TRALAC - Trade Law Centre

Raw materials rule threatens Kenya textile exports to US

Monday, 21 February 2011

Source: Business Daily (Kenya)

Fabrics from Kenya’s export processing zones could be barred from entering the US market under the lucrative Africa Growth and Opportunity Act (Agoa) if the country fails to produce enough raw materials for its textile industry.

Agoa, which gives 38 African countries free access to the American market for a wide variety of goods, will in September next year demand that countries be self-reliant in raw materials used in the manufacture of exports.

“Once the clause on self reliance comes into effect, our exports will not compete with the Chinese textile exports. This will lead to mass layoffs,” said Thomas Puthoor, the chairman of the Kenya Apparel Manufacturers Association.

It takes about 150 days for a Kenyan manufacturer to supply products to American markets from the time of ordering the fabric to delivery of finished products.

The period could be cut by almost half to 60 days if raw materials were secured locally, leading to higher sales and more benefits to farmers, Mr Puthoor said.

But policymakers and industry players say it would be difficult meeting this deadline with the country’s struggling cotton sector.

In 2009, the USA government extended Agoa concessions to 2015 but refused to review the rule of origin clause.

This means that fabrics made from raw materials imported from other countries will not enjoy tax holidays in the US markets.

Kenya has made a formal request for an exemption from the clause which if not granted would deal a blow to the country’s nascent apparel sector that is reeling from high operation costs and relocation of factories to cheaper cost regimes.

The textile sub-sector is the fourth largest manufacturing sector in the country, accounting for 11 per cent, and comprises half of Kenya’s exports to the US under Agoa.

Besides textiles, another 6,000 products are eligible but Kenya takes advantage of only 20 items.

Kenya’s once robust apparel export sector under the Agoa arrangement consisted of 44 textile exporting firms with a direct and indirect employment capacity of more than 32,000 people.

According to Mr Puthoor, these have in the last five years whittled down to just 10 firms with a workforce of 9,000.

He blamed the drop on high production and operational costs, cut-throat competition, slow pace of labour and employment reform.

Although Kenya has reaped dividends from Agoa since its inception in 2001, it has done little to stimulate cotton production, with farmers’ confidence eroded by weak links to markets, costly inputs including seeds and lack of affordable credit facilities.

Mr Puthoor said Kenya was drawing only a half of its total potential because textile firms under Export Promotion Zone (EPZ) import most of their raw materials from competitors in China, India, Bangladesh and Malaysia.

The rule of origin clause was adopted in September, 2007, giving countries five years to build capacity for producing local textile manufacturing materials.

According to Cotton Development Authority (CODA), there has been a rise in Kenya’s cotton production from 23,000 bales in 2009 to last year’s 49,000 bales.

But this only comprised slightly more than a quarter of the local demand of 180,000 bales.

“We are phasing out brokers and setting good prices to encourage farmers to plant more,” CODA coast region manager Justin Ondiko said of recent efforts to streamline marketing.

Since last year, he said, prices have been at Sh32 per kilogramme and this March we expect the price to be reviewed upwards to Sh40 per kg.

Seasonal potential

Kenya has 350,000 hectares of land suitable for cotton cultivation and another 35,000 hectares which can be put under irrigation, giving it a seasonal potential of 300,000 tonnes of seed cotton each season.

Giving an example of the Coast region which produced 3,000 tonnes against a capacity of 13,000 tonnes Mr Ondiko said the country would be hard pressed to meet stipulations under Agoa IV.

“Although we have already revived ginneries, we can not talk of milling factories with such low production,” said Mr Ondiko.

He said the government’s decisions to remove 16 per cent Value Added Tax levied on locally produced and ginned cotton and to impose taxes on imported textiles, including second-hand clothes, spurred local productions.

High-yielding cotton seeds are also being distributed to farmers.



“ Latest AGOA Trade Data currently available on AGOA.info


Click here to view a sector profile of Kenya's bilateral trade with the United States, disaggregated by total exports and imports, AGOA exports and GSP exports.


Other regularly updated trade statistics on AGOA.info include: (click each link to view)

  • AGOA-Beneficiary Countries’ AGOA and GSP Trade Aggregates

  • AGOA Trade by Industry Sector

  • Apparel Trade under AGOA’s Wearing Apparel Provisions

  • Latest Apparel Quotas under AGOA

  • Bilateral Trade Data for all AGOA-eligible countries individually.