The longer-term impact of the African Growth and Opportunity Act

Ana Fernandes, Alejandro Forero, Hibret Maemir, Aaditya Mattoo 14 April 2021

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Economists do not agree on whether preferential access to foreign markets can foster industrial development, particularly in Africa. Some see it as a more effective means than conventional infant industry protection “to transport a bit of the economic miracle from China to Africa” (Collier and Venables 2007). The benefits of preferential access are conditional on competing successfully in foreign markets, rather than in less contested domestic markets. In addition, prolonged privileged access cannot be taken for granted, creating stronger incentives to improve performance. In support of this view is evidence that privileged access to the US market under the African Growth and Opportunity Act (AGOA) initially spurred growth in African exports (e.g. Frazer and Van Biesebroeck 2010). 

Others are sceptical about the benefits of trade preferences. One concern is that unconditional preferences can dilute the case for policy reform at home and lure beneficiaries into sectors where they do not have a comparative advantage (Özden and Reinhardt 2005, Hoekman and Özden 2005). A different concern is that trade preferences are subject to uncertainty, which leads to underinvestment in eligible products (Borchert and Di Ubaldo 2021). The sceptical view finds support in the limited benefits reaped by least-developed countries from the Generalized System of Preferences (GSP) (e.g. Herz and Wagner 2011, Ornelas and Ritel 2018). 

There is surprisingly little evidence, however, on the important economic question: did preferential access durably boost African export performance? The true measure of success for any assistance is not whether performance improves while the assistance is in place but whether the improvement survives a reduction in assistance. Most analytical trade models would predict static benefits of preferential market access in terms of contemporaneous export increases. But dynamic benefits of privileged market access, in terms of enhanced future competitiveness, arise under more demanding conditions. Either we need dynamic economies of scale internal to the firm, for example due to learning-by-doing, which the firm cannot exploit without external assistance because of market failures, such as imperfect capital markets. Alternatively, we need dynamic externalities between firms within an industry, for example due to demonstration effects, which no individual firm would generate without external assistance. 

In recent research, we evaluate the longer-term effects of preferential market access exploiting two trade policy changes in the US (Fernandes et al. 2021). First, under AGOA in 2001, the US allowed unprecedented duty-free entry of apparel products for all African countries eligible for the benefits. African countries obtained privileged access to the US market not only because other countries continued paying tariffs but also because the main exporters were initially subject to quotas under the Multi-Fiber Arrangement (MFA). The second big policy change was the phase out of MFA quotas by 2005, unleashing competition from China and other Asian countries and eroding the preferences that African countries enjoyed in the US market. 

The AGOA implementation in 2001 allows us to assess whether preferential access leads to an expansion of exports for beneficiary countries, for products in general, and apparel specifically. The end of the MFA allows us to assess whether any expansion in apparel exports persisted beyond the reduction in trade preferences. We use product-level data for 208 countries exporting to the US over the period 1992-2017 and a triple-differences specification following Frazer and Van Biesebroeck (2010) to identify the causal impact on African countries’ exports. The inclusion of a stringent set of fixed effects at country-year and product-year levels accounts for macroeconomic shocks such as the Great Recession and for changes in US preferences or global technological/supply shocks. Potential differential pre-treatment dynamics are accounted for by including product group-specific time trends.

We find that AGOA significantly enhanced apparel exports to the US, which increased by 22% for AGOA-eligible countries from 2001 onwards relative to pre-AGOA levels. While there is evidence of apparel export diversion from other destinations (EU and the rest of the world), aggregate apparel exports of beneficiary countries increased. Thus, AGOA’s trade creation outweighed any trade diversion. 

The marginal impact on African apparel exports of beneficiary countries started low but shot up over the first four years after AGOA enactment. Specifically, that impact was zero in 2001 and increased rapidly thereafter, reaching 29% in 2004. This gradual increase in the impact may reflect the time taken by beneficiary countries to (1) learn and build capacity, (2) join a global value chain (GVC) in response to the expanded market opportunities in the US, or (3) to increase the trans-shipment of African imports of apparel from China (Rotunno et al. 2012). After the MFA ended in 2005, the impact of AGOA on apparel exports by African countries to the US levelled off and decreased between 2011 and 2015 (Figure 1). This flattening could be a consequence of the erosion of preferences for African countries facing fiercer competition from Asian giants in the US market. 

Figure 1 Impact of AGOA on African apparel exports across years

Notes: The figure shows coefficients and 95% confidence intervals based on robust standard errors, clustered by HS six-digit product from estimating a triple-differences specification (Eq. (1) in the paper) based on 27,420,560 observations at a country-product-year level allowing for separate coefficients in each year after 2001.

