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Agoa Successes and Challenges: A Look Back at the First Two Years

Published date:
Friday, 10 January 2003

The landmark African Growth and Opportunity Act (Agoa) was signed into law by President Clinton on May 18, 2000, and took effect on October 1, 2000. Agoa seeks to harness the power of the private sector to contribute to sustainable economic development of Sub-Saharan Africa by stimulating increased trade flows between the United States and Africa.

With two years of experience under the Agoa framework now behind us, the second annual meeting of the U.S.-Sub-Saharan Africa Trade and Economic Cooperation Forum (Agoa Forum) in Mauritius from January 13-17, 2002, provides an appropriate occasion to assess the effectiveness of Agoa in achieving its goals.

Looking back over the past two years, it is evident that Agoa has been remarkably successful, yet several important challenges still remain to be resolved.

Successful Implementation of Agoa

The U.S. Administration has worked hard during the past two years to ensure that access to the benefits of Agoa is available to as many of the potential beneficiary countries as possible. When Agoa took effect on October 1, 2000, 34 of the 48 potential beneficiaries were found to be in compliance with the Agoa conditions of eligibility. In the interim, the Administration has determined that two additional beneficiaries have become eligible, Swaziland in 2001 and more recently Cote d'Ivoire in May 2002. Thus, only 12 of the 48 potential beneficiaries have failed to take adequate steps toward good governance, democracy and economic reforms that are required to benefit from the Agoa program, and several of these 12 ineligible countries have in fact opted out of Agoa apparently for political reasons.

At the same time, the U.S. authorities, led by the Office of the U.S. Trade Representative, have worked closely with the 36 eligible beneficiaries to assist them in developing apparel export visa systems to combat illegal transshipment and, thereby, to qualify for duty-free access to the U.S. apparel market. Today, fully one-half of the eligible beneficiaries - 18 out of 36 - have approved visa systems and enjoy duty-free status for apparel exports. Illustrating the importance of Agoa apparel trade preference, these 18 countries with approved visas account for 98% of Africa's apparel exports to the United States.

Congress Enacts Agoa II Amendments

While the Administration has been implementing Agoa, Congress has also made progress in expanding the scope of the Agoa trade benefits and in correcting technical mistakes made in the original statute. In August 2002, Congress enacted and President Bush signed into law the so-called "Agoa II" amendments, which (1) doubled the size of the tariff rate quota (TRQ) applicable to duty-free apparel imports; (2) extended less developed country (LDC) status to Botswana and Namibia, thereby entitling them to use third-country fabric through September 30, 2004; (3) clarified that knit-to-shape garments are eligible for duty-free treatment; and (4) corrected a technical mistake in the provision extending duty-free treatment to sweaters made of fine wool yarn.

Additional technical amendments to Agoa were passed by the House of Representatives, but died before the Senate when the 107th Congress adjourned. These additional amendments would have authorized greater flexibility in the use of both U.S. and African origin fabrics in a single garment and would have expanded the so-called "short supply" provision to permit African-origin fabrics to qualify for this special treatment. Despite the failure to enact these amendments this year, there are encouraging signs that Congress may take up these amendments early next year.

In addition, an even more aggressive set of amendments to expand Agoa is currently being discussed with key Members of Congress. Known as "Agoa-Plus," these amendments focus on creating incentives to attract more U.S. private sector investment into Africa and additional ways to expand agricultural exports from Africa to the United States.

Strong Growth in Apparel Trade

Against this background, it is also clear that Agoa has been a great success in spurring increased African apparel exports to the United States. In 1999, the year before Agoa was enacted, the United States imported a total of 128.203 million square meter equivalents (msme) of apparel from Africa. In response to the incentives created by duty-free access to the U.S. apparel market, U.S. apparel imports from Africa by 2001 had shot up to 218.496 million sme, an increase of 70% in two years. Based on import statistics through September 2002, it seems likely that U.S. apparel imports from Africa during 2002 will jump to about 279 million sme, a further increase of 28%, bringing total growth in the three years since Agoa was enacted to a remarkable 118%!

This strong growth in apparel imports from Africa is even more impressive when viewed in the context of the greater U.S. economy, which has been either slowing down or actually in recession since the enactment of Agoa. Total U.S. apparel imports from all origins have been virtually flat, growing by just 3.5% per year over the past two years. This is in sharp contrast to the experience over the past decade, when total U.S. apparel imports have grown on average by more than 10% per year. Moreover, U.S. apparel imports from the countries of the Caribbean Basin, which enjoy their own apparel trade preference program, have declined by 1% over the same period. That Africa has managed to expand its apparel exports by and capture U.S. market share in these tough economic times is eloquent testimony to the importance of Agoa.

Agoa intentionally targeted the apparel sector for special benefits precisely because the worldwide system of apparel quotas and typically high import duties on apparel in the mid-1990s when Agoa was being drafted made trade and investment in this sector especially susceptible to being modified by regulatory mechanisms such as extending quota-free and duty-free treatment to apparel from Africa.

Equally important, apparel manufacturing is labor-intensive, so providing preferential treatment to apparel made in Africa would immediately translate to the creation of employment opportunities for a region that suffers from massive and chronic unemployment. Although comprehensive statistics are not available, anecdotal evidence indicates that between 100,000 - 200,000 new jobs have been created in the apparel sector alone during the past two years in the 18 Agoa beneficiaries with approved visa systems.

