GSP impact on apparel exports

 5 May 2023, Mumbai 

Impact on South Asia

Proposed reforms to the General System of Preferences (GSP) program threaten Southeast Asian countries such as Thailand, Indonesia, Cambodia, and the Philippines, which have been significant beneficiaries of the tariff reductions provided under the program.

What all you need to know

The GSP scheme, which has been inactive since the end of 2020, requires renewal and reauthorization by the US Congress. The latest revision introduces new eligibility criteria for tariff reductions, including considerations of human rights, environmental enforcement, poverty reduction, corruption, and women's empowerment.

Critics argue that the program should recognize the efforts made by beneficiary countries in addressing discrepancies in law. However, introducing too many eligibility requirements could render the GSP impractical and unenforceable, impacting low-income countries with limited government capacity.

The final decision on GSP renewal remains uncertain, and there are calls for balancing eligibility changes with expanded product coverage to aid compliance for Southeast Asian countries. Failure to renew the GSP could have disastrous consequences for industries in these countries.

Inside Indian story

Art of possible; The commodity market bubble has deflated due to monetary tightening and slowing growth in major economies like China, the European Union, and the United States. This, coupled with temporary export restrictions on key products, has adversely affected India's exports.

After experiencing robust growth of 20-25 percent in the first half of the year, India's merchandise exports slowed down in the third quarter and contracted significantly by 16.8 percent year on year in October.

Despite these challenges, India has the potential to increase its exports. Currently, India's share in the global export market is less than 2 percent, amounting to $421 billion out of a $22 trillion market. Even if global exports remain stagnant, India can enhance its export share by implementing several corrective measures.

The continuous rise in cotton and cotton yarn prices has been a major concern for the industry, affecting its cost competitiveness. The council has actively addressed this issue by explaining the factors and trends influencing cotton prices and submitting suggestions to stabilize yarn prices.

In response, the government temporarily removed the 10 percent import duty on cotton from April to September 2022 to enhance supply from countries like Australia, the US, and Africa and alleviate yarn prices until the next cotton harvest in October.

The Apparel Export Promotion Council (AEPC) has consistently raised concerns about the rising prices and advocated for export calibration to mitigate the impact. India is already losing ground to competitors like Bangladesh, which benefits from FTAs and GSP privileges in prominent export markets.

With Bangladesh surpassing India's garment exports by 2.9 times, AEPC emphasizes the need for action.

During a meeting chaired by the Minister of Commerce and Industry, Textiles, stakeholders in the cotton textile value chain discussed high raw material prices. AEPC's chairman highlighted the challenges posed by increased yarn prices and the industry's struggle to meet customer demands.

The Commerce Minister urged the textile industry to reduce cotton and yarn exports by 25% compared to the previous year. Furthermore, duty-free import of cotton was announced for a bill of lading dates up to September 30, 2022.

The Minister emphasized the importance of collaboration over competition and excessive profit-seeking, encouraging stakeholders to resolve the cotton and yarn price issue without relying on government intervention, which could have long-term consequences.

The establishment of the Cotton Council of India was also announced to address these concerns. The baggage of history; At the outset, it is goldilocks time for India as India is doing something right.

Impact on Bangladesh's garment industry

EuroCommerce, the European body representing retail and wholesale sectors, has raised concerns about the forthcoming European Union Generalised System of Preferences (GSP) scheme, stating that it does not favor Bangladesh.

The proposed safeguard measures in the new GSP could have severe implications for Bangladesh, which currently benefits from the "Everything but Arms" arrangement of GSP for least developed countries (LDCs).

As Bangladesh's per-capita income has reached $2,457, classifying it as a low-middle income country, the new GSP Regulation set to take effect in 2024 could remove the zero custom duty and most favored nation tariffs currently enjoyed by Bangladesh.

With 58% of the country's exports directed to the EU and UK markets, the potential exit of Bangladesh from the group of LDCs in 2024 poses significant challenges in terms of preferential market access. Upgrades in status could lead to average duties of 8.7% for exports, and 12% for readymade garments.

EuroCommerce has highlighted the detrimental impact of these proposed measures on Bangladesh's overall economy and has urged for negotiations on the new GSP regulation to mitigate potential job losses and ensure sustainable development in the sector.

