Review on proposed reform of EU GSP scheme

The European Commission, in the first week of last month (10 May) adopted a proposal to massively overhaul the current contours of the GSP Scheme.

Although there appears to be no substantial negative effect on Sri Lankan apparel exports to the EU following the withdrawal of EU GSP + Scheme from August 2010, Sri Lanka continue to enjoy the tariff concessions granted under the EU Standard GSP Scheme. Hence, any changes proposed to the current scheme merits further examination and scrutiny as the proposed scheme will have bearing on Sri Lankan exports to the EU.

It is widely believed that EU has withdrawn GSP+ facilities from Sri Lanka mainly on account of political compulsion rather than on the basis of trade issues. However, Sri Lanka was able to weather the transition from GSP+ tariff concessions to standard GSP tariff concessions by demonstrating its resilience in the export front.

The current GSP Scheme comes to an end in December, 2011. The commission has put forward ‘Role Over’ regulation extending the present system until the end of 2013. The EU Parliament and the Council have approved the roll-over legislation to continue the present system where Sri Lanka will also enjoy standard GSP Scheme continuously. The new proposal made by the EU will come into effect from January, 2014.

Under the current regime, the GSP covers three separate schemes:

•The standard GSP Scheme which currently provides 3.5 percentage of tariff concessions for all other eligible goods except textile and apparel and 20% tariff concessions for apparel and textile from EU MFN duties for 176 countries covering approximately 6244 product lines subject to meeting EU rules of origin requirements. ( e.g. Sri Lanka, India, Pakistan, etc.)

•The special incentive arrangement known as GSP+. This scheme offers zero duty concessions covering 6336 product lines for 15 beneficiary countries who are vulnerable, less diversified and which ratify and implement 27 international conventions on human rights, labour rights, environment and good governance. (e.g. Ecuador, Peru, Venezuela, Costa Rica, etc.) Sri Lanka was a beneficiary until 10 August 2010.

•The Everything But Arms (EBA) arrangement under which all products from 49 Least-Developed Countries covering 7140 product lines receives duty-free and quota free access to European Union (e.g. Bangladesh, Cambodia, Malawi, Ethiopia, etc.). This is an open ended scheme where there is no time limitation or obligation to ratify and to implement any international conventions. The beneficiaries will be able to enjoy duty free and quota free access to EU market so long as they are in the UN list of Least Developed Countries. This scheme is more generous in terms of depth of tariff concessions, product coverage, graduation principle, relaxed rules of origin and transparency and predictability.

The EU held public consultations to review the present regime during the period March/June, 2010 to assess and evaluate the current regime and consequently made drastic changes to the current regime.

According to the EU study, the current regime does not better focus on the beneficiary countries that are in most need of the GSP tariff concessions. In the recent past due to developments in the global economic scene and change of development dynamics, some developing countries that benefitted from GSP Scheme emerged as more advanced developing countries which are now globally competitive.

On the other hand, many poor countries are lagging behind. The competitive, advanced developing countries invariably apply high competitive pressure on the poor countries in the utilisation of the current GSP facilities. In order to address the disproportionate distribution of benefits and to concentrate on fever needy countries, EU is now proposing to eliminate following group of countries from the scheme.

(a) Countries which have been classified by the World Bank as high or upper-middle income economies for the past three years based on the gross national income (GNI) Per Capita.

(b) Countries which enjoyed similar tariff concessions under the free trade agreement with EU. (E.g. EU Special Regime for Balkan Countries, Economic Partnership Agreements such as ACP)

(c) Overseas countries and territories that enjoy tariff concessions and alternative market access for developed markets.

The final list of eligible countries will be drawn by the EU utilising World Bank data for the years 2011, 2012 and 2013. According to data available today, it is tentatively estimates under the proposed scheme, number of beneficiary countries would drop from 176 to 80 countries.

Beneficiaries such as Brazil, Russia, Saudi Arabia and Qatar will be among the countries that loose eligibility. However, India, Pakistan and China that are classified as Lower-Middle Income Countries would continue to eligible for the concessions. Sri Lanka also will retain the benefit even under the Revised Scheme of GSP as a standard GSP beneficiary. The World Bank Lower-Middle Income Country threshold is US$ 996 – US$ 3945 per capita. During the year 2009, World Bank estimated that Sri Lanka’s GNI as US$ 1990.

One of the positive aspects of the proposed scheme with the reduced number of beneficiaries particularly from Upper-Middle Income Countries is that the huge competitive pressure exerts by those countries on products originating from Low and Lower Middle Income Countries come to an end. At present, GSP covered exports from China, India, Thailand, Brazil and Russia cover almost 67% of all GSP exports.

The less domination by Advanced Developing Countries would provide enhanced space for Low and Lower Middle Income Countries in EU market. However, fast developing and advanced developing countries like India, China and Indonesia would continue to retain the benefit as they are still comes under the Low Middle Income Category. Pakistan will also most likely to receive GSP+ facilities under the revised threshold of vulnerability.

The new and additional space created in the market with the reduced number of beneficiaries would be substitute and penetrated by the countries named above yet at the cost of Low and Lower Middle Income Countries.

At present the total value of GSP covered imports to the EU from all sources (176 countries) during the year 2009 stand at Euro 59.5 billion. The standard GSP imports (121 countries) in the same year were valued at Euro 48 billion. The value of the GSP+ imports in 2009 was Euro 5.3 billion from 15 beneficiary countries, mainly from Latin American Region. The value of imports from 49 Least-Developed Countries were at Euro 6.2 Billion.

With the implementation of the new scheme and consequent reduced number of beneficiaries, the expected value of the GSP covered imports expected to reduce drastically to the Euro 37.7 billion reducing the GSP covered imports by Euro 21.8 billion or 36%. This will certainly protect indirectly the EU’s trade interests as well.

