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

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Sub-Saharan Africa (SSA) is widely regarded as a growing apparel-souring destination. Particularly, U.S. Congress established the African Growth and Opportunity Act (AGOA), a non-reciprocal trade preference program, in 2000, to help developing SSA countries grow their economy through expanded exports to the United States. 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. Notably, 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 items use yarns and fabrics produced by non-AGOA members, such as China, South Korea, and Taiwan. This special rule is deemed as critical as most SSA countries still have no capacity in producing capital and technology-intensive textile products.

That being said, to play a bigger role as an apparel sourcing base, SSA is not without significant challenges:

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Challenge 1: limited industry upgrading and local textile production capacity

Theoretically, as a country’s economy advances, it should gradually be producing and exporting more capital and technology-intensive textiles versus labor-intensive apparel products. This is the notable trends in many Asian countries (such as China and Vietnam), where the textile/apparel export ratio has been rising steadily between 2005 and 2017. However, as a reflection of the stagnant industry upgrading, the textile/apparel export ratio remains fairly low in SSA, including in Lesotho, Kenya, and Mauritius, the top three largest apparel exporters in the SSA region.

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Challenge 2: Slow and no progress in export diversification

Ideally, as the economy becomes more sophisticated, textiles and apparel (T&A) should account for a declining share in a country’s total merchandise exports. Countries such as China, Vietnam, and ASEAN demonstrate perfect examples. However, in some SSA countries (e.g., Lesotho), T&A has stably accounted for over 80% of their total merchandise exports over the past 17 years, a sign of slow or no progress in export diversification. In other SSA countries, T&A accounted for less than 10% of their total merchandise exports, suggesting the sector is not a priority to the local economy.

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Challenge 3: Intense competition both in key export markets and domestic market

As of 2017, over 96% of SSA countries’ T&A exports went to three markets: the United States, the EU, and other SSA members. However, because of the intense competition, except for the regional SSA market, SSA countries account for merely 1.4% and 0.2% of total U.S. and EU textile and apparel imports in 2017 respectively.

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Even more concerning, the T&A industry in SSA countries is facing growing competition in the domestic market with cheap imports, mostly from Asia. Notably, SSA countries import MORE apparel than they export, a phenomenon rarely seen among developing countries in a similar stage of economic development.

Challenge 4: U.S. companies remain low interest in investing in the region directly

According to several recent studies, leading U.S. fashion brands and retailers remain low interest in investing in the SSA region directly, even though companies admit more investments in areas such as infrastructure are critical to the success of SSA countries serving as competitive apparel sourcing bases. Some argue that the “temporary” nature of AGOA make companies hesitant to build factories in SSA. However, should AGOA become a permanent free trade agreement, which follows the principle of reciprocity, SSA countries would have to lower their trade barriers to U.S. products, including eliminating the tariffs and non-tariff barriers, in exchange for the reciprocal market access benefits from the United States. It doesn’t seem most AGOA members are ready for that stage yet.

by Sheng Lu

Further reading: Challenges for sub-Saharan Africa as an apparel sourcing hub

USITC Report: AGOA and the Third-country Fabric Provisions Critical for U.S. Apparel Sourcing from sub-Saharan Africa

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A newly released report by the U.S. International Trade Commission (USITC) suggests that the African Growth Opportunity Act (AGOA) and the 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 2010–16, U.S. apparel imports from SSA enjoyed a compound annual growth rate (CAGR) of 4.5 percent (compared with 2.1 percent CAGR of all countries), from $795.2 million in 2010 to over $1.0 billion in 2016. However, SSA overall remained a small apparel supplier to the U.S. market, accounting for only 1.2 percent of the market shares in 2016 (lower than 2.7 percent in 2004, but higher than 1.1 percent in 2010).

U.S. apparel imports from SSA remain uneven across countries. Kenya, Lesotho, Mauritius, and Madagascar accounted for over 90 percent of all apparel imports from SSA in 2016. Ethiopia and Tanzania experienced the fastest growth rates during the period—63.8 percent and 33.3 percent, respectively

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 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 (97.3 percent) U.S. imports of apparel from SSA countries entered under AGOA, and of these imports, virtually all (96 percent) used the third-country fabric provision in 2016.

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

  • Madagascar were 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, and in 2016, U.S. apparel imports from Madagascar bounced back to one-half of the 2009 level.

The USITC report also argues that the long-term renewal of AGOA and the third-country fabric provision was critical to instilling confidence in U.S. firms deciding to invest in or source from SSA countries. The report says that “because apparel production lead times are generally 6 to 9 months, U.S. apparel companies that source from the region import basic cut-and-sew garments that can be ordered months in advance and have steady U.S. demand, such as five-pocket denim jeans, uniform tops and bottoms, and T-shirts. This long lead time on orders makes long-term AGOA renewal particularly important to the apparel industry.”

Additionally, the USITC report believes that China’s declining competitiveness as an apparel producer (caused by its increasing labor cost) benefited the second- and third-largest suppliers to the United States, Vietnam and Bangladesh, but also helped smaller suppliers in SSA.

Last but not the least, the USITC report suggests that Kenya, Madagascar, and Ethiopia may have the most potential for apparel export growth in the future. However, the report doesn’t think apparel exports from South Africa will grow much because the country does not qualify for third-country fabric provisions under AGOA. Similarly, USITC believes that should SSA countries like Tanzania lose their AGOA benefits, due largely to its recent import ban on used clothing, the United States will likely see significant decreases in apparel imports from these countries too.

*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.

In 2016, US apparel imports from the AGOA region totaled US$260m, of which US$255m were under the agreement (or 98% utilisation rate).

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 fabric originating anywhere in the world. In comparison, the regular AGOA rules of origin more restrictively require that apparel qualify for duty-free treatment must meet one of the following conditions:

  • apparel made of U.S. yarns and fabrics;
  • apparel made of SSA (regional) yarns and fabrics, subject to a cap;
  • apparel made in a designated lesser-developed country of third-country yarns and fabrics (also subject to a cap);
  • apparel made of yarns and fabrics not produced in commercial quantities in the United States;
  • textile or textile articles originating entirely in one or more lesser-developed beneficiary SSA countries;
  • certain cashmere and merino wool sweaters; and
  • hand-loomed/handmade/or folklore articles and ethnic printed fabrics