AfCFTA sounds the death knell for AGOA

Between 2016 and 2018, the bulk of US imports from Sub Saharan Africa (SSA) countries was crude petroleum from Nigeria and precious metals, non-numismatic coins, and diamonds from South Africa.

The trade revenues increased by 11.5 per cent CAGR to hit US$25.1 billion from US$4.9 billion.

These imports were under the African Growth and Opportunity Act (AGOA) which was enacted in 2000. AGOA has been at the core of US economic policy and commercial engagement with Africa providing eligible sub-Saharan African countries duty-free access to the US market for over 1,800 products. This is in addition to the more than 5,000 products eligible for duty-free access under the Generalized System of Preferences programme.

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By 2020, 38 countries were eligible for AGOA benefits. In 2015, the American Congress passed legislation modernizing and extending the programme to 2025. Up until 2020, all the trade under AGOA was happening in an Africa that had no unilateral trade agreement.

With the operationalisation of the African Continental Free Trade Area (AfCFTA) on January 1, 2021, the trade agreement is a game-changer in how the rest of the world does business with Africa. For starters, the AfCFTA is opening up Africa for more trade within itself. This is something that has been an insurmountable task for many businesses especially those in the formative stages.

The trade agreement, when fully implemented, will become one of the best ways to invest money on the continent.

What the AfCFTA will do for trade in Africa is unprecedented.

According to The Borgen Project, some of the benefits include:

1. Creating a single market. By creating a single market for goods and services on the continent, there will be increased trading among the African nations. The AfCFTA’s implementation will eliminate trade barriers and foster cooperation with member states on investment and competition policies, intellectual property rights, settlement of disputes and other trade-liberating strategies.

1. Expected economic boost and trade diversity. Estimates by the UNECA show that AfCFTA will boost intra-African trade by 52.3 per cent once import duties and non-tariff barriers are eliminated. While it covers a GDP of US$2.5 trillion of the African market, the AfCFTA will also diversify intra-African trade by encouraging more industrial goods as opposed to extractive goods and natural resources. As has been the case and as evidenced by the AGOA, more than 75 per cent of African exports consisted of extractive commodities whereas only 40 per cent of intra-African trade were extractive.

1. Collaborative structure and enforcement. Since all decisions of the AfCFTA institutions are reached by a simple majority vote, the AU Assembly provides oversight, guidance and interpretations of the Agreement. This means that trade agreements that would have taken decades are hastened in a collaborative way.

1. Eliminating tariffs. Import duties will be progressively eliminated and preferential tariffs applied to imports from other state parties. If state parties are a part of regional trade arrangements that have preferential tariffs already in place, state parties must maintain and improve on them.

1. Settling trade disputes. To quickly resolve disputes, the AfCFTA has the Dispute Settlement Mechanism in place to offer mediated consultations between disputing parties. The mechanism is only available to state parties and not private enterprises.

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1. Protecting women traders. With reduced tariffs, women will find trading under the AfCFTA more affordable. With the formalisation of trade channels, UNECA and the African Trade Policy Centre, say that women who account for around 70 per cent of informal cross-border trade will no longer be vulnerable to harassment and violence.

1. Growing Small and Medium-Sized Businesses. In Africa, small and medium-sized businesses make up 80 per cent of the region’s businesses. The elimination of import duties will open up trading activities to small businesses in the regional markets increasing trade and also facilitating small business products to be traded as inputs for larger enterprises in the region.

1. Encouraging industrialization. Under the AfCFTA, the potential for Africa’s manufacturing sector is set to double from US$500 billion in 2015 to US$1 trillion in 2025 and create 14 million stable jobs.

1. Contributing to sustainable growth. The AfCFTA will create and enable decent work and thus sustainable economic growth. The reduced reliance on donor funding will encourage independent financing and development.

With these kinds of benefits, the AGOA has to be improved to align with the demands of the AfCFTA. In February 2020, the US and Kenya signed the first of a kind trade agreement between the United States and a Sub-Saharan African (SSA) country.

The FTA represents the most significant innovation in US-African trade relations since the enactment of AGOA and if successfully concluded, the FTA would undoubtedly signify an important shift in US trade policy in the region.

With the reality that competition for business in Africa is heating up, the FTA is a crucial issue which the Biden administration and Congress must grapple with especially now that the AfCFTA has been operationalised. On the other hand, Africa must be wary of any external forces that would disintegrate the AfCFTA in the guise of doing business with individual countries.

While the AfCFTA could possibly be the last option for the continent’s economic transformation, the Brookings Institute notes that a shift from regional preferential trade agreements to bilateral free trade agreements could undermine the growth of smaller countries, which may not be of enough economic interest to the United States.

The institute adds that bilateral agreements could also undermine efforts to create a regional economic bloc through the AfCFTA.

The AfCFTA marks a key milestone for Africa’s continental trade system with the size of the trade area presenting enormous economic development and sustainable growth that reaches all market sectors and participants.

With the devastating effects of the Covid-19 pandemic, launching the AfCFTA is expected to contribute to the alleviation of the pandemic’s economic damages which have left many businesses struggling or having some close down.

As of 2018, the fastest-growing US imports from SSA countries were mainly natural resources and metals while agricultural products were also among the top of the list. The leading source markets of US imports by absolute value change were South Africa, Nigeria, and Madagascar.  Niger saw the largest increase which grew from US$12.4 million in 2016 to US$58.6 million in 2018 representing an 117.4 per cent CAGR. With its large mineral deposits, the Democratic Republic of Congo had the largest increase in percentage terms, growing 81.0 per cent.

For African countries, meeting AGOA’s rigorous eligibility requirements is difficult. Since countries must establish or make continual progress toward establishing a market-based economy, observe the rule of law, promote political pluralism, and the right to due process, it makes it even harder for many African nations to qualify.

In what could be an arm-twisting tactic, the African countries must also eliminate barriers to US trade and investment. This is despite the fact the US is many times larger as an economy than many African countries combined. As such, the AfCFTA remains the hope of Africa unshackling itself from poverty and not amended trade pacts with countries outside the continent.

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