GSP plus and effects of GSP plus on Sri Lankan Economy

Introduction

The Generalized System of Preferences is typical offers to a developing country and which provides a tariff reduction, and that can happen in the decrease of poverty in those countries. Generally, this benefit gave by countries that are in the European Union to some specific developing countries. This debate about the system of tariff preferences was started in 1960 at the conference of the United Nations Conference on trade and development (UNCTAD). (Perera, 2016). Therefore, this tariff preference system can be categorized into three significant arrangements. Those are,

1. GSP(Standard)
2. GSP Plus (+)
3. EBA

GSP(Standard) was introduced in 1968 by the European Commission, and these facilities had been given for 177 countries, and it included 6400 products. Therefore, this trade arrangement offers by EU Union that allows developing countries, and they can get their exports in pay less or no duties. According to the GSP scheme, which provides partial or fully or two-third of tariff reduction of all product categories, which are exported into the European region. However, the GSP standard scheme had three primary objectives. Those are,

• To increase developing countries export earnings
• To promote industrialization to developing countries.
• To accelerate the growth rate of developing countries.

The new GSP plus scheme was introduced on 1st July 2005, and the facilitates given for 15 developing countries, and GSP Plus is a distinctive element of the GSP scheme that provides additional trade benefits to developing countries. Sri Lanka was granted GSP plus tariff concession due to the Tsunami disaster in 2005. However, the primary purpose of the GSP plus is providing a wide – range of market access than the GSP scheme. Which offer beneficiary countries have an opportunity to duty-free access to the EU market for over 7200 products.

Eligibility Criteria Under the New GSP+ Scheme

A country should qualify under the vulnerability criteria, the income criteria and comply with 27 EU conventions to be eligible under the current GSP plus scheme. (‘Gsp+ and Sri Lanka’, 2016).
· The vulnerability criterion ensures a country can benefit from GSP+ if;

01. The country is not competitive on the EU market (The import-share ratio is less than 2%)
This implies that a country has a low level of exports to the EU; exports under GSP are less than 2% in value of total GSP covered imports by the EU. This rate was relaxed from 1% under the previous scheme.

02. The country doesn't have a diversified export base with the diversification ratio is 75% of a country's exports to the EU for its seven most significant sections.
Exports from a country to the EU are heavily concentrated in a few products that the seven most significant sections of GSP-covered imports into the EU represent more than 75% in the value of their total GSP covered exports.

Income Criterion

The country should not be classified by the World Bank as an upper middle income or higher income economy for three consecutive years. Sri Lanka is currently at the US $ 3,625 per capita income level and is well below the $ 4,125 mark for the Upper-middle-income category. Hence eligibility under this criterion can be easily met.

Comply with and effectively implemented 27 EU Conventions.

All 27 international conventions were strictly related to the above two topics. Withing those conventions, 15 were related to human and labor rights of the beneficial countries; then, the other 12 conventions are related to sustainable development and good governance. These are mainly UN and International Labor Organization (ILO) conventions, conventions on the environment, and good governance. Examples of such conventions are The Convention on the elimination of all Forms of Racial Discrimination; the International Convention on the Rights of the Child; the Freedom of Association and Protection of the Right to Organize Convention; and the Convention on International Trade in Endangered Species etc.

Sri Lanka Gaining and Losing GSP Plus

Sri Lanka has been a primary beneficiary of the EU’s standard GSP from the scheme’s commencement, and it began to benefit from GSP+ on 15th July 2005. Though, on 15th August 2010, the EU suspended Sri Lanka’s GSP+ status. Because incorporation of three conventions of EU’s decision was to withdraw GSP+ benefit from Sri Lanka was mainly based on the findings of a Commission investigation study that identified some failures in the implementation of conventions: (Perera, 2016). Those are.

