ANTANANARIVO, July 17 (Reuters) - Madagascar's $600-million-a-year textile industry faces collapse if the United States suspends the Indian Ocean island from a trade deal for Africa over democracy concerns.

President Andry Rajoelina - Photo: REUTERS/Siphiwe Sibeko

The U.S. African Growth and Opportunity Act (AGOA) allows many African nations to export goods to the United States without duty -- but it has conditions on good governance.

Washington branded President Andry Rajoelina's seizure of power in March a coup and told him to make strides to restore constitutional order before the end of 2009.

Failing that, AGOA may be suspended for Madagascar.

"If that happens, no U.S. buyer will risk placing an order in Madagascar," said John Hargreaves, acting head of the Madagascar Export Processing Zone Association (GEFP).

Half of the island's 150 factories -- employing 50,000 workers -- supply major U.S. stores including Wal-Mart (WMT.N) and Bloomingdale's (M.N), and sports brands such as Puma (PUMG.DE) and Adidas (ADSG.DE), according to industry observers.

The textile sector accounts for about 6.5-8 percent of Madagascar's GDP, with almost half of textile exports destined for the United States.

Clothing exports to the United States totalled $278.8 million in 2008, making it the second largest textile exporter through AGOA after Lesotho, according to the GEFP.

In a letter to the export association in April, the U.S. government specifically warned of possible AGOA suspension.

"As you know, respect for the rule of law is a condition of eligibility outlined in the AGOA legislation," wrote Florizelle Liser, Assistant U.S. Trade Representative for Africa, in the letter seen by Reuters.

"In those cases where the President determines that a country no longer meets AGOA's eligibility standards, that country's eligibility for AGOA's trade benefits is revoked effective January 1st of the following year."

"MINUTE MARGINS"

Robert Strauss, president of the American Chamber of Commerce in Madagascar, said such a move would be an "economic calamity" for Madagascar that may sink the sector.

"U.S. orders would dry up very quickly and manufacturers serving the EU market would see their costs increase to levels that would make Madagascar look very unattractive," he said.

AGOA offers members duty-free and quota-free access to the U.S. market for a range of goods including oil, minerals and clothing. Manufacturers say duty on clothing entering the United States ranges from 12-33 percent for synthetic products.

"It's a very difficult market. The margins are minute, and no buyer will risk the financial burden of paying that duty," Hargreaves said.

High transport, fuel and electricity costs make Madagascar an expensive location to operate compared to Asian competitors.

"I would say that everyone who ships to the U.S. commenced their operations in Madagascar because AGOA was in place. So if AGOA goes, I think (we) all go," said one of the island's leading U.S. market providers, on condition of anonymity.

"We could be in Bangladesh where it would be cheaper with or without AGOA. It's a buyers' market and the market dictates."

Madagascar's finance minister, Benja Razafimahaleo, told Reuters he did not expect the United States to risk triggering a social crisis. "AGOA is a success story for U.S. cooperation so I don't see them wanting to wreck that."

Experts say lead times on orders, typically averaging five months, mean the industry needs a positive signal from Washington within the next two to three weeks.

"50,000 people risk losing their jobs very quickly and it would mean a downsizing of the industry by about 50 percent. That risks collapsing the sector altogether," Hargreaves said.

The ripple effect could hit Mauritius, Swaziland and Lesotho, which supply fabric and accessories to Madagascar, he added.