The aggregate picture of a sustained (or at least non-declining) impact of AGOA on apparel exports is based on heterogenous performance across regions: late-bloomers in East Africa offset the boom-bust pattern in Southern Africa and the never-significant growth in Central and Western Africa (Figure 2). After 2005, aggregate African exports were sustained only by the large marginal impacts of AGOA on East African exports. Low tariffs on own imports may help explain the initial success of Southern African countries, because such regimes allowed easy access to imported inputs even compared to that in other countries where duty-drawback and other schemes involved higher transactions costs. The establishment of effective special economic zones, which combined liberal trade regimes with ease of doing business and improved infrastructure, may be a reason for the success of Kenya and Ethiopia. 

Figure 2 Impacts of AGOA on apparel across years and sub-regions in Africa

Notes: These figures show coefficients and 95% confidence intervals based on robust standard errors, clustered by HS six-digit product obtained from estimating a triple-differences specification (Eq. (1) in the paper) based on 27,420,560 observations at a country-product-year level, allowing for separate coefficients in each year after 2001 and for separate coefficients for each sub-region in Africa.

Firm-level export customs data reveal that the sustained dynamism of Kenya and the late growth of Ethiopia in their exports of apparel to the US were driven largely by new exporters that entered the market after 2010, rather than by incumbent exporters that had benefitted from large preference margins during the early AGOA period. This pattern is consistent with dynamic externalities across firms within the apparel industry but rules out dynamic benefits internal to the firms. Thus, it is possible that external economies generated by earlier firms paved the road for subsequent exporters, with industry-level or country-level improvements or reforms. At the same time, these findings cast doubt on a key pillar of the argument for infant industry assistance: learning-by-doing internal to firms which benefit from earlier privileged access.

In Madagascar and Mauritius, a large-scale exit of exporting firms accompanied the contraction of exports after the end of the MFA and the withdrawal of AGOA benefits to Madagascar in 2009. Exports recovered only after Mauritius was granted liberal rules of origin (ROO) in 2009 allowing greater use of imported fabrics, and hence a wider preference margin (Figure 3), and Madagascar regained AGOA preferences in 2015. This pattern suggests that the ups and downs in firms’ export performance were driven by fluctuations in the preference margin rather than by dynamic benefits internal to the firm. Furthermore, growth was concentrated in surviving firms with almost no role played by new firms, which does not support the existence of dynamic externalities.  

Figure 3 Impact of AGOA on Mauritius apparel exports: Firm-level evidence

Notes: The figure shows coefficients and 95% confidence intervals based on robust standard errors, clustered by HS six-digit product obtained from estimating a triple-differences specification (Eq. (3) in the paper) based on 4,916,706 observations at the firm-HS six-digit product-destination-year level (with the three destinations being US, EU, and rest of the world) including zeroes in export flows. The first dotted vertical line indicates the switch into a period with strict ROO while the second dotted vertical line indicates the switch into a period with liberal ROO.

Thus, we find no evidence in any of the four countries of firms learning-by-doing and becoming internationally competitive due to the preferential access they enjoyed in the early AGOA period. Instead, the results are consistent with domestic reform complementing trade preferences to produce export growth in different countries and firms at different points of time.

References

Borchert, I and M Di Ubaldo (2021), “Trade preferences need predictability”, VoxEU.org, 11 January.

Collier, P and A Venables (2007), “Rethinking trade preferences: How Africa can diversify its exports”, VoxEU.org, 28 May. Interview available here.

Fernandes, A, A Forero, H Maemir and A Mattoo (2021), “Are Trade Preferences a Panacea? The Export Impact of the African Growth and Opportunity Act”, update to World Bank Policy Research Working Paper 8753.

Frazer, G and J Van Biesebroeck (2010), “Trade Growth under the African Growth and Opportunity Act”, Review of Economics and Statistics 92(1): 128-144.

Herz, B and M Wagner (2011), “The Dark Side of the Generalized System of Preferences”, Review of International Economics 19(4): 763-775.

Hoekman, B and C Özden (2005), “Trade Preferences and Differential Treatment of Developing Countries: A Selective Survey”, World Bank Policy Research Working Paper 3566.

Ornelas, E and M Ritel (2018), “The not-so-generalised effects of the Generalised System of Preferences”, VoxEU.org, 8 November.

Özden, C and E Reinhardt (2005), “The Perversity of Preferences: GSP and Developing Country Trade Policies”, Journal of Development Economics 78(1): 1-21.

Rottuno, L, P-L Vézina and Z Wang (2012), “The rise and fall of (Chinese) African apparel exports”, VoxEU.org, 14 October.

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Topics:  Development International trade

Tags:  trade preferences, AGOA, reforms, Africa, trade creation, Multi-Fiber Arrangement

Lead Economist, Trade and International Integration Unit, Development Research Group, World Bank

Consultant, World Bank

Economist, World Bank

Chief Economist, East Asia and Pacific, World Bank

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