Government of Malawi Ministry of Industry, Trade and Private Sector Development

Integrated Framework Policy Analysis Working Paper Series No.3

“An Analysis of Malawi’s Trade Performance under the African Growth and Opportunity Act”

Christina Zakeyo Chatima

April 2007

The opinions expressed in this paper are entirely those of the author and do not necessarily represent those of the Ministry of Industry, Trade and Private Sector Development or the Integrated Framework Secretariat. Policy Analysis Working Papers are available at http://www.mitpsd.gov.mw.

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INTEGRATED FRAMEWORK (IF ) PAPER WORKING SERIES: AN ANALYSIS OF MALAWI’S TRADE PERFORMANCE UNDER THE AFRICAN

GROWTH AND OPPORTUNITIES ACT (AGOA) By

Christina Zakeyo Chatima

TABLE OF CONTENTS

Page I. Introduction and Executive Summary 2 II. Overview of Malawi’s Trade with the World 6 III. Performance of Malawi’s Trade with the USA under the AGOA 10 IV. Major Challenges in implementing the AGOA initiative 15 V. Possible Solutions to overcome the Challenges 18 VI. Recommendations 22 VII. Conclusions 24

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Chapter 1: INTRODUCTION AND EXECUTIVE SUMMARY

The African Growth and Opportunity was enacted on May 18, 2000 as part of the Trade

and Development Act of the United States of America. The Act extends to African

beneficiary countries the most liberal access to the United States market available to

any countries except those with which the United States has Free Trade Agreement.

The Act has three salient features: first, the sense in which it benefits the African

countries; second, its positive effect on American business; third, the conditions that

countries have to fulfill in order to enjoy the benefits of the Act.

Regarding the sense in which the Act benefits African countries, the Act reinforces

African reform efforts, provides improved access to US credit and technical expertise,

and establishes a high level dialogue on trade and investment in the form of a US-

Africa Trade and Economic cooperation Forum. Concerning the way in which the Act

benefits US firms, AGOA contributes to better market access opportunities and better

commercial partners in Africa and new opportunities in privatization of African state

owned enterprises and infrastructure projects.

Turning to the conditions placed on participation by African countries, it is worth

noting that in the Act, it is stipulated that the President of the US designates a Sub-

Saharan country as eligible to receive benefits of the Act if it makes progress in such

areas as : establishment of market based economies, development of political

pluralism and the rule of law, elimination to barriers to US trade and investment,

protection of intellectual property rights, efforts to combat corruption, policies to

reduce poverty, increased availability of health care and educational opportunities,

protection of human rights and worker rights and elimination of certain practices of

child labor.( AGOA implementation guide -2000)

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In 2006, Thirty Seven (37) Sub-Saharan African countries1 are benefiting from the Act.

AGOA amends the United States Generalized System of Preferences (GSP) statute with

respect to AGOA eligible beneficiaries by extending duty free treatment until 20 15

and expanding GSP product coverage by more than 1,800 additional tariff lines. As a

result of the AGOA, substantially all imports from Sub-Saharan Africa are eligible to

enter the United States duty free.

AGOA requires that President determine annually whether sub-Saharan African

countries are , or remain , eligible for benefits based on their progress in meeting the

eligibility criteria set out in the Act. Malawi became an eligible country after passing

through the eligibility criteria set forth.

It is also worth noting that the AGOA had a limited time of up to 2008 but after several

consultations with the African Governments and some lobbies in the USA, amendments

were done to the original act to improve the initiative. After the different

improvements to the original Act, and AGOA II was passed. Some of the amendments

that were done to the original Act included:

• extending the third country sourcing of fabric by LDCs from 2004 to 2007;

• designation of other non LDC countries to benefit from the third country

sourcing provision etc.

Malawi became an AGOA eligible country in 2000 and it qualified as a textile and

apparel beneficiary country on 17th August, 2001, after introducing an effective visa

system to ensure compliance with the requirements of AGOA for exportation of apparel

and textile products to US on a duty and quota-free basis.

1 The 37 AGOA beneficiary countries are Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Chad, Republic of Congo, Democratic Republic of Congo, Djibouti, Ethiopia, Gabon, The Gambia, Ghana, Guinea, Guinea –Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali, Mauritius, Mozambique, Namibia, Niger, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, South Africa, Swaziland, Tanzania, Uganda and Zambia. On January 1, 2006 Burundi was added to the list of eligible countries, and Mauritania was removed from the list.

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Malawi is amongst the Least Developed Countries benefiting from the third-country-

apparel provision that allows duty and quota-free access for apparel made from fabrics

imported from anywhere in the world. As of April, 2006, 25 countries were eligible to

receive AGOA apparel benefits2. Fourteen of these countries3 also qualified for AGOA’S

provisions for hand-loomed and hand made articles (known as Category 9).

This research paper aims at analyzing Malawi’s trade performance under the AGOA

since Malawi’s designation in 2000 and recommends ways on how to fully utilize the

benefits under the Act up to 2015. It has the following objectives:

• Assess Malawi’s performance in utilizing the AGOA initiative ;

• Identify challenges from implementing the initiative; and

• Propose solutions and make recommendations on how to take full advantage of

the AGOA initiative

In terms of methodology, the paper aims at addressing the following concerns:

First to provide information on AGOA using literature review of primary and secondary

sources. The facts were obtained from such sources as documented policies by the

United States Department of Commerce, and annual comprehensive reports on US trade

and Investment Policy Towards Sub-Saharan Africa and Implementation of the African

Growth and Opportunity Act. Other sources were the interviews with Key AGOA

implementing agencies in Malawi, business persons and Government officials.

