How reliable is the African Growth and Opportunity Act?
Trade is an important mechanism through which countries can allocate their resources efficiently. As such, trade is an important tool for economic growth. Developed countries have a variety of preferential treatment program in favor of products from developing countries.
The African Growth and Opportunity Act (AGOA) is a US trade program that gives preferential treatment for products from most Sub-Saharan African countries into the US market. AGOA came into effect in 2000. The growth of the textile industry in countries including Kenya, Madagascar, Mauritius, Swaziland, Tanzania, and, especially, Lesotho can be attributed to AGOA. However, any company or country that relies on AGOA for its future will undoubtedly, sooner or later, be disappointed. First of all, if you take out the textile and apparel industry, AGOA is not at all as important as US-Sub-Saharan Africa (US-SSA) trade might make someone believe. Second, even when you take the textile and apparel industry into account, the margin of preference is small, eroding, and unpredictable.
US-SSA trade reports describe almost all US imports from Sub-Saharan Africa as “AGOA imports.” But 90 per cent of US imports from Africa are petroleum products, minerals, metals, and unprocessed agricultural products like green coffee – products that faced hardly any trade barriers in the US even before AGOA. It should not come as a surprise that, leaving South Africa aside, the top four so-called AGOA beneficiary countries are Nigeria, Angola, Chad, and Gabon.
These countries have one thing in common. Their major export (80-90 per cent of total exports) is crude oil. These countries could be removed from the AGOA list and that would not affect US imports of crude oil from those countries. The US is happy to have access to crude oil. To label them as AGOA imports, as if the US is doing those countries a favor by buying their crude oil, is a misnomer.
Textiles and apparel, which indeed have benefited from AGOA’s preferential treatment, comprise less than five per cent of US imports from SSA, and the margin of preference is eroding. The margin of preference is the difference between the US tariff rates for non-Sub-Saharan African goods and the preferential tariff rates for similar goods coming from SSA. But it should be noted that the US, like all other developed countries, implements the Generalized System of Preferences (GSP) program that offers special and preferential treatment to all developing countries. In other words, SSA goods were already receiving preferential entry into the US market even before AGOA. Indeed, AGOA increased US openness to African products, but the margin of preference between AGOA tariffs and GSP tariffs is small.
What made textiles and apparel special? When AGOA came into effect in 2000, the US textile and apparel industry was still protected by the Multi-Fibre Arrangement (MFA). AGOA provided those Sub-Saharan African countries that qualified for textile and apparel benefits a significant margin of preference. Countries like Kenya, Lesotho, and Mauritius took advantage of that window of opportunity, that is, a large margin of preference. But the margin of preference kept getting smaller over time as the MFA was gradually being phased out.
It was well known that the phasing out of the MFA would be completed in December of 2004. Yet the decline in the margin of preference came as if it were a surprise to some. Those companies that didn’t prepare accordingly had to shut down due to declining orders from the US.
Even for a few products where AGOA seems to make a difference, it is important to note that preferential arrangements are, in practice, non-binding commitments. In fact, AGOA expires in 2015. While its renewal is expected, it is not guaranteed.
The US sets conditions for AGOA’s eligibility. The US can suspend AGOA in whole or in part. It can add, remove, and/or re-designate a product or country at its own discretion. AGOA is, therefore, generally unpredictable. Central African Republic, Cote d’Ivoire, the Democratic Republic of Congo, Eritrea, Guinea, Madagascar, Madagascar, and Mauritania are countries that have been removed from AGOA at one point or another. Even if there is a legitimate reason for removing a country, the impact is not confined to that country. AGOA’s rules of origin regard inputs imported from other AGOA countries as part of local content. When a country is removed from AGOA, regional linkages are disrupted. A Brookings Institution study points out how Madagascar’s apparel industry used denim fabric from Lesotho, zippers from Swaziland, and cotton yarn from Zambia, Mauritius and South Africa. When Madagascar was removed from AGOA, its trading partners were punished as well.
If a company can take advantage of AGOA, let it do so. However, it must not rely on AGOA. It must try to diversify its markets. Otherwise it will find itself disappointed with AGOA provisions.
Richard E. Mshomba, Ph.D.
(Posted in November, 2013)