GSP Plus: opportunities and challenges

Professor Jagdish Bhagwati, in his article Why free trade matters, says: Contrary to what sceptics often assert, the case for free trade is robust. It not only extends to overall prosperity, but also to distributional outcomes, which makes the free-trade argument morally compelling as well. However, despite all textbook arguments in favour of free trade between nations, international trade has always been held by the chains of tariffs and non-tariffs. The old mercantilism, which favoured exports and discouraged imports by erecting high tariff walls, still reigns supreme. Though tariffs were considerably reduced owing to the WTO and Washington Consensus but they are still so high especially in the case of sensitive products like textiles that their reduction for an exporting country is a matter of celebration. Regional trade agreements (RTAs), preferential trade agreements (PTAs), and free trade agreements (FTAs) and generalised systems of preferences (GSPs) are all deviations from the most favoured nation (MFN) principle favour one, favour all of the WTO which forms the bedrock of the superstructure WTO is based on. Critics like Professor Bhagwati say that they are not necessarily born out of some economic thinking rather it is the bandwagon effect that explains their mushroom growth as no country wants to be left behind in of the race for PTAs and FTAs. Political exigencies outweigh economic considerations in negotiating such trading arrangements. Governments certainly gain political and diplomatic mileage through such trade agreements. We may continue buying tea from Kenya at comparatively high prices compared with Sri Lanka with whom we have entered into an FTA or Sri Lanka may refuse entry to our mangoes under the pressure of domestic lobbies but the FTA between Pakistan and Sri Lanka has certainly helped foster political and diplomatic ties between the two countries.

Distortions in the global trading system are there to stay for long. We have to live with them unless mercantilist thinking is scratched out of the collective subconscious of the nations. In this context, euphoria in our political and trade circles over GSP Plus status to Pakistan makes sense. What is a GSP status? In common parlance, GSP means programmes devised by developed countries granting preferential treatment to the imports from developing countries. According to the European Commissions Practical guide to GSP trade regime, GSP has three strands. First, everything but arms (EBA) means duty-free quota-free access to the EU market for all products from the 49 least developed countries. Second, GSP+ deep tariff cuts for ten countries which have ratified and implemented 27 international conventions relating to human and labour rights, environment and good governance. The first 10 GSP+ countries are Armenia, Bolivia, Cape Verde, Costa Rica, Ecuador, Georgia, Mongolia, Paraguay, Pakistan and Peru. The third category relates to the general arrangements of preferences for countries other than those falling under EBA and GSP Plus. What is the criterion for GSP Plus? GSP Plus has two basic conditions. First, a country must have ratified and implemented 27 UN conventions relating to human rights (like conventions on elimination of all forms of discrimination against women, rights of the child, abolition of forced labour, and prohibition and immediate action for the elimination of the worst forms of child labour etc), environment (conventions on climate change, international trade in endangered species, biological diversity, and narcotics drugs etc) and good governance (convention against corruption). The second criterion for GSP Plus is that a country must be a vulnerable country which means that a country is not classified as a high income country and the five largest sections of its GSP-covered exports account for more than 75 percent of total GSP-covered exports

to EU, meaning it lacks diversification in exports and integration with the global trading system. It needs to be emphasised here that tariff cuts will not automatically translate into increase in exports to EU. In case of EU more than half of MFN tariff lines are set at zero and about one fourth are below five percent ad valorem. Several of our export commodities like rice, sports goods, surgical instruments, meat products and fruits already had duty free access to EU as the normal tariffs were set at zero; GSP Plus is not relevant in their case. The lesson is very simple and straight. It is not only the tariff that constitutes competitive advantage rather production costs, quality, economies of scale and delivery efficiencies also matter. According to the WTO working paper, New evidence on preference utilization (2012), preference utilisation has an element of fixed cost and preference utilisation increases with increase both in the preferential margin and the volume of exports. The point here is that taking advantage out of reduced tariffs depends on number of variables. Getting preferential treatment in terms of tariff is one thing and its optimum utilisation is totally another. Limitations of GPS+ Status Further, the GSP Plus status is not a free lunch. Article 14 of the New GSP Regulation (Regulation No 978/2012) 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 implementation of 27 conventions. Article 15 further provides that in case a GSP Plus 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. But that does not mean that GSP Plus is not an opportunity worth grasping. Prior to the granting of the status, Pakistan was a beneficiary of preferential tariffs in the EU but such tariff concessions were

