Dependency on trade concessions

by FS

(July 12, Colombo, Sri Lanka Guardian) While there has been a lot of hot air over the withdrawal of GSP+ concessions by the European Union and a probe on a petition by a US trade union to discontinue trade concessions for Sri Lankan exporters to the US, it is important to analyse the bigger picture in terms of these benefits.

While concessions are useful to gain a price advantage since Sri Lanka’s production costs are much higher than its nearest competitors like Vietnam, Cambodia or Bangladesh, concessions are always temporary and the industry needs to move out.

Most sections of Sri Lanka’s private sector revel on handouts, concessions and tax breaks. On the other hand, a chaotic tax regime is also hurting business, a point raised by Treasury Secretary P.B. Jayasundera at a recent breakfast meeting where he said banking sector taxes are as high as 60% while corporate taxes are also too high. He was critical of the Board of Investment tax (holidays) regime which prevents a level playing field and said a new structure recommended by the Presidential Tax Commission should address all these issues to ensure businesses revel and the economy, accordingly, progresses.

A Business Times poll this week on the GSP+ issue also drew comments from respondents that Sri Lanka needs to wake up and move on without being dependant. For too long our business community has relied on tax breaks and handouts and when it’s not there, there’s discontent to the extent that it is often turned into a (UNP vs UPFA) political issue. In the case of both the EU GSP+ concessions and the US GSP, there are rules and guidelines in which recipient countries must observe to qualify for these duty-free and reduced tax benefits.

Even if Sri Lanka loses GSP+ concessions from the EU, the normal GSP (reduced-tax) concessions continue and should we then antagonise the European Union as some of the statements and protests in recent times have shown? We have said this earlier and we repeat: GSP is neither a right nor an entitlement of a recipient country. It is solely at the discretion of the EU to grant this facility and there are many countries waiting for this facility and are prepared to follow the rules.

The EC has repeatedly said at various forums in Colombo that the continuation of the GSP+ depends on how well the Sri Lankan government implements the 27 international conventions on human rights, labour rights and environmental standards.

In the US case, worker rights is a condition for recipient countries and if this is not adhered to, the US has every right to withdraw such concessions. There was concern in Colombo last week that the US decision was linked to the EU move and a subsequent statement by the EU urging Sri Lanka to accept the UN Panel on Human Rights –which all happened on Tuesday or Wednesday. So was there an international conspiracy against Sri Lanka as some commentators in Colombo saw?

The US Embassy in a statement to the Business Times explained that it was more of a coincidence that everything came at the same time. In the US case, the annual review of GSP for all countries must be made before July 1 and a glance at the website of the US Trade Representative would show that in the previous years – 2009, 2008 or 2007 – the review statement has been made in or around June 28/29. On the issue of why the trade union petition which was filed in 2008 was suddenly accepted in 2010 (at a time when Sri Lanka is blazing away with the West), the embassy said that there are many cases of petitions being deferred to allow the country to correct any flaws and in this case, there hadn’t been any progress by Sri Lanka. Furthermore there are some countries where the review has been going on since 2000 and these nations still continue to get GSP.

Thus the US GSP review won’t be as quick as the EU GSP probe. Yet, it is time Sri Lankan industry moves on and takes up new challenges, just like how some companies like MAS Holdings and Bradix handled the end to the Multi Fibre Arrangement (MFA) in 2005. Then there was much more chaos in the garment industry fearing the end to quotas would lead to a major crisis. However the industry came together and formed the Joint Apparel Association Forum to counter the fallout from this development.

Came 2005 and 2006 and the impact was not as one expected. Yes, smaller companies were forced to close or downsize but bigger ones began acquiring these companies and moving into the top-end, non-quota of the market. Now even if there are job losses from the suspension of EU GSP+, there are still 30,000 unfilled vacancies in the garment sector.

Thus the writing is not on the wall for Sri Lankan industry vis-à-vis trade concessions. The country needs to move on to make it competitive in the international market instead of using trade concessions to get an advantage. However, the antagonistic and hostile approach response to rules on trade concessions would not help and would only ruin our immediate and short-term relations with the West which – like it or not - is our main export market.