EU Trade initiative for Pakistan: pluses and minuses

Majyd Aziz

PAKISTAN, bestowed with many bounties of nature, frequently faces natural disasters that strain the nation’s unstable economy and ruthlessly disrupt the lives of its people. The earthquake in 2005 in the Northern Areas devastated a large population resulting in countless deaths and economic losses running into billions. In 2010, the country faced another monumental calamity caused by floods ensuing from heavy monsoon rains that violently affected one-fifth of the country. More than 20 million citizens were directly affected and there were more than 2000 casualties. The loss to property, infrastructure, and livelihood was incalculable. Some estimates put the total losses as high as $45 billion. Sympathy, relief goods, pledges, and expert human resources poured in from all over the country and from everywhere around the globe.

Although, during and after the disastrous floods the Pakistani government was frantically appealing for all kinds of aid, many donors preferred to contribute directly or through trusted NGOs and CBOs to the affected and displaced victims. The appeal also resonated in Brussels at the headquarters of the European Union where member countries agreed with the superb presentation made by Federal Commerce Secretary, Zafar Mahmood, who was accompanied by the then Foreign Minister Shah Mahmood Qureshi on this trip. The EU members, accepting Pakistan’s oft-used mantra of ‘Trade not Aid”, announced an economic package at a press conference on October 07, 2010 addressed by EU Trade Commissioner Karel De Gucht. This envisaged duty exemption on 75 designated products constituting 27% of Pakistan’s exports to EU countries, for a period of two years, subject to the approval of WTO. Humanitarian consideration was pragmatically enveloped in an economic facility.

Pakistan’s domestic industries, while deeming the package as restrictive and not all encompassing, nevertheless hailed the initiative as encouraging, and exporters were buoyant about their own expected financial inflows and projections, and began gearing up for new orders and new hiring. The prevailing slide in the dollar-rupee parity, the confidence on their own products, the favorable global demand for their goods, and the sympathy factor were all positive and favorable factors. The high hopes, that Pakistani exporters would further consolidate and substantially increase the market share in EU countries, inculcated in them urgency and optimism.

When the proposal was placed before the WTO for admitting it as a waiver in January 2011, 150 of its 152 members supported the request under the Most Favored Nation stipulations. The waiver – lowering trade barriers for humanitarian reasons – was unprecedented in WTO since there was no precedent of similar action because preferential trade terms offered to one member must be offered to all, thus making such favoritism impossible. The EU desired that WTO members ignore the rules to help Pakistan in these extenuating circumstances. Alas, Pakistan faced an unexpected bombshell. While countries such as China, Saudi Arabia, United States, Kuwait, Oman, Qatar, UAE, Chile, Turkey, Uganda, Colombia, Norway, Mauritius, and Zambia, etc., provided full support to grant of the waiver, Bangladesh, Brazil, Chile etc., spearheaded by neighbor India, put a damaging spanner in the works leading into an undesirable and unjustified deadlock.

What was at that time commended as a heartening gesture by EU, as well as by other WTO members, seemed headed for defeat courtesy the negative stance maintained by Pakistan’s traditional competitors because it was highlighted as providing Pakistan with undue advantages and unwarranted benefits. Pakistan was having her worst nightmare and this calamity, with losses in billions, was in addition to billions of dollars spent on the Global War on Terror since Pakistan was a front-line state in this operation too. To date, Pakistan has spent nearly $ 70 billion and has lost close to 40,000 civil and military casualties in this war.

The stalemate was ostensibly broken when, during the visit of the Commerce Minister accompanied by a 70-member trade delegation (the writer being a part of it), the Indian authorities agreed to withdraw objections to this initiative. However, the bolt from the blue then came from Dhaka and suddenly it seemed that Pakistan was back to square one in Geneva. Fortunately, friends of Pakistan, primarily Saudi Arabia, did not let the issue to be further exacerbated, and Bangladesh and some other countries had to relent in favor of Pakistan, albeit with some changes that addressed their apprehensions and concerns.
The journey from Brussels to Geneva to Brussels took nearly sixteen precious months and it would be another couple of months before Islamabad gets the final nod. The trade package would be presented before the General Conference of the WTO for approval where, apparently, no opposition is expected. After the General Conference clears the package, a bill would be tabled in EU Parliament for final approval.

