Bangladesh needs a clear strategy for GSP+
This February, Bangladesh received the endorsement of the United Nations Committee for Development Policy (UNCDP) regarding its final timeline for exiting the Least Developed Countries (LDCs) group. Bangladesh is now scheduled to leave the LDC category in 2026.
As we leave the group, Bangladesh will miss out on the LDC -specific preferences and privileges afforded by its international development partners. The most specific and significant loss will be duty-free and quota-free (DFQF) market access for the country's export items.
This is a situation that all Bangladesh exporters will be watching most closely. The EU (along with the huge UK) market currently accounts for about 62 percent of apparel exports and nearly 56 percent of all exports from Bangladesh. Losing these huge trading benefits overnight represents a serious risk for Bangladesh's export competitiveness. Logically, addressing DFQF loss-related fallouts—particularly in the EU market—must be a core pillar of Bangladesh's LDC graduation (transition) strategy.
In 2015, the EU initiated a preferential market scheme for (non-LDC) Low-Income Countries (LICs) and Low-Middle-Income Countries (LMICs), titled "Special Incentive Arrangement for Sustainable Development and Good Governance", commonly known as GSP+. Under this scheme, the EU offers zero duty market access up to 66 percent of tariff lines to the eligible countries, like Bangladesh.
Yet, curiously, out of a total of potentially eligible 71 LICs and LMICs, currently only eight enjoy benefits under GSP+, with Pakistan and Sri Lanka being the only countries from South Asia.
So, the question is: how is Bangladesh getting ready to access the EU's GSP+ benefits? It becomes all the more critical given already rising concerns that Bangladesh would continue to enjoy the EBA (Everything But Arms)—the special arrangement for LDCs, providing them with duty-free, quota-free access for all products except arms and ammunition—till 2029. But, the reality is: the EU is advancing on a new GSP+ Policy by 2023, which may not make our EBA continuation automatic.
Bangladesh must fulfil several requirements to access the already existing GSP+ scheme: a beneficiary country has to satisfy a vulnerability criterion. This means, an exporting country's value of the top seven major products should be more than 75 percent of its total GSP-covered exports. In other words, high product concentration is considered to be a sign of the exporting country's "vulnerable economy".
Currently, that figure for Bangladesh is around 96 percent of our total exports to the EU. So, Bangladesh is already eligible for the scheme, at least on one count.
The other eligibility condition relates to the "import share criterion". This means, the exporting country's share in the EU's total import under the scheme should not be more than 7.4 percent. This limit has been imposed to curb the dominance of "large suppliers" among the beneficiary countries.
On that criterion, Bangladesh is indeed a major supplier of apparel and other products in the EU market, as the relevant figure is as high as 26 percent. Therefore, unless the allowed share is significantly increased or the denominator of the concerned variable is favourably changed, Bangladesh will not be eligible for GSP+. Of course, Bangladesh could try to negotiate replacement of the criterion with an altogether new one.
Under the existing EBA, LDCs are granted preferential "Rules of Origin" (RoO) permitting "single transformation". But, preference eligibility under the GSP+ scheme demands "double transformation" of the exported items. In other words, in post-graduation life, if we are to get DFQF market access, Bangladesh has to first convert fibres into fabrics and then fabrics to apparels. While this is quite demanding and has major implications for product competitiveness, surely we need to review the ongoing structural changes in our apparel and textile industry.
Beyond the difficult technical issues, there is another set of complex (and equally important) issues concerning the guidelines of "sustainable development" and "good governance". These conditions are collectively known as the "sustainability requirements". Social and environmental considerations are likely to become much larger.
We cannot sit pretty. We need to act, from now, to address the emerging scenario and possible consequences. Some of the key actions should include the following.
The government and all the industry trade bodies should collate and process credible data to argue the "vulnerability criteria" and "import share criteria", if we intend to pursue the GSP+ pathway.
The Bangladesh apparel sector has gradually strengthened its backward linkage industries. As much as 80 percent of our exportable knitwear are undergoing double transformation, while it is around 50 percent for woven garments. If Bangladesh opts to meet GSP+ eligibility, we must immediately draw up and progressively implement a "strategic business plan" in the textiles sector to cover the "shortfall" in the area of backward (as well as forward) linkage industries,
The RoO of GSP+ also offers alternative opportunities for meeting the requirements of double transformation. One option provides the exporting countries the opportunity to use "regional cumulation" of RoO of its products. One such provision allows imports from South Asian countries (including India) to account in the calculation of the double transformation. Although India is one of the two predominant suppliers of textiles and apparel-related inputs, Bangladesh till now has justifiably avoided this option in the interest of developing our domestic textile industries. We need to decide to what extent we would wish to go for this and invoke this option that is potentially available for accessing GSP Plus.
The regional cumulation provision can also be executed by accounting for imports from countries with which the EU has Free Trade Agreements (FTA). Two Asian countries—Vietnam and South Korea, which have FTAs with the EU—are relevant for Bangladesh. The question we then need to look at is the extent to which Bangladesh's exports will remain price-competitive by using South Korean inputs. Meanwhile, sourcing from Vietnam will be quite complicated as they already have established themselves as a main competitor of Bangladesh in global apparel market.
The government and the industry stakeholders will also need to have a clear strategy on how our manufacturing industries would accomplish other related global commitments—to ensure clean energy, carbon neutrality, waste management, robust climate actions vis-à-vis the emerging EU Green Deal, Circular Economy frameworks, etc.
Last but not the least, Bangladesh can weigh the option of an FTA with the EU to have permanent duty-free access. Surely, a bilateral FTA with the EU would witness "trade-offs" on aspects/issues much more political than just tariff. It is a tedious, so-far-uncharted walk that requires difficult trade-offs between domestic industries/sectors. Given the rudimentary understanding and preparedness within our government and business on bilateral FTAs to date, I am not sure at which stage Bangladesh may opt for negotiating an FTA with the EU.
All of these can hardly wait for another rainy day. Time is ripe for the government and our business and industry to see eye to eye and begin talks, at least internally.
Mostafiz Uddin is the Managing Director of Denim Expert Limited. He is also the Founder and CEO of Bangladesh Denim Expo and Bangladesh Apparel Exchange (BAE).