What’s the Future for Africa’s Textile Sector Under AfCFTA?

African leaders want more clothes made on the continent and are trying to retool the textile industry using tariff liberalisation, the chief ambition of the African Continental Free Trade Agreement (AfCFTA). The aim is to level the playing field by lowering the cost of producing and distributing clothes in the region, which in turn will increase competitiveness and attract new investments. But these ambitions are not without risk, not least of all, the push-back of the AfCFTA start date, infrastructural bottlenecks and even winning over consumer appetite for Made in Africa apparel, to name a few. 

Spotlight on Kenya

“If we buy Kenya, we will build Kenya,” said Kenya’s President Uhuru Kenyatta as he rallied support for his country’s textile sector in May. COVID-19 has increased the domestic production of cloth face masks around Africa, and leaders like Kenyatta want citizens to embrace locally made fashion as well. According to Kenyatta, “this will extend employment opportunities for thousands and encourage more of our farmers to plant cotton and invest in inputs for other fabrics, like wool, which we can easily produce locally.”

Kenya is one of a number of African countries that had a large textiles sector thriving behind state protection 40 years ago. [KA1] It was the country’s biggest industrial sector by employment, employing around 30% of the workforce[1]. However, the World Trade Organization’s Agreement on Textile and Clothing in 1995 required countries to begin lifting import restrictions. Meanwhile, some African countries were reforming their economies by privatising state firms – including textile companies. Infrastructure and technology lagged amid political instability and other forms of institutional weakness. Local production grew uncompetitive in these circumstances, and imports (particularly from Asia) began putting local producers out of business. [KA2] 

The AfCFTA Ambition

Today, African governments are trying to retool the system using tariff liberalisation. AfCFTA policymakers envision that by African countries liberalising tariff lines, this will reduce the cost of exporting within the region and that the resulting gains in competitiveness will attract new investments. The African Growth and Opportunity Act (AGOA) has produced this effect in countries like Kenya.

First becoming applicable in 2000, AGOA is a piece of US legislation that lets firms in Sub-Saharan Africa export to the US duty-free if the African country meets requirements based on the rule of law and human rights. AGOA rules of origin are lenient for textile firms – only single transformation (fabric to apparel) is required. The US’ apparel market is worth more than USD350 billion and is the largest in the world. Easier access to that much consumer spending has fueled the establishment of factories in Kenya’s export processing zones. Accordingly, Kenya’s apparel exports to the US increased forty-fold between 2000 and 2014, putting more than 30,000 people to work.[2]One World Bank report also suggests that Africa’s exports to the US has grown more than 168% because of AGOA.[3]

The apparel market in Africa is worth around USD30 billion (plus footwear), ten times less than that of the US’. Still, the market is promising. The continent’s population is growing 2.7% a year and faster than anywhere else in the world. Pre-Covid-19 consumer spending in Sub-Saharan Africa was growing 4% a year as of 2018 (though we are yet to fully understand the extent of the pandemic’s impact on this)[4]. African leaders agreed last year that most member countries will be required to cut 90% of all tariff lines within five years. Tariff liberalisation could pave the way for textile firms in the region to tap into the market opportunity as they have similarly done under AGOA. 

The Real Texture of Textiles

Even after those negotiations are complete, tariff liberalisation may yield limited results if firms in Africa continue to be exposed to risk, some of which we’ve highlighted below:

Infrastructural bottlenecks:  Half of the bottom 60 countries ranked in the World Bank’s 2018 Logistics Performance Index are in Africa, demonstrating the huge impediment that supply chains experience in producing and distributing goods efficiently. That index measures the quality of transport infrastructure and port efficiency, among other indicators. That efficiency gap gives cheaper imported goods an edge in the local market in terms of competitive pricing. 

Compromise & collusion at customs: Often, imported goods (some counterfeit) slip in through weak standards and customs systems. Speaking at a virtual meeting held by the American Business Council last month, the AfCFTA Secretary General, Wamkele Mene expressed concern that porous borders are a real risk for the trade area: “Where the bigger challenge will be is from the border (custom) officials in the remote parts of the member states and whether or not the officials will adhere to the rules that required them to apply the AfCFTA procedures. This is the number one concern for me”.

The Economic Community of West African States (ECOWAS) has had a trade liberalisation scheme (ETLS) since 1979, but rules of origin are sometimes enforced poorly at the ports and borders. To dodge taxes, some importers bring textile products into a member country by claiming they were made in another member country. These products are then presented to customs in the recipient country for ETLS status—even if the products really originated from outside of ECOWAS.

Business leaders in the region have recently told us about such tax fraud. A senior executive of one Nigerian textile association said, “Some competitors who import get to exploit slack ETLS enforcement and avoid paying taxes that were put up to protect us local producers. Such tax fraud is part of the reasons why they can outcompete us on pricing.”

Consumer preferences: At one of our Songhai roundtables at the end of last month, we had the pleasure of exchanging thoughts about the extent to which Made in Africagoods will be patronized by Africans with Delali Bentsi- Enchill, Product Manager of Vlisco and Amma Aboagye, founder of The Afropole. From our discussions, it was felt that encouraging some African consumers to replace their current preferences for garments which are imported with those which are locally produced, will take time. There will need to be a wholesale sensitisation campaign, in which leaders in the political, business and entertainment worlds are leading the charge, not too dissimilar to the Year of Return campaign. The latter marked 400 years since the departure of African slaves to the US, and Ghana’s government adopted a sustained, joined- up approach in spreading the aims of the initiative. Even still, there was a shortfall but it was strongly felt that a robust marketing campaign would be critical in aligning preferences with local production, which would be an even harder sell if quality is also below par.

Outlook

Governments are taking steps to ease these market constraints and elevate the investment climate in anticipation of AfCFTA, even though the start date has been pushed back, owing to the pandemic. Nigeria’s central bank is lending to firms in the textile sector at a 9% interest rate (interest rates in the country are typically in double digits). The Nigerian government is also building a 3,000km railway that will connect its top ports in Lagos to the country’s northern region, which used to be a textile hub. In 2016, Rwanda cut VAT and import duties to zero on raw materials and machines for the textile industry. The East African Community is also developing similar incentives on a regional level in a pending Cotton, Textiles and Apparels Strategy and its Implementation Roadmap. Similarly, creatives on the continent are already positioning themselves for an even larger customer base, leveraging the power of digital technology. Online brands like Kiki Clothing and marketplaces like Afrikea are set to play an increasingly prominent role in driving customer delight for African apparel on the continent and globally. 

[1]https://library.fes.de/pdf-files/iez/03796/11kenya.pdf

[2]http://documents.worldbank.org/curated/en/441761468000939834/pdf/99480-REVISED-Kenya-Apparel-and-Textile-Industry.pdf

[3]https://blogs.worldbank.org/trade/make-preferential-treatment-real-for-africa-relax-rules-of-origin

[4]https://data.worldbank.org/indicator/NE.CON.TOTL.KD.ZG?locations=ZG

[5]Others are national security, livelihood and industrialisation

 [KA1]Could we have some comparative data here pls to affirm the size of Kenya’s textile industry compared with others in the sub-region?

 [KA2]What prompted this? It would be useful to know such that we know what possible triggers could be for the risk of a more liberalised stance going fwd

 [KA3]Any update on what happened at this meeting?