Financial Times

GSP+ loss will cost public as well as businesses
By Dilshani Samaraweera

Sri Lankan industries, outside the garments sector, say the loss of the European Union’s GSP+ duty free export scheme will dearly cost the public as well as businesses. As it is, public funds have already been invested to build export capacity to use the GSP+. The industries using the scheme have also increased, linking the trade scheme with incomes and jobs of thousands.

Although the apparel industry accounts for around 65% of total GSP+ exports, the balance 35% is made up by a wide variety of much smaller-scale producers. The Commerce Department says producers of fish and fisheries products, ceramics, plants and foliage, footwear and shoes, bicycles, wooden products, processed foods and rubber products, are now slowly developing markets in EU countries using the GSP+.

Shot in the foot

The local footwear sector for instance, was giving way under huge pressure from lower cost producers like China and Vietnam. The industry was losing not just foreign market share but also the domestic market, to low-priced imported footwear.

But three and a half years after the GSP+ was introduced, the Sri Lankan footwear industry is bouncing back. Footwear exports to the EU doubled from just US$ 13 million worth in 2004 to US$24 million last year. The industry says local shoemakers have got a new lease of life.

“It takes time for any trade agreement to show results because it takes time for industries to make adjustments to be able to use these agreements. So it is only now that we are building our capacities to be able to make use of this,” explained Rangith Hettiarachchi, Chairman of the Footwear Advisory Committee of the Ministry Of Industrial Development. Mr Hettiarachchi is also a representative of the DSI Samson group, one of the country’s largest footwear manufacturers. Footwear sector capacity building is supported by the government. The industry is working with the government to set up a footwear and leather goods training centre in collaboration with the Footwear Design and Development Centre of India. The government also made leather imports duty free to help the sector and the Ministry of Industrial Development started a programme to develop the SME sector. Better still, the industry points out that external market conditions are as good as they can ever be.

This is because, on top of getting duty free entry into EU markets through the GSP+, the local shoe sector can also capitalise on extra duties on Chinese and Vietnamese goods. The EU has slapped a whopping 16.5% anti-dumping duty on leather shoes from China and Vietnam and now Macao. Taken together, the GSP+ and the anti-dumping duties on major competitors, give Sri Lankan footwear a head start in the race.

So the industry says the conditions are just about perfect for Sri Lankan footwear to make a comeback.
“But now, just when things are finally taking off, we may lose the GSP+,” says Mr Hettiarachchi.
As it is still in the process of building capacity and skills, the industry says it needs the added boost from the GSP+ to continue for a while, especially for the small and medium sector to become stronger.

Short smoke

Another little known Sri Lankan export that has piggybacked on the GSP+ is luxury, hand-made cigars.
“We sold to European buyers before the GSP+, but now there are more orders because it is actually the importer that benefits. They had to pay very high duties on imports of tobacco products. Now it is zero duty,” said Thasneem Lafir, CEO of Thansher Cigars. The cigars go to European countries like Italy, Spain, Finland and the Czech Republic.

But the benefits trickle down beyond local and European businesses, to rural communities in Sri Lanka in places as far away as Anuradhapura, Dambulla and Sigiriya.

“There are quite a few farmers growing tobacco. Around 25 farmers supply to my company. In addition, we also proved employment to around 150 people at the factory,” said Mr Lafir.
Without the GSP+, the much higher duties on cigars are expected to burn out orders.
“If the GSP+ is removed some buyers will switch to lower priced, machine-made cigars. So our orders will reduce,” said Mr Lafir.

Off the plate

The ceramic tableware industry says it would have to pay duties that would eat into profits, if the GSP+ is not available. “If the GSP+ is not there we will have an issue, because we will have to pay at least 8.4% duty at that end,” said Sunil Wijesinha Chairman of Dankotuwa Porcelain, a leading tableware exporter.
Dankotuwa says this added expense would come on top of increasing energy and labour costs.

Dressing down

The garment sector has been the fastest to capitalise on the GSP+. Utilisation of the GSP+ by the industry shows impressive growth, more than tripling over a short period of over years. According to the Commerce Department, GSP + utilisation by garments and textile products increased from 30.4% in 2004 to 67.0% and 69.0% respectively in 2005 and 2006.

But the uncertainty about GSP+ availability from next year is already hitting the industry. “The orders for next year need to be procured now, before the GSP+ situation is known. Orders for January-February 2009 deliveries, must start coming in from about this month onwards,” said Rohan Masakorala, Deputy Secretary General of the Joint Apparel Association Forum (JAAF).

Without the GSP+, apparel exports into the EU must pay 8% to 12% duties. Since extension of the GSP+ is uncertain at this point, some factories have already been forced to absorb the total duty component or a portion of it.

“Because the factories need to capture orders and retain customers, some have had to absorb the duty component into their margins. If they add the duty to their prices, they will be out-priced by manufacturers in other countries. So they have had to quote prices without adding the duty that they will have to pay if the GSP+ is not available next year,” said Mr Masakorala.

The JAAF says that although large garment factories could remain competitive even with duties factored in, many smaller factories will not be able to sustain themselves for long.


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