Nine Ideas to Improve AGOA

The African Growth and Opportunity Act (AGOA) is up for renewal this year. AGOA is a cornerstone of US-Africa economic relations, and has enjoyed bipartisan support for nearly a quarter century. But it's showing its age.

A lot has changed since Bill Clinton signed the bill back in 2000—not least, the rise of China as a global manufacturing powerhouse. In a recent CGD paper and blog summary, Arvind Subramanian and I present evidence that China's rise basically killed AGOA's beneficial impact on US-Africa trade. So while the program should be renewed, it also needs to be updated for current global economic realities.

What could be improved? We gathered experts on African trade and investment issues for two closed-door roundtables at CGD to discuss that question. While the discussion was off the record, here's a roundup of some broad ideas that were discussed across several different topics including:

• Preference erosion
• Capital shortages
• The African Continental Free Trade Area
• The Inflation Reduction Act and critical minerals
• Rules of origin
• Suspensions and eligibility rules 
• Agricultural quotas 
• Visas, and
• Trade in services

Some of these are politically easy but may not have a transformative impact (like aligning AGOA with the African Continental Free Trade Agreement), while others offer potentially big rewards but face big political hurdles (like addressing agricultural quotas, or reversing AGOA preference erosion in the wake of the China shock). In all scenarios though, Congress needs to pass a bill. The Senate has gotten the ball rolling with new bipartisan legislation (more on that below), but we're still waiting on the House. So here's a list of ideas to get them started.

1. Restore Africa's tariff advantage vis-a-vis China with negative tariffs

The whole point of trade preferences is that they offer one set of countries (in this case, African economies) lower tariffs than faced by competitors. In AGOA's case though, this gap has narrowed over time, what economists call "preference erosion."

When AGOA was passed back in 2000, it lowered the tariffs African textiles and garments faced in the US from something in the range of 10 percent on average down to zero. But that dramatically understates the actual advantage AGOA gave to Africa relative to the rest of the world.

At the time, textile and garment imports from other countries—notably, China—were subject to binding caps. Estimates at the time suggested those caps were roughly equivalent to an additional 30 percent tariff of East Asian apparel products. So Africa's real advantage was not 10 percentage point lower tariffs, it was more like 40 percentage points.

When the caps expired in 2005, AGOA countries' tariff advantage fell back down to just 10 percent or so. African apparel exports to the US plummeted, and AGOA ceased to be a big deal.

The obvious solution is to lower tariffs on African goods even further, except that they're already at zero for key products. Hence in our paper Arvind Subramanian and I propose negative tariffs: essentially import subsidies, targeted at African countries and specific labor-intensive manufacturing goods like apparel.

Table 1.  Implied impact of a negative tariff on African light-manufacturing imports to US

We estimate a 10 percent import subsidy would cost the US something in the range of $200 million per annum, and double African manufacturing exports to the US—a huge shot in the arm for industrialization and structural transformation.

Subsidizing another country’s trades as part of industrial policy is not unprecedented. A recent review by Chad Bown, now Chief Economist at the State Department, notes three examples:

• Japan subsidize gave “China exit” subsidies to firms to relocate from China to Southeast Asia.
• The 2022 CHIPS Act provides subsidies for assembly in Costa Rica, Panama, or Vietnam.
• Subsidies under the Inflation Reduction Act can accrue to foreign firms if they source inputs from countries that have a free trade or criticam minerals agreement with the U.S. – more on that below.

2. Complement access to American markets with American capital

In our recent paper on AGOA renewal, Arvind Subramanian and I argue that even with expanded market access, AGOA may not achieve much if African economies lack finance to invest in the large-scale plants required to compete in 21st-century manufacturing.

In a report for the Atlantic Council last year, Frannie Léautier made a similar call to address investment bottlenecks to AGOA's success—aligning the work of the US International Development Finance Corporation (DFC) and the Millennium Challenge Corporation (MCC) with the industrialization goals of AGOA.

DFC, in particular, was set up to tackle problems exactly like this, providing subsidized capital and facilitating private investments in developing countries.

But in Africa's case, DFC doesn't invest a lot in manufacturing. It mostly works in mining and banking. That's unfortunate, because achieving structural transformation and sustained growth in many African economies is going to require a shift away from extractive industries toward higher-value sectors like manufacturing. (Perhaps this is something the new DFC office in Nairobi can focus on.)

AGOA renewal would be a good moment for Congress to nudge DFC not to think of Africa solely as a source for minerals, and put real money into industrialization—without that, it's unlikely many more countries can exploit AGOA market access.

Investment doesn't have to be limited to public institutions though. Over on the Brookings site, Witney Schneidman has a proposal for tax incentives for American firms to invest in specific sectors in the continent.

3. Expand AGOA's definition of "Africa" to match AfCFTA

To simplify a bit, 35 percent of the value of products imported duty-free under AGOA must be produced within "Africa." So Kenyan garment manufacturers can import textiles from Madagascar, and both steps in that value chain count toward the 35 percent.

