High intentions of AGOA throw up unintended consequences 20 years after; quota, not a panacea, inferior to organically-intentioned national development policy

The Trade, Development Research Group assert that preferential import policies that allow developing markets to export to advanced economies are intended to dynamically promote development rather than just provide basic gains from trade. They argue that the Africa Growth and Opportunities Act achieves the latter but not the former, distorting incentives along the value-added chain. While beneficial, preferential trade deals are not a panacea and are certainly not a replacement for pro-development policies

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Workers arrange fresh roses at the Vermont Flowers export processing zone (EPZ) factory in Kenya's capital Nairobi March 10, 2011. Vermont claims their technique allows real blossoms and leaves to retain their natural appearance for long periods of time after being plucked, according to their website. A Kenyan company, Vermont benefits greatly from the African Growth and Opportunity Act (AGOA), which has granted duty-free access for many sub-Saharan African nations' products into the U.S. since 2000. REUTERS/Thomas Mukoya (KENYA - Tags: SOCIETY EMPLOYMENT BUSINESS) - GM1E73A1Q6T01
Workers arrange fresh roses at the Vermont Flowers export processing zone (EPZ) factory in Kenya’s capital Nairobi March 10, 2011. Vermont claims their technique allows real blossoms and leaves to retain their natural appearance for long periods of time after being plucked, according to their website. A Kenyan company, Vermont benefits greatly from the African Growth and Opportunity Act (AGOA), which has granted duty-free access for many sub-Saharan African nations’ products into the U.S. since 2000. REUTERS/Thomas Mukoya (KENYA – Tags: SOCIETY EMPLOYMENT BUSINESS) – GM1E73A1Q6T01

The Africa Growth and Opportunity Act, AGOA, signed into American law on May 18, 2000, is a major plank of U.S. initiatives toward the African continent. As an incentive for Africa to adopt the necessary policy reform, AGOA offers increased preferential access for African exports to the United States.

Even on conservative estimates about Africa’s supply response, Africa’s non-oil exports could be increased by about 8–11 percent. · However, the medium-term gains could have been much greater if AGOA had not imposed certain conditions and not excluded certain items from its coverage.

The most important condition is the stringent rule-of-origin, that is, the requirement that exporters source certain inputs from within Africa or the United States. Estimates suggest that the absence of these conditions would have magnified the impact nearly five-fold, resulting in an overall increase in non-oil exports of US$0.54 billion compared with the US$100-US$140 million increase that is expected in the presence of these restrictions.

These restrictions, particularly on apparel, will come at a particularly inopportune time, as Africa will be exposed to competition from other developing countries when the quotas maintained on the latter’s’ exports under the Multi-Fiber Arrangement (MFA) are eliminated.

Africa’s apparel exports will be lower by over 30 percent with the dismantling of the MFA. If, on the other hand, AGOA had provided unrestricted access, the negative impact of the dismantling could be nearly fully offset.

The Trade, Development Research Group assert that preferential import policies that allow developing markets to export to advanced economies are intended to dynamically promote development rather than just provide basic gains from trade.

They argue that the Africa Growth and Opportunities Act achieves the latter but not the former, distorting incentives along the value-added chain. While beneficial, preferential trade deals are not a panacea and are certainly not a replacement for pro-development policies.

The US and EU often claim credit for granting duty-free quota-free access to products from the least developed countries. Such preferential treatment is of interest not only because it might provide one-time benefits in the form of higher incomes and increased employment, but also because trade is often associated with dynamic benefits that lead to faster growth and development.

By providing preferential access to developed economies, it is hoped that poor countries will ‘learn by doing;’ that they will over time upgrade their product sophistication, diversify into other products and markets, and ultimately become competitors no longer in need of preferential treatment.

Whether developed markets are actually open to manufactured exports from the least developed economies is unclear.

The Africa Growth and Opportunities Act, AGOA, which gave sub-Saharan countries duty-free quota-free access to the US is the exception that proves the rule. It highlights the importance of rules of origin. AGOA contained an unusual and generous waiver for wearing apparel that was granted to ‘Lesser Developed Beneficiary Countries’ (LDBCs). The waiver allowed these LDBC countries to use third-country fabrics or yarn and still export clothing under the AGOA preferences. All that was needed was an inspection by US officials that certified that real production was taking place.

The results were impressive. In 2004, just three years after Lesotho became eligible for preferences under AGOA, clothing exports to the US from one of Africa’s poorest land-locked nations had trebled to $460 million, providing employment for over 50,000 workers. Exports from other African countries such as Kenya, Madagascar, Malawi, Swaziland and others also increased dramatically.

Despite this impressive growth in export volumes, there is more disquieting evidence in AGOA’s performance that relates to the issue of dynamic benefits. After 12 years of AGOA support, beneficiary countries still do not appear to have viable internationally competitive industries that could survive without the preferences, or to have diversified horizontally into new products and markets or vertically into greater domestic value addition.

In the words of Lawrence Edwards, professor in the School of Economics, University of Cape Town, the experience of AGOA underscores the importance of distinguishing between trade and development. Trade preferences do have major advantages. The experience also shows that preferential trade deals are not a panacea and certainly not a substitute for other development policies.”

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