The European Union’s (EU) Generalised System of Tariff Preferences (GSP) is a scheme where the EU grants developing countries such as Sri Lanka duty free or preferential duty access to the EU market for a selected number of products.
What is GSP Plus?
The EU has three types of concessions granted under the GSP scheme: (1) Standard GSP scheme, (2) Special Arrangement for the Least Developed Countries (LDCs) and (3) Special Incentive Arrangement for Sustainable Development and Good Governance. It is this last that is known as GSP Plus. A comparison of the concessions under the different schemes is given in Table 1. Notice that countries with GSP Plus receive greater concessions than those with Standard GSP, especially if their main exports fall into the category of “sensitive products”.
GSP Plus and trade with EU
Sri Lanka lost its GSP Plus status in August 2010. The EU is the largest export destination of Sri Lanka accounting for 30 percent of exports of the country. Apparel accounts for 60 percent of exports to the EU and this is categorized as a “sensitive product” – standing to gain much more from GSP Plus than from just the Standard GSP.
It is not clear how the revocation of GSP Plus affected exports. The effect does not seem to have been immediate as 2011 still shows significant growth in exports to the EU (Figure 1). This is possibly due to forward contracts and other difficulties in switching suppliers quickly. Some sectors would have felt the impact more quickly than the apparel sector (e.g. fisheries, bicycles), yet the total exports from these sectors is relatively small. Even though apparel is a beneficiary sector, not all apparel products exported from Sri Lanka are eligible for duty free access; only those using textiles made in Sri Lanka or another SAARC country are eligible for duty free access. Again, therefore, the impact could have been small if the qualifying product set was relatively small.
Exports to the EU declined in 2012 and the decline seems to be continuing into 2013. This could be due to the loss of GSP Plus kicking in with a lag but it could also be due to the decline in demand caused by the economic downturn in the EU. While a clear disaggregation is not available, chances are both factors mattered: It was not only export of products that are categorized as “sensitive” that declined; even exports such as tea, which continued to enjoy duty free access to the EU, declined.
Why GSP Plus?
The case for GSP Plus is clear. Every little bit of concession helps. Furthermore, Sri Lankan apparel exports face severe competition from other developing countries that have duty free access under the LDCs scheme (e.g. Bangladesh). Therefore, without GSP Plus, Sri Lanka will struggle to maintain market share.
Another factor is that in times of economic downturn, consumers are likely to be more price sensitive, substituting towards cheaper alternatives. This pressure comes back down the supply chain demanding reduced prices and having GSP Plus can cushion the effect for Sri Lankan exporters.
Criteria for GSP Plus
Qualifying for GSP Plus involves meeting both economic and governance criteria. The economic criteria has two aspects: First, the qualifying country cannot have more than 2 percent of the EU market share in the “GSP eligible products”; second, the qualifying country should be vulnerable to the EU market access (where just seven product categories account for more than 75 percent of the country’s GSP exports to the EU). To put it simply, being small and vulnerable are the economic criteria for qualifying.
The governance criteria are defined in terms of a binding commitment to ratify and effectively implement 27 international conventions that are billed to promote “sustainable development and good governance”. These include 15 UN/ILO conventions on core human and labour rights and 12 conventions to the environment and governance principles.
Sri Lanka continues to meet the economic criteria of being small and vulnerable: Its share in total EU imports of its qualifying products is 0.8 percent, well under the ceiling of 2 percent. The EU’s share in Sri Lanka’s qualifying GSP Plus exports is above 90 percent, well above the floor of 75 percent.
But the reason Sri Lanka lost out in 2010 was to do with the governance criteria. The country was deemed to have failed in effectively implementing three UN human rights conventions: The International Covenant on Civil and Political Rights, Convention Against Torture and Convention on the Rights of the Child.
The introduction of a revised scheme by the EU has created the opportunity to re-enter in January 2014 but this new scheme is also more stringent in its checking of governance compliance. Therefore, the capacity of the government to meet the governance criteria remains the issue in deciding whether “to GSP or not to GSP.”
Is it better to have
loved and lost?
Some might argue along the lines that “it is better to have loved and lost, than never to have loved at all.” That is, better to have GSP Plus again, even briefly, than not to have it at all. But that approach should be cautioned.
A second ending of a GSP love affair for Sri Lanka will come invariably with significant international exposure and embarrassment on its governance record. Such exposure has economic consequences: It acts as a deterrent to investment and heightens the evaluation of “country risk”.
The economic trajectory of a country is entwined with its governance. If Sri Lanka is “to GSP Plus” again, business should have a serious tête-à-tête with the government and perhaps put in place its own monitoring and compliance efforts. Without a genuine resolve to comply with the governance criteria, the GSP Plus entry can backfire. A person with several broken engagements can be seen as more of a relationship risk than one who has been afraid to take the plunge in the first place.
(Verité Research provides strategic analysis and advice to governments and the private sector in Asia)