SRI LANKA TEXTILES AND APPAREL SECTOR: UPDATED STATS AND

UNCLAS SECTION 01 OF 03 COLOMBO 001355 SIPDIS SENSITIVE SIPDIS STATE FOR SCA/INS AND EEB/TPP/ABT JOHN FINN AND GARY A CLEMENTS COMMERCE/ITA/OTEXA FOR MARIA D'ANDREA STATE PLS PASS TO USTR CAROYL MILLER MCC FOR S GROFF, D NASSIRY AND E BURKE E.O. 12958: N/A TAGS: ECON ETRD KTEX CE SUBJECT: SRI LANKA TEXTILES AND APPAREL SECTOR: UPDATED STATS AND PROJECTIONS FOR FUTURE COMPETITIVENESS REF: SECSTATE 114799 ¶1. Summary: While growth in Sri Lanka's textile and apparel export market has slowed since expiration of the Multifiber Agreement, the sector continues to maintain market share and in some cases grow in niche garment industry markets. Exports to the U.S., Sri Lanka's largest market, were flat in 2006, and have decreased slightly in the first half of 2007. Exports to the EU continue to increase as Sri Lanka takes greater advantage of duty-free access to EU markets. Industry representatives continue to lobby, both in DC and with Post, for continuation of China safeguards past 2008 and/or preferential treatment for Sri Lankan apparel via possible Congressional legislation. The industry is working hard to brand Sri Lanka as an ethical producer of garments as a way to differentiate itself from producers in other countries. End Summary. -------------- Requested Information -------------- ¶2. The following responses are keyed to questions in reftel para five. See paras three and four for 2006 and 2007 statistical data. a) Following the end of quotas, local industry chose to focus on specific types of garments (in particular lingerie and active wear) that still had preferential treatment due to China safeguards. Producers in 2007 are receiving more orders than in 2006. Prices generally remain unchanged. (Note: The cost of producing garments in Sri Lanka - USD 3.73 per piece in 2006 was higher than the world average of USD 3.18 piece. This cost puts Sri Lanka behind China, Bangladesh, Vietnam, Indonesia, Cambodia, Pakistan, and the Philippines in terms of cost per piece.) b) Yes, U.S. restrictions on exports of textiles and apparel from China have affected export prospects for Sri Lankan manufacturers. The U.S. is Sri Lanka's largest export market for textiles; approximately 52% of garments produced in Sri Lanka are shipped to the U.S. Sri Lankan producers have chosen to target garment sectors where Chinese textiles and apparel are restricted to ensure that the industry will continue and thrive. Textile/garment sector representatives state that the withdrawal of safeguards against China, without other action to provide a favorable environment for Sri Lankan products, will cause a significant downturn for the sector. The industry is closely following and lobbying in favor of two U.S. Congressional bills that could provide support and preferential treatment: "Tax Relief Assistance for Developing Economies Act 2007" and the "Decent Workplace Conditions and Fair Competition Act 2007." c) No, the government has not implemented, nor is it considering implementing, import restrictions on textiles and apparel from China. There are currently no specific restrictions on imports from China. All textile fabric imports are free of import duty to support the apparel industry, irrespective of the country of origin. For apparel, there is a 15% import duty and an additional 15% tax on apparel. d) No. In fact, there is a shortage of approximately 20,000 workers in the garment sector. The sector employs approximately 270,000 workers - predominantly women. e) Global competition is a problem for Sri Lanka's comparatively small garment-production sector. However, industry has chosen to focus on sectors currently protected under China safeguards and to brand Sri Lanka as a "Garments Without Guilt" (see para f below) production location rather than reduce wages. Wages have increased in many cases as the apparel sector looks to attract and maintain labor. There has been no adverse effect on organizing unions due to global competition. f) Private industry is actively working to increase the textile COLOMBO 00001355 002 OF 003 industry's competitiveness via branding. The Joint Apparel Association Forum (JAAF),comprised of both the major and the majority of garment producers, has started an international campaign entitled "Garments Without Guilt." Its goal is to