TRALAC - Trade Law Centre

Reflections on AGOA

Monday, 08 December 2008

Source: Council on Foreign Relations (USA)

Under President George W. Bush, U.S. aid to Africa has more than doubled. The continent receives most of the funding from programs like the President's Emergency Program for AIDS Relief (PEPFAR) and the Millennium Challenge Corporation (MCC). But some analysts say potentially the most successful U.S. initiative in Africa is not aid, but trade. Since 2000, sub-Saharan Africa has enjoyed broad access to U.S. markets due to the passage of the African Growth and Opportunity Act (AGOA). The legislation expanded the number of tariff-free goods-from textiles to agricultural goods to motor-vehicle components-that countries in the region could export to the United States. But while trade has increased between the United States and Africa, it remains concentrated on oil and other commodities produced in a handful of countries. Some analysts say the act's objective of spurring African economies will only be reached by steps such as the opening up agricultural trade between Africa and the United States, and improvements in the capacity of African states to trade with the United States and with each other.

Liberalizing Trade to Africa

The African Growth and Opportunity Act, passed in May 2000 and signed by President Bill Clinton, aims to increase trade between the United States and sub-Saharan Africa. To become eligible for trade benefits, a country must make progress on criteria that include: market-based reforms; the rule of law; reduced barriers to U.S. trade and investment; economic policies to reduce poverty; labor standards; and anti-corruption measures. As of May 2008, forty countries were eligible.

Eligible countries receive trade benefits that expand the list of duty-free goods they can export to the United States. Prior to AGOA, African countries received tariff-free benefits under the Generalized System of Preferences (GSP) program, an initiative aimed at expanding trade between the United States and the developing world. AGOA added 1,800 products to the list of duty-free products included in the GSP, giving eligible countries duty-free benefits for approximately seven thousand products, including motor-vehicle components, wine, footwear, and some agriculture products. Due to U.S. congressional opposition, agriculture products that Africa would have a competitive advantage in exporting, such as sugar, tobacco, peanuts, and beef, were not included on the list. In addition, countries that meet separate requirements are allowed to export specific kinds of textiles (cloth and other fabrics) and apparel (clothing manufactured from textiles) duty-free.

"AGOA imports were $51.1 billion in 2007, or more than six times the 2001 amount. AGOA has created 150,000 textile, apparel, and related-industry jobs in eligible countries."

AGOA also calls for the United States to meet annually with AGOA countries to discuss trade capacity building issues. It requests that the U.S. government provide technical assistance to AGOA countries through USAID and the Overseas Private Development Corporation (OPIC). Finally, it suggests that the United States work toward free-trade agreements with interested African countries.

The original AGOA legislation has been amended to extend benefits to 2015. In 2007, apparel and textiles provisions were extended to 2015.

Results of AGOA

U.S.-Africa trade has increased significantly since AGOA's passage in 2000, and the United States remains the largest single-country recipient of exports from sub-Saharan Africa (it purchases 29.6 percent of the region's exports). According to a 2008 report (PDF) from the U.S. Trade Representative, AGOA imports were $51.1 billion in 2007, or more than six times the 2001 amount. The Whitaker Group, a private consultancy, says AGOA has created 150,000 textile, apparel, and related-industry jobs in AGOA-eligible countries.

But experts add that AGOA has not diversified U.S.-Africa trade. "AGOA has all the right words," says Stephen Lande of Manchester Trade, a Washington-based consulting firm. "The real concrete results, that's where the wheels begin coming off the train." In 2007, petroleum accounted for roughly 80 percent of total AGOA imports, and the next highest category, minerals and metals, accounted for about 7 percent. Further, the majority of U.S. imports from Africa came from only four countries-Nigeria, Angola, South Africa, and the Democratic Republic of Congo. According to the Congressional Research Service, eleven AGOA countries each exported less than $1 million in goods under AGOA; three countries covered by the deal exported nothing. AGOA trade figures also include the value of imports on the GSP list that would have been allowed into the United States duty-free before AGOA was enacted, notes a 2006 paper in the Texas International Law Review. "The effective rate of tariff protection on imports from Africa was low, even prior to AGOA's enactment," it writes.

If petroleum is excluded, AGOA exports to the United States have doubled over the life of the legislation, reaching roughly $3.4 billion. But Florizelle Liser, the U.S. trade representative for Africa, says this amount "is nothing, if you think about it." She adds: "The reason we have not seen more is because of supply-side constraints." For instance, all of sub-Saharan Africa produces 2.3 percent of U.S. apparel imports. Due to the small size of the apparel industry in most African countries and factors limiting their ability to ramp up production quickly, countries have not always been able to meet demand. Among non-petroleum exports, however, a diversification of products has begun. According to the Congressional Research Service, transportation equipment and apparel imports from South Africa have increased significantly. The 2008 USTR report says exports of leather products, cut flowers, and prepared seafood from sub-Saharan Africa also increased between 2001 and 2007.

Some experts argue that, despite the small absolute size of African exports, the effect of AGOA is still significant. In a working paper for the National Bureau of Economic Research, Garth Frazer and Johannes Van Biesebroeck of the University of Toronto find that apparel exports in AGOA-eligible countries increased by 53 percent on average since the deal took effect, and manufacturing exports increased by 34 percent. "While AGOA countries export notably fewer products than most other countries, this gap decreased tremendously following the Act," they write. Tony Carroll of Manchester Trade says AGOA has "created an opportunity for African countries to reform internal policies and procedures on export development. Those results may not necessarily reflect themselves in bilateral trade data." He notes the example of Ethiopia, which has received technical assistance from the United States to develop its horticulture sector. Now, most of that sector's exports go to Europe.

