A Primer on SADC Regional Value Chains

PESA Regional Integration Monitor, Dec 2016

The December 2016 issue focuses on regional value chains and industrialisation in Southern Africa – What are regional value chains? how do they operate? which ones exist in the SADC region? which ones show greatest prospects in Southern Africa? The PESA Regional Integration Monitor, Dec 2016 examines some of these questions.

Regional Value Chains in Southern Africa

What are regional and global value chains?

With the globalisation of capitalism and production networks many firms have become internationalised and, in some cases, industrial production no longer occurs within one country. This has had a strong influence on the emergence of the regional and global value chains. A value chain typically refers to the entire process of value addition, including production processes from inputs to final product or service, marketing and provision of after sales services. Typical value addition activities that comprise a value chain include research and design, marketing, distribution and customer support1.
While a value chain can be contained in one country, region, or even within a single firm – a global or regional value chain is so titled as the many activities involved in the production of the final product are spread across multiple locations and potentially many different firms.
In the context of globalisation, various stages of value-addition within a production process tend to occur in locations, and by firms, most optimally placed to carry out each activity. This ‘optimal environment’ is a result of a plethora of factors, including labour costs and skill and the ability of firms to capitalise on favourable government policies.
According to UNCTAD2, approximately 60 percent of global trade comprises of intermediate goods and services that are integrated to the production of final products and services. Such globalised production networks have come to be known as global value chains (GVCs). In the case of multi-firm GVCs, a unique governance structure tends to emerge, characterised by a ‘lead firm’ and ‘follower firms’ with varying degrees of vertical integration. Lead firms are usually closer to the end product or service and focus strongly on design and marketing of the final product; whilst the follower firms focus on repetitive productive tasks based on lead firms’ needs, designs and intellectual property3. The development of regional and global production networks is driven by multinational firms who are the centre of the international trade and investment nexus. Governing regional and global production networks is complicated by the complexity of ownership structures, particularly that of affiliates to multinational enterprises. Currently, more than 40 percent of all foreign affiliates to multinational enterprises are owned through complex vertical integration arrangements with multiple cross-border linkages involving, on average, three jurisdictions which blurs firm and investor or owners’ nationality4.

What is the developmental impact of GVCs?

Cross-border value chains provide both potential benefits and risks for participating economies. In many cases, the development of GVCs has resulted in an asymmetrical balance of power which tends to favour lead firms5. This is largely due to the fact that there are few multinational corporations engaged in foreign direct investment whilst there is a plethora of sovereign governments competing to attract foreign direct investment6. And the development of follower firms often depends on the lead firms’ productive demands and corporate arrangements framing the conditions of supply production by follower firms. Industrial policy directed at benefiting the lead firm and, or, final product will likely have some beneficial knock on affect for supplying follower firms. But without the necessary structures in place to allow for simultaneous learning and industrial upgrading follower firms, which are typically in developing countries, will find themselves locked into a position of repetitive productive with limited scope for value addition and technological upgrading. Moreover, the development of supplying follower firms is often tied to their geographical proximity to large markets where consumers are located and sometimes where the lead firms are headquartered; or the bargaining ability of host governments and labour which depends on political will and their position in geopolitics7.
An often cited example is that of Mexican firms who have been able to transfer skills and functions, expanding their relations with lead firms based in the United States (US). Meanwhile follower firms in Sub-Saharan Africa have faced great difficulty with expanding their operations beyond “cut, make and trim” under the Africa Growth and Opportunities Act (AGOA) which was intended to allow greater market access for African producers exporting to the US market8. This example exposes the unequal work of foreign direct investment and multinational operations which determine the developmental impact of regional and global value chains. When small landlocked countries with limited proximity to key markets and little bargaining power have not been able to negotiate their way towards mutually-beneficial deals with multinational corporations, countries have banded together through regional economic communities in order to negotiate as a bloc and improve the developmental prospects of being integrated in global production networks.
Regionally economic communities, such as Common Market for East and Southern Africa, the East African Community and the Southern African Development Community (SADC), provide a unique opportunity to coordinate cross-border production in a mutually beneficial way to benefit the region. The emergence of the SADC Industrialisation Strategy and Roadmap is the beginning of such an initiative to coordinate and consolidate regional industrial development needs of SADC Member States. National consultations and regional meetings on the SADC Industrialisation Strategy were held and the Strategy was adopted by the SADC Summit of Heads of State and Government on 29 April 20159.

