US Trade Preferences: The GSP and AGOA

1992 and 2017. To harmonize the product codes across years, we convert all HS 6-digit-level codes into HS 1996 revision 6-digit codes using the concordance tables provided by WITS.

The detailed tariff information allows us to examine how the trade effects of preferences under the AGOA or the GSP LDC vary with the magnitude of the preference margin offered to the beneficiary countries and how this effect changes over time. The database also provides detailed tariff information to examine how these trade effects change in response to the reciprocal and nonreciprocal preferential tariff rates granted to other countries.

A limitation of the tariff information is that it does not capture the ad valorem equivalents of quotas, such as those on apparel exports implemented under the MFA. To account for the effects of the MFA phaseout in our analysis, we complement the tariff data using quota information for 1992–2004 from Brambilla, Khandelwal, and Schott (2010). They construct quota fill rates in the United States, by exporting country and year, for 3-digit MFA categories defined by the Office of Textiles and Apparel that are mapped to 10-digit US HS codes using a concordance table.4

US Trade Preferences: The GSP and AGOA

GSP Programs

Over the past half century, high-income countries have aimed to support the integration of low- and middle-income countries (LMICs) into the world economy by providing them with “special and differential treatment,” including nonreciprocal preferential access to their markets. The GSP has become a key instrument for such trade preferences.5 The GSP programs were established in 1971, led by the United Nations Conference on Trade and Development (UNCTAD), under the assumption that preferential market access to high-income country markets—in the form of duty-free status or lower tariff rates for a wide range of products—could spur export-driven growth in LMICs. The argument was that the markets of high-income countries were sufficiently large to provide economic motivation and space for LMICs to achieve those goals.

The European Union (EU) was the first to establish a GSP program for LMICs in the early 1970s, and other high-income countries followed, with the United States beginning its GSP program for beneficiary LMICs in 1975.6 In 1997, the scope of the US GSP benefits was expanded for LDC beneficiaries (“GSP LDC”) by allowing duty-free entry into the United States for a larger number of products.

To be eligible for the GSP, countries must not be classified as “high income” by the World Bank.7 As for the GSP LDC, the United Nations determines eligibility on the basis of three criteria: per capita gross national income, human assets, and economic vulnerability to external shocks.8 In addition to the GSP programs, the EU and the United States signed other nonreciprocal PTAs with LMICs, such as, respectively, Everything but Arms (EBA) and the AGOA.

AGOA Eligibility and Benefits

General textile and apparel preferences. AGOA and country eligibility are discussed at length in chapter 1, but it is worth describing product eligibility in detail because it is crucial for the analysis conducted here. To begin with, Sub-Saharan African countries that are eligible for AGOA preferences do not automatically qualify for preferences under the general textile and apparel provisions. To be eligible for preferences under the AGOA’s general textile and apparel provisions (section 112), AGOA beneficiary countries must be certified to confirm that they have in place an effective visa system and enforcement and verification procedures (USITC 2014).

These conditions ensure that the goods on which AGOA benefits are claimed are in fact produced in an eligible Sub-Saharan African country, meeting the rules of origin required to claim those benefits. As of 2017, 26 AGOA beneficiary countries also qualify for the general AGOA textile and apparel provisions. Burundi, South Sudan, and Togo, among others, do not qualify.

The Special Rule for Apparel. AGOA-eligible countries that are designated as “lesser developed beneficiary countries” (LDBCs)—those with a per capita gross national product (GNP) of less than US$1,500 in 1998—qualify for additional preferential treatment under the AGOA Special Rule. Under this rule, yarn, thread, or fabric used in manufacturing of textile and apparel articles can be sourced in any country in the world, and those articles can be eligible for duty-free access in the United States, subject to certain quantitative restrictions.9 Although Botswana, Mauritius, and Namibia are not LDBCs under the per capita GNP definition, amendments to the AGOA designated them as LDBCs from 2004 onward.10 As of 2017, 24 AGOA beneficiary countries also qualify for the AGOA Special Rule.

