Reforming the EU’s GSP+ Scheme – An Analysis into Uzbekistan’s Admission

The EU’s GSP+ Scheme aims to alleviate poverty in beneficiary countries by providing them the opportunity to strengthen and diversify their exports. Despite the benefits, the nature of the scheme’s conditions have raised questions on its ability to deliver its key intentions. Using Uzbekistan as a case study, this Op-ed will assess and analyse the EU’s GSP+ scheme and question who indeed benefits from the scheme, and the manner in which the EU identifies and addresses the issues of poor corporate practices resulting.

The EU’s GSP+ Scheme (Generalised Scheme of Preferences Plus) aims to alleviate poverty in beneficiary countries by providing them the opportunity to strengthen and diversify their exports. The scheme builds on the regular Generalised Scheme of Preferences (GSP) and Everything but Arms (EBA) schemes by providing tariff-free access to 66% of listed import goods, as well as low-duty exports of other goods to the EU. In return, the EU obliges beneficiary countries to abide by, and ratify 27 international conventions on human and labour rights, good governance, and the environment, of which their implementation is monitored by the EU. Of the nine beneficiary countries in the scheme, Kyrgyzstan, Mongolia, Pakistan, Sri Lanka, Armenia, the Philippines and Uzbekistan are the ones located in Asia. 

Since 2016, Uzbekistan has undergone substantial economic and political reforms, boosting the modernisation and opening up of the country. The first round of reforms (2017 to 2021) improved Uzbekistan’s status in the world and launched privatisation initiatives on previously state-owned industries, as well as allowed greater opportunities for foreign investment. Social issues including forced labour in the cotton industry have also been addressed through new legislation and policy. These reforms have been welcomed by the EU, who have allowed Uzbekistan’s entry into the GSP+ scheme in 2021 as a means of further supporting their integration into the international trade and supply chains.

Despite the benefits, the nature of the scheme’s conditions have raised questions on its ability to deliver its key intentions in alleviating poverty, and improving labour and human rights, governance and environmental conditions in the beneficiary countries. The sheer number of these 27 international conventions heavily dilute the impact of the scheme, and place a heavy bureaucratic burden on the beneficiary countries. As the EU has proposed to add more conventions to the scheme, the value of these conventions must be called into question.  

Using Uzbekistan as a case study, this Op-ed will assess and analyse the EU’s GSP+ scheme and question who indeed benefits from the scheme, and the manner in which the EU identifies and addresses the issues of poor corporate practices resulting.

International Conventions and EU Transparency: Too Much and Too Little

At its core, the 27 international conventions’ loose wording and broad statements mean that the text offers many legal loopholes. This makes it complicated for beneficiary countries to implement the conventions and for the EU to effectively monitor the process. This therefore gives way for companies to scale back on social and environmental protections as a means of remaining competitive in the global market.

A prominent example of where loopholes are common is in the Minimum Age Convention 1973 (No.10). Not including the convention’s influence on other minimum age conventions listed in the tenth article, it lists six minimum working ages (12, 13, 14, 15, 16, and 18). Each of these minimum ages are permitted depending on the region’s development (Article 2, Paragraph 4; Article 5, Paragraph 1; and Article 7, Paragraph 4), the nature and completion of the child’s education (Article 6; Article 7, Paragraph 2), and the nature of the work (Article 3 Paragraph 1; Article 3, Paragraph 3; Article 7 Paragraph 1; and Article 8, Paragraph 1). For instance, Article 7 Paragraph 1 articulates how children aged 13 to 15 may be permitted to do ‘light work’ which should not be harmful to their health or development, and will not prejudice their attendance at school. This is unless the given country’s economic and educational facilities are underdeveloped, in which the age can be further reduced to 12 and 14 years old (Article 7, Paragraph 4). Whilst such caveats allow states to localise the law, as their implementation requires heavy monitoring, they assume that a state has an adequate administrative capacity which can effectively implement and monitor legislation. This ignores the country’s domestic situation and relations between state, corporations, and local governments, and fails to consider the conduct of companies operating in highly competitive global markets. This may lead companies to cut back on wages, as well as other social and environmental protections in working to remain competitive.  

With regard to Uzbekistan, challenges in the reforms’ implementation have been attributed to the middle management of the state apparatus, who due to increasing pressures from the reform agenda, have pushed the issues down the line. Hence, for the scheme to rely on the implementation of the international conventions blindly assumes a country’s administrative capacity, and does not reflect sufficiently on the considerable extra bureaucratic workload they bring. 

This administrative overload is further complicated by the fact that some conventions also fail to provide clear definitions or operational guidance for key terms in the text. For instance, Article 7 of the Minimum Age Convention describes ‘light work’ as that which is ‘likely to be harmful to [someone’s] health or development’ and that which does not interfere with a child’s education, failing to provide any further operational guidance on its assessment. Although the ILO has requested its member states to adopt legislation and measures to regulate the ‘light work’ of children, the lack of clarity prevents the EU and beneficiary countries from monitoring the implementation of the conventions from an objective standpoint, and thus be unable to effectively assess violations of the scheme.