In addition, other facts were unearthed from newspapers and magazine findings as well

as from research papers by individuals and from several websites.

2 The 25 countries eligible to receive AGOA apparel benefits are Benin, Botswana, Cameroon, Cape Verde, Chad, Ethiopia, Ghana, Kenya, Lesotho, Madagascar, Malawi, Mali, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, South Africa, Swaziland, Tanzania, Uganda and Zambia. 3 The fourteen countries are : Kenya, Lesotho, Botswana, Malawi, Swaziland, Namibia, Zambia, Ghana, Mozambique, Tanzania, Senegal, Ethiopia, Nigeria and Sierra Leone.

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In light of the above, the first part of the paper will make an analysis of Malawi’s trade

performance with the World. This has been done to give an overview of Malawi’s trading

partners and the products Malawi trades in as well as how Malawi is performing in the

international arena.

The second part explains in detail the pattern of Malawi’s trade with the United States,

before and after Malawi became an AGOA beneficiary country. The main objective is to

establish if the AGOA has indeed brought any changes in the pattern of trade with the

United States of America. Data will be provided and analyzed to gain the required results.

The third part delves into analyzing the major challenges facing Malawi in the

implementation of the AGOA initiative since Malawi became a beneficiary country. This

part shows the different actions that government and other stakeholders have continued to

take to make AGOA a success story in Malawi.

The fourth part describes and provided the possible solutions to overcome the

challenges.

In the conclusions, the paper makes recommendations to ensure the successful

implementation of the AGOA programme in Malawi of course taking into considerations

the views of all the concerned stakeholders with the aim of developing trade between

Malawi and the United States of America through the AGOA.

Chapter 2: Overview of Malawi’s Trade with the World

2(a) . Trade Agreements and Arrangements

Malawi’s trade policy is aligned to the World Trade Organization (WTO) Agreement to

which Malawi is a signatory member, since 1995 [previously having been a member of

General Agreement on Tariffs and Trade (GATT), since the 1960s].

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Malawi is signatory to the Africa, Caribbean and Pacific (ACP) – European Union (EU)

Partnership Agreement (commonly known as “Cotonou Agreement”). Malawi is a

member of the commodity agreements such as International Sugar Organization (ISO)

and is also signatory to the International Coffee and Tea Agreements.

At bilateral level, Malawi maintains asymmetrical and symmetrical trade

agreements with the Republic of South Africa, Mozambique, and the Republic of

Zimbabwe, and a Customs Agreement with the Republic of Botswana. Malawi is

in the process of negotiating new bilateral trade agreements with Tanzania and Namibia.

At regional level, Malawi is signatory to the Southern African Development Community

(SADC) Trade Protocol and the Common Market for Eastern and Southern Africa

(COMESA) Treaty. Malawi joined the COMESA Free Trade Area (FTA) on 31st

October 2000, and it is expected that a Customs Union will be established. In the case of

the SADC Trade Protocol, member states, including Malawi, are implementing tariff

reductions and eliminating non-tariff barriers with a view of establishing an FTA in 2008.

Malawi trades with the EU on preferential terms under the Cotonou Agreement and the

Everything But Arms (EBA) Initiative. Currently, Malawi, together with the other ACP

States, are negotiating new trade arrangements with the EU known as Economic

Partnership Agreements (EPAs). The EPAs will provide for reciprocal trade preferences

between individual ACP States and the EU. Malawi is participating in the EPA

negotiations, together with 15 other countries in an Eastern and Southern Africa (ESA)

configuration. It is expected that the EPAs will enter into force on 1st January 2008.

The Malawi exports are also given duty and quota-free treatment in Canadian market

under the Canadian Government and Least Developed Countries’ (LDC’) Initiative. The

initiative aims at fighting poverty through provision of preferential access to the

Canadian market for products from the LDCs, including Malawi. The initiative provides

duty-free and quota free access to Canada’s imports, with the exception of dairy, poultry

and eggs. The Government of the Republic of Malawi and the Government of Canada on

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12th February 2004, signed a Memorandum of Understanding on the Least Developed

Countries (LDCs) Market Access Initiative. Malawi, therefore, qualified to receive duty

and quota free access to Canadian markets under this agreement.

Since November 2001, Malawi has been participating in WTO negotiations on

Agriculture, Non-Agricultural Market Access (NAMA), development issues, trade

facilitation and Trade in Services, under the Doha Development Agenda.

2(b). Trade with major trading partners

Malawi’s major trading partners include the European Union (EU), the United States of

America (US), and the SADC and COMESA regions. Approximately 40% of Malawi’s

exports go to the EU, another 20% goes to the SADC region (mainly South Africa), a

further 12% goes to the US, and 5% goes to non-SADC COMESA countries.

In terms of imports, approximately 45% of Malawi’s imports come from the SADC

region (mainly South Africa), another 25% from the EU, 2% from the US and 1% from

non-SADC COMESA countries.

