Friday, July 02, 2010

GSP plus: some misunderstandings and understandings

By Muttukrishna Sarvananthan |

The European Commission (EC) introduced a Generalised Scheme of Tariff Preferences (GSP) in 2003 for low and middle-income countries to mitigate the impact of the removal of quotas in 2001 for garments exports to the European Union (EU) countries. While the least developed countries had duty free access to the EU markets, middle-income countries like Sri Lanka had a very low tariff barrier under the GSP.

By mid-2005 the EC introduced a new GSP plus (GSP+) to contribute to poverty reduction, promote ‘sustainable development’ and ‘good governance’ in low and middle-income countries, which afforded duty free access for circa 6,400 goods to the EU markets (see the regulation European Council No.980/2005 of June 27, 2005). The least developed countries were afforded duty free access for 7,200 goods. In 2008 there were fourteen GSP+ beneficiary countries. The GSP+ scheme is renewable every three years.

Three core objectives of the GSP+ are poverty reduction, promotion of ‘sustainable development’ and ‘good governance’ in beneficiary countries. Though what ‘good governance’ specifically means is defined clearly (ratification and effective implementation of 16 core conventions on human and labour rights and ratification and implementation of 11 conventions on good governance and environment), what constitutes ‘sustainable development’ is defined loosely as meeting the Millennium Development Goals set in 2000 and the Johannesburg declaration of 2002.

Fundamentally, the GSP+ scheme is an incentive scheme and NOT a conditionality to get access to the markets of the member countries of the EU. Unfortunately, some people mistakenly argue that the eligibility criteria set for the GSP+ scheme by the EC are conditionalities and therefore non-tariff barriers. The EC has not violated any WTO rules of trade by setting eligibility criteria for the GSP+ scheme. The issue is not access to markets but DUTY FREE access to markets, which is a privilege and NOT a right and entirely a prerogative of the EC. Thus, countries cannot demand the privileges of GSP+ scheme, but could make a request through an application process which includes an undertaking to fulfill the eligibility criteria.

There are several countries queuing-up to get into the GSP+ scheme and thereby gain duty free access to their exports to the EU markets. Therefore, the EC is duty bound to enforce the eligibility criteria in order to be fair by all applicants. Suppose one (or more) country is exempted from certain eligibility criterion/criteria, then there could be demands from other countries those do not fulfill the eligibility criteria (such as China), in which case the objectives of the GSP+ scheme would be lost. In certain instances the United States and the EU have had trade deals with countries like China without any non-trade or non-economic conditions (like labour/human rights and governance) because of reciprocity (i.e. those are bilateral trade concessions). That is, such trade deals are reciprocal whereby both trading partners agree on preferential access to each other’s markets. However, the GSP+ scheme is non-reciprocal (i.e. beneficiary countries need not provide duty free access to goods from EU countries in return for duty free access to their goods in EU markets) and therefore EC has the moral and legal right to lay down eligibility criteria to make avail of this one-sided concession (unilateral trade concession).

Further, GSP+ scheme did result in loss of market for same or similar products produced by member countries of the EU. Loss of market for locally produced goods also means loss of employment to the nationals of EU countries. In fact, there is a strong lobby against the schemes such as the GSP+ by the European trade unions because of the loss of jobs resulting from import of cheap goods from the developing world. Therefore, the EC should be 2 able to justify to its citizens that granting of duty free access under the GSP+ scheme to developing countries would be beneficial to the citizens of the beneficiary countries, especially the marginalized labour and the poor, and therefore worth the losses incurred by the domestic labour.

Moreover, the eligibility criteria of the GSP+ scheme are meant to benefit the citizens of the beneficiary countries and not the citizens of the EU. Therefore, how come a democratic government object to the eligibility criteria of the GSP+ scheme that are meant to benefit its own citizens? Every game in sports has rules and all the teams that participate in different games agree to abide by the respective rules. Any team or member/s of the team violating any rules of the game could be expelled from the game. Therefore, no team or member of a team could morally or legally argue that it has been unfairly treated by the game referee because of its expulsion due to violation of the rule/s of the game.

Similarly, markets do have rules and regulations in order to foster fair play (perfect competition) and prevent anti-competitive and unfair practices. Under preferential and free trade agreements there is a conditionality called “rules of origin”. There is usually a requirement that at least a certain proportion of the value added of any product should accrue from the country of origin. That is, any product that is exported from one country to another should have a minimum value addition in the country of origin in order to be eligible to get concessional (preferential) duty or duty free access to its partner country. No country could cry foul if its goods have been barred from obtaining the privilege of concessional duty or duty free access to foreign market/s due to violation of the rules of origin conditionality.

The same analogy applies to the GSP+ scheme as well. In fact, currently the biggest threat to Sri Lanka’s exports is not the suspension or withdrawal of the duty free access to the EU markets under the GSP+ scheme. Deliberate or intentional overvaluation of the rupee due to the myopic exchange rate management policy of the Central Bank is the biggest threat facing exports from Sri Lanka. In pursuit of building up the foreign exchange reserve of the country the Central Bank of Sri Lanka has resorted to wanton short-term international private capital market borrowings in the past few years (since 2006). In order to keep the amount of repayment of these short-term loans low, the rupee is prevented from depreciating (according to the market forces) through purchase of foreign currency by the Central Bank in the open market. Instead of correcting its own policy mistakes it has become a national sport for the present Sri Lankan government to evoke the bogey of foreign conspiracy against Sri Lanka on issues of critical importance to its citizens.

This note of clarification should not be misconstrued as batting for the European Commission; rather the author is batting for the hapless citizens of Sri Lanka who are misled by various interest groups.


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