Trading Up

April 17, 2015

By exerting their economic power, African countries can leverage better trade terms with the US.

In 2000, the US passed what would become one of the landmark pieces of legislation of George W. Bush’s presidency, the African Growth and Opportunity Act (AGOA). Since its inception, AGOA has been the foundation for all US-African investments and it coincided with America’s most ambitious foreign aid campaign in Africa to date. Between 2000 and 2008, AGOA was crucial in increasing American trade with Sub-Saharan Africa from $30 billion per year to more than $100 billion. But how quickly things have changed in the span of just one presidency. Since President Barack Obama took office, US trade with sub-Saharan Africa has fallen 40 percent. In just a few election cycles, America went from Africa’s dominant trade force to a behind-the-times laggard.

So what happened? For starters, there was a global recession that drove American investments inward. Then there was China, whose trade with Africa increased by nearly 50 times since AGOA was passed. In 2009, China overtook the United States to become Africa’s largest trade partner – and it has never really looked back. Moreover, African economies are far more competitive today than they were in 2000. The overall GDP of the continent is five times bigger and African countries have exercised their economic strength by expanding trade relations with China, India, Canada and the whole of Europe. What this reveals is that America no longer has the power to dictate trade terms entirely in its favor. African countries simply have more flexibility and more options to demand reciprocity. So as the US mulls over a 10-year extension of AGOA before it expires in September, now is the best time to rebalance the exchange. On May 14, the US Senate authorized the extension by an overwhelming margin. Now the fate of AGOA moves to the House of Representatives, which has a golden opportunity to herald a new chapter in US-African trade relations.

Make trade, not politics

AGOA has not just been important in increasing trade but it has been a principal conveyance for promoting democracy and achieving market reforms. But as the no political strings attached approach adopted by China has effectively demonstrated, African countries are more interested in a balanced trade equation than being admonished over their governmental affairs. By scaling back the political rhetoric, the US can help African economies get more of what they want – long-term loans, modern infrastructure and improved market access. Europe’s commensurate trade scheme, the Everything but Arms Initiative, which grants duty-free sales of African products, has generated nearly twice as many exports as AGOA. Besides, what the last decade has revealed is that African countries will continue making crucial economic and regulatory reforms regardless of America’s trade conditions.

One of the biggest culprits for the decline in US-Africa trade is American shale oil production, which has significantly impacted petroleum exports from Africa.

Non-oil exports

One of the biggest culprits for the decline in US-Africa trade is American shale oil production, which has significantly impacted petroleum exports from Africa. Crude oil accounts for approximately 90 percent of all US-Africa trade, exposing the need for diversification. Non-oil trade has grown tremendously thanks to AGOA – from $1 billion per year to $5 billion in 2013 – and the US should continue giving duty-free access to agricultural products, manufacturing and textile and apparel exports from Africa. On the other side, AGOA beneficiaries should become more cost-competitive as their recent gains have only been at the expense of developing Asian countries whose products don’t receive preferential treatment from the US. Large US clothing retailers such as GAP, Target and Old Navy have already been sourcing goods from Africa, but more examples like this are needed to produce tangible trickle-down results.

Right of reciprocity

So far, AGOA has kept the growth of agriculture exports at arm’s length. But there is good reason to encourage more growth as agriculture makes up 30 percent of Sub-Saharan African GDP and almost three-quarters of its labor force. Trade barriers on products such as sugar, meat, dairy, vegetables and processed goods have stunted exports. It is said that complete elimination of tariffs on those products could increase exports by more than $100 million with negligible impact on US agricultural production. Eliminating quotas on agricultural products would create a more level-playing field for African producers to break into the American market. This would enable countries like Ivory Coast and Ghana, which together account for three-quarters of global cocoa bean exports, to build on their $50,000 worth of processed chocolate sales to the US each year.

Rethinking the model

China’s state-led economic model has enabled it to decide quickly and grow trade exponentially. After eight years of sluggish performance, perhaps it is time for the US to rethink its African trade model and try something new. One of the legacies of George W. Bush’s presidency was a 640-percent increase in aid to the continent. The investments resulted in breakthroughs in the fights to contain the spread of HIV/AIDS and malaria. Applying the same scale of ambition to stimulating Africa’s economies through long-term infrastructure loans from institutions like the Export-Import Bank of the United States is one possible idea. Preferential access to markets is important for trade, but it does little good unless you have a product and the means to export it.