Apparel industry bullish about the budget


Despite the passage of the budget for 2016 with a two thirds majority in parliament, discontent over certain proposals continues to boil below the surface and threatens to erupt to the surface in the form of industrial action after the holiday season. One important sector that appears to be quite satisfied with the budget is the apparel industry. In this interview with The Island staffer C. A. Chandraprema,

the General Secretary of the Joint Apparel Association Forum (JAAF) Tuli Cooray discusses among other things, what the budget has on offer for the apparel industry, the restoration of the GSP+ trade concession to Sri Lanka, the transformation that has taken place in the industry over the years and apparel industry’s take on the proposed Economic and Technical Cooperation Agreement with India.

Q. The government wants the private sector to increase wages by Rs. 2,500 a month. The plantation sector has said they can’t afford it. If an estate or factory employing 1,000 workers increases salaries by Rs. 2,500, that will add another Rs. 30 million per year to the salary bill. Is your industry able to take the proposed wage hike?

A. We have already made a commitment to the government in that regard. The prime minister said the government will create an environment conducive to carry on our business, with GSP +, and preferential trade agreements with the USA and China. We agreed to pay Rs. 1500 in May 2015, and the balance Rs. 1000 in January 2016.

Q. If the GSP+ trade concession is restored, does that improve the profitability of the local apparel industry?

A. That is a debatable point. GSP+ enables the importers in the EU to import from a recipient country without the payment of import duties. This improves Sri Lanka’s capacity to penetrate into that market because the ‘landed cost’ of goods produced in Sri Lanka will be less. In that context there may be the possibility of dividing the benefit between the buyer at that end and the producer at this end. It depends on each company’s capacity to negotiate. The buyer may turn down a request to share the benefit but he may give more orders to Sri Lanka.

Q. Is there any study done among your members quantifying the benefit that GSP+ has brought to each company?

A. We don’t have any empirical evidence other than what has happened. We got GSP+ in 2005 and it was withdrawn in 2010. During that period, apparel exports to the EU increased from 980 million USD in 2005 to over 1.6 billion USD in 2010. So there was an increase in exports to the EU during that period.

Q. If the importer at the EU end is to benefit from GSP+ he will have to meet the rules of origin criteria.

A. The country of origin is important. We have a thing called ‘regional cumulation’ which means we can manufacture garments from fabric imported from SAARC countries and qualify for GSP+. If fabric is imported from China we may not be able to qualify.

Q. Have you done any study among your buyers in the EU as to whether any of them have been actually qualifying for GSP+ under the rules of origin criteria?

A. Of course. No sooner the Sri Lanka certificate of origin is issued by the Department of Commerce, the importer qualifies for GSP+.

Q. The nature of the industry is such that you get orders from big retailers in Europe and you manufacture the garments according to their specifications.

A. At the early stages in the 1980s the companies were actually contract manufacturers. The design, fabric and accessories were sent by the manufacturer. That was possible so long as the quota system prevailed because the importer had to buy from the country that held the quota. After the quota system was abolished in 2005, the importer could buy from anywhere in the world so we had to adjust to the new situation. We started a process of backward integration in this country. In the old days we exported mostly woven fabric garments now we export mostly knitted products. The yarn is imported, the fabric is knitted and the garment produced here. Even in the case of woven fabrics, we import unfinished fabric, do the finishing here and then manufacture the garments. We started managing the supply chain. Now inputs are managed by us not by the buyer. In this industry, the value addition is not so much at the assembly stage but at the front end and the back end. Our objective is to integrate the front end, where we provide the design and the sample and the buyer decides. That evolution is taking place. When the quota system was to be removed in 2005, the entire technocratic world, the World Bank, the Asia Foundation and even experts in this country predicted the end of the apparel industry in Sri Lanka. But we survived and grew due to the investment made in creating backward integration. Today the value addition is 60%.

Q. How is the local value addition estimated at 60%?

A. The private sector has invested heavily in producing accessories such as thread, buttons, collar stays, and in services such as printing, packaging and bar coding. If you analyse the import of inputs into the apparel industry over time, you will see that yarn imports have increased and fabric imports have decreased. Even in the case of woven fabrics, we import half finished products and we do the rest here. We have the best embroidery and washing services in this part of the world. Though we are one of the highest cost producers in the region we continue to grow because of the strengths of the industry.

Q. Conventional wisdom says that the readymade garment industry which relies on cheap labour moves on to a cheaper location when the cost of labour becomes too high and that therefore, the apparel industry in this country is a sunset industry.

A. Two weeks ago, an analysis in the online Just-Style magazine divided the countries exporting apparel to the US market into four categories as winners, apparent winners, stuck in the middle and losers. Sri Lanka was categorised as one of the winners. We feel that with GSP+, and a free trade agreement with the USA and China, nobody can stop us. But we understand that the diversification of Sri Lankan exports is a dire necessity and the country can’t simply rely on apparel. We directly employ about 400,000 workers. If you take the other suppliers, and service providers, we touch the lives of about one million people.

Q. There is the question of the cost of production – not just the cost of labour but also of energy. Then the salaries on offer don’t attract enough workers, there is heavy labour turnover in the industry as well as a severe labour shortage. How is the industry to move forward in such circumstances?

A. Labour problems are common in all industries not just the garment industry.

Q. Because of the labour shortage in the apparel industry and also in other sectors, a request was made some time ago for labour to be imported from India. The main benefit in having the apparel industry here is because of the employment it creates. If employment is going to be opened to Indians, there would be no point in having the apparel industry here.

