TRALAC - Trade Law Centre

A Stich in Time - FTA's and AGOA

Friday, 01 August 2003

Source: Financial Mail

The proposed free trade agreement (FTA) between the Southern African Customs Union (SACU) and the United States will open new markets for the customs union countries. It also has potential pitfalls.

SACU, whose members are South Africa, Botswana, Lesotho, Namibia and Swaziland, began trade talks with the US in May and these will resume this month.

The proposed FTA will be the second most significant trade relationship exercise between the US and African countries after the African Growth and Opportunity Act (AGOA).

AGOA removes US import tariffs on a large number of goods from 38 designated sub-Saharan African countries. Its main flaw is that it is not a negotiated trade agreement between the US and Africa and its benefits can be unilaterally withdrawn.

On the other hand, a free trade agreement between the US and SACU should increase the number of products that SACU members can export to the US market beyond those that can be sold under AGOA.

An FTA should, for example, extend preferential access into the US to some SACU products from the steel, agricultural, and textile industries, currently excluded under AGOA.

It should also provide businesses in both the US and the SACU region with a more stable and predictable policy framework on which to base investment decisions and strategy. AGOA does not even provide an independent dispute settlement mechanism. An FTA should lower the perceived risk of doing business in Southern Africa.

From a US perspective, its eagerness to negotiate an FTA with SACU is almost certainly bolstered by the fact that AGOA provides one of the economically most important regions in Africa with non reciprocal preferential market access to the US.

A free trade agreement will significantly open the SACU market to US goods and services. It will address concerns of US business that the 2000 agreement between the EU and SA providing for the eventual elimination of duties on trade between the two has made US products less competitive on the SA market and, by extension, the SACU region.

By opening up the SACU market to US goods and services, an FTA may contribute to a reduction in the US trade deficit with SACU. Last year, the customs union neighbours enjoyed a trade surplus with the US of $2,2bn ($1,9 billion). But the proposed FTA has pitfalls. SACU fears there may be more "give" than "take". SACU also has concerns about the US's resolve to extend negotiations beyond trade in goods. Particularly sensitive issues, both political and economic , revolve around trade in services, intellectual property rights, technical standards, investment and government procurement.

This emphasises the need for SACU and other developing countries to establish the technical expertise needed to push their positions as the power relationship with the US shifts to a new level.

Though SA built up some experience during the arduous trade negotiations with the EU, SACU negotiators are likely to face highly organised and well-equipped US negotiators with a clear mandate to serve US interests.

Despite the hurdles, an FTA looks a better prospect for SACU, particularly SA, the region's most industrialised economy. SA has already reaped the fruits of AGOA, with its automotive, clothing and minerals industries seeing an increase in duty-free exports into the US.

AGOA is part of the US Trade and Development Act of 2000, which also extends preferential access to the US market to some countries in Central and South America, as well as the Caribbean under the Caribbean Basin Initiative (CBI). In that sense, AGOA is perhaps a US response to the partnership agreements between the EU and 78 African, Caribbean and Pacific countries, known as the various Lomé Conventions or, lately as the Cotonou Agreement. AGOA runs from October 2000 to September 2008.

Though AGOA has been punted as the success story of US economic policy towards Africa, it has not increased aggregate African exports to the US. Instead, the value of total exports to the US from the 38 countries has shrunk by almost a quarter (in dollar terms) since AGOA's inception.

Notwithstanding (or perhaps because of) lower exports, a growing share of exports to the US from AGOA-eligible countries qualifies for duty-free access under this programme. Last year, this amounted to almost $9bn, or roughly 65% of all exports.

But more than 75% of exports under AGOA consist of relatively unprocessed products such as petroleum, which have low import tariff levels anyway. These are predominantly from Nigeria and Gabon. Total non-energy exports under AGOA were $2,17 billion last year , up 60% from $1,35 billion in 2001.

AGOA builds on and extends a US trade-preference programme, the Generalised System of Preferences (GSP). Of the more than 7 000 products now covered by AGOA, about 4 600 qualified for preferential market access under GSP.

And since virtually all African countries qualified for GSP benefits, a better indication of AGOA's benefits is to look at exports of non-GSP goods.

Non-GSP goods qualifying under AGOA include a range of agricultural, chemical, footwear, clothing, iron and steel, automotive and motor vehicle component categories. Of the non-energy exports sent to the US in 2002, $1,54 billion (or roughly 70%) were "newly added" non-GSP products.

The clothing sector stands out, accounting for more than half of the "new" non-energy exports in 2002. Next is the automotive industry, with almost $500 million of new AGOA exports, followed by minerals and metals at $140 million. The lion's share of the "incremental" exports in 2002 came from SA, especially in the above categories. SA also accounted for a significant share of agricultural and clothing exports.

That AGOA has perhaps not achieved broad success to the extent that was initially hoped is indicated by the fact that only the clothing sector has seen substantial increases in exports across a range of countries. This is despite the onerous requirement that countries must convince US customs authorities that they have adequate customs controls to ensure proper implementation of the rules of origin relating to textiles and clothing.

Compliance with this requirement has to date been achieved by 19 of the 38 AGOA-eligible countries.

One of the main beneficiaries of AGOA has been Lesotho, whose industrial base is constituted largely of clothing manufacturing. Its exports under AGOA more than doubled to $318 million last year - now significantly exceeding SA's clothing exports to the US.

Also, employment in Lesotho has increased and so has foreign investment. Six new garment factories opened in 2002 against 13 in 2001. Taiwan's Nien Hsing is investing $100 million in denim rolling mill and $40 million in a cotton yarn-spinning mill, according to a US government report.

The success of Lesotho and other developing countries in the US market hinges strongly on liberal rules of origin applicable to less-developed countries.

This provision is set to expire in September 2004. Unless it is extended or local textile manufacturing supply constraints are remedied, it could dissipate AGOA's benefits to some of the countries concerned.