Deep Focus / Sri Lanka Overview / PART III Report

Spotlight: Sri Lanka Overview

Trade Ahoy

As trade wars rage, a new mega-treaty comes into play and some uncertainties keep rankling Sri Lanka’s GSP+ status from the EU. A look at how the country’s apparel industry is working it out.

Subir Ghosh

7 March 2022

5 minutes

Long Story, Cut Short

As trade wars rage, a new mega-treaty comes into play and some uncertainties keep rankling Sri Lanka’s GSP+ status from the EU, a look at how the country’s apparel industry is working it out.
Retaining GSP+ is a massive priority for the industry, even the country because other export industries also benefit from it.
Sri Lanka has free trade agreements (FTAs) with India, Pakistan and Singapore, and is currently negotiating an FTA with China.

Trading Future GSP+ privileges with the European Union (EU) and other key trading partners is not just essential, but crucial at this juncture. Rehman Abubakr / Wikimedia Commons

The forex issue is one thing; global trade quite another.

Sri Lanka is heavily dependent on the United States (US) and European Union (EU) for its apparel exports. In 2021, according to the Joint Apparel Association Forum Sri Lanka (JAAFSL), the US accounted for US$ 2114.01 million and the EU US$2210.46 million. Only US$746.84 million worth of garments out of a total of US$5071.31 million were exported to other countries.

Sri Lanka has free trade agreements (FTAs) with India, Pakistan and Singapore, and is currently negotiating an FTA with China. The FTAs with India and Pakistan cover only trade in goods, while the one with Singapore which came into force as recently as May 1, 2018 covers investment, goods, services, trade facilitation, government procurement, telecommunications, e-commerce, and dispute settlement. The country is also a member of the virtually non-existent South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (APTA).

According to International Trade Administration, US Department of Commerce, “Some Sri Lankan exports to the US qualify for duty free privileges under the US Generalized System of Preferences (GSP) programme, which offers preferential duty-free treatment for up to 5,000 products (apparel products are excluded) from designated beneficiary countries. The US-Sri Lanka bilateral Trade and Investment Framework Agreement (TIFA) provides a framework for the two governments to discuss and resolve trade and investment issues at an early stage.”

The EU has been a saving grace. “In May 2017, Sri Lanka regained the European Union’s (EU) Generalized Scheme of Preferences (GSP+) privileges for Sri Lankan exports. The trade preferences under GSP+ consists of the full removal of duties on 66 percent of tariff lines, covering a wide array of products including textiles and fisheries. The GSP+ scheme is conditional on Sri Lanka advancing human and labor rights and working towards sustainable development.”

The GSP+ of the EU has become all the more crucial of late, with incessant pressure coming in both from the EU as well as human rights organisations like the US-based Human Rights Watch.

Sri Lanka had lost access to GSP Plus in 2010 due to alleged human rights violations, but regained it in 2016 after pledging to implement 27 international conventions. The current sentiment in the EU is that Sri Lanka has nevertheless failed on many of the commitments and some key demands that necessarily include the repeal of the Prevention of Terrorism Act (PTA) and the release of long detained suspects under the PTA. Enacted in 1979, the PTA allows authorities to make warrantless arrests and searches if a person is suspected of involvement in a "terrorist activity.”

The European Parliament in June 2021 passed a motion for a resolution demanding that the PTA be scrapped as it “breaches human rights, democracy and the rule of law.” The European Parliament had called on the European Union (EU) Commission to consider temporarily withdrawing Sri Lanka’s access to its Generalised System of Preferences (GSP+) concession.

An amendment has been made and is set be enacted soon. The country’s foreign ministry recently announced the proposed amendment to the PTA, which it described as the “most progressive step…in advancing, securing and protecting the rights of persons subject to investigation and judicial review under the said law and is an important move towards the realization of enforcing international best practices to address counter terrorism legislation.”

The EU, however, is not happy. After a meeting in Brussels on February 8 , EU officials said that “important elements had not been included in the Amendment Bill” and urged “further steps to make the PTA fully compliant with international norms.”

The noose still hangs around Sri Lanka’s neck. But is industry worried?

Says Yohan Lawrence, Secretary-General of the Joint Apparel Association Forum Sri Lanka (JAAFSL), “Retaining GSP+ is a massive priority for the industry, even the country because other export industries also benefit from it. To grow, we need to enhance access to key export markets, including within the Asian region, which significantly boost our market share. GSP+ privileges with the European Union (EU) and other key trading partners is not just essential, but crucial at this juncture.

