Rules of Origin and the SADC Textiles and Garments Industries

Rules of Origin and the SADC Textiles and Garments Industries

28 February 2011

Author

Frank Flatters

The Southern African Development Community (SADC) rules of origin in the textiles and garments sector have been a source of considerable controversy and conflict within SADC. Provisional agreement was reached on a highly restrictive rule of origin that made separate and more lenient provisions for a number of the poorer Member States. However, the recent expiry of this provision, together with differences arising within the 'SADC group' in the recent Economic Partnership Agreements (EPAs) negotiations and major differences between the Common Market for Eastern and Southern Africa (COMESA) and SADC rules in this sector that would have to be resolved as part of any move towards a Tripartite Free Trade Area (FTA) have brought the issues to the forefront once again. This briefing note summarizes and explains some of the main issues, and possible ways to deal with them. It points out the critical role of SADC Member State tariff structures as an underlying source of continuing conflicts.

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WHY RULES OF ORIGIN?

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In a preferential trading arrangement (PTA) member countries agree to apply lower import duties (preferential duty rates) to goods imported from each other than they impose on imports from non-members (most-favoured nation (MFN) rates).

Differences in PTA members' MFN rate structures create an opportunity for traders to avoid a high MFN rate country's import duties by importing third country goods first into a lower MFN-duty partner and then bringing them into the high rate country under the preferential (usually zero) rates offered by the PTA. This is known as trade deflection.

The incentive for trade deflection clearly depends on differences in tariff rate structures among PTA members; the greater the differences in MFN tariff rates on important tradable goods the greater the incentive to engage in trade deflecting activities. If members' MFN tariff rates are low and relatively similar, there will be little incentive for trade deflection.

The simplest way to avoid the threat of trade deflection would be for partner countries to reduce and harmonize MFN tariffs—i.e. to make preferential tariff reductions part of a more general process of MFN tariff reform. This would expand the benefits of tariff reform and would also avoid the real danger and cost of diverting imports from low cost third country sources to higher cost ones in partner countries.

For high MFN rate countries trade deflection can reduce the protection provided to local industries by tariffs on third country imports and/or erode customs revenues that otherwise would be collected on imports of such goods.

Rules of origin are an instrument for preventing trade deflection. They do so by setting out the criteria necessary for an import to be deemed to originate in a PTA partner country.

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