How big is GSP Plus?

The article was Published in Money Matter, February 10, 2014
   

Energy projects, luring foreign investors to the country, implementing Vision 2025, kicking off the privatisation process and securing GSP Plus status are among the important endeavours of the current governemnt since they took charge in June 2013.

Although securing GSP Plus status is an important achievement for the current government, the benefits of the trade agreement with the EU are exaggerated.

What is GSP Plus? It is a special incentive scheme which provides a complete waiver on the exports of specific products. GSP Plus provides special treatment to developing countries and least developed countries to export their products at a lower tariff rate compared to MFN tariff rates. However, the agreement comes with conditions which have to be fulfilled by the country that is awarded GSP Plus status. These conditions relate to the standard of living and working conditions, implementing the international convention of human and labour rights, good governance and environment.

GSP Plus status, which came into force on January 1 this year, gives Pakistan free trade access on zero duty to the European market for the next ten years. It sounds quite grand but only 75 products are allowed on duty-free access to the European markets with a condition that it must not exceed 6% of the EU’s total imports.

The limited number of products has reduced the scope of potential benefits Pakistan can earn from the agreement but it is still expected that Pakistani exports will increase by $1 billion to     $2 billion. The numbers are not too big but the status will have a possible externality effect through employment generation in upstream industries as well as services sectors. Minister for Commerce and Trade Khurram Dastagir Khan ambitiously assumes that 100,000 people will get employment in different sectors due to the GSP Plus agreement. Nonetheless half of that number would also be satisfactory.

However, there is no free lunch. The EU has placed 27 compliance restrictions on Pakistan which relate to child labour, standard of living of employees, environment and governance. Consequently, the European Union (EU) will closely watch Pakistan’s human and labour rights laws, governance and environment protection laws. Any violation could lead to temporary or even permanent suspension of the agreement. Moreover, ensuring the enforcement of the above mentioned laws would increase the cost of production as well.

And while securing GSP Plus status is being touted as a major achievement of the current government despite it being an initiative of the previous government, there are certain hurdles which still need to be overcome to get the required benefits of the agreement.

The first hurdle is the availability of energy, which is the essential component in the production process, as power outages have led to lower growth in almost all sectors of the economy. An understanding needs to be developed between firms and the government to provide uninterrupted supply whenever necessary, especially to firms involved in exporting commodities to European countries.

The second problem deals with the lack of available exports surpluses. The problem can be addressed through horizontal networks. However, due to lack of clusters and networking among the firms, the overall benefits may not be exploited. Another issue is implementing the 27 constraints which are imposed on Pakistan. Who will ensure that the entire conditions are being met?

Another interesting restriction of GSP Plus is that the share of exports of any product cannot exceed six percent of total EU imports of that product. Who will regulate this process if we are giving free hand to the firms to export? Who will calculate whether we are exporting each product within our limit? Since a violation of these conditions would lead to either temporary or permanent suspension of GSP Plus, the government will have to devise a foolproof mechanism to monitor these dealings.

No doubt our current account balance would improve through additional exports under the GSP Plus incentive scheme. Moreover, we need to borrow $1 billion less if our exports increase by $1 billion. Nevertheless, the expectations to increase exports by more than $2 billion under GSP Plus status are ambitious because (i) few products of leather garments, textiles and carpets are allowed (ii) value added products are not among the major exportable items and (iii) GSP Plus is limited to one segment of the industry.

The role of lobbyists is crucial in the approval of GSP Plus. Therefore it would be great if lobbyists keep negotiating with European countries to allow exports of more products at zero duty as well as if the quota restrictions could be increased from the current 6 percent. Although the latter suggestion is only be beneficial if we have energy to produce as well as exports surpluses to export.

More importantly, in the era of globalisation, we need to reduce our transaction costs and compete in the world market. GSP Plus alone is not the solution. We also need to think long-term and devise an alternate strategy if GSP Plus is not renewed after ten years or suspended due to a violation of conditions. Value addition is the key to increase the value of exports. Branding is also another way to increase value of exports

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