“Before the advent of COVID-19, it was probable that Sri Lanka would 'graduate' from the GSP+ regime; the pandemic, however, changed this dramatically. Now, retaining those privileges beyond December 2023 is being and should continue to be advocated forcefully and intensely. JAAF is working with the relevant authorities ahead of the new GSP framework from 2024.”

Subir Ghosh

SUBIR GHOSH is a Kolkata-based independent journalist-writer-researcher who writes about environment, corruption, crony capitalism, conflict, wildlife, and cinema. He is the author of two books, and has co-authored two more with others. He writes, edits, reports and designs. He is also a professionally trained and qualified photographer.

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MAS Holdings feels many of the larger Sri Lanka-based apparel exporters are also well positioned within RCEP nations with subsidiary manufacturing organisation currently in operation.

Well Placed MAS Holdings feels many of the larger Sri Lanka-based apparel exporters are also well positioned within RCEP nations with subsidiary manufacturing organisation currently in operation. MAS Holdings

Needed: More Trade Agreements

The much-hyped Regional Comprehensive Economic Partnership (RCEP) came into play at the start of the year. Like India, Sri Lanka is not a party. But then Sri Lanka was never a negotiating partner.

Reacts Aroon Hirdaramani, Director of the Hirdaramani Group, “The RCEP has come in quite recently. It has different benefits for different countries. But (it) is definitely something that will increase our competition, and which is why one of our key plans as an industry and tasks of the government is to work on specific FTAs. The RCEP is a regional agreement. We need to increase our penetration to our region—India, Southeast Asia, the Middle East, China. Those are markets where Sri Lanka is under-penetrated. We need FTAs, or it will be hard for us to be competitive in these areas.”

A MAS Holdings representative agrees that this would pose a significant challenge to the Sri Lankan industry, but “also is an opportunity for them to provide customers with more sustainable, innovative and inspirational product offerings. This will only enable the growth of organisations that are able to keep innovating, leaving others behind. That said, the Sri Lankan apparel industry has always been resilient and can continue to remain competitive with the right ecosystem and the right government policies.

“Many of the larger Sri Lanka-based apparel exporters are also well positioned within RCEP nations with subsidiary manufacturing organisation currently in operation. MAS already has extensive operations in Indonesia and Vietnam, enabling the company to offer customers sourcing solutions through the RCEP as well. Our rapid expansion and network of operations in the region can boost supply chain benefits, helping MAS build regional verticality.”

Aroon Hirdaramani

Director

Hirdaramani Group

We need to increase our penetration to our region—India, Southeast Asia, the Middle East, China. Those are markets where Sri Lanka is under-penetrated. We need FTAs, or it will be hard for us to be competitive in these areas.

Resilient The Sri Lankan apparel industry has shown remarkable resilience during the still ongoing COVID-19 pandemic. Star Garments / JAAF

The Forex Shortage, Supply Chain Crisis and Exports

Lawrence admits that the global supply chains were heavily affected by the pandemic. “However, trade has been improving since last year. Maritime freight rates had been moving up since the second half of 2020. In September 2021, rates had increased by almost three times year-on-year (yoy). On an average, Sri Lanka had 200 shipments on a monthly basis; in addition, 78 flights and freighter operations move in and out of the country on a weekly basis.”

The MAS Holdings representative is not perturbed by the forex crunch, thus arguing: “As exporters, MAS and other apparel manufacturers can retain foreign currency in their own accounts to pay for any imports of raw materials, without relying on banks to supply forex. Therefore, the industry isn’t significantly affected by forex shortages in the market.

“There is, at present, a renewed level of interest by fabric mills and supply chain organisations in terms of setting up operations in Sri Lanka. The newly commissioned export processing zone in Eravur (a town in the Batticaloa district of Eastern Province) will play a major role to scale up verticality within the island, mitigating the impact of the RCEP to some extent.”

Yohan Lawrence

Secretary-General

Joint Apparel Association Forum

To grow, we need to enhance access to key export markets, including within the Asian region, which significantly boost our market share. GSP+ privileges with the European Union (EU) and other key trading partners is not just essential, but crucial at this juncture.