TRALAC - Trade Law Centre

Uganda: Where to now, under AGOA?

Sunday, 03 December 2006

Source: New Vision (Kampala)

The recent struggles of Tri-Star Apparel appear to have set off a chorus of gloom in the Ugandan press and predictions of failure both for the country's apparel sector and Uganda ability in general to benefit from the African Growth and Opportunity Act (AGOA).

These reports ignore the reality of AGOA's full performance and potential and miscast the importance of the role of government in stimulating industrial development.

When the US Congress enacted AGOA in 2000 it presented Africa with an opportunity, not a guarantee. To his enduring credit, President Museveni recognised the importance of this opportunity, and moved aggressively to put Uganda at the vanguard of African countries seeking to take advantage of it. Following a tested strategy that had successfully transformed South Korea into an "Asian tiger" and Brazil into the world's leading producer of biofuels, the Ugandan government threw its weight behind the country's nascent apparel sector.

Strong government intervention has allowed many developing countries to trade their way out of poverty. The East Asian countries, many of which were less developed than Uganda at independence, have several success stories where the governments supported local industries for growth, exports and employment generation. Through supports such as production subsidies and tax incentives, several companies have demonstrated remarkable growth. For example, the Taiwanese government used its own resources to jumpstart Formosa Plastics Group in 1958.

Since then, Formosa Plastics has grown into a $51b company, vertically integrated and able to produce plastic products ranging from raw petrochemical materials to high-end electronics. In South Korea, the government supported the growing electronics industry, particularly the Samsung Group. From its small beginnings in the 1950s, the Samsung Group is now worth over $78b, producing memory chips, mobile phones, and plasma display panels for televisions and computers.

It should be remembered that Tri-Star quickly emerged as a success, exporting more garments to the U.S. in one month than the entire country exported in a decade. Under AGOA, one-fifth of all Ugandan exports came from Tri-Star and Ugandan apparel exports to the US tripled from $1.6 million to $4.8 million between 2002 and 2004. No one at this time seemed to be questioning the President's wisdom in favouring this key sector.

Then came the end of the World Trade Organisation's Multi-Fibre Agreement in 2005 and the resulting flood of Chinese apparel onto the world market. Ugandan apparel exports to the US fell to $1.2 million in the first eight months of this year. Others suffered similar contractions. But while the situation is serious there is no reason to give up on the notion that Uganda can succeed in the competitive global apparel market. There is every reason to be optimistic that AGOA garments still holds plenty of promise for Uganda.

Those wanting to pull the plug on the nation's apparel industry should cast their eyes southward to Lesotho. In 2004, Lesotho's apparel sector earned $456 million in exports to the US and employed 50,000 workers. After the MFA lapsed, 10,000 workers lost their jobs as factories closed and earnings in 2005 dropped to $391 million. But rather than submit to pessimism, the government of Lesotho rolled up its sleeves and set about finding a solution. Working with the industry, the government strengthened its support and incentive in strategic areas.

Today, all the factories are open, 7,000 workers have been rehired. Rather than trying to compete with Asian clothing on cost, Lesotho's manufacturers are retoolling to appeal to a niche market that values higher quality goods made in countries with good labour and human rights practices. With the assistance of The Whitaker Group, Lesotho clothing can now be found in giant US retail chains like Target and The Gap bearing the Product Red label created by rock star Bono.

There is no reason why Uganda cannot do the same. Despite its setbacks, Tri-Star is still receiving orders. Phenix Logistics, another Ugandan company, is making great headway marketing clothing made from organic Ugandan cotton.

The Whitaker Group (TWG) recently led a delegation of US buyers to Uganda in August representing Russell Athletic, one of America's top retailers of sports apparel, and Edun, Bono's fair trade clothing company. The results from that mission are promising as Uganda strengthens its position to compete globally in the burgeoning market for organic cotton products, especially high-value yarns.

Uganda's ability to grow its own organic cotton is a tremendous asset and could provide the very niche the country needs to promote its apparel among socially and health conscious consumers in the West.

But AGOA is about more than just apparel, and Uganda, unlike some African countries, has many more options for diversifying its export base. Under AGOA, Uganda is now exporting cut flowers directly to the US market, for the first time bypassing European middlemen.

Uganda is also exporting fish, whose exports to the US increased by 163% under AGOA. Opportunities for vanilla are also promising under AGOA; in 2003 Uganda's exports of vanilla and related products to the US reached $21 million. Strong work is also on-going in other promising AGOA sectors, such as organic food products and value-added coffee.

Overall, while Uganda had experienced strong early growth with AGOA, its exports under this programme are now decreasing with a greater share of exports now being diverted to Europe. This is not AGOA's failure, but a function of untapped potential and on-the-ground capacity constraints. The Whitaker Group continues to work with Uganda in addressing these challenges.

The importance of foreign direct investment in solving Uganda's capacity cannot be overstated. Without foreign capital to build factories and skills, Uganda will not be able to produce either the quality or quantities of goods to meet U.S. market demands. That is precisely why TWG is aggressively working with potential investors in both India and China who are interested in partnering with African companies to seize AGOA's tariff and quote free benefits in the America's $11 trillion market.

Through AGOA, America offers Africa the most generous access to its market of any region in the world. AGOA is more generous than all of America's free trade agreements with other nations. AGOA is also more generous than trade preference programmes offered by other OECD countries.

This year, TWG has travelled to both China and India to introduce potential investors to opportunities in Uganda's apparel, mining, telecommunications, agribusiness and pharmaceutical sectors. We are also promoting the new Ugandan Renewable Energy Policy with potential investors in the US and elsewhere, building on TWG's work with the Ministry of Energy in designing an ethanol policy. We believe that promotion of green energy is a prime investment opportunity in Uganda. Ethanol is also an AGOA eligible product and an opportunity for longer term diversification of Uganda's exports.

There is ample evidence that the work to promote AGOA opportunities and investment in Uganda are paying off. In October, the United Nations Conference on Trade and Development named Uganda as the top venue for foreign direct investment in East Africa, the only nation in the region to make that mark.

[Article by Rosa Whitaker]