What Africa Should For the Next 10 Years - Now that AGOA is Law

With Stephen Lande | Manchester Trade Limited, Inc. | Washington, DC

On June 25, 2015, after what were years of advocacy, the House of Representatives and Senate voted overwhelmingly to reauthorize AGOA, sending the legislation to President Obama; guaranteeing the long-term extension of America’s flagship program for sub Saharan Africa. Speaking in Kenya during his historic visit by a U.S. president to Kenya, President Obama also contextualized AGOA alongside his other programs such as Feed the Future, Power Africa and the Young Africans Leadership Institute (YALI). 

Now officially known as AGOA Extension & Enhancement Act (AEEA) of 2015, many stakeholders deserve credit for ensuring eventual passage of the act. Many of the adjustments in the newly extended and enhanced AGOA had, apparently, been garnered from, amongst others, the African Union/UNECA’s April 2014 AGOA 2.0 white paper. Importantly, ensuring AGOA efficacy was a bipartisan effort: Ambassador Froman and his USTR team worked in tandem with the State Department, and also with Reps. Paul Ryan and Sander Levin, Chairman and Ranking Member respectively of the House Ways & Means Committee; with Senators Orrin Hatch and Ron Wyden - Chairman and Ranking Member respectively of the Senate Finance Committee and their staff. Rep. Ed Royce, Chair of the House Foreign Relations Committee and Rep. Karen Bass, Ranking Member, House African Subcommittee strove to ensure AGOA continuity. Here, special mention must also go to the group of AGOA Ambassadors in Washington, DC, with the esteemed envoys of Ethiopia, Mauritius, Gabon, the African Union and Lesotho playing expansive roles alongside entities like the Corporate Council on Africa, U.S. Chamber of Commerce, Civil Society and the think tanks.

In the AEEA of 2015, much of the publicity went to its extension of the ten year non-reciprocal period providing not only sufficient time for new investors to feel confident but an unprecedented period for garment producers.  The bill included such enhancements as more flexibility in the annual beneficiary reviews for eligibility - although the concept of out-of-cycle reviews was introduced - and rules of origin that allowed greater cumulation among AGOA beneficiaries. Much emphasis was placed on the importance of AGOA utilization strategies at all levels, and although this was outside AGOA, the United States Trade Representative was also authorized to add the higher duty tranche of upland cotton to the Generalized System of Preferences (GSP).

Setting the Stage for the Next Level

It would not be prudent to tinker with the AEEA as it stands. However, it is important to point out that assuring a seamless and timely renewal of AGOA prevented the consideration of a number of measures that would have enhanced AGOA and better enabled the program to meet challenges that exist today as opposed to 15 years ago when the program was designed. Invariably, the decade between 2015 and 2025 when the AEEA is in effect is not a period within which to expect a program designed in 2000 to maximize its effectiveness. Pointedly, the Obama Administration has already pointed out to African diplomatic missions that because it is negotiating mega trade agreements, there’s a threat to the current competitive advantage provided to AGOA beneficiaries.

The logic for the potential damage from the mega trade agreements is quite simple: If and when  one concludes and then begins to implement, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP mega trade arrangements between the United States and Pacific nations, and the European Union respectively will allow very competitive economies such as Vietnam to do more business with the U.S. under the same privileges AGOA beneficiaries currently receive. While the mechanism may be different, many Vietnamese garment exports to the United States will receive similar benefits like those in AGOA’s third country fabric provision. This will, without a doubt, displace some African exports given that Vietnam is a much more competitive apparel producer than any of the African countries.  

Fortunately, there’s a whole host of vehicles outside of AGOA - legislative or regulatory – that can be used to enhance African opportunities and thus help offset some of the competitive disadvantage that these mega trade agreements could unleash. Here, both African countries and their strategic stakeholders have a task to recognize that AGOA can be leveraged to ensure that African countries can better compete with countries like Vietnam. The key, however, is for African countries to implement aggressive AGOA utilization strategies. At the same time, as reflected in AEEA of 2015, the United States is keen to negotiate free trade agreements with African countries, or groups of countries that are ready for the process.  While this could stave off further competition, the African countries are better off developing a common approach that prevents this American approach from causing the kind of disruption to Africa’s regional integration efforts seen in the EU’s economic partnership agreements (EPAs). For its part, the United States is, ostensibly a strong supporter of regional and continental integration and has vowed not to use force to negotiate these FTAs.

Part One: Ideas on Promoting the Africa/U.S. Trade Relationship (offsetting improved access for third countries during the period of AGOA extension)

1: With AEEA in place, the United States and Africa should work within the WTO in developing more effective origin rule regime for preferential agreement ones which better enable Africa to attract economic activities leaving China and other Asian locations due to shifting comparative advantage. Of utmost importance is that given the level of African development, more advantageous rules of origin would be such as those provided under regular free trade agreements: This would be accomplished by a special provision that recognizes that LDC have difficulty in adding value to products. Using the existing WTO precedence, the new rule should apply to all but the most advanced members of regional economic communities to prevent new obstacles to regional integration.  

To be consistent with the WTO/Bali 2013 agreement, any potential new origin rules should extend simpler and more flexible treatment to export originating from least developed countries. Here, changes should specifically be made to rules of origin for non-garment products that are still burdened by the requirement that 35 percent of the direct cost of processing must originate in Africa, and the fact that intermediary production in an African country or LDC does not reduce duties of the final product when imported into preference giving countries even if the African countries are part of a regional or global supply chain. Here, the key would be in reducing the 35% or­igin requirement for least developed countries that mostly have limited capacity to add value beyond low priced labor inputs. [Garments sewn from third country fabrics only qualify because the 35 percent value-add does not apply]. Such a rule will provide significant incentive to global companies to place at least part of their global supply chain in Africa. This step should also support regional integration by harmonizing rules of origin across the continent. 

