From Center for Development and Strategy VOL. 2014 NO. 1
Should AGOA be Renewed in 2015?
Center for Development and Strategy
2014, Vol. 2014 No. 1 | pg. 1/1
IN THIS ARTICLE
On May 18th, 2000, the United States enacted the African Growth and Opportunity Act (AGOA), dramatically expanding trade between itself and Sub-Saharan Africa over the following decade. Yet whereas previous studies in the literature have often sought to confirm the significance or investigate the welfare effects of AGOA, this article considers the incentives generated by AGOA in relation to its sustainability, particularly in light of its impending expiration on September 30, 2015. Drawing upon a review of the relevant literature, these effects are considered in terms of AGOA's rules of origin, Third-Country Fabric provision, relation to Chinese investment in Sub-Saharan Africa, and exclusion of "key" exports from full duty-free quota-free status. From these considerations, trade assistance is recommended as the appropriate strategy for restructuring the program.
Though Sub-Saharan Africa is undoubtedly one of the most impoverished regions of the developing world, it has also experienced phenomenal economic growth over the past decade. Among its developing countries alone, average per-capita income in Sub-Saharan Africa rose from $777.8 in 2005 to $1657.2 in 2013, reflecting an average annual growth rate of over 9.9% (World Bank, 2014). To the extent that this growth is the result of trade preferences extended under the African Growth and Opportunity Act, this paper has been prepared in order to investigate the true impact of AGOA in light of its impending expiration on September 30, 2015. From this review, adequate conclusions may be drawn to determine whether or not AGOA should be renewed, and whether or not it should be amended. The report is organized as follows: section 2 presents an overview and the background of AGOA. Section 3 analyzes several criticisms of AGOA in light of arguments made in academic articles and governmental/nongovernmental reports. Section 4 concludes and presents several policy suggestions.
The African Growth and Opportunity Act (henceforth AGOA) is a preferential trading agreement between the United States and Sub-Saharan Africa (SSA), signed into law on May 18, 2000 (Bonarriva et al., 2014). Building upon an exemption in Article 1 of the GATT, AGOA significantly expands the number of SSA non-apparel goods eligible for duty-free access to the United States beyond the previously existing Generalized System of Preferences (GSP), which expired on July 31, 2013 (Condon & Stern, 2010; United States Trade Representative [USTR], 2014). Further, AGOA countries with a qualifying visa system able to verify the source of imported fabrics can gain eligibility to export apparel items as well (Frazer & Van Biesebroeck, 2010; East African Community [EAC], 2014). As a result of these provisions, SSA countries now face an average protection rate of less than 1% when exporting to the United States, compared to non-SSA lesser-developed countries which face an average protection rate of 9.2% (Mevel, Lewis, Kimenyi, Karingi, & Kamau, 2013). Currently, 39 SSA countries are eligible to receive AGOA benefits, however this figure has fluctuated over time (United States International Trade Administration [USITA], 2014). Though originally set to expire at the end of 2008, a revision in 2004 extended AGOA's current deadline to September 30, 2015 (EAC, 2014).
AGOA's stated purpose is to "encourag[e] increased trade and investment between the United States and sub-Saharan Africa", and from a cursory look at U.S. international trade data it would seem that it has been successful in this regard (U.S. Congress, 2000). Between 2000 and 2008, total AGOA imports to the U.S. grew from roughly $8 billion to $57 billion (Bonarriva et al., 2014). Notwithstanding the economic crisis of 2008, current AGOA imports stand at roughly $25 billion (ibid.). Further, despite a flaw in the AGOA classification scheme that allows for the inclusion of crude petroleum in official reports of the data2, a University of Toronto report by Frazer and Van Biesebroeck (2010) has demonstrated the robustness of AGOA's effects on non-oil exports.
