Preparing for ‘beyond GSP Plus’

By Neville Ladduwahetty

In the midst of all the challenges that Sri Lanka is currently facing, the prospect of having to prepare itself for a possible temporary withdrawal by the European Union (EU) of its tariff preference in favour of developing countries known as GSP+ at this particular juncture, when the whole world is desperately trying to cope with the effects of a pandemic, runs counter to the EU’s own mission of helping developing countries through GSP+. This preferential treatment is extended to Low and Middle Income countries as classified by the Word Bank. According to this classification the Gross National Income (GNI) of Low Middle Income Countries varies between $1036 and $4045, while GNI of Upper Income Countries varies between $ 4046 and 12535.

The GNI per capita in Sri Lanka has hovered around $4000 depending on the method of calculation. Therefore, reaching a GNI per capita greater than $4046 is not much of a stretch. However, the issue is that a GNI in excess of $4046 needs to be sustained for three consecutive years for Sri Lanka not to qualify for tariff preference; a benchmark that is applicable for normal global conditions. Sri Lanka reached the Upper Income Status in 2019 prior to COVID-19. If not for COVID-19 Sri Lanka could have maintained the growth momentum for three years and beyond, in which event Sri Lanka would have lost the benefits of tariff preference. The fact that no allowance is made for a shortfall in GNI per capita due to a global pandemic, the consequences of which are experienced by every country, is not only deeply regretted but also lacks acknowledgement of reality. If such an allowance is made for 2020 and 2021 there is a strong possibility that Sri Lanka could reach the Upper Income status in 2021 and the requirement for three consecutive years would have been met. In such an event Sri Lanka would have lost tariff preference for GSP+ anyway. Therefore, the EU should seriously consider adjusting the threshold for Upper Income category for countries such as Sri Lanka that hover around the lower limit of Upper Income, instead of waiving temporarily or otherwise, GSP+ based on standards that do not apply for unprecedented global catastrophes.

As stated by former Director General, Dhammika Senasinghe, for Europe, Central Asia, the EU and Commonwealth, of the Foreign Ministry of Sri Lanka at a business forum, “As Sri Lanka progress to graduate to upper middle income states in the future we will be not qualify for the GSP+ benefits, which means we would need to work out on a special trading arrangement with the EU whilst highlighting our climate change related vulnerability also under the sustainable development criteria.” (ECONOMYNEXT, June 23, 2021).

Therefore, Sri Lanka has to prepare for the day when it is not eligible to GSP+. Since this is a real prospect, the Government should set up a group that is knowledgeable and experienced in trade related issues, preferably with international experience to prepare a proposal that could serve as a blue print for negotiations with the EU. The mandate for such a team should be to provide the same tariff preferences as the current scheme, or better for substantially all trade.

GSP+ to HELP DEVELOPING

COUNTRIES

According to the European Commission, GSP+ is a “Special Incentive Arrangement for Sustainable Development and Good Governance”. Furthermore, the Commission states: “The GSP+ scheme is designed to help developing countries assume the special burdens and responsibilities resulting from the ratification of 27 core International Conventions on human and labour rights, environmental protection and good governance as well as from the effective implementation thereof. It does so by granting full removal of tariffs on over 66% of tariff lines covering a very wide array of products including, for example, textiles and fisheries”.

Despite these inducements nearly 75% of the 193 countries remain in the Low or Upper Income category, as per the World Bank. Furthermore, only eight (8) countries are beneficiaries of the GSP+ scheme. They are, Armenia, Bolivia, Cape Verde, Kyrgyzstan, Mongolia, Pakistan and Sri Lanka. Therefore, there has to be an explanation why more Low Income Countries are not attempting to take advantage of the tariff preference and work towards becoming an Upper Middle Income country. For instance, India, Nepal, Bhutan and Bangladesh are not beneficiaries. Perhaps each of these countries have negotiated and initiated arrangements outside the constraints of GSP+ Therefore, there is a need to study the policies and strategies adopted by these countries including Vietnam, in order to stay competitive without the benefits of tariff preference of GSP+.

SITUATION in SRI LANKA

The former DG cited above opined that “Sri Lanka utilization rate of facilities is around 55- 58 percent, while Pakistan is 96 percent and the Philippines is 73 percent. Confirming this situation during the 14th Trade Policy Review of the European Union held on 18th February 2020, at the WTO, Geneva, the Sri Lankan delegation stated: “judging from Sri Lanka’s two years’ experience, the utilization rate of the GSP+ facility by Sri Lankan exporters stand relatively low at 55 – 60%, due to several reasons, including difficulties of qualifying GSP preferential Rules of Origin Criteria. For instance, more than half of the apparel exports of Sri Lanka enter the EU market without availing the GSP+ facility, but paying relatively high import duties compared to other industrial goods”.