What is the real benefit of this initiative? What difference would it make in enhancing Pakistan’s exports and its manufacturing capacities? How would this fare well with the new GSP Plus that would be applicable to qualifying countries from 2014? When the EU proposal for Pakistan was decided, there was a sense of excitement among exporters from Karachi to Peshawar. The 75 items translated into some $900 million worth of exports corresponding to 27% of Pakistan’s total exports to EU countries.

These include 65 textile products, 9 from the leather sector, and also ethanol but the main items of the textile sector bedwear, readymade garments and cotton fabrics, which command 38 percent, 20 percent and 12 percent share respectively in exports to the EU, are not included in the concession package. The sub-textile sectors of dishcloth, duster, knitted tracksuits, other fabrics, towels, gloves and socks would benefit. The total exports from Pakistan amount to $ 4.50 billion. There were various estimates hovering around that Pakistan’s exports to EU would increase by more than $250 million per year. This could have been possible if it was applicable from January 2011 when economic conditions in Europe were attractive for inflow of Pakistani exports.

Today, most of Europe is in a financial and economic turmoil. Things are not as conducive as they were last year. Yes, Pakistani exporters would endeavor to extract maximum advantage from the initiative, but the possibility of enhanced exports of around $500 million until December 2012 seems far-fetched. The pragmatic advantage Pakistan would probably get is not more than $ 200 million during the two-year tenure of this package. This figure may not be accepted by all but, if the present shortages of infrastructure (that have played havoc with textile units, especially in Punjab persist) then the desired figure may not be achievable.

Moreover, EU has imposed ceilings on eight major items that are not at all acceptable to the industry as Pakistan has been exporting these products under different tariff codes, and the trade figures are actually understated drastically. It can be correctly said that the ceiling in these categories may be exhausted within a few months, thus narrowing the benefits from the described concessions if the exporters manage to operate their units even with all the negative factors impeding their progress.

The way out is an urgent brainstorming session between the stakeholders in the private sector and government’s policymakers, to evolve a practicable action plan to maximize the benefits of the package. Textile processing mills would have to convert to coal based power generation since gas supply in the coming years would be substantially reduced. At the same time, the government has to improve the political environment, ensure better law and order, spruce up the bureaucratic structure, settle all outstanding duty refund claims pending with the Federal Board of Revenue, convince State Bank of Pakistan to reduce the discount rates, improve good governance, stop human rights violations and, more importantly, announce initiatives that would enable the private sector to reduce the cost of production.

Pakistan enjoyed GSP Plus from 2002 to 2005, but after expiry of that period, the EU did not renew this package. It is worth mentioning here that EU leaders are supportive of the proposal to accommodate Pakistan in the new GSP Plus initiative from 2014 onwards. At the same time, the brainstorming session must also discuss the game plan to ensure that Pakistan not only qualifies for the GSP Plus commencing from 2014, but also convinces SAARC countries to strive for a uniform and common strategy applicable to all SAARC countries. This would naturally benefit Pakistan, and provide the Pakistani exporters the momentum to compete with other competitors on an equal footing. This is also the responsibility of the decision makers to lobby strenuously in SAARC as well as in EU. Moreover, the private sector, under the lead of FPCCI, must utilize services of top lobbyists to lobby for inclusion of Pakistan in GSP Plus.

It is hoped that this would be given top priority by the concerned Ministries as well as by the highest authorities in the government today. Pakistan must persuade EU to change the criteria for GSP Plus so that benefits of this scheme accrue to domestic exporters who are geared up to expand exports to EU. Currently, GSP Plus is given only to those countries whose exports to EU are less than one percent of their total exports. Efforts must be made to convince EU to increase this percentage as Pakistan's exports to EU are presently surpassing the threshold. Under GSP Plus import duties on products there would also be no limitation on exports.

It is important that Pakistani exporters and the government maintain optimism and ensure that the EU GSP Plus boat does not leave the shores without them being on board. The cautionary signal is that the present package is just a short-term booster, and not a complete panacea for Pakistan’s alarming economic situation. The real remedy is a mixture of various factors such as diversification of products, tapping new markets, sense of urgency, and government and stakeholders being on the same page.