GSP (Generalized System of Preferences) is a unilateral preferential trade arrangement, which is governed by a set of rules different from those applicable in regular trade. The rules are based on the rationale to promote industrialization of the developing countries through a reduced or zero-duty access to the developed importing countries. The Rules of Origin for GSP, thus, tend to be tougher than that of regular trade. Unless the required value addition is done, an export item will not be considered eligible under GSP. It can still be exported, but a regular tariff will be imposed, for LDCs(Least Developed Country) quota will not be there and GATT( General Agreement on Tariffs and Trade) rules of origin will be applied.
EU (European Union) proposed new rules of origin criteria requiring products from LDCs to have 30 percent local value to get duty-free access to EU market. The new rules of origin are supposed to come into effect in the beginning of 2009.
Local textile and knitwear sectors fear that the proposed single-stage rules of origin criteria would put their industries in danger of losing market to advanced textile manufacturing countries. They have urged the European Commission to raise local value addition threshold to 45 per cent to help Bangladesh’s dressmakers benefit from the revised GSP. Bangladesh Textile Mills association (BTMA) leaders opined that the proposed rules of origin would discourage investments of textile entrepreneurs in local backward linkage industries, and suppliers from China, India and Pakistan would grab local market of fabrics and yarns for export-oriented garment industries.
The two-stage rules of origin effective from 1997 provide that to get duty-free access under EU’s GSPs, LDC exporters require significant local value additions (80%for Bangladesh)to export items. Following the requirement, Bangladesh’s knitwear exporters continued to enjoy duty-free access by shipping apparels made of local knit fabrics. But only a few woven garment exporters benefit from the scheme due to the country’s poor local manufacturing base for woven fabrics.
Since 1986, following EC-Bangladesh Textile Agreement, RMG exports very quickly took an overwhelming share of total exports to EU. The growth in the exports to EU had also been phenomenal. It was mainly for the quota-free access, not that much for duty free access of Bangladeshi textile products. The GSP utilization increased, together with the sudden growth in knit export to EU after the relaxation of the rule in 1999. The share of woven (shirts, trousers) and knitted products (T-shirts, sweaters) about five years ago, (of the total RMG export to EU) was 60 and 40 per cent respectively. Since 1999 share of the knitted RMG started increasing and it is now about 51 per cent. Apparently, the better backward linkage (reduced lead-time) and duty free status (owing to the change in the Rules of Origin) provided better business, which kept the overall growth despite the recent economic depression.
Bangladesh warmly welcomed Everything But Arms (EBA) initiative of the EU when GSP Regulation was amended (February, 2001) to continue LDC’s zero duty access to EU market for an indefinite period and for export of everything but arms. However, all Bangladesh export items have already been entering EU market under duty and quota free trade regime (LDC treatment under GSP). But Bangladesh’s GSP utilisations could not be much in the textile category, although significant increase in the utilisation has been observed in the last couple of years. Interestingly, this increase coincided with a change in the Rules of Origin for knitted garments (1999) allowing imported yarn to be manufactured and exported under GSP. The GSP utilisation in the woven garments, however, remained very low.