Africa: Trading beyond preferences

By Memory Dube

Debates preceding the June 2015 renewal of the African Growth and Opportunities Act (AGOA), a US Government initiative to enhance market access for qualifying Sub-Saharan African countries, centered on the unilateral nature of the initiative. Unlike a negotiated trade deal, the US Government under AGOA decides what countries and what products are eligible. With African countries having signed Economic Partnership Agreements with the European Union, it is not hard to imagine that it is unlikely for AGOA to be renewed beyond 2025 – at least not in its current form. The question therefore is: How do African countries ensure they are able to compete in the US market beyond AGOA? And can African countries use AGOA as a springboard to enhance their participation in global trade beyond the US and post AGOA?

While AGOA has had a significant positive impact on US-Africa trade, trebling the two-way trade between the US and Africa between the period 2001 and 2013, it still presents a hobbled story. The bulk of African exports to the US is in commodities, specifically oil and gas, and the preferences remain generally underutilized, with most countries exporting less than US $1 million to the United States. It is also worrying that 80% of total AGOA exports to the US in 2013 were attributed to only three countries: Nigeria, South Africa and Angola.

Though there are certain challenges that remain inherent to AGOA as a preference programme, it is particularly important to reflect on some of those challenges that are specific to African countries and speak to the structure of production in their economies. The more binding constraints on industrialization and manufactured exports are local, rather than foreign, trade barriers. In a post-AGOA environment, African countries could use their experience from AGOA to plug into global value chains to spread the production of goods across different countries, and essentially leverage on their AGOA experience to maximize benefits. AGOA is of limited utility if, by 2025, African countries have not built added capacity to export to other markets. Two imperatives exist therefore: to diversify the export basket, which ties in neatly with Africa’s industrialization agenda; and, concomitant to this, to attract investment that spurs industrialization.

Africa is not very competitive in the global value chains and its share in global manufacturing is just under 2%. The industrialization of Africa remains very high on the agenda of various continental institutions, including the African Development Bank, which has ‘Industrialize Africa’ as one of its ‘High 5’ priorities. Under AGOA, and in addition to products that already have duty-free access, beneficiaries have access to 5,200 tariff lines in the United States, duty-free, which translates to 86% of the US market. All the products under those tariff lines come from various industries, and African countries need to take advantage of that and scale up the value chain. Given the nature of the markets in Africa and the role played by small and medium enterprises in economic growth as well as employment creation, the industrialization approach should, as set out in the AfDB’s High 5s strategy, have SMEs development at its core and driving the industrialization agenda.

An example of some of the sectors that could be more easily industrialized include mining and agro-processing. In mining, an innovative idea could be to look at the backward linkages and focus on the industries that feed into mining. This could include sectors like mining equipment (South Africa being a good example of such), but the focus should be on products that could then transition into sustainable consumer industries. These could be torches, trucks, ventilation systems (transitioning to air-conditioning), safety shoes (transitioning to shoes generally), radio equipment, etc. In effect, countries could use the mines as large, stable demand-generators, and then leverage off the products they need, in order to develop manufacturing capacity. With agro-processing, there are many opportunities, beyond textiles and clothing, which have been successful under AGOA, in such sectors as food production, marketing and transportation. Expansion from basic agricultural production to agro-processing would create many jobs in a continent whose youth population is expanding beyond the currently available employment opportunities. There is ample market available, outside of AGOA. The free trade areas being negotiated, the Tripartite Free Trade Area and the Continental Free Trade Area, in addition to the Regional Economic Communities, will open huge opportunities for African exporters. Agro-processing presents opportunities for SME development, for productive and sustainable labour absorption, for the elimination of post-harvest losses, and, above all, it captures the local value and provides opportunity for industrialization and SME development.

However, as acknowledged in the AfDB’s industrialization pillar under the High 5s, capturing a higher value in global value chains demands that countries address the infrastructure deficiencies; create spaces for technological innovation and advancement; pay more attention to research and development; develop a skilled workforce; and, create the right kind of policies that act as a fulcrum to all the above, among other necessary pre-conditions. This will help in creating and integrating forward and backward linkages, based on the commodity sectors that house the bulk of Africa’s trade with the US under AGOA and, indeed, with other developed countries as well as China and India.

The issue of policy prescriptions to support countries’ integration into global value chains is fraught with controversy. There are no easy policy prescriptions, and, indeed, they may differ across different value chains and different countries. However, it should be noted that the current global production structure creates increased competition for investment. To give an example, the rising cost of production in China opens up opportunities for other countries to capture the value that is relocating from China, and, by extension, China’s markets. This means that countries have to make themselves attractive to investors that are relocating from China. Soft infrastructure issues become important, countries have to pay special attention to policies that create a conducive environment for investment. This primarily speaks to issues on competition law and policy, investment policy, intellectual property rights, standards issues and services, with special emphasis on network services infrastructure such as energy, telecommunications, transport and financial services. These, along with the hard infrastructure issues, are critical to resolving the chronic supply side constraints that African countries face in the conduct of global trade.

The question of where production capacity resides is also a question of investment climate and investor-friendly policies. It is ultimately about regulations, institutions and services. There are many opportunities that are available to African countries to create competitive niches for themselves in various value chains. Opportunities could also be created through various incentives to attract trans-national corporations to invest in particular sectors. Of course, beyond the industrialization agenda, there are questions of market access: When Africa starts competing with other countries for markets for value added, what is needed to make African countries more competitive? What implications would such initiatives as the negotiation of mega-regional trade agreements, such as the Trans-Pacific Partnership (TTP) and Transatlantic Trade and Investment Partnership (TTIP), have on Africa in a post-trade preferences era? Lastly, most discussion on Africa’s industrialization has not been linked to the WTO negotiations, but how can Africa best negotiate future trade (and investment) policies to support industrialization?