What is South Africa’s Integration to SADC Regional Value-Chains?

When discussing regional value chains in SADC one cannot discard South Africa’s productive and trade capacity in the region. South Africa contributed approximately 62.23% of the SADC regional gross domestic product over the two decades ending in 2015; and in 2015 this contribution has declined to 49.92% largely due to growing output from Angola that currently contributes 21.61%. Similarly, South Africa contributes significantly to SADC trade. South Africa has contributed approximately 54.75% of SADC total exports over the two decades ending in 2015, which declined slightly to 52.08% largely due to rising exports from Angola that grew from 8.42% in 1995 to 12.73% in 2015. Similarly, South Africa has imported an average 60.15% of total SADC imports from 1995 to 2015, which declined to 51.16% in 2015. Therefore South Africa is the primary industrial base in SADC due to its contribution to total SADC output and trade. Hence, when looking at intra-regional production and trade, South Africa has the strongest potential to influence the development of regional value chains within SADC. The following analysis gives some insight into the current state of potential and existing value chains linking South Africa to the SADC region.
Angola accounts for approximately 30.2% of South Africa’s imports from the SADC region over the decade ending in 2014. Primary products such as petroleum, petroleum products and related materials accounted for approximately all (98.94%) of all South African imports from Angola from 2010 to 2014. The nature of South African imports and the proximity to Angola means there is little room for establishing coherent regional value-chains or cross-border beneficiation between the two countries. Moreover, the recent commodity price shocks affecting fuel products has a negative impact on the sustainability of trade flows. This shows in the volatility of Angola’s share of South African imports from SADC which drops from 45.4% in 2008 to 26.1% 2011 before recovering to the average of about 30%.

South African Goods Imports
Figure 1: South African Goods Imports, % of Intra-SADC Imports (2000-2014)

The trade profile between South Africa and Swaziland is slightly different. South Africa imports mostly agricultural and other resource-based manufactures such as essential oils for perfume materials and cleaning preparations, and chemical materials and products; which account for approximately 50% of South Africa imports from Swaziland. Primary food products such as sugar and feedstock for animals accounted for an average of 23.56% of South African imports from Swaziland from 2010 to 2015. The proximity, long established trade links, and liberalised trade between South Africa and Swaziland under the Southern African Customs Union (SACU) and Common Monetary Area (CMA) are strong foundations for further enhancing regional value chains in agro-processing and chemical products given the profile of trade between the two countries. South Africa has a strongly supported and growing agro-processing industry which, if integrated to primary product imports from Swaziland, could allow South African firms to take the position of lead-firms in the regional agro-processing and chemical product value chains.
Mozambique, Zambia and Zimbabwe have gone from accounting for more than 60% of all South African export to SADC in 2000, to accounting for approximately 30% since 2007. These SADC export markets for South African goods have been partially replaced by Botswana and Namibia since about 2007. This shows the increasing importance of the SACU market for South African trade relations. The growth in SACU export markets coincides with the period when the 2002 SACU Agreement came into effect; after which South African exports to Botswana and Namibia grew strongly to overtake the Mozambican, Zambian and Zimbabwean markets. The growing importance of the SACU market is also shown by the growth in South African exports to Lesotho and Swaziland. Collectively, SACU Member States now accounts for approximately 50% of South African exports to the SADC region.
Botswana accounted for an average of 20.3% of South Africa’s exports to the SADC from 2007 to 2015. Petroleum, non-metallic mineral manufactures, and machinery and transport equipment account for more than 60% of South African exports to Botswana since 2010. This is a well-diversified export basket similar to South African exports to Namibia. Machinery and transport equipment, and manufactured goods (primarily metal product manufactures) account for more than 60% of South African exports to Namibia. Although exports to Botswana and Namibia are diversified in manufactured goods, and machinery and transport equipment, there is little regional integration in the domestic production of these goods in South Africa. The South African machinery and transport equipment sectors are not integrated in the region nor is there substantial regional sourcing, except in the case of automotive trim and other small components sourced from Swaziland and Lesotho.
Policy Implications
However, the issue of developing regional value-chains does not simply depend on regional sourcing behavior of South Africa producers because other considerations such as security of supply and manufacturing capabilities take precedence. Moreover, this requires regional cooperation between governments to support the development of regional value-chains; and governments are faced with complex trade-offs between sharing productive capacity, which reduces domestic employment, and developing regional value-chains. Despite this, trade relations and economic infrastructure enabled through SACU and the CMA present the greatest prospects for regional value-chains between South Africa and other SACU Member States.
Transport Infrastructure in Southern Africa
Figure 2: Transport Infrastructure in Southern Africa