AGOA's Limitations

Experts point out several factors limiting AGOA's impact. First, countries need to develop the capacity to take advantage of favorable trade conditions. Many African countries lack reliable power supplies, a skilled workforce to develop light manufacturing, and trade laws that allows them to import goods from neighboring countries at competitive prices. Carroll says there is a "quandary of what do you do first? Do you invest in improving the power supply, or do you build out the competitive sector?" As a result, many countries have not been able to take advantage of AGOA. This is even a electricity shortage problem for relatively developed countries in the region like South Africa.

African officials say many countries would benefit from the addition of specific agriculture products to AGOA. In particular, African countries would have a competitive advantage in some goods that are subsidized by the U.S. government under the Farm Bill, including sugar and tobacco. "African countries' competitiveness, especially in agriculture, will continue to be adversely affected by the effects of subsidies-with the livelihoods of millions of smallholder farmers and businesses that totally depend on these commodities-greatly diminished," testified Sindiso Ngwenya of the COMESA regional trade group before a U.S. House of Representatives subcommittee in 2007. Defenders of the U.S. Farm Bill say it provides security to the U.S. agriculture economy.

""AGOA has all the right words. The real concrete results, that's where the wheels begin coming of the train." — Stephen Lande of Manchester Trade consulting firm.

The structure of AGOA's textile and apparel benefits have also been criticized. Some economists argue that the requirements that African countries must meet to benefit from the legislation-from determining the percentage of a particular good that is made in-country to fulfilling complicated sanitation and health procedures-are prohibitively complex in places where business capacity is already limited. To benefit from AGOA, they argue, African countries would need the law's trade preferences extended indefinitely. Critics of such an extension say that it removes any incentive for quick action on the part of sub-Saharan African producers.

Finally, the end of the Multi Fiber Agreement in 2005, a worldwide system of tariffs on apparel, put the rest of the world on equal footing with African apparel producers, negating the advantage offered by AGOA. Statistics on U.S.-Africa apparel trade flows since then offer a mixed picture: Overall apparel exports to the United States under AGOA have declined, but some academic research says the apparel industries in southern Africa remain viable.

Improving Trade Capacity

Many Africa analysts and some U.S. officials argue that AGOA does not provide enough funding for trade capacity building in sub-Saharan Africa. Unless the United States provides additional trade capacity building assistance to the region, any trade increases seen from AGOA will be short-lived. For instance, Lesotho has seen increased trade flows from textiles, but it lacks the ability to expand the sector further, according to an April 2008 report from the U.S. International Trade Commission. The countries that have benefited most from AGOA, such as Ghana and Mauritius, have worked to improve their infrastructure, eliminate bureaucratic delays, and facilitate customs processing.

The AGOA legislation suggests that the United States should offer trade capacity assistance, but does not specify levels of funding. In fiscal year 2007, the United States allocated $505 million to trade assistance in sub-Saharan Africa, an increase of 26 percent over the previous year. The primary U.S. channel for such assistance is the African Global Competitiveness Initiative, a $200-million five-year initiative that is implemented by USAID and ends in 2010. This program supports four regional trade hubs-in Ghana, Senegal, Kenya, and Botswana-that work to link U.S. and African businesses as well as improve the trade environment in their regions. "Two-hundred million is nothing for forty countries over five years," says Lizer. She suggests that sector-focused technical assistance should be funded much more aggressively, on the scale of "billions." For instance, Liberia would like to develop its rubber industry so that instead of exporting rubber as a raw commodity, it moves up the value chain and manufactures, for instance, gloves or tires.

"Due to U.S. congressional opposition, agriculture products that Africa would have a competitive advantage in exporting, such as sugar, tobacco, peanuts, and beef, were not included on the duty-free list."

Trade experts suggest that the United States should also work to bolster connections between small businesses in the United States and Africa. The Sullivan Foundation, an organization that promotes entrepreneurship in Africa, says U.S. businesses continue to be resistant to investing in African industries that are not related to resource extraction. In 2008, the Congressional Research Service wrote that few U.S. small businesses are even aware of AGOA's existence. It suggests the U.S. government might work to increase domestic awareness of AGOA.

Some economists point out that until sub-Saharan African countries liberalize trade among themselves, AGOA and any trade capacity assistance will have limited benefits. Sub-Saharan Africa is one of the most protectionist areas in the world, according to the Cato Institute's Marion L. Tupy. Only 10 percent of African exports are intraregional, according to the World Trade Organization; by comparison, 68 percent of Western Europe's exports go to other Western European countries. The World Bank says sub-Saharan Africa would gain significantly from internal trade liberalization; in 2001, it projected that intraregional trade would increase by 54 percent, or $12.6 billion, by 2015. The United States should require AGOA countries to eliminate tariffs on imports from other sub-Saharan African countries by 2010, write Brett D. Schaefer and Daniella Markheim of the Heritage Foundation.

Some modest efforts are being made to lower regional tariffs. Last year, intra-COMESA trade increased more than trade with any other region of the world (View a profile of COMESA-US trade on at this link). Between 2005 and 2007, it doubled, and as of 2007, it stood at more than $7.8 billion. The South African Development Community is working to eliminate tariffs across its member countries.