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Old Tuesday, January 07, 2014
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Default The GSP Plus status

The GSP Plus status
Dr Ashfaque H Khan
Tuesday, January 07, 2014

The European Union has granted the Generalized Scheme of Preferences (GSP) Plus status to Pakistan in December 2013. This status is likely to increase access to the EU market through duty free imports of GSP-eligible products. The grant of the GSP Plus status is effective from January 1, 2014. This is indeed a positive development and all those who contributed to achieving this status must be congratulated.

The EU is not only one of the largest trading partners of Pakistan, but is actively engaged and contributing effectively to socio-economic development of Pakistan. Trading relations have, however, weakened over the years. One-third of Pakistanís exports used to go to the EU in 1995-96. These declined to one-fourth in 2000-01 and further declined to almost 10 percent by 2010-11. The slower pace of economic activities in Pakistan since 2007-08 and the emergence of the European debt crisis in the aftermath of the great recession appear to be the reason behind the weakening of trade relations.

While approximately 12 percent of Pakistanís remittances come from the EU, foreign investment from there has declined rapidly in recent years. Almost 35 percent foreign investment originated from the EU in the mid-1990s. It increased to 43 percent in 2000-01 but declined drastically to 11.5 percent by 2010-11. Factors like the economic slowdown, less than satisfactory security environment, energy bottlenecks, and poor governance since 2007-08 appear to have contributed towards making Pakistan a less desirable destination for foreign investment.

European countries introduced the GSP in 1971 with a view to helping developing countries develop and diversify their exports. Under the GSP, the European countries either eliminated or reduced import tariff on specified products exported by approved developing countries, including Pakistan. This tariff preferential regime has been extended to GSP Plus through additional tariff reductions to vulnerable developing countries. The objectives of GSP Plus have been to assist developing countries in reducing poverty, improving governance and promoting sustainable development.

The tariff advantages provided by the GSP Plus status are powerful and must be exploited by our exporter and government. However, they are not the only factor that can make Pakistan more competitive in the EU market. Tariff preferences under GSP Plus are subject to quantity restraints and safeguards. These instruments are not applied to exports under MFN rates (more than one-half of all MFN tariff lines are set at zero percent and another one-quarter are below five percent). The EU buyers, therefore, prefer imports cleared under MFN because they are more reliable and sustainable and are not subject to quantity restraints and safeguards as well.

Although the prospects of duty-free under the GSP Plus access for textile and clothing suggest enormous scope for Pakistanís exports expansion, the reality is somewhat different. The applicable quantity threshold, that is, tariff preferences are not available to a country for a product whose exports exceed six percent of the EUís annual GSP imports of that product, means that Pakistanís textile and clothing exports will largely remain subject to MFN imports duties.

The applicable safeguard provision under which tariff preferences are withdrawn when imports of textiles increase by 14.5 percent and all other products by 17.5 percent over a period of three years. An authoritative research study has estimated that a total of $600 million (that is, roughly $300 million in textiles, $100 million in leather products and $200 million in all other products) can be additionally exported to the EU at zero percent duty without attracting safeguard action.

Many non-textile products such as sports goods, surgical instruments and Basmati rice, copper and animal casings, already enter the EU duty free under either GSP or MFN rates. For these products, the GSP Plus tariff preferences will have no positive market access impact. Nonetheless, the greatest scope for expansion of Pakistanís exports lay with textile and clothing sector under the GSP Plus package.

This preferential duty regime will not suffice to secure sustainable market access to the EU. They are merely a catalyst. The government and industry need to invest in higher technology, standards compliance, certification, quality control and packaging, and demand-driven output. The GSP Plus status will not be there forever; therefore, investment must be made to make this sector competitive on a sustained basis.

It is also to be noted that the GSP Plus advantages perceived to accrue to Pakistan may attract strong defensive action from EU competitors like Italy, Portugal and Greece in textiles and Romania in clothing; and offensive actions from non-EU competitors like Bangladesh, India and China. How to face these defensive and offensive actions will be a real challenge for Pakistan and its textile industry going forward.

Some of the serious impediments to increasing exports not only to the EU but to all markets are rising cost of production, low productivity, volatile prices of raw materials, difficulty in achieving the required market standards, costs of certification, lack of customer confidence inconsistent levels of quality control and supply driven exports that are unresponsive to the EU market demand. The EU market is lucrative and highly profitable, but at the same time it is also very sophisticated and competitive. Pakistan must use its GSP Plus advantages to improve upon the factors listed above.

The GSP Plus status granted to Pakistan is conditional on the ratification and implementation of 27 international conventions in the areas of human rights, labour standards, environment and good governance. Adoption of these conventions will assist Pakistan in integrating into the cross-border supply chain which will strengthen manufacturing activity and further promote its exports. Pakistan has ratified almost all the conventions. The most critical aspect of these conventions is that their compliance will be strictly monitored by the EU through the unnamed third parties from civil society or NGOs.

Another critical challenge pertaining to the compliance would emanate from the 18th Amendment to the constitution. As a result of the 18th Amendment, there has been a shift of power relevant to the conditions of GSP Plus Ė from the federal to the provincial governments. While the federal government has worked hard to get the GSP Plus status and is responsible for monitoring and reporting of the 27 conventions, implementation of the corresponding domestic legislation is largely the responsibility of provincial governments, perhaps not yet ready for compliance. The federal government must establish a supervisory body to coordinate with provincial governments in this respect.

The extension of the EUís GSP preferences to Pakistan will certainly boost its competitiveness, but ultimately success in accessing the EU market in greater quantities will depend on Pakistanís ability to meet EU consumersí demand both in terms of quantity and quality, to increase its production efficiency, to invest in technologies and skilled manpower, and to be able to withstand its competitorsí defensive and offensive actions.

GSP Plus alone will not suffice. The short-term advantages of tariff preferences under GSP Plus must wisely be invested for long-term goals, not short-term profit.

The author is principal and dean at NUST School of Social Sciences & Humanities, Islamabad.

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