African Growth and Opportunity Act: A Case of Vanishing Benefits

July 30, 2009

On August 4, 2009 high-level delegations of government, private sector and civil society representatives from the United States and sub-Saharan Africa (SSA) will meet in Nairobi for the 8th annual African Growth and Opportunity Act (AGOA) Forum. As with previous forums, a key issue that will likely dominate the deliberations is how to achieve the full potential of AGOA, which was signed into U.S. law by President Clinton in May 2000. AGOA is a centerpiece of U.S. trade, aid and investment policy in Sub-Saharan Africa that provides for duty and quota free access to U.S. markets for designated products, especially textiles and apparels. In addition to market access provisions, AGOA provides for trade facilitation and technical assistance to African producers.

AGOA 2000-2008: A Success Story?

Although AGOA is touted as a success story, a careful evaluation reveals that the initiative’s impact has been limited. It is in fact the case that the volume of trade between SSA and the United States has expanded during the life of AGOA. By adding several tariff lines to those covered under the Generalized System of Preferences (GSP), AGOA has provided tangible benefits to African producers who ordinarily operate under relatively small margins. The preferential status, especially in the earlier years, permitted African producers of textiles and apparel to increase their volume of exports substantially. For example, U.S. imports from SSA increased by more than 50 percent from the pre AGOA 1999 levels. In 2001, the U.S. imported $7.6 billion of duty free goods from AGOA eligible countries and by 2008 this figure was over $81 billion.

Nevertheless, considering the size of the U.S. market for the various AGOA products, it is evident that the potential benefits have not been exploited to any significant degree. In 2008 total apparel imports to the U.S. were valued at $93 billion, of which SSA accounted for $1.1 billion (1.26 % of the total market). In the same year, Bangladesh alone exported $3.5 billion worth of apparel (3.79 % of total market)—more than double the entire exports from SSA. Also of concern is that African exports under AGOA have declined in recent years. For example, African AGOA exports in 2004 and 2007 accounted for 54.5% and 36.5% of total exports to the United States respectively.

Further interrogation reveals that the gains from AGOA are overrated. In 2008, of the $81.3 billion worth of exports from AGOA-eligible African countries, merchandise valued at $66.2 billion entered under the AGOA duty-free provisions. However, $9.8 billion of the $66.2 billion was accounted for by merchandise previously eligible for duty-free access under GSP, thus $56.3 billion worth of trade is directly attributable to the AGOA preferences. Of the AGOA exports, $52.8 billion of exports (95.7 percent) consisted of energy related products (mainly crude oil). Thus, the real benefits of AGOA to African countries are much lower than what aggregate numbers show—about $3.5 billion of exports.

Beyond Market Access

The real problem with regard to U.S.-Africa trade has little to do with market access. Africa has not fully exploited the market access opportunities that are already available under GSP and AGOA. Thus, focus should be on the problem areas that have limited Africa’s ability to exploit market access preferences. A number of the issues that the Nairobi forum should focus on include:

Costs of Doing Business: With increasingly liberalized world trade, the benefits that can be gained from preferences are minimal. Even with the duty-free and quota-free market access provisions, African countries have not been able to effectively exploit the preferences. The simple reason is that African countries are not competitive. The sources of the competitive disadvantage are many and it is in this area that the forum should focus; infrastructure: transport, ports and electricity are particularly important. In addition, there is a need to focus on the standard costs of doing business. Although many countries have made progress in this area, the costs of doing business remain high in terms of regulatory burden, licensing procedures, etc. At this point in time, the AGOA Forum should focus on collaborative initiatives to deal with the major cost drivers impacting African competitiveness.

Investments in Value Addition: AGOA has not been effective in transforming African economies. The fact that the large proportion of AGOA exports are commodities is evidence that the benefits of the initiative are limited and likely to be short-lived. Long-term economic growth and development of Africa will require economic transformation. Policy proposals should therefore be evaluated on the extent to which they contribute to transformation and diversification. The AGOA Forum should therefore deliberate on how Africa can attract American capital and also appropriate incentives to mobilize domestic capital for economic transformation. In addition, it is crucial that AGOA eliminate provisions that penalize value addition.

Simplifying the Approval Process: Even with the duty-free market access, African agricultural exports still face multiple non-tariff barriers. While strict health and safety standards must be adhered to, African exporters have expressed dissatisfaction with the product approval process which is cumbersome and takes unnecessarily long times even for products that are exported to other developed countries. The U.S. government must work on streamlining this process. Also of concern is the need for harmonization in standards between European countries and the United States.

Evaluating Proposed Preferences to Less Developed Countries: A serious challenge to AGOA might come from the U.S. Congress. A number of bills that would extend AGOA-like preferences to other less-developed countries have been proposed. The proposed laws would extend benefits to countries such as Cambodia and Bangladesh that are already competitive as compared to African countries, especially in textiles. Should these proposals become law without modification of AGOA, the investments already made in several sectors would collapse, which would of course be detrimental to investors. At the present time, enactment of those laws would be tantamount to the scrapping of AGOA.

Revocation of Status: The AGOA eligibility conditions, especially in regard to political governance, are important as they place responsibility of institutional strengthening on Africans. But the fact that eligibility can be revoked has a detrimental impact on investment decisions. Once a country becomes eligible for AGOA membership, it attracts investors to specific industries. In essence, firms make transaction-specific investments that are profitable only to the extent that they export duty-free to the American market. Loss of eligibility implies that the investment is a sunk cost. Revocation of status then raises the risk associated with AGOA transaction-specific investments. Given the fragility of African states, there is a non-trivial probability that a particular country will revert to weaker governance. This implies that investors will shy away from making what would otherwise be profitable investments because of the threat of losing market access.

Harmonizing Member Positions: Currently, there is no formal structure for member countries to negotiate with U.S. policy-makers on AGOA. This might result in a situation where amendments to the act do not sufficiently incorporate the consensus of the African countries. The AGOA Forum can be more effective if the African position is deliberated in advance and specific positions are agreed upon by the governments. A viable option is for African governments to build AGOA negotiation capacity within the African Union now that the AU is formally represented in Washington.

African governments expect U.S. representatives to use the Nairobi Forum to articulate the Obama administration’s policy on U.S.-Africa trade and investment relations. The forum therefore provides an opportunity to both the United States and African countries for dialogue on the future of AGOA. What is evident is that, while market access preferences are important, Africa cannot take full advantage unless existing structural problems within the countries are dealt with. Of outmost importance is focusing on making Africa competitive and keeping the rules simple and predictable.