AFRICA TRADE- A WIDER PLAYING FIELD BUT STILL UNEVEN TERRAIN

By Joseph J. Schatz, CQ Staff
CQ WEEKLY – IN FOCUS
Sept. 5, 2009

Lesotho, a tiny, mountain kingdom surrounded by South Africa, is a world away from Bangladesh, a densely populated country of 156 million bordering India in three directions.

But both rank among the world’s very poorest countries — and both have staked their hopes for long-term prosperity on fast-growing textile and apparel industries. And that, in turn, may trigger a Capitol Hill skirmish that has the potential to envelop many similarly situated countries in Asia and Africa, under a proposal lawmakers are weighing to significantly revise the American system of trade preferences.

Since 1975, Congress has doled out especially low tariffs to promote economic growth in the developing world — while also opening up low-cost global chains of supply for U.S. consumers. In 2000, President Bill Clinton designated a separate set of trade preferences to promote industrial development in Africa, by signing into law the African Growth and Opportunity Act (AGOA).

Now, however, a coalition of retail and business organizations and anti-poverty development groups has been pressing Congress to extend the greatly reduced tariffs available under the African program to a broader range of poor countries, most of which are in Asia. Unsurprisingly, the plan is meeting stiff opposition from African countries that have shipped fabrics and clothing under the program’s protective umbrella for the past nine years.

Backers of the original Africa system of preferences say that a flatter and wider trade program would give an unfair leg up to the very countries that have been some of Africa’s fiercest competitors for investment — places such as Bangladesh and Cambodia, which, although poor, are home to enormous textile and apparel concerns. Especially as the global textile industry struggles to survive the recession, African advocates argue, this is no time to threaten preferences for African countries.

“It would kill them, basically,” argues Rosa Whitaker, who served as assistant U.S. trade representative for Africa under presidents Clinton and George W. Bush , and now heads The Whitaker Group, a consulting firm that helps U.S. businesses invest in Africa. “If you take AGOA and give a benefit to supercompetitors — Bangladesh and Cambodia — that would be killing AGOA. Why would you give them a preference designed for the weak?”

This conflict goes to the core of the complicated business of trade preferences — and the business and policy interests that influence U.S. trade policy. It’s gaining new attention as the Generalized System of Preferences, a huge low-tariff program covering 131 countries and territories and about 4,800 products, reaches its expiration date at the end of this year.

With high-profile negotiations on health care and climate change likely to dominate the trade-writing House Ways and Means and Senate Finance committees well into the winter, lawmakers are likely to give the generalized system a short-term extension (along with a separate program to steer Andean countries away from drug production, which is scheduled to expire at the same time).

But trade groups and advocates on both sides of the issue expect the relevant committees to start holding hearings this autumn, as they did last year, setting the stage for a broader legislative debate next year.

African Genesis

The original Africa program, which cut tariffs for roughly 6,000 products made in sub-Saharan countries, still has strong support in Congress — reflecting the bipartisan coalition that enacted it almost a decade ago. The program set out to boost imports from countries across the continent — and particularly those with governments that sought to take advantage of it, such as Kenya, Mauritius, Lesotho and Ghana. With sub-Saharan Africa then accounting for just 1.5 percent of all global trade, prospects for growth were robust. Congress left tariffs in place on African sugar, and the United States continues to provide subsidies for cotton growers, to the chagrin of African leaders.

Forty of the 48 countries in the region have met the program’s eligibility requirements, with overall imports from sub-Saharan Africa more than tripling to $86.1 billion last year from $23.5 billion in 2000. The law, along with other U.S. aid programs for the region, has helped launch a range of U.S.-Africa business ventures in flowers, birdseed and textiles, such as a Victoria’s Secret line now made with cotton sourced from Burkina Faso.

Still, critics of the program say it hasn’t spurred African nations to transform their economies and to develop new industries in a region long dependent on commodities. Indeed, 92.3 percent of AGOA imports in 2008 were petroleum-related products from Angola, Nigeria and other oil producers. “The fact that the large proportion of AGOA exports are commodities is evidence that the benefits of the initiative are limited and likely to be short-lived,” said Mwangi S. Kimenyi, a senior fellow at the Brookings Institution and founding executive director of the Kenya Institute for Public Policy Research and Analysis, in a July paper.

