TRALAC - Trade Law Centre

Swaziland’s AGOA status revoked: Madagascar all over again?

Friday, 23 May 2014 Published: | Zenia Lewis and Amadou Sy

Source: Brookings Institution

Earlier this week, the United States was expected to make an announcement regarding duty-free export access under the African Growth and Opportunity Act (AGOA) for Swaziland. News reports indicated that access was rescinded, yet this week others have indicated that official statements have not yet been made. If Swaziland is made ineligible for AGOA, the Swaziland economy is expected to be severely injured. The small country’s exports to the U.S. have averaged over $100 million a year since the beginning of AGOA, mostly in the apparel sector. The sector is thought to employ around 17,000 people, which is a huge number for a country whose unemployment rate is estimated to be around 40 percent.

Swaziland will not be the first country to have its AGOA benefits revoked. Côte d’Ivoire, the Democratic Republic of the Congo, Guinea, Guinea-Bissau, Madagascar, Mali, Mauritania and Niger have all had their privileges rescinded (though in some cases restored) in the last few years for a variety of reasons (often due to undemocratic transitions), but of these countries only Madagascar lost access in any significant amount to non-mineral fuel-related exports to the U.S. under AGOA.

To give some context, AGOA is a U.S. trade preference that provides duty-free treatment to U.S. imports of about 6,000 products from eligible sub-Saharan African countries. Eligibility for AGOA is based on a few main criteria, namely: having or working towards a market-based economy, rule of law, the elimination of trade barriers, economic policies that reduce poverty, systems to combat corruption, protection of workers’ rights; not engaging in activities that undermine U.S. national security; and not engaging in gross violations of human rights or supporting for terrorism. Countries are reviewed annually to ensure they meet or are making progress towards meeting these criteria.

The large majority of U.S. imports from sub-Saharan Africa enter under AGOA, though on average, about 90 percent of imports under AGOA are oil or energy related. Automobiles and apparel make up the leading non-oil import sectors, which, it should be noted, serve to create the most jobs in AGOA-eligible countries. Swaziland is one of the main exporters of apparel under AGOA, and losing its AGOA benefits would mean losing jobs and create uncertainty in one of the country’s most successful export sectors.

What Did Swaziland Do to Possibly Lose AGOA?

Swaziland’s benefits were under review by the Office of the U.S. Trade Representative (USTR) due to concerns over workers’ rights in the country: As stated above, the AGOA eligibility criteria include the protection of internationally recognized worker rights. USTR does not believe that Swaziland has put in place sufficient protections for workers’ rights, human rights or security. According to some news sources, the U.S. had ordered Swaziland to pass a number of amendments related to industrial relations, unions, terrorism, public order and protests among others. Interestingly, media reports from the Swazi Observer indicated that Swaziland’s minister of labor and social security stated a few weeks ago that the AGOA eligibility requirements came from the International Labor Organization and not the U.S. government, which of course, the U.S. Embassy in Swaziland’s public affairs officer rebuked, reaffirming that AGOA standards are from the U.S. Such confusion warrants concern over the understanding of AGOA in the country, which is awaiting an official statement regarding whether or not its status will be terminated in January of 2015.

How Big Could the Consequences of AGOA Revocation Be?

Madagascar was the last major non-oil AGOA-beneficiary that saw its status revoked, following a coup in 2009. This revocation resulted in massive setbacks for its economy. Madagascar exported, on average, over $200 million a year under AGOA, with a peak of over $300 million in 2004—most of it in the apparel sector, but with some handicraft items as well. Half of all textile exports from the country (around $600 million in total) went to the United States, and the textile sector covered up to 8 percent of the country’s GDP. According to Reuters, half of the country’s 150 factories, which employed 50,000 workers, supplied major U.S. stores and brands, such as Wal-Mart, Bloomingdale's and Adidas. Following revocation, tariff rates on apparel exports returned to high levels—estimated around 12-33 percent, much greater than the tariff free access of AGOA. Warning that the tariff increase would make apparel exports from Madagascar uncompetitive and result in export losses, then-head of the Madagascar Export Processing Zone Association said, "It's a very difficult market. The margins are minute, and no buyer will risk the financial burden of paying that duty."

