Fix AGOA, and keep moving

4 June 2012

The U.S. African Growth and Opportunity Act (AGOA) of 2000 marked a major change in American trade policy towards poor countries. The program went well beyond the Generalized System of Preferences (GSP) for all developing countries, extending duty-free treatment to 97 percent of eligible products from sub-Saharan African countries. The United States also pledged, as part of the Millennium Declaration in 2000 and the Doha Round in 2005, to provide duty-free, quota-free market access for all least-developed countries (LDCs), though it has yet to do so. That means that more than a dozen Asian LDCs are eligible only for the U.S. GSP program, which provides duty-free access on just 73 percent of products, and excludes clothing, footwear, and other light manufactures.

As expected, AGOA succeeded in boosting African exports to the United States, but the program has weaknesses, and the increased trade was concentrated in only a few products from a handful of countries. Key agricultural products-including sugar, dairy, peanuts, and tobacco-remain subject to prohibitive tariffs, and the fact that the program requires reauthorisation every few years creates uncertainty for potential traders and investors. The legislation also failed to sustain the increase in clothing exports once the managed trade system for textiles and apparel was phased out in 2005. The question now is how much attention should be on extending and improving AGOA, and impeding the expansion of market access for other LDCs, relative to broader policy reforms that could spur trade and private sector growth more broadly.

Assessing AGOA's Impact

From 2001 to its peak in 2008 (prior to the economic crisis), the value of exports under AGOA increased nearly seven-fold, and the share of total U.S. imports originating in AGOA countries (including those exported outside the program) more than doubled from 1.8 percent to 3.9 percent.  Rising oil prices accounted however for much of the current increase measured in dollars. In 2011, more than 90 percent of exports under AGOA were still petroleum products, and eight of the Africa's poorest countries combined-Burkina Faso, Djibouti, Gambia, Guinea, Mali, Niger, Rwanda, and Sierra Leone-exported less than $1,000,000 in total under AGOA from 2001 to 2011. Petroleum products aside, the range of products exported under AGOA remains quite narrow. Of the total $3.4 billion in non-oil AGOA exports during  2011, $2 billion derived from vehicles produced in South Africa and just under $1 billion from clothing, two-thirds of it from Kenya and Lesotho.

A serious gap in the program is the exclusion of sensitive agricultural products. Although agriculture provides livelihoods for roughly two-thirds of all Africans, total exports of food, beverages, and tobacco products from AGOA-eligible countries grew just five percent annually on average from 2001 to 2009, when they reached just under $700 million. Exports under the AGOA program itself averaged just under $150 million annually over the past decade, in part because many agricultural exports receive duty-free treatment under normal trade rules. This is also the case, however, because the most heavily protected products-sugar, dairy, peanuts and tobacco-still face prohibitive tariffs. In addition, cocoa exporting countries are discouraged from processing cocoa beans because of restrictions on dairy and sugar imports , which in turn restrict U.S. imports of chocolate and other cocoa products.

While, the European Union's Everything But Arms (EBA) programme, introduced in 2001, eventually reached full product coverage in 2009, including all agriculture, AGOA proved more meaningful for some exporters because it had a more flexible rule of origin for clothing. AGOA's "third-country fabric" rule allows eligible exporters to assemble clothing from imported fabric and other inputs, while the EBA, until it was changed last year, required both the fabric and the final item of clothing to be produced locally, in order to be eligible for preferences.

The success in boosting clothing exports was however temporary, they started to fall after the global system of bilateral quotas on textiles and apparel ended in 2005 (see figure 1). These exports showed signs of stabilizing after the United States and European Union imposed temporary restrictions on Chinese textile exports in early 2006, but they plummeted again in several countries when the global recession hit in 2008, and the restrictions on Chinese exports expired. More recent data suggests possible signs of post-recession recovery, or at least stabilisation, in Lesotho, Kenya, and Mauritius, but at lower levels than in the early 2000.

Recommendations

The U.S. Congress should correct the flaws in AGOA by providing full coverage for agriculture, and by authorising it indefinitely to remove the repeated uncertainty surrounding extensions of the program. The clothing origin rule will expire later this year, and the entire program in three years, if not extended by the U.S. Congress.  President Obama and the Congress should  also fulfill the commitment to provide duty-free, quota-free market access for other LDCs. African clothing exports being highly concentrated, it would be possible to shelter 70 percent of AGOA-eligible exports by exempting just two dozen clothing items (at the detailed, 10-digit tariff line level) from LDC preferences for competitive exporters. That would provide benefits for more than half of Bangladeshi and Cambodian exports, and give other Asian LDCs new opportunities to access the U.S. market.

With or without the extension of preferences to other LDCs, the impact of AGOA will remain limited as long as fundamental African competitiveness continues to lag. In addition to infrastructure financing and national policy reforms to remove unnecessary regulatory barriers, serious implementation of the commitments to regional integration could significantly reduce overall trade costs and help firms achieve economies of scale and become more competitive. These policies are more difficult to implement and sustain, but they would have higher payoffs than simply maintaining or expanding access to the American market.

Author : Kim Elliot  is a Senior Fellow at the Center for Global Development and principal author of the CGD report, Open Markets for the Poorest Countries:  Trade Preferences that Work.

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