also available to all other developing countries including China, India, and Brazil etc. Pakistans major exports like value added textile goods, footwear, leather, plastics and nonvalue added textiles respectively faced tariffs up to 9.6 percent,12 percent, 5.5 percent, 3 percent and 6.4 percent which will now be reduced to zero. Under the GSP, these products were facing stiff competition from China, India and Brazil due to economies of scale, meaning they had competitive advantage compared to Pakistan due to reduced costs. Even Bangladesh was giving a tough competition to Pakistan in garments since its exports to EU were duty-free. It is no secret that garment manufacturing units were established by Pakistani businessmen in Bangladesh inter alia to take advantage of such tariff concessions.

However, in order to capitalise on the opportunities created by the GSP Plus, we need to overcome the supply-side constraints. If you are unable to increase your production capacity, deepening of market access hardly makes any sense. Shortage of electricity and gas to the export industry is one challenge. Standards compliance, certification, and quality control etc are a few others that need to be addressed through a coherent and welldesigned policy. Benefits for Textile Industry Textile lobbies are very strong in the EU as well as in textile exporting countries. GSP Plus may trigger strong defensive action from such lobbies within EU countries in the name of job losses. Bangladesh, China, and India, who are our competitors, may also initiate offensive actions. Such defensive and offensive actions will necessarily be on the pretexts of standards, quality, child labour and human rights violations etc and the earlier we prepare ourselves for countering such onslaught, the better. The government should come up with a coherent communications strategy to bring all the stakeholders into the loop regarding the opportunities and challenges arising out of GSP Plus. GSP Plus status: Challenges & opportunities for Pakistan

A number of challenges face the textile industry, the foremost being the need for diversification of its export base. Energy crisis, This appears a major hindrance to expanding the product base for textile exports. Many textile units were closed down at the end of 2012, owing to shortage of power supply for a long time. Many textile units even moved to Bangladesh, Turkey and Sri Lanka due to tariff concessions, easy market access and adequate energy supply in these countries. Punjabbased textiles were particularly hard hit by the energy crisis, which contribute 75 per cent to the total textile industry. However, in March 2013, the export performance of these textile industries improved to a large extent, mainly as a result of the contribution of few largescale textile industries developing their own power producing units. Obsolete infrastructure Diversification in the export base is not possible unless new and efficient production units are set up, which is not attainable in the short run. Moreover, foreign direct investment (FDI) in the textile sector has been on the decline for the last few years, which explains the poor condition of the textile infrastructure. According to the Board of Investment (BOI), FDI inflows in textiles have decreased from $29.8 million (2012) to $10 million (2013). Other factors adding to the misery of the industry include rapidly fluctuating prices of raw materials, increasing cost of production, bureaucratic hurdles faced by textile exporters and a tight monetary policy. Difficulty in Adhoc Basis Exports Keeping in view the current situation, it would be difficult to expand the export base of textile products on an adhoc basis. However, timely policy actions can help this sector enjoy the privileges of the GSP Plus status. Government support to Small- and Medium-Scale Textile Units First, the government can extend its support to small- and medium-scale textile units. Loans for working capital on low interest rate can be offered so as to make them

operational. This would enhance the production capability of the existing production units. Moreover, financial support can be offered in establishing small-scale bio-fuel electricity generating plants or other alternative low-cost plants to ensure that production is sustainable. Attract FDI Second, efforts should be made to attract FDI towards this sector. When the GSP Plus status was granted to Bangladesh, it attracted massive amounts of FDI. In order to attract a substantial amount of FDI in Pakistan, the BOI must ensure the security of foreign assets and profits. To attract FDI, Bangladesh had offered unconditional 100 per cent foreign equity for industrial investments. Tax exemptions of five to seven years were granted. Bangladeshi citizenship was also offered on investment of $75,000. The process of repatriation of capital investments was simplified and was allowed without any prior permission of any authority. Pakistan can also consider relaxing its investment policy in light of the aforementioned steps taken in Bangladesh. Refrain from Intervening in Price Settings The government can also refrain from intervening in setting the prices of raw materials and promote greater competition in the production of intermediate goods so that prices of inputs are lowered and small textile units can operate at a low cost. The replacement of exports from high duty countries to EU countries can also help. Outsourcing of the production process and the import of low-cost raw materials from India would also enable our textile industry to fully reap the benefits of the GSP Plus status.