By now, the term GSP+ has become almost a household word in Sri Lanka. As the European Union’s GSP scheme’s current cycle is set to expire by the end of 2023 and the new cycle for the next ten years (2024–2033) is about to begin, Naveera Perera, the Research and Publications Manager (Internal) of the Moot Court Bench International Trade Law Program, interviews Gomi Senadhira, an expert in International Trade Policy who, among other key roles, has held the positions of, Director General of Commerce of Sri Lanka, Sri Lanka’s Permanent Representative of the World Trade Organisation (2004-2006), the Chair of the WTO Committee on Trade and Development (2005), Minister of Commercial and Economic Affairs at the Sri Lanka Mission to the European Commission in Brussels (2001-2004), and the Commonwealth Senior Advisor for Trade Policy and Negotiations to the Government of the Seychelles (2013-2015), to discuss what GSP and GSP+ are and has subsequently meant for Sri Lanka. This article was originally published on Moot Court Bench International Trade Law Program Website

Compiled by Naveera Perera

Q: What does the term ‘GSP’ mean?

A: “GSP” is an abbreviation of “Generalised System of Preferences”. It is one of the most important tools in global trade policy to support the economic development of developing countries through international trade. However, to understand what it really means and its legal status, it is necessary to understand another important international trade term: MFN, the Most Favoured Nation principle. The MFN is the most important principle in multilateral trade law, as embodied in Article 1.1 of the General Agreement on Tariffs and Trade (GATT). It requires all members of the GATT (now the WTO) to be treated in the same manner in terms of market access. In other words, the best tariffs or non-tariff conditions extended by any member of the GATT to any other country have to be automatically and unconditionally extended to every other member of the GATT. The only possible exceptions are Free Trade Agreements, which are covered under Article XXIV of the GATT. Thus, even if a developed country wanted to give trade/tariff concessions to a developing country, it was not possible to do so without extending it to all other members of the GATT.

At the time when GATT was negotiated, a few preferential systems existed between developed and developing countries. These included, among others, the Commonwealth preferences and preferential trade arrangements between France and her former colonies. Therefore, attempts were made to find a way to use preferential trade as a tool of international development policy at the United Nations. This was deliberated at the first session of the United Nations Conference on Trade and Development (UNCTAD I) in 1964. Then in 1968, the second session of UNCTAD adopted a resolution to establish a system of generalised, nonreciprocal and non-discriminatory preferential tariffs system in favour of developing countries. This is what is known as the Generalised System of Preferences (GSP).

Subsequently, the necessary legal cover was provided by the GATT: first through a temporary waiver for GSP from Article 1 obligation and then the Enabling Clause (which became an integral part of the GATT). Under these decisions, “Notwithstanding the MFN obligation under Article 1.1, developed countries can extend developing countries more preferential tariffs in a generalised, nonreciprocal and non-discriminatory manner”. With the approval of these waivers, developed countries could establish autonomous GSP schemes, according to its own regulations, whilst staying true to its basic principles, that is, “preferential tariffs for developing countries in a generalised, nonreciprocal and non-discriminatory manner”.

Q: How does GSP relate to EU-Sri Lanka Trade Relations?

A: The first to launch a GSP scheme was EEC (EU). When this was done in 1971, it was extended to all developing countries in a generalised, nonreciprocal, and non-discriminatory manner. However, the EEC also continued with the trade preferences for some of their former colonies in Africa, the Caribbean, and the Pacific (ACP preferences). The ACP preferences included broader product coverage and deeper preference margins (mostly duty-free) than what was provided under the GSP preferences. The Asian and Latin American (former) colonies were left out of this enhanced preferential arrangement. So, from the very beginning, Sri Lanka and other Asian developing countries were not getting MFN in the European market.

Q: Then why didn’t Sri Lanka and/or other Asian countries challenge that in the GATT?

