The European Union’s (E.U.) Generalized System of Preferences (GSP) has been a hot topic in the news after it granted Pakistan duty-free access to its markets under the program. However, much less noticed has been a bevy of changes to the program that will potentially have a considerable impact on global trade and, in particular, Asia.
The GSP program is periodically updated to reflect the shifting sands of international trade, accommodating new sovereign agreements, transformed economic conditions and tariff regimes and new beneficiary nations. Since the E.U. is responsible for more than 20 percent of global imports and exports, even minor revisions of the GSP program can have reverberations for world trade, especially regarding emerging markets.
The most significant update to the GSP program has been to the list of countries that benefit from it, revised downwards from 177 to ninety. Nations are typically excised from the list due to a shift in their status as assigned by the E.U. For example, countries can be removed from the list because their beneficiary status is rendered redundant by a new free trade agreement or because a low-income country graduates to middle-income or high-income status. Malaysia and Brunei are good examples of countries essentially disqualified from participation in the GSP program given their substantial economic improvement, both now classified as high-income nations by the World Bank.
As a general rule, a country graduates out of the GSP program after its exports to the E.U. top 12.5% of GSP imports of any particular product. That threshold will now be increased to 14.5%.
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Also, products themselves can be counted as belonging to “graduated sectors,” which translates into their exclusion from preferential status. For example, textiles, raw hides and leathers in India are no longer granted duty-free entry into E.U. markets. Apparel and clothing, footwear and textiles in China has also been excluded.
Similarly, product sectors can also be “de-graduated” which means they were formerly excluded from preferential status and are now restored to the list. Footwear in Vietnam has been de-graduated, for example.
Many experts are anticipating that this year’s revisions will have a noticeable impact on Asian commerce, in particular. E.U. trade with India alone swelled from $38.9 billion in 2003 to $109 billion in 2011. Collectively, ASEAN is the E.U.’s largest trading partner following the U.S. and China, accountable for more than $280 billion in trade.
The transformative impact GSP plus status is expected to bring to Pakistan’s economy is illustrative of the program’s power. Currently, the E.U. is Pakistan’s primary destination for its textile exports. Overall, Pakistan’s textile exports topped $13.06 billion last fiscal year, including $2.7 billion worth of yarn and $2.5 billion of fabric to Bangladesh, specifically. Pakistan’s exports have grown by approximately 12.5% per year, with a growth of 10.3% to the EU, in particular. The textile industry accounts for more than 50 percent of the nation’s total exports. While forecasts regarding the full reverberations of the new status for Pakistan vary widely, many predict growth by as much as 100 percent over the next four years.
Thirteen textile products are included on the list of those than can be exported duty-free to the the twenty-seven members of the E.U., accountable for $231 million worth of goods last year. Some are predicting this will increase Pakistan’s exports to the E.U. by $1 billion.
The GSP program was specifically developed to provide a boost to emerging nations struggling to take advantage of trade opportunities exclusive to international agreements to which they typically did not belong. According to E.U. Trade Commissioner Karel De Gucht changes to the GSP eligibility criteria are responses to the fact that “key developing economies have become globally competitive,” adjustments necessary given the success of the program itself. De Gucht also said, “This now allows us to tailor our pro-development trade scheme to give the countries still lagging behind some additional breathing space and support.”