AGOA defines Africa roughly as sub-Saharan Africa. But the new African Continental Free Trade Area (AfCFTA) is broader, encompassing North Africa as well.

The recent bipartisan bill proposed by Senate Foreign Relations Committee member Chris Coons (D-DE) and Ranking Member Jim Risch (R-ID) would allow AGOA countries to source inputs from non-AGOA AfCFTA countries in North Africa and still count toward the 35 percent cap. But the North African source countries still have to comply with "AGOA’s eligibility requirements related to governance, human rights, and foreign policy."

It's a small but worthwhile step toward encouraging economic integration on the continent.

4. Admit African critical minerals under the new IRA sourcing rules

The clean energy transition has set off a global race for supplies of minerals needed in the production of batteries and other green technologies. Africa is home to about half the world's reserves of cobalt and manganese, as well as considerable deposits of graphite, copper, and nickel.

There is a risk that the new scramble for Africa's critical minerals could distract from the deeper goals of AGOA. The policy's biggest accomplishments have been building up a manufacturing base in countries like Ethiopia and Madagascar, allowing countries to go beyond primary product exports. It would be a shame if AGOA pushes them back in that direction.

That said, someone is going to buy Congo's cobalt. And it would benefit Congo if whoever does is committed to transparency and good governance. Zainab Usman at Carnegie has written extensively about how AGOA can help the US diversify its source of critical minerals.

The first step is to avoid a de facto US boycott of African minerals. I say “boycott” because the Inflation Reduction Act (IRA) provides tax incentives for purchasing electric vehicles, but only if 50 percent (and soon 80 percent) of the critical minerals in their batteries are produced in the US or a country that has a free trade agreement with the US. No African country does except Morocco. So, in effect, under the IRA, Africa's critical minerals aren't welcome.

Luckily there’s a simple fix: adding AGOA countries to the IRA list of acceptable source countries. 

America shouldn't be trying carve up Africa into regions of geopolitical influence, forcing countries to choose between China and the West, but it also shouldn't self-sabotage by shutting the door to African commodities.

5. Keep the rules of origin as flexible as possible

In Washington, D.C. these days, all international economic policy conversations seem to revolve around China. That can work to African countries' benefit if they can become part of America's "friendshoring" strategy, per points #1 and #4 above.

But there is one hypothetical scenario where America's desire to keep China in check could directly undermine AGOA's impact: if Congress were to somehow limit the use of Chinese inputs or Chinese firms in AGOA supply chains.

There is some evidence of "transshipment" occurring in the early AGOA days, whereby Chinese products were sent to Africa, repackaged, and exported to the US. That was well over a decade ago, though, and China’s role in apparel markets is waning. While the US should still police that, it also needs to ensure that African producers can be integrated into global supply chains—requiring that AGOA supply chains eschew all inputs from the world's largest exporter would doom the program to irrelevance.

Unlike the other items on this list, this is actually just a plea to maintain the status quo despite a new geopolitical context. 

 6. Make eligibility more predictable

Successive US administrations have used AGOA eligibility as a stick to discipline African governments. It's unclear if this works, and very clear it imposes big costs on African economies. One of AGOA's main benefits is providing predictable, long-term market access that justifies upfront investments in manufacturing capacity. Suspending countries too capriciously undermines this.

The original AGOA act outlines a long list of governance requirements that countries must meet for eligibility, e.g., not engaging in gross violations of human rights or sponsoring terrorism, having a market-based economy, rule of law, anti-corruption measures, microcredit programs (oddly specific), and an acceptable minimum wage, all while protecting US intellectual property and generally not undermining US "foreign policy interests."

In a few cases (e.g. Mali and Niger), the US has deemed a country’s government too odious to let it export t-shirts to America, while continuing to provide it with military aid. (Not that Mali was exporting any t-shirts anyway.) 

The Coons-Risch bill provides some welcome clarity about AGOA eligibility rules, and removes some arbitrary discretion by tying it to existing US government country classifications with regard to human rights abuses, control of corruption, and so on. But for the most part, the bill leans into the idea of using AGOA as leverage for unrelated policy goals.

Allowing poorly governed countries to remain in AGOA is not a surrender on governance: it's a strategy for improvement. The most plausible route for AGOA to improve governance in African countries is not as a carrot or stick, but by building up private businesses and a corps of industrial workers who demand sound economic management.

That's not to say AGOA should take an "anything goes" approach. But legislators should be clear about what they hope to achieve with the rules about eligibility. Suspensions likely make much more sense for some forms of misgovernance than others.

For instance, if a government expropriates private property and employs prison labor to manufacture goods for export, the US should obviously drop that country from AGOA. To do otherwise would be to reward bad behavior and undercut US workers.

But if a government shakes down private companies for bribes, it is unclear how denying those same firms access to American markets helps matters. Manufacturing firms that overcome such obstacles to tap into export markets should be encouraged. Their success is perhaps the best hope for a new political economy built around value addition, not rent extraction.

