EU sanctions make Sri Lanka garments uncompetitive

On February 15, the European Union decided to withdraw temporarily the preferential tariff benefits under Generalized System of Preferences (GSP) granted to Sri Lanka on the charge that Colombo had indulged in human rights violations.  The ‘suspension’ will come into effect in six months. And it means a loss of $ 150 million annually particularly by the ready-made garments sector of the island nation. This decision is a sequel to an independent investigation by the European Commission.

EU will closely monitor SL progress card on human rights over the next six-months, according to Trade Commissioner Karel De Guchi. ‘If sufficient progress (on human rights) is made, we will re-evaluate the situation and advice member-nations to restore duty free imports from Sri Lanka’, he said.

President Mahinda Rajapaksa, who had won a second term in the January 26 ballot, has strongly disputed the EU charge of human rights violations in Sri Lanka. His contends that the EU investigations were carried out when the ethnic war was at its height against the Tamil rebels. ‘The (HR) situation has improved since the guns fell silent (in April-May last)’, he says.

Brussels based European Union decided on July 22, 2008 to introduce a special tariff regime to encourage imports from 16 poor countries including Sri Lanka. Known as GSP Plus, the incentives, which in essence are duty free imports, became effective from January 1, 2009 and are valid for three years ending with December 31, 2011.

To qualify for GSP Plus, , the selected country must ratify as many as  27 international conventions on issues that range from human rights and labour rights  to good governance and environmental standards.

Sri Lanka’s readymade garment trade greatly benefited from GSP Plus. And was able to withstand competition from Asia’s garment giants – India, China and Bangladesh. In less than a year, readymade garments emerged as the country’s biggest net foreign exchange earner and the biggest employer in the manufacturing sector providing direct livelihood to nearly 300,000 people mostly rural women.

Rajapaksa government hopes that the EU would roll back the ‘suspension’. It claims that the loss of GSP Plus benefit will not hurt the country’s economic growth. ‘We were expecting the EU move for a while and, therefore, we have put in place alternatives’, officials said in Colombo but did not elaborate.

Industry watchers, however, do not share the official optimism. In their assessment, the loss of zero tariff regime under GSP Plus will directly impact the price competitiveness of Sri Lankan garment. ‘Colombo labels will no longer be cheap and so there will be few buyers in EU’.

This in turn, will hurt the export income and impact local job market when the Rajapaksa government is yet to come to grips with the post-conflict recovery and rehabilitation demands of the Tamil dominated belt of North and East of the country.