The withdrawal of EU GSP+ scheme: its impact on
Sri Lankan exports and its economy
Are we ready to cushion the economic shock?
August 22, 2010, 7:25 pm
By D.T.Kingsley Bernard
Sri Lanka was among the 16 beneficiary countries and the only South Asian country that qualified for GSP+ arrangement, from July 2005. The EU-GSP+ concession was withdrawn from Sri Lanka with effect from 15th August 2010. This article critically , analyzes the progress achieved by the Sri Lankan exporters in the EU market under the EU-GSP+ Scheme since its enforcement and evaluates the resulting impact on the exports and Sri Lankan Economy due to its’ withdrawal. The writer also questions the readiness of Sri Lanka to cushion the resulting economic shock.
What is GSP+and its’ Consessions
=GSP stands for Generalized System of Preferences (GSP) which is an individual generalized scheme of tariff preferences introduced as an exception to the Most Favoured Nation (MFN) concessions which was established to facilitate exports from developing countries. Under this arrangement, developed countries were authorized to establish individual schemes to offer tariff preferences to their trading partners.
= As a result, the GSP scheme of the European Commission (EC) was established in 1971. Later with the change of European Commission (EC) to European Union (EU), GSP Scheme with special incentives for the protection of labour rights was established in 2002. The new GSP+ Scheme was introduced as a special incentive programme for sustainable development and good governance and enforced on 1st July 2005.The duty on import items which enjoy GSP+ is zero and is a non-reciprocal, unilateral instrument offering preferential market access. Sri Lanka was able to enjoy the GSP+ scheme since July 2005 ,enabling 7200 product lines for duty free access under Rules of Origin (ROO).
Export Performance of Sri Lanka in EU Countries
Sri Lanka’s exports to EU registered a significant growth with the introduction of EU-GSP+ facility in July 2005. The utilization of concessions under the EU-GSP+ Scheme by Sri Lankan exporters were around 70% as against 38% under the GSP concessions, amply proving the attractiveness of the Scheme which granted duty free
access to a large number of products including key export products of Sri Lanka. A comparison of Sri Lanka’s exports by major market regions pre and post implementation of GSP+ ,shows that the EU countries have become the leading export market of Sri Lanka by surpassing the North American market region(NAFTA)since 2006 to date after the introduction of GSP+ in 2005. The share of exports to the EU region has increased steadily from 28% in 2005 to 39% in 2009 which was an increase of approximately US$800 million. If we compare the annual export growth of Sri Lanka to EU during the pre and post four year periods of the implementation of GSP+ scheme in 2005, the average annual growth of exports to EU during the pre GSP+ period from 2001 to 2004 was 11.5% and export growth rose to 16.4% during the post GSP+ period from 2006 to 2009, this increase has resulted mainly from the benefits of GSP+. This growth is reflected in major export products namely; garments, diamonds, frozen fish, tyres & tubes and transport equipment & parts. These five products contributed more than 70% of total exports to EU annually during the period from 2006 to 2009.
The export earnings from garments which alone contributed 60% to total annual export earnings from EU region, grew at an average growth rate of 13% during the period 2006 -2009 period reflecting positive impact of EU-GSP+ Scheme on the apparel sector. Other major products, mentioned above registered substantial growth rates during the period compared to pre GSP+ period as evident from the export data given in graph below.
In 2004,more than 50% of Sri Lanka’s total export earnings from EU region were from two countries ,namely UK and Italy. Further, only six EU countries were responsible for 90% of the total export earnings during the same year.The position has not changed significantly after introducing GSP+ Scheme. However, the share of United Kingdom has dropped to 37% ,Italy and Belgium had increased to 16% and 13% respectively, while the relative importance of Germany had reduced marginally and the total exports to the region had declined in 2009. (see table-1 below). The drop in total exports to EU region in 2009 compared to 2008 was mainly due to the global economic slowdown. It should also be noted that the exports had increased steadily from 2005 to 2008 ,under GSP+ except 2009.
Impact of Withdrawal of GSP+ Concessions
It is amply clear from the above discussion that the removal GSP+ Scheme will have a negative impact on the competitiveness of export products as Sri Lanka has been reverted to normal GSP Scheme from 15th August 2010 which imposes certain percent of duty for most of our major export products as against zero duty under the GSP+ Scheme to EU countries .
The table-2 below presents a comparison of tariff structure for selected major products under the GSP+.
