Trade and Economy

GSP Plus Status for Pakistan

The Generalized System of Preferences (GSP) is a formal system of exemption from the more general rules of the World Trade Organization (WTO). Specifically, it's a system of exemption from the Most Favoured Nation (MFN) principle treatment that obliges WTO member countries to treat the imports of all other WTO member countries no worse than they treat the imports of their "most favoured" trading partner. In essence, MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them, etc.

GSP is a system by which developed countries unilaterally grant customs preferences to developing countries and the Least Developed Countries (LDCs) under WTO's Special & Differential treatment of latter. It was established in 1968 by the UNCTAD Resolution No. 21. Goals of the GSP are strengthening of economies of developing countries and the LDCs through increase of their exports, promotion of their industrialization and speeding up of their economic development. Today, in the world, 11 developed countries which grant the GSP are: Australia, Belarus, the European Union (EU), Japan, Canada,

New Zealand, Norway, the Russian Federation, the United States of America, Switzerland and Turkey. To benefit from the GSP Plus scheme of the EU, countries need to demonstrate that their economies are poorly diversified, and therefore dependent and vulnerable. They also need to have ratify and effectively implement the 16 core conventions on human and labour rights and seven (out of 11) of the conventions related to good governance and the protection of environment. At the same time, beneficiary countries must commit themselves to ratifying and effectively implementing the international conventions, which they have not yet ratified. All in all, the 27 conventions have to be ratified and

implemented by the beneficiary countries. Whenever an individual country's performance on the EU market over a three-year period exceeds or falls below a set threshold level, preferential tariffs are either suspended or re-established. Moreover, graduation is triggered when a country becomes competitive in one or more product groups and is therefore considered no longer to be in need of the preferential tariff rates – it is considered as a sign of growing export success. The graduation mechanism is relevant for both GSP and GSP Plus preferences. The GSP is one of the measures of trade policy of the EU, which reduces custom duties on imports coming from developing countries. Since 1971, the EU grants trade preferences through its GSP system, and currently the EU guidelines on the role of GSP are implemented for a ten-year period from 2006 to 2015.

From the perspective of developing countries, GSP programmes have been a mixed success. On the one hand, most rich countries have complied with the obligation to generalize their programmes by offering benefits to a large group of beneficiaries, generally including nearly every non-OECD (---) member state. However, every GSP programme imposes some restrictions. The United States, for instance, has excluded countries from GSP coverage for reasons such as being communist, being placed on the U.S. State Department's list of countries that support terrorism, and failing to respect the U.S. intellectual property laws.

Criticism has been levelled while noting that most GSP programmes are not completely generalized with respect to products, and this is by design. That is, they don't cover products of greatest export interest to developing countries. In the United States and in many other developed countries, domestic producers of "simple" manufactured goods, such as textiles, leather goods, ceramics, glass and steel, have long claimed that they could not compete with large quantities of imports, especially originating from developing countries. Thus, such products have been categorically excluded from the GSP coverage. Critics assert that these excluded products are precisely the kinds of manufactures that most developing countries are able to export, the argument being that developing countries may not be able to efficiently produce things like engineering goods or telecommunications equipment, but they can stitch shirts.

Supporters note that even in the face of its limitations, it would not be accurate to conclude that GSP has failed to benefit developing countries, though some concede GSP has benefited developing countries unevenly. Some assert that, for most of its history, GSP has benefited "richer developing" countries – in early years Mexico, Taiwan, Hong Kong, Singapore, and Malaysia, more recently Brazil and India – while providing virtually no assistance to the world's ‘poorer developing’ countries.

The EU has granted duty free market access under GSP Plus to Pakistani textile, leather and other products to its 27 member countries. This status became effective on January 1, 2014. Pakistan's textile and clothing exports to the EU currently constitute over half of the country's total exports to the bloc worth USD 9.5 billion. Pakistani textile exports to the EU currently attract an 11 % duty. Initial studies by the EU Commission indicate that exports from Pakistan may increase by Euro 574 million (i.e., US$750 million) annually as a result of duty free status on over 90 % of all product categories (that is, 75 products would have duty-free access to EU markets) exported by Pakistan. If Pakistan takes full advantage from this opportunity then it can generate up to 50 thousand new jobs directly in the textile sector, of course more than these jobs will be indirectly created in ancillary sectors.

The above, thus, suggests that Pakistani policymakers should devise a very careful strategy to maximize benefits from this opportunity that would be available for about next ten years. This opportunity should not create inertia among the industrialists and government policy managers; they should utilize this opportunity to further improve competitiveness of exports, so that in the future when this scheme will end then the industry should be ready to stand on its own feet competing with other countries in the EU markets on MFN basis. What government and industry should plan for the future is to introduce quality and value added textiles and other products covered in the GSP scheme so that exporters effectively compete with countries that are permanent beneficiaries of the GSP. This cannot be achieved through ad hoc policies but with careful long-term planning.

To qualify for the recently amended GSP rules, exports from Pakistan to the EU countries would have to account for less than 2 % of the EU's total GSP imports. It may be further noted that, according to the new legislation tariff, preferences for these products will be suspended for a country if EU imports from the country grow by 13.5 % or more in a year or if imports of specific products exceed 6 % of total EU imports of these products. So there will be an upper limit to our export growth in the EU markets. Pakistan has proved that it abides by 27 international conventions in the field of human rights and sustainable development. Any violation of these conventions can cause suspension of the GSP status. Therefore, government will have to very carefully implement its commitments with the EU.

Access to the GSP scheme and benefiting from it is also conditional upon putting into place and maintaining the necessary administrative structures and systems required for the implementation and management of the GSP 'rules-of-origin' and origin-related procedures by Pakistan. Any violation of the rules-of-origin will bring severe penalties. The competent authorities of Pakistan are thus required to cooperate with the European Commission and the customs authorities of the EU Member countries in this context. Thus, Pakistan needs to create an effective institutional infrastructure so as to ensure that commitments are implemented in letter and spirit. Whereas, GSP Plus will raise growth, export earnings and employment, Pakistan will have to invest to develop its institutional infrastructure to ensure full compliance with its commitments.

In light of Pak rupee appreciation, various quarters have been expressing apprehension whether Pakistan will be able to benefit from GSP plus. To answer this one can put a counter question, that is, what if we don't have this facility then perhaps Pakistan would have been in a more difficult situation. With appreciation persisting, if cost of production decreases and export firms improve their productivity and efficiency then it is highly likely that GSP Plus will trigger higher export growth.

I shall conclude on a cautious note that the reduction of MFN tariffs, after successive rounds of multilateral trade negotiations, has diminished the value of the GSP concessions. With a new accord under the WTO, the general level of MFN tariffs may fall in the range of 3-4%, rendering GSP Plus less consequential in the future. It is, however, unfortunate that at present, the prospect for conclusion of the Doha Round appears blurred. In light of this, perhaps a better option would also be to conclude a bilateral trade and investment agreement that Pakistan and the EU have been negotiating for quite some time. A deal on this front might bring sustained gains that are bigger than what the Doha Round or GSP Plus can offer.


The writer is a Professor of Economics at School of Social Sciences and Humanities at NUST, Islamabad.
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