Blog: GSP+ fears loom
Leonie Barrie | 22 October 2008
By refusing a European Union investigation into the country’s alleged human rights abuses, the Sri Lankan government has effectively sounded the death knell for an extension to the GSP+ trade scheme.
The trade concession, which comes to the end of a three-year term in December, has almost single-handedly helped Sri Lanka's garment sector grow to a US$3bn a year industry. Garments account for 65% of Sri Lanka’s exports to the EU, using the GSP+ - and without the trade preference, export duties will rise from zero to 8%-10%.
To offset concerns of leading international buyers about possible price rises, the government says it will provide $150m to industry in 2009 to offset any potential shocks from losing the preference. But this relief is only temporary, and may well end up giving retailers and importers a year in which to find other, cheaper sources of supply in neighbouring countries like India, Pakistan, Bangladesh, Thailand, Vietnam, Cambodia and the Philippines.
Some buyers have already asked garment factories to absorb the duty component partially or in total – highlighting the fact that higher manufacturing costs in Sri Lanka have already made profit margins wafer thin and there is little room for any further concessions.
Ironically, higher production costs are in part due to the industry’s focus on better labour standards. The Garments without Guilt campaign was introduced to give the Indian Ocean island an edge as an ethical producer in a crowded international market. But this image has perhaps been irreparably damaged by the actions of its own government which, through its refusal to be monitored, suggests the welfare of its citizens is not now as high on its agenda as it claims.
The EU’s decision at the end of this month may also detrimentally influence the industry’s chances of getting support from a US programme similar to the EU’s GSP+.
Of course there’s also the argument that a country should not always depend on trade concessions for its competitive advantage. And indeed, investments in local fabric and trimmings facilities means Sri Lanka is now in a much stronger vertical position than it was when the GSP+ status was first granted in 2005.
But when retailers are fearful for their own businesses, and when cutting margins and lowering inventories is a key to their survival, losing a concession that keeps prices down couldn’t have come at a worse time.
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