The African Growth and Opportunity Act, a US trade failure

Too many people read the headlines and skip the actual substance. A headline might say that it’s imperative for America to renew the African Growth and Opportunity Act (AGOA). The underlying facts might demonstrate that AGOA has failed and needs to reinvent itself.

Brad Pitt actually summed up the results for America’s 15-year love affair with AGOA when his Benjamin Button movie character said that “Our lives are defined by opportunities, even the ones we miss.”

{mosads}Pitt’s comment came from a movie called “The Curious Case of Benjamin Button” and, unfortunately, runs parallel to the real-life legislative drama that we have experienced with the AGOA. The movie is about a man who starts life at the end of his years and works his way back to the beginning. One cannot miss the AGOA parallel, which, after 15 long years, is expected to end up in about the same place that it started. Any honest assessment of AGOA demonstrates that it has not grown and cannot claim success. In the end, just like Button, we can only describe AGOA as a “missed opportunity.”

It was the year 2000 when President Clinton proudly led America into the AGOA trade initiative. The program was designed to improve the commercial relationship between sub-Saharan Africa and the United States. At inception, there were 34 African countries involved, and the number has grown to about 40 today. The first full year of AGOA showed a trading volume close to $17 billion, and it peaked in 2008 at $80 billion. All the early signs of AGOA indicated that the program would develop into a successful trade initiative. Unfortunately, after hitting the peak in 2008, AGOA numbers have been declining ever since. Just last year, AGOA was valued at $23 billion (down 71 percent from its peak).

Pitt’s Button character also said in the movie: “You can change or stay the same; there are no rules to this thing. We can make the best of it or the worst of it.” In retrospect, the AGOA initiative has seemingly made the worst of it.

To be part of the AGOA program, an African nation would achieve U.S. duty-free status for multiple products if it worked toward several goals, including protection of intellectual property and human rights; combating poverty, corruption and child labor; and working toward better healthcare and education. Most of the goals were reached, so on one level, the program did quite well.

However, as we evaluate actual AGOA numbers, the problem is that success of the program is inexorably linked to the total value of shipments under the initiative. Some of the numbers overlap with the America’s Generalized System of Preferences program and that makes it a bit confusing to clarify the true benefit. In addition, approximately two-thirds of AGOA usage is energy-related products (like crude oil), where the African nations have an abundant supply. Not to be a trade spoiler, but the duty savings on a barrel of oil is quite low (in the range of 5 to 10 cents a barrel) and, with the savings being so minor, it’s clear that purchases were based on the prevailing cost from the region, and not because there was a duty advantage under the AGOA program.

If Congress fails to renew AGOA when it expires on Sept. 30, Americans who are planning to purchase a new BMW 3 Series might notice the difference, because the cost of their vehicle could suddenly increase. In fact, both Mercedes and BMW have assembled select automobiles in South Africa for shipment to the USA (free of duty) under AGOA. If you are in the apparel business, non-renewal of AGOA will surely spell disaster on several levels. Seasonal apparel is booked months in advance and the actual cost of the added duty is more significant (on a percentage basis) then on a car or a barrel of oil. If fact, it’s the apparel folks who are trying their hardest to keep the AGOA program moving, and they also are capable of providing significant employment and help to the African economies.

Experts love to tout the dramatic increase of the non-oil exports from sub-Saharan Africa, but the reality is that AGOA exports in this category have only increased from $1.3 billion in 2001 (first year) to $4.9 billion by 2013. This might sound like a lot, but in the world of trade this is really an insignificant number (U.S. imports were valued at $2.2 trillion in 2013).

The AGOA does have its merits, but it’s difficult to prove that it has actually worked based on the data. In fact, one can easily conclude that the program has failed. Here are some rationalizations that may help explain:

1. While the European Union has sought to achieve bilateral trade deals with specific African countries under Economic Partnership Agreements, AGOA was designed to be one-sided and only allows imports to the U.S. There are many who now would argue that our U.S. exports to the region deserve some preferential treatment as well.