Figure 1: Malawi Trade with the World in US$

Figure 1: Malawi Trade with the World in US$

Source: Ministry of Industry, Trade and Private Sector Development statistics office

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An analysis of the above table shows that Malawi has consistently experienced trade

deficit from 1994 to 2005:

Malawi’s Export Sector

The agricultural sector accounts for 43% of GDP and 90% of all export earnings.

Malawi’s export sector is dominated by primary commodities, which include

tobacco, sugar, tea and coffee. A renewed emphasis has been placed on the cotton

industry as a growth sector. Of the non-traditional exports, textiles and clothing is the

major item that has, in recent years shown strong annual growth. Exports of apparel or

clothing have found markets in the US under the AGOA and the SADC under the SADC

Trade Protocol.

The main tobacco markets are the EU (Germany, Belgium, Netherlands, Spain, and

France), Japan, USA and Egypt. The main markets for sugar are the EU (UK, France,

Netherlands, Portugal), USA, South Africa, Kenya, Mozambique and Tanzania. The main

markets for tea are the EU (UK, Netherlands), USA, Kenya, Egypt and Botswana. The

main markets for coffee are the EU (UK, Germany, Belgium, and France), USA and

South Africa. The main markets for cotton are the EU (UK), Zimbabwe and Zambia. The

interest in cotton is not merely as an export crop but as a raw material in the growing

textile and garment industry in Malawi.

The apparel provisions of AGOA have led to significant growth in the apparel exports

from Malawi as can be seen from Table 2 below.

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Malawi’s major exports, to each of its major trading partners, are summarized below:

Table 2: Major Exports to Major Trading Partners

Trading Partner

EU USA SADC COMESA JAPAN CANADA

Tobacco Tobacco Tobacco Tobacco Tobacco Tobacco

Tea Tea Farm

vegetables

Tea Tea Tea

Sugar Sugar Rubber Sugar Leather Coffee

Coffee Apparel

and

Clothing

products

Apparel

and

Clothing

products

Coffee Coffee Apparel

and

Clothing

products

Source: MOITPSD Statistics Office

Import Sector

Malawi’s major imports, from each of its major trading partners, are as below:

Table 3: Major Imports from Major Trading Partners

Trading Partner

EU USA SADC COMESA JAPAN CANADA

Mineral fuels Maize Mineral fuels Products of iron

and steel

Opticals Textiles and

clothing

Nuclear reactors Textiles and

clothing

Vehicles and

industrial spares

Vehicles Vehicles,

parts and

accessories

and industrial

Nuclear reactors

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spares

Electrical

machinery and

equipment

Electrical

machinery and

equipment

Electrical

machinery and

equipment

Pharmaceutical

Products

Electrical

machinery

and

equipment

Cereals

Vehicles Chemicals Chemicals Cereals Photographic

parts

Electrical

machinery and

equipment

Pharmaceutical

Products

Pharmaceutical

Products

Pharmaceutical

Products

Fertilizers Printed books Pharmaceutical

Products

CHAPTER 3: PERFORMANCE OF MALAWI’S TRADE WITH THE

USA UNDER THE AGOA

This chapter tries to evaluate the performance of trade between Malawi before and after

the enactment of the AGOA programme.

Essentially all products of AGOA beneficiary countries including Malawi may enter the

United States duty free, either under AGOA, GSP, or under a category for which the

United States maintains a zero normal trade relations rate of duty. In the case of Malawi,

exports to the United States enter both under the AGOA and Generalized System of

Preferences. Most of the products being exported under the GSP include, tea, coffee,

sugar , tobacco etc and it is in these few cases where US tariff rate quotas exist.

Malawi’s exports to the United States consist almost exclusively of agricultural products

followed by textiles and apparel. Of the apparel exports, all are currently exported to the

United States under the AGOA.

But due to the concentrated nature of goods, exports from Malawi to the United States

qualify for duty free benefits of the AGOA.

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The agriculture exports include dried fruits and nuts (macadamia nuts) and another major

export product is timber (hand crafts). See attached table 4 on trade between the two

countries under the GSP and the AGOA.

Malawi’s exports under the AGOA and its GSP provisions were valued at nearly $66

million in 2005 representing 57% of the country’s total exports to the United States. The

most exciting AGOA related activity in Malawi has been in the textile and apparel

sectors.

The table and figures below demonstrate the pattern of trade between Malawi and USA

before and after the AGOA initiative.

Table 4: MALAWI TRADE WITH USA –( 1994-2005) VALUE US $ ('000') US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$

YEARS 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

TOTAL DOMESTIC EXPORTS TO USA 840 64,916 58,620 52,091 47,937 58,422 35,306 67,382 53,757 52,565 54,494 54,329

TOTAL IMPORTS TO USA 18,191 13,530 13,483 18,726 6,195 13,332 6,936 21,212 14,465 21,561 25,164 29,099

TRADE BALANCE

-17,351 51,385 45,138 33,365 41,742 45,090 28,370 46,170 39,292 31,004 29,330 25,230

Figure 2: Trade between Malawi and the United States of America

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MALAWI TRADE WITH USA 1994-2005

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

YEARS

TOTAL DOMESTIC EXPORTS TO USA

TOTAL IMPORTS TO USA

TRADE BALANCE

Source: Ministry of Industry, Trade and Private Sector Development Statistics

Office.

