Africa to enjoy ten more years of AGOA
The African Growth and Opportunity Act (AGOA) will be extended for an additional ten years. President Obama signed the legislation into law on June 29, 2015.
AGOA became operational for the first time at the beginning of 2001. President Clinton signed the legislation toward the end of his second term, but the program began during the Republican administration of George W. Bush.
In essence, AGOA grants duty free entry into the United States for products made in Africa. There is no requirement for reciprocity. Products manufactured in the United States continue to pay customs duties and other tariffs when entering Africa.
After fifteen years, AGOA has resulted in some modest benefits for sub-Saharan Africa. Several hundred thousand workers have found jobs in the manufacture of apparel for sale in major American retail outlets such as Walmart, the Gap, and Banana Republic. The Republic of South Africa, one of the few African nations that achieved its freedom with an industrial base already existing, was able to benefit from AGOA to a limited extent. South Africa exports automobiles, auto parts and canned fruits and vegetables.
Duty free entry into the United States for manufactured goods is a major advantage in international trade. Nevertheless, for the first fifteen years of AGOA, Africa was not able to earn many benefits. The main reason was that manufacturing for the United States market required investors willing to finance manufacturing enterprises. And African nations did not encourage private investments, either foreign or domestic.
By the term “did not encourage private investments”, I mean that most African governments did not establish the type of pro-business environment needed to encourage investors in the export industries that could have taken advantage of AGOA. The absence of the rule of law and the inability to enforce contracts were the major impediments to private investments.
What happened, therefore, was the arrival of investors from Taiwan and Mauritius, who had experience in sub-Saharan Africa, and were therefore willing to take the risks of investing in apparel manufacturing. It was the entrepreneurs from these countries who invested in order to export to the United States. For those countries like Madagascar, Lesotho, Kenya and Tanzania, where the jobs were created, AGOA has been a winner. But the volume has remained small and the overall benefits meager.
Apart from the problems of attracting investors, African governments, of course, are competing with more advanced countries for the investment dollar. India, Bangladesh, Indonesia, and Mexico also have cheap labor, and have better business environments than Africa.
Now that AGOA has been extended for a full ten years, what are the prospects for enhanced investments in African manufactured exports to the United States? According to World Bank studies, a number of African countries are looking a lot better in terms of their ability to attract investors, both domestic and international. Countries like Rwanda, Côte d’Ivoire, Ghana, Kenya and Nigeria, are becoming more friendly to the private investor. Presumably, with the AGOA extension, these countries will be able to augment exports to the United States by taking advantage of the zero tariffs available exclusively to Africa.
Nevertheless, important impediments remain.
• Africa has a large power deficit. Manufacturing cannot be competitive without reliable and affordable power.
• Other infrastructure is also in bad shape, especially roads, ports and railways.
• Education and skills are lagging behind.
• And last, but not least, Africa’s internal markets are too small. There needs to be an opening of borders for intra-African trade so that manufacturers can have economies of scale. African governments keep talking about this, but have a hard time achieving this important goal.
Ten years is a long time. Let’s hope that by the end of that decade, Africa will have become a major exporter to the United States.