Enhanced tariff-free access to UK: Relief for apparel industry

The recent announcement by the UK High Commission that Sri Lankan garment manufacturers will be allowed to source up to 100% of inputs from any country worldwide while maintaining the prevailing tariff-free access to the European state from 2026 onwards would have given a relief and comfort to the apparel industry. The proposed change is quite valuable for the industry because as at present fabrics are predominantly imported from China.

Under the UK’s Developing Countries Trading Scheme (DCTS), Sri Lanka receives benefits as an ‘Enhanced Preference’ country. The existing rules allow tariff-free access to Sri Lankan garments if inputs are sourced from the South Asian region. It must be borne in mind that the UK-India FTA will come into effect next year; hence, the simplification of the rules of origin for the benefit of the Sri Lankan exporters would aid the garment industry to compete with the products of India within the UK market.   

The development comes amidst the recent imposition of the 20% additional tariff by the US on all imports from Sri Lanka apart from the sector-specific duties currently in force. A recent IPS report had projected that the recent US tariff changes could cost the export sector $ 634 million and put nearly 16,000 garment sector jobs at risk. Moreover, with the cost of imports going up considerably in the US due to Trump’s unpredictable protectionist policies, American consumers could cut spending on fashion and clothing, resulting in less orders to garment manufacturers in Sri Lanka who focus on high-end, premium clothing customers in the US. 

For years, analysts have warned about the perils of the nation’s premier export commodity’s overreliance on the US market while stressing the necessity to diversify its export markets. Last year, the US accounted for 40% of the country’s apparel exports while the UK – the second largest apparel export market – accounted for 14.17%. In 2014, Sri Lankan apparel exports to the UK reached its peak of $ 903 million but demonstrated a declining trend thereafter. Having earned $ 717 million in 2017, the industry netted only $ 675 million last year. Although the COVID pandemic and uncertainty associated with Brexit would have played a role in the reduction in export income, garment exports from competing countries like Bangladesh had fared much better during the same period.

Apart from the UK, Italy, Germany, and the Netherlands are the other leading European markets of the apparel industry. Since departing from the EU, economic growth in the UK has slowed and economists have expressed lukewarm views about the future of the UK economy. Therefore, it is essential that Sri Lanka makes full use of the EU GSP+ facility in its quest to diversify the apparel export markets and increase its market shares in the EU states like France, Belgium, and Ireland that currently account for a less significant share of exports.

Despite Sri Lanka enjoying the EU GSP+ concession, complying with the strict rules of origin criteria has been a challenge. The EU does allow regional cumulation with SAARC countries, but many manufacturers use fabrics from China, preventing the realisation of the GSP+ duty benefits. There are some large apparel groups in Sri Lanka that have invested in textile mills to produce fabric locally, but those mills do not cover the entire industry requirement. Already negotiations are underway between the EU and India to sign a FTA. If a trade deal is finalised between the two parties, cumulation with India may not be allowed.

Eravur Textile Manufacturing Zone, which was mooted by JAAFSL, has the potential to considerably increase the availability of locally sourced fabric. The industrial park has been earmarked as a major initiative to enhance local value addition within the industry. The BOI must actively engage to attract investments for the remaining spaces in the zone in view of its potential to advance the apparel industry to superior levels.