In the absence of the Generalised Scheme of Preferences Plus (GSP+) tariff preference, Sri Lanka will face a tariff increase to Most Favoured Nation (MFN) rates. This study estimates Sri Lanka’s potential export loss due to a hypothetical tariff increase from GSP+ to MFN rates. A second-stage simulation assesses the impact of labour force and distributional costs across different labour groups resulting from preference erosion.
Since preference utilisation is below 100% and varies across sectors, trade effects are weighted for the utilisation ratio. The tariff hike in the EU-28 is projected to cause an export loss of USD 1.23 billion (Bn) or 36.7% of Sri Lanka’s EU-28-bound exports, based on 2019 export figures. The wearing apparel and processed fish sectors will be particularly affected, facing significant export losses. The decline in import demand from the EU-28 will put 4.99% of Sri Lanka’s total industrial workforce at risk of adverse labour market outcomes.
Additionally, this study highlights the disproportionate impact of GSP+ preference erosion on women and low- to medium-skilled workers, who constitute 65.65% of the vulnerable workforce. The spatial distribution of affected workers indicates a concentration in rural areas with high poverty rates.
Sri Lanka risks losing US$ 1.23bn in EU exports if GSP+ revoked
- New study from IPS indicates the absence of preferential tariff scheme could potentially result in a loss of 36.7 percent of exports to the EU
- Asserts GSP+ preference erosion in the EU-28 market is worrying as it will dwindle Sri Lanka’s export value
- A fall of exports would also have major consequences for employment, especially for Sri Lanka’s formal manufacturing sector
Sri Lanka could face losses of up to US$ 1.23 billion if it loses its Generalised Scheme of Preferences Plus (GSP+) trade benefits with the European Union (EU), a new study by the Institute of Policy Studies (IPS) showed.
With the absence of the preferential tariff scheme, the report noted that Sri Lanka risks facing a tariff increase from its GSP+ concessions to Most Favoured Nation (MFN) levels, which could potentially result in a loss of 36.7 percent of its exports to the EU.
Titled ‘Who Stands to Lose? The Effects of GSP+ Withdrawal on Sri Lanka’s Exports and Labour Force’ , the study went on to highlight several other economic and labour market consequences for Sri Lanka if its preferential trade access to the EU is revoked.
“The GSP+ preference erosion in the EU-28 market is worrying, as it will dwindle Sri Lanka’s export value while impeding the diversification of its export product basket towards products with high technology content,” the report, authored by IPS Researchers Dr. Asanka Wijesinghe, Chaya Dissanayake and Rashmi Anupama said.
The EU is a major market for high-technology products such as transformers, which accounted for 50 percent of Sri Lanka’s exports to the EU in 2019. The report indicated that losing GSP+ could result in a 10 percent decline in exports of transformers.
The wearing apparel sector was also identified as an industry that could be among the hardest hit, with tariffs potentially rising by nearly 10 percentage points, despite the sector not fully utilizing GSP+.
This fall of exports would also have major consequences for employment, especially for Sri Lanka’s formal manufacturing sector where approximately 4.99 percent of the industrial workforce would be vulnerable to adverse labour market conditions due to reduced demand from the EU.
This includes 13.47 percent of workers in the wearing apparel sector, who could potentially lose their jobs, according to the report.
Based on the number of jobs linked to imports by the EU-28, the report estimated that the reduced imports under MFN tariffs could make a total of 73,574 workers vulnerable, out of which 65.65 percent will be women and low- or medium-skilled workers.
Although Sri Lanka may eventually outgrow its eligibility for GSP+ as it moves up the economic ladder, the study stressed that losing it at this stage of development would be far more damaging than at a later stage when the economy is stronger.
“Sri Lanka has a strong economic incentive to comply with the agreed-upon conventions, which is a condition for the tariff preference. Despite the variation in utilisation rates, the export effect of preference erosion will be substantial,” the report said.