Is Sri Lanka the Least-Favoured- Nation of the European Union?


By Gomi Senadhira

The European Union is a single market and the world’s largest economy. It is also the largest market for Sri Lanka’s exports. Unfortunately, Sri Lanka is the least-favored-nation in the European Union, in terms of market access. If so, one may ask, how did the European Union emerge, during the last few years, as the largest market for Sri Lankan exports? Let me explain.

Prior to January 2004, most of Sri Lankan products were exported to the EU under what are called MFN tariffs. The MFN tariffs are linked to the most-favoured-nation (MFN) treatment which is considered the very foundation of the multilateral (GATT/WTO) trading system. The MFN treatment requires the extension of best tariff and non-tariff conditions extended to one member of the WTO to all other members of the WTO.

In 2004,a report prepared by a group of eight ‘wise men’, chaired by Mr. Peter Southerland, former European Competition Commissioner, on the "Future of the WTO", pointed out"………Certainly the term might now be better be defined as LFN, Least-Favoured- Nation treatment…. This is best illustrated by reference to the EU which now has its MFN tariff fully applicable to only nine trading partners… All other trading partners are nearly five decades after founding of the GATT, MFN in no longer the rule; it is almost the exception granted concessional market access under Article XXIV, the Enabling Clause, GSP schemes, ‘Everything but Arms" and other relationships." In essence, in the European Union the basic rules of multilateral trade are treated as exceptions and exceptions have become the rules.

By the beginning of this century the free and preferential trading arrangements the EU has developed over the preceding 30 years, had placed Sri Lanka in a position of competitive disadvantage in the EU market, vis-à-vis most developing and developed countries. Sri Lanka was one of the few developing countries which was benefiting only from the GSP general arrangement. However, as Sri Lanka is a smaller economy without integrated production facilities, most of her exports did not qualify for the GSP benefits, under the very strict Rules of Origin of the EU GSP scheme. This resulted in the payment of high MFN import duties in the EU market. This position was summarized, in a briefing paper published by Oxfam in 2003, as follows"…the available evidence suggests that the EU’s Common External Tariff (CET) as fundamentally anti-poor. Here too the principle of perverse graduation applies. In Britain, tax rates on imports of goods from India are around four times higher than for the USA, rising to over eight times higher for countries such as Sri Lanka".

In 2001, Sri Lanka’s exports to the EU, the second largest market accounting for 26% of her exports, declined by 16%. The studies on this, undertaken by the Sri Lanka’s mission to the EC in Brussels, concluded that Sri Lanka’s position at very bottom of the pyramid of tariffs of the European Unionwas the main reason for this decline. Though, technically Sri Lanka as beneficiary of GSP (General) arrangement had position above the nine MFN only countries, referred to above, given the low utilization of GSP and MFN tariff peaks for her exports provided Sri Lanka a position at very bottom of the pyramid, as well as the highest average tariffs. In 2002,long before the Southerland Report or the Oxfam study were published, Sri Lanka’s mission to the EC brought this situation to attention of the government and the European Commission.

As a result, this was taken up by the Sri Lankan authorities at the highest level of the Commission. During these discussions it was agreed to undertake a joint study, funded by the Commission, on the EU-Sri Lanka Trade. This study too confirmed thatthough there were number of reasons for the decline of exports in general in 2001, such as the attack on the Bandaranaike International Airport, one of the main reasons for the decline of exports to the EU was the high tariff Sri Lankan exporters faced against lower tariffs or tariff-free treatment for the similar exports from most of their competitors. Consequently, the Commission together with the Sri Lanka mission in Brussels started to explore the ways to improve the level of market access for Sri Lanka, using available tools.

Around this time, Sri Lanka had also applied for"GSP labour" and had successfully completed the process for these benefits by late 2003.Hence, the EC was in a position to provide higher level of market access, for Sri Lanka, through "GSP Labour". This was done from February 2004 to June 2005. The EU restructured the GSP regime and replaced the "GSP Drugs", "GSP Environment" and "GSP labour" with "GSP Plus" in 2005. From July 2005 Sri Lanka received GSP Plus benefits. What was impact of these developments on Sri Lanka’s exports to the EU?