You will notice from the graph and the table above that trade between the two countries

is skewed towards net exports from Malawi. The trade balance further increased from

2001 after Malawi had just qualified as a beneficiary country. But the trade balance

further dropped after 2004 which could be due to the end of the multifibre agreement

under the WTO that led to some of the major companies reducing exports to the USA and

one of them closing. (Haps Investments Ltd based in Lilongwe). The table below also

provides further information on how the textile sector has performed since inception of

AGOA in Malawi. It is clear from the table that the end of the Multifibe Agreement had

an impact on the textile exports to the US. From 2001 to 2004 exports had been

increasing but later on dropped in 2005. After 2005 there has been a significant drop in

exports to the USA and the drop in exports has taken place during the time the WTO

Agreement on Textiles and Trade was integrated into the multilateral trading system

with quotas being removed in textile trade.

It is important to note that before the end of the Multifibre Agreement, major textile and

apparel producers in the world such as China and other producers were constrained in

exporting to the US but after the expiry of the MFA, the restrictions were uplifted. This

drop in export trade by Malawian exporters during this time could be a result of the end

of the Multifibre Agreement.

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Following the drop of exports to the US, most of the textile companies switched to their

old South African market. This was because they could not compete in the US market

and one of the AGOA major export companies Haps Investments Ltd that used to

employ more than 2,000 workers closed and reallocated to China.

According to the US Comprehensive report on Trade and Investment Policy towards

Africa and the implementation of the AGOA , the end of the MFA hurt Africa more

significantly than any other region in the world resulting in 39%decline in exports.

Table 2: Malawi Apparel Exports of AGOA to the US

2001

2002 2003 2004

2005 2006 GRAND

TOTAL

Total

(US$ ‘000)

Total

(US$ ‘000)

Total

(US$ ‘000)

Total

(US$ ‘000)

Total

(US$’000)

Total

(US$’000)

Total

(US$’000)

4,819,281 12,195,722 24,176,987 27,351,607 20,216,881 6,726,167 95,488,645

Source: Malawi Revenue Authority

At the mean time, seven registered companies4 export under the AGOA in Malawi. The

companies are registered through a process where it applies to the Malawi Revenue

Authority for registration. The verification team conducts the factory visits and approves

the company if the company meets certain conditions relating to safety, standards, labour

issues etc.

4 Crown Fashions Ltd, Haps investments Ltd, Chirimba Garments Ltd, Knit wear industries Ltd, Crossbow Clothing Ltd, Giant Clothing Ltd, Win Win Garments Ltd and Mapeto David White Head and Sons Ltd.

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The verification exercise only applies to companies in the textile and apparel sector.

Most of these companies started exporting soon after the inclusion of Malawi as one of

the textile and apparel beneficiary country in 2001.

In terms of exports of dried fruits and nuts, Macadamia nuts are the only nuts being

exported to the United States. The major exporting company is Sable Manufacturing

Company Ltd. As regards exports of wood, the Malawi Revenue Authority indicated that

handcrafts made of wood have been exported to the USA not in large quantities. These

are mainly gifts and souveniours.

3 (a) Initiatives to implement AGOA Programme in Malawi

To assist small and medium enterprises to take advantage of the initiative, the Ministry of

Industry, Trade and Private Sector Development undertook to use funds that were

provided for by Ministry of Finance under the HIPC Initiative to boost the

implementation of the AGOA in Malawi. The funds were used for the following

initiatives:

• Construction of factor shells in Kanengo Lilongwe. The motive behind the

construction of these shells was for prospective investors who would be interested

to venture into textile and apparel business and other AGOA related activity. This

was a major activity that needed enough funds to accomplish the intended

purpose. But due to lack of financial resources by Government, the project could

not proceed . Due to the importance of these to prospective investors,

Government could still set aside some funds for the completition of the

incomplete factory shells. Seeking financial support from donors could be

another option.

• Sub-contracting of Small and Medium Enterprises to large textile apparel

manufacturing companies. The Ministry and other support institutions like Small

Enterprise Development of Malawi visited several AGOA apparel exporting

companies to seek their opinion of allowing SMEs to subcontract. But due to lack

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of skills and capacity by the envisaged SMEs the programmes did not succeed.

Most companies were reluctant to enter into such arrangements due to the nature

of the US market which was sophisticated and that there was need for such SMEs

to have proper training.

• Purchase of machines for the Blantyre cooperative. As one way to assist SMEs to

take advantage of the AGOA Initiative, Government through the Ministry of

Industry, Trade and Private Sector Development used the HIPC resources by

supporting the Blantyre Cooperative to purchase sewing machines. The aim

behind this initiative was to empower Malawians economically to take advantage

of the AGOA Initiative. The programme could not succeed and proceed due to

lack of working capital by the cooperative . On the other hand, management of

the programme was a problem and there was lack of coordination amongst the

entrepreneurs in the cooperative. .The other problems included lack of proper

skills to produce a product that could sell in America,and lack of customer

information etc.

It would also be worth noting that in the Agriculture sector, USAID has instituted a

programme called Support for Agriculturally –Linked Enterprises (SALES) whose focus

is on the production and export of cotton, tea, coffee, and macadamia nuts. This

programme also aims at assisting Malawi take advantage of the AGOA initiative.