In addition to increasing the volume of trade, AGOA has promoted the growth of manufacturing and apparel industries in SSA. In particular, countries such as Lesotho, Kenya, and Madagascar have been able to revitalize their apparel industries as a direct result of special benefits granted from AGOA, particularly the ThirdBCountry Fabric (TCF) provision.3 In response to the phasing out of the Multi-Fiber Agreement in 2005, increased competition from East Asia has caused apparel production to claim a declining share of AGOA imports relative to manufacturing in recent years (Bonarriva et al., 2014).
Despite its apparent successes, AGOA has not been without its criticisms. Specifically, the program has been criticized for its rules of origin requirements, potential encouragement of export processing zones (EPZs), political motives, and remaining barriers to trade. Currently, the United States is reviewing legislation to extend AGOA by another 15 years (AGOA Communiqué 2014). As such, an informed decision of whether or not to amend AGOA necessitates a review of these criticisms.
Review of Specific Criticisms
Rules of Origin
In order to qualify for duty-free status, products imported under AGOA must satisfy certain rules of origin. For products designated as "non-apparel", 35% of the product's value must be added in the beneficiary country exporting to the United States; for "apparel", the product must be produced using materials wholly from the United States or locally (Condon & Stern, 2010). The motivation behind AGOA's rules of origin is relatively straightforward: without them, trade deflection would occur as, "any Chinese product could pass though an African country with a made in Namibia label on it...nullifying the intended benefits for the African exporter" (Davies, 2011). Nevertheless, one criticism of these requirements is that by tying the "amount of origin" to the value of the product, the amount of origin may fluctuate with wages, commodity prices, and exchange rates (Brenton & Hoppe, 2006). The risk of a product losing duty-free access without advance notice acts as a disincentive for production in AGOA beneficiary countries.
In practice, the risk of lost value is mitigated through an alternative route. As noted by Collier and Venables (2007), "in the modern globalised world, production is highly fragmented, with the different stages involved in the production of a particular good now taking place in many different countries. This fragmentation means that comparative advantage now resides in narrowly defined tasks" (as cited in Condon & Stern, 2010). The primary vehicle for certain SSA countries to take advantage of this fragmentation is the Third-Country Fabric (TCF) provision. TCF beneficiaries are allowed to use materials from anywhere in the world, and consequently they are often able to secure cheaper fabric from East Asia (Condon & Stern, 2010; Lall, 2005). As a result, most apparel production under AGOA has tended to concentrate in lower-income countries where the TCF provision holds, particularly under the ownership of foreign multinational corporations (Lall, 2005; Phelps et al., 2008). By requiring apparel production in countries without the TCF to use fabric wholly produced locally or from the United States, critics argue that non-TCF countries are unable to compete with TCF beneficiaries; especially as technology in the apparel industry is relatively simple and there exist few other opportunities to reduce costs through economies of scale (Brenton & Hoppe, 2006).
The hegemony of TCF apparel producers over their non-TCF counterparts is immediately apparent from AGOA export data. Before the end of the Multi-Fiber Agreement (MFA) in 2005, 96% of U.S. AGOA apparel imports came from seven countries, and 75% came from only four: Kenya, Lesotho, Madagascar, and Swaziland, all of which qualified for the TCF (ibid.; USITA, 2014). Likewise, an independent report by the East African Community (2014) found that 95% of AGOA apparel imports were dependent on the TCF. Additionally, empirical analyses by Brenton and Hoppe attribute all of the growth in AGOA apparel exports from 2001 to 2004 to the TCF (ibid.). Similar results hold in the post-MFA era. Frazer and Van Biesebroeck (2010) find that AGOA's impact on apparel was the largest in 2006 and 2007, the years immediately following the end of the MFA. While not mentioned in the article, a potential explanation of this phenomenon is that the lifting of MFA quotas on East Asian apparel may have allowed Asian-owned multinational corporations in SSA to source more fabric for production. Consequentially, critics of AGOA's rules of origin requirements allege that the TCF restricts other AGOA countries ability to compete, and encourages trade deflection through the most impoverished beneficiaries.
