Garment industry counting on EU GSP+ for lease of life

The garment sector is targeting a ‘modest’ growth in 2007 by using the European Union’s GSP+ duty-free scheme to offset market losses in the US. Traditionally USA has been Sri Lanka’s largest market for ready made garments. But increased competition after the removal of quotas has forced a market shift towards Europe.

In 2006, Sri Lankan garment exporters watched while their less than 1%, share of the US market was eaten into by China and other low cost producers. The industry representative body, the Joint Apparel Association Forum (JAAF) says the industry may be unable to meet its export target of US$ 3 billion by the end of 2006, due to US market losses. However, the industry is setting a 5% export growth target for 2007 by pinning its hopes on European markets.

“We expect a slight shortfall in the 2006 export earnings target of US$ 3 billion mainly due to market losses in the US. However, we are expecting overall growth of about 5% in 2006,” said Chairman of JAAF, Ajith Dias. “In 2007, we are expecting a similar modest growth of 5% and export earnings of over US$ 3 billion. Most of this growth is anticipated in European markets. In the US, we expect to see further losses in 2007,” said Mr Dias.

JAAF said that Sri Lanka’s market share in the US had dropped by about 2% by November 2006 but had grown by almost 12% in Europe. The growth in Europe is attributed the EU’s GSP+ scheme that allows Sri Lankan garments duty free entry into EU countries.
“The EU is the growth market because of the GSP+. We have also requested some changes to the rules of the GSP+ and these changes will also help further growth in 2007,” said Mr Dias.

Sri Lankan exporters have had difficulties using the EU’s GSP+ scheme because of its rigid rules of origin that ask for over 50% domestic value addition and domestic double transformation. So to help industries make better use of the GSP+, the Trade Ministry has requested that the domestic value addition be reduced to 35% and the rules be made more user-friendly.
The garment industry is expecting a favourable response from the EU this year. With changes to the GSP+ rules, Sri Lankan garments is hoping to grow its market share in Italy, Germany and France in addition to its main market in the UK.

US problem
Although prospects in European markets look set to improve for the garment industry, losses in the US are an increasing source of worry. Particularly given the high dependence on the US. Although Sri Lankan garments account for less than 1% of total US garment imports from the world, this translates into over half (58% in 2005) of total garment exports from Sri Lanka.

In 2005 the US once more limited Chinese exports through quotas but this did not stop erosion of Sri Lankan market share. Steeper losses are expected with Vietnam getting into free trade this year and growing exports from India. Quotas on China will also be removed after end-2008.

“We will have to look at how to increase entry into the US. The trade agreement is now history. So we must now move up the scale. China is not the only worry. The Indian government is investing US$ 5 billion in backward integration and upgrading. This is on top of the backward integration in cotton that they already have. That kind of money has got to show results at some point,” says Mr Dias.
JAAF is looking at using ethical trading concepts to hold the US market and increase Sri Lanka’s share of high value exports.
“Ethical manufacture is the key. Even in Europe we got the GSP+ because of our labour standards. This can also be used in the US. So it is very important to promote this and retain the image of being an ethical manufacturing destination,” says Mr Dias.
However, the industry does not have a clear strategy to maintain its grip on the US market.

Peace is priority
In spite of all strategies, the garment industry points out that peace is priority for industry growth.
“Peace is an absolute priority. One reason is that the conflict affects the image and buyers don’t like to come here. On the other hand, war brings about inflation and that puts up costs. So we get stuck in-between. Right now we are not feeling an impact but if the situation is prolonged it will seriously affect us,” says Mr Dias.