TRALAC - Trade Law Centre

Agoa Offers Template For Growth

Tuesday, 21 October 2003

Source: Business Day (South Africa)

Countries that have taken advantage of the provisions of the African Growth and Opportunity Act (Agoa), notably Lesotho and Swaziland, have enjoyed an enormous increase in formal employment.

There are early indications Agoa is helping these states to climb a rung higher on the industrialisation ladder, and may offer other African nations a template for success.

Agoa was ratified by the Bush administration in October 2000. In December 2000, President George Bush extended duty-free treatment under the generalised system of preferences (GSP) to Agoa-eligible countries for more than 1800 tariff line items in addition to the standard GSP list of about 4600 items available to non-Agoa GSP beneficiary countries in effect, including almost everything except those items deemed too sensitive to US industry.

Agoa 2, signed into law in August last year, substantially expands preferential access for imports from beneficiary subSaharan African countries.

It provides for duty-free and quotafree access to the US market without limits for apparel made in eligible sub-Saharan African countries from US fabric, yarn and thread. The act provides for substantial growth of duty-free and quota-free apparel imports made with fabric produced in beneficiary African nations.

It offers a special rule for lesser developed beneficiary nations by allowing them to import third-country fabric until September 30 next year. Nations with per capita gross national product of less than 1500 in 1998 meet this criterion.

SA is ineligible for this exception. However, SA got other benefits, notably in the areas of cars and spares (BMW currently exports about half of its annual three-series output to the US); minerals and metals; chemicals and related products; agricultural products; and textiles and apparel.

It is estimated Agoa raised African exports to the US by 1000% in the first two years, created 60000 jobs and brought another 1bn worth of new investment. According to the US commerce department, Agoa imports to the US last year totalled U9bn, or half of total imports.

Three-quarters of imports were petroleum products, and with these excluded, Agoa imports were $2,2bn, of which textile and apparel imports were $803m and transportation equipment (cars) 545m. Agricultural products grew 38% to 212m.

Despite the absence of formal diplomatic links with SA and Lesotho, Agoa has generated a substantial increase in Taiwanese investment in southern Africa, with about 32 garment and textile factories operating in Lesotho, employing 50000, or 20% of the kingdom's workforce. The number of textile factories in Swaziland has grown from three to 29 in three years, providing 23000 jobs. There are also three factories in Botswana and two in Namibia.

The production figures are staggering. In Lesotho, the fivefold increase in exports in four years, now totalling more than 400m, translates into more than 3,5-million garments a month, 99% of which are destined for the US market.

Lesotho is today the largest manufacturer of jeans in the southern hemisphere. The number of Basotho in the garment industry will soon overtake the 54000 mining migrants who remit R625m annually from SA.

These enterprises are gradually moving into the mid- and upstream areas, reflecting partly the scheduled termination in September next year of the thirdcountry exception rule. Although there is an "Agoa 3" lobby to extend this special rule to September 2006 and the act through to 2020, its success is doubtful at this stage given Washington's intention that Agoa be a once-off stepping stone to improved competitiveness enabling the establishment of an African-US free trade area after 2008.

If third-country yarn is disallowed, it is forecast that investment in the textile and related (yarn, spinning, packaging and labelling) industries in Lesotho could increase through such vertical integration to a target of 2bn of exports and one million jobs within a decade.

There is still some way to go for these countries to reach the quota restriction enforced by Agoa, and to reach the sort of level of development enjoyed in textiles elsewhere in the developing world. Bangladesh, for example, currently exports $6bn in garments to the US market.

There are weaknesses that worry investors, including, most importantly, the appreciation in value of the rand which has pushed most garment factories in Swaziland (where labour costs are, on average, 20% to 30% higher than Lesotho) into the red. Also cited are the high costs of transportation to and from Durban harbour, port inefficiencies, shortage of skilled labour, and low and fluctuating productivity. In Swaziland it takes a team of 40 to produce 1200 crew-neck T-shirts in a nine-hour shift. In Indonesia, 35 workers produce 2800 in eight hours.

Perversely, perhaps, the greatest threat to Swaziland's Agoa status is the reason for its attractiveness to some investors its circumscribed union rights. Under pressure from the American Federation of Labour-Congress of Industrial Organisations, the US trade department has asked for Swaziland to be taken off the list of states eligible for Agoa benefits.

Swaziland is counterlobbying this in Washington, but the imperative for labour reform remains. Swaziland's loss of Agoa beneficiary status would be catastrophic for investors, workers and their families, but could also precipitate far broader social upheaval in the kingdom.

In Lesotho and Swaziland sustainable competitiveness is a major concern, especially relative to China where Taiwan is now the major investor with a stake of about 100bn, and where production costs are low and the internal market apparently limitless. China poses a major strategic threat to Africa in its quest for investment and development, offering a larger market (1,2-billion versus Africa's 650-million people), centralised planning, comparative political stability, and twice Africa's per capita wealth.

The textile sector in SA has not benefited from Agoa to the same extent as the two kingdoms. There has been a post-1994 trend of disinvestment by Taiwanese businesses. This translates into, for example, the cost of landed Chinese denim being between 30 to 40% cheaper, and of better quality, than its SA-manufactured competitor.

Ultimately, of course, this is not a zero-sum gain. If these job opportunities were not available in the neighbouring states, it is likely their citizens would be in SA to seek work. Lesotho and Swaziland could, if current developments continue, be well-placed not only to offer a template for African industrialisation, but compete successfully without preferences in free trade arrangements.

Mills and Hughes are, respectively, national director and parliamentary research fellow at the SA Institute of International Affairs.