AGOA III: Amendment to the African Growth and Opportunity Act
Released: 2005-01-19T00:00:00

RS21772 -- AGOA III: Amendment to the African Growth and Opportunity Act

Updated January 19, 2005

Background: The African Growth and Opportunity Act

After two decades of economic stagnation and decline, some African countries began to show signs of renewed economic growth in the early 1990s. Thisgrowth was generally due to better global economic conditions and improved economic management. However,growth in Africa was also threatened by newfactors, such as HIV/AIDS and high foreign debt levels. The African Growth and Opportunity Act (AGOA) ( P.L.106-200 - Title I) was enacted to encouragetrade as a way to further economic growth in Sub-Saharan Africa and to help integrate the region into the worldeconomy. AGOA provided trade preferencesand other benefits to countries that were making progress in economic, legal, and human rights reforms. Currently,37 of the 48 Sub-Saharan African countriesare eligible for benefits under AGOA.

AGOA expands duty-free and quota-free access to the United States as provided under the U.S. Generalized System of Preferences (GSP). (1) GSP grantspreferential access into the United States for approximately 4,600 products. AGOA extends preferential access toabout 2,000 additional products by removingcertain product eligibility restrictions of GSP and extends the expiration date of the preferences for beneficiaryAfrican countries from 2006 to 2015. Otherthan articles expressly stipulated, only articles that are determined by the United States as not import-sensitive (inthe context of imports from AGOAbeneficiaries) are eligible for duty-free access under AGOA.

Beyond trade preferences, AGOA directs the President to provide technical assistance and trade capacity support to AGOA beneficiary countries. Various U.S.government agencies carry out trade-related technical assistance in Sub-Saharan Africa. The U.S. Agency forInternational Development funds three regionaltrade hubs, located in Ghana, Kenya, and Botswana, that provide trade technical assistance. Such assistance includes support for improving Africangovernments' trade policy and business development strategies; capacity to participate in trade agreementnegotiations; compliance with WTO policies and withU.S. phytosanitary regulations; and strategies for further benefiting from AGOA.

AGOA also provides for duty- and quota-free entry into the United States of certain apparel articles, a benefit not extended to other GSP countries. This hasstimulated job growth and investment in certain countries, such as Lesotho and Kenya, and has the potential tosimilarly boost the economies of other countries,such as Namibia and Ghana. In order to qualify for this provision of AGOA, however, beneficiary countries mustdevelop a U.S.-approved visa system toprevent illegal transshipments. Of the 37 AGOA-eligible countries, 24 are qualified for duty-freeapparel trade (wearing-apparel qualified). These countriesmay also benefit from Lesser Developed Country (LDC) status. Countries that have LDC status for the purpose ofAGOA, and are wearing-apparel qualified,may obtain fabric and yarn for apparel production from outside the AGOA region. As long as the apparel isassembled within the LDC country, they mayexport it duty-free to the United States. Some LDC AGOA beneficiaries have used this provision to jump-start theirapparel industries. This provision was dueto expire on September 30, 2004. The AGOA Acceleration Act extends the LDC provision to September 30, 2007,with a reduction in the cap on the allowablepercentage of total U.S. apparel imports beginning in October 2006. Countries that are not designated as LDCs butare wearing apparel qualified must use onlyfabric and yarn from AGOA-eligible countries or from the United States. The only wearing apparel qualifiednon-LDC countries is South Africa, althoughMauritius only qualifies for LDC status under AGOA for one year ending September 30, 2005, per theMiscellaneous Trade and Technical Corrections Act of2003 ( P.L. 108-429 ).

AGOA was first amended in the Trade Act of 2002 ( P.L. 107-210 ), which doubled a pre-existing cap set on allowable duty-free apparel imports. The cap wasonly doubled for apparel imports that meet non-LDC rules of origin; apparel imports produced with foreign fabricwere still subject to the original cap. Theamendment also clarified certain apparel rules of origin, granted LDC status to Namibia and Botswana for thepurposes of AGOA, and provided that U.S.workers displaced by production shifts due to AGOA could be eligible for trade adjustment assistance.

Three Years of AGOA: Successes and Challenges

U.S. duty-free imports under AGOA (excluding GSP) increased dramatically in 2003 -- by about 58%, from $8.36 billion in 2002 to $13.19 billion in 2003-- after a more modest increase of about 10% in 2002. (2) However, 70% of these imports consisted of energy-related products from Nigeria. ExcludingNigeria, U.S. imports under AGOA increased 30% in 2003, to $3.84 billion, up from $2.95 billion in 2002. Theincrease in AGOA imports since the law'senactment is impressive, but it must be viewed in the broader context of Africa's declining share of U.S. trade overmany years. AGOA has done little to slowor reverse this trend -- the growth in AGOA trade can be explained by a greater number of already-traded goodsreceiving duty free treatment under AGOA. One industry has grown substantially under AGOA: the textile and apparel industry. Much of the growth in textileand apparel imports has come from thenewly emerging apparel industries in Lesotho, Kenya, and Swaziland.

