TWN Info Service on WTO and Trade Issues (Dec10/08)
13 December 2010
Third World Network

EU presents WTO duty-free waiver request for Pakistan
Published in SUNS #7053 dated 3 December 2010

Geneva, 2 Dec (Kanaga Raja) -- The European Union (EU) this week presented its request for a waiver from its obligations under the GATT 1994 for a period of two years with respect to the granting of unlimited tariff free or other preferential tariff treatment for certain products originating in Pakistan, presenting the proposal as an aid to reconstruction efforts in Pakistan following its unprecedented floods.

The EU presented its waiver request (G/C/W/640) at a meeting of the Council for Trade in Goods on Tuesday (30 November).

The request appears to have elicited the support without conditions of some countries including China and the US, support from a second group of countries who however expressed their reservations and systemic concerns, while a third group called for further consultations.

The Council is to revert to the subject at its next meeting in January.

The EU request for a waiver from its obligations under the provisions of Article I: 1 and Article XIII of the GATT 1994, if granted, would permit the EU to provide preferential treatment for imports originating in Pakistan, without it being required to extend the same preferential treatment to the like products of any other Member of the WTO.

In its communication to the Goods Council, the EU highlighted the purpose of its request.

It said that in July and August 2010, following heavy monsoon rains, devastating floods affected extensive regions of Pakistan, notably, the areas of Baluchistan, Khyber Pakhtunkwa, Punjab, Sindh and Gilgit-Baltistan.

According to UN sources, it added, the flooding affected some 20 million people and 20% of Pakistan's land, equivalent to at least 160,000 square kilometres, and left up to 12 million people in need of urgent humanitarian aid.

"Humanitarian aid is of course the primary instrument in this kind of situation," said the EU, noting that since the beginning of the natural disaster, the collective contribution of the EU to the humanitarian effort has exceeded 415 million Euro.

The EU further said that at the same time it is conscious of the importance of smoothly moving from humanitarian relief to the reconstruction phase. "In this context, the EU is ready to use all means available to facilitate Pakistan's economic activities, including by granting to Pakistan an improved access to the EU's market to support the recovery of its economy through increased exports."

The EU communication said that it is foreseen that certain products originating in Pakistan will be admitted for import into the EU with the exemption of customs duties. In addition, a tariff preference is given for certain textiles and clothing products and ethanol in the form of exemption from customs duties within the limit of a tariff quota.

The EU highlighted a list of 75 dutiable product lines of importance for Pakistan's exports that has been established. The selected product lines amount to almost 900 million Euro in import value, accounting for about 27% of EU imports from Pakistan (3.3 billion Euro).

The products for which it is envisaged to grant unlimited duty free access or limited tariff preferences are listed in two annexes to the draft waiver decision proposed by the EU.

Products originating in Pakistan that are to be exempt from custom duties upon importation into the EU range from dried mushrooms and truffles, to gloves, single and multiple cotton yarn, bleached and unbleached plain woven fabrics of cotton, anoraks, jackets, trousers, nightshirts and other garments, and footwear.

Products originating in Pakistan subject to annual duty-free tariff quotas upon importation into the EU include ethyl alcohol, other dyed woven fabrics of cotton, pantyhose, tights, stockings, socks and other hosiery and footwear, women's or girl's cotton denim trousers and breeches, women's or girl's garments, and toilet and kitchen linen.

The EU communication said that in order to ensure an immediate, but also sustainable impact on the economic recovery of Pakistan in the aftermath of the floods, it is appropriate to limit the duration of the trade preferences to two years.

The EU said it reserves its right to request an extension of this duration by another year if it considers that this is necessary for the economic recovery of Pakistan.

The EU was of the view that the tariff preferences provided under the envisaged autonomous regime do not create any impediment to the reduction or the elimination of tariffs or other restrictions to trade on a most-favoured-nation basis. Furthermore, the tariff preferences under the autonomous regime will not affect benefits to other developing countries under the EU's GSP scheme, it added.

The EU said that it is prepared to give full consideration to representations made to it by other WTO Members and to engage in consultations with them as may be necessary.

A trade diplomat who participated in the Goods Council meeting classified the reactions to the EU's proposal into three groups of countries. In the first group were those that were in favour of the EU proposal. The middle group of countries highlighted their reservations and concerns over the proposal but said that they would support it. In the third group were those that said that further consultations would be needed.

The trade diplomat told SUNS that in the first group were the United States, China, Pakistan, Colombia, Chile, Turkey and one or two others that said that they were in favour of the EU proposal, without mentioning any conditions or reservations.

According to the trade diplomat, a middle group of countries said that they had many systemic concerns with the EU proposal but that they would support it based on the humanitarian angle that is being advanced by the EU. These countries were Uganda, Uruguay, Mauritius (on behalf of the ACP group), Madagascar, Bangladesh and Sri Lanka.

