US-Africa trade relations: 'Why is AGOA better than a bilateral free trade agreement?'

US-Africa trade relations: 'Why is AGOA better than a bilateral free trade agreement?'
Published date:
Thursday, 24 September 2020
Author:
Gracelin Baskaran

In recent months, the U.S. began negotiations for a bilateral free trade agreement with Kenya.

These negotiations are aligned with the current administration’s vision for trade reciprocity rather than unilateral trade preference programs.

Although these negotiations could produce the first bilateral trade agreement between the U.S. and a sub-Saharan African country, a shift from regional preferential trade agreements to bilateral free trade agreements could undermine the growth of smaller countries, who may not be of enough economic interest to the United States. Bilateral agreements could also undermine efforts to create a regional economic bloc through the African Continental Free Trade Area (AfCFTA).

When President Bill Clinton signed the African Growth and Opportunity Act (AGOA) in 2000, African countries were given a competitive edge by providing unilateral duty-free exports for 6,500 products from Africa to the United States.

Twenty years after AGOA was first adopted, we see that it has created long-term, sustainable growth by stimulating the private sector and creating jobs in a region where many countries are battling high unemployment, thereby addressing structural challenges the region faces. Additionally, in choosing a regional approach for the trade agreement, Clinton empowered both big players like South Africa and smaller players like Lesotho. In many ways, this approach aligns with the “trade not aid” mantra.

Although AGOA has been extended twice, most recently until 2025, it has come under threats over the last four years, as tariffs were imposed on key steel and aluminum products and duty-free access was suspended for apparel imports from Rwanda. Any further disruptions to AGOA could devastate the region, particularly in the medium to long term as economies seek to recover from the impact of COVID-19.

In South Africa, AGOA has contributed to substantially increasing export-led job creation in many sectors, including automobiles and agriculture ($553 million and $364 million, respectively, in 2019).

AGOA has boosted South African agricultural exports such as wine and citrus, the latter of which is one of the agriculture sector’s most labor-intensive sectors. An analysis by the University of South Africa found that in 2017, the U.S. imported roughly $59 million—or 10 percent—of its wine from South Africa, which is a sizable share given global competition.

A partial equilibrium simulation showed that in the short run, South Africa would lose a wine-products market of approximately $8.1 million if AGOA benefits were replaced with reciprocal tariffs through the Most Favored Nation (MFN) tariff system. This would mean a loss of 14 percent of wine export revenue, which would have a direct impact on the industry that provides 300,000 direct and indirect jobs.

But small countries have benefited immensely too. Although Lesotho’s textile and apparel industry was first established in the late 1980s, exports skyrocketed after AGOA. The industry grew from having a handful of factories in the 1990s to becoming the largest private-sector employer (43 percent), providing 40,000 jobs, which directly and indirectly benefit 13 percent of Lesotho’s population. Lesotho exports approximately $250 million in garments to U.S. brands such as Levi’s, Walmart, and Old Navy.

The duty-free access afforded by AGOA is important for increasing the competitiveness of the African garment industry, which isn’t covered by the Generalized System of Preferences (GSP), another preferential trade program. Some of this competitive edge was lost in 2005 when the World Trade Organization’s Multi-Fiber Agreement expired, which ended export quotas and increased competition from China and other Asian garment producers.

Still the duty-free access has allowed sub-Saharan Africa to grow the textile and apparel sector, which is a large-scale employer of low-skilled labor.

The benefit of preferential trade agreements is that they can create sustainable structural changes. After 18 years of benefiting from AGOA, a computable general equilibrium analysis by the World Bank in 2018 showed that if AGOA was terminated, it would lead to a 1 percent loss in income by 2020 and a 16 percent decline in textile and apparel.

But simulations also showed that trade facilitation measures that decrease average trade costs by 2 percent per year would eliminate the adverse income effects that result from the elimination of AGOA. The infant industry protection provided by AGOA allowed the industry to develop and flourish, such that decreasing trade costs by just 2 percent would allow Lesotho to maintain its competitiveness.

While Lesotho has benefited from AGOA for two decades, other industries and sectors are just starting to benefit. Namibia has a large livestock sector with over 7.7 million cattle, sheep, and goats. In 2019, Namibia became the first country in Africa to export beef to the United States after 15 years of working to satisfy safety regulations and logistics, and is set to export 860 tons of beef to the U.S. in 2020, rising to 5,000 tons by 2025.

Exporting to the U.S. is a big market opportunity for Namibia—the U.S. is the largest consumer of red meat with Americans consuming an average of 120 kilograms of meat per person annually, according to the U.S. Department of Agriculture.

Namibia’s Meatco benefited from duty-free access to the U.S. market through AGOA—given the infancy of the beef export relationship with the U.S., a disruption to AGOA could risk its sustainability and undermine capital investments within the sector.

U.S.-Africa trade relations are currently being reshaped—and if AGOA is further disrupted or replaced by bilateral free trade agreements, it could be a blow to a number of economies in the region.