Apart from the apparent success of the emergent apparel industries in some African countries, the potential benefits from AGOA have been slowly realized. There has been little export diversification, with the exception of a few countries whose governments have activelypromoted diversification. Agriculturalproducts are a promising area for African export growth, but African producers have faced difficulties in meetingU.S. regulatory and market standards. Manycountries have been slow to utilize AGOA at all. Others, such as Mali, Rwanda, and Senegal, have implementedAGOA-related projects, but have madeinsignificant gains thus far. In addition to lack of market access, there are substantial obstacles to increased exportgrowth in Africa. Key impediments includeinsufficient domestic markets, lack of investment capital, and poor transportation and power infrastructures. Othersignificant challenges include low levels ofhealth and education, protectionist trade policies in Africa, and the high cost of doing business in Africa due tocorruption and inefficient governmentregulation. Furthermore, the apparel industry in Africa now faces a challenge in the dismantled MultifibreArrangement quota regime, which ended as ofJanuary 1, 2005. As a result, Africa must now compete more directly with Asian apparel producers for the U.S.market. AGOA beneficiaries retain theirduty-free advantage, but they have lost their more significant quota-free advantage. Apparel producers havereportedly already left Lesotho, with a loss of 7,000jobs. (3) This makes export diversification in Africaall the more vital.

Key Provisions in AGOA III

AGOA III extends the preference program to 2015 from its previous 2008 deadline. AGOA III supporters claimed that many AGOA beneficiaries had onlyrecently begun to realize gains as a result of AGOA, and that extending AGOA benefits would improve the stabilityof the investment climate in Africa. AGOA III also provides for apparel rules of origin and product eligibility benefits; it extends the third-country fabricrule for LDCs, and encourages foreigninvestment and the development of agriculture and physical infrastructures.

Extension of Lesser Developed Country Provision. One of the more controversial aspects of AGOA III wasthe extension of the LDC provision. If the LDC provision had not been extended, LDCs would no longer haveduty-free access to the United States for apparelmade from third-country fabric after September 30, 2004. Supporters of the extension claimed that if the LDCprovision was not extended, the apparel industrymay have contracted significantly, causing a loss of many of the gains from AGOA, as apparel assembly plants wereshut down. This might have occurredbecause all AGOA beneficiaries would need to source their fabric and yarn from within the AGOA region or fromthe United States in order to get duty-freeaccess under AGOA, and the regional supply of fabric and yarn would likely be insufficient to meet the demand. (4) Sourcing materials from the United Stateswould not be a viable option because it would entail greater costs. Some analysts argued for the LDC provision tobe extended to allow more time to develop atextile milling industry to support the needs of the apparel industry in Africa, and to prevent the collapse of theemerging apparel industry.

Opponents of extending the LDC provision claimed that the expiration of the LDC provision would provide an incentive for further textile milling investmentsin Africa. They argued that the LDC provision has slowed fabric and yarn production investment in Africa, becausethese materials could be imported cheaplyfrom Asia for use in AGOA-eligible apparel with no need for costly investments. They feared that an extension ofthe LDC provision would provide adisincentive to textile milling investment in Africa, because the deadline would lose its credibility as investorsanticipated further extensions. However,supporters of the extension argued that investment in the textile industry would continue because of its inherentprofitability, despite the availability ofthird-country fabric. Others worried that looser rules of origin under the LDC provision might allow companies touse Africa as a transshipment point betweenAsia and the United States.

The outlook for the development of a textile industry in Sub-Saharan Africa is clouded by the phase-out of the Multifibre Arrangement (MFA) quota regime inJanuary 2005. (5) Now that quotas have beeneliminated, Africa will be competing more directly with Asia for the U.S. apparel and textile market, though theyremain eligible for tariff preferences. Apparel plants are particularly sensitive to price conditions as they do notrequire large capital investments and can easilyand rapidly be shifted to areas outside Africa. Textile plants are more capital-intensive and more costly to move,and are therefore likely to remain in Africa inthe long-term. Thus, it is argued that the promotion of vertical integration between apparel, textile, and cottonproducers is necessary to keep apparel plants inAfrica, along with the jobs they provide. Vertical integration is a challenging prospect regardless of the LDCprovision extension. Some investment in textilemilling has occurred in Africa, but investors have found it difficult to consistently source high quality cotton in largevolumes. While there is agreement thatvertical integration is the key to a thriving African textile and apparel industry, the question is how to facilitate thisprocess. (6)

Agricultural Products. The growth of agricultural trade holds potential for improved economic growth inAfrica. Most Africans rely on agricultural production for their income. It is estimated that 62% of the labor forcein Africa works in agriculture, and in thepoorer countries, that portion is as high as 92%. (7) By exporting to the U.S. market, African agricultural producers could receive higher prices for their goods. In order for this to occur, the United States may need to further open its market to African agricultural products, andprovide technical assistance to help Africanagricultural producers meet the high standards of the U.S. market.

AGOA III seeks to improve African agricultural market access to the United States by providing assistance to African countries to enable them to meet U.S.technical agricultural standards. African agricultural producers have previously faced difficulties in meeting thesestandards. The AGOA Acceleration Actcalls for the placement of 20 full-time personnel to at least 10 countries in Africa to provide this assistance. Someobservers are skeptical about theeffectiveness of technical assistance without increased market access. Others are concerned that U.S. technicalassistance is hindered by laws restrictingagricultural technical assistance to products that would compete with U.S. farm products. However, technicalassistance proponents point to the lowinstitutional capacity in Africa as the main obstacle to African export-led development. They feel that U.S.-providedtechnical assistance can be an importantfactor in improving Africa's agricultural development and export performance.

Table 1. Provisions from the AGOA Acceleration Act of 2004