on trade and their investment and development role.

Furthermore, a sensitization programme is crucial for the uptake of preference under the rules of origin, the participation of business enterprises in RVCs and the realization of the resultant development. Many businesses are not aware of the obligations and opportunities afforded under the AfCFTA Agreement. Sensitization creates more awareness among business communities on the business opportunities, obligations and modalities for compliance. Accordingly, national authorities (ministries of industry, trade and investment / commerce) should intensify efforts to liaise with the private sector by organizing shows and workshops to create more awareness of participation in the AfCFTA’s value chain. This will enable enterprises to fully utilize the opportunities afforded by the rules of origin and the RVCs, to expand their business activities and to foster development under the AfCFTA Agreement.

Additionally, NTBs must be eliminated in intra-African trade under the AfCFTA Agreement to hasten the ease of doing business and the realization of the development dimension of trade and investment liberalization. NTBs simply mean barriers that undermine cross-border trade apart from tariffs. A practical illustration is the improper application of sanitary and phytosanitary (SPS) measures to control the risks posed to human, animal or plant life or health. The government of Country A, for instance, could ban the import of frozen meat from Country Z on the ground that the meat poses risks to human, animal or plant life or health of Country A. But behind the cover of the import ban of the product from Country Z, the government of Country A’s true reason is to protect their national meat producers and livestock sector (which is never stated in the government regulation). Such an action restricts the volume of cross-border trade, at least with Country Z, in the area of the frozen meat trade. A broader application of SPS measures against many goods and countries could significantly lower imports and undermine the development dimension of trade liberalization.

Like many FTAs, the AfCFTA Agreement incorporates a framework for identifying, categorizing and progressively eliminating NTBs in intra-African trade. This is structured mainly through (a) institutional structures for the elimination of NTBs; (b) general categorization of NTBs; (c) reporting and monitoring; and (d) the resolution of identified NTBs.Footnote ⁶² Article 3 of annex 5 to the AfCFTA Agreement on NTBs provides a non-exhaustive list in a general categorization of NTBs, which is expanded by the accompanying Appendix 1.Footnote ⁶³ This does not determine the legitimacy, adequacy, necessity or discrimination of any form of policy intervention used in international trade, and it does not prejudice the rights and obligations of state parties under the WTO Agreements. Accordingly, the state parties, through the secretariat, may propose changes for consideration and concurrence by other state parties. The elimination of NTBs is vital if value chain trade should act as an important contributor to African development. Besides, businesses have the liberty to report the occurrence of NTBs to institutions at the national, REC and AfCFTA levels. This is achieved through the frameworks of the National Monitoring Committees and National Focal Points on NTBs, RECs’ NTB units and the NTB sub-committee. The RECs, working closely with the NTB sub-committee and the National Focal Points, have a duty to ensure a timely and effective resolution of identified NTBs.

These modalities are meant to remove obstacles encountered in intra-African trade, simplify the procedures and processes in optimizing rules of origin, and facilitate the growth of businesses that support African development. It is expected that a conducive business environment will spur business enterprises to optimize trade preferences, strengthen value chain growth and facilitate structural transformation and ultimate development. The scale of businesses’ participation in the value chain trade as agents of development is closely linked to the quality of infrastructure.

Infrastructure investment and connectivity

The quality of infrastructure in existence and operation is crucial to the success of the AfCFTA as an instrument of African development. Indeed, it has important implications for the upscaling of preference utilization, the growth of RVCs and the realization of the underlying development dimension. African countries fail across diverse metrics for having quality infrastructure necessary for the proper functioning of value chain trade and the realization of associated development. Transport infrastructure, globally considered fundamental to cross-border trade, is in a deleterious state in Africa; and extensive road and rail networks that facilitate seamless trade and investment across borders still elude the continent. While the world average of paved roads is 944 km per 1000 km², Africa can only boast a paltry average of 204 km of paved roads per 1000 km².Footnote ⁶⁴ Also, air travel in Africa is among the most expensive in the world, with 1–4 hours of intra-African air travel often more expensive than 5–6 hours’ air travel from some African cities to some European cities. A practical illustration was my own flight costs: I once paid a higher amount for a flight of less than 2 hours from Abuja Airport (Nigeria) to Yaoundé Airport (Cameroon) than the amount I paid for a flight from Lagos Airport (Nigeria) to Manchester Airport (United Kingdom) around the same time. Apart from the prohibitive flight costs, African airports are still plagued by missing cargo, long cargo clearance times and poor port infrastructure. The movement of cargo and persons inland is affected equally by endless insecurity and inland waterways that are largely not accessible to ships, so requiring dredging. Similarly, Africa has the lowest access to electricity in the world, with over 640 million Africans having no access at all, while electrified areas constantly suffer from unreliable supply.Footnote ⁶⁵ Unless addressed, these challenges will undermine the use of rules of origin and value chain trade under the AfCFTA Agreement to promote African development.

In reality, there are initiatives to address the infrastructural issue in Africa in order to promote development. The AU’s Agenda 2063 prioritizes regional power pools to help transform the continent with a sustainable use of energy. Also, the Pan African Infrastructure Development Fund seeks to finance projects across many sectors in Africa, such as power, transport, water and sanitation, information and communication technologies (ICT) and healthcare infrastructure. Moreover, the Programme for Infrastructure Development in Africa, championed by the AU Commission (AUC), the New Partnership for African Development (NEPAD) Secretariat and the AfDB, aims to develop regional and continental infrastructure (energy, transport, ICT and trans-boundary water resources). So far, this effort has not significantly changed the quality of infrastructure in many African countries.

Moreover, China is stepping up infrastructure financing, investment and projects in Africa, outpacing other countries as the largest infrastructure financier in Africa, with almost every critical project undertaken by Chinese investors.Footnote ⁶⁶ As Zhou has noted, “[w]hen you set foot on the land of Africa, you will see many projects invested by Chinese enterprises, who are helping African countries build roads, railways, airports, and ports”.Footnote ⁶⁷ McKinsey & Company reports that nearly a third of Chinese firms in Africa are “involved in manufacturing, a quarter in services, and around a fifth each in trade and in construction and real estate”.Footnote ⁶⁸ In manufacturing, it is projected that over “12 percent of Africa’s industrial production – valued at some $500 billion a year in total – is already handled by Chinese firms”.Footnote ⁶⁹ In infrastructure, the dominance of Chinese firms is equally felt given that they claim about 50 per cent of Africa’s internationally contracted construction market.Footnote ⁷⁰ Chinese companies have also been compensated with investment returns. Zhou reports that “nearly a quarter of the 1000 companies surveyed said they could recover their initial investment in one year or even less”, and nearly one-third of companies have profit margins of more than 20 per cent.Footnote ⁷¹ China’s investment in Africa has exceeded USD 100 billion, straddling almost every country on the continent and diverse areas such as science and technology, geological exploration, real estate, finance, wholesale and retail, and agriculture.Footnote ⁷² It remains to be seen how the strides made so far in this regard will promote African development under the AfCFTA Agreement.

Arguably, existing programmes of infrastructure investment complemented by China’s infrastructure projects will contribute positively to foregrounding a conducive environment for business participation with opportunities afforded by the rules of origin and value chain trade. However, the AfCFTA policy-makers need to realize that existing achievements cannot significantly change the infrastructural deficit required for intra-regional trade. Consequently, more planning, investment and project execution are required, including the possibility of deepening public–private partnership collaboration to deliver quality infrastructure.Footnote ⁷³ This evidently feeds into the stimulation of business growth and the achievement of the development aspects of value chain trade and trade liberalization.