As discussed, Botswana and Namibia have grown as South African export markets to overtake the historical importance of Mozambique, Zambia and Zimbabwe since 2007. This transition was driven by the growing importance of SACU exports markets for South African goods and the decline in mineral fuels, lubricants and related product exports to Mozambique, Zambia and Zimbabwe since 2007. On the other hand, South African exports in machinery and transport equipment, manufactured goods, and chemical products to Mozambique, Zambia and Zimbabwe have remained resilient. Hence, these sectors have great potential for establishing regional value-chains in the SADC region if the South African government can make the compromise to share productive capacity in return for the possibility of expanding and enhancing throughout the region. Nevertheless, given the advanced availability of infrastructure and productive capacity in South Africa, the regional integration process and the development of regional value-chains could place South African firms at an advantageous position of lead-firms in the region.
Lastly, the rising importance of the SACU market for South African trade shows the benefits of reduced tariff barriers. But the development of regional value-chains requires more concerted work to reduce non-tariff barriers such as logistical challenges, harmonisation of policies and production standards, and the provision of other forms of enterprise support to ensure that gaps in security of supply and productive capacity can be overcome.

1 Gereffi, G. & Fernandez-Stark, K., 2011. ‘Global Value Chain Analysis: A Primer’, Duke University: Durham, North Carolina. Available At: http://cggc.duke.edu [Last Accessed: 8 November 2016].
2 UNCTAD, 2013. ‘World Investment Report 2013: Global Value Chains: Investment and Trade for Development’, United National Conference on Trade and Development: New York and Geneva. Available At: http://unctad.org [Last Accessed: 6 November 2016].
3 Gereffi, G. & Fernandez-Stark, K., 2011.ibid.
4 UNCTAD, 2016. ‘Investor Nationality: Policy Challenges’, United National Conference on Trade and Development: New York and Geneva. Available At: http://unctad.org [Last Accessed: 6 November 2016].
5 Burke, J. & Epstein, G., 2001. ‘Threat Effects and the Internationalization of Production’, University of Massachusetts: Amherst. Available At: http://peri.umass.edu [Last Accessed: 7 November 2016].
6-8 Burke, J. & Epstein, G., 2001.ibid.
9 SADC, 2015. ‘SADC Industrialisation Strategy and Roadmap: 2015-2063’, Southern African Development Community: Gaborone. Available At: http://sacu.int [Last Accessed: 7 November 2016].
Country Spotlight: The Republic of Mauritius