South Africa is the only Sub-Saharan African country that is eligible for preferences under the AGOA’s general textile and apparel provisions but not eligible for the Special Rule, because it is not designated as an LDBC. For South Africa, the rules of origin for apparel and textile articles require (a) the use of US yarn, thread, or fabric (bilateral cumulation) for duty-free, quota-free access, or (b) the use of AGOA-originated yarn, thread, or fabric for duty-free access but with quantitative restrictions.11

Non-apparel products. The rules of origin for non-apparel products differ from those applied to textile and apparel articles and are similar for all AGOA-eligible countries, resembling those of the GSP program. Duty-free treatment of exports to the United States is allowed if (a) the product is the “growth, product, or manufacturing” of an AGOA beneficiary country, and (b) the percentage of local content in the appraised import value of the good when it enters the United States exceeds 35 percent. (This percentage can include the cost of materials and parts sourced from other AGOA-eligible countries, as well as the cost of materials and parts sourced from the United States, which can account for up to 15 percentage points of that 35 percent.)

Changes and amendments. Between 1997 and 2017, there was some degree of uncertainty about the continuity of the US GSP and AGOA, because of periodic expirations, and the AGOA also underwent amendments and changes. One such change, as noted earlier, was the addition of three countries to the list of LDBCs benefiting from the Special Rule that had not fit the LDBC per capita GNP definition in 2006 and 2008. In 2004, AGOA benefits were extended until 2015, but the Special Rule was extended only until 2007. Then the Special Rule was renewed under a series of waivers in 2006 and extended until 2012, and in 2012 it was extended until 2015. In 2015, the AGOA (including the Special Rule) was reauthorized to be in place until 2025.12

Tariff Structures and Changes under the GSP and AGOA

Next, we discuss product eligibility under the GSP and the changes brought by the AGOA, drawing on the US Trade and Market Access Database. Table 2.1 presents the numbers separately for Sub-Saharan African LDCs and non-LDCs in 2001. For LDCs and non-LDCs before AGOA enactment, from the universe of 10,184 tariff rate lines (HS 8-digit) on US imports, 3,131 faced a nonpreferential (MFN) zero rate of duty in the United States, and 3,507 faced a zero rate of duty in the United States for GSP-eligible countries.13

For LDCs, 1,670 tariff lines were added to the duty-free group under the expansion of the GSP LDC program in 1997, and from 2001 onward 780 new product lines became eligible for duty-free entry under the AGOA— divided into 555 apparel tariff lines (which had never been duty-free under any other nonreciprocal trade preference regime before the AGOA) and 225 non-apparel tariff lines (which faced positive MFN tariffs before the AGOA).

For non-LDCs, from 2001 onward, 1,610 tariff lines (which were already duty-free under the GSP LDC program since 1997) became duty-free under the AGOA. And (similarly to the LDCs) 780 new product lines—555 apparel and 225 non-apparel—became eligible for duty-free entry under the AGOA.

The AGOA’s significance seems larger when accounting for the value of Sub-Saharan African exports in eligible tariff lines. For Sub-Saharan African LDCs, the AGOA covered 11 percent of exports in 2001, mostly from apparel products (table 2.1). For Sub-Saharan African non-LDCs, the AGOA covered 67 percent of exports, of which 3 percent were of AGOA-exclusive products (mostly apparel) and 64 percent were due to the extension of the GSP LDC preferences to all Sub-Saharan African countries. For LDCs, 1,096 tariff lines remain dutiable in the United States after AGOA, whereas for non-LDCs, 1,156 tariff lines remain dutiable in the United States.14

The tariff structure presented in table 2.1 shows that, for AGOA-eligible countries in the US market, the bulk of the tariff lines are duty-free. Focusing on LDCs, of the 1,096 tariff lines that have no preference and positive MFN tariffs, textiles (HS 50–60) account for 753 tariff lines and textile products other than apparel for 85. The other most important categories are dairy

Table 2.1 US Tariff Schedule under MFN, GSP, and AGOA Preferences for Sub-Saharan African Countries, by LDC Status, 2001

Tariff type Number of US tariff lines (HTS 8-digit) Share of exports to US (%)

