Opinion
The Lande Opus On A Transformational AGOA
Basis for Proposal Amendments
Paul Ryan, Orin Hatch and Michael Froman are saying things that could mean that the 114th Congress and the two last years of the Obama presidency are the most productive in U.S. trade policy history. That the powerful chairs of the House Ways and Means, and Senate Finance Committees, and United States Trade Representative respectively are, somewhat coordinating on trade in a white-hot partisan climate says more about how much both Republicans and Democrats have in common than not.
There are, actually, strong indications that the trade promotion authority (TPA) will be passed, giving President Obama the opportunity to conclude two mega trade deals; the Trans-Pacific Partnership (TPP) with 12 Pacific nations, and Transatlantic Trade and Investment Partnership (TTIP) with Europe.
With signs that activity in the World Trade Organization (WTO) is picking up, whether there the long-enduring Doha Round of trade negotiations is concluded or not, a whole host of multilateral agreements covering environmental and ICT goods, trade in services and the nearly concluded Trade Facilitation Agreement (TFA) could have a huge impact on global trade. Congress could also pass lingering legislation in renewing (and improving) AGOA, the Generalized System of Preferences (GSP), Customs Modernization Act (CMA) and the Miscellaneous Tariff Bill (MTB).
But for all these opportunities, if the excerpt from President Barack Obama’s 2015 – 2016 budget is anything to go by, then the journey towards a truly transformational AGOA is off to a great start! Conceivably impelled by lobbying from the African Union and the U.S. private sector, Obama’s budget proposal extends AGOA for another fifteen years – from September 2015 until September 2030. This would allow much more investment in various AGOA industries.
While heavy lifting may be required for legislation to take its ideal shape over the next few weeks, the elements are there for the Obama Administration and Congress to agree on an ideal AGOA as envisaged by its founders. Today, AGOA could mean a lot for the legacy of both Obama and 114 Congress. Fortunately, unlike the free trade agreements such as TPP and TTIP that are largely negotiated by the Executive, improving AGOA rests squarely in the hands of trade committees who hold responsibility for almost all U.S. preference programs.
Starting with past House Ways and Means giants like Archer, Rostenkowski, Gibbons, Thomas and Rangel, and soon Ryan, it was this particular committee and not the Administration that took the lead in the Caribbean Basin Initiative (CBI) and AGOA in the 1980s and 1990s respectively. House Ways and Means developed AGOA’s most effective provision – the third country fabric origin rule for apparel.
Affirmatively, third country fabric is the most successful provision in any unilateral preferential program ever created. But this should not come as a surprise since Ways and Means specializes in rules of origin.
At this stage, it is important for us to note that AGOA must be updated to catch up with the times. Ever since the original AGOA was enacted in 2000, other countries such as China have introduced ever more aggressive programs in their dealings with Africa. As a result, China has not only displaced the United States as Africa’s leading trade partner; it is now displacing U.S. influence and investment on the continent.
The European Union is even more aggressive with its Economic Partnership Agreements (EPAs) not only put American goods at a competitive disadvantage, but much are worse in that they have created stumbling blocks to an economically integrated Africa, which is not just a requirement for American companies to operate their world class distribution chains in Africa, but also to create a stable Africa free of political unrest. Palliatives measure can alleviate the impact from EPAs on U.S. exports, but a more effective AGOA is required for overriding geopolitical reasons in a region that, in possessing the fastest growing middle class, may be the last frontier for global economic expansion.
In suggesting this, I remain positive that countless Africans will welcome an assertion of U.S. creativity since these aspects, for the most part, support a more-progressive-than-China presence of Americans; oftentimes, accompanied by an emphasis on good governance, state of the art management techniques and a transfer of labor and technology skills that China does not seem to have a nark for, and may not even care for in the dynamic between two powers.
In short, while much effort will be expended on TPA, TPP and TTIP, AGOA could, perhaps, have the most lasting impact on global economic development – receiving much greater bipartisan support than any of these other initiatives.
A Transformational AGOA
Knowing that AGOA enhancement is a congressional markup process that will lead to a focus on a speedy passage through Congress, Ethiopia’s Minister of Trade who, as immediate past chair of the African Union’s Africa Trade Ministers’ Consultative Forum, urged that the timely renewal of AGOA not be bogged down in too much detail.
The most promising areas for AGOA Enhancement are the 4 areas identified by Ambassador Froman and the AGOA 2.0. white paper, which are duration of the program, origin rules, product coverage and eligibility requirements and review), as well as 2 steps that Africans can take to ensure that they leverage AGOA preferences and create a level playing field for U.S. exporters.
1. Product Coverage
Having already addressed the need for a longer period for AGOA renewal, we now address Priority 2. Although AGOA already provides duty-free access for 97.5 percent of all tariff lines for virtually all AGOA beneficiaries, there are still 316 tariff lines – mostly in agriculture, that are not currently included.
Here, sub-Saharan Africa has focused much attention on product coverage because designating exports in which they are competitive but subject to the high duty tranche of tariff rate quotas (TRQs) could be the key to getting a more effective AGOA. At the opening ceremony of the 2014 AGOA Forum, the African Union Commission’s Deputy Chairperson Erastus Mwencha specifically advocated for leaf tobacco, peanuts, and sweetened cocoa, amongst other commodities.