During the period 2000 to beginning of 2004 Sri Lankan exports were mainly facing MFN tariff peaks, while all other South Asian countries were receiving either duty free treatment (LDCs under EBA and in the case of Pakistan under "GSP- Drugs", after 9/11) or preferential tariff ( most of the Indian exports were under GSP). As I do not have access to comparative data for the period for all exports from Sri Lanka and other South Asian countries, I could look only at Sri Lanka’s main export EU, apparel. The EU’s clothing market shares of India and Bangladesh in 2000 were 2.9% and 2.8% respectively. Pakistan and Sri Lanka had share of 1% each. By 2003, the market share of India, Bangladesh and Pakistan had increased to 3%, 3.4% and 1.1% respectively, along with their exports. In case of Bangladesh, exports increased from US$ 2.4billion to US$ 3.4billion. Sri Lanka’s clothing exports to the EU declined during the period from US$ 864 million in 2000 to US$ 831 in 2003 and market share from 1% to 0.8%.

As against this in 2004 Sri Lanka’s clothing exports to EC increased by 25%. From 2005 to 2010 exports continued to increase at average of 9% per year and the growth rate was the second best in South Asia. Bangladesh recorded 31% growth in 2004 and continued on an average growth of 12% during the period. What changed for Sri Lanka in 2004? The level of market access, which changed from MFN to MFN Plus through GSP (Labour and Plus). The other important trade policy development, the end of textile quota regimes in 2005 did not have any adverse impact on Sri Lanka before or after 2005. It, however, provided some safeguard against tariff peaks by ensuring some market share during the difficult years of the early part of the decade.

From these development one could perhaps conclude that Sri Lanka, during the middle of the last decade moved from a position of least-favoured- nation in the European Union, in terms of market access, to most-favoured- nation status plus and therefore had level playing field vis-à-vis other similar economies. As a result, by the end of the decade, Sri Lanka’s exports to the EU significantly increased, while exports to the United States at best remained stagnant, and the EU became largest market for Sri Lanka, replacing the United States, which was the largest market for Sri Lanka during the last two decades of the last century. The level playing field, Sri Lankan exporters received through the GSP plus, was a major reason for this.

The withdrawal of GSP Plus from Sri Lanka

However, by 2006/2007 the EU started to threaten the withdrawal of the GSP Plus, due to political reasons. The first formal declaration in this direction came from the German Economic Cooperation and Development Minister, Heidemarie Wieczorek-Zeul in an interview to "Tages Speigel" newspaper published on February 9, 2008, where she stated "… If the Sri Lankan government continues to insist on a military option, I will demand that the EU should withdraw the General System of Preference (GSP) offered to Sri Lanka. This concession enables Sri Lanka to export its goods and products to the EU at reduced or exempted tax and duty levies. This step will really bring economic pressure on the GoSL. The biggest portion of Sri Lanka’s exports consists of textile exports. Only garment product exports to the EU markets are valued at US$ 1-2 billion annually."

The rest is history and part of high profile public diplomacywhich I do not wish to discuss here. The GSP was withdrawn from Sri Lanka from August 2010.

It is interesting to note that, as far back as in December 2008,European Trade Union Confederation stated through a media release"…The list of beneficiaries of the EU’s GSP plus system over 2009 to 2011 includes some of the world’s worst violators including Colombia, Guatemala and Georgia’, In the cases of El Salvador and Sri Lanka where there are ongoing investigations under GSP procedures, the Commission has made clear it is serious about the requirement to respect labour standards and human rights. It must do the same in all such cases". According to the International Labor Rights Forum "… For over a decade, Colombia has been the world’s most dangerous country to be a trade unionist. According to the Solidarity Center of the AFL-CIO, roughly 4,000 Colombian trade unionists have been murdered in the past 20 years. Fifty-one Colombian unionists were murdered in 2010, more than the rest of the world combined. Shockingly, virtually no one is prosecuted or convicted for these crimes, with an impunity rate of approximately 96 percent." It appears that the Commission had ignored these requests from powerful trade unions.

