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Note: This document is from the archive of the Africa Policy E-Journal, published by the Africa Policy Information Center (APIC) from 1995 to 2001 and by Africa Action from 2001 to 2003. APIC was merged into Africa Action in 2001. Please note that many outdated links in this archived document may not work.


US/Africa: Trade Meeting, 1

AFRICA ACTION
Africa Policy E-Journal
January 14, 2003 (030114)

US/Africa: Trade Meeting, 1
(Reposted from sources cited below)

US/African meetings in Mauritius this week focusing on the African Growth and Opportunity Act (AGOA) are proceeding without U.S. President George W. Bush, whose promised Africa trip was postponed suddenly in a brief announcement just before Christmas, Then Secretary of State Colin Powell also backed out, leaving the U.S. delegation to be headed by trade representative Robert Zoellick. On Sunday, Mauritian Minister of International Trade Jayen Cuttaree said Mauritius would make the best of the opportunity, and in the opening session of the NGO forum, Minister of Women's Affairs Arianne Navarre-Marie said, "African Women would like to know how AGOA is going to provide the necesary support for making cheap anti-retrovirals available to their brothers, sisters and children who are dying of AIDS because thay cannot afford the price of such drugs".

Unfortunately, both the reduced level of the U.S. presence in Mauritius this week and the exclusive focus on trade accurately reflect the realities of U.S. policy towards Africa. Strikingly, Bush's balance sheet is deeply in the red even in the realm for which the U.S. seeks to claim credit: trade policy. The damage done by other U.S. trade policies far outweighs the impact of increased AGOA imports from Africa, and an IMF study shows that even those benefits are far less than they might be.

Today's series of two postings contains (1) excerpts from an IMF working paper showing that the benefits in increased textile exports from AGOA are only a fifth of what they could be without the highly restrictive "rules of origin" imposed by the law (see below), and, in a separate posting, (2) excerpts from articles by allAfrica.com on the Mauritius meeting, a press release on the latest report on US/African trade, and links to other sources on related issues.

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2002 International Monetary Fund WP/021158

IMF Working Paper African Department

The African Growth and Opportunity Act and Its Rules of Origin: Generosity Undermined?

Prepared by Aaditya Mattoo, Devesh Roy, and Arvind Subramanian

September 2002

[brief excerpts: The full paper,including tables, is available at: http://www.imf.org/external/pubs/ft/wp/2002/wp02158.pdf]

Abstract

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. ...

This paper describes the United States recently enacted African Growth and Opportunity Act (AGOA) and assesses its quantitative impact on African exports. The AGOA expands the scope of preferential access of Africa's exports to the United States in key areas such as clothing. However, its medium-term benefits - estimated at about US$100-$140 million, an 8-11 percent addition to current non-oil exports - would have been nearly five times greater (US$540 million) if no restrictive conditions bad been imposed on the terms of market access. The most important of these conditions are the rules of origin with which African exporters of clothing must comply to benefit from duty-free access.

Authors E-Mail Addresses:
amattoo @worldbank.org, roy@econ.bsos.umd.edu,asubramanian@imf.org

...

INTRODUCTION

...

The African Growth and Opportunity Act (hereafter "AGOA"), signed into U.S. law as Title 1 of the U.S. Trade and Development Act on May 18, 2000, is a major plank of U.S. initiatives toward the African continent. The Act aims at broadly improving economic policymaking in Africa, enabling countries to embrace globalization, and securing durable political and economic stability. As an incentive for Africa to adopt these policy changes, AGOA offers increased preferential access for African exports to the United States. It envisages the possible conversion of AGOA - which is essentially a one-way preferential arrangement - into reciprocal free trade areas (FTAs) where feasible with interested African countries.

