USITC Report: U.S. Apparel Sourcing under African Growth and Opportunity Act (AGOA)

Untitled

A newly released study by the U.S. International Trade Commission (USITC) suggests that the African Growth Opportunity Act (AGOA) and its “third-country fabric provision” are critical for U.S. apparel sourcing from sub-Saharan Africa (SSA). Specifically:

U.S. apparel imports from SSA grew faster than the world average. During 2016–19, U.S. apparel imports from SSA enjoyed a compound annual growth rate (CAGR) of 11.8 percent (compared with 1.3 percent CAGR of all countries), from $1.0 billion in 2016 to $1.4 billion in 2019. However, SSA overall remained a small apparel supplier to the U.S. market, accounting for only 1.7 percent of the market shares in 2019 (lower than 2.7 percent in 2004, but was a record high since 2015).

U.S. apparel imports from SSA remain uneven across countries. The five SSA countries–Kenya, Lesotho, Madagascar, Mauritius, and Ethiopia altogether accounted for almost 95 percent of all apparel imported from the SSA region under AGOA. The growth of U.S. apparel imports from Ethiopia was particularly fast (86.4% CAGR during 2016-2019), thanks to the country’s industrial parks and its increased use of AGOA benefits. Several global brands such as H&M, Calvin Klein, and Tommy Hilfiger currently source apparel from garment factories located in these industrial parks.

The USITC report suggests that the duty-free preferences awarded under AGOA and the liberal rules of origin available for apparel under the “third-country fabric provision”* are the key competitive advantages of SSA serving as an apparel sourcing destination for U.S. companies. Due to limited yarn and fabric production in SSA, the third-country fabric provision remained critical for SSA exports of apparel to receive duty-free entrance to the United States. Notably, nearly all U.S. imports of apparel from SSA countries entered under AGOA (98 percent). Of these imports, virtually all of them (95.8 percent) used the third-country fabric provision in 2018.

Further, the USITC report used Madagascar as an example to illustrate the significance of AGOA and its third-country fabric provision in particular to SSA countries’ apparel exports to the United States. As noted by USITC:

  • Madagascar was evidenced by the sharp decline in its apparel exports to the U.S. after the country lost its AGOA eligibility in 2009. Without duty-free access to the United States, the average duty rate for U.S. imports of apparel from Madagascar rose to 19.6 percent, and apparel exports to the United States from Madagascar fell from over $211 million in 2009 to only $40 million in 2011.
  • Madagascar’s AGOA benefits were reinstated in 2014. Just in two years, U.S. apparel imports from Madagascar bounced back to one-half of the 2009 level. In 2019, U.S. apparel imports from Madagascar totaled $243 billion, a new record high since 2015.

The USITC report mentioned several factors that are encouraging more U.S. apparel sourcing from SSA. For example:

  • U.S. fashion companies’ sourcing diversification strategy
  • U.S. fashion companies’ rising emphasis on corporate social responsibility (CSR) in sourcing
  • Deepened regional economic integration among SSA countries through regional trade arrangements such as the African Continental Free Trade Area

However, it remains a concern that SSA countries are lack of genuine competitiveness as apparel sourcing destinations. According to the USITC report, SSA countries’ current competitive advantage in apparel “comes solely through the cutting of tariffs on apparel to zero, since the apparel sectors of Bangladesh, Vietnam, and China are more cost-competitive than those of SSA countries. The current competitive advantage that SSA countries have in the apparel sector will decline significantly if AGOA expires in 2025. The uncertainty about AGOA renewal will likely discourage U.S. FDI in the SSA apparel sector.”

Related, as quoted by the USITC report, according to the 2019 Fashion Industry Benchmarking Study, almost half of the surveyed U.S. fashion companies expressed hesitancy about investing in the SSA region due to the temporary nature of AGOA. Moreover, long lead times, lack of infrastructure, and high logistical costs continue to deter apparel retailers from investing in the AGOA region.

*About the African Growth and Opportunity Act (AGOA)

The African Growth and Opportunity Act (AGOA) is a non-reciprocal trade agreement enacted in 2000 that provides duty-free treatment to US imports of certain products from eligible sub-Saharan African (SSA) countries. AGOA intends to promote market-led economic growth and development in SSA and deepen US trade and investment ties with the region.

