Lessons from AGOA Review for EAC Three Partner States

On 12 July 2017 at 03:13

Second hand clothes fall on the EAC sensitive list of products, which attract Common External Tariff (CET) rates beyond 25%. Nonetheless, importation of second hand clothes into the East Africa Community (EAC) region is enormous. In 2015, only five EAC Partner States imported second hand clothes (SHC) worth 8% of global SHC exports (Esther, 2017).
In 2016, five EAC Partners States committed to phase out importation of second hand clothes and shoes by 2019. Further to their decision, the (...)

Second hand clothes fall on the EAC sensitive list of products, which attract Common External Tariff (CET) rates beyond 25%. Nonetheless, importation of second hand clothes into the East Africa Community (EAC) region is enormous. In 2015, only five EAC Partner States imported second hand clothes (SHC) worth 8% of global SHC exports (Esther, 2017).

In 2016, five EAC Partners States committed to phase out importation of second hand clothes and shoes by 2019. Further to their decision, the five EAC countries agreed to increase customs duties on imported second hand clothes from the current CET rate of 35% or $0.2 per kg, whichever is higher. Currently, Rwanda has established clear pathways to completely phase-out importation of second hand clothes.

The EAC decision has attracted mixed reactions, including the “expected petition” from the U.S Secondary Materials and Recycled Textiles Association (SMART).Responding to the petition, on 13thJuly 2017, the USTR will convene public hearing petitioning the AGOA eligibility status for three Countries (Rwanda, Tanzania and Uganda).

Why is the USA taking the lead? Simply, USA is the leading exporter of second hand clothes (see table 1 below), and has one trade instrument (the AGOA) to its advantage.

Total 1: Share of Global Second Hand clothes 2015 exports

  • 1. USA 19.5
  • 2. UK 13.3
  • 3. Germany 11.5
  • 4. China 7.9
  • 5. Netherlands 5.4
  • 6. Belgium 4
  • 7. Canada 3.9
  • 8. Poland 3.7
  • 9. Italy 3.6
  • 10. Others 27.2

Source: COMTRADE, cited in “the impact of second hand clothes” by Katende E, 2017

The USA has AGOA at its disposal. Losing AGOA preferences(less utilized by most EAC Partner States) is enough to scare away EAC Partner States from their disruptive, but game changing trade policies. Kenya has already retreated from EAC decision. Hence, Kenya will not under the AGOA Eligibility Status review with its Peer EAC Countries. Kenya’s withdrawal is weakening the EAC regional position.
The USA fight against the EAC decision is just the beginning. If the EAC decision persists, similar concerns should be expected during the WTO trade policy review for the EAC Partner States, and/or under the relevant unilateral trade preferences. For instance, Six out of 9 leading exporters of second hand clothes (listed in Table 1 above) are EU Member States-the providers of the unilateral Everything But Arms (EBA) preference scheme. Will the six EU countries and other WTO members keep silent? Time will tell.

Therefore, EAC Partner States have a lot to worry about. And, withdrawing from their decision is not the panacea. For instance, despite Kenya and Burundi not being under
AGOA eligibility status review, it is regional integration at stake during the AGOA eligibility review for EAC countries. Any unfavorable outcomes regarding AGOA eligibility for the three EAC Partner States will have significant impacts on the EAC region as whole. The first EAC trade governance instrument to be affected is the EAC Common External Tariff (CET), which governs EAC Partner States’ trade regime with the rest of the world. The EAC CET is already vulnerable to the controversy surrounding the future of Economic Partnership Agreement (EPA) involving the EAC region and the EU. Any additional burden onto the CET is disastrous.

History of the out-of-cycle AGOA review

Unlike, the normal annual AGOA review cycle, the out-of-cycle review is unpopular. South Africa is the country to have recently undergone through the same AGOA eligibility review process, in 2015. The South Africa case, commonly known as the “three meat issue”, stemmed from concerns relating to South Africa restrictions on three meat products (chicken, pork and beef) from the USA. To some extent, the South Africa case can shade some light on what is in stores for the three EAC Countries undergoing AGOA eligibility status review.But also South Africa’seligibility for AGOA preferences provides a strong argument in favor of the EAC Partner States.

“The fact that South Africa does not allow importation of Second Hand Clothes (Esther, 2017), yet eligible for AGOA preferences, obliges the USA to ensure equal treatment of all AGOA beneficiaries.”