Governments in many poorly governed countries have their private sector held hostage; America needs a better policy response than shooting the hostage.

7. Open up American markets to African cotton, tobacco, and beef

A question that comes up a lot in AGOA discussions is, "are there new products that could be added to the list? Why is AGOA all about manufacturing, and not agriculture?"

The answer to why there isn’t more agricultural trade under AGOA is not a simple question of tariffs or extending AGOA in its current form. It will require slightly more creative legislative tweaks. The Economist summarized the situation as follows, drawing on work by former CGD senior fellow Kimberly Ann Elliott:

AGOA was meant to open America’s food market to Africa. But while most agricultural products from Africa can enter tariff-free, the small print limits imports of much of what the continent grows. Some crops are still hit with import taxes. And even though the threat to American farmers is negligible, the United States imposes quotas on imports of African products including cotton, sugar, dairy products, peanuts and tobacco. Processed foods that contain milk, such as chocolate, get caught up in these too. Imports above the allocated quota are hit with steep tariffs—350% for tobacco. America allocates most of its quotas to long-standing trading partners. This year Namibia secured a quota for its debut shipment of beef. (Without that it would have been taxed at 26%.) Yet its quota of 860 tonnes is tiny, amounting to just 0.008% of American beef production.

As Elliott told The Economist, the import requirements surrounding these cash crops are "mind-bogglingly complex." The task for congressional staffers drafting bills would be to cut through that complexity, and deliver guaranteed quota access to at least some African cash crop exporters. 

8. Give African students and businesspeople visas to build links with America

Trade depends on people. If the US is serious about promoting US-Africa trade and forging a lasting strategic alliance with the region, Congress needs to make it easier for Africans to study, visit, and work in the United States.

In a post about Biden's 2022 US-Africa Leaders Summit, CGD non-resident fellow Todd Moss and the Institute for Progress’s Jeremy Neufeld recounted the following story:

Powwater, an American technology startup which delivers clean water in Kenya, was recently invited to pitch a major Silicon Valley investor [in early 2022]. But when the company tried to bring their Kenyan chief product officer to California, she was told the next available visa appointment was in June. . . of 2024.

Currently the wait time for an appointment for an interview to get a US student visa is 286 days in Accra, Ghana, 266 days in Kinshasa, Democratic Republic of Congo, and 251 days in Abuja, Nigeria. This is a problem for US consulates globally, not just in Africa, but has particularly stark implications for US-Africa economic relations. 

Diaspora networks are key determinants of trade patterns, as well as good governance. Return migrants have an outsized role in entrepreneurship and establishing new trade patterns (that's not only true in the former Yugoslavia, there's also good evidence from Mozambique as well). Across Africa, diaspora entrepreneurs are more likely to export. And African diasporas (e.g., in Mozambique and Cape Verde) appear to improve the demand for democracy and good governance at home.

No serious trade relationship is possible if trading partners literally can't travel to have meetings. AGOA renewal would be a good opportunity for Congress to insist the State Department clean up this process. 

9. Expand AGOA’s scope to encourage trade in services

While manufacturing exports have been the traditional springboard to fast growth for developing economies, manufacturing’s share in global GDP has flattened out. The future, many economists believe, is in services. And particularly for Anglophone African countries with friendly diplomatic relations with the West, trade in services is a potential area for expansion.

Think, for instance, of call centers in Kenya. These fit into what the World Trade Organization calls the “cross-border supply” mode of services trade, in which both parties stay in their home country (other modes incorporate things like tourism, wholly owned subsidiaries, and short-term consultants crossing borders).

Tariffs are not really the issue here, so the scope for AGOA expansion isn’t immediately obvious. But Congress does have levers it could use:

• Our proposal above to actively subsidize trade in specific sectors in AGOA-eligible countries could be applied to our hypothetical Kenyan call center as well.
• The same goes for any variety of financial tools, via entities like the DFC or tax incentives.
• Finally, regulatory barriers around issues like data protection often constitute hurdles to services trade which Congress could address.

Conclusion: renew and reform

To understand how AGOA works, and which aspects should be reinforced, it's instructive to look at who is pushing for its renewal. By and large those are African firms and governments who succeeded in setting up apparel exports during AGOA's early heyday. That mostly happened in the early years, when Africa's tariff advantage over China was bigger. It wasn't about carrots and sticks for policy reform, or expanding America's share in African commodity markets. It was about economic opportunity and (as far as politics entered at all) creating a viable manufacturing sector, with companies and workers who would lobby their governments for sane economic policymaking—just as they are petitioning American policymakers to renew AGOA now.

AGOA expires in October 2025. Given the challenging political climate, Capitol Hill should seize an opening to make vital progress now. In a perfect world, lawmakers will incorporate some of the ideas above. But first and foremost, Congress needs to pass *something.* Letting AGOA lapse would be an unforced error, imposing economic pain on some of the most fragile economies in the world and undermining America's influence in the region for no clear gain.