3 (b) Potential export products

Some of the major AGOA agriculture export potential products include processed

paprika, macadamia nuts and ground nuts.

There is also an improving comparative advantage in fresh and dried nuts. The processing

of ground nuts and other nuts into oils also represents a potential downstream export if

crushing capacity can be increased.

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Fruit juice also represents a potential export because approximately 50% of mangoes,

tangerines and other tropical fruits go waste ever year do to lack of manufacturing

processing plants. Development of the sector requires capital investment. Currently, there

is Mulanje Peak Foods Ltd that has specialized in the production of canned foods but it is

not clear yet if the company has plans to export to the US under the initiative.

Horticulture products such as mushroom, chilies, etc also have export growth potential.

Cut flowers have also been identified as having the export potential. Neem medicinal

plant grown in Nsanje District also has the export potential.

The Government and industry have also identified increased production and vertical

integration of the cotton sector apparel production as export growth sectors.

Malawi also has comparative advantage in the some apparel and textile sector, too,

though infrastructure improvements and trade capacity building is needed in the cotton –

textile garment supply chain.

The other potential products are the hand loomed, handmade and Folklore articles and

ethnic printed Fabrics. The AGOA provided duty free benefits for these articles under

Category nine. Malawi was nominated after separate consultative process with the

Committee for the Implementation of Textile Agreements (CITA).in the US Department

of Commerce.

Category nine articles are mostly produced by Malawi Council for the Handicapped

(MACOHA) and other women groups under the Ministry of Gender and Community

Services. Since Malawi was designated as an eligible exporter of such articles, it has not

exported any due to several factors. The factors range from lack of niche market

information, raw materials and lack of how to identify producers of these products in

Malawi. Therefore, given Malawi’s weak price competitiveness in the garments sector,

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the specialization in niche areas such as those for handicrafts, where there is less

competition, is vital.

CHAPTER 4: MAJOR CHALLENGES IN IMPLEMENTING THE

AGOA INITIATIVE

Since Malawi started participating in the AGOA initiative, it has faced and still faces

several challenges which do not only affect it but as well as other countries in the region.

It should also be pointed out here that these constraints are not only tied to the AGOA

exports but as well as other exporting initiatives that Malawi is participating in. Outlined

below are in brief some of the major challenges Malawi faces. The analysis of the

challenges will be divided into those affecting the garments sector and those affecting

the other products.

a. Supply side constraints.

This has been the major constraining factor in Malawi from full participation in the

AGOA programme. The extile and apparel sector is affectd mainly due to the fact that

the cotton to textiles to garments value chain is fragmented and this makes it too

difficult for Malawi to meet the Rules of Origin. As indicate above, most of the

AGOA apparel exports are made from the third country fabric and Malawi.

The inappropriate production technologies, and inefficient and costly financing for

small and medium enterprises are other impediments affecting the AGOA benefiting

industry in Malawi. Technology and communication obstacles impede export growth of

the potential sectors.

More computers and internet access are needed in order to access market information for

small and medium sized exporters. Erratic supply and inefficiencies in electricity

distribution are common problems that affect several industries particularly the apparel

manufacturing industry. Lack of cold supply chain and local transport air hub impedes

the development of horticultural products such as cut flowers. Limited supply capacity

resulting from high input cost and high production costs generally constrain agricultural

exports. Low levels of irrigation also lead to low agricultural production levels.

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b. Constraints in manufacturing

The high capital and transport costs and lack of adequate infrastructure constrain the

apparel sector mainly. There is also limited electric capacity for major investments in

spinning and textile mills.These impediments ,as well as slow customs clearance

procedures, reduce the competativenes with respect to lead times. Low ginning capacity

and dearth of investment in cotton ginneries constrain the cotton industry from

expanding into downstream production.

The impediments in the other manufacturing sectors include weak industrial base, lack

of diversification strategies, insufficient standards and quality assurance and limited

capabilities to market products in the USA. The agro-processing industry is dependent on

the domestic agricultural sector and is thus adversely affected during times of drought.

c. Standards

Malawi lacks the capability to conduct tests in line with quality control regulations

required under the AGOA. Some few industries have so much been affected by the

problem of standards such that the companies are is not able to export to the USA

because of inability to meet standards. A specific example is Nali Ltd – a leading Chili

Sauce manufacturer which cannot directly export its products to USA due to the fact

that its product failed the USA Food and Drug Administration Test of sanitary standards.

On the other hand, the Malawi Bureau of Standards, a standards testing body in Malawi

does not have adequate information on existing standards, technical regulations,

conformity procedures and Sanitary and Phyto-sanitary regulations.

d. Transportation:

Malawi being one of the land locked countries faces forminable challenges in the

movement of goods for export because of inadequate transport infrastructure in Malawi

and neighboring Mozambique, where Malawi exports are transported to the port. The

transport costs are high and are associated with inadequate road and rail transportation

that significantly impede the efficient movement of goods for export to the USA and also

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the anti-competitive behaviour in the domestic trucking industry along with the

assorted governance problems concerning the way that Malawi’s transport fleet is

utilized also pose a challenge.