Continuing the Sri Lankan Delegation stated: “Sri Lanka is in the verge of losing the EU GSP/GSP+ benefits from 01st January 2023, if this Status continues for two consecutive years. Sri Lanka has already flagged this situation and wishes to negotiate an alternative bilateral preferential trade mechanism or alternatively, a special scheme of preferential market access for small and vulnerable countries in the upper middle-income category.

Whatever measures Sri Lanka adopts to improve the rate of utilization of facilities, the stark fact facing Sri Lanka is how to use the facilities offered by the EU when Sri Lanka is recognized as an Upper Income Country. How to prepare for such an eventuality should be the focus of the government. In such a context, the dire warnings by commentators about the prospect of losing the benefits of GSP+ on grounds of the status of Human Rights in Sri Lanka, highlighted by the UN Human Rights Commissioner and the ineffective measures adopted to address accountability and reconciliation by the Core Group, would be secondary to losing GSP+ on grounds that Sri Lanka is recognized as an Upper Income Country not only for its economic gains but also for its noteworthy achievement in the field of Human Development that in fact surpasses some of those within EU’s 27 Members.

If Sri Lanka is to undergo experiences similar to what it had to endure with the withdrawal of GSP+ in 2010 on grounds of the Human Rights situation in the country, the prediction is that many factories and commercial establishments would close down and thousands would lose employment at a time when the public is already facing unprecedented hardships due to COVID-19. Therefore, instead of waiting for the axe to fall, Sri Lanka should adopt a “proactive approach” as suggested by the Free Trade Zone Manufacturers Association (FTZMA). However, it would have been helpful if the FRZMA had specifically proposed such an approach.

GEOPOLITICAL DIMENSIONS of the EU RESOLUTION

The Resolution of the EU Parliament having given regard to related documents and a Preamble with paragraphs A to K, proceeds to adopt nineteen (19) Resolutions. Nearly all the issues Resolved either impact on issues within the domestic jurisdiction of Sri Lanka or relate to GSP+ except for paragraph 18 of the Resolution which states: “Expresses, concern about the growing role and interference of China in Sri Lanka”. The question that naturally arises is whether the real reason for Paragraphs 14 and 18 to co-exist in the same Resolution is because of genuine concern for Human Rights or because of concern for China’s “growing role and inference of China in Sri Lanka?

Paragraph 14 states: “Underlines that the GSP+ scheme offered to Sri Lanka has made a significant contribution to the country’s economy, from which exports to the EU have increased to EUR 2.3 billion, making the EU Sri Lanka’s second-largest export market; highlights the ongoing monitoring of Sri Lanka’s eligibility for GSP+ status and stresses that the continuance of GSP+ trade preferences is not automatic; calls on the Commission and the European External Action Service (EEAS) to take into due account current events when assessing Sri Lanka’s eligibility for GSP+ status; further calls on the Commission and the EEAS to use the GSP+ as a leverage to push for advancement on Sri Lanka’s human rights obligations and demand the repeal or replacement of the PTA, to carefully assess whether there is sufficient reason, as a last resort, to initiate a procedure for the temporary withdrawal of Sri Lanka’s GSP+ status and the benefits that come with it, and to report to Parliament on this matter as soon as possible”.

If the EU hopes to use a temporary withdrawal of GSP+ to make matters difficult for Sri Lanka because of China’s growing role in Sri Lanka, the EU may be acting against its own interests of staying engaged with Sri Lanka because China is bound to grab the opportunity and entrench itself even further. Therefore, it is in the interest of the EU to stay engaged with Sri Lanka and negotiate an arrangement special to Sri Lanka, conscious of the fact that Sri Lanka would not be eligible for GSP+ anyway, in the very near term.

CONCLUSION

After wading through paragraph after paragraph of the EU Resolution, the only two paragraphs that matter are paragraphs 14 and 18. While the former intends to explore the prospect of a “temporary withdrawal” of GSP+ as leverage to advance Human Rights in Sri Lanka, the latter is concerned with the “growing role and interference of China in Sri Lanka”. While a temporary withdrawal is bound to hurt Sri Lanka at a moment of unprecedented hardship due to COVID-19, there is a strong possibility that China would take advantage and step into the breach. Such an outcome would not be in the interests of the EU and the recently stated resolve of the G7 to Build Bigger and Better (B3B), in order to counter the growing global imbalance created by China’s Belt and Road initiative.

Instead, it would be far more prudent for the EU to stay engaged with Sri Lanka because doing so is in its own interest and that of the West, and recognize that Sri Lanka is on the threshold of becoming an Upper Income Country, and in keeping with such a prospect work out arrangements as stated in Article 4 of EU’s GUIDE to SRI LANKAN EXPORTERS. Article 4 states: “Sri Lanka would become ineligible for the GSP+ scheme should the EU conclude a Preferential Trade Agreement with Sri Lanka, which provided the same tariff preferences as the scheme, or better, for substantially all trade. The EU is currently not negotiating any further trade agreements with Sri Lanka”.