A new conversation has begun over the GSP+ concession in Sri Lanka, with the European Parliament adopting a recent resolution on Sri Lanka. Diverse views have been expressed regarding the economy and our exports.
One school of thought has been that the economic impact would be serious, as this is expected to directly impact our apparel exports, which form a quite sizable portion of our export basket to the EU.
Another school of thought that has been popularised is that it will have a very limited impact, as Sri Lanka is going to lose the GSP+ facility anyway if we are able to upgrade to the status of an upper middle income country. Some statistics illustrate that even after resuming the GSP+ concessions in 2017, our exports to the EU have not changed significantly over the last few years.
So the question is: How do we look at this in terms of economics?
What is GSP+?
The Generalised Scheme of Preferences (GSP) of the EU is a trade arrangement that allows developing countries to pay lower or no duties on their exports to the EU. This programme helps vulnerable countries with access to markets to reduce poverty, improve governance, and move towards development. GSP+ is a special component of the same programme that provides duty free access to beneficiary countries for over 7,200 product categories (HS codes). The beneficiary countries have to, in turn, agree to international conventions on human rights, good governance, labour rights, and the environment.
Sri Lanka was a beneficiary of the GSP+ scheme since its inception in July 2005, and then lost the concession in August 2010. We regained the concession scheme in August 2017.
[caption id="attachment_148683" align="alignright" width="350"]
Graph 1 - Sri Lanka’s exports to EU versus Sri Lanka’s total exports[/caption]
When we look at the statistics after we received the GSP+ concession in 2005, there was a big improvement in our exports. The end of the 30-year war and the boom of the post-war business environment too contributed to this improvement.
However, even with the suspension of GSP+ in 2010, our exports to the EU increased, although the rate of exports slowed down. Before the suspension of GSP+, from 2005-2010, our share of exports to the EU increased from 28% to 38%.
On the other hand, even after securing the GSP+ again in 2017, our exports to the EU recorded slow growth, seeing about a $ 250 million increase from 2017-2019. This can be traced back to the fundamental fact that even with or without GSP+, our exports will remain unchallenged.
Looking at the problem from an economic point of view
As economists, we have to evaluate a few other variables before we jump to conclusions. One is the growth of our total exports. We can observe our total exports have not been growing by much over the last decade. The reality is that compared to our GDP growth, our exports are declining.
So from an economic point of view, it reiterates the fact that the challenges to our exports are no longer from outside, they come from inside. Our Customs processes and barriers for international trade remain at a level that even a trade concession will not bring any positive impact to increase our exports.
One the other hand, we have to consider the income levels and consumption patterns of the EU to see whether our exports have become irrelevant in that market. Markets change very fast, and if we do not adapt, trade concessions won’t help much.
The diversification of our export basket has not materialised, and our exports have not been competitive in the global market. As a result, our total export growth and export growth for non-EU countries has also remained stagnant.
Whether our competitors have become better
We have to evaluate if other countries in the region, with GSP+, have increased the competition faced by our exports. According to European Commission data from 2019, Pakistan and Sri Lanka are the only two countries in Asia with GSP+. However, labour-intensive markets such as Philippines, Armenia, and Mongolia in the region too have received the GSP+ concession. So it is likely that over the years, the competition has increased, while our approach has remained the same, meaning we maintain the same export basket with higher protection and a lack of competition.
On the other hand there is a discussion within Bangladesh to acquire the GSP+ concession, according to The Daily Star. This may not only increase competition for Sri Lanka, but also open an alternative for existing local companies who have business in Bangladesh. They will consider moving to Bangladesh and increase capacity there. Thus, evaluation of the GSP+ has to consider all the facts and market dimensions. We should also have a strategy to increase our exports without GSP+ when we upgrade to middle income country status.
At the same time, we need to understand that markets are driven by information and sentiments. If the EU suspends our GSP+ claims on the basis of human rights, good governance, and environmental mishaps, it is very likely that other markets and investors will also be driven by that decision, which will affect our investments and the country’s reputation. Additionally, Sri Lankan exporters are currently benefitting from concessions, and losing GSP+ will have a negative effect on them.
Solutions
The solution to improve our exports is to create competition. The development of exports has to be tapped from the import end. Trade is a two-way street, and we are in a world where every nation is linked in an interconnected global supply chain. They all manufacture parts and components, and assemble those parts and components to create the final product. From an end-to-end total manufacturing process, the world has moved to an assembly of parts and components to keep the economies of scale and make it affordable for most of the citizens in the world.
The solution is to integrate into the global production and supply chain network. To do that we have to unilaterally embrace the price-driven market system. Price is the best way to ensure allocation of resources. So that is definitely the best solution for Sri Lanka – but at the same time, we should remember our economic situation and retain the existing concessions that are currently benefitting our exporters.