The General System of Preferences (GSP) is a mechanism introduced by the European Union (EU) to grant non-reciprocal preferential treatment to imports from developing countries, without legally violating the obligations of the most favoured nation (MFN) status, as per the World Trade Organisation’s norms.
The EU awards this status to those developing countries which qualify for the following criterion: they do not classify as high or upper-middle income countries; their export earnings are below the two percent threshold of EU’s total GSP imports; exports from their seven largest sectors exceed 75 percent of their total exports to EU; and the beneficiary countries should have signed, ratified and implemented 27 international conventions pertaining to social compliance, including human rights, labour rights, environment and good governance.
GSP Plus facilitates imports from beneficiary countries at a lower or zero import duty to support the beneficiary countries. Its objective is to provide incentives to those countries which are committed to promoting sustainable development and good governance. This means that there will be less competition from more advanced developing economies.
Pakistan had formally applied to be granted the GSP Plus status by the EU. The status was granted in March this year. The country was previously awarded the GSP Plus status by European parliamentarians in 2013. In the vote, 406 parliamentarians had voted in favour of Pakistan, while 182 had voted against it, out of a total of 780 parliamentarians. At least 192 parliamentarians had not participated in the voting. This approval allowed Pakistan and nine other countries to use this facility from January 1, 2014. The other nine countries were Armenia, Bolivia, Cape Verde, Costa Rica, Ecuador, Georgia, Mongolia, Paraguay and Peru. These countries can now export to the EU at zero tariffs. For Pakistan, the EU had imposed a duty of around six to seven percent on textile, and about 10 percent on woven and knitted goods, before the GSP Plus status was granted. During the years 2008-17, exports to the EU increased at a rate of about seven to eight percent per annum.
With the inclusion of Pakistan in the GSP Plus, it was expected that Pakistan’s exports to the EU would increase by 20 percent or more during the next few years, which meant doubling the total exports to the EU in the next five years. This would have been done by exporting more finished products rather than raw materials.
Pakistan’s progress in gaining advantage of the GSP Plus status has not been impressive. Data shows that the increase in exports to the EU during the first-half of 2014 was about 12 percent. There has not been much increase after that. The total exports to EU increased to Rs346 billion in 2008-09. In 2012-13 they reached Rs550 billion, indicating a growth of 12 percent per annum on an average. The exports then increased to Rs706 billion during the year 2013-14, indicating an increase of about 28 percent. However, after this period the growth has not been as positive. Our exports decreased to Rs 698 billion in 2014-15 (a decrease of about 1.3 percent), then marginally increased to Rs705 billion in 2015-16 (an increase of about 1.1 percent).
Pakistan’s exports to the EU are generally concentrated in six countries, the UK, Germany, Spain, Italy, Netherlands and Belgium. They have accounted for around 80 percent of the total trade to the EU for the last 10 years. This was topped by the UK in 2015-16 when Pakistan’s exports to the UK were calculated to be Rs165 billion, followed by Germany, Spain, Italy, Netherlands and Belgium. Pakistan’s exports to these countries were calculated to be Rs119 billion, Rs84 billion, Rs68 billion, Rs67 billion and Rs63 billion. respectively. This shows that Pakistan was unable to diversify its exports to other countries. The product mix of exports also remained the same. On the other hand, if one looks at Pakistan’s overall exports, they decreased from Rs2.6 trillion in 2013-14 to Rs2.4 trillion in 2014-15; and further decreased to Rs2.2 trillion in 2015-16. Textile and textile products are the major export products and account for around 65 percent of the total exports, followed by food and beverages.
In order to fully maximise the GSP Plus status, Pakistan needs to increase its exports to the EU. This can be done in multiple ways. The country can find export markets in other countries of the EU, increase its export of finished products rather than raw materials, diversify the product base for export by introducing new products. raw material supply should be insured in a stable manner with lesser volatility in prices, skilled manpower should be made available to produce good quality products at lower costs.
Furthermore, Pakistan should focus on product delivery and finishing, including packaging conformance to delivery schedule. The turnaround time for production also needs to be minimised, and quality of final products should be insured to meet the minimum requirements. Policies should be defined so that quality control, certification and compliance are brought under a defined framework. Smooth supply of utilities including electrical supply and gas should also be insured.
Last, but not the least, suppliers need to manage the production in a sustainable manner so that exports proceed even if the status is not maintained. We should be investing in new technologies to bring efficiency in production, reducing the cost of production, providing better infrastructure and insuring reliability of the supply chain. This will ensure reliability of the supply, diversify exports, employment and create wealth.
The writer is the chairman of the Atlas group of companies.