Sri Lankan exports take off with reinstated Generalised Scheme of Preferences Plus status

Export industries received a welcome boost in May 2017, when the EU reinstated Sri Lanka’s Generalised Scheme of Preferences Plus (GSP+) status, which had previously been rescinded over human rights concerns in 2010. GSP+ status removes the majority of import duties on Sri Lankan goods entering the European single market, providing access to over 500m potential consumers. The move has been widely welcomed in Sri Lanka, where it served once again to highlight the importance of the European market to domestic exporters. In the 17 months since the reinstatement of programme to end-October 2018, exports to the EU rose by some 18%, according to the EU ambassador to Sri Lanka, Tunglai Margue, with clothing apparel, seafood, and boat and shipbuilding particular beneficiaries.

The positive changes brought on by reinstated GSP+ status exist in a context of significantly shifting international trading patterns and alliances, with closer relationships developing within the Asia-Pacific region. Meanwhile, the EU itself faces potential changes, if and when the UK – one of Sri Lanka’s top European markets – departs the bloc.

Long Relationship

GSPs were first put forward by the UN Conference on Trade and Development (UNCTAD) in the 1960s. The general idea was that developed nations would offer “vulnerable” countries – those that World Bank has not classified as high-income or upper-middle-income in the last three consecutive years – the benefit of reduced import tariffs and quotas in certain industries. The benefits are tied to certain commitments by the recipient country to improve governance, reduce poverty and foster sustainable development.

Since then, a number of countries have established GSP schemes. The EU’s first GSP programme was implemented in 1971 to help developing countries benefit from reduced tariffs to the EU – or what was then the European Economic Community.

Sri Lanka was one of the first countries to be admitted to the GSP scheme, which significantly reduced tariffs on 66% of exported goods. After many years as a beneficiary, in 2005 Sri Lanka moved up to the EU’s GSP+ programme.

This completely removed tariffs and added recipient country commitments to introduce and enforce environmental protections, additional labour rights and rules to combat illegal drug trafficking.

Also included in the GSP+ programme was the Everything but Arms initiative, which excluded arms and ammunition sales in return for even lower tariffs and exemptions from quotas.

Deep Impact

In the short period that Sri Lanka participated in GSP+, the country became one of the greatest beneficiaries of the scheme, according to a 2010 UNCTAD analysis of participating countries. To compare, in the 2001-04 period before GSP+ implementation, the average growth rate of exports to the EU was 11.5%; in 2005-09, however, this increased to 16.4%, according to Eurostat.

The EU quickly surpassed the North American Free Trade Area as Sri Lanka’s largest export market. According to EU statistics agency Eurostat, Sri Lankan annual exports to the EU expanded by 46.8%, from $1.8bn in 2004 to $2.9bn in 2009.

However, soon after achieving GSP+ status, civil conflict erupted in Sri Lanka once again and did not end until May 2009. These armed hostilities and consequent concerns over the deterioration of human rights in the country, particularly towards the end of the war, led the EU to suspend Sri Lanka’s GSP+ status from August 2010.

The impact of the withdrawal of GSP+ was felt by many ordinary Sri Lankans over the following years. As businesses lost tariff concessions, they also lost contracts and were priced out of the market by rivals – some of whom were also part of GSP+. Approximately 25 garment factories closed, causing the loss of thousands of jobs. Without GSP+, EU export growth declined to 7.4% in 2010-14, according to Eurostat. This fallout led many Sri Lankan businesses and politicians to lobby for the programme’s return, with the movement given particular impetus by the change of government in 2015. The benefits of being privy to the scheme are apparent. Under GSP, tariff rates on apparel, for example, range from 5.9% to 9.6%, while under GSP+, they are 0%. This makes Sri Lanka’s clothing sector one of the biggest beneficiaries of its reintroduction.

The new programme also targets specific sectors – usually the main industries that export to the EU. This included the textiles sector, which in 2017 accounted for some 47% of Sri Lanka’s total exports.

Trade With Benefits

Indeed, figures from the Central Bank of Sri Lanka (CBSL) show that monthly exports of textiles and garments increased by approximately 15%, from LKR54.7bn ($344.5m) in May 2017 to LKR62.9bn ($396.1m) in May 2018.

Total exports, meanwhile, rose by 13.8%, from LKR128.2bn ($807.4m) in May 2017 to LKR145.9bn ($918.9m) in May 2018. These are aggregate figures, including non-EU exports, as specific data on EU GSP+ beneficiary products since May 2017 was unavailable as of early 2019.

Other sectors have also benefitted. According to the CBSL, edible fish exports were up from $169.6m in 2016 to $240.7m in 2017. Exports for the first nine months of 2018 stood at $191m, suggesting an estimated yearly total of around $250m.

The boat-building segment has boomed postGSP+, with exports rising from $64.7m in 2016 to $279m in 2017, growing the segment’s contribution to merchandise exports from 0.6% to 2.5%.

According to the Institute of Policy Studies (IPS) in Colombo, however, the full impact of the GSP+ status is unlikely to be felt for two years after its reintroduction, as companies need time to adjust to the scheme and develop new contracts.

The results for 2019, then, are likely to show an even stronger GSP+ effect. The IPS estimates that exports of animal and animal products will increase by 32.2%, followed by transport products (28%), textile and apparel exports (21%) and foodstuffs (11.8%). Overall exports are expected to increase by 14.7%, with shipments to the EU alone set to generate an additional $481.1m.

The agreement also has a powerful impact beyond pure trade and into governance and human rights. The current GSP+ agreement requires the recipient country to conform to 27 additional international conventions in areas such as human rights, environmental protection, good governance and labour protection, with a strict monitoring system also in place. The importance of this was demonstrated during the political crisis in late 2018, when the prospect of EU suspension of the GSP+ scheme was raised to powerful effect by business leaders.

Wider Preferences

However, the EU is not the only trade bloc or country offering preferential trade programmes. Indeed, Sri Lanka has also signed such agreements with the US, Russia, Japan, Canada, Australia and Turkey. These also give beneficial tariff and quota arrangements, with all of these markets seeing increased trade in 2017. While the value of exports under the EU’s GSP+ were by far the largest – valued at $2.47bn in 2017 by the CBSL – exports to the US were worth $782m that year, indicating an increase of 28.1% on 2016. Russia ranked third behind the EU and the US, with a 2017 export value of $188.3m, indicating an increase of 17.5% in the previous year. This was followed by Japan ($96.4m, 15.4%), Canada ($90.5m, 50.6%), Australia ($81.4m, 33.7%) and Turkey ($79.8m, 32.5%).

The US GSP expired at the end of 2017; however, in March 2018, US and Sri Lankan governments reauthorised the programme up to the end of 2020. The lapsed period was covered by a retroactive clause in the reauthorisation agreement so that exporters could claim refunds. The years ahead will likely continue to see exports grow.

Brexit Worries

One potential downside, however, is Brexit. The UK, currently covered under GSP+ as an EU member, is expected to leave the giant trading bloc in 2019. This presents a significant risk for Sri Lanka as 30% of exports sent to the EU are destined for the UK. The UK also directly received some 8.9% of Sri Lanka’s total exports in 2017, ahead of Germany with 4.7% and Italy with 4.5%.

The UK announced in March 2018 that it intended to keep the same trade arrangements with Sri Lanka post-Brexit, although in the beginning of 2019 growing doubts over the process of the UK’s departure from the EU were clearly a cause for concern, particularly in the apparel sector.

The coming year should at least bring some certainty on this issue. In the meantime, Sri Lankan exporters should continue to make the most of their preferential international trade arrangements.