Surprises up Lamys sleeve

Written by Malcolm Subhan | Updated: Oct 23 2004, 05:30am hrs
European Union chief trade negotiator Pascal Lamy had good news for Indian exporters earlier this week, when he unveiled the new generalised system of preferences (GSP) to the international press. Under the new scheme, which will come into effect from July 1, 2005 China will lose GSP benefits for export of textiles and clothing to the EU.

India, however, will enjoy GSP benefits for export of both textiles and clothing. Its textile exports will no longer be deprived of these benefits, because textiles and clothing will be treated as a single section or product group. (Pakistan, too, will recover GSP benefits for its textile exports.)

To drive his point home, Mr Lamy took shirts as an example. He noted that the EU tariff on shirts is 12%, while the preferential rate under the new GSP scheme would drop to 9% for India and Pakistan. This will allow them to compete against China, Mr Lamy declared.

However, replying to a question from a journalist, he admitted that Chinese exporters will absorb the 3% difference, given their substantial profit margins. (The difference, in fact, is not 3% but a mere 2.4%, the preferential margin on textiles and clothing being 20% of the normal tariff, as under the present GSP scheme.)

The preferential margin on products classified as sensitive by the EU remains unchanged at 3.5%. Although tariffs on non-sensitive products will be fully suspended at zero, the number of sensitive products is a massive 3,700, out of a total of some 7,000 under the present GSP scheme. These are the preferential margins under what is termed the general scheme.

Additional preferences will be available under a special scheme, called GSP+. To be entitled to GSP+, a developing country must have ratified and effectively implemented no fewer than 16 core international conventions on human and labour rights, and seven out of 11 other international conventions.

The 16 core relate to child labour, economic, social and cultural rights, and discrimination against women. Included in the second set of 11 conventions are the Montreal Protocol on substances that deplete the ozone layer, the Stockholm convention on persistent organic pollutants, the UN single convention on narcotic drugs and the Mexico UN convention against corruption.

It remains to be seen whether India will be able to qualify for GSP+. Mr Lamy indicated that Pakistan will not. He would argue that India has done well under the present GSP scheme, and should therefore be able to do even better, even under the new scheme, which will include some 300 additional products, mostly in the farm and fishery sectors. India, in fact, is a major GSP beneficiary. Its share of total GSP imports into the EU was 11.8% in 2002, putting it in second place, although well behind China, with 35.8%. (Total GSP imports into the EU amounted to 52 billion euro in 2003, as compared to just 16 billion euro for the US.)

Bangladesh is another major GSP beneficiary: it ranked seventh, with a 3.9% share, in 2002. As a least developed country, it will be entitled to duty-free entry for all its exports to the EU, including textiles and clothing. But garments account for three-quarters of its exports to the EU. If its garment exporters are to enjoy the benefits of duty-free entry to the full, the EU will have to introduce more flexible rules of origin.

The fact is that Bangladesh is already entitled to duty- and quota-free entry for all its exports, under Mr Lamys Everything But Arms initiative. However, many of its shirts, for example, do not qualify as they are made from fabric imported from east Asian countries. The rules of origin will be more flexible under the new GSP schemes. The main improvement relates to regional cumulation. Thus Bangladesh, as a member of Saarc, could meet the rules of origin were its shirts made from cloth imported from India, or Pakistan - or even one of the Asean countries, provided that the two regional groupings agree to cross-regional cumulation.

Pakistan, unlike India, benefits from a key feature of the old scheme, the so-called drugs regime. This regime was introduced by the EU to encourage countries in central and south America to combat drug trafficking. Mr Lamy has replaced the drugs regime, and the two existing incentive schemes, covering social standards and environmental protection, with GPS+.

The 25 EU governments must now give Mr Lamys GSP proposals the green light. This is almost certain.