The African Growth Opportunity Act offers Exponential Growth for the African Continent
The African Growth Opportunity Act is a tremendous opportunity for the African Continent that provides access to the world’s largest economy.
The African Growth Opportunity Act (AGOA) is the key trade legislation the United States has with the African continent. AGOA allows thousands of products to be imported into the US duty-free. Currently, 39 Sub-Saharan Africa countries qualify to have access to the world's largest economy. In this article, we discuss the aspects of AGOA and how companies can leverage AGOA to expand and access the US by using the law to their advantage.
I. What is AGOA?
AGOA is a trade Preferential Trade Agreement where 39 countries in Sub-Saharan Africa are allowed to export thousands of products into the US duty-free. This is important because the US imports approximately $3 Trillion worth of products every year. Companies in Africa now have direct access to the US without having to pay expensive duty rates. In addition to AGOA, the U.S. General System of Preferences (GSP) allows 119 developing countries throughout the world - including many in Africa - to export many products duty-free to the US. Thus, products that do not fit under the GSP are likely to be eligible for duty-free status under AGOA. This allows African entrepreneurs to export about 6,500 products duty-free into the US, including apparel products.
Apparel Products - What is the Third Country Fabric Rule?
The apparel sector has taken advantage of AGOA at a higher rate than most other industries. This is because AGOA offers the additional benefit of allowing apparel companies in Africa to use the Third-Country Fabric Rule. The Third-Country Fabric Rule offers many of the least-developed African countries to utilize yarn and fabric from any country, including China or India.
This is vital to understand because the use of yarn and fabric from a third country is rare in trade agreements. Most trade agreements require yarn and fabric to be created in the actual country it is exported from.
Apparel from these African countries is now being created for some of the largest US clothing companies. However, despite the use of parts from other non-AGOA countries, the apparel must originate from an African country in order for the duty-free exemption to apply.
What is AGOA’s Country of Origin Rule?
Likely the most important aspect of AGOA is to ensure the item being exported to the US, originates from an eligible African country. The “originate” term is technical, but the important part to remember is that at least 35 percent of the value of the good must originate from the eligible African country.
AGOA is an outstanding opportunity for African companies to expand their products into the US market. Combining AGOA with the necessary legal strategies is the recipe for exponential growth.
II. Legal Strategies
Drafting a strong Sales Contract is an important legal strategy to effectively use AGOA. In the realm of international trade, agreements often begin as pro forma sales invoices and later finalized into sales invoices or full-blown sales contracts. It is vital to understand many of the intricacies in trade contract language such as:
net 30 or net 90 terms,
dispute resolution tactics involving international arbitration to minimize the home-court advantage,
termination clauses, and
many other important legal terms.
Also, companies can contact the US Customs and Border Protection (CBP) as a legal strategy to maximize profit.
How to Use the CBP’s Binding Rulings for AGOA
The CBP is the primary border control agency and controls what comes into the US. To ensure the products can enter the US duty-free under AGOA, companies should request a binding ruling from CBP.
Those in international trade are often unfamiliar with binding rulings and their effectiveness as a legal strategy. Binding rulings have tremendous benefits for exporters and importers. Once a company is granted a positive binding ruling from the CBP, the company will have full confidence the product will enter the US duty-free. This can prevent the exporter from spending millions of wasted dollars.
Due to globalization, products are sourced from all over the world to create a finished product. But, it is important to understand that at least 35 percent of the value of the good must originate from the eligible African nation. The 35 percent hurdle can be hard to predict, so to ensure eligibility it is best to request a binding ruling from the CBP and ensure there are no problems.
These select legal strategies are a few that African companies can use as the future of AGOA remains to be determined.
III. What is the Future of AGOA?
When AGOA was created, there were high hopes for AGOA to serve as a path for economic opportunity for the African continent and to increase relations with the US. However, AGOA has been underutilized by African entrepreneurs and US lawmakers are questioning whether to extend AGOA after the 2025 expiration date.
Recently, the Trump Administration entered negotiations for a US-Kenya Free Trade Agreement. This would be the first free trade agreement with a Sub-Saharan country. If approved, this could serve as a blueprint for other free trade agreements with African nations. However, many African scholars, economists, and politicians would rather have an all-encompassing US-Africa Free Trade Agreement - instead of the US creating agreements with each nation. This would be similar to where the African Union recently launched the African Continental Free Trade Agreement, a continental-wide free trade agreement.
Despite the uncertainties with the future of AGOA, AGOA is no doubt an incredible opportunity for African countries to expand their products into the largest economy in the world.
Geremy Johnson, Esq. is a trade lawyer that offers various trade legal services. Please contact him with your trade and legal needs.