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September 22, 2018

An Extension Of AGOA Is Critical For Kenya

TRADE TALKS: Cabinet Secretaries Phyllis Kandie (R), Amina Mohammed and Adan Mohammed (standing) at an AGOA meeting ahead of the US-Africa leaders summit in Washington DC on August 4 last year. PHOTO/FILE
TRADE TALKS: Cabinet Secretaries Phyllis Kandie (R), Amina Mohammed and Adan Mohammed (standing) at an AGOA meeting ahead of the US-Africa leaders summit in Washington DC on August 4 last year. PHOTO/FILE

As the expiry date for the African Growth and Opportunities Act approaches, there is consensus from many experts that more could be done to exploit the full potential of this window of opportunity.

The trade deal provided an opportunity for sub-Saharan African countries to export specific products to the US duty-free for a period of 15 years from 2001. The benefits that have accrued to the participating countries are undeniable. Export figures have grown in many of the countries, including Kenya and jobs have been created.

However, the AGOA was expected to not only grow exports, but to transform the sub-Saharan economies. To this end, AGOA has not yet achieved this objective, building a case to give it a longer time with an extension.

An extension of another 15 years is under discussion, but equally important is how to ensure that this time round we are able to capitalise more on the opportunity.

The essence of AGOA was to give less developed countries an opportunity to access the US market competitively. It recognised that the nascent industries did not have the efficiency that is required to compete in the highly competitive global market.

Competition is usually hedged on the price and quality of products. In a quality conscious export market like the US, to achieve the required quality requires spending more money on production.

Without efficiency, this results in costly goods. Costly goods would then face competition from the more efficient producers who have perfected their production to achieve high quality goods at lower costs. Without the AGOA, the less efficient exporters would be forced out of the market by the efficient producers.

The purpose of the act was therefore to give the less efficient firms from sub-Saharan Africa a head start in the market. More importantly though, was the expectation that within this period, sub-Saharan countries would accumulate enough knowledge and experience to build up efficiency that can compete in both quality and price in a free market. It other words, AGOA was never meant to last for ever, but it was hoped that it would give sub-Saharan Africa time to stand on its feet.

It is an arrangement that is no different from bringing up a child. The child is nurtured from an infant with care and attention. Gradually they gain the ability to walk and talk and enough independence to go to school.With time they reach teenage and start charting their own destiny independent of their parents and eventually they become young adults.

At this stage, they make decisions independent from the parents, and are expected to live on their own and take up adult responsibilities.

In fact, having a young adult that is living with their parents by age thirty-five attracts society concern. It also creates lots of discomfort for the adult who has to contend with names such as “mummy’s boy” and a girl is reminded that her biological clock is ticking. The parents also get concerned and wonder what went wrong and how they could rectify the situation.

Deeply caring parents will then go out of their way to give assistance to their young adult, this time with the main focus being intervention to create independence.

Such parents recognise that they too share the responsibility to get their adult sons and daughters on their two feet and their joy would not be complete if this were not accomplished.

Many sub-Saharan economies have found themselves in the same position as the young adult who has come of age but who is not yet independent of parental care which is an uncomfortable position.

It was expected the market exposure provided by AGOA would improve the competitiveness of the less developed economies and position them to compete in the fierce export market as equals. That now we are advocating for an extension, any such extension needs to be accompanied with key interventions that will build competitiveness and eventual integration into the global market.

Extension will only make sense if and only if it is seen as a pathway to global integration, rather than an opportunity to purely grow exports. The preferential treatment is not permanent and the purpose is to prepare for the time that it will not be available.

Both the US and the benefiting countries have a role to play to realise the full potential of the scheme. While the onus is mainly placed on the sub-Saharan countries to build their capacity to produce and supply products, and have faced accusation of lack of commitment to themselves, it is no walk in the park to access the US market.

It is now better appreciated that entering the US market is highly complex and the US has a responsibility, not just to extend AGOA, but also to shepherd the process in a more focused manner.

At least to an extent. A cited example is when last year a group of Ethiopian horticulture companies sent a consignment of roses to US for sale for Valentine’s Day.

The consignment is said to have been destroyed because there was no fumigation centre at the point of entry! Either the exporting companies, who are already conversant with exporting of roses to the European Union, did not know about the fumigation requirement or the US did not have the fumigation facilities as expected.

Essentially, non-tariff barriers may make it difficult for the full benefits of AGOA to be realised, and the onus is on the US to minimise, if not entirely eliminate them.

That said, most benefiting countries can hardly claim to have done their best to exploit the opportunities created by AGOA. First and foremost the business environment is a major obstacle, with most sub-Saharan countries ranking low in ease of doing business, with Kenya ranked position 135 out of 189 economies according to the World Bank Doing Business 2015 report. Cost of credit and poor infrastructure continue to be major barriers to efficient production.

The planned launch of direct flights from Nairobi to the US will open opportunities under AGOA to be exploited further. Horticulture and flower exports, in particular will have a direct route to the US. With Kenya already an established exporter of horticulture and flowers to the European Union, we hope the availability of direct flights, will open the US market for this sector.

As we wait for the extension of AGOA, improving the local business environment and working with local producers to navigate the complexity of the US market will require re-prioritising and re-strategising for many countries including Kenya.

The US also has a role to play; to address non-tariff barriers, provide technical guidelines on US import requirements and extend the AGOA for a sufficiently long period of time so that the transformation agenda is achieved.

Karen Kandie is a financial & risk consultant with First Trident Capital and a PhD candidate in finance at Catholic University of Eastern Africa. [email protected]

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