Why is AGOA better than a bilateral free trade agreement?

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Photo by Wendy Scofield on Unsplash

Although AGOA has been extended twice, most recently until 2025, it has come under threats over the last four years, as tariffs were imposed on key steel and aluminum products and duty-free access was suspended for apparel imports from Rwanda. Any further disruptions to AGOA could devastate the region, particularly in the medium to long term as economies seek to recover from the impact of COVID-19.

But small countries have benefited immensely too. Although Lesotho’s textile and apparel industry was first established in the late 1980s, exports skyrocketed after AGOA. The industry grew from having a handful of factories in the 1990s to becoming the largest private-sector employer (43 percent), providing 40,000 jobs, which directly and indirectly benefit 13 percent of Lesotho’s population. Lesotho exports approximately $250 million in garments to U.S. brands such as Levi’s, Walmart, and Old Navy.

The duty-free access afforded by AGOA is important for increasing the competitiveness of the African garment industry, which isn’t covered by the Generalized System of Preferences (GSP), another preferential trade program. Some of this competitive edge was lost in 2005 when the World Trade Organization’s Multi-Fiber Agreement expired, which ended export quotas and increased competition from China and other Asian garment producers. Still the duty-free access has allowed sub-Saharan Africa to grow the textile and apparel sector, which is a large-scale employer of low-skilled labor.

The benefit of preferential trade agreements is that they can create sustainable structural changes. After 18 years of benefiting from AGOA, a computable general equilibrium analysis by the World Bank in 2018 showed that if AGOA was terminated, it would lead to a 1 percent loss in income by 2020 and a 16 percent decline in textile and apparel.

But simulations also showed that trade facilitation measures that decrease average trade costs by 2 percent per year would eliminate the adverse income effects that result from the elimination of AGOA. The infant industry protection provided by AGOA allowed the industry to develop and flourish, such that decreasing trade costs by just 2 percent would allow Lesotho to maintain its competitiveness.

While Lesotho has benefited from AGOA for two decades, other industries and sectors are just starting to benefit. 

This article was originally written by Gracelin Baskaran on Brookings.

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