The Apparel Digest Report
The recent arrival of a European Union (EU) monitoring delegation to Sri Lanka on trade benefits under the Generalized Scheme of Preferences (GSP) Plus has sparked considerable conjecture about the risks of losing GSP to the EU. However, most of these assessments understate the potential costs by disregarding important aspects. As a result, the purpose of this article is to enlighten stakeholders about the costs of losing GSP to the EU, as outlined by the Joint Garment Association Forum (JAAF), the Sri Lankan apparel industry’s apex organization. Evidence reveals that this has considerable economic, social, and human implications, with the latter being especially relevant in terms of poverty and vulnerability.
A few comments about the relevance of the GSP to Sri Lanka: Sri Lanka’s second-largest export destination, the EU, accounting for over a quarter of the island’s total export revenues in 2020. This will account for around 3.2 percent of Sri Lanka’s GDP in 2020. Many of Sri Lanka’s most important export industries obtain a significant portion of their exports from the European Union. GSP reductions are available for more than two-thirds of the country’s exports to the EU. Apparel accounts for over half of the sector’s revenues, accounting for 43 percent of exports in 2020. Furthermore, for Sri Lanka’s plastics and rubber products, vegetable products, machinery and appliances, and food and beverage industries, EU markets are critical.
As a corollary, sectors including fisheries, rubber goods, and footwear rely on GSP at even larger rates than garments (more than 90% vs. less than 50% for apparel) and are thus more susceptible if GSP is eliminated. There is a lot of evidence that the GSP program helps nations that qualify for these benefits. Exports to the EU by GSP recipients climbed by 82 percent between 2011 and 2017. Prior to the epidemic in 2019, Sri Lanka’s garment sector generated over $5.3 billion in export revenues, largely from the European Union. Sri Lanka’s opponents, such as Bangladesh, will continue to reap the benefits of these exemptions.
Even if just garment and food exports are affected, both of which are EU GSP qualified, losing GSP will have a considerable impact on local jobs. The garment sector directly employs around 350,000 people, while indirectly employing another 700,000 people across the country. According to the 2019 Annual Survey of Industries, the food goods industry employs about 360,000 people. When non-exporting enterprises in the food products sector are removed, many of the export industries that profit from the GSP become some of the country’s greatest employers.
When only apparel and food exports are taken into account – two of the products that benefit from GSP -, the consequences for local employment are significant. Around 350,000 apparel workers have been employed steadily and uninterruptedly, and an extra 700,000 have benefited indirectly from the industry. In the food products sector, over 360,000 people are employed, according to the 2019 edition of the Annual Survey of Industries. It would imply that export industries that are established to benefit from the EU’s GSP are also among the country’s biggest employers even after removing employees from non-export businesses in the food products sector. Nearly 80 percent of the employees/associates in clothing are rural women. GSP’s loss will have a disproportionate impact on vulnerable rural groups. Inequality levels in the country would thus be exacerbated. In the apparel industry, SMEs might also be affected more severely, thereby contributing to inequality. There has been some evidence that poverty and income inequality increased as a result of the loss of GSP by Sri Lanka in 2010 (for example, the study done by Bandara and Naranpanawa in 2014). At a public forum a few months ago, another well-known trade expert in Sri Lanka said that losing GSP led to a 1-2% loss of GDP.
Aside from the context outlined above, the likely outcomes of the EU losing GSP must also be considered. To grasp the total cost, this must be taken into account. There should be consideration of two factors in this regard: the likelihood of trade shifting and the potential for cascading negative consequences, such as Sri Lanka losing other trade concessions. End-to-end provider companies are becoming increasingly popular with apparel brands and buyers. Therefore, if Sri Lanka were to lose GSP to the EU, the cost of apparel in the EU would rise by 9.5%, resulting in a loss of market share not just of the products that receive GSP concessions. Hence, trade shifts would be further detrimental to the interests of Sri Lanka as buyers could shift en masse to Sri Lanka’s competitors. Sri Lanka currently enjoys similar tariff concessions to other countries under similar schemes. Moreover, there are similarities between the conditions under which GSP concessions are provided to the country. Sri Lanka’s trade concessions to the UK and the USA would likely be reexamined if GSP was to be lost to the EU. Sri Lanka also exports to these markets, with the US and UK together accounting for more than one-third of Sri Lanka’s national exports in 2020. Sri Lanka hopes to enter two other markets – Japan and Australia – that offer GSP schemes modeled on those of the EU. These plans could be affected by the European Commission’s actions.
Foreign Direct Investments (FDI) too would be negatively impacted, if GSP to the EU is lost. Sri Lanka has recently designated fabric processing as a key sector for foreign direct investment, assisting the apparel industry in using trade concessions, such as GSP, more effectively. Moreover, if the country is no longer eligible for trade concessions, the viability of the sector would be questioned. There would be a considerable opportunity cost for the country in this situation. Millions of dollars in much-needed foreign direct investment will be lost, together with thousands of jobs in the fabric-processing and apparel industries. In addition, the loss of foreign exchange earnings from exports, employment, and FDI will have cascading effects that will negatively affect other aspects of the economy. Sri Lanka requires foreign exchange earned from exports such as apparel and other goods to import critical products such as food, medicine, and fuel.
From the above, it is clear that losing the GSP of the EU could have negative effects on several fronts, which could apply to all sectors of the economy. The pandemic has taken a heavy toll on the country’s economy and export industries.
Economic upheavals have also impacted the garment industry, which is still beset by problems. Some of the effects include order cancellations and reductions, profit losses, needing to provide customers longer credit terms, supply chain interruptions, and working with fewer people. Observing safety protocols is referred to as compliance. GSP is probably more crucial than ever in light of these issues. We appreciate the government’s commitment to maintaining it in this respect. We are hopeful that any issues may be resolved via positive interaction. However, the GSP concessions should not be interpreted to mean that the sector would be reliant on them permanently in the medium to long term. Several measures have been put in place to improve the sector’s competitiveness. Developing strategies (rather than) undertaken in order to increase the sector’s competitiveness Among these initiatives include developing strategic (rather than transactional) partnerships with customers, enhancing research and development skills, expanding innovation, and broadening export markets. These facts have been acknowledged by buyers, and the World Bank has published them.
If favorable trade concessions and steps to boost competitiveness are maintained, Sri Lanka’s garment sector will achieve its aim of being a $8 billion export earner by 2026. We will make a considerable contribution to the domestic economy in terms of export revenues, employment, technology generation, and investment. The industry is completely dedicated to achieving this aim, but it now lacks adequate stability, notably protection from economic shocks.