LDC Non-LDC LDC Non-LDC

MFN zero

3,131 3,131 9 28 GSP duty-free 3,507 3,507 1 4 GSP LDC duty-free 1,670 n.a. 79 n.a. AGOA apparel 555 555 11 3 AGOA non-LDC n.a. 1,610 n.a. 64 AGOA only 225 225 0 0 No preference (MFN > 0) 1,096 1,156 0 1 Total 10,184 10,184 100 100

Source: World Bank’s US Trade and Market Access Database. Note: The number of tariff rate lines and shares of total exports are for 2001, the year after enactment of the US African Growth and Opportunity Act (AGOA). Exports from least developed countries (LDCs) and non-LDCs include only those of the 46 countries that were AGOA-eligible between 2001 and 2017. (As such, the exports do not account for country-year-specific eligibility or preference utilization.) GSP = Generalized System of Preferences; HTS = Harmonized Tariff Schedule of the United States; MFN = most favored nation; n.a. = not applicable.

produce, bird eggs, and so forth (81); sugars and confectionary (24); cocoa and preparations (38); miscellaneous edible preparations (29); and travel goods (15).

Preferential Tariff Impacts on African Exports, before and after the AGOA

In addition to product eligibility under the AGOA, it is important to document the tariff preferences that the regime awarded to Sub-Saharan African exports to the United States. Before the AGOA, across all products, the average tariff had already been reduced from the average MFN tariff of 5 percent to less than 4 percent for GSP-eligible countries and to less than 3 percent for GSP LDC–eligible countries (figure 2.1, panel a). The AGOA further reduced the simple average tariff to 1–2 percent from 2001 onward for all eligible countries. This impact was particularly large for non-LDC Sub-Saharan African countries for which the AGOA non-LDC product list (almost all GSP LDC) and the AGOA-only products were liberalized simultaneously in 2001.

The trade-weighted average tariff, which accounts for the actual export capacity of African countries, was much lower than the simple average even before the AGOA but declined further with the AGOA—more sharply than as a result of the GSP and GSP LDC programs (figure 2.1, panel b). The GSP covered products making up a small share of exports, and the GSP LDC

Figure 2.1 US Average Tariffs on Products from Sub-Saharan Africa, before and after the AGOA

8

a. All product tariffs, simple average, 1997–2017

1.5

b. All product tariffs, weighted average, 1998–2002

Tariff rate (%)

6

4

2

0 1995 2000 2005 2010 2015

8

c. Manufactures tariffs, simple average, 1997–2017

Tariff rate (%)

6

4

2

0 1995 2000 2005 2010 2015

15

e. Apparel tariffs, simple average, 1997–2017 Tariff rate (%)

1.0

0.5

0 1998 1999 2000 2001 2002

Tariff rate (%)

5

4

3

2

d. Manufactures tariffs, weighted average, 1998–2002

1

0 1998 1999 2000 2001 2002

20

f. Apparel tariffs, weighted average, 1998–2002

Tariff rate (%)

10

5

Tariff rate (%)

15

10

5

0 1995 2000 2005 2010 2015 0 1998 1999 2000 2001 2002

Only MFN With GSP With GSP LCD With AGOA

Source: World Bank’s US Trade and Market Access Database. Note: Simple average tariffs include all 8-digit tariff lines of the Harmonized Tariff Schedule of the United States (HTS) each year. Ad valorem equivalents are calculated for tariffs with specific components (149 tariff lines with complex tariffs are not included). Trade-weighted average tariffs use Sub-Saharan Africa’s total exports to the United States in 2000 as weights. The number of products per sector in 2001 HTS apparel includes Harmonized System sections 61 and 62. AGOA = US African Growth and Opportunity Act; GSP = Generalized System of Preferences; LDC = least developed country; MFN = most favored nation.

covered important products, such as oil exported by several African countries (for example, Angola). But the AGOA was the reason for the reduction of the average to zero, because of its expansion to all Sub-Saharan African countries (for example, Nigeria) and its coverage of apparel products.

