EU Tariff Preferences Will Be Tilted Against India

Written by Malcolm Subhan | Updated: Aug 14 2004, 05:30am hrs
The 25-nation European Union (EU) will introduce its revised generalised system of preferences (GSP) on 1 January, 2006. And early indications are that the revised scheme will benefit exporters in Bangladesh - whether of garments or marine products - more than Indian exporters.

At present, India is a major beneficiary of the EUs GSP scheme. This is partly because its garment exporters find it much easier to meet the schemes rules of origin, for example, than their counterparts in Bangladesh. But EU trade supremo Pascal Lamy believes that all this must change after 1 January 2006.

Nearly a year ago, he urged the EU governments and the European Parliament in Bruss-els that tariff preferences shou-ld be given to countries that would need them most when the textile quota system comes to an end. This would include Bangladesh and 48 other least developed countries, as well as landlocked and low-income countries such as Nepal.

The GSP has helped India develop its textile and clothing exports to the EU. This explains why New Delhi challenged, in the WTO, the EUs decision to grant additional tariff preferences to Pakistan two years ago, under a GSP provision aimed at helping countries combating drug production and trafficking.

The truth is that since its introduction in 1971, the EUs GSP scheme has never matc-hed the claims made for it. This is because most of the products of export interest to India and other developing countries are still classified as sensitive and are subject to quotas, as is the case with clothing.

EU imports from developing countries doubled between 1992 and 2002, rising from 424 to 936 billion euro. However, the volume of imports under the GSP scheme rose from 30 to just 53 billion euro. The GSP utilisation rate fluctuated over this period: it was 48 per cent in 1992 and 53 per cent in 2002, having peaked at 58 per cent in 1996.

Trade commissioner Lamy believes that there are ways of maintaining and improving the GSP scheme of the EU, which since May 1 expanded its membership to 25 countries following the entry of eight central European and two Mediterranean countries.

Lamy also wants to extend the GSP scheme to cover new products; at present, some 10 per cent of products subject to tariffs are not covered by the scheme. And he wants to transfer some products currently classed as sensitive to the non-sensitive list, given the changing definition of sensitivity.

But Lamy also wants to focus GSP benefits on countries most in need. He is opposed to Bangladeshs request to put off the elimination of textile and garment import quotas from next January to 1 January, 2007. He believes the EU must use its GSP scheme to help Bangladesh meet the challenge of January 1, 2005.

This means (1) continuation of the policy of duty-free and quota-free entry for least developed countries and (2) greater use of the policy of graduation to withdraw GSP benefits from the more competitive countries, such as India. It also means greater emphasis on regional cumulation, aimed at encouraging Bangladeshs garment manufacturers to import fabrics from its partners in SAARC rather than from East Asian countries.

Should India challenge these attempts to reduce GSP benefits to countries like itself On the contrary, it should do all it can to strengthen its domestic industry, including the garment industry. The WTO study points out that time to market is important and increasingly so, particularly in the fashion clothing sector.

It notes that countries close to the major markets are likely to be less affected by competition from India and China than has been anticipated in previous studies. In other words, while both China and India will gain marketshare in the EU, the US and Canada to a significant extent, the expected surge in marketshare may be less than anticipated.

The challenge for India is to develop world-class industries, through its own efforts, rather than count on the marginal benefits of the EUs GSP scheme to increase its marketshare, which the study forecasts will rise from 6 to 9 per cent.