TRALAC - Trade Law Centre

Obama backs AGOA extension

Tuesday, 09 July 2013 Published: | Ethel Hazelhurst

Source: Business Report (South Africa)

South Africa's motor industry is raking in billions of rands in export revenue from the US, boosted by duty free access under the African Growth and Opportunity Act (AGOA).

The act, which has been in place since 2000, is due to expire in 2015. On his recent visit to Africa, US President Barack Obama said he would support the extension of Agoa, which allows a range of products from Africa to enter the world’s largest economy duty free.

Local motor manufacturers have benefited “massively” from Agoa, according to Eckart Naumann, an economist with the Trade Law Centre (Tralac).

Figures from the US Department of Commerce show South African sales of transportation equipment to the US were worth just under $2.2 billion (R22.1bn at Friday’s rate) last year. Of this, $1.9bn was Agoa related, while another $139 million was exported under the generalised system of preferences (GSP), boosting the total sold duty free to almost $2.1bn.

Like Agoa, GSP which was implemented in 1976, is intended to promote economic growth in developing countries.

Meluleki Nzimande, an international trade specialist at Webber Wentzel, said the major players in South Africa were German-based manufacturers Mercedes Benz and BMW.

Naumann said Agoa preferences had influenced the companies’ choice of South Africa as “a production and export base for certain motor vehicles for the US”.

Norman Lamprecht, the National Association of Automobile Manufacturers executive manager, said the Automotive Production and Development Programme and an earlier government support programme had also played a critical role in the sector.

According to Lamprecht, South Africa accounted for 76 percent of Africa’s vehicle production last year, and the US is the biggest market for local vehicle manufacturers.

In contrast to the experience of the motor industry, the struggling garment and textile sector is barely in the frame, with exports of only $24.5m last year, of which only $5.2m was under Agoa.

The reason for this disappointing performance is that, to qualify for duty free status under Agoa, clothing manufacturers have to use local content, according to Naumann. And domestic fabric manufacturers were unable to compete in the highly competitive US market, he added.

The manufacture of clothes has played an important part in the economy of developing countries. And when Agoa was launched, the local garment sector was expected to be a major beneficiary.

For several years it was. Competition in the US was limited at the time, Naumann explained, because the US imposed quotas on imports from certain countries including China and other south-east Asian economies.

The rand had weakened to around R12 or R13 against the dollar in the wake of the terror attack on New York, which gave local exports a price advantage abroad.

However, the situation changed after 2005 as the US quota system was phased out and South African manufacturers faced more competition in the US market. At the same time, the rand started to strengthen to a best level of R5.60 at the end of 2004.

The situation worsened at the end of 2007 when the US economy plunged into recession. And, despite the recovery in the US, there is little chance for local garment manufacturers in that market.

According to the AGOA.info website, South Africa is the most diverse exporter on the continent. But by far the biggest category of local exports to the US currently is minerals and metals, $4.6bn last year. This represents almost half total exports to the US worth $8.7bn. Only $221m of mineral and metal sales were Agoa related, while $642m worth of goods was exported under GSP.

A breakdown of this category showed $3.3bn were primary metals, but the accessible data did not reveal the type of metals.

Total South African exports to the US last year were worth $8.7bn, compared with $7.1bn in imports from the US. The surplus was largely due to minerals and metals where imports from the US were only worth $884m. Transportation equipment showed a shortfall because imports from the US were worth $2.4bn.

US data show the imports were largely made up of tractors and transport vehicles: $414m and $388m respectively.

For the rest, Lamprecht said the imports were largely light motor vehicles manufactured by General Motors, Chrysler and Ford and vehicle components that could not be sourced in South Africa.

The continent’s leading exporters to the US have been Nigeria, $19.1bn last year, and Angola $9.6bn.

However, this year South Africa has overtaken Angola. With exports between January and May at just over $2bn, it is ahead of Angola’s $1.9bn. Nigeria still leads with over $4bn.

Nigeria and Angola, which export largely oil, are under pressure because of shale gas discoveries in the US.

The New York Times reported recently that the US is still importing substantial amounts of oil from Saudi Arabia and other Persian Gulf nations that produce heavy and medium grades of crude that Gulf of Mexico refineries are designed to process.

But it said the boom in US oil shale fields that produce lighter grades were quickly replacing imports from Algeria, Nigeria and other African producers.

If Agoa is extended beyond 2015, South Africa’s status is not secure.

Nzimande said there was a view in the US that South Africa as a middle-income economy should be excluded from the provisions of the act. This was one of the topics on the agenda in discussions between Obama and President Jacob Zuma.

Agoa notes on its website that the two governments have very different trade policy trajectories.

“South Africa shows little appetite for bilateral engagement on trade and investment, while the US is looking beyond the World Trade Organisation (WTO) to what it can achieve through regional negotiations,” it said.

But Naumann said it was unlikely that South Africa would be excluded if Agoa were to be extended.

 

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