1. International Covenant on Civil and Political Rights (ICCPR)
2. Convention Against Torture (CAT)
3. Convention on the Rights of the Child (CRC)

Effect of GSP Plus to Sri Lankan Economy

The EU had introduced a new GSP plus for 15 countries, and also, they had expected eligible criteria under the GSP plus scheme. Sri Lanka has been exported like apparel, tea, rubber, processed food products, seafood, toy products, porcelain, and ceramic ware and etc. Then, our significant exports are apparel, tea, and rubber sectors. The Sri Lankan exports, mainly apparel sector items, significantly increased after introduced GSP+. After introduced GSP+, our primary export market becomes EU. According to the table and figure, 1, the share of EU exports to total export has gradually increased for the period of GSP plus 2005 to 2010. According to table 2 and figure 2 If compared with the average annual growth of Sri Lanka export to the EU. Before the execution of the GSP plus in 2001 to 2004, the average annual growth of exports to EU was 11.5%, and export growth rose to 16.4% during the period of GSP+ was received from 2006 to 2009, this increase has resulted mainly from the benefits of GSP+. Up to 2004, we are primarily exporting our products to the UK and Italy, but after GSP+ introduced, it has extended to 6 countries. Such as UK, Italy, Belgium, Germany, Denmark, France. It should also be noted
that exports had increased gradually from 2005-2009. After that, the suspension of GSP plus the average annual growth of exports became decrease for the period of 2010 to 2014 from 7.4%. (Jayaratne, 2011)

Effect of GSP Plus on Sri Lankan Apparel Exports

As a developing country of Sri Lanka, the relationship with the EU is vital for developing the process of the country, because of EU is the principal export market and the second largest import market of Sri Lanka. For example, 50% of apparel products export to EU countries, and 29% of industrial products import from EU countries (The Island, 2010). In 2005 the EU decided to choose Sri Lanka as a GSP plus beneficiary country because Sri Lanka has involved with all international conventions rather than other regional countries in South Asia. Though they have decided to start this agreement in 2006 (January) because of disaster Tsunami, they originated it from July 2005. And it extended in 2009 again. In the year 2005 (before becoming a beneficiary), the share of Apparel Export to EU countries was 36.2%. However, after became a beneficiary holder, the percentage of export to EU has increased by up to 48.8% while the US market of apparel export has reduced its share from 59.4% to 45.2% and the EU market was dominated or suppressed rather than US market (The Island, 2010). GSP plus had been suspended in 2010; therefore, it mainly impacts of our garment sector. After removal GSP+, the apparel sector will lose a 9.6% tariff advantage(Perera, 2016). According to table 3 and figure 3, these facts and statistics, it is evident that the GSP advantage denoted as an instrument to control the EU export market positively.

Conclusion

· Under the GSP plus concession, Sri Lanka has been able to beat price competition and expand the market share in the EU.

· The apparel industry has been the largest beneficiary of the GSP plus scheme. If the suspension of GSP plus its most of the impact on the apparel industry as well as the entire economy will be significant.
· If the Sri Lankan perspective, the importance of the GSP plus has been highlighted for the period of economic crisis.

· Apparel exports better, performing in the EU market rather than in the USA.

· However, the current situation emphasizes the need for Sri Lanka to diversify its export products and markets and seek alternative markets to reduce its over-dependence on the EU and the US on especially for the apparel industry.

Recommendation

· Sri Lankan government must ensure the country's commitment to ratify and effectively implement 27 international conventions on human rights, labor conditions, protection of the environment & good governance.

· Sri Lanka should diversify its export product range and seek alternative markets, and that’s through can reduce the effect of the suspension of GSP plus.

· Sri Lanka should focus the sustainable products in international markets by making such research and development efforts, and that’s through can face competitiveness and take some competitive advantages in international trade.

Appendix

GSP

The following countries currently benefit from the Standard arrangement.

