AGOA's Impact on Kenya's Economy and the Future of US-Kenya Relations

By Leshan L Naisho

Since 2000, the African Growth and Opportunity Act (AGOA) has been a cornerstone of US-Africa trade relations, and it has had a considerable impact on Kenya's dynamic economic landscape. As the program nears its end in 2025, it's critical to assess its influence on Kenya's economy and the future of US-Kenya economic relations. Since its introduction, AGOA has been a driving force behind Kenya's export-driven growth, particularly in the textile and garment sectors. The initiative has granted duty-free access to the US market for a wide range of Kenyan products, promoting job development and economic diversification.

Kenya's bilateral commerce with the United States expanded dramatically between 2000 and 2022, from $235 million to $892 million, representing a 27.7 percent ($189 million) rise from 2021 and a 125 percent increase from 2012. With AGOA exports accounting for $602 million of the $892 million in 2022 or around 67% of export income, more than 90% of Kenya's exports to the United States have profited from AGOA and the Generalized System of Preferences. The textile and apparel sector accounted for more than 94% of Kenya's AGOA exports in 2009; nevertheless, non-textile exports increased from $25.7 million in 2019 to $34.5 million in 2022. While textiles and clothing continue to be the dominating exports under AGOA, accounting for more than 70% of Kenya's total exports, the program has also boosted growth in other sectors. Non-textile exports include agricultural items like coffee, tea, cut flowers, and macadamia nuts; minerals like titanium and tantalum ores; and electronic and chemical products. The handicraft sector, particularly basketware, has profited from AGOA preferences. 

The impact of AGOA goes beyond direct exports. The program has attracted US foreign direct investment (FDI) in Kenya (stock), which was $277 million in 2022, down 9.5% from 2021. Nonetheless, AGOA has had a favourable influence on the economy, especially in export-oriented businesses, resulting in the creation of 66,260 jobs and knowledge transfer. It has also encouraged improvements in production standards and corporate procedures to satisfy U.S. market requirements.

Despite its successes, AGOA's impact on Kenya's economy has not been without challenges. The heavy reliance on textile and apparel exports has raised concerns about economic vulnerability and the need for further diversification. Moreover, while non-textile exports have grown, they still represent a relatively small portion of Kenya's total AGOA exports. Another limitation has been the underutilisation of AGOA benefits in certain sectors. Many Kenyan businesses, particularly small and medium-sized enterprises, have struggled to fully leverage AGOA due to capacity constraints, a lack of awareness, and difficulties in meeting U.S. market standards. Kenyan businesses often struggle to meet the stringent quality, safety, and certification standards required for access to the U.S. market. Compliance with these standards can be costly and time-consuming, particularly for smaller businesses with limited resources. Furthermore, inadequate infrastructure, particularly in terms of reliable transportation and logistics networks, has hindered many local businesses' capacity to meet US market requirements this is due among many things time delivery and maintaining product quality during transit.

Access to finance and investment capital is another challenge that limits many businesses' ability to expand production capabilities, invest in new technologies, and scale up their export operations to meet U.S. market demand. However, these challenges can be overcome through a concerted, multi-faceted approach that includes improving awareness and education programs about AGOA, continuing investment in infrastructure development, providing technical assistance to help businesses meet U.S. market standards, and developing financial support mechanisms for export-oriented businesses.

As AGOA approaches its 2025 expiration date, discussions about its future and its role in U.S.-Africa trade relations have intensified. President William Ruto urged the U.S. Congress to extend AGOA during his most recent trip to the United States, where he highlighted its importance to Kenya's economy and U.S.-Kenya relations. Several scenarios are being considered: 

1. Extending AGOA: Many African countries, including Kenya, are advocating for a straightforward extension of AGOA. This would provide continuity and predictability for businesses and investors. 
2. Modification of AGOA: There are proposals to modify AGOA to address some of its limitations. This could include measures to promote more diversified exports and enhance capacity-building support. 
3. Transition to Reciprocal Trade Agreements: The U.S. has indicated a long-term goal of moving towards more reciprocal trade arrangements with African countries. The ongoing negotiations for a U.S.-Kenya Strategic Trade and Investment Partnership (STIP) reflect this direction. 
4. Hybrid approach: This could involve extending AGOA while simultaneously working on new trade frameworks that would eventually replace or complement it. 

The future of AGOA will have significant implications for U.S.-Kenya relations. AGOA has been a cornerstone of economic diplomacy between the two countries, and its potential expiration or modification will necessitate a recalibration of the economic partnership. The U.S.-Kenya Strategic Trade and Investment Partnership (STIP) negotiations, launched in 2022, signal a potential shift towards a more comprehensive and reciprocal trade relationship. As it aims to establish commitments between Kenya and the United States on non-tariff trade issues such as agriculture and labour rights, it is not a free trade agreement. However, STIP could open up new opportunities for trade and investment in areas such as digital trade, climate change mitigation, and regulatory practices. 

Preparing for the Future Regardless of AGOA's future, Kenya is taking steps to enhance its competitiveness and diversify its economy. These efforts include:

1. Value addition: There's a growing focus on moving up the value chain, particularly in agricultural exports. For instance, instead of exporting raw coffee beans, Kenya is looking to increase exports of processed coffee products. 
2. Export diversification: Kenya is working to expand its export base beyond traditional AGOA products. This includes promoting sectors such as business process outsourcing and digital services. 
3. Capacity building: Various initiatives, supported by USAID and other partners, are underway to help Kenyan businesses better understand and utilize trade preferences, whether under AGOA or future arrangements. 
4. Infrastructure development: investments in transportation and logistics infrastructure aim to reduce trade costs and enhance competitiveness. 
5. Regional integration: Kenya is leveraging its position in the East African Community and the African Continental Free Trade Area to expand its market access and attract investment. 

AGOA has played a crucial role in shaping Kenya's export sector and strengthening U.S.-Kenya economic ties over the past two decades. As discussions about its future unfold, both countries have an opportunity to build on AGOA's successes while addressing its limitations. The potential transition to more reciprocal trade arrangements, as exemplified by the STIP negotiations, could usher in a new era of U.S.-Kenya economic relations. However, this transition will need to be managed carefully to ensure that gains made under AGOA are not lost and that new opportunities for inclusive growth are created. Ultimately, the future of U.S.-Kenya trade relations will depend on the ability of both countries to craft a partnership that goes beyond preferential market access to address broader issues of economic development, regional integration, and global competitiveness. As Kenya continues to position itself as a key economic player in East Africa, its evolving trade relationship with the U.S. will be crucial in shaping its economic trajectory in the coming decades.