The small island nation of Mauritius, off the east of the African continent, has a population of approx. 1.3 million people and one of the highest per-capita incomes in Africa. Mauritius has achieved an average GDP growth of around 3.5% over the past 5 years and is projected to grow by around 3.8% in 2016 – above the projected Sub-Saharan average1.
The Mauritian economy, traditionally underpinned by agricultural production, particularly sugar, has undergone a transformation in recent years as government policies have targeted a shift from primary to secondary and tertiary sector industries. Industries which currently dominate the economy include sugar milling, textiles, clothing, mining, chemicals, metal products, transport equipment, nonelectrical machinery and tourism2.
The export market for Mauritian primary commodities such as clothing and textiles, sugar, molasses and fish is mainly: the European Union (United Kingdom (17.32%), Italy (11.16%), Spain (9.17%) and France (4.87%)), the United States (18.39%) and regional partners such as South Africa (8.58%) and Madagascar (2.32%)3.
Over the period 2010 to 2015, Mauritian imports have been dominated by machinery and transport equipment (21.34%), mineral fuels and lubricants (19.59%), food and live animals (18.51%) and manufactured goods (17.74%). In 2015, Mauritius imported most of these goods from India (20.90%), China (18.11%), Vietnam (5.74%), South Africa (5.72%), and France (5.11%)4.
A strategic, development-oriented trade regime has boosted the government’s efforts toward economic diversification. There have been some major structural changes in the economy: First from an agro-intensive, mono-crop economy driven by sugar exports, to a more diverse and export-led economy, driven by the manufacturing of clothing and textiles. Then, in the most recent development, into a service-sector driven economy5. Notwithstanding the political will and socio-political factors that allowed Mauritius to harness its strengths in these sectors; these structural changes have been driven, for the most part, by external factors6. Mauritius is a member of both COMESA and SADC.
A combination of strong institutions, a stable political environment and relatively liberal investment policies has attracted notable levels of FDI. Historically, Mauritius was known for its 0% capital gains tax and low, flat, corporate tax rate (15%). This, along with its close to 40 Double Tax Avoidance Agreement (DTAA) with major trading partners like India, resulted in the small economy being the second largest source of FDI flows into India. Under the current double taxation treaty between India and Mauritius, capital gains on Indian investments held by a Mauritian company are not subject to Indian tax laws and rates. The tax treaty, signed in 1982 was, however, revised in May of this year, in an effort by the new Indian Government to curb unwarranted tax avoidance occurring under the agreement. The treaty will be phased out over two years, from April 20177.
Moody’s rating agency expressed some concern over the impact of the revised agreement on the Mauritian economy – particularly its ability to continue to attract current levels of financial inflows and ultimately the deterioration of its balance-of-payments8. It is likely though, that while Mauritius will certainly lose some direct advantage, it will not be in a worse off position relative to other countries with which India has double-tax agreements, as it seems likely to revise all such agreements.
Moreover, apart from Mauritius’s readiness to deal with fiscal avoidance, the country has made further strides to implement the Base Erosion Profit Shifting (BEPS) Action Plan of the Organisation for Economic Cooperation and Development (OECD) through the establishment of a BEPS - Action Plan 15 and the Mauritian Commodity Exchange system9. Hence, given the importance of Mauritius as a conduit for financial services connecting Africa with Asia, the country has taken steps to avoid fiscal evasion and illicit financial flows which will ensure its long-term viability and sustainability as a financial off-shore hub.

1-2 AfDB, 2016. ‘Mauritius Economic Outlook’, African Development Bank: Abidjan. [Online]. Available At: http://afdb.org [Last Accessed: 5 December 2016].
3-4 UNCTADStat, 2016. Available At: http://unctad.org [Last Accessed: 5 December 2016].

5-6 Sobhee, S. K, 2009. ‘The Economic Success of Mauritius: Lessons and Policy Options for Africa’, Journal of Economic Policy Reform, Vol. 12(1), pp. 29–42.
7 MoF, 2016. ‘Protocol Amending the Convention between the Government of Mauritius and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, and for the Encouragement of Mutual Trade and Investment’, Mauritian Ministry of Finance: Ebene. Available At: http://mof.govmu.org [Last Accessed: 5 December 2016].
8 PTI, 2016. ‘Redrawn Tax Treaty Credit Negative for Mauritius: Moody's’, The Economic Times, May 16, 2016, [Online]. Available At: http://indiatimes.com [Last Accessed: 5 December 2016].
8 Kuriachen, K., 2016. ‘Speech of Mr. P.K Kuriachen, Acting Chief Executive, Financial Services Commission, Mauritius’, Mauritian Financial Services Commission: Ebene Cyber City. Available At: http://fscmauritius.org [Last Accessed: 5 December 2016].