·         Africa: Botswana, Cameroon, Cote d’Ivoire, Republic of Congo, Kenya, Ghana, Namibia, Nauru, Nigeria, Swaziland

·         Asia: Kyrgyzstan, India, Indonesia, Sri Lanka, Vietnam, Tajikistan, Turkmenistan, Uzbekistan

·         Australia and Pacific: Cook Islands, Fiji, Marshall Islands, Micronesia (the Federated States of), Niue, Tonga

·         Europe: Ukraine

·         Middle East: Iraq, Syria

·         South America: Colombia, Honduras, Nicaragua

GSP Plus

Pakistan is the only South Asian country to have GSP+ privileges, as of January 2016. The other states which make use of the GSP+ scheme to export goods to the EU are: Armenia, Bolivia, Cape Verde, Costa Rica, Ecuador, Georgia, Mongolia, Paraguay and Peru.

EBA

The countries which qualify for the EBA the arrangement is as follows:

·         Africa: Angola, Burkina Faso, Burundi, Benin, Chad, Democratic Republic of Congo, Central African (Republic), Djibouti, Eritrea, Ethiopia, Gambia, Guinea, Equatorial Guinea, Guinea-Bissau, Comoros Islands, Liberia, Lesotho, Madagascar, Mali, Mauritania, Malawi, Mozambique, Niger, Rwanda, Sierra Leone, Senegal, Somalia, South Sudan, Sudan, Sao Tome and Principe, Togo, Tanzania, Uganda, Zambia

·         Asia: Afghanistan, Bangladesh, Bhutan, Cambodia, Lao (People’s Democratic Republic), Myanmar/Burma, Nepal, Timor-Leste, Yemen

·         Australia and Pacific: Kiribati, Samoa, Solomon Islands, Tuvalu, Vanuatu

·         Caribbean: Haiti

Table 1

Year	Total Exports (US$ mn)	EU Exports (US$ mn)	Contribution of total exports to EU exports (%)
2002	4699	1363	29%
2003	5133	1540	30%
2004	5757	1842	32%
2005	6347	1968	31%
2006	6883	2271	33%
2007	7640	2903	38%
2008	8111	3001	37%
2009	7085	2763	39%
2010	8307	2907	35%
2011	10559	3590	34%
2012	9774	3128	32%
2013	10394	3326	32%
2014	11130	3450	31%
2015	10505	3046	29%

Figure 1

Economic Policies and Strategies used in the Colonial Period

Portuguese Era (1505 A.D to 1658 A.D)

Trade

Even if are ca nuts, coconut, cinnamon, pepper, elephants, gems and pearls were the main commodities traded, mainly through Arabs early in the 16^th century Portuguese found Cinnamon the most important article of trade. The plant   grows wild in southwest coast of Sri Lanka.

Everyone had to deliver a fixed amount of cinnamon to Portuguese as a responsibility and was without a pay. The dried and the peeled bark is used as a condiment. Gathering, drying and peeling was carried out by the “Salagama” caste. It is estimated by Portuguese writers that in 1518 Portuguese took 1000 Bahia's of cinnamon from island and a Bahia was about 400 pounds.

It became an extremely lucrative trade for Portuguese fetching many times its original purchase price in Sri Lanka when sold in Cochin or Ormuz and even when sold in Lisbon. The price was kept artificially high by Portuguese and increased a thousand fold during 16^th century.

Dutch era (1656 A.D to 1796 A.D)

Cinnamon

The ditched monopolized and administered trading, particularly in cinnamon, more efficiently and ruthlessly than Portuguese.

A cinnamon Department or “Mahabadde” was organized for peeling and delivery of the cinnamon by all men belonging to the Salagama Caste. A fixed amount had to be delivered (without payment) by each man as part of his obligatory caste service. Dutch also tightened up the procedures by keeping accurate records of all the Salagama men and inflicting heavy punishments for absenteeism or any other minor wrong doing. A pittance was paid for any other additional weight of cinnamon delivered. Most of cinnamon was sold in Europe and only about one fifth was sold in Asia.

Dutch was the only supplier of cinnamon for both Europe and Asia and hence they were able to dictate the price of the commodity. Since the cost was minimum the profits were considerable. But this didn’t benefit the island and sales appeared as profits in Netherlands for the company.

