GSP Plus Status and foreign exchange

Evidence suggests that economic gains out of GSP plus would be lower than trumpeted.

The European Union has already approved GSP Plus status for the Pakistani textile exports. Due to this approval, 20 per cent of the exports can enter the European market at zero tariff, while 70 per cent at the preferential tariff. On the trade diplomatic front, this is a success. In this globalised world, trade diplomacy is significant, even stronger than market fundamentals. There is lot of drum beating about this status in the press and the media. However, evidence suggests that economic gains out of this deal would be lower than trumpeted and expected on the following grounds.

Firstly, most European economies are in recession at the moment. In recession, the purchasing power of the people goes down. The European people try to buy the finished industrial products cheaply and in less quantities. Furthermore, there are a few fierce competitors such as Bangladesh and Sri Lanka, which have already given a tough time to Pakistan since both are enjoying the same status and would continue to give tough time in future.

Secondly, Pakistan connects to the European market at the lower end of the value chain, while Sri Lanka connects at the higher end. The status of Bangladesh lies in between Pakistan and Sri Lanka in terms of value added products. Normally, it takes lot of time to move up the value chain, since global buyers ‘lock in’ with the developing countries’ suppliers due to which they don’t change the supplier quickly.

Thirdly, the major trading partner of Pakistan in terms of textile exports is the US. Pakistan exports around 55 per cent of its merchandise exports to the US, while the share of the European Union is between 25-30 per cent. These two markets and their buying capacities are different. The orders are usually big from the US market, while the orders are small and continuous from the European market. Our textile industry, its layout and techniques of production are highly aligned with the US market as reflected from the share above. It would be a challenging task for the textile industry to align the method of production with the European market in the shortest possible time.

After considering these significant challenges, now comes the question of public policy. Public policy can play an important role in squeezing the maximum benefit out of any deal. The policy should follow a long-term vision. The policy goals should be set on the basis of constraints, aspirations of the business community and ground realities.

In a nutshell, there are significant challenges and a few opportunities associated with this GSP Plus status. Before taking any policy decision, we should ask a question. Whether GSP Plus status brings the precious foreign exchange over a medium to long-term? The clarity of question is important. A proper question leads to an adequate answer. ‘GSP Plus status brings a certain amount of foreign exchange’ is a metaphysical statement which is devoid of facts. In my opinion, Pakistan has to embark on an industrial development strategy, which can bring precious foreign exchange reserves in the medium- to long-term. The ‘patchwork approach’ of wooing foreign investors, selling assets through privatisation, launching Euro bonds and drum beating the GSP Plus status can bring foreign exchange in the short run, but leave the medium- to long-term problems intact as already happened since 1988.

Published in The Express Tribune, January 19^th, 2014.

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