Tackling local apparel sector’s newest variant: Loss of EU’s GSP Plus

June 25, 2021

Sri Lanka’s apparel sector continues to beat the odds to remain competitive in the global space but just as it tackles one hurdle, crops up another.

The industry was badly hit with the global pandemic, which led to its export revenue contribution to contract. Just when it thought it is the pandemic that it needs to cushion itself from, it is slapped with the likelihood of losing the GSP Plus scheme.

The European Union’s (EU) trade concession is a key necessity for Sri Lanka’s apparel industry to mark its presence in the international market. A possible withdrawn by the EU would be detrimental for the industry that is a key pillar of the economy.

Mirror Business recently spoke to Joint Apparel Association Forum (JAAF) Secretary General Tuli Cooray, on the new situation the industry has to deal with.

According to Cooray, the GSP Plus withdrawal will no doubt be a massive hit but with the right action plan, the industry will not be threatened with the pull out for long. Following are the excerpts from the interview.

Where does the apparel sector stand at this juncture, given the series of incoming shocks?
Since Sri Lanka is not operating on a low-cost environment, relative to the competitors in the region, we were required to differentiate ourselves. In this journey, Sri Lanka set itself apart from its competitors on two fronts.

Firstly, we became manufacturers that were more than simple cut and sew manufacturers. Rather, we became solution providers across the spectrum of the apparel supply chain.

Secondly, we brought to the forefront the practices we followed that showcased Sri Lanka as a responsible and sustainable sourcing destination that prided itself on ethical manufacturing.

Hence, before the industry had to deal with the challenges brought on by the COVID-19 pandemic, the Sri Lankan apparel industry overcame the cost competitive challenges by converting itself to be a reliable partner with additional value-added service offerings that transformed the industry into a total solutions provider and engaged in both front and back-end operations.

Further, the industry turned its focus towards minimising transaction costs domestically through digitalisation as an addendum to these efforts.

The first wave of the COVID-19 pandemic taught us the danger of relying on the external supply chain for inputs and made us rethink the real need for improved verticality to the fullest extent possible. Therefore, we once again concentrated on substitution of imported inputs for export processing and that is how the Eravur Zone dedicated to fabric manufacturing, conceptualised in 2013, was rejuvenated.

During the second wave in Sri Lanka, we were appalled at the outright attacks directed at the young men and women that form the crux of the apparel industry. The reality of living in a world plagued by a pandemic is that people will be afflicted with the disease. To singlehandedly lay blame at the hands of the people that represent one industry, due to the presence of positive cases, was reprehensible.

Further, if not for the young women and men who represent the apparel industry, the economy of this isle of apparel would not be the same, particularly in a COVID-19 world that has dealt killer blows to economies across the planet.

The third wave of COVID-19 was no different. Right now, we are faced with a situation where our country is in a state of semi-lockdown, due to the pandemic, whereas the countries we supply are opening and require product.

Whilst appreciating the efforts taken by the state and the frontliners to keep the sector operating, plants have on average been running at around 50 percent capacity through the end-April and parts of May because of COVID-19 and adherence to the health protocols of the country.

At the moment, we are running at about 10 percent below our levels of 2019 but the real impact of this will be seen in June and beyond. At the same time, our competitor countries continue to operate at much higher levels, which puts Sri Lanka in a relative position of weakness in our ability to meet customer demand on time.

So, we have a lot of challenges to manage but I am sure we can be resilient if the right environment is there.

What are the immediate challenges faced by the industry that threaten its longevity?
There are a few. The first is reputational impact on our status as a reliable manufacturing destination. This is primarily due to a failure to deliver on commitments made because of lost and low capacity, owing to the third wave of the pandemic.

Second is remaining competitive in a market landscape increasingly moving towards low-cost manufacturing. In this backdrop, it is vital we are on the same field as our competition in retaining the few trade benefits we have.

Then there is the management of negative perceptions created through false allegations internally and externally; it is another challenge we face particularly in convincing our sourcing partners.

The lack of concentrated trade dialogue with other trading partners outside the US and EU makes it close to impossible to increase and diversify market penetration.

Yet another major challenge will be the attraction of investments to the Eravur Zone, in the absence of preferential trade agreements with sourcing countries.

While the industry is grappling with the implications of the COVID third wave, the EU Parliament dropped a bombshell – the withdrawal of GSP Plus. What is the reaction of the apparel industry in this regard?
Well, I am not that pessimistic. If the terminology used in the proposal is analysed carefully, it says carefully assesses, whether there is sufficient reason, as a last resort, to initiate a procedure for the withdrawal of Sri Lanka’s GSP status and the benefits that come with it and to report to the EU Parliament on this matter as soon as possible.

