Many Sri Lankan businesses, we're told, believe they'll keep their GSP+ duty free access to the EU. Which only goes to show how little many businesses understand politics. The belief, we're told, is that "their government has been working behind the scenes to allay the fears of the EU, and that Sri Lanka may well be handed an action plan or roadmap that outlines changes it needs to implement during the six-month period before the GSP+ is withdrawn." This, they believe could lead to duty-free access being extended. But can a bunch of factory owners possibly know about the motivations and machinations of politicians and officials 5,000 miles away? The odds are none of them even know the name of the head of Europe's Trade Directorate. Actually no-one does: although the President of the European Commission has nominated the man he wants to be head of the directorate, his nominations are subject to confirmation by the European Parliament. Predicting the details of European trade policy without knowing who's going to be in charge is like predicting in 2008, when we didn't know who'd be in power the next year, what US policy was likely to be in 2009.
What Sri Lankan factory owners MIGHT know is what the Sri Lankan government is likely to do to honour the agreement it voluntarily made in order to get duty-free access. In fact, though, since Sri Lanka's got a presidential election around the end of January – about the same time the EU is due to decide on Sri Lanka's fate – the likelihood has to be that any decision the EU makes will depend on who the Sri Lankan president is after January, and whether the EU trusts him to be do what he says. That decision partly depends on what Sri Lanka promises – but it depends far more on the EU's judgement in January. For what it's worth, here's our view about how the EU will behave. Now on paper, the problem the EU faces over Sri Lanka is the same as the one the US faces over Madagascar. Madagascar's eligibility for duty free access under the US AGOA programme also depends on its adhering to good government – which, since the elected government was overthrown in March, it hasn't. But the two cases are interestingly different – and we suggest they illustrate how Western governments make decisions. Neither Sri Lanka nor Madagascar matter much to the EU or US, and neither are in much of a position to negotiate. Both made commitments when they got their duty-free status: the current president of neither country has shown any real interest in honouring those commitments – for the very good reason that both think reneging on those commitments is in their country's interests. The debate in both the EU and US goes:
Is the beneficiary country going to do what it said it would? To which the current answer has to be no.
Will it give convincing assurance in time for our deadline? Who knows?
Will the damage to the local people of withdrawing duty-free privileges outweigh the benefit of better governance? And that's where the debate gets interesting.
It doesn't matter in this debate whether the EU and US attitudes to what's right for Sri Lanka and Madagascar are justified. The US and EU hold all the cards, and what matters is what they think – not whether they're right to think it. But the damage withdrawal might do is very different in Sri Lanka from the damage withdrawal might do in Madagascar.
For Sri Lanka, losing GSP+ is a nuisance. It would put the price of most clothes exported to the EU up 9.6% - but for only if the Sri Lankan government reneges (which its Central Bank has argued it should) on the promise it made in 2008 to provide a subsidy equivalent to the new duty. Sri Lanka's strengths, though, lie in garments like bras (on which the EU will charge only 5.2% duty from Sri Lanka), around a third of the garments it sends to Europe don't qualify for duty-free entry anyway – and sales to the US account for about 40-45% of the country's garment exports. So loss of its EU concession would clearly hurt many Sri Lankan exporters and lose many Sri Lankan jobs – but it would hardly destroy its thriving garment industry forever. What's more, Sri Lanka has reasonably stable government: its recent civil war was an uprising by one ethnic group, leading to terrorist incidents throughout the country – but that no more destabilised life in most of the country than the IRA destabilised the UK. The effects of withdrawing GSP+ would be to damage the economy – but no more than currency fluctuations would do, and it would have limited knock-on effects on the rest of the country.
For Madagascar, though, losing AGOA duty-free privileges would be far more damaging. It would add 20-30% to the price of garments delivered to the US (because the US charges far higher import duty tan the EU), and the US buys over 70% of Madagascar's garment exports. Loss of AGOA privileges would probably devastate Madagascar's garment industry – and this could hit European customers, even though Madagascar's duty-free access to the EU would be unaffected. Tens or hundreds of thousands of people would lose their jobs, which, in Madagascar's highly unstable political situation (that's why the last president was deposed) would destabilise things even more.
Looked at from Brussels, stripping Sri Lanka's GSP+ is probably a good way of emphasising that the rules laid down in duty concessions have to be obeyed. Looked at from Washington, though, stripping Madagascar's AGOA privileges risks a serious deterioration in an already difficult situation. Losing AGOA would damage Madagascar far more than losing GSP+ would damage Sri Lanka.
So, in our view, the likelihood on December 6, 2009 is that the EU will take away Sri Lanka's GSP+, subject to reviews in a year or so if Sri Lanka promises to improve. The US will tell Madagascar it keeps the concession for a year – but it's got to show improvements.
Those aren't forecasts. We need to know what the beneficiaries are offering right now, and what the EU/US negotiators think of that. We don't have that information – so predictions would be foolhardy. There's a high likelihood both countries will lose their privileges – Sri Lanka from June 30, 2010 and Madagascar from the end of 2009. Businesses, as always, have to plan for the worst and hope for the best.
Which means finding alternative suppliers. Whether they're called into play depends on what the EU and US decide.