Resulting from the removal of GSP+,the apparel sector will loose 9.6% tariff advantage. Similarly, bicycles and frozen fish which improved their exports in the EU market after implementing the GSP+ will loose the tariff advantage of 11.5% and 18.5% respectively. Porcelain tableware exporters will encounter further difficulties due to loosing the tariff advantage 8.5% they were enjoying. Hence, the removal of GSP+ concessions will expose exporters of these products to stiff price competition from the low cost producing countries, some of whom will still be enjoying the GSP+ concessions.
However, the table also shows that activated carbon and new pneumatic tyres will not be affected as they enjoy zero duty concession even under the normal GSP Scheme.
The withdrawal of EU-GSP+ Scheme will reduce the price competitiveness of products which would not enjoy zero duty under the GSP normal scheme hence the export performance of such product sectors will depend on the ability of these industries to survive in a competitive environment.
Is Sri Lanka Ready to Face the Challenge?
The EU with half a billion population possessing a relatively high purchasing power is one of the key markets for Sri Lanka over a long period of time. Since 2006, EU has emerged the major market for Sri Lanka surpassing dominance of USA as Sri Lanka’s major export market. This is mainly due to the impact of GSP+ benefits. Preferential trade arrangements such as EU GSP+ are useful ,especially for developing countries to develop their exports . However, these are only short term mechanisms that can help recipient countries to gain price competiveness and not long term sound export strategies for countries to adopt. Therefore, it is more important for countries to address basic issues which improves the long-term competitiveness of the export sector.
A conducive macro economic environment is a must for export growth in the long run. Some of the attributes of such an environment are; proper infrastructure facilities, realistic exchange rate, low inflation and competitive interest rates. Taking appropriate measures to manage the above motioned factors are in the domain of the Government. While appreciating the timely action of the Government to reduce the interest rates and manage inflation, attention of the Government should be paid to manage appreciation of the rupee against major currencies such as US$ and Euro, in order to maintain the competitiveness of the exporters. Further, the Government’s development of road network deserves commendation, with regard to the infrastructure.
On the other hand, industry related competitive factors such as productivity, technological processes, quality, design and skills are essential to build industry level competitiveness. Although, improving such factors are the responsibility of the industrialist or the private sector, creating a conducive business environment to encourage exporters to invest in improving such factors again ,becomes the responsibility of the Government. It appears that neither the Government nor the Private sector has identified appropriate strategies and alternatives to mitigate the expected loss of export income to the country.
Further, export earnings are vital to Sri Lankan economy as its contribution is substantial. However, the contribution of Exports to GNP, which was more than 30% annually before 2001 has declined to 25% annually during the period 2002 to 2008 and in 2009 it has further dropped to 17%. This is an alarming situation. Therefore, any negative impact on Sri Lanka’s exports will drastically reduce its contribution to the country’s economy. On the other hand, our foremost export earner, job creating and income distribution mechanism; apparel industry will be the most affected sector. In this context, is Sri Lanka in readiness to face the economic shock?. Have we identified alternative products and markets as an alternative to existing products and loosing markets? Have we decided on a strategic plan which is ready to be implemented by the private sector with the assistance and guidance of the public sector institutions responsible for export development to the Government?
How to face the challenge; way forward
One clear alternative Sri Lanka has is to intensity its export promotion efforts on a one to one basis with six member countries which account for 90% of exports to EU Although, EU has 27 member countries, only six countries namely; United Kingdom, Italy, Belgium, Germany, France and Netherlands making 90% contribution to its imports from Sri Lanka is a blessing in disguise as we have to intensify efforts with only few countries.
Secondly, intensifying export efforts in the Asian region which has already started to unleash its potential as an economic growth centre. We need to identify appropriate products and services as these Asian countries also produce similar products such as ours.
Thirdly, identification of alternative products to take the place of apparel through proper research and matching those products with appropriate markets would be a long term solution. In doing so, Sri Lanka’s competitive and comparative advantages should be taken into consideration in identifying winning products in international markets.
These are only a few of the options and many more options can be found through serious discussions and study. However, a clear understanding of the challenge and genuine effort by all stake holders are a must in overcoming the serious repercussions following the withdrawal of GSP+. It is high time that we stop wasting our energies on "How and Why we lost GSP+" and take a step forward and face the challenge of finding alternatives to increase the export revenue of Sri Lanka.
About the author: D.T.Kingsley Bernard (B.Sc; Dip. Intl. Mktg; MBA) is former Director-Marketing of the Export Development Board and Management Consultant of the Sri Lanka Export Credit Insurance Corporation. He was also the President of the National Chamber of Exporters of Sri Lank and Chairman of the Joint Business Forum(JBiz) He had held top management positions in private sector leading export firms.
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