Originally posted in The Business Standard on 21 April 2021
In the end of February 2021, Bangladesh received the endorsement of the United Nations Committee for Development Policy (UN CDP) regarding its final timeline for exiting the group of least developed countries (LDCs). The country is now scheduled to leave the category in 2026, i.e., with extra two years to get ready for a smooth and sustainable transition.
Joyous celebration of this developmental achievement however should not obfuscate the pitfalls associated with this change in country status. Indeed, fixation of the finishing timeline has brought to the fore more forcefully the need for Bangladesh to design and deliver a LDC graduation or transition strategy in the coming five years.
On leaving the group, Bangladesh is going to miss out on the LDC category specific preferences and privileges extended by its international development partners.
The most specific and significant loss in this regard will be the duty-free and quota-free (DFQF) market access for the country’s export items. It has been estimated by the Centre for Policy Dialogue (CPD) that this may lead to 8-10 percent fall in Bangladesh’s export revenue, amounting to about USD 2.5 billion annually.
In this connection, the forfeiture of entitlement under the “Everything but Arms” (EBA) scheme of the European Union (EU), launched in 2001, will play the most defining role for Bangladesh.
The EU market (along with the UK market) currently accounts for about 62 percent of the country’s apparel exports and nearly 56 percent of the total exports of the country. Thus, addressing the DFQF loss-related fallouts—particularly in the EU market—has to be one of the core pillars of Bangladesh’s transition strategy for LDC graduation.
The obvious way out of the situation lies in extending the additional time of three years when the graduated LDC continues to enjoy DFQF privilege in the EU market.
The most specific and significant loss in this regard will be the duty-free and quota-free (DFQF) market access for the country’s export items. It has been estimated by the Centre for Policy Dialogue (CPD) that this may lead to 8 -10 per cent fall in Bangladesh’s export revenue, amounting to about USD 2.5 billion annually
A number of proposals regarding this currently remain under consideration at the World Trade Organisation (WTO). Whatsoever, Bangladesh is assured of enjoying this privilege at least till 2029.
Yet, it will be only prudent and proper for Bangladesh to look beyond this time-bound traditional provision and explore other preferential market schemes available (particularly in the EU) for post-LDC countries.
The EU, in 2014, initiated a preferential market scheme for (non-LDC) low-income countries (LICs) and low-middle-income countries (LMICs). This scheme, titled “Special Incentive Arrangement Sustainable Development and Good Governance”, is popularly known as GSP Plus.
Under this scheme, the EU offers zero duty market access up to 66 percent of the tariff lines to the “eligible” countries.
Curiously out of a total of 71 LICs and LMICs potentially eligible countries, currently only 8 countries actually enjoy benefits under GSP Plus. These countries include Pakistan and Sri Lanka from the South Asian region.
So, the question is – how is Bangladesh poised for accessing the benefits of EU’s GSP Plus?
One may segment this question into three parts.
First, is Bangladesh potentially eligible for accessing GSP Plus? The answer is: Yes. Bangladesh is entitled for the scheme as a LMIC.
Second, does Bangladesh currently fulfil the requirements to access GSP Plus? The answer is: No. That is why the question of the country’s readiness for the scheme comes up.
Third, can Bangladesh be ready by 2029 for the scheme? The answer is: Probably, it depends.
The rest of the present piece will elaborate on the issues that the country has to take on board to turn this possibility into reality.
Addressing eligibility criteria
There are a host of conditions to be satisfied by a beneficiary country in order to take advantage of the GSP Plus scheme. Let us check out some of the important ones.
A beneficiary country has to satisfy a vulnerability criterion. It implies that the exporting country’s value of top 7 major products should account for 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, the concerned figure for Bangladesh is to the tune of 96 percent of its 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 suggests that 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. And Bangladesh is indeed a hefty supplier of apparels and other products in the EU market as the relevant figure is as high as 26 percent.