Therefore, if this proposal is to be taken forward, the parliamentary resolution has to be accepted by the EU Commission and EU Council and may take a decision to undertake an investigation against Sri Lanka.

We are aware that two similar proposals were made against two other countries, which did not go beyond the resolution. Hence, if the principle of equality is applied, this resolution should not lead to an investigation but we have no room for complacency because this resolution was voted favourably by 628 parliamentarians, with only 15 voting against it.

Our understanding is that in the worst-case scenario, where the EU decides to withdraw, such action will take place in about 10 to 12 months and in the best case, a review could take place on the GSP renewal process in 2023. This situation can best be judged within the next one or two month.

The JAAF is working closely with the government authorities on this. The immediate reactions we received are very promising and that the government will be engaging with the EU on this matter and have been actively participating in the usual GSP Plus monitoring exercise, which is in progress right now.

How important is GSP Plus for the local apparel sector? Do you suppose the government understands this importance?
Let us first take a look at the ground situation. In 2019, Sri Lanka exported goods to the value of US $ 1.88 billion to the EU, excluding the United Kingdom. Apparel export alone was US $ 1.198 billion. Of those exports, US $ 1.165 billion worth of goods or 62 percent entered the EU market on zero duty basis.

Within this 62 percent, the value of apparel exports was US $ 586 million or 42 percent. So, apparel will face a very serious difficulty. In that, if we or our customers are required to pay an average of 9.5 percent duty on these goods, our ability to sustain our market share within the EU is doubtful, to say the least.

If you further analyse the other exports entering the EU market, the country will have to make a serious evaluation of the value of GSP Plus. Apparel goods fall under three HS chapters, that is, 61, 62 and 63. The value of goods other than apparel entering the EU (outside of the UK) is US $ 691 million and are exported under 59 HS chapters. These exporters comprise of smaller industries as well as industries such as rubber, fish and ceramic exporters.

Additionally, GSP Plus utilisation in 42 of these 59 non-apparel HS chapters comes to anywhere between 70-90 percent. Therefore, the withdrawal of this zero duty benefit will be a catastrophic to all these small enterprises. It will also totally disturb the efforts towards diversifying the export basket and will result in needing a major structural adjustment to the national export strategy.

Hence, it is noted GSP is not only apparel but for all. These small industries struggling to hold on to export markets in the difficult post-COVID era will face a major issue of survival.

Of course, it goes without saying, for apparel too, the impact will be very significant. The EU is a significant market for Sri Lankan apparel and 43 percent of our global apparel exports go to the EU. Can we sustain? It is the issue.

Looking at the worst-case scenario, what will be the state of the industry and stakeholders, should the EU pull out the trade concession?
First of all, we need to look at whether we could penetrate market without dependant on concession, as being advocated by certain quarters.

Let us look at the EU market access given to our competitors in the apparel sector. Bangladesh being a LDC has the EBA facility. The ASEAN countries are bilaterally negotiating BTA with the EU and the EU is a major trading partner both ways. The Philippines and Pakistan enjoy GSP Plus. Vietnam has a free trade agreement (FTA), where the apparel goods are reciprocally made duty free.

India very recently agreed with the EU to recommence FTA negotiations. In this environment, how can Sri Lankan exports penetrate the EU market on payment of MFN duty while being competitive? This would automatically make our products on average 9.5 percent more expensive than that of our competitors. Hopefully it will not come to that.

That said, should the country lose its GSP status, there will be a significant and quite possibly irreversible impact on the country and its economy. A colossal trade shift could occur in the long run, which will be impossible to reverse. We have experienced this.

One other major benefit of GSP Plus is the diversification of the country’s export basket, as demonstrated by the point above regarding the large number of codes, where there is a GSP utilisation of over 70 percent. Loss of GSP Plus will be catastrophic to those industries and will be a blow to the country’s efforts to diversify our basket of exports, which is a critical need for the economy. In this environment, the worst case looking at the country’s trade with Europe is the slow evaporation away over time.

Additionally, GSP Plus and the trade benefit it presents is one of the biggest attractions for investors to invest in the Eravur fabric park. The viability of this project too would be under threat, if we lose our concession with the EU.

Sri Lanka’s apparel sector is a success story of standing tall and beating the odds. In that backdrop, how long will the industry be GSP Plus dependent?
This is a function of how many competitors retain such trade benefits. It’s not a ‘black mark’ on the industry that it relies on trading relationships. This is how global trade works. Even in Sri Lanka, apparel is not the only industry that relies on GSP Plus.

Competitors such as Vietnam have shown that positive diplomatic relationships lead to trading benefits even political ideologies are not aligned.

