Strategies to Enhance Gains of AGOA
Nov 11th 2013
By Mwangi S. Kimenyi and Zenia A. Lewis
The African Growth and Opportunity Act (AGOA) is the primary legislation that defines the U.S.-Africa commercial relationship. The benefits provided by AGOA have allowed for an average of around 70 per cent of all imports from Sub-Saharan Africa to enter the U.S. duty-free since the enactment of the legislation. While AGOA has been successful in providing duty-free access, it still leaves a great deal to be desired regarding the promotion of sustainable economic gains for the continent. Understanding where AGOA has been successful and considering how to enhance its impact is important, especially at this time when its renewal is being debated and requires decisive action over the next 12-18 months.
Examining the gains
AGOA has accomplished a great deal in terms of increased access to the U.S. market. However, this access has largely benefited African exporters of petroleum products to the U.S., which have made up around 90 per cent of AGOA imports over the last decade. Nevertheless, non-oil imports under AGOA tripled from about $1.2 billion in 2001 to $4.5 billion in 2011, peaking in 2008 at $4.7 billion. Within the non-oil sector, textiles and vehicles have benefited the most, with the latter coming mostly from South Africa. It is within this non-oil sector, however, where AGOA has led to substantial gains in job creation and economic opportunity, so it is important to examine this sector when considering the real economic impact of AGOA.
While AGOA has not been a panacea when it comes to spurring the diversification of African economies across all regions, it has helped incentivize growth in some non-traditional sectors and within several regions and countries. As demonstrated in the 2013 Brookings-United Nations Economic Commission for Africa (UNECA) AGOA report, if the legislation was not extended for 10 years beyond 2015, there would be declines in Africa’s exports of textiles, meat products, leather products, manufactured products and vegetable products. AGOA has provided significant benefits to those regions and countries that have been able to utilize the legislation’s trade preferences. Based on the report, southern Africa, East Africa and Mauritius would potentially stand to gain the most if AGOA were to continue for another 10 years as is, with several other regions seeing slightly lesser gains.
Employment has also increased in the same regions that have seen export growth – AGOA is credited with having created around 300,000 jobs predominantly in the apparel sector stemming from the duty-free export advantages that it provides. Many of these jobs provide employment for women, which has proven to be a key economic benefit of the legislation. Were AGOA to expire, we forecast that wages would decline in skilled and unskilled non-agricultural sectors in the countries of the Southern African Customs Union (although not as dramatically in South Africa and even less so in Botswana). Malawi, Mauritius and, to some degree, Nigeria would also see decreases in wages in these sectors.
As an example of how impactful AGOA has been for job creation and increases in non-traditional export sectors, the Africa Growth Initiative at Brookings recently met with a representative from a textile company operating a factory in Lesotho that has grown immensely since the enactment of the legislation. The company has expanded its capacity fivefold since it opened in 1992, thanks to the duty-free access to the U.S. market provided by AGOA and to additional incentives offered by the government of Lesotho, especially since the enactment of the legislation in 2000. Interestingly, this one factory alone is cited as making up 20 per cent of all formal sector private employment in the country, which means that AGOA’s impact on Lesotho has been considerable. Stories like this are indicative of the valuable benefits that AGOA can provide, outside of the extractive sector, which positively impact local communities if the trade preference is utilized by investors and promoted by the government.
Recommendations on Enhancing the Economic Impact of AGOA
AGOA has the potential to be impactful legislation for spurring economic growth and development if exploited effectively. While it ultimately rests in the hands of the U.S. Congress to extend AGOA – and lobbying Congress to do so while presenting a strong argument for the mutual benefits of the legislation is important – there are many ways that African countries can also work to better exploit and enhance their benefits from AGOA. Identifying how AGOA is useful to both Africa and the U.S. will be important to qualify now for the argument in favour of extension. Beyond this, two of the most critical options geared towards African countries for enhancing AGOA after its renewal involve fully utilizing the legislation explicitly through developing country-specific AGOA strategies; and working to enhance regional integration on the continent, which will provide benefits well beyond AGOA exports. The U.S. could also be supportive by continuing to expand upon its new Africa strategy and ensuring that the different AGOA-related actors in the government are working together to achieve this.
- Importance of Country Specific AGOA Strategies
AGOA strategies should focus on providing information about the successes and achievements of different export sectors, strategies for addressing internal and external barriers, and specific information and contacts for existing AGOA-relevant organizations that exporters could use for support. It would also be useful to have market data and to identify sectors where each country has the potential to scale exports by looking at products that could be processed or manufactured with a competitive advantage based on interest, available commodities or skills that could be easily accessed or obtained. Similarly, identifying the barriers to expansion or investment in these potential growth sectors would be important to demonstrate (e.g., lack of financing or inability to find capital, the need for partners with experience and knowledge of production, etc.);
Ethiopia and Zambia have recently announced plans to pursue AGOA strategies; Ethiopia in particular has made a great deal of progress with its strategy thanks to efforts made by the Ethiopian Ministry of Trade and the African Trade Policy Center at the United Nations Economic Commission for Africa. As of right now, however, Kenya appears to be the only country with an AGOA strategy in place. Kenya’s Ministry of Trade pursued creation of the strategic document in collaboration with the East Africa Trade Hub. The strategy is useful, in that it identifies some of the major domestic and external barriers that Kenyan companies face in trying to export both domestically and externally in reaching the U.S. market.
