New EU GSP Rules of Origin for Bangladesh and other LDCs

The European Commission Regulation (EU) No. 1063/2010 of 18 November 2010 has been published in the Official Journal of the European Union amending Regulation (EEC) No 2454/93 laying down provisions for the implementation of Council Regulation (EEC) No. 2913/92 establishing the Community Customs Code.

Subsequently the European Union (EU) has notified about the changes in the Rules of Origin (RoO) from certain LDC countries which will simplify the procedure of granting the GSP benefits to the exporting countries and will also benefit other countries involved in supplying raw materials to the country exporting the final product. Thus ensure a better integration of developing countries into the world economy, in particular through improved access to the markets of developed countries.

The EU provides three types of GSP benefits to the exporting countries :

The standard GSP provides with preferences to 176 Developing Countries and Territories on over 6,200 tariff lines;

The GSP+ is the special incentive arrangement for sustainable development and good governance, which offers additional tariff reductions to support vulnerable developing countries (currently 16) in their ratification and implementation of 27 international conventions in these areas;

Everything But Arms (EBA) arrangement provides with Duty-Free, Quota-Free access for all products for the 49 Least Developed Countries (LDCs). Under this arrangement, started in 2001, EU granted duty free access for all products except arms without any quantitative restrictions . These countries are :

Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Cape Verde, Central African Republic, Chad, Comoros Islands (Islands), Congo, Democratic Republic of Djibouti, East Timor, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Laos, Lesotho, Liberia, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Nepal, Niger, Rwanda, Samoa, São Tomé & Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Tanzania, Tuvalu, Togo, Uganda, Vanuatu, Yemen and Zambia.

As per the new notification of EU regarding change of Rules or Origin, it seems that all the above countries are going to benefit and can export duty free to the EU even if only one stage of processing (ie garment making in case of apparel) has happened in that country. Consequently, these countries will be able to import fabrics from any country in the world and export apparel duty free to the EU. A maximum content of 70% of non-originating material can be used for getting the GSP benefit. However, this percentage will differ from product to product.

There is also a possibility that the following countries also get the benefit of zero duty export based on the second criteria of vulnerability. These countries are: Tajikistan, Uruguay, Turkmenistan, Peru, Panama, Paraguay, Nigeria, Fiji, Dominican Republic, Kenya and some others. This list keeps on updating each year and has to be referred with the EU to see the latest status.

Who is going to Benefit?

A. Apparel Exporters in the LDCs: The main winners of this change would be the garment exporters in these LDC countries – noteably Bangladesh, Cambodia , Lesotho etc.

B. Fabric Exporters in the neighbouring countries: Fabric exporters to Bangladesh from countries like China, India, Indonesia, Pakistan and Thailand would be greatly benefitted as currently they are at a disadvantageous position against the local mills in Bangladesh who enjoy easy sales due to the GSP benefit that is received by garment exporters using their fabrics.

C. EU Importers: The importers of apparel in EU would be benefitted due to reduced costs of apparel. Or rather, I should say that they would benefit from the costs of apparel which do not increase as much as they would normally due to the highly increased cotton costs.

D. Other industries in Bangladesh etc LDCs: The plastic and other industries in Bangladesh would greatly benefit from using imported materials to export finished products to EU.

Who can be the losers?

A. Bangladesh textile mills: The textile industry can be the biggest loser as it loses its main advantage of the GSP benefit. It will now have to compete with the strong textile industries in China, India, Indonesia, Pakistan, Thailand and other countries in the open market. For example, currently most denim mills in Bangladesh enjoy a sold out position and some mills do not actually have a marketing department! This situation is likely to change now. However, the powerful textile lobby of Bangladesh has previously fought against the benefits being passed on to other countries. Under the current rules, EU allows the fabric of India and Pakistan to be used for getting GSP benefit. But Bangladesh, under pressure from its textile lobby, has not passed this benefit. It is now fighting hard against changes also and it is anybody’s guess how much they will be successful. But the chances of reversion of EU decision or the capacity of the Bangladesh Textile Mills to put a spanner in the works seems limited as they are pitted against all the other industries in Bangladesh including apparel – who are benefitting from this development. However, this loss of profit for the Bangladesh textile mills could be for short term period . In the longer run, it would help the industry to upgrade itself and compete with the best in the world. In any case, they will continue to enjoy the logistic benefit .

The textile industry in Bangladesh may also benefit from the changed rules in some sectors:

Example 1: Chapter 58 Special woven fabrics; tufted textile fabrics; lace; tapestries; trimmings; embroidery etc. For these products, either the weaving can be done in Bangladesh or Printing accompanied by at least two preparatory or finishing operations (such as scouring, bleaching, mercerising, heat setting, raising, calendaring, shrink resistance processing, permanent finishing, decatising, impregnating, mending and burling) can be done where the value of the unprinted fabric used does not exceed 47,5 % of the ex- works price of the product. This may raise possibility of increased production of some textile items in Bangladesh.

Example 2: A yarn, of heading 5,205, made from cotton fibres of heading 5,203 and synthetic staple fibres of heading 5,506, is a mixed yarn. Therefore, non-originating synthetic staple fibres which do not satisfy the origin rules may be used, provided that their total weight does not exceed 10 % of the weight of the yarn.

B. Garment industry in India and other Non-LDC countries: The impetus that the garment industry in Bangladesh receives or for that matter Cambodia receives, will be at the cost of the garment industry in the vicinity countries. India is already unable to compete with Bangladesh in garment exports and when the duty free advantage comes into place, India’s garment exports will be further eroded as buyers flock to the LDC countries to source their goods. India, China, Indonesia, Vietnam and some other countries could be big losers in the garment export game. Pakistan may not be that affected as it has the currency advantage with it.

Calculating the Benefits:

If the garment exported from Bangladesh using Pakistani / Indian fabrics priced at $6 / pc (CIF), it attracted a duty of 72 cents @12% previously. The whole of this duty amount would now be saved. Currently, for denim fabrics, the mills in Bangladesh enjoy a premium of about 20-50 cents per metre over other suppliers from Pakistan, India, Indonesia etc. This translates into a benefit of about 30 to 70 cents per garment. Once the new rules of origin are in place, this margin will actually be reduced to very little or almost nil. Hence the denim mills in the surrounding countries can expect an increase in the prices of their denim fabrics from 10 cents to 25 cents per metre assuming that the importer in EU will try to take away 50% of advantage by way of reduced garment prices.

And it is not only the denim industry that is going to be affected. Let’s take some examples of exports from Bangladesh for products other than apparel which also open up possibilities for exporters.