Because apparel production plays a dominant role in many SSA countries’ economic development, apparel has become one of the top exports for many SSA countries under AGOA. Particularly, the “third-country fabric provision” under AGOA allows US apparel imports from certain SSA countries to be qualified for duty-free treatment even if the apparel use yarns and fabrics produced by non-AGOA countries/regions (such as China, South Korea, and Taiwan). This special rule is deemed as critical because most SSA countries still have no capacity in producing capital and technology-intensive textile products.

On 29 June 2015, the Obama Administration signed a new bill to extend the AGOA (including the third-country fabric provision) for another ten years (until 30 September 2025). The new law simplifies the AGOA rules of origin; gives the president the ability to withdraw, suspend or limit benefits (rather than just terminate eligibility) if designated AGOA countries do not comply with the eligibility criteria; adds notification and reporting requirements; and improves transparency and participation in the AGOA review process.

About the “Third-Country Fabric” provision under AGOA

This is a “Special Rule” for lesser-developed SSA countries (LDCs) under AGOA. According to the rule, these SSA LDCs can enjoy duty-free and quota-free access to the U.S. market for apparel made from yarns and fabrics originating from anywhere in the world. In comparison, most U.S. free trade agreements require the more restrictive “yarn-forward” rules of origin.

Related reading: Challenges facing Sub-Saharan Africa (SSA) as an Apparel Sourcing Base

Author: Sheng Lu

Professor @ University of Delaware

22 thoughts on “USITC Report: U.S. Apparel Sourcing under African Growth and Opportunity Act (AGOA)”

  1. When considering countries that provide imports to the US, the African region is never one I think of, but it’s a good thing that the U.S. apparel imports from Sub-Saharan Africa SSA grew faster than the world average. From 2016-19 the U.S. apparel imports from SSA increased by about 11.8%, but yet still remained a small retailer supplier to the US at about 1.7%. The SSA is working towards increasing their productivity and thus increase developed nations usage of their apparel. Many areas of Africa are still developing, and the AGOA is intended to help promote the SSA’s trade and supply sector even further. With so many restrictions and regulations on other primary exporting nations like China, an efficient trade agreement amongst the US and Africa would encourage production in Africa which would hopefully provide benefits for the US, SSA, and other nations looking to move their production to different countries amidst trade wars and regulations. I wonder what some of the possible barriers and restrictions exist in the SSA region that prevent production and manufacturing processes to successfully endure.

    1. I totally agree. The first country I always think of when I think of sourcing/trade is China or other Asian regions. Personally, I did not realize how much of an impact that SSA made within its sourcing operations. I always thought that since they were not as economically and technologically advanced that they were not too much involved in these matters, but this article really proved me wrong. I think it’ll be positive in promoting diversity of globalization and trade. It would be nice to see “Made in SSA” garments within the United States. In addition, I think it could generate a great reputation for SSA made products and goods. I also like how you talked about the possible barriers/restrictions that may exist in the SSA region. I would love to know those restrictions and I wonder what else can be done to the region to make more of a mark on globalized trade/sourcing.

  2. I think it’s great for both parties that the US apparel industry sources from sub-Saharan Africa. I wouldn’t typically think that the US and SAA would ever be business partners, but this transaction creates opportunities for both countries. How has the pandemic affected these numbers? I’d think that imports from SSA have gone down since the spread of COVID-19.

    1. I have the same thought that the US and SSA will never be business partners but it’s good to see this business relationship as it provides more job opportunities for people in SSA. Under the impacts brought by the virus, the exports from SSA must have reduced and affected the entire supply chain process. However, I see it as a global phenomenon so I think it requires all parties to fight against this.

    2. Before this article, I did not think that the US and SSA were business partners as well. I love seeing the different types of countries that the United States is in business with. I was always under the impression that SSA was not that involved in global affairs. As to your question, I definitely think the number of imports have decreased. However, I think that once the pandemic has subsided and normalcy returns that SSA will have an opportunity to get even more involved in globalization since there is a prediction that many people will stop sourcing from China.

  3. It is very interesting to read that there could be opportunities sourcing in SSA as long as the AGOA remains intact after 2025. This “duty-free treatment to US imports of certain products from eligible sub-Saharan African (SSA) countries”. This intent was to promote market growth in SSA countries, I think this agreement could be helpful to the US but by 2025 may not be as feasible. Sourcing in SSA would help their economy but the United States would have to heavily invest into the production. There is lack of infrastructure and technology to attain the mass needed to be produced to be a successful partner of the United States. Which would mean long lead times and logistical issues. In a large idea the opportunity sourcing from an SSA country seems amazing but how can this all be done before the AGOA agreement is terminated?

