Declining fortunes of SL apparel exports to USA

His assertion is supported by the statistics as US apparel imports from Bangladesh belonging to the above mentioned chapters increased even in 2008, But the Sri Lankan apparel exports to US declined even in 2007, during the year in which the US economy grew at a healthy rate for the first three quarters. According to the Central Bank Annual Report 2007, the Economic slowdown in US began in the last quarter in 2007 consequent to the sub prime mortgage crisis in US. Moreover US apparel imports covering the chapters, 61, 62 and 63 increased in 2007 from the imported values recorded in 2006, in manifestation of the positive consumer sentiment that prevailed in US for the most part of 2007. Hence the decline of Sri Lankan garment exports to US can’t be entirely attributed to the economic slowdown in US

By Asela Gunawardena

The apparel industry has been the major breadwinner of the Sri Lankan economy with the advent of the open economic regime in 1977. Since 1977 the apparel industry has been playing a significant role in terms of employment, foreign exchange and exports. The growth of the apparel industry transformed the shape of the Sri Lankan economy with the share of agricultural exports declining in terms of relative importance and apparel exports becoming the largest export earner of the economy. Then UNP government led by the late President J.R.Jayewardena earmarked the apparel industry to be the thrust industry of the country in terms of employment and wealth generation and hence actively promoted the growth of the industry by offering tax holidays and setting up of Free Trade Zones in selected locations.
In reflection of the rise of the apparel industry, the apparel exports accounted for 46% of Sri Lanka’s exports in 2009 from a negligible 2% of total exports in 1977. The industry directly employs around 350,000 employees and is responsible for the livelihoods of 1 million people overall. The progressive evolution of the apparel industry was despite the two-decade-old civil war and the JVP insurgency in 1989. USA is the largest market for Sri Lankan apparel exports even though Sri Lankan exports to USA have been declining in the last few years. The USA market was of immense significance to the expansion of the industry and the development of the industry was assisted by the Multi Fibre Arrangement (MFA) which granted guaranteed quota access for Sri Lankan garment exports to USA. In 1985, Martin Trust, one of the pioneers in the development of “speed sourcing” for the American fashion retail sector, began working with Sri Lankan textile and apparel companies. In 1986 and 1987, they established joint venture partnerships with the Brandix Group and the Amalean Group, which helped to make the country more competitive through knowledge transfers and technology, attracting further foreign investors. In 2008, in a significant development, for the first time apparel exports from Sri Lanka to the European Union (EU) exceeded that of to USA. To be precise, since 2007 apparel exports to USA have been declining, although the apparel exports of Sri Lanka’s competing nations, Bangladesh and China showed an increasing trend in 2007 and 2008 (the total US imports declined in 2009 as it underwent the brunt of the effects of the recession). Given the apparel industry’s socio-economic importance to Sri Lanka it is pertinent to pay a closer attention to this issue.

US market
MFA also known as the Agreement on Textile and Clothing (ATC)) governed the world trade in textiles and garments from 1974 through 2004, imposing quotas on the amount developing countries could export to developed countries. It expired on January 1, 2005. On the same day, Sri Lanka became eligible for the GSP+ concession, which granted favourable market access to the EU as a result of the groundwork laid down by the former Prime Minister Ranil Wicremesinghe and then Minister of Commerce, Ravi Karunanayake during the UNP administration from 2002 to 2004, contrary to the misconception that GSP+ was given by EU as a measure of humanitarian assistance to the country in the aftermath of Tsunami. Until the end of 2004, around 90% of Sri Lanka’s garment exports to US faced quota restrictions. The MFA was favourable to Sri Lanka within the US market as it imposed limits on the garment exports to US from China. Since the phasing out of MFA in 2004 the apparel exports from China, Bangladesh, Vietnam and India have risen to US whilst the garment exports from Greece, Portugal and Sri Lanka to US have declined during the same period. The labour and energy costs of Bangladesh and China are much lower than that of Sri Lanka, thus eroding the competitiveness of Sri Lankan garments in the quota free trading environment within the US market against its competitors. As of 2010, most of the Sri Lankan exports to US are from MAS or Brandix, with a smaller amount coming from the Hirdaramani Group of Companies. Together, these three companies account for a majority of the value of exports of garments to the U.S. market.