Elephants

Elephants were another important export to Bengal where they fetched a high price. Jaffna was the main center for elephant trade. Elephants were used in war, haulage and ceremonial purposes. Sri Lankan elephants were popular because they were more easily tamed and trained.

Other exports

Are ca nuts, pearls, gems, chunks and cowries (types of sea-shells) were also exported mainly to India. Pepper and cardamoms were obtained mainly from Kandyan kingdom. Coconut cultivation rapidly increased in this era. Coffee which had been introduced to Europe in the mid seventeenth century and had become popular by 18^th century was grown and exported for hundred thousand pounds by 1739. But by 1760 coffee export had ceased and begun again  under the British. Tobacco grown in Jaffna was demanded by Devanagari. Palmyra timber was also export from Jaffna to South India.

Imports

The main imports were rice and textiles. Rice came mainly from Bengal and the Coromandel coast where it was cheaper than the west coast of India. The Dutch monopoly tended to stifle the trade with India and this lead to a shortage of essentials such as rice and textiles. Because of this very early in 18^th century rules were relaxed and traders from India were allowed to participate more freely but Dutch continued to control prices by a system of passes and inspection.

Other strategies

Galle was strategically situated for international trade and Dutch allowed Portuguese and English merchantmen to carry an exchange of goods at this port from 18^th century. Sinhalese traders in the south and west, Tamil traders in the north and east and Muslim traders who lived in all the ports carried on a flourishing coastal trade in small boats. Dutch built a system of canals in Sri Lanka which are part of everyday life in Netherlands. These canals were not only useful for transport of goods but also acted in some places as flood protection schemes and in others helped to irrigate crops.

The Kandyan kingdom too participated in trade by exporting items such as are ca nuts, pepper and cardamoms and importing rice and textiles. Muslim trades helped to promote kandyan trade. The salt supply to kandy was also controlled by the Dutch who allowed just enough to be taken from the salt-pans along the current needs and the excess was thrown back into the sea to avoid storage within kandyan kingdom.  Even if Dutch didn’t allowed the kandyan freedom of trade it continued openly with India because of Nayakkara influence.

Thought the Dutch policy of shifting free trade reduced the rate of economic growth, there was a general increase in productivity.

By the 18^th century money economy had expanded to include all classes. Indian merchants brought in gold and silver coins for the smaller transactions, which were becoming more frequent with the expanding economy. A competitive trade continued with India, Maldives and other countries of Southern Asia. From this trade there emerged a group of entrepreneurs- Muslim, Sinhalese, Tamils and Indian expatriates who formed a class consisting of merchants and middlemen, which became more prominent during the Bristish period.

British Era (1796 A.D to 1948 A.D)

British removed traditional tax system such as “Rajakariya” and “Uliyam” but replaced with new taxation system which caused sudden increase in taxation level.   

In 1820s and early 1830s Sri Lanka was economically and socially in a terrible state. The only important export was cinnamon. Up to 1822 external trade was monopolized by the English East India Company and only a small proportion of profit was made available to the island’s economy. After the government took over the monopoly in 1822 the price of Sri Lankan cinnamon fell mainly because of the competition from east India Company. The British continued to use the Salagama caste to collect cinnamon in their traditional role as providing free labor for a service that was essential to the state.  The larger proportion of external trade at this stage was the coastal trade with South India. Export of coffee was increased as Governor Barnes abolished export tax on coffee and made loans available for investors.

Thought the internal trade improved rapidly, external trade was slow to develop because it was still a government monopoly. The duties which were carried with native customs had been taken over by British civil servants.

Coffee

Coffee was an important export. Export duties on coffee was revoked and tax on coffee plantation was abolished in 1825. In 1835 import duties in Britain on coffee from the West Indies and Asia were equalized further helping the profitability of the Sri Lankan exports. British planters recruited laborers from South Indian Tamils for work in coffee plantations and later an unwritten contract between planter and labourer was made. As a result Indian immigrants population increased within the country.