Industry Spotlight: Sugar

Sugar is an important commodity in the SADC region. For some SADC countries, sugar contributed more than 30% of total earnings from food and live animal exports in 20151. Even in South Africa, where the contribution of sugar exports have declined by an average of 29.35% per annum from 2010 to 2015, sugar exports have contributed an average of 10.5% of total export earnings from food and live animals between 1995 and 2015. Apart from the importance of sugar for export earnings, the sugar industry also has a considerable positive impact on socioeconomic development.
Sugar production, including sugar cane farming, is relatively labour-intensive, leading to job-creation and a positive developmental outcomes. Because sucrose is the main ingredient used in the production sugar, sugar beet, thanks to its high sucrose content, is an alternative crop to more common sugar cane. In addition to direct employment associated with sugar production, the industry also promotes growth and development of small and medium enterprises through the integration of smallholder farmers who supply sugar cane to mills. Due to high transport costs however, and the fact that the sucrose content of sugar cane deteriorates quickly, most growers are situated within 40-50 kilometers from the prominent mills, limiting the developmental impact to one geographic region2. Subsequently, sugarcane growers typically have close relations to the millers they supply, if they are not vertically integrated suppliers, which also affects competition in the sector. For these reasons, the structural dynamics of the sugar industry have an adverse effect on its growth and developmental impact.
The global market for sugar is highly coordinated and the international price of sugar is severely affected by subsidy-induced overproduction in some sugar-producing countries3. This is visible in the volatility of the international price of sugar, which declined by an average of 46.5% in 2007 after having grown by 33% in the prior year. Moreover, on a monthly basis, the volatility in the international price of sugar has resulted in month-on-month losses as high as 36% in March 2010, or growth as high as 17.9% in August 20094. To deal with these structural challenges, most countries have legislation coordinating all operations of the industry through national sugar associations that provide extensive value-added services for sugar cane growers and millers. Sugar associations often provide product research and development, storage, financing, marketing and sales services to sugar cane growers and millers. The associations typically consolidate sugar output, and other by-products, from local producers for sale in international markets. All earnings from the sale of sugar and, in some cases, other sugar byproducts are then distributed amongst member growers and millers. Some of the income from sugar sales is used to finance sustainability of the sugar association before the distribution of surpluses.

Monthly and Annual Average International Price of Sugar
Figure 3: Monthly and Annual Average International Price of Sugar, Average of I.S.A. Daily Prices, FOB & Stowed, in Bulk, Caribbean Ports (¢/lb.) (2000-2016)

At a regional level, regional economic communities have also cooperated on allowances and tariff-rate quotas for member states and third-parties. The SADC Protocol on Trade’s Annex VII: Concerning Trade in Sugar governs regional sugar trade and access between the SADC and SACU market. According to this annex, SADC member states have duty-free access to the SACU market for its sugar. The duty-free quantity for each SADC member state is calculated according to its relative share of the SADC net sugar surplus multiplied by the growth rate of sugar demand in SACU; which is assumed to be 45000 metric tons in the first year of the agreement, escalating to 138000 metric tons in the following three years5.
However, this multilateral cooperative strategy is complicated by member states with multiple RECs memberships. In SADC, Malawi, Mauritius, Swaziland, Zambia, and Zimbabwe are members to both SADC and COMESA which have different protocols governing sugar – meanwhile Tanzania is also a member of the EAC. This translates to market access controlled through tariff-rate quotas to different regions, with or without reciprocal preferential access. For example, in COMESA, Swaziland trades under an indefinite derogation that allows the country not to reciprocate tariff preference on the imports originating from other member states of COMESA as provided by the COMESA Treaty6. Clearly, the regional market is governed through a complexity of trade agreements and special arrangements controlling access to sugar markets. Hence, countries tend to export sugar to a set of countries that allow greatest market access. Within SADC, particularly for SACU member states, intraregional trade plays an important role for the top sugar producers. However, for some, access to the European Union and United States plays a more significant role.
SADC Regional Sugar Production Snapshot
Table 1: SADC Regional Sugar Production Snapshot7

The sector is relatively concentrated in some surplus-producers. Where there is some dispersion due to a larger number of millers, there are many cases of vertical integration and joint ventures. The structural dynamics of the sugar industry are also a result of the perishable nature of the commodity which often requires that growers and millers be situated in close proximity. Moreover, climatic conditions and access to irrigating water are other structural factors influencing the sector. The Mauritian sugar industry is highly productive as illustrated by its high cane-to-sugar ratio. This is partly a direct impact of market competition, given the relatively higher number of millers per grower, long-established sugar production culture and conducive climatic conditions. However, South African sugar production and domestic demand are by far highest amongst SADC countries.
But productive capacity in sugar cane growing and milling is only part of the story, since most of the sales depend on access to markets, which is governed by a plethora of regional and bilateral trade agreements. Even when these agreements are in place, due to volatility in prices which may affect economic viability, exports may not take place. For example, due to domestic firm prices, Zimbabwe has not been able to make regional exports since 2011/128 despite having favourable access to SACU and COMESA markets.

