The Sri Lankan government has failed to understand the serious repercussions of its decision not to accept EU conditions that would have extended the GSP+ duty-free trade scheme for another six months. The country has been caught up in the politics of the global garment industry, asserts David Birnbaum, and the real losers will be workers who desperately need factory jobs.

The global garment industry has always been politicised. However, in the past the politics was limited to trade – countries trying to protect their own export markets or their own domestic suppliers.

Recently, the rules of the game have changed as governments in the industrialised West have finally woken up to the fact that there is more to the garment industry than just trade.

For many developing countries the garment industry is the first indispensable step toward industrial development.

In these countries, we garmentos are the largest industrial employers as well as the largest source of foreign exchange. As a result, the politics of the global garment industry has now been extended to include all areas of foreign policy.

Take the case of Sri Lanka. With only a 1.9% EU market share and a 2% US market share, Sri Lanka is not in the ‘major-garment-supplier’ category.

However, as they say, size is not everything. Sri Lanka’s garment industry is very special.

The industry consists of about 300+ factories of which approximately 15 are major suppliers. Of these, three – Brandix, Hirdaramani and MAS Lanka – are in that special group consisting of the world’s 50 most important garment suppliers.

Everybody loves working in Sri Lanka. It is not just that the country is beautiful, the food superb, and the people among the nicest in the world.

In truth we garmentos care little about the amenities of life. We care only about product and delivery, which is precisely why we love Sri Lanka.

Technically, these people have some of the best management in garment industry world. The industry is known for its acceptance of styles that no one else will touch. These factories are not only 100% reliable; they are at the cutting edge of human rights, working conditions and sustainability.

No child labour. No illegal practices. Others may still dump effluent in rivers or worse in ground water. Not the Sri Lankan big three. Do want you see a state-of-the-art factory with the most efficient pre-production and production systems, with a zero carbon footprint? Go to Sri Lanka.

Exports in decline
Unfortunately, despite its exceptional industry, Sri Lanka’s global garment export market share has declined steadily since the quota phase out in 2005 – from 1.07% in 2004 to 0.96% in 2008 (according to World Trade Organization, International Trade Statistics 2009).

There are three important reasons for this decline:

  • For much of this period, Sri Lanka was involved in a long-term internal war against the LTTE, a vicious terrorist group. Indiscriminate attacks against the civilian population are never good for business, despite the fact that during the 30-year conflict, not one foreigner was killed or attacked.
  • The major garment factories expanded off shore – in the case of the big three building large scale industrial parks in India.
  • As the global garment industry consolidated, US customers increasingly concentrated their orders in the major supplying countries, dropping Sri Lanka as too small. From 2004 to 2009 Sri Lanka’s US market share fell from 2.4% to 1.9%.

To some degree the loss of US business was compensated by an increase in exports to the EU where from 2004 to 2008 market share increased from 1.6% to 1.9%.

Much of this was due to GSP+ status granted to Sri Lanka by the EU in 2005. GSP+ allows duty-free status for all exports to the EU, thus saving 8%-12% on garment costs.

GSP+ is given only to those countries who have signed and abided by 27 international conventions on human rights, labour rights and environmental standards.

With the exception of Mongolia, Sri Lanka is the only Asian country given GSP+. In all fairness, no Asian country was more deserving nor more entitled.

The result was a major shift in Sri Lanka’s export markets.

In 2004 the US accounted for 61% of all Sri Lanka’s garment exports compared with 39% for the EU. By 2008 the situation had almost entirely reversed with the EU accounting for 50% of total Sri Lankan garment exports compared with the US at 47%.

Sri Lanka garment exports

2010 was to be Sri Lanka’s great year
In May 2009, the LTTE was finally and completely defeated and the internecine war came to an end. After 23 years of terrorist attacks, peace had finally returned to the Sri Lanka.

Armed with GSP+ status, Sri Lanka’s major factories looked to expand their operations in the north of the country, supplying jobs to the local Tamil population.

So, it is with more than a little irony that on 5 July 2010 the EU announced that Sri Lanka is to lose its GSP+ status with effect from 15 August 2010. The reason given was human rights violations which occurred in the closing months of the fight against the LTTE.

Last October the European Commission (EC) said its investigation identified significant shortcomings in respect of three UN human rights conventions: the International Covenant on Civil and Political Rights (ICCPR), the Convention against Torture (CAT) and the Convention on the Rights of the Child (CRC).

The EU offered to delay its action by six months in exchange for written assurances that the Sri Lankan government could deliver pledges on 15 specific issues on human rights.

The Sri Lankan government refused to give those assurances.

Media Minister Keheliya Rambukwella said: “Colombo has already arranged relief to export businesses that would be affected by Sri Lanka no longer receiving preferential access to European Union markets.

“We are not accepting EU conditions. Our position is very clear. We have already made alternate arrangements to help the exporters who may be affected by this.”

The minister had previously dismissed the EU conditions as “insulting to every Sri Lankan” and vowed the government would not back down.

In all fairness the Sri Lankan government did try to negotiate a solution with the EC and walked away only after concluding they were unable to reach a “reasonable” agreement.

The problem is that they failed to see Sri Lanka was in no position to bargain. Losing GSP+ carries considerable cost to Sri Lanka; taking GSP+ away from Sri Lanka costs the EU nothing.

When all is said and done, the Sri Lankan government failed to understand the serious repercussions that will arise from its decision.

Garment industry grief
So much for the politicians. Here are the real problems.

Garment factories are not only Sri Lanka’s largest employer, they account for over 40% of the country’s export trade. Much of this is about to be lost.

The Sri Lankan garment industry relies on only two markets for 97% of its garment exports. The US market is in secular decline. The EU, which is Sri Lanka’s largest customer, is a growing market and the world’s largest garment importer – yet is about to freeze Sri Lanka out.

Compensating the factory owners is a costly irrelevance since virtually all of the big Sri Lankan factories are capable of shifting production off-shore on 10 minutes’ notice.

Having finally liberated the previously Tamil Tiger controlled regions of the country, the government must take immediate steps to bring these people back into a viable society.

The first step must be job creation. How does the government intend to create jobs at the very moment they are inviting their largest industrial employers to leave the country, taking their jobs with them?

The Sri Lankan government should look to the garment industries in Hong Kong, Korea and Taiwan, whose companies are among the world’s largest garment exporters but have almost no sewing factories in their home countries.

This may well be Sri Lanka’s future. The only difference is that today Hong Kong, Korea and Taiwan are among the world’s most affluent countries. They neither need nor value the semi-skilled jobs offered by garment producers.

Sri Lanka is not an affluent country. Sri Lanka needs garment factory jobs. Regrettably, their government does not seem to place sufficient value those jobs. 

David Birnbaum is the author of The Birnbaum Report, a monthly newsletter for garment industry professionals. Each issue analyses in-depth US garment imports of four major products from 21 countries, as well as ancillary data such as currency fluctuations, China quota premiums and clearance rates.