In summary, though the rules of origin were included in AGOA to prevent trade deflection, they have instead encouraged it. By requiring non-TCF apparel producers to source locally or from the United States, apparel manufacturers have disproportionately chosen to locate in TCF countries and source cheaper fabric from East Asia. This has resulted in a lack of competition among apparel- producing countries and a high degree of dependence on the TCF among apparel-producing countries.
A related class of AGOA criticisms maintains that the program promotes shallow Foreign Direct Investment by encouraging the growth of Export Processing Zones (EPZs). These criticisms are particularly evident in academic studies of TCFNqualifying countries such as Kenya and Lesotho. As a landlocked country with few natural resources and an unskilled workforce, it would seem odd that Lesotho had nonetheless risen to become AGOA's leading apparel exporter to the United States by 2002, as well as the top recipient of FDI per capita in Sub-Saharan Africa (Lall, 2005). Lesotho's rise to preeminence in apparel was precipitated by a historical accident. In the 1980s, Taiwanese firms operating in South Africa were forced to relocate when economic sanctions were levied on the apartheid regime (ibid.). As Lesotho supported, "liberal trade and FDI policies, reasonable infrastructure, low taxes and a relatively efficient and honest administration" and maintained diplomatic relations with Taiwan, these firms chose to locate there (ibid.).
By the second year of AGOA, Oxford professor Sanjaya Lall uncovered several features of Lesotho's apparel industry resembling an EPZ. As a first observation, Lall (2005) found that over 90% of Lesotho's FDI was concentrated in the apparel industry, and this industry itself was entirely foreign- owned. Further, the apparel firms made no effort to invest in local workers, granting most supervisory and managerial positions to Taiwanese and Chinese expatriates (ibid.). The firms also made no attempt to create linkages to the local economy. Rather than source fabric from Lesotho or South Africa, they relied on their own supply chains to procure cheap fabric from East Asia (ibid.). Finally, production was directed almost exclusively towards U.S. markets, with North America accounting for over 76.3% of Lesotho's total exports in 2002 (ibid.). These factors in combination suggest that the Taiwanese apparel firms were using Lesotho's TCF status and "business-friendly regime" to assemble apparel for export to the Untied States (ibid.). Unfortunately, due to the untimely death of professor Lall in 2005, no academic update has since been made on Lesotho's apparel industry in the post-MFA period; though official statistics reveal that employment in the apparel industry has contracted by 28.9% (Davies, 2011).
In Kenya, Phelps, Stillwell, and Wanjiru (2008) found conditions similar to Lesotho despite differing historical circumstances. Owing to an influx of British FDI before World War II, Indian textile investment in the 1930s, and import-substitution protectionism after independence, Kenya established a base of apparel production that reached its height in terms of employment the 1980s, yet had been in decline ever since (ibid.). However, in the first years of the program, AGOA revived the industry in a manner highly resembling an EPZ. In a survey of 20 out of the 35 operating apparel firms in Kenya, Phelps et al. found that an average of 64.25% of each firm's sales were made for their largest customer, suggesting a high level of dependence and a failure to diversify among consumers (ibid.). Further, Kenya's "hands-of" approach to regulation paralleled Lesotho's "business-friendly regime" model (ibid.). Unlike Lesotho, however, Kenyan apparel industries were more likely to source chemicals and dyes from local suppliers; though this may simply be the result of its established base of apparel production (ibid.). Regardless, it is safe to say that even in countries with different historical contexts, the inclusion of the TCF allowed their apparel industries to evolve in similar ways.
Aside from strictly economic considerations, AGOA has also been criticized for its political motivations. The most common objections by far are that AGOA is a non-reciprocal program designed to promote U.S. interests and the "Washington Consensus" at the expense of SSA sovereignty. These criticisms are often made specifically in the context of AGOA's eligibility criteria and in its relation to the growing influence of China on the continent.