The paper assesses the impact of AGOA. Its main conclusions are the following:

  • First, AGOA will provide real opportunities to Africa. Even on conservative estimates about Africa's supply response, Africa's non-oil exports could be raised by 8 Il percent.
  • However, the gains from 2005 onward could have been much greater if AGOA (i) had imposed the multifiber agreement (MFA) rule of origin rather than the more stringent"yarn-forward" rule; and (ii) not excluded certain items from its coverage. Our estimates suggest that the absence of these restrictions would have magnified the impact nearly fivefold, resulting in an overall increase in non-oil exports of US$0.54 billion compared withthe US$100-$140 million increase that is expected in the presence of these restrictions.
  • Third, 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 latters' exports under the MFA are eliminated in 2005. On the one hand, 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.

This paper adds to the recent work on the benefits to sub-Saharan Africa of preferential access granted by industrial countries (see Ianchovicina and others 2001 and Hoekman and others 2001). The main conclusion of these papers is that Africa stands to gain, but the bulk of the gains come from preferential access to the Japanese and European agricultural markets. These papers, however, do not explore fully the gains from apparel exports and how these are affected by rules of origin.

II. BACKGROUND: AFRICA'S EXPORTS

... A number of features stand out.

First, at about US$27 billion in 1999, the absolute level of non-oil exports is very low (Table 1), reflecting a slow rate of growth during the 1990s. Non-oil exports from the continent grew at a glacial 0.6 percent per annum, consistent with notion of Africa's marginalization from global trade (Subramanian and Tamirisa, 2001).

Second, while Europe remains the biggest market for SSA's non-oil exports, absorbing about 55 percent, developing countries have seen their share of SSA's exports rise from 25.6 percent in 1990 to over 30 percent in 1999. Interestingly, while the United States accounts for a sizable share (23 percent) of total exports, it is actually a much smaller market (7.4 percent) for non-oil exports. In other words, the bulk of SSA's exports to the United States comprise oil and related products.

Third, SSA's exports remain predominantly agriculture and natural resource-based. Oil accounts for close to 50 percent of exports, agriculture and other commodities for about 36 percent, and manufacturing for a meager 12 percent. This composition has not substantially changed during the 1990s. Clothing, a key sector under AGOA, has been one of the most dynamic, growing at an annual rate of close to 7 percent and has become one of the largest export items.

Fourth, in terms of exports of textiles and clothing, there are interesting differences in the composition and vibrancy of SSA's exports to the three major markets - European Union, United States, and developing countries. Developing countries are the largest market for exports of cotton and textile fibers from SSA, with the EU being the largest market for fabric and yarns and clothing but particularly so for the former category. Exports of clothing have grown most rapidly in the U.S. market, at about 10 percent per annum, from US$187 million in 1990 to US$620 million in 1999, compared with 6.5 percent for the EU (Table 3).

Finally, exports of clothing to the United States remain very concentrated: in 1999 a few countries - those in the South Africa Customs Union (SACU) and Mauritius - accounted for 80 percent and another three countries for a further 17 percent, of SSA's exports (Table 4).

III. AGOA's MAIN PROVISIONS

Prior to AGOA, 48 sub-Saharan African countries were granted preferential access to the U.S. market - essentially paying a zero tariff subject to certain conditions - for a range of exports under the Generalized System of Preferences (GSP). In 2000, the GSP covered about US$4 billion out of Africa's total exports of US$23 billion. The margin of preference - the advantage faced by African exporters compared with other most-favored nation (MFN) suppliers - was about 5 percent (the average MFN tariff rate). AGOA represents two advances over the GSP scheme:

  • First, the existing preferential access enjoyed by SSA countries under the GSP schemehas been extended in time; and
  • Second, it increases the range of products for which preferential access is granted to include: petroleum products;apparel products, previously subject to quotas under the MFA and tariffs; [and] a range of other agricultural and industrial products. ...

In evaluating the benefits accruing under AGOA, however, it is important to consider not just the import coverage but the magnitude of current trade restrictions. For example, a large portion of the increased coverage under AGOA is accounted for by petroleum products, which faced average tariffs of only 1.5 percent prior to AGOA. The elimination of these tariffs, which will increase the price received by African suppliers (mainly Nigeria, Angola, and Gabon) by about 1 percent, will not yield significant benefits.