The AGOA’s impact on the simple average tariff on manufactured products was similar in magnitude to its impact across all products (figure 2.1, panel c), but it was much higher on the trade-weighted average tariff on manufactured products (figure 2.1, panel d). That is because (a) the corresponding trade-weighted average MFN tariff was much higher (above 4.5 percent) than across all products combined, and (b) the GSP and GSP LDC duty-free treatment covered products with seemingly little export capacity in Sub-Saharan Africa. The AGOA slashed the tradeweighted average tariff on manufactured products to almost zero, because it covered manufactured products in which African countries had the greatest export capacity.

But the most crucial tariff cuts induced by the AGOA were on apparel products (figure 2.1, panel e). These were the products most protected by US MFN tariffs (of about 12 percent), and AGOA duty-free treatment was extended to every apparel product in HS chapters 61–62. The GSP and GSP LDC had almost no effect on average tariffs because those preference programs do not cover apparel (other than a few accessories). The AGOA’s impact is magnified for the trade-weighted average, which is brought to zero, relative to a trade-weighted MFN rate of 17 percent (figure 2.1, panel f).

For the AGOA’s impact on the average tariffs on agricultural products and mining products, see figure 2B.1 (in annex 2B). The AGOA added a few agricultural products to those that were already duty-free under the GSP LDC program. As such, AGOA duty-free treatment was important only in reducing tariffs for non-LDC African countries that export agricultural products, like Côte d’Ivoire and Kenya. Average tariffs for mining were small because of low MFN tariffs and GSP preferences. The most important African mining exports to the United States already faced MFN tariffs that were close to zero before the AGOA. AGOA duty-free treatment became important for non-LDC, mining-intensive countries such as Botswana, Namibia, Nigeria, and South Africa.

AGOA Benefits Relative to US PTAs with Non-African Countries

Because of the proliferation of PTAs over the past two decades between the United States and non-African trading partners, the MFN tariff rates used in figure 2.1 are an imperfect benchmark against which to measure the tariff advantage that a preference program like the AGOA provided in the US market. It is therefore useful to consider a measure that captures the benefits of duty-free treatment provided by the AGOA to African countries relative to the preferential treatment provided by the United States to other exporting countries.

We construct a competition-adjusted relative preference margin (RPM), simplifying the formula used by Nicita (2011), as15

RPM

US j X t X

US v hs , jhs US V vhs US hs t V , vhs X

∑ X ∑ ∑ US , , US j ,hs ∑hs , jhs US (2.1)

where j is the country exporting to the United States, X is export value, v are other exporting countries competing with country j, t is the tariff paid in the United States, and hs is an HS 8-digit product. For a given country, RPM measures the difference between the trade-weighted average tariff it pays with that paid by all other competing countries, with a higher RPM indicating that the country benefits from a higher preference.

To illustrate this, we construct RPMs for apparel (HS 8-digit products within chapters 61–62) for China; Mexico (capturing the North American Free Trade Agreement, NAFTA); El Salvador (capturing the Central American Free Trade Agreement, CAFTA); and Kenya and South Africa (capturing the AGOA) and show them in figure 2.2.

Figure 2.2 Relative Preference Margins in Apparel Exports to the US from Selected Countries, 1997–2017

RPM for apparel exports to the US (%)

15

10

5

0

–5 1995 2000 2005 2010 2015 KEN MEX SLV ZAF CHN

Source: World Bank’s US Trade and Market Access Database. Note: Figure shows the relative preference margin (RPM), in tariff rate differentials, for apparel exports to the United States from five countries: China (CHN), Kenya (KEN), El Salvador (SLV), Mexico (MEX), and South Africa (ZAF). The RPM measures the difference between the trade-weighted average tariff a given country pays with that paid by all other competing countries, with a higher RPM indicating that the country benefits from a higher preference. Kenya and South Africa benefited from the US Africa Growth and Opportunity Act (AGOA) of 2000, whereas El Salvador benefited from the Central America Free Trade Agreement (CAFTA) since 2005, and Mexico from the North American Free Trade Agreement since 1994.