EUs protectionist streak no big threat

Written by Malcolm Subhan | Updated: Oct 30 2004, 05:30am hrs
Trade policy in the 25-nation European Union (EU) is largely in the hands of the Brussels-based European Commission, the body now locked in combat with the EUs only elected body, the European Parliament. But Indian exporters can rest assured that whatever the outcome of the latest crisis, the EUs new trade supremo will implement his predecessors two key decisions on trade with India and other developing countries.

The first relates to the elimination of quota restrictions on EUs imports of textiles and clothing from January 1, 2005. The EU will scrupulously respect its WTO obligation to eliminate textiles and clothing quotas by 2005, chief trade negotiator, Pascal Lamy, announced here on Tuesday. His successor, who will almost certainly be the former minister for trade and industry in Tony Blairs government, Peter Mandelson, will make good the promise.

He will insist that EU governments meet their obligations under the 1994 WTO agreement on textiles and clothing and duly abolish the 210 remaining quotas on imports of these products from 11 WTO countries, including India and China. He will also insist that they introduce the revised GSP scheme which his predecessor sent them for approval last week.

EU governments are certain to adhere, barring minor changes, to Mr Lamys proposals. But how far have exporters in India and elsewhere actually benefited from the EUs trade policy in the two key areas covered by these proposals The fact is that quotas on the textile and clothing exports of India and other developing countries were first imposed by the industrialised countries some 40 years ago, and the generalised system of preferences (GSP), granting developing countries tariff preferences, first introduced by the EU over 30 years ago.

Quotas were imposed on textile and clothing exports of developing countries to give the industry in developed countries time to meet the challenge posed by India and a handful of other countries. They were first imposed on products made from cotton fibres, then extended to products made from man-made fibres. They were meant to be temporary in both cases.

The decision to grant developing countries tariff preferences was taken in New Delhi during the second UN Conference on Trade and Development (UNCTAD) in 1968. The aim was to help developing countries raise their living standards by allowing them to industrialise rapidly. The six-nation EEC, the forerunner to the EU, led the way, introducing its GSP scheme in 1971, just ahead of the UK.

Now, here is a fit subject for study by the Indian research students who will benefit from the very generous scholarship scheme the EU is setting up for them: How far has Indian industry benefited from the GSP scheme And, how far has preferential entry into the EU offset the negative effects of quotas on Indias exports and, therefore, the development of its textiles and clothing industry

The needs of academic objectivity would require scholars to look into Indias policies also. A study by an Indian scholar, Samar Verma, for example, highlighted the extent to which government policies had prevented the countrys textiles and clothing industry from becoming fully competitive in the export market.

Even so, impartial analysis is likely to lead to the conclusion that the EUs GSP scheme was designed to protect domestic industry from the effects of rapidly industrialising developing countries. Had the EU implemented its GSP scheme in the spirit of the admittedly non-binding UNCTAD resolution, it would have introduced Mr Lamys everything but arms initiative in 1971.

Under this initiative, introduced some two years ago, least developed countries, like Bangladesh, have been granted duty-free and quota-free access to the EU market. The GSP scheme introduced in 1971 was the opposite: it divided imports into three categories: sensitive, semi-sensitive and non-sensitive. Even today, 3,700 of the roughly 7,000 products covered by the GSP scheme are classified as sensitive, and benefit from a tariff reduction of 3.5% from the regular tariff. The tariff reduction on textiles and clothing is 20% of the regular rate.

What about the use of quotas to give the EU textile and clothing industry time to restructure and reorganise itself, while allowing the industry to grow in developing countries The EU industry pressured EU governments from the very beginning to use the MFA agreement to restrict imports. It has seen to it that the 1994 Agreement on Textiles and Clothing is implemented according to its letter and not just its spirit. As a result, the EU still maintains quotas on 210 products from 11 countries, nine of them in Asia (the other two are Argentina and Peru).

The highly fragmented nature of the EU industry is the main reason why it has been so protectionist. And a majority of EU governments have gone along with the industry because large parts of it are located in regions of declining employment. The industry itself is shedding jobs at a steady pace, as it introduces latest technology and restructures itself. Trade unions are determined, therefore, that governments protect jobs, even if it means maintaining quotas on semi-finished products, such as yarn and grey cloth.

To assess the impact of quotas and the GSP scheme on countries, like India, it is necessary to look at EUs import figures. This will be the subject of next weeks article.