Opinion: Sri Lankan apparel, seeking market access through trade deals

By Subhashini Abeysinghe

Apparel is the single most important export of Sri Lanka. With export earnings of US$ 4.7 billion, apparel accounted for 42% of total exports of the country in 2014. The sector faces several challenges in the international market.

Erosion of cost competitiveness due to higher costs and a shortage of labour at home, sluggish growth in demand from key markets (e.g. USA and EU account for 90% of apparel exports) and having to pay import duties in foreign markets while competitors’ products enjoy duty free access through trade deals are a few of these challenges.

Trade deals with potential emerging markets such as India and China are considered useful in overcoming some of these challenges.

Together, India and China account for a mere 1.1% of world apparel imports. The two countries account for only 2% of the total apparel exports of Sri Lanka. What makes these two markets attractive is not their current size but the rate of growth and future potential.

During 2010-2014, total apparel imports into India and China grew at 26% and 24% respectively compared to lower or negative single digit growth rates recorded by leading importers in North America and Europe. Apparel exports from Sri Lanka to India and China grew at 46% and 62% respectively during the same period compared to single digit growth rates in exports to USA and EU.

Sri Lanka already has a free trade agreement (FTA) with India since 2000 and have agreed to enter into a FTA with China. This article briefly looks at prospects for Sri Lankan apparel in India and China. The analysis finds that despite the difficulties the sector faces in entering India through the existing FTA, the probability of getting better market access to China through the proposed FTA is relatively high.

Further analysis indicates higher market potential for Sri Lankan apparel in China compared to India as well.

The current growth in apparel exports indicates the likelihood of faring better if given duty free access under the proposed FTA with China. Sri Lanka can be more optimistic in this regard because China has already given duty free access to apparel exports from ASEAN countries like Vietnam, Cambodia, Indonesia and Philippines under the China – ASEAN FTA.

Having given duty free access to larger and more cost competitive neighbors, the likelihood of extending the same concessions to Sri Lanka remains high. Further, unlike in the case of India, where the mandatory requirement to use Indian fabric was a barrier to export, flexibility to use Chinese fabric to meet 40% domestic value addition (DVA) in Chinese agreements will be an advantage for Sri Lanka. This is because China is the main source market for fabric used in manufacturing apparel in Sri Lanka.

The size of the market and future potential coupled with high growth in demand for branded and fashion apparel makes China a lucrative market for Sri Lanka that is vying to be a leading manufacturer of high end global brands. In 2014, the value of imports into China (US$ 2051 mn) was ten times the value of imports into India (US$ 203 mn). A report by IMA Asia (2013) expects China to replace USA to become the world’s largest apparel retail market by 2020.

The FTA with India has failed to provide effective market access to Sri Lankan apparel. However, the sector can be hopeful of getting better market access to China under the proposed China – Sri Lanka FTA. The experience with India provides a lesson for Sri Lanka in going forward with trade deals; i.e. trade coverage matters more than product coverage when a country has only a few exportable products. The FTA with India has extensive product coverage, yet restricts access to apparel, the single most important exportable product of Sri Lanka.

The full article can be read here

(–Subhashini Abeysinghe is a Senior Analyst and Head of Economic Research at Verité Research, an independent think-tank based in Colombo that provides strategic analysis to high level decision-makers in economics, law, politics and media –)