    1. What do you mean “This intent was to promote market growth in SSA countries, I think this agreement could be helpful to the US but by 2025 may not be as feasible.”?

  4. I am unfamiliar with apparel sourcing from Africa. I did not realize that countries within Africa took up market share in apparel imports to the United States. It is interesting to see that they are increasing at an incredible rate that is faster than the world average (11.8%). There are a lot of developing countries in AFrica, and apparel manufacturing is a great industry to boost the economy of that country and provide less skilled work for laborers. I think AGOA is a great start to fostering relationships with Africa in manufacturing and provides a way for Africa to grow as a player in importing to the U.S. With duty-free imports due to “third-country fabric provision”, there is a key competitive advantage that can make Africa become a threat to Asian countries that are already established in apparel manufacturing and open up the floor for even further globalization.

  5. This article is fascinating in that it shows the political impact of multi country agreements on the diversification and tax consequences of different countries, particularly the willingness of the US apparel industry to look to other countries besides China, Bangladesh and Vietnam. Although those countries still enjoy 98.3% of the apparel supplies to the US market, the African Growth Opportunity Act (AGOA) enables sub-Saharan countries like Madagascar, Ethiopia, Mauritius, Lesotho and Kenya to have a small percentage as a US supplier. However, these countries can’t produce enough yarns and fabrics, so they are allowed to import these under the “third country fabric provision” and still get tax breaks to export to the US. While I also never thought the US and SSA countries would be business partners, I think this agreement helps SSA countries as well as helping US fashion companies diversify their imports from around the world and helps in the fashion company’s role of corporate responsibility giving business to sub Saharan countries.

    1. So what are the “political impact of multi country agreements” you see from the blog post? And why do you think AGOA “helps in the fashion company’s role of corporate responsibility giving business to sub Saharan countries”?

      1. The AGOA agreement encourages fashion industry companies to do business in sub-Saharan Africa where they otherwise might not. The favorable tax status with the third country fabric provision enables countries in the AGOA to be competitive. It is important for companies to not only run their business as cheaply and efficiently as possible but to be a good neighbor also. With this agreement they are encouraged to be role models and leaders in support of the local communities they are doing business with. It encourages a cooperation between the companies and the local economy. I think the political impact of multi country agreements for the countries involved in the AGOA agreement can boost the economy of these countries, put more people to work and maybe increase in GDP. This could lead to bigger roles for those countries in global economic decisions. For the United States there is more risk as there are many civil wars going on in Sub Saharan Africa and investing more in these countries for technology and production could be lost should a country be taken over by a less democratic government or lost to the seeming never ending civil wars or even terrorism.

  6. I love that this article provided exposure on the contribution of SSA countries and benefits under AGOA. I didn’t realize how critical it is towards U.S. apparel sourcing industry. Even though it is a small supplier, they contribute a lot to the United States. I think that the increase of U.S. apparel imports from SSA are going to be critical in the growth of their economy. SSA is one of the most least developed countries and I think that continuing to source with the United States may help to bring other countries to begin sourcing from that region. Due to COVID-19, many companies/countries are moving away from sourcing with China and to other Asian countries. Hopefully, this virus accelerates the movement to Sub-Saharan Africa as well. It may allow the region to make gain popularity within globalization. SSA is one of the last places that someone thinks of when they think of sourcing apparel, most people think of China. I think this can completely change the way that globalization and sourcing operates. When it concerns globalization, I think it will add more of a balance because China has dominated sourcing/trade for centuries now. It will help to increase diversity of sourcing arrangements.

  7. After reading this article I think that the SSA countries will never be competitive with developing Asian suppliers since they lack the infrastructure they need to reduce lead times. However, I think it is a positive effort to help the SSA countries build their economy while we get cheap labor. I think this trade deal would be impossible without the “third country fabric” provision since the SSA countries do not have the means to produce their own textiles. I think that imports from SSA could also be beneficial for our economy too. It provides us cheap labor and an alternative to China and Asian suppliers that rely on China for textiles in the case of COVID-19 and the US China Trade War.

  8. This article was very interesting because I was not aware that President Obama extended AGOA to only 2025, and how this has helped businesses such as H&M and Calvin Klein conduct business. At first I was surprised not more retailers were utilizing the benefits of duty-free treatment in SSA countries, however, I now see the hesitation to invest production in AGOA countries if there is not certainty it will be intact after 2025. This is a very interesting concept because production has become rather difficult for the U.S. given the “yarn forward” rules of origin and high tariffs. Do you think it is likely that AGOA will be passed again by 2025? If so, do you think more U.S retailers will invest in SSA region given the risks?

