The 2019 Annual Meetings of the African Development Bank Group will be held from 11-14 June 2019, in Malabo, Republic of Equatorial Guinea. Find out more
by Christopher Wood
Ten years is a very short time in the global economy, and by all accounts a decade is all that is left of the African Growth and Opportunity Act (AGOA). While the United States’ unilateral preferential access programme for Africa has been reauthorized three times since it began in 2000, it looks very unlikely to be extended beyond 2025.
An increasingly desirable African domestic market seems likely to inspire calls for reciprocal trade deals akin to the European Union’s Economic Partnership Agreements (EPA); while an increasingly protectionist American political space may see eroding access to the US market. What those deals will look like, and if they could be agreed upon before AGOA expires, remains uncertain, but they are likely to represent significant shifts in the US-Africa trade architecture in 25 years.
For policymakers, this poses a difficult question: is it really worth spending scarce resources on helping firms to take advantage of AGOA, when the deal will end in 10 years? Those 10 years certainly hold immense opportunity, with the US being the world’s single largest consumer market, and seemingly leading the way in a global recovery that remains weak in Europe and is hurting emerging economies. But the development of new export opportunities through policy takes a long time. If we consider the time it takes to make, implement, and see the impact of export-promotion policy, the trade it creates will only be discernable after ten years. If that trade is dependent on AGOA, then it risks having consumed policy focus for short-lived success.
And yet policy is certainly needed. While AGOA has lowered formal trade barriers between Africa and the US, non-tariff barriers and basic structural limitations in domestic economies have prevented countries from truly taking advantage of the trade potential on offer. While Africa - US trade has grown during the period of the deal, the growth has overwhelmingly been in commodities (particularly oil) that do not face serious trade barriers in the first place. And with the end of the commodity boom, even that limited success is in doubt, with oil exports in 2015 being only a tenth of what they were in 2008.
Countries with more diversified economies, notably South Africa, have succeeded in exporting value added goods (particularly automobiles), and some small economies have had limited successes in exports of textiles or select agricultural goods. Overwhelmingly, however, AGOA has a lot of potential without offering real transformation (so far).
A number of creative ideas seem to offer solutions to the puzzle of how to improve AGOA utilization, with many of these revolving around value chains. Instead of building export industries from scratch, smaller African countries could focus on trying to supply components to more diversified African economies. These have existing export
s capacities to the US, using the new AGOA’s more accommodating approach to cumulation of origin. Similarly, all African countries could target entry to strategic European value chains, allowing an alternative low-tariff route to the US, via Africa’s EPAs and Europe’s developing trade preferences under the Transatlantic Trade and Investment Partnership (if the deal is agreed).
These strategies are vital and should be guiding considerations on how to approach AGOA, but they are not policies, and they are not likely to take root in 10 years. What most states need now are targeted interventions that achieve two things; first, quickly boosting AGOA utilization; and second, remaining relevant and beneficial even if AGOA goes away.
Three immediate interventions could prove useful:
1. Rolling out funding support for firms seeking standards certification for export to the US market: Exporting higher value added products often requires meeting rigorous quality and product standards, and this is particularly true for a US market that maintains demanding technical regulations and sanitary and phytosanitary standards. Inability to meet these requirements can preclude firms from utilizing AGOA, while also locking them out of value chains that supply the US market. Many firms, however, have neither the capacity to meet standards, nor the knowledge of those standards and their certification processes - and require support to achieve compliance. Governments can help either through a targeted support programme for certifications that currently create problems for their exports or they can offer all-purpose quality certifications like ISO-9000.
ISO-9000 certifications offer a triple-benefit of being recognized worldwide, establishing quality controls that help firms manage their production while also familiarizing them with the process of certification. This makes it easier for the firms to meet any product-specific requirements they may face. ISO-9000 promotion was a key strategy utilized by China to overcome perceptions of low quality goods, and could build a base of trust that facilitates easier entry into the US market for potential AGOA exporters.
2. Investing in the middleman: Export support tends to be concentrated on producer firms, helping them to upgrade or improve their trade capacity. Mostly, however, small or new firms do not sell directly to foreign markets, but rather work through some intermediary, either a marketing agency in the case of agriculture or a distributor in the case of manufacturing. Specialist trading firms played a vitally important role in growing exports in Asia. As Ahn, et al note, “In the early 1980s, 300 trading (non-manufacturing) Japanese firms accounted for 80 percent of Japanese trade, and the ten largest of these firms accounted for 30 percent of Japan’s GNP”. Yet, these intermediaries often do not receive the type of trade-promoting support given to producers.
Governments can invest in these intermediaries in simple ways. First, by establishing a forum through which to engage with these bodies and understand their needs: While some countries might already do so, others tend to concentrate export promotion activities on manufacturers, often neglecting the intermediaries who do the trading on their behalf. Second, by helping create forward and backward linkages, linking local producers to their local distributors, and local distributors to foreign (in this case American) purchasers, whether through trade shows or sponsored visits. Third, through offering subsidized insurance and guarantees to trading intermediaries, to alleviate the risk they incur being the middleman. Fourth, by establishing such, especially where marketing agencies or trading firms do not exist: Small firms do not have the capacity to do business globally, but they can do business locally with an agent that can help them achieve global reach, while governments create the enabling environment to facilitate the realization of this important objective.
3. Establishing local networks to facilitate freight cost sharing: Trade is a scale business; a half-empty ship costs exporters much more than a full ship. A truck that is full one-way and empty on the return journey costs more than a full truck both ways. With weak trade among many African countries, the cost of shipping small consignments of manufactured goods goes up, as ships have to operate at reduced capacity or exporters have to bear the cost of getting their goods to a busy port. Even when working efficiently, transport costs can often be prohibitive for new firms. Building local cooperation on shipping logistics (in which firms share containers or larger consignments) can help to reduce costs and spread the risk of major shipments. Freight sharing can be facilitated either by creating a common central platform where firms can post their shipping plans and find partners with matching needs, or by more aggressive approaches, such as developing warehousing capacity for AGOA-utilizing firms, where the warehouse can centralize freight plans.
The failure of African trade relations to diversify beyond commodities during the period of AGOA demonstrates that the problems African exporters face go well beyond tariffs. Governments need to help, but their interventions must fulfill two criteria. Firstly, they must be quick to roll out and quick to make an impact. Secondly, they must continue to make a contribution even after AGOA ends.
The worst thing that can happen now is to launch into an endless process of crafting AGOA strategies, which, when finally rolled out, will have a shelf life of only a couple of years before expiry of AGOA. Focusing on developing core trade capacity – like standards, export costs, and establishing strong intermediaries – will boost AGOA implementation and remain relevant in whatever new regime replaces it.
Christopher Wood is an economist focusing on trade and industry policy. He previously worked as a researcher in economic diplomacy at the South African Institute of International Affairs, and has consulted with Oxford Analytica, Executive Research Associates, the Swiss South Africa Joint Research Programme, and a leading South African trade union. His research areas include trade and industrial policy, global economic governance, and financial regulatory reform. He holds a Masters in Development Studies from the University of Witwatersrand, and a Bachelor of Social Science in Economics and Political Science from the University of KwaZulu Natal.
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