These countries, according to the trade diplomat, raised their concerns over the EU proposal, saying that these concerns would need to be addressed, but that they would support the EU request. The trade diplomat noted that among these countries, Sri Lanka gave a "scathing attack" of the EU but in the end said it supported the waiver.

Trade officials said that Sri Lanka had expressed concern that the EU was using trade concessions for achieving its political agenda. According to the trade officials, Sri Lanka said that the impact of the EU initiative on the country will be significant. However, it said that it will accept the waiver request while remaining concerned about the discriminatory treatment it has experienced in the EU market.

According to the trade diplomat, while being critical of the proposal, Mauritius supported the waiver, saying that it would not stand in the way if the benefits go to the people in the devastated areas. Uruguay said that the door should be left open for consultations, he added.

The trade diplomat further said that Bangladesh said that it supported the EU waiver request provided that the damage was assessed and that Bangladesh gets compensation. It was willing to engage constructively towards working out that compensation.

According to the trade diplomat, the third group of countries said that there is need for further consultations concerning the EU proposal. These included India, Brazil, Vietnam, Peru, Zambia, and Chinese Taipei.

According to the trade diplomat, Zambia said that in principle it did not oppose the general thrust of the proposal, but that its impact on trade must be assessed. It asked for more time to discuss this proposal.

In a detailed statement at the Goods Council meeting, India said that Pakistan has had an unprecedented flood in 2010, which apart from taking a heavy toll of more than 1,700 lives, has also damaged or destroyed crops, food grains, livestock, houses and valuable infrastructure like school buildings, hospitals, roads, bridges, railway lines and electric transmission lines.

"Our heart goes out to the people of Pakistan, especially the families who have lost their near and dear ones in the floods. We are familiar with the effect of floods and other natural disasters which wreak havoc with a predictable regularity around the globe including in some or the other part of our own country every year. We are thus deeply conscious of widespread misery and hardship such calamities leave behind in its wake."

India added: "The EU proposal to provide zero tariffs for Pakistani exports to the EU on 75 tariff lines for two years is indeed a noble gesture. Its stated objectives are to help the flood affected people of Pakistan as well as to enable the system to move from humanitarian relief to the reconstruction phase in the flood affected areas."

However, stressed India, there is a need to look at this proposed measure in greater detail to see if it really serves the stated objective.

To implement their proposal, said India, the EU has sought a waiver from one of its most fundamental obligations of the WTO - of providing MFN (most-favoured-nation) treatment.

"This has raised systemic issues, which too merit deeper analysis and serious consideration. The members need to reflect on what impact such a waiver may have on the multilateral trading system in the long run and how such a waiver will impact the poor and disadvantaged people living in other countries."

On the efficacy part of the proposal, India said that its experience has shown that temporary tariff concessions limited to a few years are not going to lead to foreign direct investments or creation of additional employment opportunities. On the contrary, there are enough studies to show that temporary tariff concessions lead to gains mainly to the existing producers and merchant traders and only some peripheral gains for the existing labour employed in the industry, mainly by way of overtime payments. If the objective is to encourage foreign direct investments and additional employment opportunities, it has to take place through longer term measures like Free Trade Agreements, capital assistance, infrastructure strengthening etc.

Another aspect of the proposed measure is that because of the export oriented nature of the industries covered and the distance between most of the flood affected areas and the centres of production as well as rigidities in inter-sectoral labour mobility in developing countries, the industries sought to be benefited are most unlikely to absorb significant numbers of landless agricultural labour or rural artisans from the flood affected areas, added India.

India said that it has also come across reports to the effect that since the concessions are primarily in the sub-sectors of cotton yarn and fabrics and the cotton crop has been badly affected by the floods, some downstream industry bodies of Pakistan, e. g. the Bedwear Exporters Association, the Hosiery Manufacturers Association and the Readymade Garments Manufacturers and Exporters Association feel that the tariff concessions would adversely affect the overall exports of the country.

A prestigious Pakistani magazine, "Dawn - Economic and Business Review", in its edition of November 22-28, India said, has quoted several Pakistani businessmen who have raised doubts about the efficacy of the EU measures. They feel that the EU attempts to assist Pakistan is at best inadequate.

Finally, asked India, if there are not going to be direct gains for the flood affected people, are there going to be substantial indirect benefits through greater tax buoyancy and allocation of extra amounts from the government?

"We are afraid the answer to this question is not very encouraging. As is well known, every country tries its best not to export its taxes along with its export products through schemes for duty waivers or duty reimbursements for the exported products. This is most likely to happen in the instant case also. Thus, it is not clear why EU has opted for such an indirect way of providing assistance to the flood affected people and infrastructure in the flood affected areas of Pakistan."

As regards the systemic implications of the EU proposal, India said that the systemic implications are of most vital significance for India and many other developing countries. It needs to be borne in mind that the GATT and subsequently the WTO were framed, inter-alia, to provide certainty and predictability to the multilateral trading regime. Any waiver from one of the cornerstones of the GATT, i. e. MFN treatment, therefore, needs to be considered with utmost seriousness.