These manufactures will have to compete in a market with other manufacturing countries, where there is an advantage in scale, technology or resource over our industry. In certain cases, those countries do have a large domestic market to rely on, as an eventuality. Our manufacturers do not possess these benefits.

Our tariff structure is not always conducive for export processing. In other words, there is no conducive environment to be cost competitive. Though this disadvantage can be overcome over a period of time, the world market is full of heavily biased preferential treatment for market entry.

No matter the degree to which domestic adjustments are made, the removal of preferential treatment takes away our level playing field and leaves Sri Lanka with the equivalent of a flimsy knife to navigate a gun fight. Hence, trade preferences are an important element in external market penetration.

It’s not a question of being dependant on GSP Plus but being able to compete on even terms with other countries. Vietnam for example, is often cited as a country that has an impressive growth trajectory of exports. The reason for this is that Vietnam has several FTAs in place with its apparel export markets, giving that country an immediate advantage over Sri Lanka.

Similarly, Bangladesh has duty free access to the EU under the EBA scheme. At the end of the day, Sri Lanka needs to have some preferential trade agreements in place with countries that could be large-scale buyers of our apparel.

What efforts do you propose the government should take to secure the concession?
We believe the government is taking any and all steps to aid in retaining GSP Plus. If they need our support to address any of the concerns related to apparel factories, we will be happy to help.

As mentioned earlier, the JAAF is working with the relevant government authorities on this. The process of dialogue and engagement is positive and the first step, so that we can have an open dialogue with the EU on their concerns and see what can be done to address these areas. Some of these are low hanging fruit that can be easily dealt with.

Clause 15 for example, refers to strengthening the health and safety conditions of apparel employees in free trade zones. The EU has clearly been misinformed here as post COVID-19 there is an extremely robust mechanism for protecting health and safety of all employees through a series of MOH-issued guidelines, bipartite health committees at plant level and a daily monitoring mechanism for the feeding back of information from plants to the Health Ministry.

The Labour Department, through the National Institute of Occupational Health and Safety, also monitors plant adherence to these requirements. Sri Lanka also has in place a tripartite agreed wage mechanism in place to protect the wages of the employees who are unable to report to work. This has helped the objective of protection of employment in the wake of COVID-19.

Sadly, certain parties with different agendas have intentionally misinformed the EU on these matters, resulting in the inclusion of these clauses in the document. We believe these can very easily be cleared with the EU authorities and a more accurate picture provided to them.

The bigger issue is also the resultant trade shift that will occur if Sri Lanka were to lose its GSP status at this juncture. A loss of preferential trading terms will cause a shift in buying patterns that will have a long-term impact on not just apparel but the country itself.

Do we have other markets to penetrate? Yes, Japan, China and Australia are some but there is a necessity to commence trade dialogue with those countries as a matter of priority. Hence, let us preserve what we have. We call upon the government and the opposition to join together and work towards preserving this important trade facility for the betterment of the people at large.

Given the series of events observed this year, has the outlook for the industry changed? If so, how?
In 2019, Sri Lanka apparel and textile recorded exports of US $ 5.6 billion, making it the country’s single largest industrial exporter, accounting for 7 percent of our GDP. With COVID hitting in 2020, our exports fell by 22 percent to US $ 4.1 billion. As the industry picked up in 2021, we had committed to the government that we would deliver US $ 5.1 billion this year and prior to the third wave were on target for that.

With the impact of the third wave however, we are unlikely to meet this revised target of US $ 5.1 billion. We will need to reset the target for 2021, once we have the export figures for June.

2021 was considered as the year of revival. However, reality has pulled, not just the apparel sector but the economy, away from this stance. Where would you like to see the apparel sector by the end of this year, as it enters 2022?
So, we had planned to hit US $ 5.1 billion in export revenues for the country. We believe that a key part of the country’s recovery will depend on the nationwide vaccination roll out for the working population. The industry is working closely with the government in regard to the vaccination of our sector employees and are happy to note that there is now some traction in this endeavour.

As you may know, the industry came forward early this year with a pledge to cover the cost of vaccinating not only our employees but to match the industry’s requirement with a donation of the same number of vaccines to the government for the vaccination of other citizens of the country.

Unfortunately, this did not happen, due largely to the global inequality in vaccine distribution, which meant that 80 percent of the vaccines available were taken in by the developed countries, leaving countries like Sri Lanka desperate for vaccines for its citizens.

It is quite ironic that some of these same countries are now pointing the finger of ‘abuse’ in the direction of Sri Lanka. Ideally, if we can recover to close to US $ 5 billion before the end of 2021, I do think that would set us up to get back to, if not better, our numbers in 2019, come the end of 2022.