Lesotho Is Top Apparel Exporter

Six countries together have accounted for the lion's share of African apparel exports to the United States since Agoa was enacted. Foremost among these has been Lesotho, which took over first place honors in 2001. Mauritius and South Africa, which had been the largest African exporters of apparel to the United States prior to Agoa, remained in second and third place, respectively. But strong growth in apparel exports under Agoa has also been demonstrated by Madagascar, Kenya and Swaziland.

Challenges to Sustainable Apparel Trade

Impressive as this growth in African apparel exports to the United States has been, it must be recognized that these gains are fragile. Having been created by regulatory preferences, i.e., by extending artificial competitive advantages to African apparel manufacturers in the form of quota-free and duty-free status while most other suppliers remain subject to both quotas and duties, Africa's apparel export growth is vulnerable to changes in the underlying regulatory framework unless and until African apparel manufacturers can become internationally competitive. And this regulatory framework is constantly changing.

Most important among the various potential threats to Africa's apparel export gains under Agoa are: (1) the elimination of Agoa's quota-free advantage with the lifting of worldwide apparel quotas - including on China now that it has joined the WTO - when the Multi-Fiber Arrangement is terminated on January 1, 2005, pursuant to the Uruguay Round Agreement on Textiles and Clothing; and (2) the risk of dilution of Agoa's duty-free advantage as the Doha Round of international trade negotiations addresses various proposals for across-the-board tariff reductions.

While various mechanisms exist to mitigate these regulatory threats, in the long term the only reliable means to maintain the gains spurred by Agoa is to enable the African apparel industry to become internationally competitive, and this depends more on adopting modern business practices, investing in infrastructure, and eliminating hidden costs such as corruption and bureaucratic inefficiencies than on regulatory strategies. In this context of vulnerable regulatory preferences, the most important long-term challenge facing the young but growing African apparel industry is to make itself independently competitive so that it can survive and prosper independent of the Agoa regime.

2004: Third-Country Fabric and African-Origin Yarn and Fabric

Equally important, Agoa itself is not static. Rather, Agoa's special benefit for LDCs - i.e., access to third-country fabric - is scheduled to expire in just two years on September 30, 2004. Fully 80% of the apparel that has benefited from Agoa's duty-free status so far has come from LDCs and has been made with third-country fabric.

Although substantial investments have been made in expanding yarn and fabric manufacturing capacity in Africa during the past two years, it remains to be seen whether there will be enough African-origin yarn/fabric of sufficient quality to meet the requirements of the rapidly growing apparel industry by September 30, 2004. Taking the steps necessary to ensure that there will be sufficient African-origin yarn and fiber in 2004, therefore, remains a critical challenge to the ongoing success of Agoa.

The Challenge of Good Governance

But not all challenges to the future of Agoa arise from changes in the regulatory environment. Rather, to a great extent Africa holds its most important challenge in its own hands - i.e., the challenge of good governance. While good governance is a condition of eligibility under the Agoa regime, in an even more important sense the real world of the marketplace requires good governance as a precondition of doing business. That is because U.S. importers have the choice of sourcing apparel and other products literally around the world. While Agoa's regulatory incentives of quota-free/duty-free access attract U.S. buyers to explore African sources of supply, nothing drives them away faster than instability that flows from lack of good governance.

This is illustrated most clearly and tragically in the case of Madagascar, which had been one of the outstanding Agoa success stories, with annual growth in apparel exports approaching 100% per year and the creation of more than 50,000 new jobs. But all this came to a halt with the disputed presidential elections late last year and the resulting disruption of factory operations and transportation. During January - August 2002, the most recent period for which such statistics are available, U.S. apparel imports from Madagascar were down 23% from the same period in 2001.

Disturbing as it has been, the physical disruption of production is really the least of Madagascar's worries. Rather, the loss of confidence by U.S. importers and investors who had been doing business in Madagascar is really a much more serious problem. While there are encouraging signs that production is beginning to return to normal with the peaceful resolution of the political crises, it will undoubtedly be at least several more months before sufficient confidence is restored so that Madagascar can resume its prior impressive pace of apparel export growth.

In summary, the evidence is clear that the first two years of Agoa have been a great success. The U.S. Administration and Congress have made the implementation and expansion of Agoa a national priority. Apparel exports to the United States are up sharply despite a general slowdown in the U.S. economy. The challenge, however, will be to maintain these increased levels of trade in the face of regulatory changes both within the Agoa framework and in the larger world trading system. Equally important, in order to continue to succeed in the long run, African apparel manufacturers need to begin to take the steps necessary to become more internationally competitive even in the absence of trade preferences. And African governments need to solidify and expand the progress that has been made toward democracy and rule of law across most of the continent.

(Paul Ryberg is president of the, African Coalition for Trade and chairman of the Mauritius-U.S. Business Association. The African Coalition for Trade is a nonprofit trade association of African private sector companies and groups. ACT served as the lead spokesperson for the African private sector in the development, enactment and implementation of the African Growth and Opportunity Act and subsequent amendments. All rights reserved by the African Coalition for Trade.)

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