The really important incremental benefits provided by AGOA relate to the two non-petroleum categories in the lightly shaded panel in Table 5. The first comprises exports of apparel products and the second a whole range of non-apparel products, including footwear, agricultural products, watches etc. ...

In both these categories, although current exports are low, potential benefits are large because average protection is high: ...

In sum, the conclusions that can be drawn from the above are:

  • First, while AGOA has increased the scope for preferential access for African exports,this increase is important only for categories of products which have significant protection. These currently account for 5 percent of total exports and 23 percent of non-oil exports.
  • Second, even for these categories, the real medium-term benefits will depend upon the impact of the rules of origin requirements (see below);
  • Third, AGOA's generosity was not all encompassing for Africa: for about 1,067 tarifflines (1 percent of non-oil exports), preferential access was not extended, For 893 of these lines preferential access could have been meaningfbl because of the high level of MFN tariffs,

A. AGOA's Provisions on Rules of Origin

As described above, the benefits of the incremental coverage under AGOA - the extension of access to apparel and other products - will hinge crucially on the rules of origin that African exporters will have to meet. These rules vary across these two categories of exports.

Rules of origin for non-apparel exports

Under the GSP scheme duty-free treatment is to be applied to any designated article that meets the requirements of the basic GSP origin and related rules. ...The key is a requirement of 35 percent value addition within the customs territory claiming preference. However, for non-apparel products eligible for duty-free access under AGOA, the 35 percent value added content can be met also by counting production or materials from other beneficiary countries or the United States. The rules of origin clauses are supplemented with implementation requirements. For example, an importer claiming duty-free treatment must make and maintain (for a period of five years from the date of entry) the records validating facts like proof of production, value addition, shipping papers etc.

Rules of origin for apparel exports

AGOA's provisions on rules of origin relating to apparel are different and are summarized in Table 8. They require essentially that apparel be assembled in eligible sub-Saharan African countries and that that the yarn and fabric be made either in the United States or in African countries (as explained below this does not apply to the least developed countries in Africa until 2004). However, apparel imports made with regional (African) fabric and yarn are subject to a cap of 1.5 percent of overall U.S. imports, growing to 3.5 percent of overall imports over an 8-year period.

In addition a number of customs requirements need to be satisfied. To receive the apparel and textile benefits of AGOA, a USTR-chaired inter-agency committee must determine, inter alia, that countries have an effective visa system and enforcement procedures to prevent unlawful transshipment and the use of counterfeit documents.

There is an interesting difference between the rules of origin under the Cotonou Agreement, which governs preferential access to the European Union, and AGOA. The Cotonou rule of origin is based is based on the concept of "double transformation" i.e., if two of the processing stages (yarn into fabric weaving; and fabric into apparel assembly) are done in the beneficiary country, duty free entry into the EU can be enjoyed. Under Cotonou, therefore, yarn can be sourced from anywhere in the world, whereas under AGOA the yarn must come from a beneficiary SSA country or from the United States.

IV. ECOMOMIC IMPACT OF AGOA'S APPAREL PROVISIONS

A. AGOA's Apparel Provisions and Their Timing

In order to quantify the economic impact of AGOA, it is necessary to understand the provisions and their timing, which are summarized in Table 9. In the apparel sector, AGOA distinguishes two categories of SSA countries.

Lesser Developed Beneficiary Countries (LDBCs), namely those with per capita GNP under $1500 in 1998 (based on the World Bank Atlas method), and other SSA countries will see their quotas on apparel exports eliminated beginning 200l. [Forty-two countries in sub-Saharan Africa fall below the specified GNP level and hence qualify as an LDBC under AGOA; another two countries Botswana and Namibia have recently been designated as LDBCs despite their high GNP levels. Thus, only the following four do not qualify: Gabon, Mauritius, Seychelles, and South Africa.]

In discussing the empirical findings, an important complication needs to be borne in mind. The changes unleashed by AGOA will be accompanied by other important changes to the external trading environment, most notably the dismantling of the MFA under the Uruguay Round, scheduled for 2004 (shown in italics in the table above). In reality, the impact on African countries will be a combination of these two sets of changes. In the following analysis we shall attempt to isolate the different effects so that the marginal contribution of AGOA can be established. In other words, we shall analyze (i) the marginal impact of AGOA, holding other factors constant and (ii) the total impact of AGOA in conjunction with the dismantling of the MFA.

