This article is based on an interview with Felix A Fernando, Deputy Chairman of the Joint Apparel Association Forum of Sri Lanka (JAAFSL).
In view of the ongoing crisis in our country, it is crucial to seek an extension of the GSP+ tariff concession for an additional four years, until December 31, 2027. The GSP+ concession has been a valuable trade arrangement that has been in effect and previously extended for some time. Originally set to expire at the end of this year, the extension would provide much-needed economic relief and support during this challenging period.
The GSP+ concession is governed by certain requirements. For instance, beneficiaries must ensure they do not engage in child labour, adhere to labour laws, and take measures to control carbon dioxide emissions and address environmental pollution. Hence, securing the GSP+ concession demands significant dedication from countries like ours. Taking action on the specified conditions is of utmost importance to qualify for and maintain this trade arrangement.
The European Union had specific objectives when providing the GSP+ concession. Its primary aim was to assist low-income countries, offering them preferential trade benefits to promote economic development. Additionally, the EU committed itself to fostering a positive atmosphere in these countries, emphasising important issues such as safeguarding democracy, upholding the rule of law, and ensuring law and order.
A country cannot solely depend on GSP+ concessions for its economic survival. Despite the tax relief, Sri Lanka’s garment sector has experienced negative growth, highlighting the need for a more comprehensive approach to address the current economic challenges. The garment sector in our country is significantly impacted by the existing markets in Europe and America, the primary trade partners for our nation. Unfortunately, the ongoing economic crises in Europe and America have led to a substantial decrease in demand. As a result, the demand for our garments in these countries has significantly declined.
The primary reason for this decline is the decrease in consumption in those countries. Consumers are now less inclined to purchase goods, leading to an oversupply of products in those markets. The Russia-Ukraine war has impacted the cost of clothing in those countries, leading to a decrease in prices. Therefore, relying solely on the GSP+ concession to seek dollars may not be a sustainable solution, as the economic dynamics in Europe are currently uncertain.
Disastrous
It is crucial to refrain from spreading false information about the country and instead present a positive and stable image to the world. Having GSP+ relief is fortunate for our country, especially during this time of crisis. Without it, the situation would be disastrous. While the GSP+ concession provides temporary relief, the impact of recent crises, such as the Covid pandemic and last year’s economic challenges, has affected the country’s Per Capita Income, preventing it from reaching levels close to high middle-income countries in the World Bank’s economic index.
Continuing in the current condition for three consecutive years could indeed result in the loss of the GSP+ concession. The GSP+ relief is generally provided to Middle Income countries. If the Per Capita Income were to rise to the Upper Middle Income Level, the country might lose its eligibility for GSP+. However, it is important to aspire to elevate the country’s economic status to such a level.
Some countries, such as China, India, and Vietnam, are pursuing bilateral trade agreements instead of relying solely on common trade concessions like the GSP+. Bilateral trade agreements can offer more tailored and specific benefits for both parties involved, and they can play a significant role in boosting trade and economic cooperation between nations.
Correcting any deficiencies in foreign policy is crucial for moving forward. As we look ahead, countries like China and India are projected to become major consumers of apparel industry imports by 2030. Utilising trade concessions, such as duty-free access to these markets, can provide significant opportunities for the apparel industry. By establishing bilateral agreements with countries like the US, England, Japan, Korea and Australia, we can enhance market access and promote economic cooperation.
Countries like Vietnam have successfully entered into 13 regional bilateral agreements, reaping significant benefits. Emulating their approach by pursuing regional trade agreements can bring considerable advantages. The Ministry of Foreign Affairs should take proactive steps to enhance our commitment to such agreements. The President’s establishment of a dedicated committee to oversee trade agreements demonstrates the Government’s seriousness in exploring these opportunities for economic growth.
Prospects
The effectiveness of regional bilateral agreements relies on good coordination and adequate resources. Countries like India pursuing such agreements can impact our trade prospects, making active participation in negotiations crucial to safeguard our interests. Exporters to the EU benefit from relief measures, enhancing their competitiveness in the market. We face competition from countries like Bangladesh, Vietnam, Cambodia, and Kenya. Least Developed Countries (LDCs) have a significant advantage as they can export goods without duty, granting them a strong position in the market. Bangladesh, being a LDC, can send goods to Europe without any conditions. Having the GSP+ concession has helped to maintain stable prices for Sri Lankan goods in the EU market. Additionally, the high demand for Sri Lankan clothes has been favourable, preventing a major crisis for us in the European market.
Losing the GSP+ concession would result in a significant difference for European importers when importing products from Sri Lanka. Importers generally do not expect to import more than 10 percent or 12 percent without the concession. Having the GSP+ allows Sri Lankan manufacturers some time to secure their position in the market and maintain competitiveness.
Currently, only 50 percent of garment exports benefit from the GSP+ tax concession here. The main reason behind this is the challenge we face in adding value during the export process. It is crucial to enhance value by incorporating Sri Lankan raw materials into exported goods. Otherwise, the option is to export these raw materials to SAARC or Europe. Textile production in Sri Lanka remains low, and raw materials are mostly exported from China, Indonesia, or Thailand due to competitive pricing.
If our country exports US$ 1 billion worth of goods to Europe, only 51 percent of it currently enjoys the GSP+ benefit. Our goal is to increase this percentage. To achieve this, we have engaged in discussions with various Governments and have been striving for years to boost cloth production. A trade production zone in Eravur has been planned to cater to textile manufacturing, but its completion has been hindered due to limited capital expenditure.
Exports
Building five or six factories in the Eravur trade production zone could potentially raise the percentage of exports benefiting from the GSP+ concession to 70 percent. Such an increase would have a significant impact on the growth of exports. Moreover, boosting textile production in Sri Lanka would allow us to reduce our dependence on imports from China and other countries, which is vital for promoting self-reliance and enhancing economic resilience.
Engaging in discussions with various countries is crucial to finding temporary or permanent solutions for our trade challenges. Securing a tariff concession for goods imported from countries like Thailand and Indonesia would be highly beneficial. Currently, only textiles produced in our country are eligible for the GSP+ concession from Europe, but obtaining duty relief for goods imported from countries such as Thailand and Indonesia would provide significant relief. By discouraging the import of textiles from China, we can promote local production and foster a more sustainable and self-reliant economy.
Expanding the use of tax relief beyond sectors like garments, fish farming, fishing, and decorative products can be achieved. Many sectors have already benefited from this concession.
Encouraging other industries to increase production for tax-free exports is essential. For this, Sri Lanka should focus on transitioning towards a manufacturing economy, not solely relying on trade and services.