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GSP plus [generalized scheme of preferences plus]

An article showing the impact of GSP Plus on textile in Pakistan

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GSP plus [generalized scheme of preferences plus]

  1. 1. Generalized System of Preferences (GSP) Plus and Pakistan By Dr. Muhammad Mushtaq Mangat Introduction GSP Plus is a system, which has been introduced by European Union to provide exemption and relief to developing countries like Pakistan from the negative effects of the rules of World Trade Organization [WTO]. WTO has negative implications for the third world and especially for their underdeveloped industries. GSP Plus also exempts the WTO members from gaining the status MFN [Most Favored Nation], which is a discriminatory status. The countries, which get MFN, get a permission to export large quantities of goods while other countries are deprived of those benefits. When Bangladesh achieved the status of MFN, Pakistan, Nepal, Bhutan and Sri Lanka lost their share in the exports to developed countries. In short, MFN means industrial progress of on poor nation at the cost of industrial growth of several other poor nations. WTO wants to promote free trade. It has abolished or reduced quotas, import duties and tariffs but the effects of its policies have been negative for countries like Pakistan because Pakistan has many infant and underperforming industries, which cannot compete with high quality and less cost imports of countries like China and Korea. WTO policy implementation has not only adversely affected the exporting industries of poor countries but their domestic and local industries as well. Pakistan has been unable to abolish tariffs and promote free trade only because its industries are unable to survive and it will not only have negative effect on its Balance of Payments but on its total national employment as well. Before WTO era, Pakistan had a benefit of quotas, which the developed world had vested for Pakistan for providing support to its economy but WTO has abolished the mainstream quota system. All previous governments, Pakistan Institute of Development Economics, and the Planning Division of Pakistan have strongly resisted the abolition of quotas and tariffs because both of these actions are not in favor of Pakistan and they snatched away a major chunk out of the total national income, deprived the government of its income, and resulted in economic isolation of Pakistan.
  2. 2. WTO works with a vision to promote free trade and abolish barriers to international trade. Despite the fact that WTO has positive implications on overall international trade, it is not in the benefit of poor countries especially in the circumstances when countries like China, India, Brazil, Korea etc have remarkable advantages of large scale production (Economies of scale) over the poor countries. The new GSP Plus provides preference margins for 23 tariff lines, which maximizes profits and allows a bulk quantity to be exported and it not only helps a country like Pakistan to restructure its exporting industries but also opens new avenues for Pakistan, which is otherwise impossible due to restrictions of WTO. Implications for Pakistan Previously, Bangladesh was enjoying the status of a poor nation and its exports were purchased on compassionate grounds. Nations around the globe provided Bangladesh with access to their markets and promoted its textiles but Pakistan paid a lot of price for the international support to the textile sector of Bangladesh. The already underdeveloped, labor intensive, investment deficient, and less productive textile sector of Pakistan faced challenges and Pakistani textile manufacturers started moving to Bangladesh. Moreover, Bangladesh started buying Pakistan's best cotton crop and in this way the demand of Pakistani cotton increased which led to increase the price of cotton which further increased the cost of production of local cotton goods. The outward investment flow also sabotaged the process of development of the textile sector. If Pakistan wins the benefits of GSP Plus, Bangladesh will not enjoy a special status of MFN and Pakistan will get the opportunity to manufacture and export textiles in bulk. Another opportunity is that since China does not enjoy this facility and it is no more a cheap labor destination, its industries can move to Pakistan, if the Pakistan Government provides uninterrupted supply of electricity to them. Now Pakistan also has a chance to invest heavily in big textile units or issue loans for initiating big industrial projects because GSP Plus provides with a chance to increase exports. This opportunity is unique
  3. 3. in the sense that GSP Plus can give Pakistan an additional 10% benefit on custom duties which even India does not have because it has General GSP rather than GSP Plus. 1990s was the era of power looms in Pakistan and Pakistan's exports were steady but as soon as the political and economic situation of Pakistan became unstable, investors started shifting their production and capital resources to countries like India, China and Bangladesh but now with new GSP Plus, the existing industries will not need to move from Pakistan because it will become a feasible destination for producing semi-furnished and finished goods. According to estimates, Pakistan's net exports can increase by additional US $6 billion per annum while it will also improve Pakistan's exports to EU and its terms of trade. Perquisites of GSP Plus Despite the fact that EU's GSP Plus Scheme can provide Pakistan with a great chance to increase its exports, attain a better balance of payments and truly exploit its potential but for enjoying the benefits of GSP Plus in the international trade, Pakistan needs good governance, compliance with international labor laws, create better working environments, show commitment towards environment, provide testing facilities for ensuring quality and follow other possible demands of EU. Pakistan's Capacity to Get Benefit of GSP Plus Some EU members opine that Pakistan has limited capacity to gain the benefit of GSP Plus Scheme. It is a matter of fact that Pakistan has paid no attention on the capacity building of its industries as well as labor force for almost a decade. Most of the industries are producing domestic consumables while exporting industries are focused on low cost goods. Textile Industry, which is a major industry of Pakistan, has got no relief from its issues and importing latest manufacturing equipment has not been a priority of the producers over the last many years. In textile sector, the only investment Pakistan obtained had been in cotton spinning while it is not producing technical textiles and high value textile goods. Pakistan also faces energy crisis, uncertain market of industrial chemicals, and lack of transport infrastructure, which not only affected the rate of