  9. This article was fascinating to me because I would never really think these two sectors of the world to be working together as partners to help one another. I think the extension of the AGOA was a great idea because indeed the SSA countries rely heavily on the apparel industry for their economy. I think it helps both the US and SSA countries because the US gets cheaper labor and diversification of products to our country and the African region’s economy will thrive. The articles example of Madagascar further made it apparent to me of the importance of the AGOA to this region because their exports hit a sharp decrease, but when reinstated in the AGOA, they hit a record breaking high of imports in 2019.

  10. I think that the AGOA could be very beneficial for the U.S. When considering countries that the U.S. works with I never think of the African region, however, they are definitely a growing market, as you state, “U.S. apparel imports from SSA enjoyed a compound annual growth rate (CAGR) of 11.8 percent (compared with 1.3 percent CAGR of all countries), from $1.0 billion in 2016 to $1.4 billion in 2019. ” I think that the AGOA will help them continue to grow since they will be able to have duty-free imports. I am curious, how do you think this will affect developing countries such as Bangladesh and Cambodia?

  11. I found this article very interesting as a lot of the time we do not think of Africa as a large source for apparel production in any form, however it seems as though these agreements can be highly beneficial for these countries. Initially “the SSA has a compound annual growth rate (CAGR) of 11.8 percent (compared with 1.3 percent CAGR of all countries), from $1.0 billion in 2016 to $1.4 billion in 2019.” . For the US the AGOA allows US apparel imports from certain SSA countries to be qualified for duty-free treatment even if the apparel use yarns and fabrics produced by non-AGOA countries/region.”. This growth is great for the US and many countries in Africa to grow however there are some issues for the SSA. They did talk about an imbalance with “Kenya, Lesotho, Madagascar, Mauritius, and Ethiopia altogether accounted for almost 95 percent of all apparel imported from the SSA region under AGOA.”  Ethiopia is also growing at the the fastest rate, it would be preferred that all companies are growing at a great rate, specifically the other 5% that is accounting for the other growth. I think that the AGOA will can help these SSA countries to grow since especially with the promotion of duty-free imports. It will be interesting after the coronavirus ends toes if these countries are used more or less for sourcing.

  12. I think this article is interesting because I never realized the US and SSA countries had been working together. I can’t say I know much history about where the US had sourced their products, I only know now that they source most of their products from Asia. Reading this article allowed me to understand that the AGOA agreement encourages fashion industry companies to do business in sub-Saharan Africa. Even though they are a small supplier, they do contribute to the United States and I think that the increase of US apparel imports from the SSA are important to their economy. Reading some of the other articles, it has been said that many companies are sourcing elsewhere from Asia due to the prominence of COVID-19. I think this could allow for more globalization and an opportunities for the SSA to become a more prominent part of US sourcing. I am interested to see how COVID-19 will effect the sourcing of products and how it will change the current relationship between countries in the fashion industry

  13. I personally had no knowledge about apparel sourcing in Africa. Its not the first country I think of when I hear the word sourcing, and frankly I dont think ive ever thought of it in this way. I believe that the AGOA is a good start and stepping stone to expand their growth in importing. I also didn’t know anything about the Third-Country Fabric “rule”. I think this was a really interesting article/topic that more people should know about.

  14. This article was very interesting to read because I have never viewed Africa as a major sourcing country for U.S. companies. It was never obvious to me that African countries even had a presence in the market share of apparel imports. In addition, it is also surprising to see their rapid increase. The AGOA is an excellent way to create opportunity in cultivating relationships between Africa and the U.S, and is beneficial for both parties. Though they are a small-scale supplier, I believe that the U.S. imports are crucial for for their economy. The AGOA will definitely aid these SSA countries and help them grow. When global trade normalizes again post pandemic, I will be curious to see if the U.S. continues to increase trade with Africa.

  15. This article was very interesting to read for many reasons. One of which was that, in general, I don’t initially identify SSA countries as typical sourcing destinations, so it was great to read about how the AGOA is helping the SSA countries excel into the market. The AGOA seems extremely important to the SSA countries because under it, it allows many duty-free imports into the U.S.. I had no idea that Obama had extended the AGOA in 2015, and I wish people talked about that more, because it seems like a great thing for both the SSA countries as well as U.S. retailers. It makes me happy to hear that the even though the SSA countries are just a small supplier to the U.S. industry, it stimulates their economy. I hope to hear of more retailers utilizing the SSA countries for sourcing in the near future!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s