Duty or duty-free, an insight into the GSP



The current buzz in political, industrial and financial circles is the question of whether the Generalized System of Preferences or GSP+ as its popularly known will be extended for another two years. BIG Issue investigates.

Sri Lanka has to apply to renew the GSP+ trade deal by October 31 with an EU decision expected by December 15. GSP is a facility allowed by the European Union (EU) and the USA to certain developing countries to export some of their products duty-free. At the moment the EU has exempted over 7000 items and the USA 3000 items from Sri Lanka. Sri Lankan exporters have been making use of this facility since 2005. However both the EU and USA have threatened that they may not extend the GSP+ for a further period unless Sri Lanka endorses and effectively implements 27 International Conventions that it signed up in the past. Regulations governing tariff state that very simple conditions must be met by all GSP+ applicants, including Sri Lanka, if they are to benefit. They are namely, the effective implementation of 27 International Conventions on environment, human rights, good governance, and labor.

Certain ministers and government officials including the Central Bank governor have expressed their opinion to the effect that the GSP+ is no big deal. The governor's comment that market access under the GSP+ scheme was a subsidy that exporters could do without in an interview to the BBC's Hard Talk programme, earlier this year has upset many buyers, vendors and export industry officials. He told BBC the government appreciates the trade deal but that Sri Lanka's apparel industry was "mature" enough to manage without it. However industry officials said exporters depend heavily on GSP+ and that it was not only garments, but many other new industries that found new markets under the preferential access given by the scheme.

Exporters are struggling to remain competitive with domestic inflation running at over 20 percent, interest rates on borrowings going up, while the rupee has strengthened. Earnings from apparel exports fell by 3.1 percent to US$247.9 million in February 2008 compared with the same month the year before. Exports to the US market plunged 23.3 percent to $111.1 million while shipments to Europe rose 21.3 percent to $122.1 million over the same period. In 2007 exports to the EU grew substantially benefiting from increased access to EU markets under the GSP+ scheme, according to Central Bank figures.

Renewing the GSP + scheme is critical for the island's apparel exporters. It is the biggest industrial export and the second largest source of foreign exchange earnings after remittances from migrant workers. It also contributes greatly to employment generation. Sri Lankan exporters need the duty free access to compete against cheaper competitors. Access to European markets is also important at a time when exports to the US are slowing down. Over 200,000 jobs will be at risk if the tariff is withdrawn by the EU alone and a loss of foreign exchange of Rs.2 billion or more is also predicted. Several factories especially in the garment industry will be forced to throw in their towels as a result as well. Although the garment industry is by far the biggest beneficiary of the GSP + scheme, it cannot be forgotten that, the scheme also benefits several other industries, such as leather products, gems and jewellery, fisheries, including new ones like bicycle exports. The fact is that many non-garment products have managed to capitalize from these benefits and get new markets or expand existing market share. Sri Lanka exports approximately 1.1 billion euros worth of garments and under the GSP+ a 14 percent duty concession was given to Sri Lanka`s fruits and vegetables. The GSP + scheme encourages more value addition to be done in Sri Lanka, thereby encouraging backward integration, resulting in the setting up of new industries and creating substantial employment in the country. The granting of duty free access, to many products tends to encourage Sri Lankan industries to diversify their exports of products to the EU thereby removing the country`s dependence on few sectors.

Already there have been negative influences, on some overseas buyers, as a result of the uncertainties over the extension of GSP+ concession to Sri Lanka. Some orders may have already moved to countries like Vietnam and Bangladesh.

With all this at stake the government is yet toying with the idea of whether it should go ahead and sign the protocols or refrain from it, thus having to face the music of losing the concession. Signing the protocols would mean having to abide by the conditions mentioned in the covenants. This would suggest avoiding the Human Rights violations like Abductions – either for political or economic reasons, extrajudicial killings , attacking innocent citizens, rape, arbitrary arrests, torture and more which in the past several months have attracted a lot of international attention. The EU and other Western governments allege Sri Lankan security forces are violating human rights in their military campaign against the Tamil Tigers, a charge the government rejects.

Meanwhile the Sri Lankan government has also opposed a European Union probe into human rights in the island to see if it meets conditions required to renew a trade deal giving duty free access to European markets. Sri Lankan Foreign Minister Rohitha Bogollagama was quoted as saying in a government statement. That EU investigation is "unnecessary and inappropriate". His comments were made at a meeting with Benita Ferrero-Waldner, EU External Relations Commissioner in New York on the sidelines of the United Nations general assembly. Ferrero-Waldner was quoted as saying that the probe was part of mandatory compliance measures the EU requires to extend the GSP+ facility under which Sri Lankan exports go duty free to European markets. The statement also said that Commissioner Waldner acknowledged that Sri Lanka has been compelled to take military measures to counter terrorism of the Tigers and outlined that their concern was primarily the safety of civilians.
The Sri Lankan government who initially went with the begging bowl to the EU for the extension of the GSP facility has now changed their tune and taken on an anti-West attitude in recent times. This shift has taken place concurrently with a stronger alignment with China and Iran.

From a political point of view, Sri Lanka could reciprocate the EU request by offering to investigate allegations of Human Rights abuses on the part of the EU in its so called war on terror that it has embarked on with the US.

In the final analysis, the EU might in fact opt to curry favor with the government to counter the non-Western influences by giving the extension after all. Perhaps it will carry an additionally clause, trial period or a “warning”. So fingered crossed for the export community.