EU GSP: The Rules of Origin issue

Generalised System of Preferences (GSP) is a unilateral preferential trade arrangement, which is governed by a set of rules different from those applicable in regular trade. The rules are based on the rationale to promote industrialisation of the developing counties through a reduced or zero-duty access to the developed importing countries. The Rules of Origin for GSP, thus, tend to be tougher than that of regular trade. Unless the required value addition is done, an export item will not be considered eligible under GSP. It can still be exported, but a regular tariff will be imposed, for LDCs quota will not be there and GATT rules of origin will be applied.

EBA-- anything for Bangladesh?

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Bangladesh warmly welcomed Everything But Arms (EBA) initiative of the EU when GSP Regulation was amended (February, 2001) to continue LDC's zero duty access to EU market for an indefinite period and for export of everything but arms. However, all Bangladesh export items have already been entering EU market under duty and quota free trade regime (LDC treatment under GSP). But Bangladesh's GSP utilisations could not be much in the textile category, although significant increase in the utilisation has been observed in the last couple of years. Interestingly, this increase coincided with a change in the Rules of Origin for knitted garments (1999) allowing imported yarn to be manufactured and exported under GSP. The GSP utilisation in the woven garments, however, remained very low. It may be mentioned here that Readymade Garments now cover about 90% of the total export to EU from Bangladesh. There is a growing fear that Bangladesh will not be able to maintain the current market share in EU after 2005, when competitors will not have any quota restriction. Simultaneously, absence of market knowledge, expertise and proper infrastructure (including standards, certifications and packaging facility) will deter the prospect of venturing into new non-textile export items. The tough Sanitary and Phytosanitary (SPS) regulations and inadequate capacity to fulfil Rules of Origin for GSP also considered practical impediments for any possible diversification or new investment in the prospective agro-processed export items. Any Trade Related Technical Assistance (TRTA) sought by LDCs like Bangladesh cannot avoid looking at these issues in a holistic manner.

A case for change in the Rules

It is really surprising that Bangladesh, despite acknowledging the urgent need for diversification of its very narrow-based exports, never looked into the potential for changes required in the RoO for other items where Bangladesh missed the eligibility for GSP. There are items like leatherwear, light engineering products, electrical products, plastic materials, agricultural products etc that can qualify for the GSP if there are some changes in the existing rules. Bangladesh needs to identify these items and, with justification, request EU to relax the rules.

European Community framed the RoO for the GSP decades ago as an instrument to help industrialization of the developing countries through a preferential trade regime. Although there were, in successive years, further concession like duty and quota free access provided for LDCs, there had not been any major change in the original RoO of GSP. These rules were framed with some valid arguments in facilitating industrialization and ensuring certain processing before giving the originating status to an exportable item to be eligible for a preferential entry. Nevertheless the rules were same for the developing countries and the LDCs, despite their gaps in the stages of economic development. Adhering to the RoO for GSP had been very difficult, if not impossible, for most of the eligible industrial items, produced in the LDCs. The result was obvious, especially in the manufacturing sector, where the benefits of GSP had been enjoyed mostly by the developing countries not the LDCs.

The changes in the rules for knitted products (1999) showed a positive impact on Bangladesh exports to EU, both in terms of value and overall GSP utilization. The post-2005 scenario will place Bangladesh RMG exports into a very stiff competition. Bangladesh may retain that edge on price but it would largely depend on receiving GSP. It is quite likely that woven items will lose its present share of EU market dramatically unless these enter EU duty free. The only issue that worries many is the impact of any relaxation in the rules for the export of woven items on the growing textile-manufacturing sector of the country. This should be judged in the light of overall impact of post-2005 trade regime on the economy and the long-term competitiveness of our textile sector. A projectionist approach on the issue could very well be counter-productive.

Recent trade pattern

Since 1986, following EC-Bangladesh Textile Agreement, RMG exports very quickly took an overwhelming share of total exports to EU. The growth in the exports to EU had also been phenomenal. It was mainly for the quota-free access, not that much for duty free access of Bangla-deshi textile products. The GSP utilisation increased, together with the sudden growth in knit export to EU after the relaxation of the rule in 1999. The share of woven (shirts, trousers) and knitted products (T-shirts, sweaters) about five years ago, (of the total RMG export to EU) was 60 and 40 per cent respectively. Since 1999 share of the knitted RMG started increasing and it is now about 51 per cent. Apparently, the better backward linkage (reduced lead-time) and duty free status (owing to the change in the Rules of Origin) provided better business, which kept the overall growth despite the recent economic depression. The EBA and SAARC Regional Cumulation (not applied, though) did not show any further improvement. EBA, explained earlier, was not relevant for Bangladesh. We may add here that SAARC Regional Cumulation, a misunderstood system, could not be applied owing to the higher value addition criteria and the controversy it generated within Bangladesh. Nevertheless, it is evident that RMG (only woven product is relevant here) export can hardly be benefited from SAARC Regional Cumulation. However, the debate completely overlooked the possibilities offered by the Regional Cumulation in other sectors. Presumably, this could have helped exports of agro-processed items, leather products and light engineering products. The new windows of opportunity for SMEs of the region and a beginning of a possible diversification in Bangladesh exports were lost. Some of the recommendations, following studies on the issue, were forwarded with a spirit of conflict resolution between the two warring sub-sectors. These recommendations were not technically feasible and did not address the essence of the problems faced by the country's exports.

The developing countries did not press for the relaxation of rules for GSP. Their industrial products were wholly obtained within the country. Bangladesh had always been at a disadvantaged situation, being virtually the only major player among the LDCs in textile trade, with inadequate backward linkage capacity. Thus, Bangladesh has been requesting, since late eighties, to relax the rules albeit only for RMG exports. In other items, it came close to producing some exportable items, but could not avail GSP, due to Rules of Origin, sometimes missing marginally in the value addition criteria. As for agro-processed items, the EC GSP rule of wholly obtained in the exporting country was a big impediment for Bangladesh, as this prevented sourcing of any raw materials from outside the country.

Looking for an argument to change the Rules of Origin for GSP, we have to consider the external trade regime for the product concerned. In other words, an assessment has to be done in the light of available edge (triff rate in the importing country, duty applicable to competitors and cost of production) enjoyed under a preferential trade.

Presumably, the raw materials for export items will enter Bangladesh with zero duty or with marginal duty. Accordingly, the regulatory framework of the country needs to be very effective to prevent major distortions in the domestic market following the relaxation in the rules. It may be wroth noting that following GATT Agreement, there are at least 3 areas where the duty remained high in the developed markets like USA and EU. These are for footwear, textile and food products. In the case of EU one can add bicycles into that list. If Bangladesh wants to export some of these items (these are usually labour-intensive) to EU under GSP, the existing rules will be a great constraint. If the rules are relaxed Bangladesh has a chance to take the advantage.

The author works for the Delegation of the European Commission to Bangladesh. Opinions expressed are personal and do not in any way reflect the views of the European Commission.