Introduction

CHAPTER 1 Trade Impact of the AGOA: An Aggregate Perspective

Souleymane Coulibaly and Woubet Kassa

Introduction

Since the introduction of the Generalized System of Preferences (GSP) in the 1970s,1 there has been widespread interest in understanding the impacts of nonreciprocal trade preferences provided to Sub-Saharan African countries. This interest stems from robust evidence that expansion of trade boosts growth and development.

Recent economic growth success stories in countries including China, the Republic of Korea, Malaysia, and Singapore are often attributed to those countries’ effective participation in international trade (Commission on Growth and Development 2008; Connolly and Yi 2015). Firms’ participation in global trade spreads the benefits of new technology to improve overall welfare (Segerstrom 2013). The rise in exports following improved access to foreign markets may lead to the growth of more-efficient firms, further inducing increased productivity among firms and across the economy (Melitz 2003). In addition, increased access to foreign markets, because it induces entry, yields increases in the productivity of industry.

In line with this evidence, the United Nations Conference on Trade and Development (UNCTAD) has advocated for extension of the preferential trade access of least developed countries (LDCs) to high-income economies’ markets (UNCTAD 2012). A few preferential trade agreements (PTAs) have emerged, aimed at providing duty-free, quota-free market access for SubSaharan African countries’ exports. These include the GSP, the European Union’s Everything but Arms (EBA) preference program, and the US African Growth and Opportunity Act (AGOA).

This chapter revisits the impact of the most important PTA in the region, the AGOA, which provides duty-free and quota-free access to the

US market for a selected group of products from eligible countries in SubSaharan Africa. The objectives of the chapter are twofold: First, we evaluate the total trade effect of the AGOA using the synthetic control method (SCM), a quasi-experimental approach that addresses some of the limitations in existing empirical approaches to examining the impacts of PTAs (a method further discussed in annex 1A). Second, we explore possible determinants of the variations in the estimated impact across countries and review the underlying mechanisms driving the variations. We attempt to account for the AGOA’s heterogeneous impacts in the region. These findings could inform policy in the design and structure of PTAs as well as the design of domestic policy instruments to enhance the capacity of African economies to optimize their access to export markets, whether traditional or new ones.

The AGOA has been considered essential for promoting trade and hence for the transformation of economies in Sub-Saharan Africa. The underlying basis for the AGOA is that “increased trade . . . [has] the greatest impact . . . in which trading partners eliminate barriers to trade and capital flows and encourage the development of a vibrant private sector that offers . . . the freedom to expand economic opportunities.”2 PTAs are also central in foreign policy strategy as well as the international development objectives of developed economies, including the United States and the European Union (EU).

Methodological Rationale

After close to five decades of implementation of PTAs, the findings on their impacts have largely been mixed (Klasen et al. 2015). In Sub-Saharan Africa, in particular, there has been little empirical evidence. Limitations in the empirical approaches used to analyze the impacts are also evident. The gravity model has been the workhorse framework for analyzing the impact of PTAs on trade (Aiello, Cardamone, and Agostino 2010; Anderson and Van Wincoop 2003; Brenton and Hoppe 2006; Cipollina and Salvatici 2010; Cirera, Foliano, and Gasiorek 2016; Gil-Pareja, Llorca-Vivero, and Martínez-Serrano 2014).

The predominant empirical literature on the impact of PTAs on trade or exports augments the traditional gravity model with a dummy variable representing participation in a particular PTA. The estimated coefficient of the dummy variable represents a measure of the PTA’s impact. However, there is ample evidence that participation in PTAs is endogenous (Cipollina and Salvatici 2010; Egger et al. 2011; Magee 2003). Results based on the augmented versions of the gravity model suffer from the nonexperimental nature of the available data. The models fail to address underlying country differences due to observed (but not accounted for) and unobserved heterogeneity across countries. Hence, the results might have provided only an imperfect estimation of the impact.

Among recent efforts examining the impact of the AGOA, Frazer and Van Biesebroeck (2010) employ a triple difference-in-differences (DD) approach to address these issues. DD estimators provide unbiased