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