This paper provides an overview of Lesotho’s export competitiveness based on the analysis of publicly available data and evidence, by examining export dynamics and outcomes and using field interviews with representatives of the public and private sectors. It examines the relevance of trade for the macroeconomic context, and vice versa, as well as the degree of diversification and sophistication of exports over time and relative to a series of relevant comparators.<sup>2</sup> It builds on this with CGE analysis of potential impacts based on specific trade-related scenarios. Computable General Equilibrium (CGE) analysis carried out for this study finds that the negative impacts due to a sudden suspension of AGOA privileges would reach 1% of GDP in 2020, while exports of textiles and apparel would drop by 16% leading to a drop of textiles and apparel output by 9%. The decline of average real consumption by 0.5% would have significant negative consequences for the poor.

As demonstrated in the paper, an immediate loss of AGOA preferences would have a significant economic impact that far exceeds that of a potential future US-Vietnam FTA. If these preferences were suspended in 2018, the country would face 1% loss in income by 2020, relative to the baseline. However, to a large extent the impact of the sudden loss of AGOA privileges would depend on the behavior of the textiles and apparel companies, many of which are highly footloose and could decide to move their operations somewhere else given the tight margin at which the industry operates. FTAs between the United States and Asian competitor countries would have a far less significant impact. The CGE simulations stress the need to strengthen the efforts to support structural transformation leading to diversification of export products and markets, improving backward and forward linkages and lowering trade costs. They also indicate that a decrease of trade costs of an average 2% per year would eliminate the negative consequences of the loss of AGOA in terms of the loss of income.

These findings emphasize the need for a new approach to trade and trade policy that can provide exportdriven growth that is more sustainable and inclusive. This would include the following key issues: improving access to imported material inputs and technology in particular by i) pursuing tariff reductions within SACU and through bilateral agreements and ensuring that the country’s duty drawback system functions more efficiently and effectively; ii) providing increased incentives to employers for training employees in the country’s small but significant manufacturing sector in order to address skills gaps and the country’s stagnant productivity; iii) improving market information on export opportunities to South Africa, Europe and other markets, as well as for products other than apparel to the United States through more effective export and investment promotion activities; iv) greater regional coordination on trade regulatory requirements and border management and v) removing restrictions on services. In this context, it would be advisable to review the existing institutional framework and determine to what extent it is still fit for purpose.

This paper is structured as follows. Section 2 analyzes the current policy and institutional framework. Section 3 examines the country’s trade profile, including the role of trade preferences. Section 4 models the impacts of potential US policy changes. Section 5 concludes.

> 2 Based on http://mec.worldbank.org/buildercompare these include Cambodia, the Dominican Republic, El Salvador, Honduras, Kyrgyzstan, Mauritius, Namibia and Vietnam. Based on discussions with officials and World Bank country experts, we have at times also added a few other TPP (Malaysia, Peru) and SACU countries (e.g. Botswana and Eswatini).

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