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Affiliated with respectively, the World Bank, the University of Maryland, and the International Monetary Fund. The views expressed in this paper are those of the authors and should not be atrributed to the institutions with which they are affiliated. We are grateful to Natalie Hanson, Larry Hinkle, Hans-Peter Lankes, Marcelo Olarreaga, Paul Ryberg, Emilio Sacerdoti, Stephen Tokarick, Yvonne Tsikata, and participants at seminars at the IMF and the World Bank for helpful comments and suggestions. Francis Ng was extremely generous in providing data on Africa’s trade. Finally, we have benefitted from discussions on this subject with Jagdish Bhagwati, Arvind Panagariya, André Sapir, and Alan Winters.
Throughout this paper “Africa” will refer to sub-Saharan Africa.
While various slogans are touted—such as “trade not aid,” and “trade and aid,” “aid for trade”—the combination “aid not trade” is never among them.
Throughout this paper, the benchmark of “unrestricted access” for apparel exports will refer to an absence of quota and tariff barriers and to a rule of origin that requires only assembly in the beneficiary countries - as under the MFA.
The GSP scheme would probably have been extended even without the AGOA initiative. Nevertheless, the early assurance of its continuation under AGOA provides real benefits because it helps create a more predictable environment for traders and investors.
However, in 2000, only 2 countries in SSA were formally subject to quotas: Mauritius and Kenya. And only Mauritius faced quotas (on about 25 percent of its exports) that could be considered binding.
Based on the growth trend of U.S. apparel imports in recent years, the cap on apparel imports from sub-Saharan Africa under AGOA could conceivably expand to $4.2 billion in eight years, from the current level of $584 million. It is unlikely that the cap will be binding for two reasons. First, the utilization rate, though growing, was around 40 percent in the first nine months of 2002, and is projected to reach a little over 50 percent for the whole year. Second, the recent passage of the Trade Promotion Authority bill by the U.S. Congress has doubled the size of the cap on imports of apparel made from regional fabric - which will now reach 7 percent of overall imports in 2008.
Forty-two countries in sub-Saharan Africa fall below the specified GNP level and hence qualify as an LDBC under AGOA; another two countries—Botswana and Namibia—have recently been designated as LDBCs despite their high GNP levels. Thus, only the following four do not qualify: Gabon, Mauritius, Seychelles, and South Africa. As of end-2001, 12 countries—Mauritius and Kenya (January), South Africa and Madagascar (March), Lesotho (April), Swaziland (July), Ethiopia, Malawi, and Botswana (August), Uganda (October), and Namibia and Zambia (December)—qualified for the apparel benefits under AGOA. Five more countries—Tanzania (February), Mozambique (February), Cameroon (March), Ghana (March) and Senegal (April)—have qualified for the apparel benefits in 2002.
We are assuming that pre-AGOA Mauritius is not quota-constrained, as the equilibrium is on its supply curve. Because Mauritius and most African countries are small, restrictions on their export supply are not likely to affect domestic U.S. prices. In other words, as long as Mauritius’ competitors are quota-constrained, Mauritian exporters receive a net price of Pw+e-t, regardless of whether they themselves are quota-constrained—assuming they receive the full domestic price. As indicated above, virtually all SSA countries, with the sole exception of Mauritius (for 2 products), do not face quotas or are not constrained by them. Hence the assumption throughout the paper is to treat SSA countries as not being quota-constrained themselves prior to AGOA.
The assumption that the exporter receives the full domestic price in the importing country might not be appropriate because importing country intermediaries may appropriate some of the benefits of protection. Our assumption has the effect of exaggerating the benefits of preferential access as well as the losses from the elimination of protection vis-à-vis the rest of the world under the Uruguay Round agreement on textiles and clothing.
These data are available from the authors on request.
The assumed coefficient is also broadly consistent with the figure obtained from input-output data for South Africa.
Faini (1994), one of the few studies on developing countries, reports an estimate of 3.4 for an aggregate export supply elasticity for Turkey. Thus a sectoral elasticity of 5 for small African countries need not be unrealistic. To a large extent, investment in the apparel industry is determined by unskilled labor costs, which as Table 11 shows continues to remain low in much of SSA, except for Mauritius and South Africa.
The following assumes that Mauritius, prior to AGOA, was not quota constrained and will only benefit from the tariff preference effect. This is supported by data for 1999 and 2000 which show that quota utilization by Mauritius was less than 50–60 percent for all categories except two. These two categories accounted for about 25 percent of total exports by value.
This is for the most plausible scenario characterized by an export supply elasticity of 1.
This is for the most plausible scenario characterized by an export supply elasticity of 5.
Of course, this share should be close to 100 percent but may not be for three reasons. First, it is possible that certain exporter-specific certification requirements prevented full exploitation of the tariff preferences for the least developed beneficiaries. Second, Lesotho and Madagascar obtained their certification in March/April so that exports prior to that period could not benefit from AGOA. Third, knit-to-wear items (which are important for Madagascar) were not accorded the preferential access until August 2002.
It should be noted that in general equilibrium, the export response will be more muted and hence aggregating the effects based on large sectoral export elasticities may overstate the overall benefits.
It bears repetition that these numbers represent how much exports will be higher than what they would otherwise be; for example, if exports even without AGOA grow at a certain trend rate because of changes in demand and supply, our estimates show how much AGOA raises this trend path of exports.
The recent passage of the Trade Promotion Authority bill by the U.S. Congress will expand AGOA benefits somewhat. These include extending duty-free treatment to knit-to-shape apparel, doubling the size of the cap on imports of apparel made from regional fabric, and extending LDBC benefits to Namibia and Botswana.
The end of the first stage of AGOA (end-September 2004) and the dismantling of the MFA (end-December 2004) do not exactly coincide. For the purposes of our analysis, however, they are close enough to be treated as if they were happening at the same time.
As indicated above, these quotas formally affected only 2 SSA countries.