set Sri Lanka apart from garment producers in China, Bangladesh, Cambodia, etc. The campaign focuses on Sri Lanka's positive labor practices in the garment sector - no child labor, no forced labor, free of discrimination of any kind, free of sweatshop conditions. The campaign also highlights the textile industry's initiatives on women's empowerment and rural poverty alleviation. JAAF hopes that as international consumers become more discerning about purchasing garments from reputable suppliers, Sri Lankan products will continue to rise in reputation and suppliers will actively seek it out to respond to customer demands for apparel produced in non-sweatshop conditions. g) Sri Lanka is a member of several free trade agreements: The South Asia Free Trade Agreement (SAFTA); the Indo-Sri Lanka FTA (ISFTA); and the Pakistan-Sri Lanka FTA (PSFTA). However, there are some restrictions on textile imports under the ISFTA. Specifically, Sri Lanka is allowed to export six million pieces of garments duty-free, provided they are made with Indian fabric, imported via specific Indian ports, and have at least 35% value addition in Sri Lanka. An additional two million garments can be exported at 25% of the normal duty rate. However, due to these restrictions, Sri Lanka has not been able to penetrate the Indian apparel market. Sri Lanka and India are preparing to sign an additional Memorandum of Understanding to ease restrictions on textile exports to India in early October. This MOU will allow three million of the aforementioned six million pieces to enter India at any port and without restrictions on the country of origin of the fabric. While not an FTA, the EU's GSP+ program, which allows Sri Lanka to export garments to the EU duty-free, has greatly benefited Sri Lanka since ¶2005. Sri Lanka's exports to the EU increased by 17% in 2006 and accounted for 40% of garment exports. Exports to the EU grew about 27% in the first half of 2007. Exports to the U.S. declined marginally in the first half of 2007. h) Sri Lanka's apparel manufacturing sector is taking action to try to ensure it will be able to survive in both a post-China safeguards environment and as global competition for textiles and apparel increases. By working to brand itself as an ethical producer of garments, it is hoping to appeal to the educated consumer in American and European markets. Producers are also in the beginning phase of targeting eco-friendly businesses and consumers: the two largest garment-producing companies, MAS and Brandix, will open eco-friendly plants by year's end. Such efforts are resonating with some American and European companies. However these efforts, while laudable, are not without risk. There is concern among industry representatives that clothing companies, wanting to protect their bottom line, will be forced to abandon Sri Lanka's sector in favor of cheaper garments from countries such as China and Bangladesh. Nevertheless, the sector feels that the risk is worth the possible benefits, and is what it must do to survive in the long-term. Time will determine if this strategy is successful. To date, it is resonating with some companies; Victoria's Secret, GAP, The Limited, and Abercrombie and Fitch continue to place orders and to highlight Sri Lanka favorably in their annual corporate reports. i) N/A -------------- ¶3. Data: 2006 -------------- Total industrial production: (Millions of USD) 8,444.5 Total textile/apparel/leather production (Millions of USD) 3,137.9 Textile/apparel exports: Millions of USD) 3,080.3 Textile/apparel share of total exports: (Percent) 44.7 Textile and apparel share of total imports: (Percent) 15.1 Textile and apparel exports to the US:(a) (Millions of USD) 1,709 COLOMBO 00001355 003 OF 003 Total manufacturing employment: 1,363,000 Total textile and apparel employment (b) NA -------------- ¶4. Data: Jan - June 2007 -------------- Total industrial production: NA Total textile/apparel/leather production: NA Textile/apparel exports: (Millions of USD) 1,580.9 Textile/apparel share of total exports: 44.3 Textile and apparel share of total imports: 15.4 Textile and apparel exports to the US:(a) (Millions of USD) 830.1 Total manufacturing employment: NA Total textile and apparel employment:(b) 270,000 (a) Based on USITC data (b) Estimate provided by Joint Apparel Associations Forum (JAAF) BLAKE