A: To challenge that, Sri Lanka had to go against not only the EEC but also against other developing countries. That was the early stages of the Non-Alignment Movement and the Group of 77 (G77). Perhaps, at that stage, the cohesiveness of developing countries was much more important to us than market access, particularly because Sri Lanka’s development policies at the time were not export-oriented. We were inward-looking, concentrating more on import substitution. Possibly due to these reasons, Sri Lanka did not make much effort to obtain ACP-like preferences in the European Market. Instead, we were more focused on becoming the leaders of the G77 and the Non-Alignment Movement.

On the other hand, Andean, and Central American Countries (some of these countries are also loosely called “Banana Republics”) started lobbying at every possible point for ACP-like preferences in the European market. We do not have much literature on this, but available reports show the intensity of their lobbying. For example, during the official tour of these countries by Mrs. Rosalynn Carter, the US First Lady, in 1977, the main message the Presidents of Costa Rica and Colombia wanted her to take back to the US president on their behalf was to gain his assistance in getting ACP-type preferential market access to the EEC whilst receiving a similar arrangement for them in the US market.

After 10 years of consistent lobbying by Andean and Central American Countries, in 1990, the EU came up with a bizarre kind of GSP arrangement called “GSP Drugs” or the GSP “Special arrangements to combat drugs production and trafficking”. This facility was extended only to the Andean and Central American Countries. Some of these countries were among the top coca-producing countries in the world. Most of them exported bananas, cut flowers and other tropical products. The concessions under “GSP Drugs” were very similar to the concessions under ACP and provided duty-free treatment for most of the products. Only a few items, like bananas, were left out.

In the early 1990s, Sri Lanka and the Asian Group took this up at UNCTAD very strongly. We argued that “GSP Drugs” violates the non-discrimination principle of the GSP and pointed out that it should be either aborted or extended to all preference-receiving countries. The EEC defended it under the Enabling Clause. Though the EEC position was incorrect, no one wanted to challenge this in the GATT dispute settlement system, as it was weak and expensive, and the decisions were not effectively enforceable.

A few years later, in 1999, the EU introduced two other special GSP arrangements. These were; GSP Labour and GSP Environment. Additional tariff concessions were available under these arrangements, and these were open to all beneficiary countries under certain conditions. Subsequently, the EC introduced another GSP arrangement specifically for Least Developed Countries (LDCs) called “Everything But Arms (EBA)”. In addition to that, the EU also had developed a few other trade arrangements, like Euro-Med Agreements, under which some developing countries received deeper preferential tariffs.

Q: What other countries in South Asia raised similar concerns? Did any one of them succeed in getting ACP-like preferences?

A: Bangladesh, Nepal, the Maldives, and Bhutan received duty-free access to the EU market under EBA. Then after 9/11, the EU extended “GSP Drugs” to Pakistan. So overnight, Pakistan also got duty-free market access to the EU. Though India didn’t get ACP- like preferences, it was the second largest beneficiary (after China) of the GSP arrangements. Sri Lanka could not even fully benefit from GSP general arrangement due to very strict and complex “Rules of Origin” requirements, and Sri Lanka’s GSP utilisation ratio was below 50%. As a result, at the beginning of this century, Sri Lanka was seriously marginalised in the EU market and was paying the highest average tariff rate.

Q: You mentioned that Sri Lanka held a strong position against the Commission, arguing that we were being discriminated against. Could you elaborate on that?

A: To give you some context, in the year 2000, the WTO appointed a group of “Eight Wise Men” to study and clarify the challenges the multilateral trading system faced. This group was chaired by Peter Sutherland, the first WTO Director General and the former Commissioner of the European Commission in charge of Competition Policy and consisted of very eminent people (one of the eight men was John Howard Jackson – the John H Jackson Moot Court Competition is named after him).  This committee submitted a report (‘The Future of the WTO,’ published in 2004) where they noted:

“At the heart of GATT was the principle of non-discrimination characterised by the MFN clause and the national treatment provisions principally embodied in Article 1. The MFN Clause was regarded as the central organising rule of GATT and the world trading system of rules it constituted [para 58] …. Yet, nearly five decades after the founding of GATT, MFN is no longer the rule; it is almost the exception… Certainly, the term might now be better defined as LFN, a Least Favoured-Nation treatment [para 60] …. This is best illustrated by reference to the EU, which now has the MFN tariff fully applicable to only nine trading partners, albeit including the US and Japan. All other trading partners are granted concessional market access under Article XXIV, the Enabling Clause, GSP schemes, “Everything but Arms”, and other relationships [para 74].

