Pakistan gets GSP Plus status

Published in PIQUE January, 2014 http://pique.pk/economy/03-Jan-2014/pakistan-gets-gsp-plus-status

Pakistan gets GSP Plus status

Good news for the economy

Economic revival has been at the top of Prime Minister Nawaz Sharif’s government’s priorities and it was evident that despite several problems faced by the economy, and people expecting a relief package, the 2013-14 Budget was pro economic revival. The major challenges to the government are overcoming the crippling electricity shortages, abolition of the circular debt, reduction of fiscal deficit and public debt and an increase in the total tax revenues.

For a revival of the emaciated economy, the government needs to provide basic infrastructure such as energy, availability of raw materials, machinery etc. Moreover, the government should also facilitate industries and agriculture to get market access at lower cost. Lower cost can be achieved by giving incentives or introducing reforms in such a way that it facilitates businesses, increases competition and provides full information of markets they are dealing with.

Due to increase in imports — and partly due to increase in oil prices— our trade deficit is creeping up. Our exporters have been asking for several incentives as well as market access to several countries, including the European countries. Specifically, GSP+ status was continuously raised at various forums during the formation of the trade policy. Finally, Europe has given us GSP Plus status and the government has portrayed it as a triumph.

What is GSP Plus?

GSP stands for Generalised System of Preferences. It gives special treatment to Least Developed Countries, LDCs, and developing countries to export their products at a lower tariff rate compared to Most Favoured Nation tariff rates. However, GSP is different from GSP Plus. GSP arrangement reduces tariff  substantially whereas GSP Plus is a complete waiver on the exports of specific products, which are agreed in the agreement with a condition that standard of living and working conditions of the labor will be improved and not exploited at any cost. In short, GSP Plus is a special incentive arrangement, focusing on sustainable development and good governance. Any country that gets GSP Plus status must implement international convention of human and labor rights, good governance and environment.

The long-awaited GSP Plus status has been given to Pakistan with 409 to 182 votes by the EU Parliament, which will be effective from 1st January 2014. Prior to this development, Pakistan exporters enjoyed concessionary access to European markets from 2002 till 2005. The current GSP Plus status gives Pakistan free trade access on zero duty to the European market for the next four years. Nonetheless, not all products are included in this agreement. Pakistan has been able to finalise 75 products which will be allowed a duty-free access to the European markets on one condition that it will not exceed 6% of total imports of EU.

Advantages of GSP Plus

GSP Plus has already been granted to Bangladesh, Sri Lanka and India. All the three countries are Pakistani competitors, especially in textile exports. Thus, Pakistani exports were at a massive disadvantage for the last many years because Pakistani exporters had to pay significant percentage of duty for sending their products to European markets. Therefore, after the GSP Plus status, it is expected that Pakistani exports will increase by $1 billion to  $2 billion.

Although, only 75 products are finalised in the agreement of GSP Plus, but it will also benefit other industries due to externality effect. Moreover, it will generate employment in both upstream and downstream industries. According to Khurram Dastgir Khan, the state minister for commerce and textile industry, about 100,000 people will get employment opportunities. It might be an ambitious figure but even if half of it is achieved, it will indeed be good news.

Potential Disadvantages

The agreement of GSP Plus has lots of constraints attached to it. These constraints in a way are non-tariff barriers. Nevertheless, since Pakistan will get preferential treatment, the Europeans may be inclined to put certain restriction on us. Consequently, the European Union (EU) will be closely watching Pakistan’s human and labor rights laws, governance and environment protection laws.

If any of the 27 conditions is violated, the GSP Plus status can be suspended. For example, GSP status of Bangladesh was suspended by US this year when labourers died due to fire incidents in several Bangladesh factories. According to U.S., Bangladesh has not taken enough steps to give its workers the internationally recognised labor law rights. Therefore, the government as well as industrialists who are exporting their products under the GSP Plus program have greater responsibility to ensure the enforcement of international standard of human & labor rights in the country to improve working conditions of labor, including income, health and safety of the workers besides, environmental protection at all levels. Otherwise, there is a possibility that in case of any untoward event, the GSP Plus status can be revoked.

What to Expect

Although it is encouraging that Pakistan has been granted GSP Plus status but a critical question is whether can we produce and then export goods, given that there are energy shortages and lack of available exports surpluses.

The energy shortages, specially, pose a key problem and it needs to be addressed immediately. It was reported that industries who will export to European countries will get  an uninterrupted supply of energy. However, the finance minister announced in the second week of December that people should brace for more power shortages. This has caused a lot of trepidation amongst the industrialists.

Moreover, we have a very narrow base of exports to European countries. We are only exporting leather garments, textiles and carpets to Europe and need to expand our export base. There are good chances that GSP Plus can help bring foreign investment to Pakistan. If both FDI and exports go up then current account deficit may decline. On the other hand, if money supply is increased and investment is not done with equity financing then inflation will increase as well.

In conclusion, GSP Plus status is indeed an achievement and Pakistan needs to exploit it to full potential. We, however, also need to think long term and devise an alternate strategy if GSP Plus is not renewed after four years.