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Agoa: Many can still benefit

When the US government introduced the African Growth and Opportunity Act (Agoa) in 2000, it was supposed to give a substantial boost to African economic development.

By granting duty-free and quota-free access to eligible sub-Saharan African countries for about 7 000 lines of goods, the intent was to boost production by African countries themselves, so they could take advantage of that preferential access to the largest market in the world. At least, that was the idea. 

The act was also supposed to attract many foreign investors to Africa who would set up factories there in order to make goods to export duty-free to the US. 

But it hasn’t quite worked out that way, as Laird Treiber, economic counsellor at the US embassy in Pretoria, acknowledges. He says the US expected more African countries to take advantage of this “serious effort” by the US to help them develop their manufacturing industries, either by making small parts to fit into larger products like car engines, or to make and export basic goods like furniture and textiles. 

Agoa beneficiaries

South Africa has been the poster boy of Agoa, demonstrating how it was intended to be used, he says. But even SA has not fully exploited its potential.

Rather ironically, the biggest beneficiaries of Agoa have been two German auto companies, Mercedes Benz and BMW, which seized the opportunity of duty-free entry into the huge US market to invest billions in their South African auto production.

As a result, of those 7 000 lines of goods that SA may export to the US under Agoa, just vehicles and automobile parts constituted 82% by value – or $996m – of total South African exports to the US under Agoa in the first eight months of this year. That was up by 37% from the $727m of vehicles it exported under Agoa in the first eight months of last year, which equalled 79% of total exports under Agoa. 

Treiber says the US is “delighted that the SA auto industry has really used Agoa to catapult into being a global player”. Agoa has been a lifeline for this industry. 

SA’s other exports under Agoa – mainly wine, citrus, macadamia nuts and other processed foods – were significant but much smaller than automobiles, he said. The value of processed food exports, for example, was $18m in the first eight months of 2016.

Treiber says SA has used only 150 to 300 of the available 7 000 lines of products a year. He says the US was working to increase SA’s use of Agoa, conducting road shows to demonstrate its opportunities, making the Agoa website more user-friendly and connecting South African companies to US trade shows. 

The US embassy is hoping other auto-part manufacturers, such as those for electric and hybrid cars, will also exploit Agoa now. He notes that a South African company Hulamin recently won a contract to supply a part of the Tesla electric cars made in the US by South African-born Elon Musk. “There are many more Hulamins out there,” Treiber believes. 

Untapped opportunities

There is also potential for SA to exploit in other industries, such as clothing. Because of its relatively high wages, SA could not aim to produce cheap T-shirts but rather designer clothing. He adds that the US had just added leather goods such as shoes and handbags to SA’s Agoa-eligible products. 

He states that South African companies are also starting to export light manufactures such as pens and watches.

Treiber cites Clifford Machines and Technology from Pietermaritzburg, which makes machines for automated manufacture, as a trailblazer. The US is its biggest market. 

“We’re trying to flag that we’re often the biggest market so if you hit the New York standards, you can sell anywhere.”

The scope for expanding wine sales is also unlimited, he says. US shops are full of Australian and Chilean wines and there is no reason South African wines shouldn’t do just as well. 

Treiber adds that the South African department of trade and industry spoke a lot about adding value to goods and the US stood out well above other export destinations in this regard. About half of all of SA’s exports to the US are now value-added, which was a greater proportion than to any other place, including the EU. 

And there is also a huge unexploited potential to export SA’s excellent services such as in the legal and financial professions, software and engineering, some of which are already part of global supply chains and could be exported to the US on line. 

Treiber says that the South African government could stimulate an “explosion” of IT-related enterprises, if it expanded available broadband width. 

In addition, SA also boasts the brainpower to develop knowledge industries like pharmaceuticals and patented advanced manufacturing. He notes that IBM is preparing to incorporate South African scientists into its international efforts to cure cancer. “So should South Africa be exporting cancer cures? Why not?”

The US is ready to help South African companies get the necessary health certificates to export agricultural products, Treiber says. And if the South African government makes it easier for American goods to enter SA, that could stimulate SA production in the long run. For example, South African companies distributing US computers could eventually become co-producers of those computers. 

Challenges

The real problem with Agoa comes when you go beyond SA to the rest of the continent.

Treiber explains that, back in 2000, the US did not envisage that oil and gas exports from Africa would constitute the majority by value of African exports to Agoa in most years. The main idea was to stimulate manufacturing and help African countries diversify their economies, many of which are dependent on one or two commodities. 

And there has been some success. As US Trade Representative Michael Froman recently said, the generous Agoa rules of origin (which allow countries to source some material and manufacture elsewhere) have helped stimulate some light manufacturing, especially of textiles and clothing, in countries like Swaziland, Lesotho and Ethiopia. 

Non-oil Agoa imports – including automobiles, apparel, and processed agricultural products – totalled $4.1bn in 2015, almost triple the amount recorded for the programme’s first full year in 2001, Froman said. 

Yet South Africa accounts for about 41.5% of those non-oil exports. 

At last month’s Agoa summit in Washington, African trade ministers issued a statement in which they urged the US to do more to help African countries to attract investment so they could take advantage of Agoa.

Treiber’s response is that Agoa itself was designed precisely to do that, to provide a guaranteed market to investors to encourage them to locate in Africa. 

He notes that the US had recently expanded Agoa benefits to include leather goods like handbags and shoes. Vast herds of livestock seemed to present an obvious opportunity, though it is not as easy to produce quality leatherware as one might think, he said, raising the problem of the relative lack of sophistication of most sub-Saharan African economies. 

He also adds that through its Exim export credit bank and Opic, which mobilises private capital for development, the US was continuing to encourage investment in Africa. Washington’s official aid agency, USAID, was also looking at specific blockages in certain sectors. 

The African ministers complained their countries were under-utilising Agoa preferences because of “stringent standards and rules of origin, which make it difficult for African products to meet the US market”.

Treiber said the US Trade Representative was open to discussion about specific rules of origin provisions. It might be possible to ease the rules further. 

On the one hand, one could not have a product that was 95% made in China and 5% made in, say Benin, and call that a Beninese product. One the other hand the US understood that if, for example, a product was 30% made in SA, and 50% made in Namibia with maybe 5% to 10% of its components originating in Germany, that could be regarded as a real African product that would encourage African integration. 

But Agoa’s failure to stimulate diversification in most African countries has jeopardised its long-term future. It was extended last year for another 10 years in an attempt to encourage more investors in Africa by giving them certainty of steady duty-free benefits.

However at last month’s Agoa forum, Froman started discussions with the African trade ministers about different trade regimes, with more reciprocity, after the current Agoa iteration expires in 2025. They responded nervously to the prospect of having to reciprocate preferential trade.

Peter Fabricius was foreign editor of the Independent Newspaper group for 20 years, writing on African and global issues. He has been writing weekly columns for the Institute for Security Studies (ISS) since 2013.

This is a shortened version of an article that originally appeared in the 3 November edition of finweek. Buy and download the magazine here.

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