Sure enough, the results of revocation were detrimental: A 2013 paper by Takahiro Fukunishi of the Institute of Developing Economies at the Japan External Trade Organization (JETRO) stated that the consequences of AGOA revocation for Madagascar had a larger impact on the economy than the political turmoil that caused it. According to Fukunishi, the revocation caused exports from Madagascar to the U.S. to fall by around 70 percent, caused almost 30 percent of job losses after the coup, and largely increased the probability of factory shutdowns. Similarly, a publication by the United Nations Economic Commission for Africa indicated that the revocation also had negative effects on regional integration and nearby economies—stating that the revocation “affected several countries which are also AGOA beneficiaries, as Madagascar’s apparel sector uses denim fabric from Lesotho, zippers from Swaziland, and cotton yarn from Zambia, Mauritius and South Africa.” Furthermore, from a foreign investor’s perspective, the Madagascar saga highlights the risk of losing the benefits of lower tariffs to the U.S. if a country loses its eligibility to AGOA. Such a risk cannot be measured but it will certainly be priced.

Even the U.S. Embassy in Madagascar warned of the detrimental effects that losing AGOA eligibility could have upon the country—stating in a 2009 cable found on Wikileaks that “The export processing zone (EPZ), which is mainly comprised of garment factories inspired by AGOA, is the most important formal sector employer in Madagascar outside the government. The EPZ accounts for approximately 100,000 jobs, mostly in the capital area of Antananarivo, which are estimated to feed some 500,000 Malagasy. If Madagascar were declared ineligible for AGOA, these tens of thousands of workers that would almost certainly lose their jobs, which would greatly exacerbate the instability of this already volatile city.” It states that AGOA should have been used as the “carrot” to encourage elections—as if the threat (and then reality) of revocation of export benefits to a country in political crisis would somehow convince the government to return to order.

Balancing Act

The intended purpose of AGOA is to expand U.S.-Africa trade and encourage African economic growth and integration, but obviously there are foreign policy implications for the legislation as well. Balancing U.S. interests and guidelines with efforts to increase economic growth in sub-Saharan Africa is not necessarily an easy task. In addition, the situation with revocation of Swaziland’s benefits presents a very different scene than that of Madagascar. For example, in 2009, William Easterly and Laura Freschi commented on the cause of workers in Madagascar, stating, “So what to do? Cancel AGOA in support of a principle that will do nothing to advance good governance in Africa, or continue it and support workers and investors who had nothing to do with the whole business?” Such a statement makes the “carrot approach” seem poorly guided when it relates to severe job losses. Yet, in Swaziland while the workers will likely lose their jobs, it is their rights that are not currently being upheld. Thus, it would appear that if nothing changes they suffer and if AGOA is revoked they also suffer, though potentially more. Policymakers have called in the past for gradual removal of preferences that allow time for countries to make changes in problem areas and stop the negative potential affects that revocation can have for job losses and for regional integration, but it would seem that Swaziland has already been offered such a grace period.

It’s not clear how much time Swaziland requires to make reforms, but there’s certainly a lot the country can do before 2015 to make efforts towards respecting human rights and workers’ rights in order to avoid losing their jobs. There are clear concerns regarding Swaziland’s understanding of AGOA based on the above statement from Swaziland’s minister of labor regarding reporting to the ILO (if such media reports are accurate). Understanding the legislation, respecting the eligibility requirements and making the needed reforms are clearly the responsibility of the country’s government if it wants to continue receiving its duty-free export status with the U.S. Meanwhile, the U.S. could make an official statement regarding the country’s progress and give it until the end of the year to comply and make reforms if it is to maintain eligibility. Much like Madagascar, Swaziland has a lot to lose if its AGOA eligibility is revoked. The country must consider that even the uncertainty regarding possible revocation and its disregard for worker’s rights can have negative effects in the interim. However, unlike Madagascar, Swaziland has been given ample opportunity to act and make clear reforms—any job loss and declines in exports due to ineligibility will leave the Swazi government clearly at fault.

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