According to the business persons and other organizations( mainly the Malawi Export

Promotion Council(MEPC) involved in overseeing that Malawi exports, they have cited

infrastructure impediments as one of the leading impediments to taking advantage of the

AGOA. It is estimated that 55% ( MEPC) of the production costs are associated with

transport costs. Several rehabilitation and construction projects have been undertaken to

improve existing road and rail infrastructure, including the rehabilitation of the Beira

corridor and the creation of transport links such as the Nacala Development corridor. On

the other hand, the manufactures has indicated that other regulations within the region

restrict international truckers from operating outside of main roads, creating in

efficiencies and contributing to higher transport costs.

e. Lack of the AGOA diversification strategy.

There is no AGOA diversification strategy on the ground that is expected to provide

Malawi the vision on how to take advantage of the AGOA initiative. Malawi like most

other sub-Saharan African countries need to diversify their product mix away from

commodities into processed and more value-added products.

f. Lack of market information

Malawi needs to use better market information to identify niches and increase market

penetration in the USA and other markets and increase competitiveness by accelerating

vertical integration.

g. 2005 end of Multi-fibre agreement5.

5 The Multi fibre Agreement (MFA) under the WTO used to set the rules for international trade in textiles and garments made from cotton, wool and synthetic fibre. The agreement used to set quotas limiting the amount of imports of textiles and clothing from developing to developed countries essentially safeguarding industries in the industries countries, controlling the level of market access for developing country imports. The growth of textile and garment industries in many countries was heavily dependent on the quota allocations under the MFA. It expired in December2004

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In 2005, the World Trade Organization (WTO) removed quotas of textile and apparel

which resulted in an increase in competition of AGOA textile and apparel exports to

the USA from Chinese imports. This helped to slow down economic growth in the

textile and apparel sectors in several Sub-Saharan African countries including

Malawi and others. The end of the Agreement led to closure of some of the major

companies in Malawi such as Haps Investments Ltd where more than 2,000 workers

were affected.

h. Lack of financing especially by small and medium enterprises.

Some development should be addressed to as that would encourage greater impact on

the ground. AGOA must address lack of access to credit suffered by supporting

institutions that create internationally recognized banking and crediting opportunities

to small and medium small enterprises Sub Saharan Africa and the USA.

i. Lack of expertise and technological skills to enable African countries including

Malawi to meet value added requirements for agricultural products. AGOA has a

range of products that Malawi produce. But the major constraining factor factor

has been the lack of expertise and technological skills to add value to the

products being produced..

j. Lack of capacity building and linking US and Malawian small businesses. The

US and African businesses have a bi-annial Fora called the US/Africa Business

Summits where both sides meet and clinche business deals. The AGOA

programme is highly focused during these Summits. In most of these summits,

most business persons have not been able to participate due to limited financial

problems in the end it is mostly Government officials that participate in these. The

lack business persons in these summits posses a challenge as they cannot clinche

any trade deals with their counterparts .

k. Lack of foreign Direct investment in Malawi. There has been low Foreign Direct

Investment flows to Malawi and mostly negligible compared to other countries

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in the Region such as South Africa, Lesotho, Botswana This could be attributable

to may be the poor investment climate which cannot be compared to other

countries in the region. It is probably high time Malawi had reviewed some of its

investment incentives in order to attract more FDI.

CHAPTER 5: POSSIBLE SOLUTIONS TO OVERCOME THE CHALLENGES

This chapter tries to highlight what could be some of the possible solutions to overcome

the challenges that Malawi is facing in the implementation of the AGOA Programme. In

order to come up with this chapter, several stakeholders ranging from the Government,

the private sector , civil society and the manufactures were consulted in order to come

up with a solution to overcome the challenges that have been indicated above.

The following were the findings:

a. There is need for a market access opportunities study. The study to be

undertaken should identify how Malawi can develop markets in the United

States of America focusing on the AGOA. The study should later conclude with a

listing of potential trade partners and trade opportunities. The study must be

spearheaded by the Malawi Export Promotion Council.

b. Need for Foreign Direct Investment and need to develop an AGOA investment

strategy. The AGOA legislation as stated intends to increase manufacturing and

investment in the Sub-Saharan African countries. Many countries are benefiting

from the AGOA related investment. While most of these success are focused

on the Apparel and Textiles industries, AGOA has over 6,000 eligible products.

An investment strategy should concentrate on attracting AGOA related foreign

direct investment into Malawi. Malawi however needs to improve its business

22

climate by reducing some of the barriers to doing business and increase efficiency

and attract more foreign investment.

c. Need for greater financial sector reforms. Malawi needs greater financial sector

development to increase growth and provision of greater credit to individuals and

firms which need it especially small and medium enterprises that would benefit

from the AGOA programme. The introduction of lending institutions such as

MARDEF by the current administration is a welcome development however it

would be vital if probably the Ministry could consider having separate discussions

with the lending institution to assist and probably give priority SMEs

participating in the AGOA programme.

Another good development has been the recent announcement by the bankers of

the reductions in the base lending rates from 25 to 20%.The development would

reduce Government borrowing and the development assist the Private Sector, its

potential to borrow at reduced rates.