Furthermore, the annual lost of custom revenue to EU based on 2009 figures of Euro 2.97 billion due to tariff concessions offered under the current GSP Scheme would reduce to estimated Euro of 1.87 billion under the new scheme saving custom revenue of almost 1 billion Euros to the EU consolidated funds.

When a tariff concessions offered by one party to a selected group of countries if the non-selected countries exports are cost-effective than the applicable tariff at the boarder of the concession granting country, that tariff concessions does not work for the benefit of the beneficiary countries.

In other words, Low and Lower Middle Income Countries should continue to strive to supply competitive products to the EU, in order to reap the benefit of tariff concessions. This competitive status would benefit partly the EU importer and the consumer.

In respect of product coverage, the new proposal does not make any changes. Hence, the product coverage will remain unchanged. However, it is proposed to revise the graduation principle as follows. (Graduation means imports of particular groups of products originating in a given GSP beneficiary country lose GSP or GSP+ preferences.)

Under the present scheme, when the average imports of a section from a country exceed 15% of GSP imports of the same products of all GSP countries during three consecutive years would lose the GSP benefit of that section of the products. In respect of textile and apparel, the threshold is 12.5%.

Under the new regulation, the threshold has been moved up from 15% to 17.5% and in respect of textile from 12.5% to 14.5%. The graduation will not apply to GSP+ countries or EBA countries.

Furthermore, the product sections have also been increased from present 21 sections to 32 making it more homogenous products together. This proposal would certainly benefit the strong textile exporting countries such as China, India and Pakistan.

Since it is most unlikely that vulnerable country who is eligible for GSP+ will most unlikely to face the problem of graduation, the new proposal would only enhance the good will of those countries towards EU rather than effecting any tangible benefits.

In respect of GSP+, the following changes have been proposed by the EU:

(a) Encourage more beneficiaries to apply for GSP+ scheme with the objective of promoting core human rights and labour rights and principles of sustainable developments and good governance.

(b) Any country can apply for GSP+ at any time rather than present scheme where country can apply only once every one and a half years.

(c) The most important revision is the change of current vulnerability criteria. Under the proposed scheme, the present import share criterion will be expanded from 1% to 2%, while diversification criterion will remain at 75% of the country’s exports to the EU but for seven largest sections rather than current five largest sections.

(d) Continue to undertake ratification and implementation of 27 Conventions, however commission proposes to drop the Convention on Apartheid and add the United Nation’s Framework Convention on Climate Change. In case, binding commitments are not met, exclusion procedures will be swift.

(e) The most important change is that beneficiaries have to prove their abiding by their commitments. The burden of proof has been transferred to the beneficiaries.

Under the proposed revision, Pakistan is most likely to be qualified to receive GSP+ benefits and consequently its textile and apparel sector could see a vast improvement of market accession to the EU market. The Enhanced Graduation Principle would also add more benefit to Pakistan and even Indian textile sector. Ukraine will be a likely candidate for GSP+.

Our readers would recall that EU has been trying to obtain WTO waiver for granting preferential access to Pakistan Textiles Sector since September last year. (Please see our previous article on this subject at www.blog.fccisl.lk). Since the new regulation proposes EU to have access to more source of information, which are not limited to UN Monitoring and Reporting System, Some observed that the reliability, objectivity and impartiality of such source of information and the substance of information may be opened for political bias and subsequent criticism.

The 49 Least Developed Countries will continue to enjoy open ended and without undertaking of any commitments/obligations for duty free and quota free access to EU market. This facility will more enhance with the introduction of the revised and more relaxed rules of origin, especially applicable to LDC. (Please see our previous article on revision of ROO at www.blog.fccisl.lk)

If the commission proposal is implemented from 2014, the GSP beneficiary countries will be drastically reduced (according to current data the commission estimates the number of beneficiaries to reduce from current 176 to 80). Consequently, GSP covers imports to the EU will also be reduced by 36% as per the estimated data.

The foregone custom revenue to the community will also be reduced from Euro 2.97 billion to Euro 1.87 billion as per the estimates. Low and Low-Middle Income Countries in the developing world likely to benefit more from the revised scheme, particularly, the countries covered under the EBA and GSP+.

The underlining principle communicated in the proposal is that EU is keener in engaging in the developing world trading partners who are more advanced levels of development through reciprocal trading arrangements rather than engaging through non-reciprocal and unilateral tariff concessions offered through scheme such as GSP.

It appears that EU feels that there will be no free riders but at least the countries that can afford should reciprocate EU tariff concessions by reducing their own tariff and consequently opening developing countries markets for EU’s exports.

This principle is also seen at work at the WTO forum on the current Uruguay Round Negotiations in the sphere of ‘sectoral negotiations’ where EU is expecting drastic reduction of tariff above and over the standard Doha Round Formula (Swiss Formula) from the certain industrial sectors of the advanced developing countries.

GSP+ Scheme is becoming more binding for implementation of 27 international conventions and the non-trade issues are being gradually but effectively introduced into the trade arena to achieve more of political sense rather than meeting the trade, financial and development needs of the developing countries. The shadow of discarded ‘Singapore Issues’ is been brought back to the trade arena.

In conclusion, as far as Sri Lanka is concerned, it is advisable that our exporters should not rely excessively on tariff concessions granted by developed countries for our exports but rather to improve our export competitiveness and produce and export goods at the high level of the value change to capture the market purely on commercial competitiveness while adhere into core environment and labour standards.

Similarly, the public sector policy makers should design schemes to create enabling business environments by improving doing business index to provide active support to the private sector.