Moreover, trade experts and business groups say AGOA and other regional aid programs have produced a contradictory patchwork of preferences that discriminate against textiles, apparel and agriculture products — the very products that many poor countries are best equipped to produce. This ad hoc system, say U.S. retailers, Asian business groups and some charitable groups, also ends up favoring African and some Latin American countries over a large group of Asian countries.

For instance, under the Africa program’s generous tariff reductions, sub-Saharan African countries increased their textile and apparel shipments to the United States by $1 billion over the four-year span after the law’s enactment. While the numbers are currently declining, they remain 52 percent higher than before the law was enacted, according to the Government Accountability Office.

But Bangladesh and Cambodia, which rely more heavily on textile and apparel industries — and account for almost all of the apparel import tariffs paid to the United States by the poorest countries — still face very high average tariffs, notes Kimberly Ann Elliott, a senior fellow at the Center for Global Development.

In lieu of the current system, a broad coalition of organizations, including the National Retail Federation and Bread for the World, is pushing Congress to create one unified trade preference program with simpler rules and a more equitable distribution of trade benefits.

Under the proposal laid out by the coalition, all nations designated as “least developed countries” by the United Nations, as well as sub-Saharan African countries and other lower-middle-income countries, would receive tariff-free, quota-free access for all products.

Democratic Sen. Dianne Feinstein of California has introduced legislation that codifies many of these recommendations.

Meanwhile, U.S. retailers have a separate agenda in backing a unified system of preferences: They want to relax the grip of U.S. textile and apparel makers on trade policy. “They are adamant that textiles and apparel not be treated any differently anymore,” said Laura M. Baughman, president of The Trade Partnership Worldwide, a consulting firm.

According to a congressionally mandated report by the GAO, released last month, U.S. retailers increasingly favor Asian textile and apparel suppliers because they have more-advanced technology and can adjust their production schedules more quickly to match changes in consumer trends. Some industry sources have made it clear that if trade preferences are leveled out, they’ll move out of Africa and into Asia, the report said.

Textile and apparel imports from AGOA countries are now shrinking — posting a year-to-year decline of 10.4 percent in 2008. Indeed, sub-Saharan Africa accounted for only 1.3 percent of last year’s textile and apparel imports, while China supplied 35 percent. Bangladesh’s 3.8 percent share of textile and apparel imports in 2008 was three times as large as sub-Saharan Africa’s. And Cambodia’s 2.6 percent share was twice as large, according to the GAO.

Part of this gap is due to a greater state of underdevelopment in African economies, which has prevented governments and businesses on that continent from cashing in on the AGOA trade preferences. Without more competitive infrastructure and technology, many African nations aren’t able to produce some higher-value goods, such as expensive lingerie or specialty agricultural products, that qualify for tariff-free marketing under the program. Despite vigorous economic growth in parts of Africa, electricity grids, water resources, roads and bridges throughout much of the continent remain substandard and poorly maintained.

In an August speech to African leaders in Nairobi, Kenya, Secretary of State Hillary Rodham Clinton appealed to African nations to break down barriers to trade with one another and help Africa-based enterprises to take better advantage of the law’s benefits.

“Incentives matter,” said one retail industry source who requested anonymity due to the sensitivity of the debate. Without the benefits of AGOA, the source asked, “what’s the extra incentive in Africa to balance out all the risk?”

Advocates for the African program are looking to House Ways and Means Chairman Charles B. Rangel of New York, one of the principal backers of the 2000 law, to keep the substance of it intact. At the very least, advocates want provisions included in any trade-preference overhaul to mitigate possible negative effects on Africa. “For a nominal U.S. investment — I mean, we’re hardly spending anything on AGOA — we’re able to deliver $5 billion in exports,” Whitaker argued.

Still, many business interests say that Africa’s long-term economic prospects have to move beyond the trade protections of AGOA. Scott Eisner, head of the U.S. Chamber of Commerce’s Africa Business Initiative, would like to see Congress use tax policy to reward U.S. companies that invest in Africa — and he also wants African governments to do more to open their markets to U.S.-made goods, as they have already done for European companies.

Others argue that African countries need to shift into agriculture, where they have more of a competitive advantage. African governments “need to break out of that sort of zero-sum game approach,” said John G. Murphy, the Chamber’s vice president for international affairs. “No one is interested in hanging Africa out to dry. The intention is to make preference programs broader and more useful as a development tool.”