D. Results

The results are illustrated in Table 12. For a country such as Mauritius, the impact can be summarized as follows

2001-2004

The impact of AGOA during the period 2001 and 2004 will be to raise exports relative to the pre-AGOA situation by about 5 percent. Had there been no rule of origin requirement on Mauritius, the increase in exports due to the tariff preferences accorded by AGOA would have been 36 percent, substantially higher than with rules of origin.

2005-2008

In 2005, when the MFA quotas on Mauritius competitors are eliminated, its exports will be about 26 percent lower than they otherwise would have been. But if AGOA is modified to eliminate the rules of origin requirement, the decline in exports would be 18 percent.

For a least developed country such as Madagascar, the results are more dramatic both on the up side and down.

2001-2004

The impact of AGOA during the period 2002 and 2004 will be to increase exports relative to the pre-AGOA situation by about 92 percent.

2005-2008

In 2005, when the MFA quotas on Madagascar's competitors are eliminated, its exports will be lower by about 19 percent compared with the pre-AGOA situation. But if AGOA is modified to eliminate the rules of origin requirement, exports in 2004 could actually be higher than they are currently despite the elimination of the MFA.

V. REVEALED APPAREL TRADE UNDER AGOA

... Apparel exports have recorded a substantial increase following AGGA: both in terms of values and quantities, exports in 2001 were about 27 percent higher than in 2000. It is striking that the most impressive gains have been recorded by the least developed beneficiary countries: as the table shows, Madagascar, Kenya, Swaziland, and Lesotho have recorded gains varying from 47 percent to 83 percent. In contrast, South Africa and especially Mauritius, have posted more modest growth. ...

A striking feature of the data is that a very small portion of total exports (9-14 percent) from South Africa and Mauritius have benefited from the tariff preference, whereas for the least developed countries not subject to the rule of origin requirement the corresponding share is close to 50 percent, highlighting the restrictive impact of the rules of origin. ln other words, close to 90 percent of the exports of South Africa and Mauritius did not meet the rules of origin requirement.

Given the fact that the LBDCs will be subject to the same rules of origin in 2004, the above serves as a cautionary reminder about the likely effects for the poorer countries after 2004; in other words, export growth may be considerably muted for the LBDCs after 2004 as the rules of origin kick in. ...

VI. OVERALL ASSESSMENT AND CONCLUSIONS

AGOA's impact can be evaluated against two possible benchmarks. The first is current trade and the other is "what might have been" - that is, trade that would have resulted had all restrictions on SSA's exports been eliminated. ...

AGOA will raise the level of non-oil exports by between 8 percent and 11 percent, depending on the restrictiveness of rules of origin in the non-apparel sector. Most of this increase is accounted for by the apparel sector, which is expected to see higher cxports of about 8.3 percent.

We can, however, be a little less circumspect when we compare AGOA against the second benchmark, of fully unrestricted access, which is the level that Africa's trade would have attained had the United States (i) not excluded any product from the scope of AGOA2 and (ii) not imposed stringent rules of origin requirements to qualify for the benefits under it. ... AGOA as it is now stands will yield only 19-26 percent of the benefits that could have been provided if access had been unconditional. Nearly 80 percent of this shortfall is accounted for by the rules of origin requirements in the apparel sector which will significantly reduce exports below SSA's full potential. ...

+++++++++++++++++++++Document Profile+++++++++++++++++++++

Date distributed (ymd): 030114
Region: Continent-Wide
Issue Areas: +economy/development+ +US policy focus+


The Africa Action E-Journal is a free information service provided by Africa Action, including both original commentary and reposted documents. Africa Action provides this information and analysis in order to promote U.S. and international policies toward Africa that advance economic, political and social justice and the full spectrum of human rights.

URL for this file: http://www.africafocus.org/docs03ej/ag0301a.php