“My Six-year-old Son Should Get a Job,” says Haa Joon Chang, a famous Economist. As absurd as it may be, he is discussing the dynamics between the Developing and the Developed, in a free-market setting. He suggests that a child at a young age can work and earn a living, yet will never grow wholesomely to have a higher earning capacity, unless the child is provided the right kind of growth stimuli, to be well equipped to become a high-income earner later in life. Similarly, developing countries need a hand-holding, until they can realize their true potential. Now bringing our spotlight to the actual discussion, the European Union’s (EU) Generalized Scheme of Preferences (GSP) is a trade-related arrangement that enables developing nations to enjoy reduced or nominal levies on their exports to the EU. The EU offers GSP programs to assist countries that require assistance to eradicate poverty, improving governance, and fostering a long-term development process. The GSP+ (Plus) is a unique component of the GSP.
A bit more about GSP Plus
As the saying goes “There are no Free Lunches”, a country to be eligible for GSP+ should fulfill a certain set of criteria. This is similar to the story of the Six-year-old we talked about at the beginning of this article, where children are expected to oblige to a certain set of guidelines of their caretakers, to be able to receive protection and stimuli for growth. The specific incentive program for long-term sustainable development and good governance. It reduces these tariffs to 0% for low- and lower-middle-income nations that comply with 27 international treaties on human rights, labor rights, environmental protection, and good governance.
Sri Lanka’s Trade with EU
The EU is Sri Lanka’s second-largest trading partner after China and its second main export destination, absorbing 22.4% of Sri Lankan exports in 2020. In 2020, Sri Lanka was the EU’s 69th largest trading partner in goods accounting for 0.1% of EU trade. Sri Lanka’s exports to the EU are dominated by textiles and clothing, accounting for 52.3% of Sri Lanka’s total exports to the EU in 2020. 27 imports from Sri Lanka have been constantly increasing since 2016 reaching €2083 million in 2020.
EU-Sri Lanka: Trade in goods
Impact of GSP Plus Withdrawal
Borchert and Di Ubaldo in their study in 2020 suggest that the prospect of losing preferential treatment might operate as a deterrent, diverting GSP Beneficiaries’ economies away from the threshold. Removing the ambiguity around GSP preferences might result in boosted trade by GSP beneficiaries.
As of now, there is no immediate suspension of the EU GSP concession for Sri Lanka. However, as per the resolution adopted by European Parliament on 10th June 2021, It has been suggested to use GSP duty concession as a leveraging point to push for advancement on Sri Lanka’s human rights obligations. The contribution of GSP to the economic development of Sri Lanka, making the EU Sri Lanka’s second-largest export market has been highlighted in the resolution. Accordingly, we can expect, that EU will further monitor the Human Rights Situation in Sri Lanka during the next few months and withdrawal would be the last action of last resort. Further Sri Lanka’s dependency on China for capital requirements as well as market developments is reflected as a “Dependency-risk” within the context of the ongoing trade tensions between some of the developed economies and China.
When the GSP was suspended in 2010, it was widely reported the loss for Sri Lanka was approximately USD 350 Mn. However, this figure is only half of the story. It is acceptable that when the US $ 3 Billion worth of goods and services are exported; the figure is around US$360. Observing from a wider perspective, it is evident that Sri Lanka has had to compete with other low-cost countries during the time, with a loss of 12% discount compared to other nations with GSP + eligibility. When the country lost GSP+ back in 2010 the actual loss was way more than the figure of the discount, as there is a loss of Buyers, translating into declined orders. This in turn has a wider impact on employment in the apparel sector, which accounts for a large portion of the country’s economy.
As an example, whilst comparable product baskets are compared, a product that has a Factor-on-board (FOB) value of US$100, may be shipped by a competitor such as Bangladesh for US100, if Sri Lanka loses GSP+, the equal product will be shipped at US$89. Therefore, the competitiveness of Sri Lankan merchandise is considerably decreased, consequently financially unfeasible to manufacture. Therefore, lack of GSP Plus does not only make Sri Lankan merchandise uncompetitive however additionally cause long term repercussion of losing buyers, decreased marketplace credibility and subsequently the effect at the employment of the sector. At this juncture, it’s far crucial to consider how we can protect the advantages we have received.
Moving forward, we must enhance our adherence to best practices in sustainable development and good governance. Just as a six-year-old should grow to be a man, Sri Lanka needs to adopt a growth strategy, through the utilization of the benefits made available such as GSP+, to become more competitive, while focusing on lowering costs, enhancing the quality, and improving ethicality of trade, to become a developed economy.
**Feedback and comments made on this post by external parties are to be considered as individual views, therefore the National Chamber of Exporters of Sri Lanka is not responsible for the content beyond the blog post**
References
Borchert, I. and Di Ubaldo, M., 2020. Go Ahead and Trade: The Effect of Uncertainty Removal in the EU’s GSP Scheme. SSRN Electronic Journal.
Chang, H., 2011. 23 things they don’t tell you about capitalism. London: Penguin.
Ec. europa.eu. 2021. Sri Lanka – Trade – European Commission. [online] Available at
<https://ec.europa.eu/trade/policy/countries-and-regions/countries/sri-lanka/>.