In Malawi, the other major problem has been the bureaucracies, the lending

institutions offer or the tough conditions they attach when SMEs are not able to

fulfill to access the reliable credit. The major concern has been on collateral or

security that the companies or individuals have to offer. On the other hand there

is lack of national ID System and credit reference bureaus and this as well makes

lending to SMEs without collateral very risky.

d. Need for financial assistance to ensure compliance with standards by

implementing the following measures: Malawi needs to undertake institutional

reforms in our standards institutions with focus on AGOA compliance, with the

view to ensure that standards bodies are recognized by the United States

authorities. There is also need for an in country extension support to Small and

medium enterprises to meet standards requirements. The Southern African

Global competitiveness hub in Botswana provides technical assistance to

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companies facing problems with standards therefore the companies which are

exploring to export to US and are facing standards barriers could request for

assistance. Malawi also needs to submit a separate request to the Food and Drug

Administration (FDA), Food Safety Inspection Service(FSIS) and Plant Health

Inspection Services( APHIS) to provide clear explanation to Malawian

prospective exporters on Sanitary and phytosanitary norms and conditions to be

fulfilled for product eligibility under the AGOA in the United States laws.

e. Diversification of the AGOA Product Range- Malawi needs to review its

implementation of the AGOA programme taking into consideration that the

concentration has so much been on textile and apparel. The office of the United

States Trade Representative, each year produces a report on the performance of

each AGOA eligible country and provides comments on performance. Malawi

should therefore review its AGOA competitiveness report and try to develop

niche market parogramme for its prospective products. Malawi should also

explore opportunities for cross boarder export consortium and encourage

regional cooperation with the view to diversifying the product ranges. The

regional cooperation may include sourcing of raw material and collaborating in

exporting. A specific example is in exports of hand-loomed and folkloric articles.

Several countries in the region have become eligible including Malawi but in the

case of Malawi, its not able to export due to capacity problems and lack of

information on niche markets in the USA for such products. Regional efforts in

identifying the market and exporting together would greatly benefit.

f. Malawi, mainly through the Malawi Export Promotion Council should develop

and implement an effective communication and marketing strategy for AGOA. It

should mainly target those exports that have faced difficulties in accessing the US

market. Whilst developing this marketing strategy, Malawi should also consider

to undertake the following trade promotional activities: make effective use of the

Malawi embassy in the USA to enhance the implementation of the AGOA,

endeavor to make more effective use of African nationals in the diaspora to

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realize the objectives of the AGOA, collectively participate in the AGOA trade

related promotional events in the United States of America like the Corporate

council of Africa biannual events, conduct market intelligence and surveys by

using the International trade Center market intelligence tools, undertake

collective trade promotional exercise under an AGOA pavilion on the US market,

in major trade fair events that take place in the USA, organize collective buyer

seller meetings, Malawi should work hands with other countries in the region to

develop the AGOA websites to facilitate networking and trade promotion.

g. Need for infrastructure development. Malawi being a land locked country

experiences high transport costs and need to develop and improve its transport

logistics, communication and energy infrastructure. The development of the Shire

–Zambezi Water Way project needs more donor support including the United

States Government. Malawi also needs investment in agriculture irrigation

especially for products eligible for export to USA. Ministry of Agriculture and

Trade should identify priority agriculture products that need to be promoted plus

other specialty products in which we have comparative advantage.

h. Need for Malawi and other Least Developed countries that are benefiting from the

Third country sourcing provision to lobby collectively for extension of the third

country fabric provision that expires in September,2007. The provision must be

extended beyond 2007 to 2015. The AGOA third country sourcing provision has

only been extended once from 2004 to 2007. During this time, Malawi like most

other countries in the region benefiting from the provison have not been able to

graduate from depending on imported fabric or to add value to local cotton. Due

to the fact that the cotton – textiles –garments value chain in Malawi is still

fragmented, Malawi needs to lobby for extension of the third sourcing provision.

And should the US approves the extension, then the players in the cotton, textiles

and garments sectors should consider to re-look at the value chain and find ways

to ensure that before the end of the third country sourcing provision, Malawi

should have the capacity to produce garments made of textiles from local sources.

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i. Need for entrepreneurship and enterprise development- Malawi through the

Small Enterprise Development of Malawi (SEDOM), Malawi Entrepreneurship

Development Institute(MEDI) Development of Malawi Traders Trust (DEMAT)

should facilitate access to capital for SME financing AGOA related

interventions. These institutions should provide specialized business development

training to improve the competitiveness of SMEs in respect of AGOA related

activities.

j. Provision of capacity building assistance by the US government and the

establishment of the AGOA Fund. During most of the annual AGOA Fora, the

United States Government usually announces setting aside billions of funds to

assist AGOA eligible African countries take advantage of the AGOA. The funds

being set are difficulty to be accessed and the length of time it takes for USAID to

respond to requests for technical and financial assistance is difficult to determine.

Therefore the bureaucracies that are there when accessing such funds should be

dealt with. Malawi for example has not benefited much from the Hub in

Botswana hence need for Malawi to request that the funds should be allocated at

country level.

On the other hand, Malawi at national level should consider setting up an AGOA

fund and that regional groupings such as COMESA and SADC should also

consider setting up such funds that can be accessed by all SMEs in the region

either directly or through participating in African financial institutions.

k. The United states authorities are urged to provide incentives to the US private

sector to encourage increased investments in Malawi in AGOA related projects.