In 1845 economic depression affected coffee industry Sri Lanka and many small investors bankrupt. In 1848 Sri Lankan government made some new ill taxes to recover the fallen income.

Other crops

The improvement in the economy had been mainly due to coffee. Success of coffee made other crops like rice to ignore. Rice cultivation was thought to be less important due to thinking it could be imported from Bengal using some of the revenue generated from coffee.

Value of cinnamon had dropped considerably because of competition and it only played a minor role in export revenue.

Sugar cane cultivation was tried but didn’t succeed due to West Indian and Javanese sugar being cheap.

Coconut grown all over the island but mainly in the maritime districts, became more popular as an export. Rubber plantation too started in Sri Lanka in Southern, Western and Sabaragamuwa provinces. It was a profitable export too and helped when the main crop was not doing well.

The cultivation of Tea and Rubber

In early years of introducing tea to Sri Lanka, it was a failure (1824-1841). However in 1860s some plants grew alongside coffee. Tea took the place of coffee. By 1883 dark tea from Sri Lanka was noted for its distinctive aroma in the London stock market and became very popular, non alocoholic beverage in Britain about that time. By late 1890s tea plantation expanded from 20000 acres to 500000 acres. Of the total export earnings about 60% was accounted by tea.  Tea became the most important single factor in the island’s economy.

When the price of tea fell in 1897 a search was made for alternative crops. More investment was made in coconut plantation. But by 1910 rubber overtook place of coconut and became second most important export. 

What is Warehousing in Supply Chain Management

Warehousing 

Value is created by efficient warehousing management. Efficient warehousing management involves establishing and operating a system for holding inventories of goods and keeping them secure and in good condition until required, and also an efficient and economic system for receiving goods into the store and retrieving them when needed. 

A warehouse is a commercial building for the storage of goods. Warehouses are operated by different types of business organization: 

( a ) Manufacturers have warehouses for storing raw materials and components that have been purchased from suppliers, and for holding inventories of finished goods until they are sold and despatched to customers. 

( b ) Importers use warehouses for holding goods that they have imported into the country, and exporters use warehouses for goods awaiting export to buyers in other countries.  

( c ) The customs department of the government uses warehouses for holding imported goods that have not yet been given customs clearance for import into the country. 

( d ) Wholesalers use warehouses to hold goods they have purchased from manufacturers before they are sold on to retailers. 

Transport and distribution companies use warehouses for holding goods that they are in the process of transporting ( distributing ) on behalf of client businesses. Some warehouses specialize in the storage of particular types of goods. For example, refrigerated warehouses are used to hold goods such as meat products in cold storage, to prevent them from deterioration or decay while in-store. Items held in warehouses range from raw materials and components, to spare parts, finished goods, packaging materials, and agricultural produce.

Purpose of warehousing 

The purpose of warehousing is to hold goods until they are required for use or sale. The main functions of warehousing are : 

• To keep goods secure until they are needed for use or sale 
• To hold goods in a place where they can be located and retrieved easily and quickly when required 
• To minimize the costs of handling goods while in-store 

It is difficult to organize operations in a supply chain so that goods are obtained at exactly the time they are needed for use, or at exactly the time they are needed for selling to a customer . If goods could be obtained at exactly the moment they are needed, there would be no requirement at all for storage and warehousing . 

There is an approach to inventory management known as just - in - time ( JIT ) purchasing and production, which seeks to arrange for the purchase or production of goods at exactly the time they are needed, to reduce inventory levels as close to zero as possible. JIT is explained later, but JIT arrangements are difficult to achieve in practice : 

• Suppliers are often unable to deliver goods at exactly the time that they are needed.
•  Production management systems are often unable to produce goods quickly to meet new customer orders

Inventories and the warehousing of inventories are needed to prevent hold-ups or breakdowns in the supply chain ( or value network), due to delays in supply deliveries or production processes. 