India noted that even in the case when BOP (balance-of-payment) problems had led to Greece offering preferential tariff concessions to Russia in the old GATT days, the Working Party set up to go into the issue had stated as follows in paragraph 11 of its report of 14 October 1970 (L/3447-18S/179): "A major objection of principle was raised by most members of the Working Party to the granting of a waiver to cover preferential tariff treatment. The Protocol was not compatible with Greece's obligations under Article I of the General Agreement. Approval of the provisions of the Protocol, through a waiver, would set a serious precedent which could then be invoked by any contracting party. It could also encourage pressure from non-GATT countries for similar arrangements in connection with bilateral trading agreements. Furthermore, it would constitute a serious erosion of order in international trade, as formulated in the General Agreement. Such a waiver, even if granted in a case with limited trade effects, could not fail to create a serious precedent, which could well be used in cases involving large trade effects."

India believed that the views expressed by the Working Party are as valid today as they were decades ago.

"It may be germane to mention that natural disasters do not figure even once, since 1948, as a reason for providing GATT/WTO waivers to the grant of tariff preferences. Though each natural disaster leaves behind a trail of death and destruction and no value can be put on even a single human life lost, it needs to be remembered that in the 2004 Tsunami, which accounted for more than 230,000 lives in 14 countries, including only developing countries and LDCs, no tariff preferences were given to any of the affected countries."

Also, noted India, paragraph 1 of the Understanding in Respect of Waivers of Obligations under the General Agreement on Tariffs and Trade 1994 lays down as follows: "A request for a waiver or for an extension of an existing waiver shall describe the measures which the Member proposes to take, the specific policy objectives which the Member seeks to pursue and the reasons which prevent the Member from achieving its policy objectives by measures consistent with its obligations under GATT 1994 ".

India said: "The EU has not been able to provide a credible explanation of why it could not achieve its policy objective of providing assistance to the flood affected people of Pakistan, through any WTO consistent measure like additional aid in cash or kind. If indeed tariff preferences were the only option available to the EU, no acceptable explanation has been put forward as to the reasons why existing EU schemes of GSP, GSP+ etc. could not be utilized for the purpose."

India added that it needs to be remembered that many developing countries suffer every year from natural disasters. Just to recount the major natural disasters in 2010, there has been a devastating earthquake in Haiti, flash floods in Ladakh, Punjab, Himachal Pradesh and Rajasthan in India, floods in Thailand, Vietnam, tsunami and volcanic eruption in Indonesia etc. Within the last week or so, flash floods in the southern province of Tamilnadu in India have cost around a hundred lives and considerable damage to the infrastructure.

"If we were to create a precedent for granting MFN waivers for natural disasters for the first time in 63 years of GATT/WTO existence, it would seriously damage the cause of certainty and predictability of the multi-lateral trading system."

Will such natural disasters also qualify as "Exceptional circumstances justifying a waiver" criteria within the meaning of Article IX: 3 of the Marrakesh Agreement, asked India. "That is a question, we need an answer to."

India further said that the EU's measure, however well meaning, will also cause "collateral damage". It needs to be noted that there are many developing countries and LDCs, who would get adversely affected by the proposed measure through trade diversion and preference erosion. In most developing countries, garments and textiles are produced in the unorganized or small scale sector with workers getting paid on a piece-rate basis. Thus, what the EU is really asking for is that poor workers in the developing and least developed countries will contribute towards EU's humanitarian aid and assistance.

"Pakistan is an important partner for India in South Asia, and we remain committed to a prosperous and peaceful Pakistan. We would have desired that donors come up with efficient, quantifiable and direct assistance to the affected victims as well as to alleviate the negative impact of the floods in Pakistan, rather than promises of an outcome, which is extremely uncertain," added India.

"All the members need to look at the issues that we have flagged so that collectively we come up with credible and meaningful assistance for the victims as well as to rebuild the infrastructure in the flood affected areas. The EU proposal, as currently framed, appears deeply flawed, both in terms of its scant potential to help the flood affected victims and the reconstruction effort in the flood affected areas as well as the near certainty of its causing collateral systemic and commercial damage to the MFN principle and the poor workers in other developing countries respectively."

At the barest minimum, therefore, the EU proposal would need further consultations for addressing the concerns just outlined, India concluded.

According to trade officials, Vietnam, while supporting the EU request in principle, said that it had concerns regarding the impact of the EU programme on other Members. It added that it would support further consultations.

While expressing solidarity with Pakistan, Peru said that it has also suffered from natural disasters. It stressed that the EU measure will have a negative impact on the textile and footwear exports of Peru.

According to trade officials, Pakistan expressed its appreciation to the EU, and urged support for the waiver.

Both the EU and Pakistan said that they would welcome consultations on this matter, said trade officials.

The Council agreed to revert to this matter at its next meeting late January next year. +