Spearhead Analysis – 18.12.2013
By Zoon Ahmad Khan
Research Analysts, Spearhead Research – Pakistan
Trade between Pakistan and the European Union has been at the forefront of Pakistan’s export expansion. The EU is Pakistan’s largest sole trading partner with recorded bilateral trade of approximately $10 billion in 2011. Textiles and clothing products constitute more than 60% of Pakistan’s exports to the EU, the single largest economy in the world, with a combined GDP of $ 16.566 trillion (2012) and a population of 505 million.
Between Pakistan and the EU, bilateral relations are based on the Cooperation Agreement reached 2004. Under the agreement both sides were required to ‘expand’ and ‘diversify’ in order to develop “two-way trade by seeking ways and means to improve market access”. The importance of sturdy trade relations between the two was solidified during the first ever Pak-EU trade summit in 2009. Pakistan’s potential spot for the GSP Plus in 2014 was part of the Pak-EU 5-year engagement plan, which included assistance to meet EU’s sanitary and phyto-sanitary requirements for fisheries and other products.
2010 floods, as the biggest natural disaster to have hit Pakistan, turned the tide. Submerging an area as large as Florida, they left around 1,600 dead, and affected 17 million people in all. About 1.2 million houses were destroyed, 10,000 schools were either damaged or destroyed while another 6,000 were turned into shelters. In addition, 35 bridges and 9% of the national highway system was either damaged or destroyed. The United Nations reported that damages exceeded those caused by the tsunami, Haiti and AJK earthquakes combined.
In September 2010 with a view to help Pakistan in such calamitous circumstances, the European Council decided to grant Pakistan exclusive increased market access. This entailed immediate (temporary) reduction of duties on key imports from Pakistan. 75 products, mainly textile but also including industrial goods, including ethanol, were drawn up for the trade concessions through a unilateral tariff waiver. These products accounted for 27% of Pakistan’s exports to the EU, amounted to € 900 million in value and attracted an average tariff of 7.19%. It was estimated that the waiver would cause an estimated increase in EU imports from Pakistan of around € 100 million per year compared to 2009.
This immediate preferential treatment of Pakistan by the EU caused competitors including India, Bangladesh, Peru to raise concerns, fearing their own exports to EU may bear the brunt of Pakistan’s increased market access. After a few amendments to the proposed scheme the objections were dropped. In February 2012 World Trade Organization’s (WTO) General Council approved the waiver and a final go-ahead was given by the European Parliament on 13 September
2012. After final implementation of the waivers in November 2012 Pakistan was left with fourteen months to benefit from this temporary comparative advantage.
There was no duty under the Tariff Rate Quotas (TRQ) and normal Most Favored Nation (MFN) tariff would apply over the TRQ. After 31st December 2013 though Pakistan was scheduled to extend this arrangement, provided Pakistan’s economy still needed help.
GSP and GSP Plus:
The Generalized System of Preferences is aimed at giving developing countries more access to the EU market, spurring industrial growth. Arrangements under EU’s current GSP scheme include
- General Arrangement granting 20% margin of preference to textile products and 3.5% to all other eligible products.
- Special Incentive Arrangement for Sustainable Development & Good Governance (GSP+) granting duty free treatment to imports from beneficiary countries that meet the aforementioned criteria.
- Arrangement for LDCs under the ‘Everything But Arms’ initiative (EBA) of 2001 granting duty free treatment to imports from LDCs.
Despite preferences available in the GSP, after 2013 Pakistan was going to face more tariff than other competitors like Bangladesh, Afghanistan and Bhutan among others due to their Least Developed Country status; or the better economies enjoying the GSP+ status, leaving Pakistan at a comparative disadvantage.
Previously Pakistan had not been eligible for the GSP+ status since firstly Pakistan had not ratified 3 out of 27 international conventions (even though Pakistan had signed all) and; (16 on human rights and labor rights and 11 on environmental standards and drug enforcement). Secondly Pakistan’s GSP covered imports in EU were 1.48% in value of total GSP covered imports into EU as of 1st September 2007, thus exceeding the 1% threshold. However the import ceiling has been raised by the EU government to 2% in 2012.
Speaking at a seminar on EU-Pakistan Trade organized by the EU, Lars-Gunnar Wigemark, head of the EU delegation to Pakistan, stated “there are human rights and governance issues in Pakistan that would be taken into consideration by the EU Commission, which is the competent authority for devising trade policies in EU”.
12 December 2013: Pakistan’s newspapers were flashing with the news of success. The GSP+ status had been attained through the European Parliament’s vote (Brussels), along with 10 other countries. But the conditions placed by the EU, which Pakistan has barely met quite close to the tipping point, are relevant beyond the time of approval. The burden of proof lies with the beneficiary country. For Pakistan the human rights, labor rights, hygiene regulation, environmental standards and drug enforcement need to be sustained and improved as rolling back to the previously unacceptable state will result in temporary withdrawal of the status.
The greatest challenge for Pakistan in the past has been on the sanitary front. In 2007 a complete ban on Pakistani fisheries was imposed, only to be lifted partially after 6 years in February 2013. Pakistan’s fishery establishments were delisted by the European Commission after severe deficiencies in the sanitary quality. At that point Pakistani companies, fish exports to the Europe amounted to $ 38.72 million (2006) – 23% of Pakistan’s total fishery exports at the time.
The GSP+ is definitely good news. A recent trend of shifting industrial units to Bangladesh to benefit from better trading power had been on the rise. This may be reversed, and incentive for private investors in different sectors may spur. In current times of capital flight and dearth of foreign investment, this development can only improve the current state of affairs. But it is crucial for Pakistan to benefit from the protection under such an agreement, and use it to her advantage. A perpetual state of protection must not be seen as an end in itself, but the means towards creating a strong and reliable industrial backbone.