Around the same time, the discrimination Sri Lanka faced in the EU market was highlighted in a research undertaken by Oxfam/UK (‘Running into Sand’, published in 2003 by Oxfam). On page 28, they noted: “The available evidence suggests that the EU’s Common External Tariff (CET) is fundamentally anti-poor. Here too, the principle of perverse graduation applies. In Britain, tax rates on imports of goods from India are around four times higher than for the USA, rising to over eight times higher for countries such as Sri Lanka and Uruguay.”

While the above publications proved a point in favour of Sri Lanka’s claims, before these studies were published, the Sri Lanka Mission to the EC in Brussels directly took it up with the Commission in 2002. Our arguments were based on our own studies.

Perhaps, 2002 also marked the start of a new chapter in EU-Sri Lanka trade relations. The South Asia division in the Commission’s Trade Directorate was only established that year. Prior to that, South Asia and South America were handled by the same section. Within that section, South America comparatively received more focus, barely providing much attention to “South Asia” as a region. India had a strong presence in Brussels and better access to the commission. So, on a one-on-one basis, India managed to negotiate her concerns with the EC. By then, India was the second largest beneficiary of the EU GSP Scheme. The South Asian LDCs managed access through the LDC track and, by 2001, had full duty-free market access to the EU under GSP-EBA. Pakistan also had received duty-free market access, purely due to political reasons, under “GSP Drugs”.

At the very first meeting we had with the new South Asia section, we made a strong representation of the marginalisation of Sri Lanka due to the EU’s discriminatory trade policies. Around the same time, then-Prime Minister Ranil Wickremesinghe visited Brussels and also took this up with the Commission. At the end of a prolonged process over a few months, the EC agreed to have a joint study through one of its think tanks and also funded it. The Joint study largely came with the same conclusions as our original study, although theirs was a bit watered down. While this was going on, the commission suggested that Sri Lanka apply for GSP Labour to get additional duty concessions. So, we went on to apply for it, and we were the first developing country to get the GSP Labour. However, even with the GSP Labour, we were very much marginalised in the EU due to GSP rules of origin, which were loaded against small countries like Sri Lanka.

Q: So, where does GSP Plus (GSP+) come in, and how is that different from the previous GSP scheme?

A: In December 2001, Thailand became the first country to start a case (EC – GSP Drugs) in the WTO dispute settlement system. They followed the relevant procedure, first requesting a consultation and a panel. However, the dispute did not progress beyond the consultation phase, and the panel was not established. Presumably, Thailand and the EU may have possibly come into an agreement during the consultation process and decided not to move forward with the case. This is not unusual within the WTO dispute settlement system.

After the GSP Drugs facility was extended to Pakistan, in March 2002 India challenged the EU GSP scheme at the WTO. India argued that the tariff preferences accorded by the EC under the special arrangements nullified or impaired the benefits accruing to India under the most favoured nation provisions of Article I:1 of the GATT and the relevant paragraphs of the Enabling Clause. The WTO Panel decision in December 2003 and the Appellate Body decision in April 2004 agreed with the main points of the Indian submission.

In fact, the WTO ruling on the India – EU GSP case confirmed what Sri Lanka has been advocating for more than ten years. That is, EU preferential arrangements nullified or impaired the benefits that should have accrued to Sri Lanka under the MFN provisions of the GATT and the relevant paragraphs in the Enabling Clause.