Functionalities of a warehouse management system 

Value is created in warehousing through efficient planning, operations, and control. These are needed in all the following areas of operations ( functions )

• Handling goods received from suppliers: confirming that the supplier has delivered goods as mentioned in the purchase order, in good condition; transferring the purchased items into the storage location
• Similarly, handling, recording and storing finished goods as they come out of production.
• Protection of items/goods during the time they are held in the store 
• Efficient location of items within the store, so that physical movements of items are minimized - this speeds up the despatch process 
• Despatching orders 
• Monitoring and controlling inventory levels, to minimize stock-outs but also to avoid excessive levels of inventory by limiting costs of losses due to damaged and stolen inventory 

Warehousing processes 

Warehouse operations involve the recording of goods received into the warehouse and goods despatched. This is part of the inventory management process. The physical aspects of warehousing involve efficient systems for receiving holding and then despatching items held in store. 

Receiving goods into store 

Receiving goods into the store can be a time-consuming operation. The goods have to be unloaded and physically moved to their storage locations. This process does not add any value to the business, and any method of minimizing the cost of this process adds value by saving money. Some warehouses are located and constructed so that unloading and loading of goods are simplified. For example, some warehouses are located at rail terminals or airports or seaports, and goods received into the store are taken up to or into the warehouse before unloading The physical movement of goods within the store typically involves the use of forklift trucks or cranes. 

Holding goods in-store until required 

Efficient warehouse management involves making the best use of space within the warehouse. This involves not just making use of all the floor area to hold goods, but also to stack goods as high as possible. 

Pallets are stored in pallet racks, which may go up to the ceiling, Pallets stored high in a pallet rack can be placed in-store and then retrieved using cranes. Pallets low down near the floor can be retrieved using forklift trucks. Since storing and retrieving goods is easier when the goods are held close to the ground, the most commonly - used goods should usually be located low down in a pallet rack. 

Retrieving goods when required 

When goods are required for use or despatch, the objective of warehouse management should be to locate and retrieve them as quickly as possible. Cranes and forklift trucks can be used to do this. In some warehousing operations, automated storage and retrieval systems speed up the process and reduce costs by removing much of the need for human intervention. 

Automated systems may include automated cranes or conveyor belt systems. Conveyor belts can be used to move goods from their location in the warehouse to the place where they will be packaged and loaded for despatch. 

Warehousing can be an expensive operation, but costs can be reduced employing efficient systems for accepting goods into the store, location and storage and retrieval for use or despatch. 

Although JIT systems of operation seek to reduce the need for inventories and warehouses, warehousing and holding inventories is often a necessary requirement for the efficient functioning of the supply chain. The development of online selling - the direct selling of goods to consumers through the internet - is creating additional demands for warehousing to support the operations of the supply chain. Goods must be available in-store to meet the demand for online buying. 

Warehousing cost management and performance controls 

Management should monitor the efficiency and effectiveness of warehousing operations and should seek to keep warehousing costs under control. Inventory costs are discussed later. Other important aspects of warehousing are : 

• Time to complete operations
• Security and safety of goods held in store 
• Use of the facilities available ( capacity usage ) 

Standard times may be set for the time that it takes to : 

• Receive goods into the store and place them in their storage location 
• Retrieve goods from the store, from the time that a request for goods is received to the time they are despatched from the warehouse 

Security and safety of goods may be monitored by measurements of: 

• Losses due to damaged goods that have to be disposed of 
• Unexplained losses, possibly due to theft 

Some losses due to damage or theft are probably unavoidable, but these should be kept to a tolerable ( low ) level. 

Capacity usage may be measured by the average amount of storage space actually used as a percentage of warehouse capacity. A low capacity usage ratio may indicate that the organization' s warehousing facilities are too large. 

Below areas will be discussed in the coming posts series,

Warehouse management systems ( WMS ) 

Inventory management 

Physical distribution and logistics systems 

Supply chain information systems 

Supply chain performance management

To be continued...