The lack of transparency into the scheme further compounds the issues presented by the international conventions. Currently, little insight is given into how the EU conducts their monitoring missions, and how they evaluate and respond to violations of the scheme’s terms. Moreover, there is little insight into the operational structure of the companies trading under the scheme. This is concerning as without clarity on the scheme’s monitoring and regulations, corporate entities can use the scheme to their own benefit at the expense of their labour force, without facing any consequences, as seen in Pakistan. Despite progressions made by the state in eradicating the industry’s forced labour, this has the potential to continue in Uzbekistan’s cotton industry, even following their admission into the scheme.

Since 2017, Uzbekistan’s cotton industry has undergone a process of privatisation and marketisation under the ‘Cluster System.’ The Cluster System is where private companies (cotton clusters) operate vertically integrated cotton clusters, managing the entire cotton supply chain. These clusters operate on a regional basis, and in the most recent report, an estimated 96 clusters operate over 907,783HA of cotton fields. Whilst the cluster system has increased wages and decreased forced labour in the industry, there are criticisms that the system has effectively shifted forced labour into private hands. A joint report published by Kristian Lasslett and the Uzbek Forum for Human Rights underlined reports of improper activities, such as ‘fraud, corruption and labour abuse’ continuing to exist in the industry. Moreover, in their analysis of 20 clusters, they created an integrity scorecard, listing actions of each cluster as being red (evidence of bad practice), amber (absence of key data), or green (evidence of traits associated with good practice). Their findings revealed a high proportion of amber (49%) and red flags (41%), and almost all of the green flags (10%) were awarded to one cluster, Indorama Kokand Textile

Although we must consider Uzbekistan’s willingness to combat such issues in the industry, considering that the EU imported 13.1 million USD of cotton from Uzbekistan in 2019, one must question the basis on which the EU monitors these companies’ corporate practices, as well as the level of transparency the EU demands of companies partaking in the scheme. Without clarity, the EU’s ability to effectively monitor and define violations of the scheme, uphold their values, and improve the living standards of the poor in such vulnerable countries remain limited.

GSP+ Graduation: A Tariff Cliffedge

The scheme’s graduation process fails to prepare beneficiaries for the tariff increases, and uses unfair quantifiers to assess the beneficiary’s eligibility to graduate. A beneficiary’s graduation occurs when they have been classified as an upper-middle income country by the World Bank for three consecutive years. This classification is based on a country’s GNI, of which is the total income of a given country’s businesses and people, including money earned abroad. Following the classification, the EU Commission takes a decision before finalising the date of enactment with their full graduation, occuring a year later. After graduating, the beneficiary is stripped of their GSP+ tariff rates, and becomes subject to the EU’s ‘Most Favoured Nation’ (MFN) scheme of duties.

The immediate implementation of the MFN duty rates has the potential to inflict high losses on sectors dependent on exporting to the EU. Whilst considering the size of the sector, this has the prospect to cause a ripple effect on the wider economy. Such could result in a rise in sector-specific unemployment, which has the potential to increase poverty, going against the intentions of the scheme. Moreover, without effective management in beneficiaries’ transition, the sudden imposition of tariffs on specific goods has the capability to drive graduate beneficiaries to reorientate their exports, and look to other regions and economies to conduct trade. 

This is most evident in Armenia’s 2022 graduation. Their graduation saw a 4.2% average increase on export duties to the EU, with their hardest hit exports including prepared foodstuffs (11.4%), textiles and textile articles (7.7%), and footwear, headgear, and umbrellas (7.3%). The tariffs are expected to cause a 114 million USD reduction (-20%) in Armenia’s exports to the EU, with the apparel industry being the hardest hit (-39 million USD). Such not only has the potential to increase unemployment in the apparel sector, but as the German Economic Team suggests, it may trigger a partial reorientation in Armenian exports, leading harder hit industries to look to export to other economies beyond the EU. For instance, the 7.7% increase in textile tariffs may lead Armenian companies to export to other emerging textile export markets, such as their neighbour, Turkey, the 10th largest textiles importer in the world in 2018. Such may also lead countries with advantageous tariff schemes with the EU to profit from importing goods from graduate beneficiaries. Using Turkey as an example, as they have their own more advantageous tariffs schemes with the EU, it will be Turkey which would be profiting most with re-exporting Armenian goods to the EU. Such would result in post-graduate beneficiaries further missing out the benefits of EU trade, transferring the benefits of their trade with the EU to other countries. 

Considering that 24.3% of Uzbek exports to the EU were textiles and textile articles in 2021, of which would most likely grow under the scheme, their future graduation may lead to losses and hardships in the sector, causing unemployment to rise. Hence, the aims of the GSP+ scheme surrounding poverty alleviation are thus contradicted by its more long-term extremely negative consequences.

