Boosting US-Africa Trade Ain’t Just About Access, It’s About Competitiveness

This is a joint post with Vijaya Ramachandran.

This is shaping up to be a big year for US trade policy. Most eyes are on potential deals with the Pacific Rim and Europe (and reeling from Senator Reid’s latest blow to their prospects). Those of us concerned with trade as a driver for development should also be watching Congress’ and the Obama Administration’s review of the African Growth and Opportunity Act (AGOA). It has been the cornerstone of US trade policy with Sub-Saharan Africa for over a decade. AGOA uses preferential access to the $17 trillion US economy as a way of boosting trade, investment, and growth in African economies. With AGOA set to expire in September 2015, this is the right time to take a big step back and think about what’s worked and what needs to change. Not just with AGOA itself, but with US trade capacity assistance as well.

By all accounts, AGOA has produced only modest results. Oil, minerals, and South African manufactures continue to dominate the US-Africa trade picture. Even though over 96 percent of African products receive duty-free access. Just three nations (Angola, Nigeria, and South Africa) account for more than three-quarters of regional exports to the US. That number reaches well over 90 percent once you add in the other oil exporting countries.

Granted, AGOA has contributed to pockets of success in a few countries and sectors, such as apparel and agricultural goods. And, US imports from the six largest non-oil economies have increased by nearly 60 percent since 2005. Although, they still account for only 2 percent of regional exports to the US (while accounting for 13 percent of regional GDP). Despite these achievements, even its most ardent supporters would admit that AGOA’s impact has fallen short of its potential. 

Sub-Saharan Africa Exports to US Market, by Country Groups

Source: US International Trade Commission database and authors’ calculations

In a new policy paper, we catalogue how very high indirect costs continue to hold back firms’ competitiveness in many African countries. Issues like unreliable electricity, expensive and slow transport, burdensome licensing requirements, and corruption. Plus, how small African markets often prevent firms from gaining sufficient scale to become globally competitive. None of this is new – to African governments, the US government, or businesses. But, if the US wants to promote trade as a development driver, and it clearly does, then it should be much more focused on helping to address these challenges.

Firm Cost Structure: Share of Indirect and Other Costs, Select Countries

Source: Eifert, Gelb, and Ramachandran (2008)

Things are beginning to change. Last June, President Obama announced a new Trade Africa Initiative, which will support efforts to speed up port and border crossing times in East Africa. Plus, the Power Africa Initiative should help to ease electricity constraints in a handful of countries. What’s still missing is an overarching strategy that guides all US agency efforts across the entire region.

This will require a fresh look at broader US trade capacity programs. Since 2005, the Millennium Challenge Corporation (MCC) has provided the lion’s share of trade-related assistance, focusing mostly on ports, roads, and power. That’s been a good thing. However, outside of MCC compacts, US efforts have been under resourced, fragmented, and lacking strategic focus. Nearly 20 government agencies, with almost no formal coordination amongst them, have been responsible for delivering about $80 million a year. That’s only $2.5 million per country, on average. A drop in the bucket.

The US government should do four things to make its trade-related programs more meaningful and effective: 

(1)   Establish a centralized policy body, with appropriate budgetary authority, to focus and coordinate related programs;

(2)   Further increase USAID support for regional economic communities that are supporting integration and harmonized policies;

(3)   Protect and expand funding for the MCC; and

(4)   Increase support for electricity and transport infrastructure investments through OPIC, the African Development Bank, the World Bank, and USAID.

Let’s be clear, none of these are silver bullets. African governments and businesses are ultimately in the driver’s seat. Plus, these actions focus largely on the US government and less on US private investment (which arguably is more important). But, with a few modest changes, the US government could do a much better job of supporting African nations’ efforts and helping to boost US-Africa trade and investment.

[We will be posting a blog soon on whether the US should consider revising its AGOA country eligibility requirements. So, please stay tuned for that.]