Discussions
The extension of the third country fabric provisions in the Africa Growth and Opportunity Act (AGOA)
Eckart Naumann, tralac Associate, comments on the extension of the third country fabric provisions in the Africa Growth and Opportunity Act (AGOA)
Last Thursday a massive veil of uncertainty was lifted when the US Congress agreed to pass legislation that extends to September 2015 key textiles provisions of the African Growth and Opportunity Act (AGOA). The legislation has subsequently been submitted to US President Obama who now has 10 days (from date of submission last Friday) to sign the legislation into law. Considering the bi-partisan support that the legislation ultimately enjoys, and the Obama Administration’s long-standing support for this renewal, an extension can now be considered a formality.
The road leading up to here had been difficult and fraught with partisan politics. The US finds itself in a presidential election year which traditionally means that less legislation is passed as political manoeuvring and Congressional voting records often appear to dominate proceedings. Non-reciprocal trade preferences are considered less of a priority these days, and the “costs” associated with them often make for heated debate. Since the legislative process requires identical texts to be agreed in both the Senate (Democrat majority) and House of Representatives (Republican majority) and respectively the Senate Finance Committee and House Ways and Means beforehand – passage through Congress is far from certain. In fact, of all the Bills and Resolutions before Congress, only about 5% will become law. With respect to the AGOA amendment (Senate version S.3326 and House of Reps version H.R. 5986), these were both eventually passed almost concurrently – by a voice vote in the House and formal vote in the Senate – but not before another last-minute challenge in the Senate , where Amendment 2771 (by Sen. Coburn) sought to make certain adjustments to the legislation (essentially, to reduce funding for various trade-related government agencies by the US$192 mn – as per Congressional Budget Office estimates – opportunity cost of the AGOA provisions). At this point it is worth noting that the legislation covers three major items: a renewal by three years of presidential authority to apply import sanctions against Burma, non-controversial technical amendments to the rules of origin in the U.S. – Central America – Dominican Republic (CAFTA-DR) textiles and clothing provisions and the AGOA third country fabric waiver (as well as eligibility for South Sudan). It was then agreed that the AGOA legislation before the Senate would remain unchanged and pass by default should the proposed amendment not receive majority support. The amendment lost by a vote of 40 : 58 (interestingly, 3 Democrats supported this while 8 Republicans voted against the amendment). Insiders believe that an informal deal-making agreement was reached with some of the proponents of this late intervention on issues around a renewal of the US cotton and wool trust funds, which support local sourcing given cotton’s duty free status.
The extension of the AGOA third country fabric provisions to September 2015 is nothing short of a lifeline for the garment manufacturing industry in many parts of Africa, and has been widely welcomed by the private sector, civil society, various Heads of State and trade ministers. The sector has over the past decade grown significantly on the back of US exports given the favourable rules of origin under the textile provisions: these give clothing exporters in eligible countries unfettered access to the most competitive ‘third country’ fabric supplies anywhere in the world to be processed locally into AGOA-qualifying clothing. The ability to link in with global textile value chains – also within the now well-established U.S./Africa/Asia sales, manufacture and trade relationship – last year sustained US$ 800 million worth of garment exports to the U.S., and almost US$ 1.4 billion at its peak in 2004 (this being the year prior to the expiry of the Multifibre Agreement). By comparison, the value of clothing exports not dependent on third country fabric was a mere US$ 26 million in 2011. South Africa does not qualify for these concessions and its manufacturers are obliged to use locally made or regional fabric; it exported a mere US$ 5 million worth of clothing to the U.S. over the past 12 months. Sector organisations and government officials including Trade and Industry Minister Rob Davies argue that South Africa should be included under the favourable AGOA fabric waiver provisions.
