By: Dr. H.K. Sehgal

With the voting of its member-states to temporarily withdraw the preferential trade terms over Sri Lanka's poor human right record, EU had set a deadline for withdrawing the country's GSP+ trade benefits that expire on 15 August 2010. This would mean that from mid-August, Sri Lanka will lose its GSP+ benefits, which have given apparel exports zero duty access to the EU since 2005.

The Issue

Receiving reports of gross human right abuses during the final sages of Sri Lanka's civil war, the European Union wanted to investigate the issue. Sri Lanka claimed all along that allegations about human right abuses were unfair, and thereby refused outright to co-operate with EC investigators.

It may be pointed out that Sri Lanka's access to duty-free exports to the EU under he GSP+ was totally dependent on its ability to honour 27 international human rights conventions, and by breaking the rules, the preferences will vanish.

In fairness, it must be stated that the EU has been quite accommodative on the issue. In a statement prefacing its decision to suspend GSP+ benefits, the EU has described its decision as "temporary" and hoped that Sri Lanka "will sit with us" to address the problems identified. It reiterated that it "remains open to a full dialogue with the Government of Sri Lanka" and will closely monitor and regularly re-evaluate developments or the steps taken by Sri Lanka Government on the human rights issues, and would even recommend restoration of GSP+ benefits, "once sufficient progress has been made" .

Sri Lanka's response

Sri Lanka's response has been anything, but affirmative and positive. It remained stuck with its earlier stand that no human right violations have occurred; hence no need for any investigation. A Foreign Affair Ministry statement said that the GSP+ discussions would be hampered by setting "unattainable targets and shifting goal posts." The Economic Advisor to the President Mahinda Rajapaksa let the decision of the Government out, when he said, "We have been prepared for this for a long time. We have to deal with this risk at some stage or the other."

What makes Sri Lanka Belligerent?

There are a number of reasons, which need to be factored in understanding as to why Sri Lanka, whose major part of employment is attributable to exports, particularly garments, is so belligerent.

It is noted that garments like bras, which are the main strength of Sri Lankan garment exports, are subjected to only 5.2"10 duty, which reduces the impact of denial of GSP+ level. Further, about one third of the garments that -Sri Lanka exports to Europe do not qualify for duty-free entry.

Then, European Union is not the only export destination for Sri Lankan garments, as it is exporting almost 40-45% garments to the US.

Sri Lanka has not staked everything on the EU and it looks like that more the Western countries (read EU) impose conditions or cuts on their aid to Sri Lanka, more it turns to allies elsewhere like Iran, Pakistan and even China, who have been providing funds to Sri Lanka for their economic development.

Impact of withdrawal of GSP+ status

What would this mean to Sri Lanka? It would mean that Sri Lanka's exports will now be subjected to a duty of up to 9.6%, as the country now falls back to GSP levels which is the same as India and Pakistan. However, it would still be lower than 12%, which most of the clothing imported in the EU is being subjected to.

This is certainly going to impact the exports of Sri Lanka, on which the industrial and economic growth and employment in the country rest. It is not only the domestic garment manufacturers and exporters who would be impacted; it is going to be much beyond that. Many international retailers had set up garment production units in Sri Lanka on heavy investments, on account of several factors like duty free benefits, skilled workers and good track record of ethical trading, of which Sri Lankans were rightly proud of. Now, all of sudden, these advantages would disappear and the exporters would have to compete with countries like India, Pakistan, which are formidable competitors.

Such international retailers, which have set up their manufacturing facilities in Sri Lanka might not pull off completely, but they are likely to reduce their scale of production, depending upon the comparative costs in Sri Lankan factories or their competitors abroad.

Even more important ramification of withdrawal of GSP+ status lies in the blunting of price edge that Sri Lankan garment exports had had over their competitors, who would be able now to give Sri Lankans exports a tough competition.

Uncertain future

Though there is no official version available on the chances of Sri Lanka giving in to the EU demands, but it is most likely that it might prefer to stick on its stand of "no human rights violations" in the course of civil war and that "the shining example of a trade policy regime that really, really worked" may fade away, sooner than later.

Originally published in The Stitch Times: April 2010