There have been calls from US policy makers to investigate the effectiveness of the Africa trade programme

There have been calls from US policy makers to investigate the effectiveness of the Africa trade programme

With expiration of the AGOA trade preference programme looming in little over a year, a new US Government report finds it has had minimal impact - except in apparel and footwear.

Hopes are high that the African Growth and Opportunity Act (AGOA) will be renewed before its expiry on 30 September 2015. Indeed, US Trade Representative Michael Froman said as much last year, when he told an industry event that President Barack Obama, is "committed to a seamless renewal of AGOA".

But there have also been calls from US policy makers to investigate the effectiveness of the trade programme, which provides duty-free access to the United States for products from sub-Saharan Africa.

And this is where the new report released by the US International Trade Commission (ITC) comes in to play.

The report, which covers the period from 2000 to 2013, takes a look at AGOA's trade performance, its utilisation, and competitiveness factors; AGOA's effects on the business and investment climate in sub-Saharan Africa; and the relationship of these agreements to the objectives of AGOA.

US imports
Total US imports from AGOA beneficiary countries grew at an average annual rate of 6.7% during the 13-year period, rising from US$16.5bn in 2000 to $38.2bn in 2013.

Growth was most pronounced in the first eight years, when the value of these imports increased almost fivefold, reaching a record of close to $80bn in 2008. Since then, however, US imports from AGOA countries have fluctuated sharply.

The increase in imports was primarily from three categories - apparel, cars, and refined petroleum products, which accounted for around 70% of all imports from AGOA countries during 2008-13. Apparel was noted as one of the categories having experienced particularly strong export growth in the whole 13-year period.

Lesotho, Kenya, and Mauritius were the largest suppliers, accounting for 90% of imports in 2013. Lesotho exported over $321m in apparel products last year, Kenya $305m and Mauritius $187m.

The report also found that AGOA has had a positive impact on foreign direct investment (FDI) inflows, particularly in the textile and apparel sector in Kenya, Lesotho, Mauritius, Swaziland, and Botswana. Overall, the programme's trade benefits and eligibility criteria appear to have motivated AGOA beneficiary countries to improve their business and investment climates.

Why has apparel benefited?
The report's authors estimate that AGOA has raised beneficiary country exports of apparel to the US by a substantial 42%. They also concluded that the programme was responsible for 35% of the total growth in apparel exports.

But while some suggest apparel exports have been stimulated by AGOA's duty-free access, others believe the gains are primarily the result of AGOA's less restrictive rules of origin under its third-country fabric provision. They found that simplified rules of origin (single transformation) led to a substantial 168% increase in apparel exports by the seven largest AGOA apparel exporters, while tariff removal alone caused only a 44% increase in exports

Simple data analysis suggests all growth in apparel exports under AGOA must have been due to the third-country fabric provision. Indeed, apparel exports from countries under the provision more than doubled from 2001 to 2005, while exports from countries not eligible for the provision actually declined over the same period.

Besides increasing the volume of trade between beneficiary countries and the US, an additional goal of the AGOA programme was to help diversify exports from the region.

The thinking was that poorer countries would be less susceptible to external economic shocks by reducing their dependence on a limited number of products. It now appears that the effects of trade diversification not only vary by product, but also that the probability of exporting a new product increased over time. For apparel products, this probability rose from 1.8% in 2002 to 3% in 2006.

While the report focuses on the effectiveness of AGOA, the authors also offer a number of recommendations to policymakers on how the programme could be improved, largely based on results of empirical investigations.

Three major recommendations were made: improving supply capacity, including seeking out foreign direct investment and capacity-building assistance; making AGOA permanent and binding; and improving the business climate of beneficiary countries. This could include improved rule of law and protection of intellectual property rights.

The report also suggests expanding the list of eligible products, ending country eligibility requirements to aid beneficiary countries in formulating long-term export strategies, and increasing trade assistance to improve both institutional and trade capacity.

Other recommendations include ensuring all countries are made eligible for clothing preferences with liberal rules of origin, and making all products duty-free/quota-free.

Indeed, the authors strongly emphasised that rules of origin are preventing less developed countries from becoming integrated into global production networks. They noted that some sources estimate benefits accrued by African countries under AGOA would have been five times higher if rules of origin were less stringent.

In conclusion, ending AGOA would result in export losses and reduced employment in beneficiary countries.

Aside from recommendations directed at the US, the authors also stressed the importance of various reforms by the beneficiary countries themselves, including reducing tariffs on imports of intermediate goods in order to better take advantage of preferences granted by AGOA, and pursuing greater economic integration on the African continent in order to increase the region's competitiveness.

The latter would need significant investments in trade facilitation to be successful, and the US should consider including trade facilitation and trade assistance in any new incarnations of the programme.