Subsequent to the WTO Appellate Body Decision, the EU launched a renewed GSP scheme in April 2005. The new scheme contained, instead of five arrangements of the previous scheme (General, “Drugs”, Labour, Environment, and EBA), only three arrangements. It continued with the general arrangement and EBA, but “Drugs”, Labour and Environment arrangements were combined to form a new arrangement called “GSP+”. The GSP+ introduced a few additional conditions. The potential beneficiaries of the arrangement were the beneficiary countries of the “GSP Drugs” arrangement (other than Pakistan) and the countries that were receiving GSP Labour or were in the final stages of qualifying for GSP Labour. Under the arrangement, subject to the Rules of Origin, the beneficiary countries received duty-free market access for most of their exports.

However, it is important to understand that the “GSP+” does not provide Sri Lanka with a major competitive advantage over most of our competitors, as they had similar or better access into the EU market under the arrangements like ACP, “GSP Drugs”, or EBA. It only offered Sri Lanka a level playing field in the European Market after thirty years of being denied something which was rightfully ours.

At the same time, it is also necessary to point out that the EU extended the GSP+ facility to Sri Lanka at a very crucial juncture of our trade relations. Prior to 2005, the tariffs did not impact much on our garment exports to the EU because those were covered by the quota arrangement. However, after 2005, it was different. The cheapest source secured the market, and 9% to 12% duty made a difference. So, after 2005, GSP+ helped our apparel exporters to remain competitive in the EU market.

Moreover, it is also necessary to point out that Sri Lanka’s GSP utilisation rate still remains relatively low, at 63%. In other words, only 63% of preference-eligible exports receive preferential tariffs, whereas 97% of preference-eligible exports from Pakistan and Bangladesh receive preferential tariffs. As a result, as illustrated in the GSP Hub portal of the European Commission, only 54% of Sri Lanka exports get preferential GSP tariffs (as against 86% for Pakistan and 97% for Bangladesh). That means even with the GSP+, nearly half of Sri Lanka’s exports are under the MFN (or what the Sutherland Report called LFN – Least Favoured-Nation) tariffs.

Q: Recently, there has been much contention about the European Parliament (EP) resolutions that have threatened the position of Sri Lanka and other countries’ participation within the GSP+ Scheme. What are your thoughts on that?

A: In June 2021, the European Parliament (EP) adopted a resolution urging the commission “….to use the GSP+ as a leverage to push for advancement on Sri Lanka’s human rights obligations and demand the repeal or replacement of the PTA, to carefully assess whether there is sufficient reason, as a last resort, to initiate a procedure for the temporary withdrawal of Sri Lanka’s GSP+ status….”. Before that, the EP had adopted similar resolutions on Pakistan and the Philippines.

After the EP adopted the resolution on Sri Lanka, to put things into perspective, I wrote an article to compare the resolution on Sri Lanka with the resolutions on the Philippines and Pakistan. In that article, I pointed out that the EP resolutions on Pakistan and the Philippines called on the Commission to take immediate action to withdraw the concessions, and interestingly, the language used in the resolution on Sri Lanka was milder.

Although the EP may pass a resolution, it should be noted that the enforcement of the resolution is the responsibility of the commission. When it came to Sri Lanka, it appears that the commission had opted for a more cautious approach. Take the case of the Philippines – the wording used in the resolution was more immediate, implying that no alternate form or tool could be used against the country. An important point in this respect is that, to date, no action has been taken. The Pakistan resolution was also similarly strongly worded, and yet nothing has happened. In contrast, in the case of Sri Lanka, GSP+ was said to be removed “as a last resort” if the government did not address the concerns raised on the PTA.

It is also necessary to emphasise that the use or misuse of the PTA directly and adversely impacts people in Sri Lanka. Similarly, the issues related to human rights or labour standards are matters that have a direct impact on the citizens of the country. Therefore, the people in this country are more interested than the Commission in solving such issues. If GSP+ is removed or not extended on the claim that human rights or labour standards are not enforced properly, the EU would only penalise them, the victims. As of now, the Commission has much more forceful tools at its disposal to penalise those who violate the basic rights of the people. Therefore, the withdrawal of the GSP+ status from Sri Lanka only is considered “a last resort” after exhausting all other options. Similarly, I believe the Commission would adopt a more cautious approach as it reviews the GSP Plus eligibility for the next cycle.