1 Mauritius (31.12%), Mozambique (35.00%), Zambia (36.43%), Zimbabwe (51.67%), Swaziland (60.99%). Source data: UNCTADStat, 2016. Available At: http://unctad.org [Last Accessed: 5 December 2016].
2-3 NAMC, 2016. ‘Overview of the Sugar Industry in South Africa: Contribution to Social and Economic Development and Contentious Issues’, National Agricultural Marketing Council: Pretoria. Available At: http://namc.co.za [Last Accessed: 29 November 2016].
4 See Figure 3.
5 Government of South Africa, 2010. ‘Customs and Excise Rules for the Implementation of Market Access in Terms of Annex VII of the SADC Trade Protocol’ In: Government Gazette No. R. 33. Pretoria: Government of the Republic of South Africa. Available At: http://gov.za [Last Accessed: 29 November 2016]; SADC, 2011. ‘Annex VII: Concerning Trade in Sugar’, Southern African Development Community Secretariat: Gaborone. Available At: http://tralac.org [Last Accessed: 29 November 2016].
6 PESA, 2016. ‘PESA Regional Integration Monitor—September 2016’, Political Economy Southern Africa: Pretoria. Available At: https://politicaleconomy.org.za [Last Accessed: 27 November 2016].
7Mauritius: MSIRI, 2016. ‘Research and Development Plan 2016-2020: For a Resilient Mauritian Cane Industry’, Mauritius Sugarcane Industry Research Institute: Réduit. Available At: http://msiri.mu [Last Accessed: 27 November 2016]; MSS, 2009-2016. 'MSS Annual Report and Statement of Account: 2009/10-2015/16', Mauritius Sugar Syndicate: Port-Louis. Available At: http://mauritiussugar.mu [Last Accessed: 27 November 2016]; Note: Annual national market sales supplemented by imports and carried-over surplus.
7South Africa: SASA, 2016. 'South African Sugar Industry Directory: 2016/17', South African Sugar Association: Mount Edgecombe. Available At: http://sasa.org.za [Last Accessed: 27 November 2016].
7Swaziland: SSA, 2016. 'Integrated Annual Report 2015/16', Swaziland Sugar Association: Mbabane. Available At: http://ssa.co.sz [Last Accessed: 27 November 2016]; SSA, 2016. 'Sugar Sales', Swaziland Sugar Association [Online]. Available At: http://ssa.co.sz [Last Accessed: 27 November 2016]; Notes: Annual national market sales supplemented by imports and carried-over surplus. Average Annual Figures (FY2012/13-2015/16).
7Tanzania: Future Agricultures, 2014. 'Opportunities and Challenges in Tanzania's Sugar Industry: Lessons for SAGCOT and the New Alliance', Future Agricultures Consortium Secretariat: Brighton. Available At: http://future-agricultures.org [Last Accessed: 7 December 2016]; Sugar Board of Tanzania, n.d.. 'Production Data', Sugar Board of Tanzania: Dar es Salaam [Online]. Available At: http://sbt.go.tz [Last Accessed: 7 December 2016]; Sugar Board of Tanzania, n.d.. 'Imports and Exports', Sugar Board of Tanzania: Dar es Salaam [Online]. Available At: http://sbt.go.tz [Last Accessed: 7 December 2016].
7Zambia: Zambia Sugar, 2016. ‘Zambia Sugar: 2016 Annual Report’, Zambia Sugar PLC: Mazabuka. Available At: http://luse.co.zm [Last Accessed: 27 November 2016]; Zambia Sugar, 2015. ‘Zambia Sugar: 2015 Annual Report’, Zambia Sugar PLC: Mazabuka. Available At: http://illovosugar.co.za [Last Accessed: 27 November 2016]; Zambia Sugar, 2011. ‘Zambia Sugar: 2011 Annual Report’, Zambia Sugar PLC: Mazabuka. Available At: http://illovosugar.co.za [Last Accessed: 27 November 2016]. Notes: Average production saleable sugar sales for Tanzania are from FY2010/11 to FY2012/13. Number of sugar cane growers and average annual cane output is only for FY2012/13.
7Zimbabwe: USDA, 2016-10. 'Zimbabwe Sugar Annual: The Supply and Demand for Sugar in Zimbabwe', United States Department of Agriculture Foreign Agricultural Service: Pretoria. Available At: http://usda.gov/Zimbabwe-2016; http://usda.gov/Zimbabwe-2015; http://usda.gov/Zimbabwe-2014; http://usda.gov/Zimbabwe-2013; http://usda.gov/Zimbabwe-2012; http://usda.gov/Zimbabwe-2011; http://usda.gov/Zimbabwe-2010 [Last Accessed: 27 November 2016].
8 USDA, 2012. 'Zimbabwe Sugar Annual: The Supply and Demand for Sugar in Zimbabwe', United States Department of Agriculture Foreign Agricultural Service: Pretoria. Available At: http://usda.gov [Last Accessed: 27 November 2016].
Policy Spotlight: Rules of Origin

