AGOA Rules: The Intended and Unintended Consequences of Special Fabric Provisions

Abstract

Lesotho and other least developed African countries responded impressively to the preferences they were granted under the African Growth and Opportunities Act with a rapid increase in their clothing exports to the US. But this performance has not been accompanied by some of the more dynamic growth benefits that might have been hoped for. In this study we develop the theory and present empirical evidence to demonstrate that these outcomes are the predictable consequences of the manner in which the specific preferences might be expected to work.The MFA (Multi-fiber Arrangement) quotas on US imports of textiles created a favorable environment for low value-added, fabric-intensive clothing production in countries with unused quotas by inducing constrained countries to move into higher quality products. By allowing the least developed African countries to use third country fabrics in their clothing exports to the US, AGOA provided additional implicit effective subsidies to clothing that were multiples of the US tariffs on clothing imports. Taken together, these policies help account for the program's success and demonstrate the importance of other rules of origin in preventing poor countries from taking advantage of other preference programs.But the disappointments can also be attributed to the preferences because they discouraged additional value-addition in assembly and stimulated the use of expensive fabrics that were unlikely to be produced locally. When the MFA was removed, constrained countries such as China moved strongly into precisely the markets in which AGOA countries had specialized. Although AGOA helped the least developed countries withstand this shock, they were nonetheless adversely affected. Preference erosion due to MFN reductions in US clothing tariffs could similarly have particularly severe adverse effects on these countries.

Growth by Destination: The Role of Trade in Africa’s Recent Growth Episode

“…Most studies have found a positive effect of this agreement in enhancing trade between USA and Africa, yet our results show that trade with US did not have growth enhancing effects. As suggested by Brenton and Hoppe (2006) while US AGOA preferences might have increased trade the more significant constraints on trade relate to domestic supply side constraints, poor infrastructure, and weak policy environments (see also Frankel 2010, Hoekman and Ozden 2006, and Edwards and Lawrence 2010. Moreover, Ozden and Rienhardt (2004) argue that GSP schemes can discourage countries from undertaking domestic liberalisation, and that the uncertainty regarding the duration of GSP regimes can discourage investment.…”

A Manufactu(RED) Ethics: Labor, HIV, and the Body in Lesotho's “Sweat‐free” Garment Industry

“…In Lesotho, the earliest garment producers were primarily Taiwanese immigrants who had been operating factories in South Africa and who left their home communities after rising wages, decreasing returns, and the quota constraints of the Multi‐Fiber Agreement (MFA) increased costs and competition (Hart ). Producers initially moved into Lesotho as a strategy for avoiding the trade sanctions placed on South Africa during the end of the apartheid era and were later enticed by the availability of cheap wage labor (Edwards and Lawrence ; Hart ).…”

“…For buyers, HIV presented a timely opportunity to engage in CSR that had little to do with working conditions, factory pollution, or other potential reputation‐tarnishing issues. No one took better advantage of this situation than the U.S. retailer Gap, which was instrumental in the establishment of AGOA and the MFA Forum (Edwards and Lawrence :13).…”

The rise and fall of (Chinese) African apparel exports

“…Yet the rapid rise of African apparel exports to the US has not survived the demise of the Multifiber Agreement (MFA) in 2005 ( Fig. 1, top panel), when Chinese exports took over (Harrigan and Barrows, 2009), and has not been accompanied by dynamic growth benefits (Edwards and Lawrence, 2010).…”

“…Yet there is also anecdotal evidence that the inputs were quasi-finished products with little work to be done. Edwards and Lawrence (2010) describe the experience of Lesotho firms which, "almost entirely foreign owned, typically provide assembly, packaging and shipping services and depend on their Asian headquarters to generate orders, design the clothes, and send them the fabric they need". Lall (2005) also explains how East Asian firms in Lesotho had tight links with "full package" apparel suppliers from Hong Kong.…”