Trade policy as development policy

Garth Frazer, Johannes Van Biesebroeck

07 August 2007

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The trade policy of OECD governments towards Africa is currently a topic of considerable debate. In Europe, the discussion has focused on the Economic Partnership Agreements. These negotiations, ongoing since 2002, are aimed at refining the trade regime between the European Union and African, Caribbean, and Pacific countries.

The approach taken by the U.S. in implementing the African Growth and Opportunity Act (AGOA) in 2001 was markedly different. The Act is the primary trade legislation relating to Africa and involved unilaterally dropping tariffs on a large number of products coming from qualifying African countries, enlarging their preferential access to the U.S. market. Although countries needed to meet basic standards in terms of legal and democratic freedoms in order to qualify, these requirements were not overly restrictive, as 42 of the 49 sub-Saharan African countries qualified for at least some period.

Naturally, given the considerable institutional challenges that remain in Africa, many are skeptical about exactly what can be accomplished through industrialised country trade policy. Poor infrastructure, rampant corruption, and weak financial institutions are often cited as first-order constraints on African economies that should continue to restrict exports, regardless of whether or not they have preferred access to OECD markets. AGOA provides an ideal, almost experimental, setting to evaluate this skepticism.

Our recent research finds that AGOA lead to a surprisingly large increase in U.S. imports from African countries. This diversified their exports, particularly in manufactured products such as apparel. It occurred despite the relatively modest nature of the AGOA concessions compared to the restrictions that remain in place, particularly on agricultural goods.

When evaluating the impact of a policy, it is frequently difficult to establish a causal relationship. For example, in our case, imports from AGOA countries could have been increasing at the onset of AGOA for reasons unrelated to the Act itself. Alternatively, the U.S. could have selectively lowered tariffs on goods for which it expected to have increased future demand.

Fortunately, details regarding the implementation of the Act allow us to establish the causal impact of AGOA on U.S. imports in a way that is not usually possible. While imports in the key product categories covered by AGOA (apparel, and a large number of agricultural and manufactured products) increased 94% in the post-AGOA period, we are able to discern that the portion of this increase actually caused by AGOA was much smaller - closer to 34%.

The large and robust increase in apparel imports was especially surprising. Slightly more than half of the AGOA countries received duty- and quota-free access to the U.S. market for apparel, once they could demonstrate an effective visa system for verifying the source of their yarns or fabric. The end of the Multi-Fibre Arrangement in 2005 was expected by most observers to result in Chinese apparel imports replacing AGOA imports from that point onward. However, we find that the impact of AGOA on apparel imports has continued to grow, with the largest AGOA-led increases occurring in 2005 and 2006. U.S. firms may be seeking to avoid the duties that remain on Chinese apparel imports, or seeking to diversify their import sources, or both.

We moreover find that the increase in U.S. imports was not the result of a decrease in European imports. In fact, for manufactured products the Act even appears to have led to an increase in imports into Europe for the AGOA products. While this could be related to a number of factors, it certainly is consistent with the presence of fixed costs to exporting. Following the Act, foreign direct investment increased dramatically, consistent with the numerous anecdotes of Asian apparel firms investing to take advantage of AGOA preferences.

Two more stylised facts are worth noting. A large part of the Act’s impact took the form of an expansion in the product lines that African countries export to the U.S., particularly for agricultural and manufactured products. It is no surprise then that we see the impact grow over time, quadrupling from the first year (2001) to 2006.

The Act’s impact was not the same for all products. The estimated import response rises disproportionately with the level of tariff reduction. Eliminating trade restrictions on apparel products that initially faced a 20-25% tariff caused a four times larger import response than eliminating tariffs in the 10-15% range. It suggests that prior to the Act these tariffs had been quite effective in keeping out imports.

Overall, AGOA resulted in an 8.0% increase in non-oil exports from AGOA countries to the U.S. It obviously translates into a much more modest impact on GDP. Still, while the program itself was quite generous on a number of fronts, considerable U.S. restrictions remain on imports from African countries, particularly in the area of agriculture. For example, the average initial tariff for agricultural products included in the Act was 3.7%, while the average tariff remaining on the non-included agricultural products was 10.4%. This is apart from the U.S. agricultural production subsidies that are a more central issue in Doha negotiations, for example.

In the global perspective, it is important to note that Africa’s gain is hardly anyone else’s loss. An 8.0% increase in Africa’s exports to the U.S. will not noticeably affect exports from any other region. Also, the other limitations frequently cited in the African context – poor infrastructure, distorted product and credit markets, high risk, inadequate social capital, and poor public services – did not turn out to be binding constraints to expanding exports under AGOA. These should be important considerations for all OECD countries as they consider their trade policies towards Africa in the future.

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Topics:  Development International trade

Tags:  trade policy, Africa, Economic Partnership Agreements, AGOA

Assistant Professor at the University of Toronto

Professor of Economics at the K.U.Leuven, Belgium

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