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India to EU: Don’t Kill Our GSP Status

India is protesting a decision by the European Union (EU) to discontinue a preferential tariff system for imports set to expire in January. Inside of a month of a new trade relationship with the EU, Pakistani trade representatives are making a hard push to convince the authorities in Brussels to reconsider.

The EU plans to completely overhaul its trade relationship with India, enacting a shift in its preferential arrangements to lesser developed economies. India’s exports to the EU has surpassed a crucial threshold of 14.5% in value of textile imports from all other beneficiary nations, essentially “graduating” India out of the program.

The EU’s idea is that India doesn’t need the preferential status, no longer an emerging economy. Blessed with a enormous workforce of young, deeply discounted and currently underemployed labor, India has unlimited promise. However, it has historically struggled to keep apace with China and Bangladesh, the region’s dominant players. For a nation of its dizzying size, its $32 billion worth of textile exports last year is an underachieving number. It can’t yet hope to reach China’s $260 billion yet, but comparatively tiny Bangladesh took in $21 billion in the same period.

For India to draw business from China, it has to improve its often underdeveloped infrastructure and unwieldy labor regulations. As it stands today, India isn’t large enough to absorb the capacity of China or cheap enough to lure away bargain hunters from Bangladesh. But it does have a large enough population, and a skilled enough workforce, to become one of the world’s top exporters.

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And there are portents of future success. India’s exports are expected to leap 30 percent over the next year, coming in close to $44 billion. The government has been revising its cumbersome oversight rules, erasing a limitation on how much money could be invested in garment factories. On the other side of the coin, their labor laws have become impressively more stringent.

Indian trade authorities have voiced anxiety over the termination of their preferential status, citing the economic damage that such a move will surely affect. This will likely increase the cost of Indian exports by 6 percent to 12 percent. However, at the heart of their complaint is the fact that, just as their preferential status is expiring, Pakistan is being granted its own preferred designation by the EU.

An Indian trade official said, “We will take it up with Brussels because for textiles, it is a double whammy. The EU has removed Indian textiles exports from GSP, which means higher duty at EU borders, and they are in the process of giving textile exports from Pakistan GSP Plus status, which means zero duty.”

Mr. Vishwanath, managing director of Nath Brothers Exim International, said, “The U.S. has already given many advantages to Pakistan due to various political reasons and with this suspension from the EU, we might see a shortfall of 2 to 5 percent in exports.”

Currently, the EU is Pakistan’s primary destination for its textile exports. As it stands, overall 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 the 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.

The new status for Pakistan was approved by a majority vote by the European Union (EU) and is expected to have an sizable impact on its exports, affecting more than 3,500 different products.

Sheikh Mohammad Ilyas, chairman of the Pakistan Textile Exporters Association (PTEA), said, “The EU trade concessions can push our textile exports and generate significant economic activity.”

The stakes are unusually high for Pakistan given the great significance of the EU as a trading partner. Thirteen textile products are included on the list of those than can be exported duty-free to the  the 27 members of the EU, accountable for $231 million worth of goods last year. Some are predicting this will increase Pakistan’s EU exports by $1 billion.

Nevertheless, India is not prepared to concede defeat. One official hopefully said they continued to press on, albeit under a tight schedule. “We have a month’s time before the new GSP regime to convince the EU,” he said.