THE good news from Brussels is that Pakistan’s Generalised Scheme of Preferences Plus status has been extended for another two years.
The bad news is that our exports will continue to enjoy duty-free access in their single largest market without the government and businesses having to set their own house in order.
The GSP+ preferential tariff scheme covers more than 6,000 tariff lines from a few developing countries that meet the relevant criteria.
More than 78 per cent of Pakistan’s exports benefit from GSP+ treatment.
Unilateral preferential agreements may be compared to welfare transfers within an economy: as long as a person gets cash support from the government, he has little incentive to work
The textile and clothing sector, the lynchpin of Pakistan’s exports, is the largest beneficiary in terms of the margin of preference.
The EU’s average applied most-favoured-nation tariffs for textiles and clothing are 6.5pc and 9.5pc respectively; however, under GSP+, almost the entire sector is entitled to duty-free access in the EU.
According to the European Commission’s data, Pakistan’s total exports to the EU in 2014 (the first year of the GSP+ treatment) went up by 21.63pc to €5.51 billion from €4.53bn in 2013.
During the last three years, Pakistan’s exports to the EU could not sustain the substantial growth in 2014. In 2015, 2016, and 2017, the exports to the EU were €6.07bn (10.16pc growth), €6.29bn (3.62pc growth), and €6.67bn (5.72pc growth), respectively.
Cumulatively between 2014 and 2017, exports to the EU went up by 20.68pc. In 2013, 2014, 2015 and 2016, Pakistan’s textiles and clothing exports to the EU were €3.14bn, €3.89bn, €4.56bn, and €4.87bn, respectively.
This means in 2014, under GSP+, textiles and clothing exports to the EU went up by a substantial 23.88pc; however, in the following two years, the growth decelerated to 17.22pc and 6.79pc, respectively.
Between 2010 and 2013, without the GSP+ facility, Pakistan’s exports to the EU increased 17.02pc from €3.87bn to €4.53bn; while between 2014 and 2017 (under GSP+), exports to the EU jumped by 20.68pc.
Cumulatively, there has not been substantial export growth under the GSP+. One reason may be the depreciation of the euro.
In 2014, on average, one euro exchanged for $1.33; in 2015 as well as 2016, the exchange rate came down to 1.11 before increasing marginally to 1.13 in 2017. The euro depreciation may have made Pakistan’s exports more expensive in the EU market.
However, in 2014, 2015, 2016 and 2017, imports of EU countries from the rest of the world were €1,692bn, €1,730bn, €1,712bn, and €1,853bn, respectively. This shows that despite the euro’s depreciation, EU global imports went up 9.51pc between 2014 and 2018.
In fact, in 2017, EU’s global imports increased 8.2pc compared with 3.6pc growth in its imports from Pakistan. Therefore, the depreciation did not contribute significantly to growth decline of Pakistan’s exports from 2015 onward. Therefore, we need to look at domestic, particularly supply side, factors.
Between 2013-14 and 2016-17, cotton production contracted 16.43pc. The production of cotton yarn, which grew 8.6pc in 2013-14, rose 1.08pc in 2014-15, 1.37pc in 2015-16, and 0.65pc in 2016-17.
Likewise, according to the State Bank of Pakistan’s data, the production of cotton cloth, which registered 0.68pc growth in 2013-14, grew by 0.10pc in 2014-15, 1.19pc in 2015-16, and 0.42pc in 2016-17. The exporters probably had exportable surplus, which they utilised in the first year of GSP+ facility.
However, in subsequent years, the supply-side constraints made export growth difficult. Besides, despite more than 6,000 tariff lines in GSP+, only on about 760 tariff lines, are Pakistan’s exports to the EU more than $1m.
Unilateral preferential arrangements, like the GSP+, have their inherent disadvantages. They create dependency, becoming a barrier to competitiveness by preventing the recipient country from undertaking much-needed structural reforms to boost exports.
Nor do exporters feel compelled to be cost-efficient when they have duty-free access to their largest market. As a rule, the higher the margin of preference and broader the product overage, the greater is the dependence.
GSP+ may thus be compared to welfare transfers within an economy. As long as a person gets regular and considerable cash support from the government, he has little incentive to work and stand on his own feet.
Hence, unilateral arrangements are at best a short-term solution to a country’s export problems. In the long term, they may even exacerbate these problems by taking away the incentive to be competitive.
The GSP+ presents a dilemma to the recipients, too. While it aims to encourage exports from vulnerable economies, the eligibility criteria entails that the recipient country’s share in the EU’s total GSP-covered imports be less than two per cent.
This means that a considerable sustained increase in Pakistan’s exports may result in its exclusion from GSP+.
Published in Dawn, The Business and Finance Weekly, March 12th, 2018