The African Growth and Opportunity Act (#AGOA) is a trade agreement between the US and 39 sub-Saharan African nations. It was enacted in 2000 by the Bill Clinton administration. AGOA provides duty-free trade access to the US market for certain products by the eligible sub-Saharan African (SSA) countries.
It was renewed again in 2015 by then President Barack Obama and is set to expire in 2025, the longest in the program’s history. (Info).
What are the qualifications for AGOA preferences?
To qualify for the AGOA preferences, the African countries firstly need to meet the “wearing apparel provisions” by implementing a special apparel visa system. Secondly, they need to satisfy the specific Rule of Origin (RoO) requirements of the Act (‘Wearing Apparel’ Rules Of Origin).
To enjoy a duty-free treatment in the US apparel market, the T&A products made in the beneficiary countries need to belong to one of the following categories:
• Apparel products made using yarns and fabrics sourced from the US
• Apparel products made using SSA regional yarns and fabrics, subject to a cap
• Apparel products made using yarns and fabrics not produced in commercial quantities in the US
• Certain cashmere and merino wool sweater products
• Certain hand-loom, handmade, or folklore articles
• Certain ethnic printed fabrics
AGOA countries with the LDBC status (Lesser-Developed Countries) further enjoy a duty-free access to US market for apparel products made from raw-material sourced from any other countries like China, South Korea or Taiwan, subject to a cap. Since most SSA countries still don’t have the capacity, capital and technology to produce textile products, this special rule, known as the “third-country fabric” provision, is very helpful, as it increases their apparel exports, encourages foreign investment and enhances trade diversification for the qualifying SSA countries.
With the intent of promoting market-led economic growth in SSA, AGOA deepens the trade and investment relations between US and SSA countries.
The leading exporters utilizing AGOA trade preferences in apparel exports include Lesotho, Kenya, and Mauritius.
What are the benefits of this act to SSA Countries:
Apparel production plays a dominant role in the economic development of many SSA countries highlighted above. Hence, AGOA has made apparel products as one of the top exports for these countries.
A provision under AGOA allows US apparel imports from some of these countries to qualify for duty-free treatment, even when the raw materials (yarns and fabrics) are sourced from non-AGOA countries like China, Taiwan, and South Korea. Since SSA countries still have limited capacity and technology for textile production, the AGOA Act enables the African apparel industry to sustain itself.
The impact that AGOA has on the economies of the beneficiary countries is considerable. AGOA is the sole reason that has enabled the SSA countries to compete in the global apparel industry and sustain, even when competitors like India and China have better technology and capital.
The following graph highlights how the AGOA apparel exports have grown consistently.
AGOA inception happened only in the late 2000 and early 2001. The above graph reveals how the AGOA exports under apparel sector peaked in 2004. This upwards trajectory can be accounted to two reasons: firstly, the relative advantage that African manufacturers had over their Asian competitors who face trade quotas under the WTO regulations, which then expired by the end of 2004. Secondly, some of the AGOA exporters gained a competitive advantage as their local currency movements made their local products cheaper.
The dip in 2009-10 can be accounted to the global financial crisis that put pressure on the US imports.
The growth in the economies of these apparel exporting countries has also led to job creation in those countries, which have further contributed towards their local economic and social development. For instance, Lesotho, an AGOA beneficiary, which is one of the main apparel exporters under the act, has seen a steep rise in available jobs: from 19,000 jobs in 1999 to 45,700 jobs in 2011.
Are there any drawbacks of this act?
AGOA has no doubt helped SSA countries build their export competitiveness along with diversifying their economic structure in the past decade. But, a CRS* report highlights that the AGOA apparel production has only concentrated on the lowest skill tasks. Thus, the knowledge transfer to the local workforce has been limited, which, along with the limited capital and technology constraints cannot help the SSA countries maintain global competitiveness if this preferential treatment is not provided. Hence, till AGOA is offering them preferential treatment, the SSA countries’ exports are thriving, but they need to build on their strengths to survive without AGOA.
African Countries as the next textile and apparel hub:
AGOA received a new authorization in 2015, which is going to last till 2025 including the special third-country fabric provision. This renewal will encourage more long-term investment in the beneficiary countries. This will help the SSA apparel manufacturers to develop the flexibility to source their raw material from the most cost and quality effective suppliers globally. AGOA attracted investments will also help in the development of a textile industry in the region as US apparel market is an enormous opportunity and this will incentivise the foreign investors to establish textile mills in Africa near the buyers. This trend has already started in Kenya, Ethiopia, and many other SSA countries. Hence, eventually by 2025, the African countries can very well become the next textile and apparel hub in the global apparel industry picture.
Why is Trump’s administration repealing AGOA?
With Donald Trump’s inauguration as the 45th president of the US, fundamental questions are being raised regarding the US-African relationship under AGOA.
While Trump has spoken openly about his resistance to TPP, there is not much clarity on the status of AGOA. Trump is in favor of bilateral trade agreement which benefits US employment status. Due to this, AGOA might come under close examination as the agreement promotes African imports to the US without simultaneously promoting US exports to Africa.
“Repealing the Act would wipe out the EPZ* sub-sector that employs about 40,000 Kenyans, and greatly reduce trade as textile and apparel products account for about 80 percent of Kenya’s total exports to the US.
The 2015 Economic Survey shows that Kenya’s textile export to the US was worth $283.3 million in 2014. Rwanda earned $187,000 in 2014 and $435,000 in 2015, mainly from apparel and macadamia exports to the US market.” (The East African)
Despite all the speculations, it is unlikely that the AGOA will be withdrawn as it will provide very little direct benefit to the US. Also, in an event of discontinuation, it is a possibility that the intra-Africa trade could incentivize to make up for the lower trade with the US.
Now, we have evaluated all the possible benefits and limitations that AGOA brings upon the beneficiary countries. What in your view is the possibility of “Made in Africa” apparel to be competing in the global marketplace, when the raw material sourcing is still overly dependent on other countries? And is AGOA enough of a driver for investors to develop the region as the textile hub?
CRS (Congressional Research Service Reports): encyclopedic, public domain research reports written to clearly define issues in a legislative context.
EPZ: Export Processing Zone is a free trade zone for developing the country to promote exports. Incentives are offered to do the same as well. AKA development economic zone or special economic zone.