As EU Trade Plan for Pakistan Hits Roadblock, Critics Ask: Was WTO Waiver Necessary?

6 April 2011

An EU attempt to help Pakistan's economy recover from devastating floods last year by granting it tariff preferences for some textile exports has hit a roadblock, with India, Bangladesh, and Peru withholding consent from a WTO waiver authorising Brussels to deviate from multilateral rules to discriminate in favour of Pakistan.

The proposed initiative dates back to September of last year, when EU member states agreed in principle to temporarily remove tariffs on key Pakistani exports on a non-MFN basis (in other words, other comparable WTO members would not benefit from the lowered duties). The European Commission came up with a list of 75 tariff lines - mostly textiles - to receive the preferential access, keeping an eye on import-competing industry in the EU, effects on least-developed country export prospects, and potential opposition from other developing countries. The scope and duration of the propsective tariff cuts were whittled down in the face of opposition from import-sensitive EU member states, which met with disappointment in Pakistan.  But winning consent from all WTO members to authorise the EU to provide Pakistan with market access on a non-MFN basis has thus far proved an insuperable obstacle. WTO rules require a government seeking to deviate from the ‘most favoured nation' obligation - the obligation to treat countries equally - to secure a waiver from all members.

At a meeting last month of the WTO Council for Trade in Goods, India, Bangladesh, and Peru said they were still consulting on the matter with the EU. Vietnam is also believed to be in talks with the EU on the waiver. The EU delegate told the meeting that while the discussions were helping to ease some concerns, delaying too long would defeat the purpose of the proposed tariff cuts, that is, to provide immediate help to Pakistan's economy. According to the EU, a May meeting of the General Council, the WTO's top permanent decision-making body, presents that last real opportunity to resolve the issue.

Outside the WTO, words have been blunter. India's commerce ministry has said that the EU proposal would help Pakistan's textile industry, not flood victims, according to a report in the Economic Times last week. A ministry official told the Indian newspaper that New Delhi had suggested to the EU that "if they want to help they could do it in other ways, including giving direct cash aid to Pakistan." India, like Bangladesh, fears that the trade concessions could cost their own textiles industries market share in the EU.

Pakistani officials, for their part, say that New Delhi's objections are political rather than economic, arguing that the package of trade concessions is too small to matter to India's overall economic interests. The issue has been raised in bilateral talks involving trade officials from the two countries, reports The News, a Pakistani newspaper.

Fmr Pak WTO envoy: EU could have avoided waiver by expanding GSP-plus

According to Manzoor Ahmad, a former Pakistani ambassador to the WTO, the EU never needed to enter into the politically fraught quest for a waiver: in order to grant Pakistan significantly improved market access, Brussels could simply have made a small adjustment to the eligibility criteria for its ‘GSP-plus' trade preference programme. Currently, countries cannot benefit from this scheme, which goes beyond the EU's standard Generalised System of Preferences, if they account for over 1 percent of the EU's total GSP-related imports. Pakistan, says Ahmad, accounts for only a fraction above this threshold; by lifting the threshold, say to 1.5 percent, the EU could have given Pakistani textile exporters substantially improved market access without running into complications at the WTO.

Pakistan had been seeking inclusion in the EU's GSP-plus scheme even before last year's floods, Ahmad said. The country easily met the EU's criteria for economic vulnerability resulting from a relatively undiversified export basket, and had been in the process of ratifying the international conventions that were the other requirements for GSP-plus qualification.

Asked whether the European Commission was contemplating changes to its GSP-plus qualification threshold that would enable Pakistan to qualify, John Clancy, the Commission's trade spokesperson, said that "the European parliament recently granted a GSP ‘roll-over' meaning that the current GSP structure will be valid until 31st December 2013." He said that a proposal for revising the GSP was currently being developed, and could be tabled for discussion later this spring.

Ahmad, the former Pakistani WTO ambassador, said that the policy course ultimately chosen by the EU had much to do with the bloc's internal politics. The non-MFN tariff initiative was an idea that came from the EU's external relations directorate, he suggested; the trade directorate was lukewarm about it from the start, and would have preferred giving Pakistan more money instead.

In any case, Ahmad noted, the EU was hardly doing everything it could to smooth the path of imports from Pakistan: since mid-2010, the EU has levied countervailing duties of over 5 percent on Pakistani polyethylene terephthalate (PET), a material used in plastic bottles, to offset harm to EU producers resulting from what Brussels alleges are bond and export financing policies that are tantamount to a subsidy. Interim duties introduced in June 2010 amounted to 9.7 percent; in September, which was after the floods in Pakistan, the Commission confirmed that the duties would remain in place for five years, albeit at a lower rate of 5.1 percent.

In the United States, a bill seeking to grant duty-free access to certain exports from designated areas in Afghanistan and Pakistan's border regions died in Congress at the end of last year, after it got bogged down in the Senate. That bill was unrelated to flood damage -- its goal was to discourage violent extremism by stimulating economic activity. Kim Elliott, a senior fellow with the Washington-based Centre for Global Development, said that there is apparently interest in reintroducing a similar bill in the new Congress, which took office in January.

An expert on trade preferences, Elliott authored a study that found that limiting duty-free access to a small number of products from the designated ‘reconstruction opportunity zones' would limit their effectiveness. A more helpful approach, she says, would provide such access to goods from all of Pakistan, with any product caps limited to a small number of politically sensitive items. If the US ever managed to pass legislation granting non-MFN duty-free access to Pakistani products, it too would require a WTO waiver, Elliott noted.

ICTSD reporting; "India not ready to support trade sops for Pak textiles," ECONOMIC TIMES, 28 March 2011; "Iran, Pakistan, U.A.E. Face 5-Year EU Taxes on Bottle Material," BLOOMBERG, 27 September 2010; "Indian opposition to EU goodwill gesture irks Pakistan," THE NEWS, 24 March 2011.

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