Overseas Private Investment Company (OPIC) and the Import and Export

(EXIM) Bank of the USA should consider focusing on investing in countries like

Malawi where there has not been substantial investment flows since the

implementation of the AGOA programme and that these companies must invest in

such areas that will facilitate the AGOA programmes such as investment in

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telecommunication, transportation, electricity, water and sanitation projects etc.

US must also consider to introduce a special Aid for Trade Programme to support

the AGOA programme.

l. Trade and investment missions to the USA must be undertaken on our own or

jointly with the other countries in the region. Malawi Investment Promotion

Agency and MEPC with the support of Government must consider undertaking

the mission in future.

CHAPTER 6 : RECOMMENDATIONS

For Malawi to continue benefiting from the AGOA initiative, it is recommended that

Malawi and other SSA eligible countries benefiting from the third country sourcing

provision of the Act , must request for an extension of the third country sourcing

provision from 2007 to 2015.

The Chairman of the Garments and Textile Manufacturers Association of Malawi

(GTMA), Kantila Desai through the Daily Times news paper of 21st November,2006,

admitted high production capacity of emerging world economic giants China and India

posed a major challenge to Malawi and other Southern African garment manufacturers

benefiting from AGOA.

“Even South Africa, the region biggest economy in the region, cannot match China and

India. So we are trying to establish our capacity base and lobby the US government to

soften the stand on the policy for us to continue export to them,” said Desai, who is also

chairman for Knitwear Industries Limited.

Desai said Malawi has no choice but to lobby the US government because it lacks

capacity to stand on its own in the garment manufacturing.

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A boom in textile manufacturing in neighboring Mozambique and Zambia who are very

capable of producing most of their raw materials is another challenge to Malawi, Desai

said.

He also bemoaned that Malawi failed to take full advantage of AGOA because there were

no deliberate policies on the ground to attract more investors in the sector.

There is also need for more collaboration between the Ministry of Industry, Trade and

Private Sector Development, Ministry of Agriculture, Ministry of Finance, Economic

Planning and Development and Transport and Public Works, and the donors especially

USAD and the American Embassy to have a common understanding and brain storm on

how Malawi must proceed with the implementation of the AGOA programme in

Malawi. Political will and commitment is also needed.

It is also recommended that enhanced market access and trade incentives provided for

in the AGOA should be accompanied by public and private sector investments in

education, training and professional development and that the USA and other donor

agencies must approve substantial debt relief for African countries including Malawi

which would crucially be used to implement some of the AGOA programmes.

CHAPTER 7: CONCLUSION

This paper has tried to analyze Malawi’s performance in the implementation of the

AGOA initiative since Malawi was designated as beneficiary country. With the

exception of the garments, the AGOA does not appear to offer Malawi’s exports

meaningful improved market access to the United States market. Many agricultural

products that are covered by the AGOA already enjoy duty free access under the

Generalized System of Preferences. Furthermore, the products that are not included in

GSP and are of interest to Malawi such as sugar, cotton, etc are not covered by the

AGOA either. It is also of interest to note that crude oil accounts for over 83% of Africa’s

exports under the AGOA.

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It is also worth noting that in addition to the above analysis, many of the principal

impediments to Malawi from exploitation of the AGOA so far have been supply side

constraints.

This being the case, then these issues need to be addressed much more widely than just

under the AGOA in the on going development of the Malawi Private Sector Development

Strategy and the Export Strategy.

But need to mention that despite the above mentioned limitations of the AGOA, it has

had positive impact in Malawi such as creation of 7,000 jobs and increased trade balance

between Malawi and the USA. It is therefore proposed that the AGOA should be a

permanent feature of relationship between Africa and the United States especially that the

US must consider extending the 3rd country sourcing fabric provision for Least

Developed countries. I base this view on the lamentation of the Garment industry actors

in Malawi who are convinced that the termination of the 3rd sourcing provision in

Septemebr,2007 would culminate in loss of jobs for many Malawians.

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REFERENCES

2006 Comprehensive Report on US Trade and Investment Policy Towards Africa

and Implementation of the African Growth and Opportunities Act- Prepared by the

Office of the US Trade Representative – Annual Report, My,2006

US Government .2000. African Growth and Opportunity Act 2000

U.S. International Trade Commission. 2003. AGOA boosts Lesotho’s textile exports

to US by 50%, but… March 18

African Growth and Opportunity Act(AGOA) paper by Arthur Gerstenfeld and

Raphael J. Njoroge;

African Growth and Opportunity Act(AGOA) Civil Society Network Newsletter,

August,2004

US Government AGOA updates : HTTP: www.gov/news/ releases/2003/12/2003

US Department of State, 11 December, 2006. US Congress Approves measure

extending Trade Preferences, www. agoaaction.org

The U.S. International Trade Commission. 2003 AGOA boosts Lesotho’s textile to

US by 50%, but.. March 18

Outcome of the African Ministerial Consultative Group on AGOA, at the 5th AGOA

Forum in USA, 5th June,2006, Washington DC

AGOA Action –Wall Street Journal Endorsement

AGOA.info. 2006 – www. tralac.org

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Rosa Whitekar: Uganda –Where to now, under AGOA, New Vision, Uganda,

3/12/2006

Daily Times, ,Garment makers lobby for AGOA policy Change, 21/11/2006

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