Technical Report: SADC Rules of Origin in Textiles and ...· Overview of SADC ˇs Trade in Textile

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    Technical Report: SADC Rules of Origin in Textiles and Apparel:

    Review and Policy Options

    (DRAFT FOR COMMENT)

    Tomasz Iwanow, Trade Economist

    Submitted by: AECOM International Development

    Submitted to: USAID/Southern Africa

    May 2011

    USAID Contract No. 674-C-00-10-00075-00

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    Table of Contents Summary and Policy Recommendations: ............................................ 3 1. Introduction ......................................................................................... 7 2. SADC Rules of Origin in the Textiles & Apparel Industry .............. 8 3. The impact of Rules of Origin: Some empirical evidence .............. 8 4. SADC Regional Trade Agreement (RTA) Negotiation Agenda and Rules of Origin ......................................................................................... 9 5. Overview of SADCs Trade in Textile and Apparel ........................ 10

    5.1 Angola ..................................................................................................................... 13 5.2 Democratic Republic of Congo (DRC) ................................................................. 14 5.3 Lesotho.................................................................................................................... 15 5.4 Madagascar ............................................................................................................ 15 5.5 Malawi ..................................................................................................................... 16 5.6 Mauritius .................................................................................................................. 17 5.7 Mozambique ........................................................................................................... 18 5.8 Seychelles ............................................................................................................... 19 5.9 South Africa ............................................................................................................ 20 5.10 Tanzania ............................................................................................................... 21 5.11 Zambia .................................................................................................................. 22 5.12 Zimbabwe ............................................................................................................. 23

    6. Rules of Origin and Trade in Textiles and Apparel in SADC ........ 23 7. Industrial policy and reforms of SADC ROO: Effects of Tariffs, Preferences and Other Incentives ....................................................... 25 8. Policy Options for reform of SADC Rules of Origin ...................... 28

    8.1 Policy Option 1: Double transformation Rule of Origin (Status quo) .............. 28 8.1.1 Distributional Effects ....................................................................................... 29 8.1.2 The impact on SADCs Trade Negotiation Agenda ..................................... 29 8.1.3 The problem of transshipment ....................................................................... 29

    8.2 Policy Option 2: Implement relaxed single transformation Rule of Origin ...... 29 8.2.1 Distributional Effect ......................................................................................... 29 8.2.2 Impact on SADCs Trade Negotiation Agenda ............................................ 31 8.2.3 Preventive and Enhancing Measures ........................................................... 31

    8.3 Policy Option 3: Implement a preferential single transformation Rule of Origin to SADC LDCs only ...................................................................................................... 31

    8.3.1 Distributional Effects ....................................................................................... 31 8.3.2 Impact on SADCs Trade Negotiation Agenda ............................................ 31 8.3.3 Mitigation, Preventive and Enhancing Measures ......................................... 31

    9. Conclusion ......................................................................................... 32 Bibliography........................................................................................... 33 Appendix: ............................................................................................... 33

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    Summary and Policy Recommendations: The Southern African Development Community (SADC) Protocol on Trade, currently

    applies a strict double transformation Rule of Origin (ROO) that requires fabrics and yarn for garment manufacturing to be produced within SADC in order to qualify for preferential treatment.

    Among the arguments in favor of these rules is a desire to promote SADC-wide integrated value-chains for garments and textiles by encouraging producers at each stage to source from within the region. The rule is also aimed at preventing trans-shipment of garments from outside SADC.

    However, the double transformation rule has failed to spur the development of integrated value-chains but has instead stifled intra-SADC trade in textile and garments. Overall, garment producers have struggled to source sufficient amounts and quality of fabrics and yarn from within the region and hence they are often unable to fulfill the SADC ROO. Detailed analysis of trade data indicates that as the result intra-SADC trade in textiles and apparel has been severely restricted to the extent that trade between many Member States is negligible. Intra-SADC trade in textiles and garments as per cent of total SADC imports has fallen from 19% in 2000 to 14% in 2009. SADC economies increasingly import garments from South East Asia whose share of imports increased from 44% to 56% in the last decade.

    Currently, SADC ROO require more integrated domestic and regional sourcing and production linkages than are currently commercially feasible in the region. Given SADCs limited capacity for manufacturing of fabrics and yarn, regional trade in these products amounted to a mere US$ 26 million and constituted to only 4.5% of intra-SADC trade in textiles and apparel sector.

    This report presents option for the reform of the current structure of SADCs ROO in textiles and apparel in light of the changing pattern of globalized trade in manufactures. ROO may be able to act as a catalyst for growth of textile and apparel sector in SADC, leading to growth in exports and employment. To do so, ROO need to be designed to be more consistent with international trade in fragmented tasks (as opposed to complete products) and need to be open to countries with sufficient levels of complementary inputs.

    Liberalization of ROO to a single transformation rule, which does not place any restrictions on the source of materials for garment production, is likely to align SADC textile and garment sector more closely with international production chains.

    The experience of the United States (US) African Growth and Opportunities Act (AGOA) shows that liberalization of ROO can lead to large manufacturing export supply responses in SADC countries. Lesotho and Madagascar, for example, have experienced a boom in the export of textiles and apparel to US which has in turn led creation of thousands of jobs.

    Much like AGOA, liberalization of ROO to the single transformation rule within SADC is likely to enhance intra-SADC trade, employment and enhance poverty alleviation in the region but given SADCs relatively small market size these effects will be smaller than these for AGOA.

    Nevertheless, the garment industry is of key importance for several SADC countries and is a leading employer and revenue and foreign exchange earner. Therefore, even small gains in the sector are significant for local populations where unemployment is high.

    The key challenge in the reform of SADC ROO is divergence in industrial policies toward the sector among Member States. While Southern Africa Customs Union (SACU)

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    maintains significant protection for both textiles and apparel, other Member States such as Madagascar, Mauritius and Lesotho have a more export-oriented strategy. These differences lead to asymmetries in the outcome of the ROO reform. Some Member States are likely to obtain a higher margin of preference than others depending on the industrial policies applied. Therefore, some policy harmonization is essential in order to reap full benefits of preferential liberalization.

    This study reviews policy options available to SADC regarding ROO reform. The following options are assessed from the perspective of trade and economic effects as well as in the light of the ongoing SADC trade negotiations with third parties:

    Option 1: No reform - Double Transformation Rule: Inhibits intra-SADC trade: The current structure of ROO raises the price of garments

    production for exports into SADC by requiring firms to source material from within the region. Therefore, policy option 1 is likely to inhibit regional trade, reduce potential production and employment and impact negatively on the global competitiveness of SADC.

    Trans-shipment of goods from outside SADC. The double transformation ROO makes it difficult for transshipment of goods originally from outside of SADC through a low MFN duty Member State to a high MFN tariff Member State in order to avoid paying high tariffs. However, control on trans-shipment is inherently a customs issue and is most effectively addressed through the strengthening of controls on trans-shipment rather than through ROO.