Moreover, for the EU to determine a nation’s graduation status based on their GNI ignores the social development of a given country. Whilst a nation’s GNI can be correlated with a country’s life expectancy and infant mortality, it ultimately fails to represent those figures in its calculation. The World Bank has admitted that it fails to reflect income inequalities and population size, and that the Atlas currency conversion method fails to account for price differences and fluctuations in inflation given that a year’s figure is a three year average of a country’s GNI. As the EU stresses that the GSP+ scheme works to alleviate poverty and improve social conditions within a beneficiary state, to conduct their decision on a basis which does not effectively evaluate the current social development begs the question about the true intentions and effectiveness of the scheme.

Reforming the GSP+ scheme

Any reforms made to the scheme would need to achieve the following five key aims: 

  • To further strengthen labour and human rights, good governance and environment protection laws in beneficiary countries.
  • To ensure that the scheme primarily benefits the poor and the labour force within the companies, rather than company shareholders.
  • To provide greater transparency into investments in and trade with beneficiary countries.
  • To ensure corporate integrity and good corporate practices are followed by companies who operate in the GSP+ beneficiary countries and that trade under the scheme. 
  • To ensure a smooth graduation for beneficiary countries.

To achieve these five objectives is of key importance. They will serve to address the scheme’s present issues, and will allow both the people and beneficiary countries to benefit from the scheme. In achieving these objectives, there must be changes to how the international conventions are implemented, as well as to the graduation process. Moreover, there must be greater transparency in the scheme, as well as stronger regulatory and monitoring mechanisms implemented. 

As discussed, the international conventions’ loopholes and broad terminology does not account the local and national situation of a given country, and adds unnecessary administration. This has the potential to limit beneficiary countries’ ability to effectively regulate the convention’s implementation. Instead of adding more conventions to the scheme, it would be advisable to reduce the number of conventions, which would simplify monitoring and alleviate the administrative burden on beneficiary states. 

This effort could be further supported through greater transparency within the scheme. With the scheme’s monitoring, the EU should objectively clarify the terms and conditions for beneficiary countries, and create a time-specific, objective response structure to use when addressing violations of the scheme. Such will allow the EU and GSP+ beneficiaries to fully understand the parameters and conditions of the scheme, and thus be able to monitor corporations’ conduct. 

In monitoring missions, the EU should also include regional geopolitical and industry experts, and not just external consultants. This expert opinion could provide localised perspectives in identifying improvements in conditions, as well as aid identifying potential issues and violations of the scheme. Such could then be bolstered by the EU requiring companies trading under the scheme to publish regular transparency reports, allowing the EU to examine their operational practices. This would aid to clarify the scheme’s expectations surrounding corporate conduct, as well as aid beneficiaries to identify those violating the scheme’s conditions. In the case of Uzbekistan, such changes could aid the government’s reform strategy, helping identify companies using forced labour in the cotton industry. 

Moreover, reforms to the scheme’s graduation process must work to lessen the ‘tariff shock’ and change the way they determine the development of the nation. In lessening the ‘tariff shock,’ the EU could elongate the transition period. During this period, the EU could gradually increase the tariffs, thus allowing the beneficiary’s hardest hit sectors to ease into the changes rather than face a cliff edge. Moreover, for industries that would be heavily impacted by the graduation, the EU could offer protections and guarantees. This will allow them to continue exporting to the EU, as well as demonstrate the EU’s interest and willingness to continue their cooperation with the given country. 

With regard to identifying a state’s development, instead of solely relying on the World Bank’s analysis, the EU could use other measures which consider the social development of the country, such as HDI. Such measures would allow the EU to further assess the extent to which the beneficiary has seen an improvement in both social and economic conditions under the GSP+ scheme, and thus whether the intentions of the scheme have been achieved.

Furthermore, in usual trade agreements, countries are able to negotiate the terms with the EU. However, if a country wishes to partake in the EU’s GSP+ scheme, whilst they can decide whether or not to apply for it, if they are in the same region as other countries who benefit from the scheme and wish to remain competitive, they may face no other choice but to apply for accession to the scheme and accept its terms and conditions. Such would be without any equal level negotiating power. It is a very unilateral way in which the EU imposes the GSP+ conditions on beneficiary countries when applying to access the scheme, and begs the question of who is the real beneficiary of the GSP+ scheme.

Overall, the GSP+ is presently a scheme of good intentions. It over-relies on imposing international conventions, and poor transparency into the scheme’s monitoring does little to hold companies accountable for their actions. Moreover, the scheme’s graduation process does not economically prepare beneficiaries for life post-graduation. The EU should address these issues so as to enable the scheme to fulfil its original intentions, and aid beneficiary countries, including Uzbekistan, to effectively develop socially and economically. 

Author: Matt Bonini, EIAS Junior Researcher

Photo Credits: Wikimedia Commons