In order to be considered for AGOA eligibility, countries must be, "making continual progress toward establishing the following: market-based economies; the rule of law and political pluralism; elimination of barriers to U.S. trade and investment; protection of intellectual property; efforts to combat corruption; policies to reduce poverty, increasing availability of health care and educational opportunities; protection of human rights and worker rights; and elimination of certain child labour practices" (EAC, 2014). While many of these goals have sound justification from the theory of economic development, others such as the elimination of barriers to U.S. trade and investment and the protection of intellectual property have been lambasted for their neoliberal undertones (Thompson, 2004). In addition, §104 of AGOA authorizes the president of the United States as the sole authority to determine a country's eligibility, as well as the authority to terminate any country's eligibility at any time (U.S. Congress, 2000; Thompson, 2004; EAC, 2014). Over the course of the program, ten countries have lost AGOA eligibility, six of which have been reinstated (USITA, 2014).4 The large number of fluctuations as well as a lack of clearly defined eligibility criteria have drawn criticisms of the opaque and perhaps special-interest nature of designating eligibility for the program.
Of the six countries that have been reinstated, perhaps the academic investigation of Madagascar is the best illustration of the effects of AGOA suspension. Similarly to Kenya and Lesotho, Madagascar's qualification for the TCF promoted the rise of an EPZ apparel industry. Notably however, its apparel industry was primarily Mauritian-owned by firms that had relocated in the mid-1990s, Mauritius itself being a non-TCF AGOANeligible country (Sadrieh, 2012). Within the first few years of the program, Madagascar had risen to become the second-largest apparel exporter to the U.S. after Lesotho (ibid.). The country's fortune changed in 2009 when a military coup and subsequent failure to hold democratic elections cost Madagascar its AGOA eligibility (ibid.). Using a set of interviews conducted before and after the crisis, Quinnipiac professor Farid Sadrieh (2012) confirmed that Madagascar's suspension resulted in widespread closures of apparel factories, massive losses in apparel revenue, capital and FDI flight, and the loss of skilled workers to mainland TCF apparel-producing countries such as Tanzania. In many ways, the removal of AGOA benefits served only to exacerbate the global financial crisis of 2008 for Madagascar, as the loss of FDI and corresponding investor panic removed opportunities for much- needed infrastructural investment (ibid.). There is also evidence that the suspension exacerbated the political crisis. At the time of Sadrieh's report, democratic elections had not yet been held. As a result, we may conclude that the suspension of AGOA benefits served to worsen Madagascar's long-term ability to respond to its crisis.
The debate surrounding AGOA's neoliberal agenda becomes even more contentious when discussing the expanding role of China in SSA trade and investment. In the aftermath of the recent 2008 global financial crisis, China has surpassed the United States as SSA's second- largest trading partner, and as such it commands increasing influence on the continent (Mevel et al., 2013). China's success has resulted in part from contrasting its aid programs with AGOA. In particular, Chinese FDI and trade assistance have tended to include more sec- tors of SSA economies than apparel and petroleum (Davies, 2011). As crude petroleum has constituted the majority of AGOA exports over the lifetime of the program, China's FDI decisions raise strong objections to the United States claims of Chinese resource imperialism (ibid.). Chinese aid has also sought to distinguish itself through solidarity and a lack of conditionality in trade assistance, declaring, "Non-intervention is our brand, like intervention is the Americans brand" (ibid.). Such rhetoric has already enticed several African governments such as Angola, Chad, and Mozambique to reject IMF loans in favor of Chinese "soft loans" (ibid.). It is clear that as China's influence continues to expand in SSA, the geopolitics of AGOA will become more complex.
