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Could TPP Make Africa Less Competitive Under AGOA?

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The African Growth and Opportunity Act (AGOA) may have been around since 2000 but its short-term and inconsistent renewal never engendered much investor confidence.

So now that the agreement has been renewed for 10 years—meaning almost all African-made goods from AGOA-eligible countries can come into the U.S. duty free—Africa is eager to trade and companies are eager to understand opportunities there.

Speaking on a panel at last week’s Africa Sourcing and Fashion Week in Ethiopia, Finn Holm-Olsen, director of trade promotion for the East Africa Trade and Investment Hub said he’s seen three trends taking shape since AGOA’s renewal: U.S. buyers are taking a serious look at Africa, U.S. companies are committing to shifting a percentage of their worldwide sourcing to Africa and others are looking to draw investment in their supply chains to Africa.

Roy Ashurst, PVH’s production and sourcing hub leader for Africa and the Middle East, who also spoke on the panel, started off by clearing up comments likening Africa to Bangladesh.

“Africa is not the new Bangladesh,” he said. “Our goal for Africa is to be the new Sri Lanka.” PVH is one of the leaders in sourcing in Africa and the company has continued to show its support for growth in the region.

The AGOA trade preference package allows for African apparel products to enter the U.S. market duty free, and an included third party fabric provision means factories can use any fabric from any country to make their goods and still receive the duty free privileges. Forty-one African nations are eligible for AGOA, but only 26 have the effective visa system in place to ensure country of origin and guard against trans-shipment. Of that 26, those best poised for growth in manufacturing are Kenya, Ethiopia, Lesotho, Mauritius and Madagascar.

In the first year of AGOA, Africa’s exports to the U.S. saw 300 percent growth to roughly $1 billion, and though China’s entry into the WTO, which eliminated quotas in 2004, led Africa’s exports to taper off a bit, there has been an uptick since costs started rising in Asia.

“I think the potential is for a really steep increase in exports from Africa,” Ashurst said. “Africa has all the right ingredients and Ethiopia has the cheapest electricity in the world. In 10 years we can build a sustainable textile and apparel sector.”

But with the Trans-Pacific Partnership (TPP) on the horizon, which will give duty free benefits to a handful of Asian nations, including Vietnam, Africa could face crippling competition if it doesn’t look to position itself for added value.

“If we continue the way we are, importing third country fabric, with long lead times, then we’re really opening up the opportunity for the TPP countries,” Ashurst said. “Vietnam will start taking business away from Africa,” because duty free benefits for Vietnam will mean it can compete with Africa on price.

As of now, the average lead time out of the Djibouti/Hawassa ports, which Ethiopia uses, is 39 days compared to neighboring Kenya’s 43 days and Vietnam’s 35 days out of Ho Chi Minh. The current costs to process containers from factory to client in Africa is at least double, sometimes triple, that of Vietnam.

“Logistics are the biggest challenge,” Ashurst said.

Bob Berg, senior sales manager for international sourcing for MAGIC, and JC Mazingue, owner and managing partner at JCM & Associates consultancy, also spoke on the panel and said Vietnam may not be so quick to draw business from Africa.

“When there’s so much production going in there,” Berg said, “The labor cost is going to go up. There’s a saturation point.”

Regardless of how things shake out post-TPP, African countries looking to lead in sourcing will have to improve operator training for more productivity so that CM costs can remain the same, improve training of industrial engineers to develop manufacturing capabilities and efficiencies, and put vertical supply chains in place, Ashurst explained. If Africa has fabric and trims, it can compete equally with Vietnam.

Either way, Ashurst’s outlook for the up and coming continent is bright. “Africa can become a world leader, not only in cost, but in lead time and also sustainability and compliance,” he said.

(If AGOA still doesn’t add up or you need to know more, agoa.info breaks down a bit of everything, and at eatradehub.org you can pose specific questions to online AGOA experts).

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