2. Energy-related products accounted for about 67 percent of all AGOA imports to the U.S. in 2014. Most of the oil bought under the AGOA banner was purchased because it was cheap (and not because it had the AGOA duty free incentive). If you look at the overall numbers, the decline in total AGOA exports can be traced to falling worldwide oil prices and also to competition from U.S. shale oil production. Essentially, in order to understand the potential merits of AGOA, one has to discount the impact of the energy-related portion of the total agreement (67 percent) and focus on what was gained from the 33 percent non-energy related offering.

3. In fact, with close to 40 sub-Saharan countries qualified to use AGOA, only a small percentage actually do use meaningful amounts of the program. Of the ones that do, if only a handful of countries use the energy part — and that is 67 percent of the total AGOA — that leaves 33 percent for the non-energy portion. Digging deeper into the non-energy sector, South Africa is currently the largest user of that very specific part, taking up about 23 points of the 33 percent total. That means that everyone else (perhaps 38 or 39 countries) is likely using only 10 points of the total AGOA non-energy program!

4. This becomes even more interesting because Sens. Chris Coons (D-Del.) and Johnny Isakson (R-Ga.) are hellbent on either getting concessions from South Africa because of a valid poultry dispute or possibly kicking them out of AGOA altogether. This is partly because of the chickens, but also because South Africa is an economically evolving country and actually is naturally falling out of the category that defines who can participate in AGOA in the first place.

5. If South Africa is pushed out of AGOA, then very little is left from the non-energy group to export. Based on 2014 non-energy numbers, it would be hard to justify a massive free-trade agreement that includes 35 countries for approximately $1.3 billion dollars in exports of various products.

6. The last four years of AGOA have shown a steady decline. Total AGOA export numbers to the U.S. (including Generalized System of Preferences for purposes of this exercise) indicate the following:

• 2011: $68.2 billion
• 2012: $43.1 billion
• 2013: $34.8 billion
• 2014: $23.2 billion

Except for apparel and auto manufacturing (from South Africa), very few sectors have actually benefited from the treaty. To make matters worse, close to 80 percent of all the AGOA exports come from just four of the 40 countries (Nigeria, Angola, Chad and South Africa).

If we look at the non-energy sector, just four of the countries (South Africa, Kenya, Lesotho and Mauritius) cover 90 percent of the exports.

Most apparel (which accounts for about $1 billion of the total trade) comes from Kenya, Lesotho and Mauritius. Many apparel companies are interested in growing in the region, but remain reluctant to move forward with their investments until they are certain that Congress will continue the program.

As we approach the Sept. 30 deadline for Congress to renew, we need to also turn our attention to what China is doing in Africa. China remains heavily engaged in an effort to build a strong and lasting footprint on the continent. They have several infrastructure projects working in at least 35 African countries. With major investments in roads, dams, ports, clean water, sanitation and vast railway projects, China is rapidly becoming the master of the African universe! While China is investing, the U.S. remains huddled in the corner, trying to decide if our chickens are being overtaxed or whether we should make the effort to renew yet another trade deal.

We all know that the 113th Congress didn’t do anything on trade, and we do remain hopeful that the 114th will act. However, one needs to seriously decide whether all the fuss is worth the bother. If AGOA doesn’t happen, will there be any tears at the funeral? Last year, sub-Saharan Africa accounted for less than 1 percent of America’s total imports. Surely, if we really want to help Africa, we can do better than that.

The headline for this story is not about the renewal of the African Growth and Opportunity Act. Frankly, just about everyone agrees that AGOA is worthwhile and should be pursued. The real problem is that someone in government needs to figure out how to make this trade agreement work. There has to be a better way for AGOA to be more productive for sub-Saharan Africa, and more meaningful for America.

After all, if we don’t help our African friends, someone else will.

Helfenbein is chairman of the board of the American Apparel and Footwear Association. He is a strong advocate for a robust U.S. trade agenda and lectures frequently on the subjects of supply chain and international trade. Follow him on Twitter @rhelfen.