What happens beyond 2015 remains uncertain. What is clear, however, is that the United States has in recent years become somewhat more bearish on non-reciprocal trade arrangements. Economic conditions in the U.S. remain difficult on the back of the recent (and arguably ongoing) global financial crisis; Congress is divided politically (given the respective majorities within the Senate and House) and seems more intently focused on policies that, for example, promote its own market opportunities for exports of goods and services (for example through the legislation introduced to the Senate and House in May: ‘Increasing American Jobs Through Greater Exports to Africa Act of 2012‘, which inter alia seeks to triple American exports to Africa), or initiatives to bring back jobs (from outsourced locations) through tax cuts to qualifying firms (the ‘Bring Jobs Back to America’ bill was however blocked by Senate Republicans a short while ago). There has been an increase in bilateral investment treaties with African countries, and SACU also updated its Agreement with the US in June, on the sidelines of the recent AGOA Forum in Washington. The U.S.’ revised 2012 “BIT model” contains elements on transparency of public participation in the economy and stricter disciplines with respect to the preferential treatment of State-owned enterprises. The Obama Administration’s ‘U.S. Strategy Towards Sub-Saharan Africa’, released during the AGOA Forum, seems by and large to reinforce existing rather than articulate new policy, but reinforces the interest in Africa inter alia through its ‘Doing Business in Africa’ campaign in harmony with its ‘National Export Initiative’, while incidentally also promising to work with Congress to extend AGOA beyond 2015.
Indications are, however, that the future focus of AGOA may be more on the lower-income countries and that countries like South Africa could eventually be graduated out of the program (not unlike the future EU Generalised System of Preferences). There is ongoing debate on whether South Africa in particular, now that it forms part of the BRICS bloc and given its relatively higher per capita income, should even remain part of AGOA. South Africa is currently one of AGOA’s largest beneficiaries, with sectors such as the automotive industry (US$ 2.1bn worth of exports to the US in 2011), or 22% of total US exports) being specific recipients of the duty-free treatment afforded to qualifying goods. Without doubt the BRICS membership risks frequently placing South Africa at loggerheads with the U.S. in various international fora, like the United Nations. But given the strong trade relationship (South Africa imported US$ 7bn worth of goods from the US in 2011, against US$ 9.5bn in exports) – and growing strategic imperatives – neither country can afford allowing the bilateral relationship to weaken. South Africa is the U.S.’ largest trade partner in Africa in non-oil trade. AGOA’s expiry in 2015 would not only undermine the gains made by African and American firms in growing bilateral commercial trade relations, but would seriously harm more generally the standing of the U.S. as a reliable partner for Africa, especially in the face of the continuously increasing competing economic and political ties between the continent and China and India among others. More than half of the ten fastest growing countries are located in Africa.
Given the debate around South Africa and AGOA, it could be argued that there is now more incentive than ever for the US to be focused on at least maintaining the status quo relative to South Africa (let alone in Africa) given the BRICS partnership and the country’s role in the African Union. Of course the U.S. remains very interested in South Africa and the region (Secretary of State Hillary Clinton is also currently in South Africa), as evidenced by the stated desire to formalise a deeper reciprocal trade, economic and political relationship with SACU. South Africa in particular however seems intent on following a regional-integration approach first and has little appetite for restarting formal trade negotiations, while the SACU Secretariat notwithstanding ongoing technical engagement with the U.S. likewise remains cautious about the deep level of commitments (and the customs union’s readiness) that would be required in the context of a U.S.-type bilateral trade agreement. It is uncertain whether questions around South Africa’s AGOA eligibility and the sizeable volume of bilateral trade with the U.S. (and potential loss of preferences) provide much practical leverage to speed up this process, or whether for example South Africa’s standing in Africa (and globally) will ensure that it continues to remain AGOA-eligible (irrespective of other developments) along with the remaining beneficiaries especially in the post-2015 period. But for now, following the renewal of the fabric provisions, almost US$ 1bn per annum in basic manufacturing export sales to the U.S. and as many as 300,000 textile sector jobs in Africa are suddenly a lot more secure – at least for another two or three years.
Comment received:
Bhekisisa Tsabedze, 09 August 2012 02:09 PM:
“With regards to the USA Congress approving the AGOA 3rd country fabric provision (TCF) agreement, it is indeed a welcomed development for the over forty countries that continue to gain economic benefits from this arrangement. For sub-saharan african countries the importance of the extension to September 30, 2015 cannot be over-emphasised. Most of the least developed countries including Swaziland and Lesotho among others enjoy the employment benefits and economic growth prospects that come with the textile business being conducted in these countries. Swaziland in particular has a high unemployment rate, and the extension could not have come at a better time when the country is faced with economic challenges which could be somewhat cushioned by getting more unemployed Swazis being hired by the Textile industry as the companies in this sector relies completely on export business to the USA under the AGOA arrangement.”