How SA can generate more benefits from Agoa

The loss of Agoa would affect just a small share of the total 10% of SA’s exports to the US

The long-awaited week is finally here. US and African policymakers will fill the Sandton Convention Centre to discuss the African Growth & Opportunities Act (Agoa), America’s flagship trade preference programme. It is a pivotal time for the future of Agoa, since the legislation is set to expire in two years’ time after a 25-year run. While legislation for an extension has been introduced, there have been justified calls for reform.

US trade representative Constance Hamilton recently noted that the US should make changes to improve the programme ahead of its congressional reauthorisation due to low utilisation. Last year the US House of Representatives committee on ways & means requested an investigation and report on Agoa, its utilisation and the extent to which it has contributed to economic development in Africa. It found that Agoa has had a positive but limited impact on beneficiary countries’ exports to the US.

The ways & means committee report cited a paper I wrote several years ago in which I provided data on the export and employment gains generated by Agoa. Lesotho’s textile and apparel industry experienced an explosive growth trajectory, from $145m in exports to the US in 2000 to more than $450m in 2004, after Agoa’s introduction. SA increased its automotive exports to the US from $195m in 2000 to $1.8bn in 2013.

However, over time many of these benefits tapered off owing to economic diversification and trade diversion. For example, in 2013 motor vehicles accounted for 25% of US imports from SA. This fell to roughly 10% in 2022. SA now exports nearly two-thirds of its automotives to the EU.

This poses an important question: what would the impact of a loss of Agoa benefits be? While there has been a lot of political opining, there has been less analysis. My DNA Economics colleague Yash Ramkolowan and I decided to do that analysis in our forthcoming paper with the Brookings Institution. It models the loss of Agoa benefits using a standard computable general equilibrium model. I’ll share a couple of key findings.

Our model suggests that at worst, SA’s total exports to the US would fall by about 2.7%. Some sectors would be affected more than others. The biggest losers would be the food and beverages sector, with exports to the US expected to fall by 16%, and the transport equipment sector, forecast to drop 13%. This would be followed by the fruit and vegetable sector (-4.5%) and leather and clothing sector (-3.6%).

In aggregate, a loss of Agoa would lead to a decline in SA’s GDP of just 0.06%. This surprisingly small effect is a result of two factors — the nominally higher tariffs on SA exports to the US and the composition of SA’s export basket. Let me unpack these briefly.

Average tariffs (non-preferential) remain below 5% for most products. As a result, exports to the US without the Agoa programme would not be significantly more expensive. We estimate that total production would fall by less than 0.1%. The effect would be most severe in the transport equipment sector, though this would still only lead to a 0.6% contraction in output.

In addition, the composition of SA’s export basket to the US remains concentrated in goods that do not benefit from Agoa. In 2022 SA’s exports to the US amounted to about 10% of its total export basket. That’s not insignificant — the US is SA’s second biggest trade partner. But a significant share (just over 50%) of SA’s exports to the US is in the minerals and metals sector, which is not affected significantly by the loss of tariff preferences. Thus, a loss of Agoa would affect just a small share of the total 10% of SA’s exports to the US.

These calculations are limited to the impact on exports and do not reflect the potential effect on investment and market confidence, both of which SA has struggled with in recent years. Business confidence has eroded in SA as a result of compounding challenges, including prolonged energy shortages, crime, corruption and exchange rate volatility.

The RMB/BER Business Confidence Index (BCI) has only been above the neutral midpoint (score of 50) for two of the past 62 quarters, dating back to 2008. This has contributed to the loss in SA’s private sector investment. Its gross fixed capital formation (investment) has declined from 18% of GDP in 2008 to 12% of GDP in 2022, one of the lowest levels of any emerging market.

So if Agoa is yielding limited benefits, what should we be advocating for when it comes to a revised Agoa and enhanced implementation? Firstly, the inclusion of critical minerals could be bilaterally beneficial as it could help mobilise investment into a sector with significant growth potential. SA’s mining investment has continued to decline, also owing to the crisis of confidence. In 2021 SA ranked 75 out of 84 jurisdictions in the 2021 Fraser investment attractiveness index for the mining sector, in the company of Zimbabwe, the Democratic Republic of Congo and Venezuela. A trade agreement that includes critical minerals could reduce off-taker risk.

The US has a clear interest in SA’s mining sector. In 2022 it imported almost 100% of its chromium from SA and over a quarter of the manganese, titanium and platinum it required. Further tension in the US-China trade relationship is accelerating US efforts to diversify its sourcing of minerals away from China.

Second, African countries need to develop an Agoa utilisation strategy to increase both the volume of exports and the number of sectors that benefit from it. A chief complaint of US officials is that utilisation remains low for many beneficiaries. During the 2015 authorisation of the legislation the US Congress called for, but did not mandate, participating countries to produce and publish national utilisation strategies. Countries that have developed such strategies have seen an increase in export diversification, production and diversification. SA does not have a strategy as yet.

Losing Agoa will only be significant for SA and other countries if they are using it effectively. To build the export-led economy that SA’s economic leadership has continuously aimed for, it will need to generate more benefits from the trade preference programme. This week is a good time to discuss what that could look like.