Threats looming for Lanka exports to the EU

With the European Union expected to reform its GSP system by 2014, Sri Lanka could face many challenges with both Pakistan and Bangladesh eligible to benefit by trade concessions with a possible free trade agreement with India expected to exert more pressure.

“The implications of GSP reform for Sri Lanka will be indirect rather than direct given that it has already been removed from the GSP+ prior to the reform process. The cost of being excluded from the GSP+ will increase however, as under the European Commission’s (EC) proposals the GSP+ is improved by not being subject to product graduation,” a draft report on ‘Changes in the EU’s GSP Regime: The Implications for Sri Lanka’ said.

The report was brought together by the Commonwealth Secretariat and the Overseas Development Institute and discussed at a symposium organised by the Export Development Board yesterday.

“Although Sri Lanka was removed from the GSP+ scheme in 2010, it continues to receive limited tariff preferences under the EU GSP programme. Sri Lanka will not be graduated out of the GSP on income grounds

because it is not a UMIC, nor will it be affected by the ‘new’ product graduation. Therefore, the indirect impacts that will affect Sri Lanka – positive or negative – will occur only if the new regime changes the relative terms of access for its competitors for specific products, now or in the future as new countries creep over the UMIC threshold and are graduated,” the report said.

“Sri Lanka has already lost through being excluded from the GSP+ through a comparison of the standard GSP tariffs it currently pays on its main exports to the EU compared to GASP+ and Sri Lanka’s regional position may further deteriorate in the following ways: Bangladesh remains an LDC and therefore an EBA beneficiary; if the India-EU ETA is signed it is likely to give India better-than-GSP access for some exports; Pakistan will become eligible for GSP+ under the reformed GSP and vulnerability criteria (though it will still have to satisfy all the other human rights, political and environmental criteria).

“The combined effect of these changes may mean that Sri Lanka could face higher tariffs in the EU market compared to all of its neighbours in the near future.

“Bangladesh has the highest share of total exports to the EU falling within the same product categories as Sri Lanka. Since it remains an LDC and therefore already has preferential access, it is unlikely to benefit substantially from any changes in the GSP regime, but may gain from the changes to the rules of origin (e.g. for clothing) for LDCs introduced by the EC in 2011. At a more disaggregated product level Bangladesh receives duty free quota free treatment on all of the products which also feature as Sri Lanka’s major exports9 to the EU market. Bangladesh’s highest value exports to the EU that also feature in Sri Lanka’s top five products at the HS6-digit level include: T-shirts, singlets and other vests, of cotton, knitted (HS610910); and Mens/boys trousers and shorts, of cotton, not knitted (HS620342).

“India is a target of GSP reform, which is intended to be used as leverage to get countries to sign up to FTA. It will not be graduated on income grounds but features as product graduate across a number of product lines. The loss of potential revenue as a result of the imposition of MFN tariffs on India’s major exports to the EU therefore provides a major stimulus for India to negotiate an ETA with the EU. India’s highest value exports to the EU that also feature in Sri Lanka’s top five products at the HS6-digit level include: T-shirts, singlets and other vests, of cotton, knitted (HS610910); and Mens/boys trousers and shorts, of cotton, not knitted (HS620342).

“This indicates a heavy product concentration from exporters within the region towards the AEU. If the India-EU ETA is signed it is likely to give India better-than-GSP access for these exports, which could present Sri Lanka with a formidable competitiveness challenge, should levels be ,currently constrained by the high tariffs faced by India under the current GSP regime.

“Under the EC’s proposal, Pakistan will become eligible for GSP+ under the vulnerability criteria (though it will still have to satisfy the other criteria of the GASP+). Pakistan’s highest value exports that also feature within Sri Lanka’s top exports to the EU include the following: Mens/boys trousers and shorts, of cotton, not knitted (HS620342); and Womens/girls trousers and shorts, of cotton, not knitted (HS620462).

“If these products remain within the reformed GSP+ regime, Pakistan could benefit from a transfer of resources further to the removal of tariffs. Because of the proposed changes in -product graduation thresholds for the GSP+ (which will not apply) Pakistan may become a formidable competitive challenge for Sri Lanka garment exporters in particular, and may induce further changes in how production networks operate within this region for these products.

“The implications of reform of the EUs GSP for Sri Lanka will be rather more indirect as opposed to direct. Because of changes to Sri Lanka’s competitors’ relative terms of access in the EU market, the cost to Sri Lanka of being excluded from the GSP+ may increase. Sri Lanka will not be graduated out of the GSP because it is not a UMIC, nor does it feature as a graduate across products analysed under the proposed revised thresholds. Analysis of changes in GSP graduation thresholds has not highlighted Sri Lanka as a being a potential beneficiary of trade shifts across product lines where there exists a significant margin.”

“There is considerable overlap across regional export baskets, and Sri Lanka’s highest value exports to the EU also comprise relatively large shares of its regional competitors. The inclusion of Pakistan in the revised GSP+ could increase competitiveness challenges for some of Sri Lanka’s highest value exports to the EU market (should trade be constrained by current tariffs faced in the EU market by Pakistan). The reformed GSP+ will also no longer be subject to product graduation. Bangladesh which enters the EU market under the EBA regime is similarly not subject to product graduation. The imposition of tariffs on exports from India as it graduates under the reform proposals may in turn increase the incentives for it to conclude negotiations for an ETA with the EU by 2014, the date at which it could face MFN tariffs on its exports to the EU.

“In terms of strategies to mitigate any adverse effects which might arise as a results of the GSP reform process, as supply-chains and production networks in operation within the region adapt, we have identified the following:

1. Fulfil GSP+ criteria: this would result in a levelling of the playing field between Sri Lanka and its regional competitors for some of its major exports. In fulfilling the GSP+ criteria, it is important to note how the system of the burden of proof will change under the revised GSP.

2. Enhance the competitiveness of existing supply chains: A consultative process should be undertaken with a view to understanding how regional production networks, and sourcing strategies by EU importers, might adapt to GSP reform and where therefore Sri Lanka should be positioning itself in terms of its competitiveness advantages (on cost, quality, logistics performance, reduction of non-tariff barriers etc.).

3. Enhance export diversification efforts: this includes across markets as well as products. Should changes in EU importers sourcing strategies be anticipated as a result of the consultative processes undertaken with industry representatives, exporters will need to adapt either through diversifying their markets, or products. In this case, there will need to be a thorough investigation of alternative outlets for existing products, or new ones, which could include other extra-regional markets, as well as intra-regional.

“Analysis of Sri Lanka’s major exports to the EU at the HS6-digit level (above 1.5 percent of total value) suggests that despite the removal of GSP+ in some cases the value of these products was higher in 2009 compared to 2010 which suggests a certain level of resilience and ability to meet competiveness challenges. Industry representatives for the textiles and garment industry – the major product category likely to be indirectly affected by reform of the EUs GSP – should therefore be consulted with a view to first selecting, and then developing the most appropriate strategy for Sri Lanka,” the report said.

 

Courtesy: The Island