The development of global value-chains (GVCs) has brought the importance of rules of origin (RoO) to the fore, as they are required in any preferential trade agreement (PTA) in order to confirm that goods being traded under preferential tariffs originate from an eligible country. RoO are developed to prevent trade deflection, where countries bypass higher tariff rates in one member state in a PTA by importing goods through a secondary member state with lower tariffs1. With the development of GVCs however, goods do not simply originate from one country and even when the final product does originate from one location, inputs are usually sourced from multiple locations. Hence RoO have become an important tool governing regional trade, especially given the overlapping membership to regional economic communities and the proliferation of PTAs. RoO are primarily used to address trade challenges and to compliment various industrial policy instruments.
In SADC the SADC Rules of Origin: Exporter’s Guide Manual is aimed at providing a simple and transparent criteria for determining the eligibility of goods under the SADC Free Trade Area (FTA). The SADC RoO are used to distinguish between goods produced within the SADC region and eligible for the preferential tariff, from those originating from outside the region which attract the full import duty rates2. Following the formation of the SADC FTA, regional trade and economic integration was complicated by overlapping memberships of SADC member states across the region which resulted in contradictory trade obligations. Although the RoO provided clarity within SADC they also forced producers to source inputs from within the region, which drove up production costs in some instances thereby increasing barriers to entry for new producers in the market3. Also, the compilation of regional trade statistics is adversely affected by trade deflection which may hamper the monitoring, evaluation and development of regional trade and economic integration. In some instances, the absence of clear RoO poses a greater risk of revenue miss-allocation, such as in the case of SACU, where intra-regional trade is used to determine member state shares of the customs duty revenues4.
The RoO under the SADC Trade Protocol are not only intended for authentication but also serve as a broader development tool. The developmental function of RoO is justified by Article 2 of the Trade Protocol, which identifies the enhancement of economic development, diversification and industrialisation of the region as an objective of the protocol5. In light of this, there has been strong pressure to use RoO to encourage the use of local raw materials in downstream processing industries. Therefore, the SADC RoO allow for designating goods as originating in SADC, even if they are not wholly produced within the region. Goods are considered as originating in SADC as long as they have been worked on locally, such that there is a change in the good’s tariff heading categorisation; or if local works add at least 35% to the ex-factory value to the goods6.
However, these provisions do not resolve all problems associated with trade deflection and other related trade challenges. Balancing the need to determine eligibility of goods for preferential treatment with the ambitions of regional industrialisation, development of regional value-chains and economic integration is very complex. As the process of regional integration consolidates regional economic communities across the continent, and as the set of administered preferences becomes more complex, the role of RoO becomes ever more important and complicated. Moreover, given that these rules need to be dynamic in order to respond to real-time challenges of regional trade and economic integration, the lag between developing robust rules and capacitating customs administrations makes the objectives of RoO ever more unattainable.

1 Erasmus, H., Flatters, F. & Kirk R., 2004. ‘Rules of Origin as Tools of Development?: Some Lessons from SADC’ Queen’s University: Ontario. Available At: http://queensu.ca [Last Accessed: 25 November 2016].
2 SADC, 2003. ‘SADC Rules of Origin: Exporter’s Guide Manual’, Southern African Development Community Secretariat: Gaborone. Available At: http://sadc.int [Last Accessed: 30 November 2016].
3 Kajuna, K., 2016. ‘Connecting to the World through Regional Value Chains’, Bridges Africa, Volume 5 (1). Available At: http://ictsd.org [Last Accessed: 30 November 2016].
4 SACU, 2010. ‘Study on an Assessment of Trade Data Limitations Amongst SACU Member States’, Southern African Customs Union Secretariat: Windhoek. Available At: http://sacu.int [Last Accessed: 30 November 2016].
5-6 SADC, 2011. ‘Protocol on Trade in the Southern African Development Community Region’, Southern African Development Community Secretariat: Gaborone. Available At: http://sadc.int [Last Accessed: 30 November 2016].

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