How EU Trade Policy Can Better Promote Sustainability Standards in Supply Chains

The European Union has almost finalised its public consultation on a new regulation around the Generalised Scheme of Preferences (GSP). There are several measures that could be taken to improve the GSP’s effectiveness in incentivising positive human rights performance of the EU’s trade partners, but first, what is the GSP?

What is the Generalised Scheme of Preferences (GSP)?

The Generalised Scheme of Preferences (GSP) is a trade scheme based on a WTO exception clause that allows developing countries to be treated in a favorable way. In practice, this means beneficiary countries pay fewer taxes on exports to the EU. The EU applies three different GSP schemes: Standard GSP, GSP+ and Everything But Arms (EBA).

As the needs of developing countries vary widely, the GSP takes a differentiated approach, providing a sliding scale of preferences according to their needs:

• GSP - duty reductions for ca. 66% of all EU tariff lines on product categories (e.g. textile, machineries, rice) for beneficiary countries.
• Special Incentive Arrangement for Sustainable Development and Good Governance, or "GSP+" - zero duties for essentially the same 66% tariff lines on product categories for countries that ratify and effectively implement core international human and, labour rights, environment and good governance conventions. Currently, there are 13 GSP+ beneficiary countries, such as Pakistan, the Philippines, and Sri Lanka.
• Everything But Arms, or "EBA" special arrangement for the Least Developed Countries (LDCs) - full duty-free, quota-free access for all products except arms and ammunition.

While EBA and GSP are extended automatically to respectively least developed  and middle-income countries, those  wanting to benefit from GSP+ need to apply in order to  gain this preferential treatment.

Eligible GSP+ beneficiary countries need to ratify and implement core UN human rights and ILO labour rights instruments, and internationally recognised environmental and good governance standards. (See annex 8 of the GSP regulation for an overview)

The EU’s GSP+ links the ratification and implementation of these universally recognised standards to trade incentives by providing beneficiary countries access to the European Market. Thus allowing beneficiary countries to export their products to the European market against reduced or zero import tariffs in return for compliance with the requirements set out in the scheme.

For all three GSP schemes, it is essential for beneficiary countries to adhere to these  standards – a failure to do so could lead to the removal of the preferences and tariff-free access to the EU market for exports.

An Example from the EU-Cambodia GSP Relationship

In 2020 the European Union imposed trade sanctions on Cambodia due to a backsliding on its international commitments to uphold internationally recognised human and labour rights standards as a beneficiary of the European Union's EBA a trade scheme that establishes a unilateral trade relationship between the EU and developing countries.

These trade sanctions followed a diligent dialogue process in which the EU urged Cambodia to change its course. Companies and multi stakehoder initatives also expressed concerns in open letters to the Cambodian Government-. The US Senate also urged  the US Trade Representative to reconsider trade preferences extended to Cambodia.

The imposition of trade sanctions on Cambodia in 2020, as well as increasing requests from Member States and The European Parliament, to consider economic sanctions for countries such as Myanmar, Pakistan and the Philippines, highlight the EU’s delicate balancing act between trade facilitation and its intention to promote its values abroad – such as social and sustainability standards, as well as building more resilient supply chains.

The case of Cambodia brings to light several challenges to the EU’s current approach to GSP.

First, the imposition of sanctions, has not improved labour conditions much in the country and  many Cambodian workers in the garment and footwear production industries  are left without an income.

Second, companies quickly shifted production to other countries and, given the continued sanctions, are less likely to return to Cambodia.

Third, relations between the EU and Cambodia have deteriorated. These developments beg the question: would a different approach be more likely to achieve the intended goals of facilitating trade while promoting international sustainability standards?

Monitoring Compliance Under the GSP

The current GSP regulation does not specify the modalities of the monitoring process. This followed over the course of several years.

The most extensive mechanism in place concerns GSP+ beneficiary countries and EBA countries under ‘’enhanced engagement” due to the serious and systematic concerns related to human rights ascertained in the country’’ and it remains the discretion of the EU to withdraw the preferences or not.

Countries come under “enhanced engagement” when the European Commission has identified a backsliding in efforts to implement internationally recognised labour and human rights standards. The countries under ‘’enhanced engagement” currently include Cambodia, Bangladesh and Myanmar.

The EU monitoring process involves a “scorecard”  that lists the issues each beneficiary country is facing, regarding the ratification, implementation, and compliance with UN and ILO conventions and sustainability standards. The scorecard is complemented with an assessment of progress countries made on implementation. Continuous dialogue is maintained, and at the end of the monitoring cycle, the EU issues a country report to assess a country's adherence.

In 2020, this meant Cambodia lost 20% of its tariff free access to the European Market due to s, while Bangladesh and Myanmar are currently still benefiting from full preferences. All three countries remain under enhanced engagement until the EU decides the situation has improved significantly.

Unfortunately, the issues identified in the scorecards are not publicly available and only shared with the beneficiary government. This raises several challenging dynamics, outlined further below.

How to Improve the GSP?

Several measures to promote effective GSP implementation should be introduced  to make the scheme more predictable and transparent, increase compliance in beneficiary countries, and benefit workers and businesses in and outside the EU:

1. Be more transparent about the content of scorecards.

A broader set of stakeholders should have access to the information identified in the scorecards. One can imagine that cooperation between NGOs, business, social partners, the EU, and the beneficiary government together could be more impactful in addressing issues identified in the scorecards. After all, it is in everyone's interest to do so.

1. Create clear benchmarks for beneficiary countries on the basis of their social and environmental commitments.

Setting clear expectations for beneficiary countries would allow for the pooling of resources and would increase accountability in beneficiary countries, not only to ensure laws in accordance with international standards are in place, but also capacities to implement them. This would also encourage a more targeted approach in EU dialogues with beneficiary countries.

1. Provide an overview of the monitoring process and anchor it in the new regulation.

It is currently unclear how the monitoring of GSP related commitments are being conducted and which parties are involved. Providing greater access and information in this aspect of the system would further enhance the predictability of the scheme.

1. Test the extent to which sanctions incentivise countries that make efforts to address issues identified in the scorecards.

Even though the EU is diligent in discussions with beneficiary countries, the sole instrument at its disposal once a regression has been observed is to impose sanctions. As the case of Cambodia shows, sanctions do not always achieve their intended aim, and can cause more harm than good. Though sanctions should not be taken off the table completely, more economic incentives need to be developed for products that comply with International social and environmental standards, as well as introducing economic incentives for beneficiary countries that make a sustained effort to implement the conventions that are part of the GSP Scheme.

The proposed changes outlined above would:

1. Create more transparency in the overall monitoring scheme that the EU is currently using;
2. Promote increased compliance in the GSP+ beneficiary countries as the benchmarks in the scorecards clarify what is expected;
3. Great compliance in beneficiary countries improves the level playing field for companies inside and outside the EU;
4. Allow for a greater convergence of allocated EU and MS funds to achieve the issues identified in the scorecards,
5. Create a common interest to retain the trade preferences to ensure more stability in the scheme, through increased involvement of stakeholders; and
6. Create a more equitable and mature relationship between trading partners, through positive economic incentives.

The EU has almost finalised its public consultation period, after which the proposal for the new GSP regulation will be sent to the European Parliament and EU Member States. It remains to be seen if the ideas above will be reflected, but they would certainly help with making the GSP more effective.