Special Feature GSP Plus: Challenges Ahead
At a time when the Pakistani economy is in dire straits, the grant of the GSP Plus status offers both opportunities and challenges.
The real challenge before Pakistan is to expand the base of its export products to be able to compete with regional rivals.
Pakistan was vying for the GSP Plus status since 2005 but was unable to qualify as it did not meet certain eligibility criteria. In the latest GSP scheme, the eligibility criteria were modified, enabling Pakistan to apply for this facility. Pakistan filed an application for GSP Plus with the European Commission in March 2013. The process of scrutiny took around six months. In August 2013, the European Commission notified the Council of the European Union and the European Parliament through a Delegated Act that Pakistan, along with nine other applicant countries, met the eligibility requirements for GSP Plus.
During this period, Pakistan undertook an intensive lobbying effort with various stakeholders in the European Union. The sustained efforts of almost eight years came to fruition when 406 out of 588 members of the European Parliament voted in favor of granting the GSP Plus status to Pakistan on December 12, 2013.
What is GSP? The Generalized System of Preferences (GSP) is a facility granted to developing countries by certain developed countries. The status is largely considered non-reciprocal but this is not entirely correct. Reciprocity is generally in the form of adherence to certain international agreements and human rights standards. GSP is given under three arrangements. The first is Everything But Arms (EBA). According to it, all products excluding arms are eligible for duty-free access to the EU with no quantity restrictions. Fifty least developed countries are eligible to duty-free exports to the EU. The second is Standard GSP. Under this arrangement, tariff benefits are given through a combination comprising duty-free access for non-sensitive items and preferential tariffs for sensitive items. The third is GSP Plus under which tariff benefits are given to trade-vulnerable countries against all eligible items, but sensitive categories are subject to quantity restrictions. This facility has recently been extended to 10 countries, including Pakistan.
What are the criteria for grant of the GSP Plus status? First, the GSP plus beneficiary country should be a ‘vulnerable country’. A country is vulnerable if it is not a high-income country and five largest sections of its GSP-covered exports account for more than 75 percent of the total GSP exports to the EU, i.e. exports suffer from a lack of diversification. Further, GSP-covered exports to the EU account for less than two percent of the total EU-GSP covered exports i.e. below import vulnerability threshold. Second, a country must have ratified and implemented 27 UN Conventions relating to human rights (such as conventions on the elimination of all forms of discrimination against women, rights of the child, abolition of forced labor and prohibition and immediate action for the elimination of the worst forms of child labor, etc. environment (conventions on climate change, international trade in endangered species, biological diversity and narcotics drugs, etc.); and good governance (the convention against corruption).
What opportunities does GSP Plus offer to Pakistan? It may act as a stimulus in kick-starting the almost stalled economic activity, creating jobs and increasing exports. According to some estimates, Pakistan would get an additional one billion US dollars after the grant of this status with an estimated projection that the country’s export earnings from the EU would register a marked increase from the existing $13 billion to $26 billion in four years.
Pakistan’s major exports, such as value-added textile goods, footwear, leather, plastics and non-value added textiles which, respectively, faced tariffs up to 9.6 percent, 12 percent, 5.5 percent, 3 percent and 6.4 percent, will now be reduced to zero under GSP Plus. Thus, this scheme will provide opportunities to Pakistan in textile, leather and footwear, fruits, ethanol, seafood and gems and jewellery. Under the standard GSP, these products were facing stiff competition from China, India and Brazil which enjoyed competitive advantages as compared to Pakistan due to economies of scale. Even Bangladesh enjoyed an advantage over Pakistan in garments as its exports to the EU were duty-free. It was mainly due to this comparative advantage that several garment manufacturing units were set up by Pakistani businessmen in Bangladesh.
However, GSP Plus will not automatically translate into an increase in exports to the EU. In the case of the EU, more than half of MFN tariff lines are set at zero and about one-fourth
are below the five percent ad valorem. Several export commodities from Pakistan – rice, sports goods, surgical instruments, meat products and fruits – already enjoyed duty-free access to the EU as the normal tariffs were set at zero. Therefore, GSP Plus will make no positive market access impact in case of these commodities. During the period between 2002-2004, when Pakistan enjoyed duty-free GSP special incentives, non-textile products from the country did not register an increase of more than 1.5 percent per annum, implying that merely tariff concessions are not enough for increase in exports.
What are the challenges at hand? At a time when Pakistan’s economy is in dire straits with foreign reserves touching a record low, exports stagnating, the dollar hitting an alltime high against the Pak Rupee and various industries suffering due to a combination of energy shortage and the law and order crisis, the grant of the GSP Plus status offers both a set of opportunities as well as challenges. Pakistan faces tough competition from neighboring India, Bangladesh, Sri Lanka and other countries. The trade concessions that the country has won from the European Union cannot be fully exploited as currently Pakistan exports only 150 – or 2.5 percent – of the total 6,000 duty-free product lines that the bloc of 27 nations has offered. The real challenge before the government and the private sector is to expand the base of export products to be able to compete with regional rivals.
Also tied to the challenge of diversifying exports is the uphill task of overcoming the supply-side constraints. The energy crisis has slowed down the pace of economic development, causing a loss of millions of jobs. The textile industry, a linchpin of the country’s industrial base, appears to be worst hit by power and gas shortages. Many textile units have been closed down due to the energy crisis, while some industrialists have shifted their businesses to Bangladesh, Turkey and Sri Lanka due to tariff concessions, easy market access, a better law and order situation and an uninterrupted supply of energy. Thus, overcoming the energy challenge appears to be the most daunting task before the government.
Another challenge facing the industrial sector is the obsolete infrastructure. Without revamping the support infrastructure, the goal of diversifying the export base will not be achieved. Infrastructure development, however, is not possible without attracting foreign investment in this area. According to the Board of Investment (BoI), FDI inflows in textiles have decreased from $29.8 million (2012) to $10 million (2013). Foreign Direct Investment (FDI) should therefore be attracted towards this sector to help it become sustainable in terms of production capacity. When Bangladesh got the GSP Plus status, it attracted massive investment in the textile sector. The Board of Investment (BoI) has a critical role to play in formulating an investment policy.
Besides challenges at the domestic level, proper compliance with the 27 UN Conventions is also an important requirement. Article 14 of the New GSP Regulation of the European Parliament and the Council of the European Union stipulates that by January 1, 2016, and every two years thereafter, the European Commission will present a report to the European Parliament and the European Council regarding the implementation of the 27 covenants. Article 15 further provides that in case a beneficiary country does not respect its binding undertakings or formulates a reservation, the GSP Plus status will be withdrawn. Further, the burden of proof regarding compliance with the obligations resulting from the binding undertakings lies with the GSP Plus beneficiary country.
The European Union gives tariff concessions to exporting countries of the Third World as part of its efforts to promote democracy, protect human rights and improve governance. The preconditions set for the continuation of this facility are tough and broad in nature. Pakistan must adhere to these conditions through an institutional mechanism, failing which the facility can be withdrawn as had happened in the case of Sri Lanka. Pakistan should not appear to have ratified these conventions for extracting trade concessions only. In this regard, institutional mechanisms need to be put in place for active coordination between the centre and the provinces on the implementation of these conventions in the post-18th Amendment scenario.