  4. 4. production but also slashed the gains of investors. The national economic policy, export policies, roles of chambers of commerce, banking policy, interest rates, and energy policy have not been consistent while the political governments always gave priority to their political agendas over industrial development. The red-tape, corrupt bureaucratic practices and nation's dysfunctional taxation system created inconveniences for new producers but recently, the newly elected political government of Pakistan has initiated investor-friendly initiatives and announced its initiatives around the world. Pakistan's Current Status Despite the fact that Pakistan is one of the impoverished nations, it has a political government, a developed banking sector, large labor force, sea ports, road and railway infrastructure, and centuries old trade relations with many countries, so the EU considers it as one of the "Low and Middle Income Partner Countries". It gives Pakistan a better status than Afghanistan and Rwanda. Pakistan's achieving GSP Plus is also very important because EU is expected to exclude 33 countries from getting the GSP privileges and in this way, Pakistan will face lesser competition. Steps needed for Compliance with GSP Plus Pakistan needs to ensure the compliance with 27 conventions for qualifying for the GSP Plus concession. It mainly needs to mitigate flaws in its regulations. The textile sector of Pakistan is dependent 70% on cotton while the rest of the world relies on 30% cotton for manufacturing clothing. Pakistan will need to reconsider its inputs, their costs and demands of the buying nations. Historical Background & Significance of GSP During the discussions of United Nations Conference on Trade and Development [UNCTAD], developing countries claimed that the status of Most Favored Nation [MFN] was creating a disincentive/disadvantage for richer countries to reduce or abolish tariffs. In 1971, the GATT countries followed UNCTAD and approved two waivers to the MFN, which permitted tariff preferences to be granted to goods of developing countries but these waivers were valid only for ten years.
  5. 5. In 1979, the GATT established a permanent exemption to the MFN through passing the enabling clause. The enabling clause allowed the GATT [the equivalent of today's WTO members] to establish systems of trade preferences for other countries, with a compulsion that these systems should be "generalized, non-discriminatory and non-reciprocal" for beneficiary countries. WTO rules have been extended to cover both textiles and agricultural products. For nearly all of the WTO's (and GATT's) existence, which started in 1948, textiles and agricultural products were excluded from WTO/GATT coverage. Now under new WTO rules, many textile tariffs and quotas have been abolished, and liberalization of trade policy is continued. GSP programs were launched to support developing countries to protect their underdeveloped industries from the competition of the WTO era but these programs achieved partial success because every GSP program imposes certain restrictions. The United States have adapted a biased policy by excluding some impoverished nations like Libya and Vietnam for political reasons. These programs have also been criticized for not being designed with respect to products. As a result of developing countries' bulk exports, the basic industries of developed countries suffered because they could not compete with low cost products of developing countries. As a result of that, basic products such as leather goods and ceramics had been categorically excluded from the GSP coverage irrespective of the fact that most of developing countries can produce and export only basic goods. Despite their shortcomings, GSP schemes benefited developing countries and especially those countries, which showed seriousness for human rights, labor rights, environment protection and good governance. "Everything but Arms " [EBA] is a scheme for least developed countries [LDCs], which grants duty-free quota-free access to all products, except for arms and ammunitions. The new scheme is expected to start with 89 beneficiaries including 49 least developed countries in the Everything But Arms Scheme,
  6. 6. and 40 other low and lower-middle income partners. Pakistan is one of these low and lower-middle income partners. Opportunities & Recommendations for Pakistan to Gain Benefits of GSP Plus The government and manufacturers need showing a strong commitment to improve the Pakistani industries and the government needs making a strong case for Pakistan's qualifying for GSP Plus. Pakistan also requires political lobbying in the EU with the help of friendly countries like Germany. The government should increase supporting the existing industries especially exporting industries. It should also build the capacity of local industries through measures including subsidized loans, duty reduction on machinery and raw material imports, and abolish duties on exporting industries. The government should also initiate a technical capacity building and manpower development program to fulfill the exporting industries' long term demands. It should also develop labs near industrial areas in order to test the standards of production and quality of output. Pakistan also needs investing in the existing technological fields like computer aided production and industrial robotics. For that, Pakistan will need international joint ventures, co-production, partnerships, technological assistance, and providing incentives to technological organizations to come to Pakistan. The role of uninterrupted supply of energy on low rates is pivotal. Pakistan should provide maximum facilities to exporters. If Pakistan follows these suggestions, winning GSP Plus will not only become possible but it will truly benefit the Pakistani Industries and its exports.