Unless the allowed share is significantly increased or the denominator of the concerned variable is favourably changed, Bangladesh will remain ineligible for GSP Plus.
Of course, the country could try to negotiate replacement of the criterion with altogether a new one. So, this remains to be that one area where Bangladesh will have to work further in the future.
Rules of origin and double transformation
It may be recalled that under the EBA, LDCs were allowed preferential “rules of origin” (RoO) permitting “single transformation” (the need to do only one conversion of inputs to another product) in the production chain of the exportable.
This implies that due to the weak manufacturing base of the LDCs, they are allowed to use wide-ranging imported inputs in producing their final duty-free exports. Accordingly, Bangladesh was enjoying DFQF market access even when its exported apparels were stitched of imported fabrics.
Preference eligibility under the GSP Plus scheme demands “double transformation” of the exported items. In other words, in post-graduation life so as to get DFQF market access, Bangladesh has to first convert fibres into fabrics and then fabrics to apparels.
While this issue is quite demanding and has major implications for product competitiveness, we need to review in this connection the ongoing structural changes in the country’s textile industry.
Over the years, Bangladesh’s apparel sector has gradually strengthened its backward linkage industries. It is maintained that as high as 80 percent of the exportable knitwear are undergoing double transformation, while the comparable figure for the woven garments is around 50 percent.
If Bangladesh can implement a strategic business plan in the textiles sector to cover the “shortfall” in the area of backward (as well as forward) linkage industries, then the country will be in the striking distance of achieving GSP Plus eligibility.
The RoO of the GSP Plus also offers alternative opportunities for meeting the requirements of double transformation. One of the options in this regard provides the exporting countries to resort to “regional cumulation” of RoO of its products.
One such provision allows imports from South Asian countries (including India) to be accounted for 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 its domestic textile industries. But the fact remains that invoking this option 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 agreement (FTA).
Two countries, namely Vietnam and South Korea – having FTA with the EU – are relevant for Bangladesh in this respect. It is a matter of empirics to find out, for example, to what extent the country’s exportable will remain price competitive by using South Korean inputs.
Meanwhile, sourcing from Vietnam will be quite complicated as this country has already established itself as one of the main competitors of Bangladesh in the apparel market.
Focusing on sustainability requirements
Beyond the complicated technical issues, there is another set of complex (and no less important) issues concerning the guidelines of “sustainable development” and “good governance”. (Recall the official title of GSP Plus!) These conditions are collectively known as the sustainability requirements.
The GSP Plus requires that the beneficiary country ratifies 27 international conventions. Bangladesh has already ratified 26 of them and the only unattended one concerns “minimum age for admission to employment”.
Currently, under Bangladesh’s labour laws and regulations, various (sub) sectors have different minimum age for the workers. There is a demand from the international community that the country signs up to this convention and does not allow underaged people to get into employment. This is an extension of the elimination of the child labor issue.
Ratification with reservations
A significant number of the 26 ratified international conventions have been adopted by Bangladesh with “reservations”. This suggests that the country, due to a variety of economic and socio-cultural circumstances, is not in a position currently to fully implement the concerned convention.
In this connection, objections voiced by a number of member-states of the EU to two of the “reservations” expressed by Bangladesh may be pointed out.
Incidentally, both relate to gender rights issues – one relates to equal rights between man and woman with respect to inheritance law and the other to equal rights of men and women in marriage. Certain EU member-states are objecting to these reservations as, according to them, they run contrary to the basic values and objectives of the GSP scheme itself.
Monitoring and review
Apart from the ratification and reservation, the other set of issues concerns the requirement for regular monitoring and review of the ratified international conventions.
The beneficiary countries of the GSP Plus scheme are mandated to undertake regular monitoring and periodic review of the state of compliance of these conventions and disclose those reports properly. Regretfully, Bangladesh is considerably lagging behind in the required reporting; there are cases where reports are due since 2001.