Additionally, it pinpoints sectors that have benefited under AGOA; lists institutions and organizations that are available to help exporters; and identifies strategies for moving forward in the short, medium and long term to address barriers and increase utilization of AGOA. The Kenyan strategy comments specifically on the difficulty of fully attributing the success of export sectors (apart from the textile sector) to AGOA and not to other factors, which is both understandable and difficult to measure. The one limitation is that, while it indicates that market data is necessary to get more product-specific details and tailored recommendations for exporters, the strategic document does not actually provide such data. Regardless, it serves as a useful example for other countries to consider when developing their own strategies.
An additional idea that could prove very important for country-specific AGOA strategies (and which the Kenyan strategy begins to address) is the development of an actionable framework that identifies the necessary actors and steps for addressing barriers to utilization of the legislation. For example, if direct flights from Nairobi to the U.S. could be useful in ensuring more exports of fresh-cut flowers to the U.S. market, identifying the necessary stakeholders for this discussion could bring more specifics to the country strategies. In such a scenario, it would be useful for the strategic document to indicate whether the Ministry of Trade intends to foster these connections or if it assumes the private sector will use the information to lobby for its own interests. Furthermore, if certain incentives were needed to promote investment in new sectors, identifying how they could be created and providing for necessary next steps would be important.
- Scaling Regional Integration
In addition to country-specific AGOA strategies, African countries absolutely must work toward scaling efforts for increased regional integration. The AGOA report cited above examined the effects that different region-specific free-trade areas (FTAs), as well as a continental free-trade area (CFTA), could have on trade within the continent and with other trading partners. The gains are both unquestionable and immense. The report examines different scenarios, one in which regional FTAs (as dictated by the EU’s Economic Partnership Agreements) are implemented immediately following an extension of AGOA and another in which all African countries implement the CFTA in 2017. With just the FTAs, exports from Africa would increase by $6.9 billion in the year 2025 compared to the status quo. With a CFTA in place, exports would increase by $21.7 billion in 2025 – as compared to the status quo determined in the report, which would involve extending AGOA for 10 years. The gains for the continent from simply eliminating trade barriers are vast.
- A Comprehensive U.S. Approach to African Trade and Investment
Similarly, there are recommendations for the U.S. government to increase the effectiveness of AGOA. Until recently, the U.S. had not placed enough effort on commercially engaging the continent, but its recent Trade Africa and Power Africa initiatives are definitely an attempt to correct this oversight.
Expanding product coverage could also provide some additional export gains, but our recent report indicates that even if AGOA-eligible countries had 100 per cent duty-free quota-free access they would only stand to gain around $70 million in additional exports, whereas regional integration efforts would result in billions of dollars of increased trade. Apart from this, ensuring that the U.S. government moves toward a clearer way of managing its different actors working in Africa trade- and investment-related capacities will also be critical to ensuring AGOA’s future success. Navigating the passage of legislation through a divided Congress will be equally important, although it has the potential to be very difficult if the recent shutdown serves as any indicator.
While these recommendations only briefly examine ways in which African countries can work toward better utilization of AGOA, issues such as improving infrastructure, increasing capacity building to better meet international standards, addressing non-tariff barriers and improving business environments all remain important as well. Additional support to aid for trade focused on trade capacity-building and facilitating integration will be important for progress to be made. If the U.S. and African countries can scale up efforts to enhance the use of this potentially powerful legislation, there will be important economic gains for both regions.
Mwangi S. Kimenyi is Senior Fellow and Director of the Africa Growth Initiative at the Brookings Institution. He also currently serves as an advisory board member of the School of Economics, University of Nairobi, and he is a Research Associate with the Center for the Study of African Economies, University of Oxford, U.K. Prior to working with Brookings, he was a faculty member of the Department of Economics at the University of Mississippi and the University of Connecticut. He is also the Founding Executive Director of the Kenya Institute for Public Policy Research and Analysis (KIPPRA).
Zenia A. Lewis is a Research Analyst with the Africa Growth Initiative at the Brookings Institution. Her work has mainly focused on issues related to African trade, U.S.-Africa commercial relations, and revenue management for natural resources.
The Brookings Institution is a non-profit public policy organization based in Washington, DC. The Africa Growth Initiative at Brookings works to amplify the voice of African researchers through its research and analysis, which focuses on attaining sustainable economic development and prosperity in Africa.