Many of these analyses underestimate the potential loss and often fail to take into account vital factors.
There has been much speculation in Sri Lanka about the possible costs of losing GSP.
Many of these analyses, however, have underestimated potential losses and often fail to take into account vital factors. In this article, the Joint Apparel Association Forum, the apex group representing Sri Lanka’s clothing sector, aims to give stakeholders a full understanding of the potential costs associated with losing GSP.
According to the available evidence, this is likely to have high economic and social costs. This is especially true from the perspective of poverty and vulnerability.
EU – A vital trading partner
In order to put the EU’s GSP into context, Sri Lankan exports were the second-largest destination of exports in 2020. They accounted for almost a quarter of the country’s total export revenue. This is roughly equivalent to 3.2 percent of Sri Lanka’s Gross Domestic Product (GDP).
Many of Sri Lanka’s largest export industries are heavily dependent on the EU. GSP concessions are available for approximately two-thirds of Sri Lanka’s exports. While slightly over half of Sri Lanka’s exports are apparel, which represented 43 percent of its earnings in 2020, the EU is also an important market for plastics and rubber products, vegetables, machinery, and appliances, as well as food, beverages, and tobacco.
As a result, industries like footwear, rubber, and seafood use GSP even more than apparel (more than 90% compared to less than 50% for clothing). According to a local think tank, these industries would be equally vulnerable if GSP were to be lost.
Another consideration is the opportunity costs. The data available indicates that GSP is beneficial for countries that are eligible for concessions. Exports by GSP beneficiaries to the EU increased by 82% between 2011 and 2017. The EU is responsible for a large part of the Sri Lankan apparel industry’s growth, which enabled it to reach export earnings of over $5.3 billion before the pandemic of 2019. Also, it’s important to remember that Sri Lankan competitors, such as Bangladesh, will continue to benefit from these privileges.
Employment impact
Even if we only consider apparel and food exports, which both benefit from EU GSP, the impact of a GSP loss on local employment is significant. Around 350,000 garment workers have been employed by the industry, and 700,000 people indirectly. The 2019 Annual Survey of Industries shows that more than 360,000 people work in the food sector. After removing the employees of nonexport businesses from the food products industry, it would appear that the country’s largest employers are the export industries.
In the apparel industry, 80 percent of employees/associates work in rural areas, meaning that rural vulnerable groups will be adversely affected if GSP is eliminated. The already high-income inequality would be exacerbated. The apparel industry could be more involved, and this could lead to greater inequality.
Studies conducted by academics on the loss of GSP in Sri Lanka by 2010 (for instance, Bandara and Naranpanawa’s survey in 2014) indicate that income inequality and poverty likely increased at that time. In a recent public forum, a highly respected Sri Lankan expert in trade stated that the loss of GSP resulted in a loss of around 1 percent of GDP.
Trade Shifts and Beyond
To fully understand the cost of losing GSP, it’s important to consider the likely outcome of this loss. Two important factors should be taken into consideration in this regard: the likelihood of a shift in trade and the potential negative cascading effect, such as losing Sri Lanka’s trade concessions.
Clothing brands and buyers are increasingly looking for end-to-end solution providers. If Sri Lanka loses GSP to the EU, which will increase the price of our apparel for EU buyers by 9.5%, the loss of market share won’t be limited to only products that get GSP concessions. The EU could lose a large number of buyers, which would result in a trade shift that is detrimental to our country.
There are also many parallels between Sri Lanka’s current GSP scheme and the conditions that the EU provides to Sri Lanka for tariff concessions. If Sri Lanka loses GSP with the EU, trade concessions given to the UK or even the USA will likely be reviewed.
Sri Lankan exports are dependent on these markets, with the US and UK accounting for over a third (34%) of Sri Lankan exports by 2020.
Two other markets, Japan and Australia, that the Sri Lankan clothing industry hopes to enter also have GSP programs, which are modeled after the EU. The European Commission could, therefore, potentially impact those plans.
Loss of FDI
If the EU loses GSP, it will also have a negative impact on foreign direct investments (FDI).
Sri Lanka has designated FDI in a number of key sectors, including fabric processing. This sector would allow the apparel industry to benefit from trade concessions, such as GSP. If the country were no longer eligible for concessions on trade, there would be questions about the viability of the sector. The government would suffer a substantial opportunity cost. This could result in thousands of lost jobs, both in the fabric sector and the apparel industry, which would grow as a direct result.
The cascading effects of losing foreign exchange from exports, employment, and FDI would have negative consequences. Foreign exchange earnings from apparel and other exports, for example, are crucial to Sri Lankan imports, including food, medicine, and fuel. Currency depreciation pressure, etc. This would also worsen.
The GSP is more important than ever.
The above indicates that the loss of EU GSP could have a wide-ranging adverse impact on many fronts, which could spread to all sectors of the economy. The pandemic has had a major impact on the economy and export industries. Clothing was also severely impacted by the pandemic and continues to face many economic shocks. This includes order cancellations and decreases, margin drops, the need to extend credit terms to buyers, disruptions in supply chains, and working with a reduced workforce to adhere to safety protocols.
The need for GSP may be greater than ever. We are able to help you in this respect.
We appreciate that the government has shown its commitment to keeping it. We are hopeful that concerns can be addressed through constructive engagement.
This should not, however, be taken as a sign that the industry will continue to rely on GSP concessions for the foreseeable future. We have implemented concerted efforts to improve the competitiveness of our sector. It includes developing strategic relationships (as opposed to transactional ones) with buyers, upgrading R&D capabilities and increasing innovations, developing branded products, and efforts to diversify the export markets. Buyers and publications by the World Bank have recognized that these are not just claims made by the sector.
Sri Lanka’s apparel sector will be able to reach its goal of becoming an $8 billion exporter by 2026 if we maintain our current preferential trade concessions and implement initiatives to improve the competitiveness of the industry. The contribution of the apparel industry to the local economy will be significantly increased in terms of export earnings, employment, and technology. This industry is committed to achieving this goal, but it needs sufficient stability to do so, especially in the current economic climate.
Author
The author, who is also the chairman of JAAF, began his career in fashion three decades ago. He is currently the Managing Director of Star Garments Group. He is also a Fellow Member of the Institute of Chartered Accountants of Sri Lanka and a Fellow Member of the Chartered Institute of Management Accountants of the United Kingdom.
About the JAAF
The Joint Apparel Association Forum (JAAF) is the leading body that guides Sri Lanka’s apparel industry towards the ultimate goal of becoming the number one apparel-sourcing destination in the world. JAAF is made up of five associations, including supply chain partners, export-oriented clothing manufacturers, buying offices, and international brand representatives in Sri Lanka.
