What’s the Catch in the EU Trade Perk’s GSP-plus?

CURRENT TRADE CONCERNS
Elpidio V. Peria
29 December 2014

Before Christmas, news came about the EU’s trade perk to the Philippines where the EU Parliament approved the grant of GSP+ (Generalized System of Preferences-plus) to some export products such as the following items identified in the Business World news release: pineapple juice (currently 28.5% [tariffs]); garments (currently 5-9%); preserved fruits (currently 6-9%); tuna (currently 20.5%); fruit jams and jellies (currently 20.5%) and footwear (currently 11.9%).
The touted benefits here, according to the factsheet quoted in the news release are : increase in Philippine exports of around €611.8 million in the first year of availment. The Department of Trade and Industry added that this projected increase will translate to 267,587 jobs generated in both the agriculture and manufacturing sectors, many of which will be in rural areas.

While the above may possibly be the things that the country can expect to gain from this grant of GSP+ status, it may be useful to be aware also of the following catch in the said trade privilege:

1. The GSP+ benefit can actually be withdrawn anytime.

According to Caglar Ozden and Eric Reinhardt (2003), the Generalized System of Preferences (GSP) is composed of trade preferences granted by the developed world to developing countries en masse on a nonreciprocal basis, i.e., without market access concessions in return. It was first proposed by the United Nations Conference on Trade and Development (UNCTAD) during the Kennedy Round to encourage the participation of developing countries n GATT (General Agreement on Tariffs and Trade). The main principle of GSP is to provide better-than-MFN (most favored nation) treatment to imports from qualifying countries. According to Ludo Cuyvers and Stijn Verherstraeten (2005), the MFN principle implies that tariff concessions granted to any other country should automatically be extended to all WTO member countries, resulting in multilateral tariff reductions. So that this will not happen, a special waiver of article 1 of the General Agreement on Tariffs and Trade (GATT), the precursor of the WTO Agreement, was granted to developed countries so they can operate their GSP schemes. This started in 1971 and has been extended ever since.

Ludo Cuyvers and Stijn Verherstraeten (2005) further explain that “GSP plus” incentive scheme is a special arrangement by the EU for sustainable development and good governance. Under this scheme, vulnerable countries are granted this preference if they have ratified and implemented 16 selected international core human and labor rights conventions and at least 7 out of 11 selected conventions relating to the environment and to good governance principles. Once accepted, their status will be monitored and regularly reviewed by the European Commission.

The EU scheme however has a built-in mechanism of country exclusion once the beneficiary countries have reached a level of development allowing them to compete internationally with developed exporting countries particularly when it has met the following criteria : one, during three consecutive years the country has been classified by the World Bank as a high-income country, and two, when the five largest sections of its GSP-covered imports to the EU represent less than 75% of its total GSP-covered imports. Therefore, a country will only disappear from the list of beneficiaries, when it has reached a satisfactory level of diversification in its exports to the EU.

In addition to this built-in exclusion mechanism, there is also a “safeguard” provision in article 28 of the EU Regulation 978/2012 on GSP which states that Common Customs Tariff duties shall be reintroduced as long as necessary to counteract the deterioration in the economic and/or financial situation of Union producers, or as long as the threat of such deterioration persists. The period of reintroduction shall not exceed three years, unless it is extended in duly justified circumstances. The way this provision is worded means this can happen at anytime and that once the normal tariffs are reintroduced, there is no time limit as to when the previous GSP+ preferences will be restored.

2. The costs of compliance on the EU’s strict rules on origin may offset the monetary gains of increased market access

Caglar Ozden and Eric Reinhardt (2003) highlighted several studies which inhibit full use of GSP preferences in general and one of the reasons for it is the complexity of the system, particularly its rules of origin paperwork and the technical incapacity of developing country exporters. Adami, McGarry and Ugaz (2011) studied the EU’s GSP scheme and found that eligible goods imported from developing countries often do not receive preferences. They found that non-least developing country (LDC) rates of utilization of GSP schemes is 50% over the last 15 years and the rate is steadily declining. These studies share the common finding that rules of origin are the main reason for the under-utilization of these unilateral tariff preferences.

Within the Philippine realm of experience, Wignaraja, Lazaro and de Guzman (2009) surveyed Filipino firms’ compliance with the ASEAN Free Trade Area (AFTA) and they found out that the issue on rules on origin delves more on the arbitrary classification of product origin, which was cited by 44% of users of the FTA.

