To an observer, trade rules can appear to be layers of complexity that somehow, and no doubt, both manufacturers and traders encounter quite often. With the recent coming into force of the Tripartite Free Trade Area, questions can arise as to why it is necessary to have all these agreements and what purpose they serve. 

A free trade area (FTA) is an agreement between two or more countries that allows them to reduce tariff barriers and quotas and eliminate trade barriers. A customs union, on the other hand, occurs when two or more countries come together to lower and eliminate tariffs and trade barriers, but they apply a common external tariff to non-members. A customs union, therefore, joins its members into a single border with common tariffs for non-members. Members negotiate these tariffs as a block. There is also free movement of goods in the customs union. FTAs, on the other hand, do not have a common external tariff, and members can negotiate individually. FTAs also require a customs house, which is not required in an FTA. 

The TFTA is an FTA between three customs unions: COMESA, EAC, and SADC. The African Continental Free Trade Area (AfCFTA), on the other hand, is a continental one for all African countries. Like the TFTA, the AfCFTA is based on the Regional Economic Blocs. 

You only trade preferentially when you are ratified. So, under the TFTA, there are 14 ratifications, and the AfCFTA has 48 ratifications out of 54 countries. 

Each agreement has a liberalisation schedule. Such a schedule recognises that amongst countries, there are sensitive tariff lines, i.e. tariffs for goods that a country may not be willing to liberalise immediately to protect its domestic industry. Therefore, some tariffs take time before they are liberalised or harmonised in accordance with the dictates of the agreement. The AfCFTA has negotiated to have 90% of tariff lines for non-sensitive products, 7 per cent for sensitive products and 3 per cent on the exclusion list, which should be liberalised within 10 years.

 The TFTA, on the other hand, aims to have 100 per cent of all tariff lines (except for general and specific security exemptions) liberalised in 8 years. 60% – 85% was liberalised in June this year upon entry into force of the agreement. 

In the AfCFTA, meat specifically, chicken, dairy products (cheese), edible oil (soya), industrial sugar and wine have yet to be liberalised. 

Which agreement should apply? 

It is important to realise that the AfCFTA and TFTA are not customs unions, whereas COMESA is a customs union. This has certain implications. If an entity in Kenya wants to import or export, the TFTA will apply if they want to trade with a country that does not belong to an FTA, such as Mozambique, Angola or Eritrea. On the other hand, Kenya would use the AfCFTA to export to countries such as Nigeria or Ghana, which are not part of the TFTA or COMESA. Kenya may also choose which agreement to apply based on which offers the best trade terms for the goods in question or the most strategic advantages in terms of market access or tariffs.

Understanding HS codes 

To trade, each good is classified into what is known as a Harmonised System (HS) code. The Harmonised System moves from raw materials and natural goods to semi-finished goods to finished products. A HS code is a system of classifying traded goods and products so that there is a common way of identifying them. This makes it easier to trade internationally. HS codes are used to determine the applicable tariffs, taxes, and duties on imported and exported goods. Accurate classification ensures that the correct tariff rates are applied, which can significantly impact the cost of goods.

Simple, at a glance, until you get past the WCO level of six figures.  Countries can apply their eight-figure classifications like South Africa has done. Here, countries can add two more digits to their codes, making it complex when importing or exporting. Classification is done at the point of entry into the county and will consider certain factors such as the nature of the product, the materials used to produce it, its functions, in what form it is usually imported and then the classification is determined. 

Duty remission schemes

Customs Unions sometimes allow duty remission schemes where the importation of certain goods is at a rate that is lower than what is the CET. Goods on sensitive lists can also be included in such schemes.  In duty remission, each company granted the remission is gazetted, and the quantities they are allowed to import as well. Duty remission schemes tend to have an impact on government revenue and, therefore, have sunset clauses and review mechanisms. 

Rules of origin (RoO)

The Rules of Origin (RoO) have implications for sourcing raw materials because they determine the customs taxes which will be applied to the product or good being imported or exported. The percentage of material or labour that goes up to make a particular good, therefore, should be sourced from a partner state in the customs union or FTA; otherwise, higher rates will apply. This is to avoid unfair competition where goods are sourced cheaply from an outside source and to allow for a level playing field. Article 13 of the AfCFTA Protocol in Trade in Goods provides AfCFTA rules of origin, which are operationalised by Annex 2 of the AfCTA RoO. 

One of the primary purposes of RoO is to prevent trade deflection, where goods from a non-member country are routed through a member country with lower tariffs, thereby circumventing the trade agreement’s intended benefits.

By requiring a certain percentage of materials or labour to be sourced from within the member states, RoO help promote local industries, encourage intra-regional trade, and support the economic development of member countries.

Trade Agreements cover other broad and encompassing areas, such as intellectual property and standards. It is important for both manufacturers and traders to familiarise themselves with the intricate details to avoid attracting higher taxes.