It is early to predict the final USTR decision for the three countries. But the decision bucket for USTR include the following options:

1) Maintain the status quo. That is: the three Countries retain their AGOA eligibility status.South Africa is eligible for AGOA preferences, yet does not allow importation of second hand clothes. The same rule should equally apply to all AGOA beneficiaries.

2) Deny the three Countries AGOA eligibility status. In the annual AGOA review process, some Sub-Saharan African countries have lost/regained their AGOA eligibility status. A case in point is South Sudan(one of the EAC Partner States). South Sudan lost its AGOA eligibility status in 2015, due to non-compliance with AGOA rule of law criteria.

3) Both sides agree to reduce trade barriers (may be though product quotas for the concerned products) for U.S exports to the three countries. In 2015, South Africa AGOA eligibility status was reviewed. A settlement was reached, and South Africa AGOA eligibility status was retained, after South Africa agreed to annualquota for bone-in chicken imports from the US,(Terence Cremer, 2017). Similarly, product quotas may be established.

Lessons to learn

Reversing the EAC decision has significant impacts on investments already committed in the textile industry in the EAC Partner States. On the other hand, maintaining the decision needs innovative thinking, and gaming changing policy options. So, what lessons can we learn from recent developments on AGOA?

1. Unilateral trade arrangements are not sustainable, wean them off. Unilateral trade preferences are preferred because the receiving country is not obliged to reciprocate any market access offers. The common unilateral trade preferences involving EAC Partner States are: the AGOA, and EBA. However, these preferences are unpredictableand not legally binding. Thus, the same preferences can be revokedany time at the discretion of the offering party-U.S and EU in this case. All at the detriment of long term development vision, and trade&investment commitments from the receiving party side.Thus, Countries seeking to establish developmental trade policies, should wean themselves off these unpredictable trade preferences. Otherwise, businesses established to benefit from these trade preferences are at risk.Instead, game changing trade policies should prioritize: trade financing, strengthening value chains, streamlining supply chains (the whole trade facilitation spectrum), and investment in human development-innovation and skills development.Simply, trade policies that reduce transaction costs and build sector competitiveness, rather than uncompetitive sectors surviving on market access preferences, should be established.

2.Think of policy space first, free trade later.Free trade is good! Theoretically, it benefits everyone.The AGOA carries the same message and spirit. However, free trade contracts/ arrangements should not tie the governments’ policy space hand. Policy space that is necessary to protect/support the development of (infant) industries should be allowed at all times. Any trade arrangement (including AGOA) that threatens this policy space should be kept at arms-length. The importance of such arrangements should be critically reviewed. And where withdrawal from the same arrangements is due, it should be ultra-fast to allow industrialization, job creation, and meaningful poverty reduction initiatives.

3. Trade protection is not aneffective approach.Already imported Second Hand clothes attractCET rate of 35%, which has failed to deter importation of the same products neither support development of textile industry in the EAC region. So, the effectiveness of higher import duty rates on second hand clothes can also be doubted. Actually many sectors that are heavily protected by tariffs, are undeveloped and uncompetitive. See the Sugar Industry in the EAC region. Broadly, Africa markets have been protected for so long. The same markets are still uncompetitive/underdeveloped. The same can be said if trade protection measures are adopted for the textile industry, without paradigm shifts in investment and trade policies. Moreover, trade protection measures bread illicit and informal trading practices. For instance, unless all EAC countries remain committed to the EAC decision,and production of new clothes is escalated, second hand clothes are likely to join alcoholic beverages in the category of “highly smuggled and informally traded” products in the EAC region.
Also, second hand clothes are usually collected for charity purposes (as donations), at below market production costs. For instance, 70% of used clothes collected in the UK end up in overseas markets (Brooks, undated). Minimal costs incurred include: Grading and sorting of clothes before packaging for export, which makes second hand clothes cheap compared to new clothes. And renders customs duties not effective tool.

Sustainable policy options are contained in: addressing infrastructure challenges hindering the flourishment of textile industries in EAC region, and investing in human capacity building programs. Design and fashion skills are closer to the heartbeat of astrong textile industry, than access to raw materials and product price.
EAC Partner States should consider policy options that will facilitate transitioning from a protected textile industry towards a self-sustaining and competitive textile industry, which will not come overnight.

Fredrick Kamusiime.