EU parliament is set to review the GSP status accorded to Pakistan in 2014. This GSP status provides additional incentives to several LDCs by removing duties on over 66 per cent of tariff lines, making exports from them more competitive. Review and likely cancellation of GSP status to Pakistan may hurt its exports to the EU, particularly the T&A sector.
The GSP system stands for Generalised Scheme of Preferences Plus. This status is a part of EUs wider GSP and Everything But Arms (EBA) system, and under this additional incentives are provided to several least developed countries. The GSP status allows countries to export products without paying any duties on over 66 per cent of tariff lines, covering a wide range of products from textiles to fisheries. Countries such as Armenia, Bolivia, Cape Verde, Kyrgyzstan, Mongolia, Pakistan, Paraguay, Philippines and Sri Lanka are currently beneficiaries of EUs GSP regulations.
Currently, the GSP status of Pakistan has come under review by the EU parliament in the wake of certain alleged use of blasphemy laws in the country and resulting human rights violations. The GSP status was granted to Pakistan in 2014. The EU requires as part of the eligibility to the GSP system ratification and effective implementation of 27 international conventions on human and labour rights, environmental protection, and good governance.
Why is the GSP status important for the less developed countries?
Generally, the status allows increased access to the EU market, on a more preferential basis to the GSP countries, making their products highly competitive relative to the rest of the world. Since, developing countries depend heavily on trade for their economic development, and EU being the second largest economy in the world, such preferential access to the EU market becomes important for these countries.
Pakistan depends heavily on its exports and particularly the European region for its economy and trade. Trade constitutes more than 28 per cent of Pakistan’s economy, and it has only been rising over the last decade. WITS data from 2018 shows that in Pakistan’s export basket, EU countries have approximately 28 per cent share. And most importantly textiles sector plays a crucial part in its export basket, as 4 of the top 5 export commodities of Pakistan are related to textiles namely mens’ or boys’ ensemble of cotton, bed linen of cotton, toilet linen and kitchen linen, terry fabric, and uncombed single cotton yarn (with >= 85 per cent cotton). These four commodities constituted almost 16.7 per cent of the Pakistan’s total export basket in 2018.
Further data from the European Union suggests that in the exports from Pakistan to the EU, 75 per cent are textile related products. The fact that Pakistan’s economy has high dependence on its exports and particularly from the textile industry, access to the EU market for Pakistan become very crucial.
How has the GSP access helped Pakistan?
The GSP access was granted to Pakistan in 2014, so it is worth analysing how beneficial has the access been to Pakistan’s exports and its economy and therefore the loss, in case the access is revoked. Pakistan’s exports to the EU have increased from USD 6.64 billion in 2015 to USD 8.19 billion in 2019. Textile trade data from Texpro reveals that trade performance between Pakistan and the EU27 bloc has had a clear improvement since 2014, however we only analyse the progress until 2018. During 2014-18, Pakistan’s apparel exports to EU increased from USD 2,640 million to USD 3,140 million (CAGR 4.4 per cent); ensembles exports increased almost ten-fold from USD 193 million to USD 2,076 million (CAGR 81.1 per cent); footwear exports increased from USD 96 million to USD 169 million; home textile exports increased from USD 1,855 million to 2,151 million (CAGR 3.8 per cent); jerseys exports have grown more than 5 times from USD 68 million to USD 355 million (CAGR 51.0 per cent); sportswear exports have almost doubled from USD 16 million to USD 31 million (CAGR 14.0 per cent); t-shirts exports have grown more than thrice from USD 82 million to USD 290 million (CAGR 37.0 per cent) and yarn exports have grown from USD 104 million to USD 131 million (CAGR 5.9 per cent).
It has been widely accepted that the tariff relaxations under GSP have a positive impact on the exports of the beneficiary economies. Not only do the economies gain in terms of export revenue, but the efficiency gains are also immense as the relevant industries gain economies of scale and start becoming globally competitive. The labor employed in the relevant sectors are also employed gainfully as exports rise. Losing GSP status and access to the EU countries will impact Pakistan’s overall trade and specially textile related trade tremendously, since this is a large part of its export basket to the EU. It will make Pakistan’s exports to the EU relatively costlier. Pakistan’s other major trade partners such as United States, China and United Arab Emirates, might be able to absorb some part of the extra exports from Pakistan but such a shift in trade will only be apparent with time, if and when the GSP status actually gets terminated.