Beyond the conventional conditions
Recent discussions in connection with the review process of GSP Plus has highlighted a number of areas of interests of the stakeholders. The ongoing COVID-19 pandemic added new dimensions to these issues.
The ambition is to leverage the GSP Plus scheme to bring about more regulatory transparency in export governance, to promote a “Green” economic recovery and to instill human-centred development with labour rights as its pivot.
One of the critical elements of negotiations with the EU regarding entitlement to GSP Plus focuses on the whole gamut of labour issues. The workers’ rights issues have been partly addressed through a couple of changes in the country’s Labor Act (2006), while a number of crucial amendments await enactment.
The outstanding anxieties include child labour elimination (according to the Minimum Age Convention); violence against workers and work place harassment; freedom of association, registration of trade unions and rights to strike; termination of workers, benefits and penalties; elimination of backlogs in the labor court.
However, discrepancy regarding labour rights in the Export Processing Zones (EPZs) remains in the bull’s eye not only in the dialogue with the EU, but also with other development partners (e.g., the USA). In comparison, meeting the demand for appointment of an adequate number of labour/factory inspectors seems quite feasible.
Admittedly, the outstanding labour issues are complex but apparently solvable through social dialogues with domestic stakeholders and beyond.
The proponents of Green recovery are asking for more environmental commitments, e.g., in the area of wastage management and “circular economy”. They also seek the GSP Plus scheme to be at par with the EU’s Green Deal and its new Trade Strategy as well as with its upcoming Strategy for Sustainable Textiles. Moreover, a number of climate actions are being associated with the green deal and the climate action.
Learning from Cape Verde
Among the eight countries currently enjoying the benefits of GSP Plus, Cabo Verde is the only former LDC. The African island country in the Atlantic, with only half a million population, left the LDC group in 2007 and was included under EU’s GSP Plus in 2011, i.e., only after it exhausted post-graduation three years of DFQF facility.
Indeed, Cabo Verde was able to negotiate a number of derogations on the rules of origin and preferential requirements for its fisheries export.
It is always useful to learn from others, however unlike they may be.
Where do we stand now?
It is interesting that Bangladesh will be negotiating its way out while the GSP Plus scheme is going through an extensive and inclusive review as its current phase is going to expire by the end of 2023.
Till that time, the review process will sequentially go through the European Commission, European Parliament and the European Council.
Relevant proposals are currently being finalised at the Commission level – under both technical and political tracks – and by June 2021 is expected to be handed over to the Parliament.
The country is witnessing a closing window of opportunity as the discussions at the European Parliament is anticipated to be more challenging.
It may be recalled that the European Parliament in the recent past (2018) has expressed its “serious concern at the deteriorating human rights situation in Bangladesh and, in particular, at the ongoing crackdown on the freedom of expression and assembly against the media, students, activists, and the opposition”.
The essence of the foregoing analysis is that the country should have ready at the earliest a dynamic, coherent and inclusive LDC transition strategy to pursue market access negotiation with the EU on a substantive basis.
Understandably, this should be one of the most urgent deliverables in the hand of the country’s National Task Force on LDC graduation.
The Task Force was set up by the Bangladesh government under the Prime Minister’s Office back in January 2018 “to oversee implementation of a roadmap for LDC graduation”.
One awaits in suspended animation to witness how the country rises to the occasion in capable designing and clever delivery of such a “roadmap” so that Bangladesh becomes effectively eligible for the EU’s GSP Plus scheme.
The gap between possibility and reality in life is usually bridged by commitment, competence and courage. Acquiring the ability to access GSP Plus will be a test case for Bangladesh in this regard.
Dr Debapriya Bhattacharya, <firstname.lastname@example.org> is a Distinguished fellow at the Centre for Policy Dialogue (CPD), Convenor of the Citizen’s Platform for SDGs, Bangladesh and former Bangladesh Ambassador to the WTO and other international organisations in Geneva and Vienna.