IPS on impact of possible GSP+ withdrawal

Growing uncertainties on the future of global trade as President Donald Trump seeks to impose reciprocal tariffs make programmes such as the European Union’s Generalised Scheme of Preferences Plus (GSP+) more significant for small exporters such as Sri Lanka.

With a reported visit by EU representatives to assess GSP+, it is important to note that in the absence of the current tariff preferences, Sri Lanka will face a tariff increase up to Most Favoured Nation (MFN) levels, likely resulting in export losses and associated negative labour market effects, think-tank the Institute of Policy Studies (IPS) said in a statement this week.

IPS’ latest study titled “Who Stands to Lose? The Effects of GSP+ Withdrawal on Sri Lanka’s Exports and Labour Force,” by IPS Researchers Dr. Asanka Wijesinghe, Chaya Dissanayake and Rashmi Anupama estimates the export loss of Sri Lanka due to a hypothetical tariff increase from GSP+ rates to MFN rates.

The study reveals that the tariff hike in the EU–28 will cause an export loss of US$1.23 billion or 36.7 per cent of EU–28 bound exports from the base year 2019 exports.

Sri Lanka’s wearing apparel and processing fish sectors will be the hardest hit and may face significant export losses. Moreover, the fall in import demand from the EU–28 will make 4.99 per cent of total industrial employees in Sri Lanka vulnerable to adverse labour market outcomes.

This study also points to the differential effect of GSP+ preference erosion on women and low and medium–skilled workers, who account for 65.65 per cent of vulnerable workers.  

Some key highlights from the study are the following:

• Although the wearing apparel sector does not utilise the GSP+ fully, the negative effect is large as the EU tariffs can go up by close to 10 percentage points in a loss of GSP+ status.
• The EU–28 is a major export destination for relatively high–technology products like transformers, accounting for 50 per cent of Sri Lanka’s exports to the world in 2019. Estimates show that after GSP+ withdrawal, Sri Lanka will lose about 10 per cent of exports to the EU–28 in transformers.
• Reduced imports from the EU–28 under MFN tariffs will also make 73,574 workers vulnerable, as per the calculations of embedded employment in the imports by the EU–28.
• Overall, 4.99 per cent of the employment in the affected sectors will be vulnerable to a tariff increase, including 13.47 per cent of workers in the wearing apparel sector.

GSP+ withdrawal will dwindle Sri Lanka’s export value while impeding the diversification of Sri Lanka’s export product basket towards products with high technology content.

Sri Lanka has a strong economic incentive to comply with the agreed–upon conventions, which is a conditionality of the tariff preference. Despite the variation in utilisation rates, the export effect of preference erosion will be substantial.

IPS said although Sri Lanka may lose the preference with gradual economic growth, at the current growth stage of Sri Lanka, GSP+ is an important tariff preference in promoting growth and generating jobs for women and low and medium–skilled workers in the formal manufacturing sector. The loss of GSP+ at the growth stage with higher average income is a much more manageable loss, rather than a preference erosion at the current stage of growth.