  • Gracelin Baskaran, Consultant, Equitable Growth, Finance and Institutions Group - World Bank
Share this article

View related news articles

Kenya: Farmers tapping into lucrative silk farming for export

Sericulture or silk farming is practised in many countries, with China and India dominating the global market, accounting for over 60 per cent of the yield. An acre of land can produce silk worth Ksh1,800,000 annually and the product is considered to have a sustainable market in the European Union (EU), the African Growth and Opportunity Act (AGOA - United States)  and Far East Markets. Kenya has a favourable climate for silk farming,...

07 November 2022

Kenyan manufacturers eye US market in growth plan

Manufactures in Kenya are banking on the pending trade deal with the US to grow the sectors’ contribution to the GDP and create jobs. The sector targets a 20 per cent contribution to economy by  2030. This will be driven by an increase in production of high quality products that will help expand supply and grow exports, the Kenya Association of Manufactures (KAM) has said. “AGOA has provided a significant market for Kenya’s...

07 November 2022

US DOA leads trade delegation to Kenya as country embraces GM crops

Representatives from 32 United States agribusiness firms arrived in Kenya on October 30 as part of an American government delegation scouting for trade opportunities. The US food firms are looking for new and expanded markets in Kenya for their crops. Kenya currently faces food insecurity and also wants to seal a trade deal with Americas. Nairobi has been pressured by Washington to allow access to its genetically modified (GM) food and...

06 November 2022

Kenya President Ruto’s warm relationship with US likely to expedite trade deal

Kenya and the US will be taking another shot at the dragging trade talks with hopes of reaching a deal before the year 2025. This is when the African Growth and Opportunity Act (AGOA) lapses. AGOA eliminates import tariffs on goods from eligible African nations, with its coming to an end putting countries under pressure to secure a pact that will see them continue to enjoy preferential trade terms. President William Ruto’s warm...

04 November 2022

Kenya president Ruto: Country ready for more trade deals with the US

President Ruto has said Kenya is ready for more trade deals with the US under the African Growth and Opportunity Act (AGOA) program, which gives Kenya and 40 other sub-Saharan African countries duty-free access to the US market for over 6,000 products. Ruto, who hosted a US delegation at State House, Nairobi, on Monday, said the country has plenty more to offer the United States as a trade partner. "Kenya largely exports apparel products to...

31 October 2022

US food firms to visit Kenya scouting for trade opportunities

Representatives from 32 US agribusiness firms are set to jet into Kenya on Sunday as part of an American government delegation scouting for trade opportunities. The US food firms are looking for new and expanded markets in Kenya for their crops. Kenya currently faces food insecurity and also wants to seal a trade deal with Americas. Nairobi has been pressured by Washington to allow access to its genetically modified (GM) food and crop...

29 October 2022

Kenya's new president: US has overtaken the UK as Kenya's premier trading partner

President Ruto has said the United States has overtaken the United Kingdom to become Kenya's premier trading partner. Ruto, who spoke during the Mashujaa Day celebrations at Uhuru Gardens on Thursday, said Kenya will continue strategic engagements with key development partners like the US and the UK, which has been the country’s premier trading partner for a long time. "We also remain devoted to our strategic engagements with key...

20 October 2022

Why the US overtook Uganda as Kenya's top buyer of goods - US ambassador

At the end of September 2022, the United States overtook Uganda to be Kenya's leading export market. US ambassador to Kenya Meg Whitman accredited the milestone to the ongoing agreement between Kenya and the America under the African Growth and Opportunity Act (AGOA). According to Whitman, since the implementation of the Act, parallel export to the US increased drastically. "AGOA has been an amazing success story. Just recently the US...

04 October 2022

If duties were eliminated, 'strong potential for US red meat in Kenya'

The U.S. Meat Export Federation recently submitted comments (  see document alongside) to the Office of the U.S. Trade Representative on the U.S.-Kenya Strategic Trade and Investment Partnership. Cheyenne McEndaffer, USMEF senior director of export services, says that USMEF highlighted several non-tariff barriers and potential trade obstacles, including concerns about Kenya's burdensome import license system,...

30 September 2022

Kenya businesses 'want continued duty-free access'

The Biden administration has been clear that none of its trade negotiations cover tariffs. That includes talks with the U.K., the EU and the Indo-Pacific region, as well as the Strategic Trade and Investment Partnership talks with Kenya. In Kenya’s case, the country already has duty-free access to the United States for most of its goods under the African Growth and Opportunity Act. But the Biden administration has not said yet...

26 September 2022

Concerns expressed that Kenya deal with US could hurt regional trade

The pursuit of a new trade pact between Washington and Kenya is eliciting old fears on whether it could hurt adherence to obligations under the East African Community, and hence continental ambitions for more commerce. The US has confirmed it is willing to restart negotiations on a future trade pact with Nairobi once a substantive government is formed by President William Ruto. And although Washington says any trade agreements in Africa will...

24 September 2022