Studies show that with the exception of a commodity like sugar, designation all of Africa’s agricultural commodities will not affect U.S. producers or reduce American jobs. Also a number of agriculture products only attract duties if one adds sugar or dairy products during processing and unfortunately, these duties are often prohibitive. This promotes rural development in ways that do not threaten U.S. agriculture.
2. Updated Rules of Origin
While recognizing that AGOA has the most flexible origin rules of any preference program or free trade agreement, Ambassador Froman has suggested that the limits on the ‘cumulation’ of labor costs across AGOA countries be lifted to better promote regional integration. There’s also a suggestion that the current cap on the use of U.S. inputs in meeting the requisite ‘regional value content’ rules be eliminated since it has a marginal impact on promoting Africa’s participation in value chains.
For its suggestion for rules of origin, the AU alludes to a more ambitious modification, which could even go much bigger than the positive impact third country fabric has had. By recommending that this origin rule apply to all sectors outside just apparel, I would like to emphasize that if we’re to go further and achieve more success with this origin rule, the key would be to reduce duties on products not finished in Africa, but with identifiable African value added. The duties applied on such goods would be reduced by the percentage of African content in the final product. Hence, the greater the percentage of African input, the greater the duty reduction. There would be built-in inducements to increase African value-added so as to reduce duty assessments. We have already praised the third country fabric provision. However this modification would even be more transformative since it could induce shifts in the investment of light manufacturing from other parts of the world to Africa.
As for the introduction of a new and more aggressive regime of origin rules, the timing could not be any more perfect. Value chains are on the lookout for alternative locations due to currency appreciation and labor rights challenges. Can you imagine the number of global value chains that would consider Africa as awareness spread of the existence of such tariff incentives? Initially, the value chains may be limited to free trade areas located close to seaports and to a limited extent, airports. Eventually as infrastructure improves, these centers of light manufacturing should spread deeper and deeper inland. If this proposal were combined with the Obama Administration’s proposal to allow unlimited U.S. content into products finished in Africa, it should benefit U.S. producers and jobs.
3. Updating Eligibility Reviews and Criteria
We support Ambassador Froman’s proposal of adding considerations of unwarranted sanitary and phyto-sanitary (SPS) barriers and employment discrimination to reviews on eligibility. In addition, his idea to replace current annual country reviews – which are based on an “all or nothing” principle – is brilliant. Countries must not completely lose benefits or remain eligible for another year. In its place, Froman suggests GSP procedures that are more flexible in allowing for partial withdrawal of benefits as well as time for countries to correct inadequacies. This is a much better, more tailored and nimble approach to dealing with preference program beneficiaries.
Additionally, better suited for AGOA than the unilateral withdrawal or limitation of benefits in a number of cases could be the use of multilaterally coordinated diplomatic tools deemed effective at avoiding collateral damage to innocent parties. For instance, mobilizing peer pressure from neighboring countries and/or members of the same regional economic communities could work in the place of the unilateral withdrawal of AGOA benefits from a country. The United States could also cooperate with 3rd countries to implement arms embargoes, human rights complaints, a travel ban, and asset seizures and/or travel restrictions. Such collective action worked in the “Arab Spring”.
Conclusion: Africa Must Do Its Part as Well
In his August 4th remarks to the 2014 AGOA Forum, USTR Ambassador Froman expressed a need for the United States to assess and revise preference programs to take into account the rise of emerging economies. There’s a chance that the EU’s economic partnership agreements (EPAs) were on his mind as they, require African countries to phase in duty-free treatment for somewhere between 75 and 80 percent of European products and thus ensure a competitive advantage over U.S. exports.
Instead of working to integrate Africa like AGOA does, and could go even further if updated, EPAs also work to further delay Africa’s regional integration. In juxtaposition, Froman is keen on preparing the path for an eventual free trade agreement with Africa as a continent. Negotiating with Africa as a whole rests in a continental free trade agreement, and perhaps an Africa-wide customs union, which could be even further hobbled by EPAs.
Interpretively, although the United States should continue with support for the East African Community. But it must also provide support for the African Union’s building bloc regional economic community (REC) approach towards continent-wide integration. Importantly, premature negotiation of an FTA between individual or smaller groups of African countries would negatively impact the pace of economic integration on the continent. The United States can work with Africa to assure that national and regional AGOA strategies, which assure market liberalization, continue to work.
They can develop a host of agreements based on the acceptance of a common approach to investment promotion and service liberalization as well as full implementation of the WTO Trade Facilitation Agreement (TFAs). Trade and Investment Facilitation Agreements (TIFAs) could be the avenues via which we deal with trade irritants such as SPS barriers to agricultural exports to and from Africa. As for discrimination against U.S. exports as a result of Africa’s EPA commitments, the extended tariff reduction schedule in a number of the agreements should delay serious discrimination for a number of years. In other cases,
the U.S. and EPA members may have to engage in discussions about alleviating measures. South Africa has already indicated a willingness to engage the U.S. in cases where it’s EPA with the EU seriously impacts U.S. exports.
Seminally, where EPA negatives are overwhelming, the U.S. may have to prevail upon the EU for exceptions since there are still negotiations on TTIP to consider.
With writing by John Luther, Mina Kim and Young-Hoon Kim