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The Generalised Scheme Of Preferences (GSP) And Its Impact On The Frontier Markets In Asia

|Includes: EMFM, FFD, iShares MSCI Frontier 100 ETF (FM)

The Generalised Scheme of Preferences (NYSEARCA:GSP) and its Impact on the Frontier Markets in Asia

As the size of the AFC Asia Frontier Fund continues to grow, the analytical team aims to provide insight on upcoming developments impacting our key markets. One such development is the change in the way in which more developed markets will trade with those further down the economic development list moving forward. This month's research piece will cover the impact of changes to tariffs under the Generalised Scheme of Preferences (GSP) and how they may impact AFC's investment universe. The GSP is a scheme under the United Nations Conference for Trade and Development (UNCTAD) through which countries give selected products originating from developing and least developed countries preferential treatment through tariff cuts. There are currently 13 national GSP schemes notified under the UNCTAD. These are GSP schemes of Australia, Belarus, Canada, Estonia, the EU, Japan, New Zealand, Norway, Russia, Switzerland, Turkey, and the USA. In this month's newsletter, we focus on the EU GSP scheme, which is expected to change beginning January 1, 2014.

The EU's GSP program helps developing and least developed countries by making it easier for them to export their products to the EU through reduced tariffs for specific goods entering the EU market. This helps developing countries grow their export revenue and supports job creation and economic growth in the exporting nation.

The EU has decided to update its current GSP scheme to further benefit the countries that need such schemes the most. At present, some countries in the GSP scheme have free trade agreements with the EU, are middle/high income countries, or are competitive developing nations and should no longer be applicable for the GSP scheme due to their improved integration into the global economy. The new GSP scheme will focus on countries that need such benefits the most, resulting in the number of GSP beneficiary countries decreasing to 90 from 177.

Within the EU GSP framework, there is also the GSP+ and EBA (Everything But Arms) framework.

GSP+ Scheme: The EU GSP+ scheme provides full removal of tariffs for imports into the EU and has been designed to benefit countries that are economically vulnerable. These are countries that are:
• Not classified by the World Bank as a high income country for three consecutive years
• Have exports to the EU that are heavily concentrated in a few products
• Have a low level of exports to the EU

Further, in order to qualify for the GSP+ scheme, countries must meet criterion such as implementing human and labour rights as well as good governance measures. These countries also must agree to be monitored regarding their implementation of the required measures. From the Asian frontier markets that we cover, Iraq, Mongolia, Pakistan, and Sri Lanka are all eligible to apply for GSP+ status.

EBA (Everything But Arms): This scheme is designed specifically for Least Developed Countries (LDCs) and provides such countries with duty free and quota free access to the EU for all goods except arms and armaments. From the Asian frontier markets that we cover, the countries that are eligible to benefit from the EBA scheme are Bangladesh, Bhutan, Cambodia, Lao PDR, Myanmar, and Nepal.

Overview of EU GSP Scheme

Most frontier countries fall under the GSP+ or EBA schemes, and since countries like Bangladesh, Cambodia, Pakistan, and Sri Lanka are heavily dependent on exports such as textiles, being accepted to such schemes should help export-driven industries. Though this is beneficial to their economies, it is important to note that it will be critical for these countries to implement important measures as required by this scheme if they are to benefit in the long run. For example, in light of the recent factory collapses in Bangladesh, there appears to be more activity from the government, textile, and retail industry to improve audit and oversight. Government and retail groups will soon begin inspections of textile factories in the country, which could be a sign that the authorities are serious on coming down on lax safety measures given that the textile industry accounts for 80% of exports. If these countries were to lose their GSP status within the EU, it would harm their export-driven industries. Moving forward, we should expect to see better labour and working conditions in these countries to ensure that they are in compliance and can continue to benefit from GSP status.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.