Looking closely at the EU’s rulebook on rules of origin which is a 229 page document (PDF file), entitled COMMISSION REGULATION (EEC) No. 2454/93 of 2 July 1993 laying down provisions for the implementation of Council Regulation (EEC) No. 2913/92 establishing the Community Customs Code, the issue of rules of origin is something that small and medium businesses need to contend with when they try to avail of the EU’s GSP+ scheme. Definitely they will learn, but will the costs of their build-up in capacity be worth the gains in market access that they will get from the GSP+ scheme? This is something that the DTI should document thoroughly and openly for the benefit of later agreements that the Philippines may enter into and for us to know how far we will go in dealing with this challenge.

3. Philippines and Filipino companies opens itself up to closer scrutiny for its compliance with labor laws and international labor rights instruments

In Annex VIII of the EU legislation on its trade preference scheme, there are 15 core human and labor rights instruments that a GSP+ beneficiary country should accede to and implement, and for the situation of the Philippines at the moment, two relevant international labor rights instruments that it should be implementing well is the 1948 Convention Concerning Freedom of Association and Protection of the Right to Organize, No. 87 and the 1949 Convention concerning the Application of the Principle of the Right to Organize and to Bargain Collectively, No. 98.

Philippine compliance with these two international instruments may need to be closely examined since, as this is being written, there is still an unresolved labor dispute among one of the leading Filipino tuna exporters that will surely benefit from this GSP+ scheme – the Citra Mina Group of Companies in Gen. Santos City. This company has systematically violated the rights of its workers who only sought to organize themselves to ask for better working conditions. But this company only reflects the widespread practice of tuna fishing companies and canneries in Gen. Santos City of not letting their workers organize that would have enabled their workers to claim their rights under the country’s labor laws.

In a way, this closer scrutiny should be good to the workers, but how far will the Department of Trade and Industry work with the Department of Labor and Employment to make sure that the Philippine compliance to these international conventions are up to what these instruments hold up to and will not be watered down or hidden from view, in order not to jeopardize the Philippine GSP+ ?

 

4. Would Philippine positioning in the ongoing negotiations for a climate deal in Paris in 2015 be part of what the EU will monitor in exchange for this GSP+ trade preference?

 

This catch may be the most speculative part of this post, but this needs to be raised considering the shift in positioning of the Philippines in the recent Lima, Peru climate conference. Would the EU try to influence Philippine position in the on-going negotiations for a climate deal in Paris in 2015 and use the Philippine commitments under GSP+ so the Philippines may wish to toe the EU line in the climate negotiations? This is most likely, if the Philippines plays a hard ball position along with other Like-Minded Developing Countries (LMDCs). Considering however that the Philippines appears to be ready to go along with what developed countries want in the climate negotiations, perhaps the EU may no longer bother to lobby further the Philippines to go along with the EU position in the negotiations. It is now up to climate advocates to raise this issue to both the EU authorities and the Philippine Climate Change Commission and the Philippine Department of Foreign Affairs. Perhaps the Department of Trade and Industry should also be asked whether it will play a role in influencing the mentioned government agencies in order that the trade perk will continue.

oOo

 

REFERENCES:

Alice Adami, Brian McGarry and Pamela Ugaz (2011), A Comparative Analysis of Generalized System of Preferences : Challenges, Constraints and Opportunities for Improvement, MEMORANDUM to the European Parliament, Committee on International Trade, The Graduate Institute of International and Development Studies, Trade Law Clinic, Geneva
Ludo Cuyvers and Stijn Verherstraeten (2005), The EU’s Generalized System of Preferences and its ASEAN beneficiaries : a success story?, CAS Discussion Paper No. 45, December 2005, Centre for Asean Studies and Centre for International Management and Development, Antwerp

Caglar Ozden and Eric Reinhardt (2003), The Perversity of Preferences : The Generalized System of Preferences and Developing Country Trade Policies, 1976-2000, Policy Research Paper No. 2955, The World Bank, Development Research Group, Trade, January 2003

Ganeshan Wignaraja, Dorothea Lazaro and Genevieve de Guzman (2009), Factors Affecting Use or Nonuse of Free Trade Agreements in the Philippines, Philippine Journal of Development, No. 67, Second Semester 2009, Volume XXXVI, No. 2

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