Financial Times

EU grants special incentives to Sri Lanka
Sri Lanka and Moldova are the only two countries in the world to be granted with special incentive arrangements for the protection of labour rights (known as the social clause) by the European Community (EC).

The EC said in a statement that this benefit was provided to Sri Lanka on December 29, 2003 under Commission Regulation No.2342/2003. With the granting of the labour incentive, as of February 1, 2004 all Sri Lankan sensitive products which received a 3.5 percentage points reduction from the MFN rate will receive an additional 5 percentage points reduction which will make the total reduction from the MFN rate to 8.5 percentage points.

The textiles and garment sector which received a 20 percent reduction from the MFN rate will now receive an additional duty reduction of 20 percent which will make the total reduction from the MFN rate to 40 percent.

Some products with specific duties which currently enjoy under the GSP scheme a 30 percent reduction from the MFN rate will have an additional reduction of another 30 percent under the labour clause thus bringing the total reduction to 60 percent off the MFN rate. The only exception to this are the specific duty items under CN 2207 which currently enjoy a reduction of 15 percent under the GSP scheme; they will receive an additional 15 percent reduction as per the labour clause bringing the total reduction to 30 percent off the MFN rate.

The major beneficiaries of this new incentive will be the Sri Lankan manufacturers exporting to the EU markets whose products qualify as originating in Sri Lanka. As of February their exports will be more competitive than those of its competitors, the statement said.

Sri Lanka will benefit from this clause in 2004 and 2005. In 2006 a complete new GSP system will be introduced. "In the meantime Sri Lanka will have to continue its efforts to improve its social situation, in order to benefit from the social incentive under the GSP scheme," it said.

The EC's Generalized System of Preferences (GSP) has a development-oriented dimension which provides for special incentives rewarding compliance with international social (social clause) and environmental standards (environmental clause). In 2002 the Sri Lankan government applied in writing to the European Commission requesting that Sri Lanka be granted special incentives under the social clause indicating that Sri Lanka was in compliance with the core labour standards referred to in the International Labour Organization (ILO) Conventions no 29 and no.105 on forced labour , No 87 and No.98 on the freedom of association and the right to collective bargaining, No.100 and No.111 on non-discrimination in respect of employment and occupation, and No.138 and No.182 on child labour.

The EC carried out an independent evaluation on the above and concluded that Sri Lanka was making good progress towards full compliance with the core labour standards and therefore decided to grant this incentive. Under the GSP scheme, Sri Lanka like other developing countries enjoyed a reduction in duty of 3.5 percentage points from the MFN (Most Favoured Nation) rate for the sensitive products, with the exception of the garment sector where the reduction was 20 percent of the MFN rate.

Half of the products covered by the GSP scheme are classified as non-sensitive products and these enjoy complete duty free status when entering the EU market, the statement said. As per year 2002 economic data, EU is Sri Lanka's largest trading partner representing 22 percent of Sri Lanka's total external trade (or EUR 2,3 billion) of which Sri Lanka's exports to the EU accounted for 28 percent (or Euro 1.3 billion) of its total exports, while its imports from the EU accounted for 16 percent (or EUR 955 million) of its total imports.

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