The recent extension of the African Growth and Opportunity Act by the US Congress for a further ten years until 2025 is good news to several African countries. The 15-year law that was set to expire in September this year allows duty free access of some 6,000 products into the massive American market. Last week, the new bill that was passed following what was described as long and passionate debate by the US Congress received the signature of President Obama making it law.
With the upcoming Global Entrepreneurship Summit later this month that is co-hosted by Kenya and the US and President Obama’s visit to Kenya, the passing of the law is timely.
AGOA is a non- reciprocal and unilateral trade agreement, giving preferential access to exports to the US without request for trade concessions for imports. The one-way design is to give African countries a head start in competing for US market access with other countries, especially with competitors from Asia where the cost of doing business is lower particularly with the cheaper cost of labour and electricity. It offers a rare opportunity to achieve a competitive edge to the eligible countries to enable them can stand firmly on their two feet, before facing global competition.
The call for an extension was mainly informed by the argument that while it was meant to be a transformative law, its impact has been limited, especially on least developed countries that needed it most. While most details of the new law are yet to be public, concern has been expressed that only a handful of countries have benefited from the law in the last 15 years it has been in place. In fact out of the 39 countries eligible, only seven have realised a meaningful impact. Amendments were therefore expected to focus on the barriers that face majority of the eligible countries including allowing more products. So far, oil, artefacts and apparels are the three dominant sectors that have benefited under the law, with the exemption of South Africa which exports a range of products under AGOA including poultry and cars.
Besides, it is estimated that 80 per cent of the exports from Africa are from just three countries- Nigeria (47 per cent), Angola (19 per cent) and South Africa (13 per cent) with the first two comprising mainly oil exports. Other countries that have registered tangible benefits from AGOA include Kenya, Lesotho, Mauritius and Swaziland, mostly making use of the apparel benefits which may not quite qualify as transformative.
Take for instance Kenya. Even though its apparel export is one of the few success stories under AGOA, this has failed to stimulate the revival of cotton farming. AGOA has fostered almost no fabric production, with sales still consisting of fabric produced outside, generally in Asia and China. As a labour intensive manufacturing sector, clothing has historically served as a “starter industry” for many developing nations seeking both higher growth and higher incomes. Once quality and competitiveness was built around garment manufacturing, the sector would then graduate to a higher level of industrialisation, including fabric and other input production. As someone has clearly put it, we have remained stuck in knitting and sewing, which adds relatively little value to the economy beyond creating some jobs for low-skilled labour. Although we still need those low-skill jobs, it is not good enough and there is potential for more.
Overall, a significant about 68 per cent of the export is energy-related, which would likely occur regardless of AGOA.
And of the remaining 33 per cent, South Africa accounts for 20 per cent.
This leaves us with 13 per cent non-energy related export that is shared among the more than 30 remaining countries. This shows there is a lot of room for more and better utilisation of the facility by most eligible countries. The extension is therefore a second chance to make the AGOA work for many of those other countries. Infact, with the increased production of shale oil in the US, even the oil export has been on the decline thereby affecting the overall exports under AGOA.
The inclusion of more agricultural products, for instance, is one of the proposed amendments geared at stimulating increased utilisation of the facility.
Despite its limitations, AGOA has contributed positively to employment and economic development in Africa in the last decade.
The apparel sector, has particularly for non-oil producing countries created a significant number of low skill jobs. Its highest value though, is more in its potential than in its impact so far. However, the potential to use the apparel sector as a launching pad for more advanced manufacturing industries remains largely underutilised.
For the US, AGOA is the focal point for its relations with Africa, both as an investment destination and consumer market. More importantly, the eligibility criteria, and the latitude to revise it on an annual basis gives the US significant influence over both the political and economic structure of the beneficiary countries.
The ten year extension of AGOA is sufficiently long to allow long term capital investment. It provides a second chance for many beneficiaries to put their act together and build competitiveness of their products. A review of success cases such as South Africa could provide valuable lessons for potential AGOA reforms that could spur similar success in other countries.
More significantly is the need for drastic revision of country strategies to drive AGOA beyond the hype to achievement of more tangible results going forward. There is need for strategies that focus on how to advance beyond the apparel sector to more value-added production that can compete beyond the AGOA time-frame. There is also need to identify other qualifying products that can successfully be targeted to diversify the exports. Utilisation of AGOA will also benefit from improvement in ease of doing business such as improved infrastructure, adequate access to affordable electricity and focused supportive policies.
Pete Rose, a renowned former Major League Baseball player and manager, quote “If somebody is gracious enough to give me a second chance, I won’t need a third” is appropriate in regard to extension of AGOA.
Karen Kandie is a financial and risk consultant with First Trident Capital and a PhD candidate in finance at Catholic University of Eastern Africa.