Remaining Barriers to Trade
The final set of AGOA criticisms concerns the barriers to trade that the program has not removed. Though AGOA added duty-free status for over 1,800 non-apparel product lines beyond the GSP, key African exports such as sugar, cotton, diamonds, fish, and textiles continue to face significant tariffs (Frazer & Van Biesebroeck, 2010; Mevel et al., 2013). Using a computable general equilibrium model, an independent report by the Brookings Institution (Mevel et al., 2013) found that if these key exports (which make up roughly 1% of the products listed in the U.S. Harmonized Tariff Schedule) were afforded full duty-free quota-free (DFQF) access, the resulting change in African export revenue would be nearly three times larger than if DFQF access was granted to the other 99% of products; a gain of $105 million rather than $33.3 million. Surprisingly, the same model also predicts that such an extension of full DFQF access would have negligible effects on U.S. producers (ibid.). Extending DFQF access would also promote diversification of SSA industry, reducing the over-dependence of SSA states on the apparel sector. As such, critics claim that AGOA could boost welfare even more by being more comprehensive in the number of product eligible for DFQF status.
In addition to removing tariffs on key exports, critics of AGOA's limitations argue that much work remains to be done to remove significant non-tariff barriers. One frequently cited example is AGOA's stringent Sanitary and Phytosanitary (SPS) standards. In order to qualify certain agricultural goods for export such as meat, milk, fresh produce, and cut flowers, African producers must take additional steps to ensure that variables such as fertilizer, water use, pesticides, and energy use conform to the evaluations of international inspectors (Thompson, 2004; EAC, 2014). The costs of making these adjustments are often large enough to prohibit the export of these goods, increasing the country's dependence on oil or apparel. Other examples of non-tariff barriers that have been mentioned in the literature include a lack of integration into international shipping and freight networks, a lack of complementary investments in critical infrastructure such as power networks, and a lack of trade facilitation and finance assistance (EAC, 2014; Brenton & Hoppe, 2006). To remove these barriers, complementary investments in trade facilitation will be necessary.
The African Growth and Opportunity Act was created in order to encourage trade between the United States and Sub-Saharan Africa, and in this respect there is no question that it has been successful. Nonetheless, fifteen years after the program's inception, it has also become clear that revisions must be made. In its current form, AGOA's rules of origin have contributed to a non-diversified and fragile system in which oil and apparel are exported in a nearly neo-colonial arrangement. In apparel, foreign-owned multinationals make use of the TCF, cheap labor, and their own global supply chains to assemble their own products in EPZs for duty-free access to the United States. In the political arena, the process of determining eligibility is lambasted as neoliberal and opaque. Finally, several SSA countries have complained that AGOA has not done enough in expanding access for key products, and that alternative barriers to trade continue to remain high.
During the AGOA forum of the August, 2014 U.S.-Africa Leaders Summit, delegates from AGOANeligible countries advocated for a 15-year extension of AGOA and the TCF, as well as increased trade financing and assistance (AGOA Communiqué 2014). Trade assistance, otherwise known as aid for trade in the literature refers to assistance provided by a country to its trading partners in order to facilitate trade (Brenton & Hoppe, 2006). It is the official policy recommendation of this report to incorporate trade assistance into any proposed revisions of AGOA, as each of the issues described above may be ameliorated through it. For example, in the context of AGOA's rules of origin, World Bank economists Brenton and Hoppe (2006) suggest an aid for trade strategy of, "an across the board (including apparel) requirement that 10 percent of the value of the product be added in the beneficiary, supported by the option of being able to satisfy a change of tariff sub-heading requirement". This amendment would increase the profitability of producing a more diverse set of products in a larger range of countries than the current 35% rule, thereby reducing the current over-reliance on the TCF and apparel EPZs. Aid for trade strategies could also be implemented to expand full DFQF status to all African exports, as the Brookings Institute (2013) has demonstrated that such an action would have negligible effects on U.S. producers but generate $105 million in export revenues for Africa. Finally, pursuing a strategy of aid for trade could engender perceptions of solidarity and reciprocality in U.S.- SSA trade, thereby strengthening the United States political image on the international stage. In summary, as AGOA's deadline draws closer, amendments incorporating aid for trade present perhaps the strongest ability to resolve the current flaws in the program.
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