Recently, the European Union (EU) extended Pakistan’s Generalized System of Preferences (GSP) Plus status for another two years. Since the 28-member bloc constitutes the single largest market for Pakistan’s exports, and GSP Plus provides duty-free market access to thousands of products, the decision from Brussels has been widely welcomed by both the government and corporate sector. Not only this, the success in maintaining the GSP Plus status is being touted as a triumph of Pakistan’s commercial diplomacy.
However, such euphoria aside, not only does the basic concept of GSP Plus contravene the international law, the arrangement is a sting in the tail for Pakistan’s economy, as well as trade.
The Special Incentive Arrangement for Sustainable Development and Good Governance – commonly known as GSP Plus – is a form of preferential tariff treatment. Unlike the free trade agreements (FTAs), GSP Plus is unilateral, that is to say that only one country or a bloc (called the donor) cuts or eliminates tariffs on imports originating in another country (called the recipient or beneficiary). Hence, GSP Plus sets up a donor-recipient relationship between two countries. The donor doles out all the favour while, on the face of it, it does not seek any favour in return. A logical question to ask is: in this selfish world, what accounts for the donor’s altruistic behaviour? To answer this question, we need to go back to the genesis of GSP Plus-like arrangements.
The status was conceived in 1969 under the auspices of the United Nations Conference on Trade and Development (UNCTAD). This was the era when import substitution industrialisation (ISI) and trade policies had gained wide currency among a host of developing countries including Pakistan. The ISI policies were aimed at securing industrial expansion by protecting the domestic industry through high import tariffs and other such instruments. On the other hand, the developed countries, which had long past that stage, were relying on the strategy of export promotion for continuing economic prosperity. Obviously, the ISI policies were hurting the developed economies by restricting access to their exports in the markets of developing nations. However, in the eyes of both policymakers and academia of the developed world, the policies hit the developing countries even more adversely by perpetuating a business culture of protectionism and patronage.
As diagnosed by industrialised countries, one of the capital reasons that made the developing world pursue the ISI policies was their belief that their exports could not compete with their more advanced trading partners, because of the wide disparities in productivity. However, instead of shoring up productivity in developing economies, the developed countries deemed it expedient to take the more convenient path of granting preferential market access to the imports originating from them.
Since the recipe was avowedly in the interest of developing countries only, the market access had to be unilateral. The UNCTAD resolution had stipulated that the system of preferences must be, inter alia, non-reciprocal. The resolution was incorporated as the ‘enabling clause’ into the General Agreement on Tariffs and Trade (GATT) – which at that time set the rules for international trade. When in 1995, the World Trade Organisation (WTO) replaced the GATT, the clause, which was the legal basis of the GSP, was made part of the new organisation.
The capital-strapped developing countries leapt at the ‘free lunch’ opportunity. However, restructuring the economy is a painstaking, drawn-out process that entails enormous costs and has an uncertain outcome. Eyeing the next elections, governments believe in reaping an early harvest with minimum risks. And here was an offer that promised them the best of the two worlds – racking up exports without having to go through the painful and risky exercise of setting their own house in order. Closing the door on economic restructuring also precluded any change in the corporate elite, which would thrive on the opportunity of increased export thrown up by the GSP.
To their dismay, several developing nations later found out that a jump in their exports was easier said than done. Lower import tariffs in foreign markets are important but a country must have sufficient exportable surplus to cash in on the preferences. Besides, the GSP caused only the tariffs to go down, non-tariff trade barriers (NTMs) continued to be applied on the recipients’ products which together with the supply side constraints hobbled export growth.
The developing countries did not produce most of the intermediate goods and capital equipment needed to manufacture exportable products. They had to import them from developed countries. Since production processes in developing countries were by and large inefficient, the only way they could curtail the cost of producing exportable goods was to cut back the high tariffs imposed on the import of intermediate and capital goods. In this manner, the preferential arrangement, unilateral by design, became reciprocal by default. This is not to suggest that developing nations were deliberately led down the garden path, but to emphasise that even the apparent free lunch came at a price.
The GSP Plus goes one step ahead in that it is reciprocal not by default but by design. The scheme is designed to encourage exports from vulnerable economies. However, in order to become a recipient of GSP Plus, a vulnerable economy must have ratified and ‘effectively’ implemented 27 multilateral conventions relating to human rights, good governance and sustainable development. The EU is entitled to monitor the implementation of these conventions and take up with the recipient its deficiencies, if there are any.
These conventions, such as the Convention Against Torture and the International Covenant on Civil and Political Rights, are so felicitous that every progressive society needs to accede to them. The conventions are thus not a problem. Instead, the problem is the mandatory link that has been established between being a party to these treaties and being a beneficiary of GSP Plus. For one thing, their compulsory implementation vitiates the very character of a unilateral arrangement. This is manifestly in conflict with the enabling clause which is part of a legally binding international treaty and which, in so many words, states that GSP preferences must be non-reciprocal.
For another, it brings non-trade issues to bear upon a trading arrangement. One can’t question the need to eliminate child and forced labour as well as put an end to torture, but using them as the carrot and stick to either help or penalise a vulnerable economy reeks of giving it the shaft. It is in this context that GSP Plus establishes a power relationship in which the EU holds all the aces. It can at will change the eligibility criteria and enlist or delist a country from the arrangement, even for reasons that have nothing to do with trade.
In Pakistan, both the government and the businesses are on the same page on the efficacy of GSP Plus. To the government, the benefits accrued under the arrangement provide a pretext for wobbling on addressing structural constraints of economic and export growth. With foreign exchange rolling in under the status, the government remains unmindful of the fact that upgrading and expanding the industrial base is necessary if exports are to be bound in a sustained manner.
As for businesses, in the presence of GSP Plus-like arrangements, rest assured, they can rake in additional revenue without having to become efficient, competitive or innovative. Thus, government and exporters together hailing the extension of the country’s GSP Plus status conjure up an image of two paupers congratulating each other on continuing to be among the beneficiaries of an income support programme. Three cheers for both.