Financial Times - Budget 2007: Santa Claus coming again for garments

With another national budget on the horizon the government has pledged support to the garment industry in the face of rising global competition.

The country’s biggest manufacturing industry met with President Mahinda Rajapaksa recently to discuss the state of the industry and its survival options in an increasingly price competitive international trade environment.

At the moment garment exports are Sri Lanka’s biggest foreign exchange earner and some 700-odd garment factories provide jobs to over 300,000 people. Indirect employment generated through the garment export trade is estimated at around one million.

Much of these job opportunities have gone to Sri Lanka’s rural population. Keeping the garment trade going therefore, is very much in the interest of the government.

“The President himself requested the industry to look seriously at what you (industry) want from the budget to be competitive. So that the industry is not at a disadvantage with competitors,” said Secretary to the Treasury Dr P B Jayasundara speaking at an industry gathering on ‘The Future of the Apparel Industry’ organised by the Garment Buying Offices Association and the Apparel Exporters Association last week.

The garment trade is expecting heightened price competition next year from not just China but also Vietnam that is due to join the World Trade Organisation (WTO) in 2007. Vietnam is fast emerging a strong, low cost global player in the garment trade but is currently still under quotas.

Once it becomes a WTO member however, Vietnam too will be able to compete freely in the global market, with no quota limits on its garment exports.

The garment industry is concerned about the impact of this new development, particularly on Sri Lanka’s share of the US market that is already losing ground to China.

Given the political and economic weight of the industry, the government is stepping in once more to strengthen the sector.

The government says it is willing to assist the garment trade with budgetary support in return for increased export earnings, increased domestic raw material usage and increased human resource development by the industry.

“You are a US$ 3 billion export industry but with US$ 1.5 billion imports of textile and related items. The gap between imports and exports must become thinner. My vision for the industry is also still a US$ 5 billion industry,” said Dr Jayasundara.

“You must now move out to the upmarket business. We cannot operate in the low end market anymore. The pressure from China and Vietnam can be partly avoided this way,” he said.

The government says it is also willing to help the industry upgrade its supply of available skills to move into higher priced products and services. “You are managing a huge labour force but you don’t have the skills that are required. The UGC (University Grants Commission) is now looking at options to see how fast our learning institutions can integrate with you, to manage the diverse skills that you require. This will uniquely differentiate you from China, Vietnam and several other countries,” said Dr Jayasundara.

In addition, the industry was told to return with specific, identified bottlenecks to industry growth that can be targeted for solutions.

Mounting pressure
Sri Lankan garment exports are heavily concentrated in the US and a few EU countries. The US alone, is the single largest customer of Sri Lankan ready made garments, buying up over half of total export production. However, Sri Lanka is only a very small supplier to the massive US market and Sri Lanka’s 58 percent of total export production translates to less than 1 percent of total US imports from the rest of the world. Therefore even a small shift of US purchasing could translate into much higher damage to the Sri Lankan economy.

In 2005 a few categories of clothing exported to the US showed a growth. However, exporters point out that these are categories of clothing where Chinese exports are under quota restraints. In all of the categories that China is allowed to compete without any quota restraints, Sri Lanka lost market share.

“In the US market only five categories grew and this constitutes 60 percent of our total exports to the US. But the problem is, this is where China has been restrained. In the categories that China is not restrained, we got hammered. In these categories, where there are no restraints, China has forged ahead,” noted Chairman of the Joint Apparel Association Forum (JAAF), Ashroff Omar.

The industry is hoping that the EU’s GSP+ scheme would be able to at least partially absorb losses in the US, mitigating immediate damages. The GSP+ scheme allows Sri Lankan apparel to enter the EU countries duty free, giving Sri Lankan clothing a price advantage over much of the competition. Exports to the EU have also seen an increase over the last few months of this year, despite previous concerns about practical difficulties in using the scheme.

The industry is also considering market diversification and is eyeing Canada as a potential growth opportunity.

“We are trying to get a duty free deal with Canada, which we feel is easier and faster than tackling the US,” Omar said.

The only preference window into Canada, at the moment, is the Canadian GSP scheme but the scheme excludes garments. However, Canada provides duty free access for clothing from Least Developed Countries and the garment industry is considering the possibility of obtaining the same treatment for Sri Lankan apparel.

The Trade Ministry however, says Sri Lanka has so far not approached the Canadian government regarding such an arrangement.

Canada is currently a very small market for Sri Lankan clothing exports. Garment export earnings to Canada in 2005 came to around Rs 4 billion compared to over Rs 164 billion income from the US and over Rs 99 billion from the EU.

However, the garment industry says the Canadian market has great potential if Sri Lankan clothing can compete at duty free prices.