Mudassir Rizwan
In a significant development for Pakistan’s trade relations with the European Union, Olof Skoog, the EU Special Representative for Human Rights, delivered a stern warning regarding the country’s GSP Plus (Generalised Scheme of Preferences) status. In an exclusive interview with a segment of the independent press, Skoog expressed deep concerns over the ongoing issues of military courts, the freedom of expression, and the overall human rights situation in Pakistan. His message was clear: the stakeholders must not take the GSP Plus status for granted.
This caution from the EU representative must be taken seriously, as Pakistan has greatly benefited from GSP Plus since it was granted the status in 2014. The arrangement allowed Pakistan to enjoy significant trade advantages with the EU, primarily through zero tariffs on more than two-thirds of tariff lines, making Pakistani exports more competitive in the European market. However, this preferential treatment was not handed out unconditionally—it came with the expectation that Pakistan would ratify 27 international conventions and commit to their implementation, particularly in the fields of human rights, labor rights, environmental standards, and governance.
Pakistan’s commitment to these international agreements has been questionable, to say the least. While the country has passed numerous laws in alignment with global best practices, their implementation remains weak, and this has been a persistent issue. The government’s legislative efforts have often been linked to conditions set by international lending bodies, such as the International Monetary Fund (IMF) and the World Bank. Unfortunately, the practical application of these laws often falls short of international expectations.
According to the European Commission’s official website, GSP Plus aims to incentivize eligible countries to pursue sustainable development and good governance. The program rewards countries for making progress in human rights, labor rights, environmental standards, and governance by offering preferential trade treatment. Pakistan, as an eligible country, has enjoyed considerable economic benefits from this arrangement, as it allows zero-rated tariffs on nearly 66% of tariff lines, giving Pakistani products easier access to the EU market.
The most recent report on Pakistan, published jointly by the European Commission and the European External Action Service in November 2023, acknowledged some progress in terms of legislation. However, it also emphasized that practical implementation in both letter and spirit remains lacking. The report pointed out that while Pakistan has made some strides in aligning its laws with international standards, it has yet to fully deliver on the promises made regarding human rights and governance reforms.
Since Pakistan’s entry into the GSP Plus program in 2014, there has been a marked increase in the country’s exports to the EU, particularly in sectors like textiles, garments, bed linen, leather goods, and surgical products. From 2014 to 2022, Pakistan’s exports to the EU increased by a staggering 108%, and the total trade volume between the two regions surged from €8.3 billion in 2013 to €14.85 billion. This clearly demonstrates the significant economic value that GSP Plus has brought to Pakistan.
However, despite these successes, concerns persist about the long-term sustainability of Pakistan’s reliance on the GSP Plus program. A key issue highlighted by the EU Ambassador to Pakistan, Kionka, was that the full potential of the GSP Plus benefits could only be realized if Pakistan diversified its exports to include more value-added products. This is a critical point, as it reflects the broader issue of Pakistan’s export dependency on low-value, unprocessed goods.
The advice from international lending agencies, including the IMF, has been consistent: Pakistan must undertake reforms to its tariff schedules to reduce complexity and avoid relying on tariffs as a tool to promote industrialization. This approach, they argue, has led to resource misallocation and has discouraged participation in global value chains. Furthermore, policies such as export subsidies and local content requirements have been identified as potential violations of international trade obligations.
Given the current economic climate, it is troubling that, ten years after being granted GSP Plus status, Pakistan’s exporters are still heavily reliant on these incentives. The situation has become even more precarious with the ongoing IMF program, which has led to the cessation of fiscal and monetary incentives previously extended to exporters. With inflation rising and the cost of doing business remaining high, the demand for reintroducing these incentives is gaining momentum.
A major challenge facing Pakistani exporters is the high cost of production, which significantly reduces their competitiveness. The inputs for Pakistan’s manufacturing sector are more than double the regional average, and the country’s discount rate stands at 12%. Additionally, electricity tariffs are far higher than those in neighboring countries, further exacerbating the cost burden on local industries. Despite these challenges, the stakeholders can no longer afford to focus on industrial sector support at the expense of the general population. The overreliance on indirect taxes, which disproportionately affect the poor, is no longer a viable policy given the current state of poverty in Pakistan, which has now reached alarming levels of 41%.
Pl watch the video and subscribe to the YouTube channel of republicpolicy.com for quality podcasts:
The critical question that arises here is whether Pakistan can continue to benefit from the GSP Plus arrangement if it fails to address the broader concerns raised by the EU. The warning from the EU Special Representative for Human Rights is a clear signal that Pakistan cannot take its preferential trade status for granted. If the country fails to make meaningful progress in addressing human rights, governance, and economic reforms, it risks losing the very trade privileges that have been pivotal for its economic growth over the past decade.
The implications of such a loss would be significant. For one, the country would face higher tariffs on exports to the EU, which would hurt key industries, especially textiles and garments, that are heavily reliant on GSP Plus benefits. This could also lead to a broader decline in trade relations with the EU, a major trading partner for Pakistan. Furthermore, the loss of GSP Plus status would undermine the credibility of Pakistan’s commitment to international trade norms and sustainability.
The road ahead is clear: Pakistan must demonstrate tangible progress in addressing its human rights and governance challenges. The government must not only pass laws in line with international standards but also ensure their full implementation. The private sector, too, must diversify its exports and invest in value-added products to move beyond its reliance on low-value exports. Only by doing so can Pakistan truly realize the full potential of GSP Plus and ensure long-term economic stability and growth.
In conclusion, the EU’s GSP Plus status remains a valuable asset for Pakistan, but it is a privilege that must not be taken lightly. The concerns raised by the EU Special Representative for Human Rights should serve as a wake-up call for Pakistan’s policymakers to take immediate action on human rights, governance, and economic reforms. Failure to do so risks losing a crucial trade benefit that has proven indispensable to Pakistan’s economic development.