To address these concerns, Bangladesh aims to qualify for the GSP+ scheme, which offers a special incentive arrangement for sustainable development and good governance. Qualification requires ratification of 27 international conventions and meeting vulnerability criteria set by the EU.

The government of Bangladesh, in collaboration with relevant stakeholders, has been actively working towards fulfilling these criteria and has developed an action plan shared with the European Union.

However, the pandemic has temporarily halted progress, and a tripartite committee has been established to address the issues, consisting of representatives from the government, entrepreneurs, and workers. The fact that over 50% of Bangladesh's exports go to the EU poses a significant roadblock, triggering the new GSP Regulations.

It is crucial for the EU lawmakers, EuroCommerce, and the Bangladesh government to engage in tripartite discussions and find a balanced solution that safeguards the well-established textile and readymade garment sector, which serves as the backbone of Bangladesh's export-based economy, without causing extensive damage to revenue and job generation.

GSP and Pakistan apparel exports

Role of FTAs & GSP; Pakistan benefits from a free trade agreement with the EU. Pakistan's textile sector has helped to foster positive relations with the EU. Pakistan is no longer subject to import duties from the European Union, and a bill passed in December 2013 gave it a Generalized Scheme of Preferences status (GSP Plus).

Pakistan's eligibility for the European Union's Generalised Scheme of Preferences Plus (GSP+) benefits beyond 2023 is being questioned. The GSP+ scheme, which provides duty-free access to most of Pakistan's goods in the EU in exchange for adherence to international standards, has not achieved its intended objectives, according to a report by Geo-Politik.

Despite experiencing significant growth in exports to the EU, Pakistan has been slow in implementing necessary reforms, particularly in areas such as human rights, labor rights, women's working conditions, and environmental protection. The report highlights the lack of improvement in the quality of life for workers, especially women, and criticizes the government's insufficient response to these issues.

The textile and apparel industry, which constitutes approximately 60% of Pakistan's exports, has played a significant role in the country's increased exports to the EU under the GSP+ scheme.

However, the report argues that the benefits of the scheme have not been adequately reciprocated with compliance with EU values and economic cooperation.

The EU now faces a decision on whether to continue the GSP+ scheme beyond 2023 or explore alternative approaches to promote adherence to international standards in Pakistan.

Srilanka & GSP factor

Recovering the GSP+ status in 2017 was a significant achievement for Sri Lanka, as it reinstated duty-free access to the EU market for a wide range of products, including textiles and fisheries. However, concerns have arisen once again regarding the potential loss of GSP+ concessions due to Sri Lanka's human rights obligations.

The apparel sector, a key contributor to Sri Lanka's export revenue, is particularly vulnerable to the outcome of GSP+ discussions. The EU is the second-largest market for Sri Lankan apparel, and any fallback from GSP+ to standard GSP would result in increased import tariffs, impacting the competitiveness of Sri Lankan apparel in the EU market.

Despite the importance of GSP+ concessions, it is interesting to note that only 49% of Sri Lanka's apparel exports have taken full advantage of these benefits since 2017. This can be attributed to the stringent rules of origin requirements imposed by the GSP+ scheme.

Duty-free access is granted only to apparel manufactured in Sri Lanka from the yarn stage, excluding garments made from imported fabric. However, fabrics produced in SAARC countries and the EU are exempt from this rule.

In conclusion, while the retention of GSP+ concessions is crucial for Sri Lanka's economic prospects, the low utilization rate suggests that the strict rules of origin requirements pose challenges for exporters.

Sri Lanka's ability to comply with human rights obligations and effectively leverage the GSP+ scheme will play a vital role in securing its continued access to the EU market under preferential terms.

Decoding GSP factor

The Generalized System of Preferences (GSP) is a significant U.S. trade preference program that offers opportunities for impoverished nations to foster economic growth and escape poverty through trade.

Established in 1974, GSP plays a crucial role in promoting sustainable development by eliminating duties on a wide range of products imported from 119 designated beneficiary countries and territories. By encouraging increased trade and diversification of exports,

GSP contributes to the economic expansion of developing nations. Furthermore, the program provides additional benefits for products originating from least-developed countries.

The comprehensive list of eligible products for duty-free treatment can be found in the GSP Guidebook, facilitating access to the U.S. market.

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