Who will be the winners and losers of the European Union’s GSP+ in 2024?
As the European Union’s generalized system of preferences scheme (GSP) comes to an end on December 31, 2023, renewals and commitments for the next round have sparked concern and alarm in Bangladesh, Pakistan and Sri Lanka.
Manufacturers in Asia are worried that they won’t able to to fulfill the increasingly stringent conditions they expect the European Union to announce under the new EU GSP for 2024-34.
GSP+, which allows exporters to the European Union to pay lower duties or none at all, is a way of helping developing countries to alleviate poverty and create jobs based on international values and principles.
Eligible countries must adhere to 27 international conventions on human rights, labor rights, the environment and good governance.
The new GSP+ rules are expected to take effect from 2024-2034, and include additional conventions on the rights of persons with disabilities, involvement of children in armed conflict, labor inspection and trans-national organized crimes, among other stipulations.
Several of the countries have already been threatened with have their GSP+ tax benefits reviewed or revoked for not adequately meeting these requirements.
Sri Lanka, particularly vulnerable amid runaway inflation and a crumbling economy, has been looking at ways to get back in good standing.
“Our point is that the GSP+ plays a role in developing the industry,” Yohan Lawrence, president of JAAF, the Joint Apparel Association Forum, an apparel industry coalition in Sri Lanka, told Sourcing Journal. “This is especially affecting the companies in the war-torn North and the East. After the conflict the government reached out to a lot of companies to move there,” he said. “There are a number of factories in this area, and many of them are working for the European customers, many of them are reliant on this business.”
Lawrence framed the GSP+ program as a “vital piece” of the Sri Lankan garment sector’s recovery. “Obviously our competitiveness is an issue, and GSP plays a role in the rebuilding of the economy, and we should be looking to do it,” he said.
“JAAF’s position is that it is impressing on the government it is necessary that the GSP process be continued. We are not really privy to what is going on but the government recognizes how important it is,” added Lawrence.
Shiran Fernando, chief economist, The Ceylon Chamber of Commerce, said removing GSP+ would increase FOB prices by approximately 12 percent. He said that although the present scheme expires on Dec. 31, 2023, it would roll over until 2025. It also doesn’t affect the entire apparel sector.
“The GSP covers approximately 50 percent of the apparel sector because of the restriction on rules of origin. It is connected to the fabric base, you have to go from yarn to fabric and fabric to garment, and since Sri Lanka imports part of this, that part becomes ineligible for GSP,” Fernando said, adding, “Other than that it covers all the products, no restriction over products, just on rules of origin.”
“Whenever GSP has come up for a review it has always been a concern,” said Fernando about the general sense pervading the industry.
Sri Lanka’s access to the GSP+ benefits has already fallen under review, with EU members alleging that South Asian nation failed to adhere to several of the commitments it had made, mainly regarding human rights.
“Now there is also a concern with the macro situation, the global demand, as well as the inflation and other factors within the country,” he added.
The inflation rate in Sri Lanka exceeded 70 percent last year, but reforms linked to IMF have brought it down to about 40 to 50 percent.
But there “is always ongoing work that is taking place and the industry is applying towards it as well, working closely with different development partners and the government as well,” Fernando said.
Sri Lanka exported $5.4 billion apparel last year, $ 1.6 billion of which went to the European Union.
Bangladesh, the second-largest apparel exporter in the world after China, is also thinking of what lies ahead.
The country, which exported approximately $40 billion of apparel in the financial year from July 1 to June 30, 2022 is expected to touch $45 billion in the financial year ending June 30, 2023.
Bangladesh, which is covered under a separate Everything but Arms scheme, in which sourcing of the fabric and other materials is not a factor.
“It’s all about the preparation,” said Dr. Khondaker Golam Moazzem, research director, Centre for Policy Dialogue (CPD), a Bangladesh think tank. “The EU and UK have extended Everything But Arms (EBA)scheme that we enjoy as a Least Developed Country to 2029, although we graduate to a middle income country in 2026.
“What is worrying is that Bangladesh hoped to get into GSP+. But their condition is the ceiling on market share, Bangladesh export is above that share and that is a factor that needs negotiation,” he said.
“In addition, the compliance is quite stringent which will be monitored more strictly for the GSP plus, including in terms of labor, governance, child rights, environmental standards, etc. We don’t allow trade unions in export processing zones [and] there are other concerns about the trade union rights. So those will also be under scrutiny…and will be difficult on all counts,” said Moazzem.
Last week, Charles Whiteley, European Union Ambassador to Bangladesh, emphasized this notion, while pointing out that Bangladesh must comply with 32 international conventions in order to secure GSP+ facilities by 2029, he said at the twin ceremony in Dhaka commemorating Europe Day and the 50th anniversary of EU-Bangladesh diplomatic relations.
Noting the importance of seamlessly transitioning to GSP+, Whiteley said, “We’re also working and will launch this year negotiations on a new-generation agreement, which is a partnership and cooperation agreement, or PCA.”
Diplomats from the EU countries present at the event included German Ambassador Achim Tröster, Swedish Ambassador Alexandra Berg von Linde, Danish Ambassador Winnie Estrup Petersen, Netherlands Ambassador Anne van Leeuwen, and Italian Ambassador Enrico Nunziata, among others.
The discussions on GSP+ have been amplified over the past year.
In July 2022, a visit to Dhaka by a six-member delegation of the European Parliamentary Committee on International Trade urged Bangladesh to improve its rights situation and update labor laws to comply with international standards to be eligible for GSP+.
Concerns over the delay in amending the labor law, extrajudicial killings, enforced disappearances, shrinking of civic space and Digital Security Act were among the specific areas in need of reform, according to the delegation.
The situation is somewhat different in Pakistan.
Having this facility since 2014, with zero import duties on 66 percent of the tariff lines mostly in the textiles, leather, sports and surgical goods sectors, the implementation of the 27 UN conventions relating to human rights, labor rights and climate change has already been under review.
In contrast to Bangladesh and Sri Lanka where the lobbying for GSP plus is supported by the industry, disagreements between the requirements for GSP plus by the industry need careful balancing.
According to industry analysts, EU’s focus on human rights issues, including freedom of religion or belief, importance of civil society organizations, freedom of expression and media, and violations of labor rights, including the inadequacy of labor inspection systems, occupational safety and health, ineffectiveness of labor courts, and denial of workers’ rights to strike is being opposed by vested interest groups in the country.
Reeling under spiraling inflation, an energy crisis, and political uncertainty in the first half of financial year 2022-23 which runs July 1-June 30, exports of Pakistan’s textile industry dipped by 7 percent year-on-year to $8.8 billion and the manufacturing sector has been operating at less than 50 percent capacity.
As a result of GSP+, more than 76 percent of Pakistan’s exports, including textiles and clothing, enter the EU duty and quota free. This represents almost 20 percent of Pakistan’s exports globally.
Approximately 80 percent of the textiles and clothing articles from Pakistan are privy to preferential tariff rate, with a fourth of these being bed linens, table linens and bedroom and kitchen linens.
As negotiations continue, and tensions remain high, there is much at stake, and with impending pre-conditions growing more rigorous, analysts are still at odds: will 2023 see the end of GSP+? Or will 2024 bring a new beginning?