Uncertainty over future of AGOA poses a risk to investments in Africa

An interesting article published on Semafor expresses skepticism regarding the future of the African Growth Opportunity Act (AGOA), a trade deal that offers eligible sub-Saharan African countries duty-free access to the United States (US) market. AGOA operates in an asymmetric way: the US open its market to a certain number of products originating from selected African States, without a similar obligation for beneficiary countries to open their markets to US-originating products. However, access to the AGOA does not come without a price. Beneficiary countries are required to meet a set of strict conditions to qualify to trade under the programme. Among them, there is the requirement to put in place a market-based economy that protects private property rights, to develop an open rules-based trading system, and to minimize government interference in the economy through measures such as price controls, subsidies, and government ownership of economic assets. In addition, beneficiary countries are required to remove any barrier to US trade and investment, to protect internationally recognised human rights, and to adopt mechanisms aimed at combatting corruption and bribery.

AGOA, a 25-year-old free-trade program, has produced so far mixed results. Some countries like South Africa, Nigeria, Kenya, Ghana and Madagascar and South Africa have achieved substantial benefits from it, in terms of access to the US market (same for Ethiopia, as long as it was included in the programme), while in others the benefits have been more nuanced. Yet, despite the criticism on its limited effectiveness in promoting economic development and trade across Africa, many sectors of the continental economy are craving for its renewal and are seriously worried about the expiration of the program, set for September 2025. The sad reality, however, is that the possibilities that the program will survive, at least in its current form, are very slim. In fact, the new US administration has shown so far to be oriented more towards the introduction than the elimination of tariff rates.

However, not all hope is lost. There is also the possibility that the US will decide to revamp the program. But if this will happen, AGOA will certainly be reconfigured in a more favorable way for the USA than it currently is. Trump’s “America First Trade Policy” executive order on January 20 has called on the US Trade Representative, the Treasury department, and the Commerce department to review all United States trade deals in order to verify that they are concretely aligned with US interests. The outcome of this review will be announced on 1^th April 2025. This will be also the date when clarity will be finally made on the future of AGOA.

Apart from the above considerations, there are other important implications that can arise from the discontinuation of the AGOA. One of these is the effect on investment attraction. As the AGOA provides duty-free access to the US market for many African products, its termination would mean increased tariffs, making African exports less competitive and less appetible for US consumers. This could lead to a decline in export-oriented industries and discourage further investment in those sectors. Textiles, apparel, and agro-food industries, which have benefited significantly from AGOA, are particularly vulnerable to this risk.

Another possible impact of the AGOA termination is the decreased US investor confidence. Data from Statista show that in 2023 US investments in Africa reached 56.28 billion USD, with an upward trend since 2020, when the level of investments was 43.81 billion USD. Investors like predictability, and discontinuing the AGOA would create uncertantly, which could lead to US businesses relocating or scaling back operations in Africa. This, in turn, could lead to important job losses, particularly in sectors that rely heavily on AGOA.

Last but not least there is the risk of disruption of supply chains. The African businesses that have integrated into U.S. supply chains through AGOA are many. A case in point is Ethiopia, where the suspension from AGOA in January 2022, caused 18 foreign companies to leave the country, the destruction of 11,500 jobs, and a combined revenue loss of industrial parks of USD 45 million. This happened because established supply chains linking Ethiopian production sites to the US consumption markets were totally disrupted. The abrupt suspension from the program also did not gave Ethiopian businesses enough time to reposition their production output to alternative markets or to restructure their operations to offset this loss of preferential access to the US market.

African nations need to urgently diversify their trade relationships, proactively engaging with other partners both outside than within the continent in order to deepen trade relations. In this regard, the African Continental Free Trade Area (AfCFTA) presents an important opportunity: it can mitigate the impact of AGOA's termination by boosting intra-African trade and reducing reliance on external markets. This, in turn, would strengthen regional value chains within the continent and create those new investment opportunities that are much needed to set in motion the process of industrialization of African economies.