On 1st of December 2021, European Union 27 nations plus five others, including the United Kingdom, Canada, Turkey, Ukraine, and Liechtenstein; China (PRC) no longer issue GSP certificates to exporters selling to these destinations, according to CGAC(1)(China’s General Administration of Customs). What is GSP? Generalized System of Preferences(2) is, in layman terms, a special tariff treatment (lower than usually imposed) given to developing nations exporting to developed nations; developed nations or blocks lowering import tariffs to those developing nations / LDC (Least Developed Countries) exporting selected goods.
EAEU (Eurasian Economic Union) that includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia, has stopped providing special (preferential) tariff treatment to PRC earlier (the 12th of October, 2021). These changes are very likely to impact how importers source their merchandise and how exporters market (or make) their products, not to mention how manufacturers shall plant their factories in the long run. So, do these potential changes affect your international business? Today, we mainly list out these questions to further research to formulate your answers, for we shall try to lay out the big picture only. Given these two recent announcements, most would form a general impression that such happened just lately. However, countries like Belarus, Canada, Japan, Kazakhstan, Russia, and Switzerland have removed PRC from the GSP list since 2014, followed by the European Commission immediately in January 2015. Therefore, one may question why removals happened a few years back, suddenly appearing now as headlines in our economic section of online finance website portals?
This article aims not to investigate and calculate the magnitude of such removal but to encourage readers to find out more related developments to derive both short-term impacts and long-term implications to the international trading community that includes our members, banks, and independent factors exporting clients and importing debtors.
Take the garment/apparel/RMG industry, for instance. It is generally categorized as manufacturing with a relatively thinner margin and labour-intensive than the EMS sector (electronic manufacturing services). Hypothetically, an import tariff increase of 9% (please refer to the chart in this article to locate the actual tariff imposed) to one 40-foot container of T-shirts brings marginal impact financially to an importer/exporter in the short run. How about this 9% increase repeatedly on an aggregate basis? According to WTO (World Trade Organization), China is the largest apparel exporting nation globally, with a mind-boggling figure of USD 142 billion last year (2020). This figure was already a discounted one due to COVID, in which it took a 7% haircut from that of 2019 before the pandemic. PRC takes the lion share of this export segment, and it was close to 32% of the world total. Vietnam has overtaken Bangladesh as the world’s second and third largest, respectively, but they were distant second and third, accounting for roughly 6.4% each. Turkey ranked fourth with a 3.4% share, and India ranked fifth with 2.9% of the world market. These top garment/RMG exporting nations have the workforce and bells and whistles to contend the throne given enough time, strategies, and policies. Now, put yourself into the shoes of both the importers and the merchandisers. What will be the compelling reasons you have not sourced your products elsewhere and diversified given this difference in your bottom line? COVID already shook the minds of these global merchandisers and arguably reshaped their contingency plans. Can they afford not to?
One recent article by Asia Times(3) cited a trend of manufacturers moving from China to Vietnam, Bangladesh, and India. Due to this change in G, I can agree, but not for this reason alone. One needs to look beyond GSP and leap forward to GSP+(4), in which eligibility requirements are more comprehensive. Some international trade commissioners have described them as “not a walk in the park,” even though the plus system still uses the GSP structure as a backbone. Upon glancing through these new proposed requirements, one would quickly conclude that putting all your eggs in one basket out of cost and logistic concerns is out of the question, especially after experiencing the logistic nightmare related to COVID and the recent energy-related shutdowns in the mainland.
Vice-chairman of China Center for International Economic Exchanges and former vice-minister of commerce Mr WEI Jianguo wrote, in an article published by PEOPLE.NET(5), on the 5th of November 2021, brought us his views, providing another angle. He reminded readers that this process is almost inevitable once a nation has progressed beyond the line segregating developed nations and the ones becoming, where low margins and labour-intensive industries are steppingstones. China is now recognized by most that it is time for China to move on to innovative sectors. He also urges readers to distinguish between GSP and Most Favored Nation (MFN) and Preferential Normal Trade Relations (PNTR). I also encourage you to spend one minute to glance through the definition plus pros and cons here(6).
Mr WEI got to the point where all economies must transform and progress. From a macro point of view, this process of advancement has been going on for as long as we can remember and document, so the questions are what happens next and how we strategize our moves to plant seeds for the next 5 to 10 years should you agree that labour-intensive manufacturers with low margins are relocating to neighbouring countries that are relatively more cost-effective? Look no further; just back a few paragraphs, you shall find the top contenders if you are in the apparel industry or your exporting clients are, or your debtors are sourcing from these. Following your clients is a process that requires careful planning and executing this plan of action in years, not months, unless you have footprints already set up in the emerging markets like in the South and Southeast Asian region. Yes, it would be best if you learned the new markets again. This time, it will be multiple destinations to look at that require more effort. Yes, all these destinations have different legal landscapes to seek opinions from your advisors. But then, can you afford not to?
References:
- CGAC circular number 84 in Simplified Chinese: https://www.waizi.org.cn/doc/122882.html
- GSP definitions from Wikipedia: https://en.wikipedia.org/wiki/Generalized_System_of_Preferences
- Asia Times: https://asiatimes.com/2021/11/eu-poised-to-pull-chinas-gsp-trade-privil…
- https://www.mayerbrown.com/perspectives-events/publications/2021/09/…
- http://www.people.com.cn/n1/2021/1105/c32306-32274815.html
- https://www.thebalance.com/most-favored-nation-status-3305840
