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South Africa: Options for US trade after AGOA

South Africa: Options for US trade after AGOA
Published date:
Friday, 23 September 2016

This week, the US is hosting African countries for the annual African Growth and Opportunity Act (Agoa) forum under the theme "Maximising Agoa now while preparing for the future beyond Agoa". The act, a unilateral development programme offering African countries duty-free access for select exports to the US, is set to expire in 2025.

The forum will discuss how African countries can maximise its benefits until the programme expires and consider economic engagement after that.

SA should use this opportunity to explore how future trade and investment ties with the US can be strengthened. Over the past 15 years, the US has become an increasingly important economic partner for SA: total trade has nearly doubled since 2000, totalling $12.7bn in 2015, with SA offering a diverse export portfolio and consistently maintaining a trade surplus with the US.

During the same period, US foreign direct investment into SA has also doubled, totalling more than $6bn in 2015, representing 7% of total foreign direct investment in SA.

By 2015, it was estimated that more than 600 US companies operated in SA, creating 100,000 jobs and adding about 10% to GDP.

Since its inception in 2000, Agoa has been a boon to SA’s economy. The Department of Trade and Industry has suggested that more than 60,000 jobs are created as a result of Agoa preferences, notably in the automotive, metals and agriculture sectors.

Yet, the country has struggled to take full advantage of the programme, using a mere 20% of duty-free preferences extended under Agoa and other programmes. By expanding knowledge of Agoa, assisting South African exporters to better comply with US trade regulations and procedures, and matching domestic production capacities with preferences offered, SA could better leverage the opportunities.

However, given the unilateral nature of Agoa, a lack of a legislated dispute-resolution mechanism to tackle trade and investment concerns has strained relations between parties. This was perhaps best illustrated earlier in 2016 when the US and SA went head-to-head over import regulations restricting meat exports from the US to SA. In lieu of a legislated dispute-resolution mechanism, SA and the US should mitigate trade and investment disputes through established diplomatic channels.

Arguably more important, however, is to look beyond Agoa’s expiry to the future of US-SA trade relations.

The most comprehensive approach would be for SA to re-engage the US in talks around a free trade agreement. Previous negotiations between the Southern African Customs Union (Sacu) and the US, starting in 2003, broke down, largely due to inflexibility from the US and lack of policy coherence in Sacu. However, the global and domestic realities have changed considerably in the past decade.

Globally, the stalemate reached in the current World Trade Organisation (WTO) round has prevented further liberalisation of markets. Equally, the global drop in demand and prices for commodities has significantly affected commodity exporters such as SA.

At the same time, the economic slowdown in SA, together with the government’s focus on export-led growth, calls for more comprehensive engagements. Renewed talks of a free trade agreement should, therefore, be considered, as they would best promote trade and investment relations between the parties.

SA should engage the US in a so-called "partial scope agreement". Similar to free trade agreements, these create a legislated trade regime between parties. The defining difference is that unlike a free trade agreement, which covers trade relations comprehensively, a partial scope agreement allows for the selection of particular sectors and issues to be included.

Not only would a partial scope agreement allow SA to be more strategic, but it would also offer an ideal platform to eventually graduate into a free trade agreement.

However, the US’sappetite for such an agreement has been questioned, considering the high benchmark set by other multilateral agreements to which the US is party, as well as the feasibility of such an agreement under WTO rules.

The final option for SA is a "do nothing" approach. Allowing Agoa to expire without putting an alternative trade regime in place will relegate trade between the parties to the WTO regime. Not only will this result in a significant reduction of duty-free preferences for SA’s exports, it will forgo the opportunity to create an efficient and effective dispute-resolution mechanism between the parties.

While this approach is arguably the simplest of the three offered, it will do little to encourage US-South African economic relations by failing to provide incentives to the private sector and ensure policy certainty.

Given the precarious position of our economy, the country cannot afford to neglect strengthening trade and investment ties with one of its major economic partners. While the expiry of Agoa in 2025 might seem like a decade away, reaching trade agreements often requires more time than this, calling for an urgency to this dialogue.

• Prinsloo and Ncube are researchers at the South African Institute of International Affairs economic diplomacy programme.

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