Declining trend
The declining trend of apparel exports to US began in 2007. This trend continued even in 2008 and 2009. However in 2005 and 2006, garment exports to US increased even after the phasing out of the MFA. In both 2008 and 2009, the US imports of apparel items belonging to the categories of chapters, 61, 62 and 63 declined with the onset of the economic recession beginning to take effect in 2008 (all Sri Lankan garment exports to US come under these chapters). Speaking to The Bottom Line, the former chairman of the Export Development Board (EDB), Rohantha Athukorala said that US consumers became extremely price conscious during the recession and that urged consumers to move to more cheaper garments from Bangladesh and China. His assertion is supported by the statistics as US apparel imports from Bangladesh belonging to the above mentioned chapters increased even in 2008, but the Sri Lankan apparel exports to US declined even in 2007, during the year in which the US economy grew at a healthy rate for the first three quarters. According to the Central Bank Annual Report 2007, the economic slowdown in US began in the last quarter in 2007 consequent to the sub prime mortgage crisis in US. Moreover US apparel imports covering the chapters, 61, 62 and 63 increased in 2007 from the imported values recorded in 2006, in manifestation of the positive consumer sentiment that prevailed in US for the most part of 2007. Hence the decline of Sri Lankan garment exports to US can’t be entirely attributed to the economic slowdown in US.
The General Secretary of Joint Apparel Association Forum (JAAF), Rohan Masakorala told The Bottom Line that preferential trade access granted by the EU resulted in diversion of Sri Lankan exports to the European markets from US. As a matter of fact, garment exports to EU increased substantially from 37.14% of total garment exports in 2004 to 52% of garment exports in 2009, highlighting the boon given by the GSP+. “The turnaround times are much quicker for EU garment exports from Sri Lanka”, Masakorala pointed out. But nevertheless, all resource persons who spoke to The Bottom Line unanimously pointed out that Sri Lankan garment exports to US have been adversely affected by the price competitive garment exports from Bangladesh, Vietnam and China.
Meanwhile, in a rather critical outlook, the Chairman of Daya Apparel Exports, Daya Gamage highlighted that when the economic recession began in US, most of Sri Lanka’s competitors devalued their currencies to remain price competitive, but in 2008, the Sri Lankan Rupee was overvalued against the dollar amidst high inflationary pressures. His argument holds merit. In 2008, the rupee appreciated against the dollar by 2.11% in annual average exchange terms when the annual average Real Effective Exchange Rate appreciated by 18% during the same year. This would have compounded the woes of Sri Lankan exporters who were hit by the extremely high cost of living during 2008. The annual average inflation of Sri Lanka in 2008 was 22%. “The electricity costs have gone up by around five times along with the rise in transportation costs, we also had to increase the salaries of our workers in line with the increase in the cost of living, hence it is quite difficult for Sri Lankan garments to compete in the extremely competitive American market,” Gamage described the dilemma of apparel exporters. He also mentioned that Sri Lankan Rupee must be around 135 against the US dollar if it is accurately valued. In the recent past some of the premier Sri Lankan garment manufacturers, such as Brandix too have been setting up factories in Bangladesh and India to capitalise the low costs of labour and energy in those countries.
To promote the image of Sri Lankan garments, JAAF launched the ‘Garments without Guilt’ campaign to demonstrate the high compliance to ethical labour standards of treatment of garment workers in Sri Lanka in 2005 and also to indirectly refer to the poor working conditions of garment factories in China and Bangladesh. However, Rohantha Athukorala noted that it is a long-term measure of differentiating Sri Lankan garments from its competitors within Europe and American markets. “In the long-term our apparel exporters must increase their investments in research and development to ensure the continued success of the industry,” he stated.
The 2009 Central Bank Annual Report suggests the usefulness of market diversification to ensure the well-being of Sri Lankan exporters, but Athukorala explained that although market diversification has been suggested it was a difficult course of action as entire designs and models need to be changed if garment exporters intend to shift their products to Asian markets such as Japan away from traditional western markets such as EU and US.
Nevertheless, companies such as MAS Holdings, has achieved a considerable degree of success in the Indian market, with its lingerie brand, Amante being recognised as the Best Brand of Year by Indian consumers in an AC Nielsen survey.

Publicity challenge
Leaving aside all the financial and economic circumstances that have led to the uncompetitiveness of Sri Lankan garments in terms of cost, in last year Pro-LTTE Tamil Diaspora groups launched a publicity campaign to urge consumers in the West to boycott Sri Lankan made garments, citing the alleged human rights violations committed by the present ruling administration. This campaign is carried out by an organisation called, Boycott Sri Lanka and it has circulated some negative video clips on Sri Lanka via the You Tube website. So far no action has been taken by the government or our diplomatic missions abroad to counter this propaganda campaign.
Perhaps considering the reduction of apparel exports to US and the uncertainty surrounding the GSP+ concession, JAAF downgraded the initial export target of US$ 5bn in 2014 to US$ 4bn recently.