2: Congress and the Administration could build on the GSP provision that allows duty-free entry for the high duty tranche of upland cotton, to allow similar treatment for other cash crops such as groundnuts, sweetened cocoa and leaf tobacco. 

3: The AGOA Committee must use the flexibly in the AEEA of 2015 to avoid compromising the security gained for investors in the ten year renewal. Thus removal of AGOA benefits from any country must be a last resort when necessary to minimize collateral damage - particularly the kind that has an adverse effect on women, an AGOA beneficiary’s overall economic development, regional supply chains, and U.S. investment. Here, the key suggestion is that the U.S. could use non-trade sanctions such as arms embargoes, travel restrictions, freezing of assets, etc. while using the new authority under AEEA to avoid removing AGOA beneficiary status by initially taking more symbolic actions as warnings.       

4: Like it seems to suggest in the AEEA of 2015, the U.S. must employ a multi-channel route to work directly with the African Union, regional economic communities and beneficiaries to implement AGOA utilization plans. This could also be an avenue via which Africa can stick to its continental free trade agreement schedule and remove any disadvantage to intra-African trade, such as that brought by the EPAs. As recognized in the original House Ways and Means Committee summary of the AGOA bill, the U.S. and EU should work together—perhaps in the context of TTIP negotiations to avoid undue damage to American exports to Africa.

5: The U.S. should continue to work with African countries on assure ratification of the WTO’s Trade Facilitation Agreement (TFA) at the December 2015 Ministerial; ensuring that USAID programs are sufficiently funded and part of the multilateral donor effort to successfully implement the TFA. One of the ways to effectively support FTA implementation lies in facilitating the African Union and the Regional Economic Communities (RECs) to oversee or coordinate trade facilitation elements beyond national border efforts.   

Part Two: Preparing for a U.S. – Africa Free Trade Agreement

If AGOA expires in 2025 and is not replaced by a free trade agreement between Africa and the United States, or at least sub Saharan Africa, the United States and Africa are in trouble: With the proliferation of mega-regional trade agreements (MRTAs), Africa, especially, cannot afford to be left out of the overall process. After all, there are major benefits to these pacts - as displayed in America’s gusto for TPP and TTIP. However, Africa is likely to be severely hurt by MRTAs unless it produces its own continental free trade agreement in parallel. Without a continental FTA, the implementation of the EPAs—particularly the EU-ESA and EU-ECOWAS EPAs - provides advantages to EU imports and has a disruptive effect over African competition in trade between African countries that do not belong to the same economic community. Importantly, the absence of a mega continental FTA also harms American interests.

 First, from a strategic viewpoint – by creating obstacles to regional and continental integration — Africa’s effort to eliminate costly division is impeded; second an integrated continental FTA and possible customs union would allow Africa to negotiate a mega FTA with the U.S., effectively removing competitive disadvantages to U.S. exports as a result of EPA preferences. This would, at the same time, allow American value chains and distribution networks to operate throughout Africa; unfettered by tariffs across national borders.

 Fortunately, African negotiators are currently setting the basis for a whole host of integration objectives, better enabling Africa to incorporate its production into value chains and provide its consumers direct access to higher quality and lower priced consumer goods. For instance, the June 2015 launch of the Tripartite Free Trade Area building on the achievements of 3 of Africa’s building bloc regional economic communities in Eastern and Southern Africa together with the already formed ECOWAS customs union enables not just an African continental free trade agreement, but also a mega - FTA with the U.S.

 Nevertheless, although Africa, for the most part, has made progress in terms of the negotiation and in the signing of reciprocal agreements, the UN Economic Commission for Africa (UNECA) rightly points out that EPAs, for instance, will neither greatly improve Africa’s access to the European Union nor increase its capacity for intra-African trade. Here, we note that EPAs will largely maintain existing levels of access, which the EU was threatening to withdraw, or had already withdrawn to coerce ascension or signature of the pacts.

Conclusion

In May 2015, Sen. Jim Inhofe (R-Okla.) and Sen. Chris Coons (D-Del.) introduced the African Free Trade Initiative Act, which would have required the president to establish a plan to negotiate and enter into Free Trade Agreements (FTAs) in sub-Saharan Africa –a plan that hopefully will aim at the mega trade agreement described above. It would also have required the United States Trade Representative, the Millennium Challenge Corporation and USAID to coordinate and collaborate together on how to implement the goals established in the Free Trade Agreement plan. Although it was not adopted in its entirety, the essence of this bill is now integral to the AEEA of 2015.

The opportunities provided by the AEEA of 2015 - especially if trade benefits are enhanced as described above – cannot be over-estimated since they would establish a secure framework for the U.S. - Africa relations for the next 10-year period. There are also limitless possibilities for the U.S. and Africa to work on investment in agriculture, infrastructure and governance. Because of how fast Africa is growing, and with the continent’s demographic dividend, Africa has a major role to play in the world economy’s future.

If a mega trade deal between the United States and Africa were to go into effect once AGOA expires, this would be a viable way to ensure that the United States continues to play a major role in Africa. Thus, nothing should be more important than developing a path that plays the dual role of seamlessly progressing this trade and investment partnership forward, and ensuring that AGOA’s overall benefits are replaced with a more reciprocal mega arrangement between the United States and Africa. Just as much of Africa anticipates much from the U.S., the world’s fastest growing region expects that sooner or later, the world will expect it to do business like everyone else.

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