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| Sunday, 22 August 2004 |
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| News Business Features Editorial
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End of MFA : challenge for apparel exporters by Elmo Leonard. The MFA - Multi Fibre Agreement under which Sri Lanka's export apparel industry thrived on has less than 150 days to continue and what would happen to this all-important industry when the apparel market goes global? Consider that the industry accounts for 6 percent of GDP, 40 percent of industrial production, 50 percent of overall exports and employs 5 percent of the country's labour force. An answer to this dilemma in the form of a book, themed, The ReadyMade Garment Industry in Sri Lanka: Facing the Global Challenge by Executive Director, Institute of Policy Studies (IPS) Dr Saman Kelegama was launched last week. One school of thought, according to the book, cites that 12 percent of the readymade garment firms control 72 percent of exports. These optimists argue that such firms are well established and capable of taking advantage of a quota free regime. It is considered that the demand for ready-made garments globally is forecast to increase by 12 percent over the next three years. Thus, it is expected that the stronger local industrialists would make use of the small and medium garment factories by acquiring them or by using them for subcontracting purposes. Such a process would result in some loss of employment, but not for a significant large number. The other school of thought is that irrespective of whatever percentage of exports the top 12-percent of garment firms control, they are not competitive enough to improve marketshare significantly in the post-2004 period. In the scenario to follow, China is expected to increase its global marketshare from the current 20 percent to 50 percent by 2010. Also, by 2010 the marketshare of Asian countries is expected to shrink from the current 32 percent to 20 percent and Sri Lanka would be a loser, they say, according to Dr Kelegama. The pessimists cite Sri Lanka's inadequate development of backward linkages; weak forward integration; low labour productivity; increasing cost of production etc as drawbacks. They say that at least 100,000 workers will lose theirjobs and various new mechanisms will have to be devised to look into the fallout from the garment industry. But, Dr Kelegama argues that the Y2K bug scare did not have the anticipated impact, as remedial action was taken. Similarly, before the formation of NAFTA, pessimists had agreed that the U S would buy more garments from Mexico and Sri Lanka's market share of the United States would drop. On the contrary, Sri Lanka increased marketshare to the United States. To view the emerging picture more clearly, more light should be shed on issues such as backward and forward integration; labour productivity; cost of production; the emergence of China as a major supplier of ready-made garments; trade division due to regional arrangements; the impact of the phase-out of the MFA, besides. Dr Kelegama says that at present there are several fragmented views that are emerging about the post-2004 period. The objective of the book is to bring such information into focus while the debate is ongoing and time is fast running out. Factors of concern in the book are: While garments comprise more than 50 percent of Sri Lanka's exports the country does not enjoy any special privileges from among her major markets. For instance, countries that belong to the LDC and to the Afro-Caribbean Pacific countries (ACPs) benefit from duty-free or preferential access in the EU market, the former under Everything-But-Arms (EBA) and the latter by ACP preference. ANDEAN, CBI and AGOA countries benefit from duty free access to the US market. While Sri Lanka is as vulnerable to global events like Bangladesh and Nepal, our two neighbours benefit from EBA. Sri Lanka is also is also valuable to global events like Kenya and Botswana but these two benefit from AGHA. But Sri Lanka should carve out a special status in regard to market access for small open developing countries which do not belong to any preferential system that depend more than 50 percent of exports on readymade garments, the book enlightens readers. Dr Kelagama says that Sri Lanka should, in her negotiations for market access for readymade garments, link to poverty alleviation. Such a linkage would be supported by ILO, Oxfam, among others. In the contemporary scenario, international institutions are increasingly emphasising the need for poverty alleviation. The WB is emphasising PRSP, IMF wants PRGF put in place, UNDP is emphasising the MDGs, among other such moves. At the same time economists are increasing emphasising the trade-poverty nexus: they talk of "trading out of poverty" about "making trade work for the poor" and the like. Sri Lanka is in a strong position to ask for better market access because any serious threat to the industry would have a telling impact on the livelihood of the people. Sri Lanka should work out a deal with EU for deeper GSP preferences for meeting labour standards and ask for more flexible rules of origin under GSP. The book also points out that Sri Lanka had already faced a threat from China in certain categories of garments that came out of quota in 2000. The book notes that China's threat is real, but may be a bit over-emphasised. WTO has devised special China specific rules and regulations at the time of China's entry into the WTO in 2001 and may be used by leading importing countries as USA to have some degree of control over Chinese garment exports. The book says that moreover, economists know that one country cannot have a comparative advantage on all products - not only sector- wise but also sub-sector wise. Thus, there is always room for a small economy like Sri Lanka to maintain its comparative advantage on particular types of garments in its already well-established markets.Regional "Trading Arrangements (RTAs) and bilateral Free Trade Agreements (FTAs) can assist Sri Lanka's garment sector but it depends on how the RTAs are designed. For example, the rules of origin (ROO) governing it. How non-tariff barriers and para-tariffs are treated in the RTA. The Indo-Sri Lanka Agreement became a non starter for the RMG sector, among other factors, due to not very favourable rules of origin, NTBs and para tariffs, the book says. In a case, like a possible US-Sri Lanka FTA the gains will come to the RMG sector under very relaxed ROO which can be difficult to bargain with USA. Even if we were granted favourable ROO such as FTA can have unfavourable effects on the other sectors of the economy. It is vital to look at the political dimensions of an FTA without just narrowly focusing on the benefits of an FTA for one particular sector like garments. FTAs are not panaceas for lack of competitiveness, the book says. To review the book further would not be possible here. Besides being a very important study for the apparel sector, economists and others, it would also be of historical significance. Priced at Rs 800, the book is more than useful. |
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