However, March this year two European MPs submitted the following questions, on GSP Plus, to the Commission for written answers;

"The EU General System of Preferences (GSP+) is subject to the ratification and effective implementation of 27 core conventions on human and labour rights, environmental standards and governance principles.

Before and during the implementation of the GSP, Colombia has faced (and is still currently facing) grave human rights violations, includingextrajudicial executions and arbitrary arrests and detentions, carried out by the Colombian authorities.

Normally, with the GSP, it was possible for the EU to suspend tariff preferences or apply sanctions if human rights standards were not complied with.

1. Why has the Commission not started an investigation in Colombia?

2. Why has the Commission not suspended the GSP+ with Colombia, in view of the statements made by the United Nations, NGOs and the Colombian judicial authorities attesting to the grave human rights violations?"

The Trade Commissioner Karel De Gucht’s answers to these questions were even more interesting;

"The Commission actively monitors compliance with Colombia’s obligations under United Nations (UN) human rights conventions, during which the Commission and the European External Action Service (EEAS) had a bilateral dialogue with Colombia. This highlighted a number of positive developments, confirmed in recent reports of the relevant international monitoring bodies. In these circumstances, and given the aim of the General System of Preferences (GSP+) scheme and that Colombia is cooperating with the EU and international organisations, the withdrawal of GSP+ preferences was not considered warranted. Monitoring of Colombia’s compliance with its obligations will continue."

Though some GSP plus beneficiaries identified by the relevant UN monitoring bodies, such as ILO committee of experts, for serious violations of the relevant conventions, before and during the implementation of the GSP, and this was brought to the attention of the Commission, no formal investigation was initiated by the Commission, other than the token investigation on El Salvador. However, investigation on Sri Lanka was initiated though the monitoring bodies had not leveled any such serious charges against Sri Lanka. It is very clear from the above the commission has applied high handed and discriminatory approach against Sri Lanka and thedecision withdraw the GSP+ status of Sri Lanka was based on "non-objective" standard, and was for non-trade purposes.

The GSP and the GSP plus arrangements are not gifts or concessions that EU can give and withdraw as it pleases. These are arrangements made within the multilateral trade rules. The EU has to comply with the WTO regulations and rulings when it extend or withdraw such concessions. The Commission’s action is not in accordance with their WTO obligations and Sri Lanka should have challenged this through the WTO Disputes Settlement Procedure.

This was strongly advocated by the Department of Commerce, Sri Lanka’s focal point for the WTO. An advisory opinion was also obtained from Geneva based Advisory Centre for the WTO Law, on this issue. The WTO route is low-key, low-cost, closed-door legal approach and hence would have been less confrontational than high-profile public diplomacy Sri Lanka adopted vis-à-vis the EU on this issue. However, some government agencies/ officials strongly opposed the WTO route and the reasons for that position were never explained.

As stated earlier, in terms of market access to the European Union, Sri Lanka remains the most marginalized country, among the WTO members. In South Asia, though Sri Lanka is at the same level as India and Pakistan, given the low GSP utilization, she is already at the bottom of the group. In the near future the terms of market access for Pakistan and India is expected to improve further through EC’s unilateral concessions to Pakistan and the FTA negotiations with India. If no action is taken Sri Lanka, the least-favoured-nation in the EU, will be further marginalized.

The EU is the world’s largest economy and a single market. The United States is the second largest economy. The exports to the United States, which was the largest market for Sri Lanka during the last two decades of the last century, started to stagnate and/or decline, after 2001. However, the level playing field Sri Lankan exporters received in the EU market, for a short period, from 2004 to 2010, through the enhanced preferential access received, helped to offset the mistakes we made in the United States from 2002 to 2008. Let us hope that the experience of the USA would not be repeated in the EU.

(The writer is the former Director General of the Department of Commerce)

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