No early changes to GSP+ rules

By Dilshani Samaraweera

The garment industry is waiting for changes to GSP+ rules, but the European Commission (EC) office in Sri Lanka says an early announcement is unlikely.

“Any changes to rules of origin will probably be announced only towards the end of this year,” said Economic and Trade Adviser, Delegation of the EC to Sri Lanka, Roshan Lyman.Sri Lanka has requested changes to the rules of origin governing the GSP+ because Sri Lankan garment exporters find these rules too difficult to meet.

The GSP+ is a special concessionary trade scheme that was awarded to vulnerable developing countries by the countries of the European Union (EU). The scheme allows over 7,000 items to enter the 25 EU member countries, duty free. These items include Sri Lanka’s major exports to the EU, readymade garments.

Sri Lanka is the only country in South Asia to be awarded GSP+ status and the scheme was expected to help sustain Sri Lanka’s garment export market in the EU in the face of the increasing post quota price competition.

The EU is Sri Lanka’s second largest export market for ready-made garments and total exports in 2005 came to over Rs 99.8 billion. However, despite the GSP+ facility being available, export growth was marginal compared to 2004 - garment exports to the EU in 2004 came to over Rs 99.7 billion. Exporters blame the complex rules of origin of the GSP+ scheme, for the poor results.

The rules of origin are the central criteria that decide whether goods produced in Sri Lanka can qualify to use the GSP+ scheme. If Sri Lankan goods do not meet the rules of origin, they do not qualify for GSP+ and therefore, do not get duty free access into the EU.

The rules of origin for garment exports, among other things, require domestic double transformation, where the conversion from yarn to fabric and fabric to clothing must take place in Sri Lanka. The domestic value addition must also add up to over 50 percent and a change in Customs tariff heading is required. Sri Lankan exporters say these rules are extremely difficult to meet. Mainly because domestic double transformation and value addition of over 50 percent is often not possible since the garment export industry is heavily import dependent for fabric.

Under the GSP+ rules, the alternatives are to use European fabric or fabric from the SAARC region. But the main fabric sources for Sri Lanka are in the ASEAN bloc and not the SAARC or the EU. As a result, a majority of garment exporters cannot use the GSP+ although the scheme has been available since July 2005. “GSP+ utilisation is around 39 percent based on data from the EU,” said the Coordinator, for the EU-Sri Lanka trade development programme, Sonali Wijeratne, speaking at a workshop on marketing to Germany, organised by the Joint Apparel Association Forum. “That is, out of total value of garments imported into the EU from Sri Lanka, 39 percent was under the GSP+,” said Wijeratne. “That means the balance is paying full duty,” she points out. Local exporters say even the estimated 39 percent utilisation could be unrealistically high given the import dependency on fabric.

“The new rules of origin was supposed to come very shortly after the introduction of the GSP+ but this has not happened,” said Wijeratne.

However, to get round this export bottleneck, Sri Lanka has asked the EC to make the rules of origin more user friendly.

“Sri Lanka has proposed a single, value added criteria of 35 percent for clothing, instead of all the other requirements. For all the other restrictive criteria like double transformation and HS Code changes, to be removed and only to have an amount of value addition,” said Wijeratne.

“So the amount of value added that the EC will decide on, is the question. The garment trade would like a 35 percent value addition, but it is up to the EC to decide on the figure. If they decide on over 50 percent value addition again, it may not be of very much use,” said Wijeratne.

The EC office in Sri Lanka says the GSP+ rules of origin are still under discussion. “They are still studying this issue to see what kind of formula can be acceptable for all the sectors and all the HS Codes. The conclusion of the current studies is most likely to be towards the end of this year,” said Lyman.

Despite these delays, Sri Lanka is banking on the GSP+ to shore up its garment market share in large European markets like the UK, Italy and Germany. But the competition on price is increasing, with many other developing countries also using other EU trade concessions to push their exports.

Although Sri Lanka is the only country in South Asia to get GSP+ status, Least Developed Countries like Bangladesh have zero duty access into the EU through the Everything but Arms scheme. Other developing countries benefit from the EU’s standard GSP scheme. China was graduated out of the GSP scheme for most of its exports and will not see duty concessions coming their way, but Sri Lankan garments must still compete against Indian garments. Indian garments have a price advantage due to low cost domestic production capabilities and also get duty concessions under the EU’s standard GSP scheme.

“Indian textile will not benefit from the standard GSP but Indian clothing will benefit,” says Wijeratne.

Under this scenario, delaying changes to rules of origin until end of this year would mean a full year of stiff competition for Sri Lankan exporters - despite the GSP+.

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