A. We have not, and we will never ask the government to permit Indian or Bangladeshi labour to come into our industry. We have requested the government to help us set up more factories in areas where poverty levels are higher than the national average. We are going to go to those areas. That is where the labour is available. We have also started multi-skilling workers so that the importance of labour in the production process will be diminished. If you take the South Asian region, we have a large pool of labour and the region produces cotton. We are one of the best manufacturers in the world. We are looking at a regional effort. We in Sri Lanka have the technology and the capacity to do the value addition. So we intend managing the order through Sri Lanka, and getting the goods manufactured in Bangladesh bringing it over here, doing the value addition and exporting it as a Sri Lankan product. This will enhance the exports of all countries involved. In India, the middle class is growing and their purchasing power and demand for goods is increasing. We have requested the government to open the Indian market to us.

Q. What does your association think about the proposed Comprehensive Economic Partnership with India? The Economic and Technical Cooperation Agreement which is supposed to have replaced it is not known to the public.

A. The draft of the proposed Economic and Technical Cooperation Agreement has been given to all the industrial chambers including our own. It’s not in the public domain but the business community has been provided with the older CEPA with amendments, as well as the new draft of the Economic and Technical Cooperation Agreement. Our association has sent a three page letter with our comments on the proposed agreement. The free movement of natural persons has been removed from the agreement. There are two matters that we have taken up in relation to the India - Sri Lanka FTA. The first is the signing of the mutual recognition agreement on standards. The second is the removal of the apparel quota on the Indian side. We want access to the Indian market.

Q. In selling apparel in the Indian market you will directly be in competition with Indian manufacturers. We have been hearing all kinds of horror stories about Sri Lankan companies that tried to penetrate the Indian market and the bureaucratic obstacles that were placed in their path forcing the closure of those establishments in India.

A. Most manufacturers in this country want access to the Indian market but when it comes to opening up the Sri Lankan market to Indian products, the same parties say no.

Q. But the Indians do have access to the market here, look at the importation of vehicles, cement, steel and other goods.

A. That is because we are not producing those items here. Production has to be based not on protection but on competitiveness. We can export our balm to other countries but we can’t import balm from other countries into this country.

Q. Even after the FTA with India was signed, the trade balance has continued to be heavily weighted in favour of India.

A. A free trade agreement is not meant to balance the trade. We have got used to protection. Some businesses are not interested in improving their quality because they have a captive market here. About 60% of the garments sold in the Sri Lankan market is imported, but our industry has not made a hue and cry about it. Garments are brought into the country using the baggage system on airlines. Baggage carriers travel business class because they can carry more baggage. Then some importers under-invoice the consignment. That’s how the local apparel market is supplied.

Q. There is the feeling even among sections of the business community that the FTA with India has benefitted India much more than us.

A. All the countries in the world are trying to protect their interests. You can’t hope to export to India without opening up the Sri Lankan market to them for the same goods.

Q. With regard to GSP+, one cannot fail to notice that only a very few countries have even applied for it. A lot of countries benefit from the ordinary GSP scheme and the zero duty scheme for the least developed countries. But only Armenia, Cape Verde, Mongolia and Georgia have applied and obtained GSP+ in the proper manner. The other nine recipients of GSP+ including Pakistan were brought into the GSP+ scheme from the special scheme for drug producing countries. When a World Trade Organisation action started by India on 2002 forced the EU to abolish the special scheme for drug producing countries, the orphaned drug producing countries were accommodated under GSP+. The number of actual applicants for GSP+ can be counted on the fingers of one hand. Furthermore none of these proper applicants are major exporting countries. One of the main reasons why eligible countries have kept away from the GSP+ scheme is because the EU gets a political handle over the recipient country. Secondly, even if you get GSP+ you have to qualify under the rules of origin criteria so there is no guarantee that you’ll get the benefit of the concession. Thirdly, when the GSP scheme was first conceived in the 1960s, the least developed nations were supposed to get duty free access, and when they reach a certain level of development they fall into the ordinary GSP scheme where they can export to the EU with a modest import duty. Once that country reaches developed country status, the duty concessions are withdrawn altogether and trade takes place as between two equals. The GSP+ scheme distorts this natural progression and keeps an industry perpetually dependent on zero duty access to the EU without which it cannot survive. This too is a kind of protectionism. There will be no need for the local industry to be competitive because they have zero duty access to the EU.

A. The ordinary GSP should not be mixed up with GSP+. The original GSP scheme did envisage a progression. GSP+ was developed to benefit developing countries which have specific problems. One of the criteria to receive GSP+ is not having a diversified exports. Then there are 27 conventions that have to be ratified and if the EU feels that there are no systematic violations of those conventions, the country concerned will be eligible for GSP+ even if there are a few lapses.

Q. Don’t you think the industry will get stuck in a groove if they get this duty free concession which provides a protected environment for our exports?

A. We do not believe in protectionism. We believe in competition. But if my competitor is having zero duty access, I will not be able to compete. There is the Trans Pacific Agreement with 12 Pacific rim countries which includes Canada, USA, Australia and Vietnam. So we requested our government to get into the bandwagon and to talk to the USA about an FTA.

Q. The apparel industry survived the abolishing of the quota system, it survived the granting and withdrawal of GSP+. If at this stage you go back to GSP+ and get the industry into a protected environment you will be going backwards and seeking a privilege that was meant to be accorded only to the least developed countries. The reason why so few countries have applied for GSP+ is because of the political strings attached.

A. India is negotiating an FTA with the EU. They are also looking for a market with preferential treatment. GSP+ is not just for garments but for a large number of other products as well. If good governance can be established by signing those 27 conventions and we get zero duty access to the EU at the same time, why not take it? We will of course lose GSP+ when we go beyond the middle income range. So we are looking beyond GSP+, at an FTA with the EU. More than 500 FTAs are in operation today. FTAs were supposed to be an exception in terms of the rules of the WTO. But it has now become the general rule.

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