The African Growth Opportunity Act: Re-thinking the developmental role of Africa’s trade partners

October 14, 2013 12:39 pm2 comments by:

On the 18th of May 2000 President Bill Clinton signed the African Growth and Opportunity Act (AGOA) into law. AGOA caused a paradigm shift; it introduced a radical change into Africa-U.S. trade relations, which had been defined by Cold War-era policies, donor-recipient relations and aid (for poverty alleviation). Since 2001 AGOA has been the cornerstone of Africa-U.S. trade relations.

AGOA whirled Africa-U.S. trade relations from a paternalistic “assistance aid” approach to a more strategic partnership for development through trade. This transformative approach has positive-some gain for both the partners in that it promotes development and economic opportunity for both Sub-Saharan Africa and the United States.

AGOA has three primary goals: (1) promoting development through free trade and market-based economic policies; (2) promoting democratic governance; (3) creating employment and alleviating poverty.

In terms of AGOA regulations, the President designates Sub-Saharan African countries as beneficiaries. To be designated, countries must satisfy three requirements:

(1)  the country must have established or currently be in the process of establishing a market-based economy, the rule of law, elimination of trade barriers, economic policies to reduce poverty, systems to combat corruption and protecting worker’s rights;

(2)  the country must not engage in activities that undermine U.S. national security; and

(3)  the country must not engage in gross violation of human rights or support terrorism.

30 Sub-Saharan African countries were designed as beneficiaries in 2000; the number shot up to 40 beneficiaries in 2012. Beneficiaries undergo a yearly review to determine their compliance with AGOA conditions.

Once designated, beneficiaries are entitled to duty-free treatment of certain products under AGOA and under the U.S. Generalised System of Preferences (GSP). Beneficiation under AGOA and the GSP means that 6 400 products enter the U.S. duty-free and quota-free. Moreover, AGOA beneficiaries are exempt from certain GSP limits through a waiver of “competitive need limitations”. Regarding apparel exports, the “third country fabric rule of origin” allows least-developed countries to use yarn and fabric from any country in manufacturing exports to the United States. This rule accounts for 90% of African fabric exports.

The benefits of AGOA are skewed somewhat in favour of Africa. Since AGOA took effect, African exports under AGOA have increased by 500%, from $8.5 billion in 2001 to $53.8 billion in 2011. Although energy products constitute 90% of the exports, non-energy products have also increased significantly. Non-energy exports have grown by more than 275% from $1.2 billion in 2001 to $4.8 billion in 2013. The number of countries exporting non-energy products also increased from 13 in 2001 to 22 in 2007.

According to the Brookings Report, the per capita growth rate in Africa has increased from -1.1% to 2.9% in 2001. The region’s overage growth rate was 5% in 2008 and 5.5% in 2012. 6 of the top 10 fastest growing economies are in Africa. AGOA has generated 350 000 direct jobs and 1 million indirect jobs.

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SOURCE: IMF

 Extending AGOA beyond 2015

As AGOA nears its 2015 expiry date, there has been a scramble by interested parties to get an assurance from U.S. Congress that AGOA will be enhanced and extended from 2015 to 2025.

AGOA has been extended and enhanced 4 times in the past. Amendments were affected through the US Trade Act in 2002; its lifespan was extended from 2008 to 2015 by the AGOA Acceleration in 2004; it was amended again by the Miscellaneous Trade and Technical Corrections Act of 2004 and lastly, through the Africa Investment Incentive Act of 2006.

While none of the parties doubt the benefits of extending AGOA beyond 2015, questions that arise relate to maximization of benefits for both Africa and the United States. Although AGOA took Africa-U.S. trade relations to new heights, there are areas of concern.

The Deputy Chairperson of the African Union Commission, Mr Erastus Mwencha, pointed to some of these challenges in his opening address during the 12th African Growth and Opportunity Act Ministerial Forum in Addis Ababa, Ethiopia. He noted that the U.S. currently holds a meager 1% share of total foreign direct investment in Africa. Congress has attempted to increase foreign direct investment, for example, through the Africa Investment Incentive Act of 2006.

The U.S. Trade Representative, Mr Michael Froman, also addressed the Ministerial Forum. He spoke of “AGOA 2.0”, which will take a more innovative approach, taking into account the counterfactual of emerging competitive economies such India, China and Brazil.

In my view, the focus should be on the African legal and regulatory environments. The enhanced and extended AGOA should focus on transparency systems and good governance. AGOA must complement the African Union Commission’s Strategic Plan 2014-2017, although it will expire much early, it must also complement the AU’s Agenda 2063. Corruption and opaque governance systems constitute immense risks for investors. These risks must become the new focus of trade policy.

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