Financial Times

Garment industry sees “really tough” 2009

By Dilshani Samaraweera

GSP+ application goes to Lankan embassy in Brussels
Sri Lanka’s application for the EU GSP+ trade scheme has been sent to the Sri Lankan embassy in Brussels.
“The GSP+ application has already been prepared. According to protocol, our Ministry (of Export Development) sent the application to the Ministry of Foreign Affairs, and they have sent it to the Sri Lankan embassy in Brussels,” Secretary to the Ministry of Export Development and International Trade, S. Ranugge said. The deadline, to submit GSP+ applications to the European Commission (EC) in Brussels, is the end of this month (October 31).

The current GSP+ scheme expires at the end of this year and Sri Lanka needs to re-qualify for the scheme to enjoy duty free exports into the EU for another three years. But at this point Sri Lanka also faces the possibility of an investigation by the EC. This is because to qualify for the GSP+ Sri Lanka had to implement 27 international conventions on labour rights, environmental rights and human rights.

But allegations of human rights violations have raised concerns on the implementation of some conventions. Diplomatic sources say areas of concern are likely to be on the implementation of the International Covenant on Civil and Political Rights (ICCPR), allegations of the use of torture and allegations of the use of child soldiers by a group supporting the government.

But the government has still not been officially notified of an investigation. “As far as I know, there has so far been no official communication to the government about an investigation on the GSP+. The government can respond to such a decision only when it is officially communicated,” said Mr Ranugge.

Meanwhile, trade sources say that even if an investigation is decided on, the GSP+ will continue to be available during the period of the investigation.
Officials from the Joint Apparel Association Forum, the garment industry representative body, say that according to rules governing the GSP+, a country subjected to an investigation can continue to benefit from the GSP+ during the period of an investigation.
In addition, even if the GSP+ is terminated as a result of the findings of an investigation, Sri Lanka can still re-apply for GSP+, if the government is able to improve the implementation of the required international conventions. In fact, because of recent changes to the relevant regulations, countries can apply for the GSP+ in mid 2010, as well as this year.

The GSP+ trade scheme allows Sri Lanka to export 7,200 items duty free to the EU. Although originally the scheme was used only by the local garment
manufacturing sector, by now others, like footwear, fisheries andagricultural exporters are also starting to use the GSP+ to develop exports markets in EU countries.

The garment industry is to expect a “really tough” first half next year with the US, Sri Lanka’s single biggest buyer of garments, heading deeper into recession. “The impact of the US recession will hit us in the first half of next year. The whole of next year will be difficult, but the first half will be really tough,” Chairman/CEO of MAS Holdings, Mahesh Amalean told The Sunday Times FT on Wednesday after delivering a speech on ‘lean manufacturing’ to the local garment industry, at a forum organised by the Sri Lanka Apparel Exporters Association.

The US buys up around half of total garment exports from Sri Lanka and already garment factories are feeling the downturn of the US economy in the form of lower orders and downward pressure on prices. But the impact is expected to spread out across the industry from next year.

“We are feeling it even now, but people will still go shopping for Christmas. So the bad times will come after, from the first half of next year,” said Mr Amalean. “It is not just small and medium factories that will be affected. We will all be affected badly,” he added.

To make matters worse, Sri Lanka’s second largest garment export destination, the European Union, is also expected to go into recession. “The EU economies are also expected to slow down. So next year will be a very difficult year for all of us,” said Mr Amalean.

MAS Holdings, one of the biggest garment exporters in Sri Lanka, has been restructuring over the last few years and is now focussing on ‘lean manufacturing’, to adjust to global changes. “We have been restructuring over the past three years. We have elastic manufacturing plants in China, Indonesia and Mexico. But we have closed our garment manufacturing plants in places like Madagascar and Vietnam.

For garment manufacturing, we are now concentrating in the region, in Sri Lanka and India,” said Mr Amalean. The MAS Garment manufacturing plants are now all on the road to being ‘lean’ manufacturing units. Next year, on top of recessions in its two major export markets, the US and EU, local garment manufacturers will also have to face increased competition from lower cost manufacturing countries like China and Bangladesh. So garment factories are told to start making changes, if they want to stay in business.

As the head of MAS Holdings puts it, “If factories don’t start making changes now, they will not have a chance at all.”

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