Sri Lanka's recent reaffirmation of its commitment to the EU's Generalized Scheme of Preferences Plus (GSP+) program underscores its critical importance to the island nation's economy, particularly for its textile and apparel industry. This trade program grants Sri Lanka preferential access to the lucrative European market, offering duty-free entry for thousands of products, including vital textile and apparel exports.

The GSP+ program isn't just about economic benefits; it's tied to Sri Lanka upholding 27 international conventions on human rights, labor standards, environmental protection, and good governance. This makes GSP+ a powerful tool for promoting sustainable and inclusive development in the country.

Sri Lankan textiles and apparel exports

The textile and apparel industry is a significant contributor to the nation's economy, providing employment for hundreds of thousands of workers, predominantly women. In 2023, Sri Lanka exported a total of $3.63 billion worth of goods to the EU and the UK, which was almost 30 per cent of its total exports. Of this, the textile and apparel sector accounted for a lion's share, with the EU and UK being the destination for over half (54.9 per cent) of Sri Lanka's total apparel exports.

Table: Sri Lanka’s total apparel exports to the EU, UK

Source: Sri Lanka Export Development Board

GSP+ advantages and challenges

The GSP+ program provides Sri Lankan exporters with a significant competitive edge by eliminating tariffs on many goods. Without GSP+, these exporters would face the EU's Most Favored Nation (MFN) tariffs, which can be substantial. For the apparel sector, this difference (known as the preference margin) is often more than 10 percentage points.

However, utilizing GSP+ benefits is not without its problems. Complex rules of origin, which dictate the minimum local content required for a product to qualify for preferential treatment, can be challenging and costly to comply, particularly for the apparel sector which often relies on imported fabrics and yarns. This is reflected in the utilization rates:

Table: Sri Lanka’s utilization rates

Source: ‘Who Stands to Lose? Examining the Fallout of GSP+ Preference Erosion in Sri Lanka’

Losing GSP+ would have a devastating impact on Sri Lanka's apparel sector. A study by the Institute of Policy Studies (IPS) estimates that reverting to MFN tariffs could lead to a decline in overall exports of $1.23 billion (36.7 per cent compared to 2019 levels), with the apparel sector bearing the brunt of the loss ($996.38 million, or a 44.63 per cent drop). This decline in exports translates to significant job losses. The IPS analysis suggests that 73,574 workers could be at risk of losing their jobs if GSP+ is withdrawn, with 87.1 per cent of those workers coming from the apparel sector. Women, who make up 70.5 per cent of the apparel industry's workforce, would be disproportionately affected.

Take the example of leading apparel manufacturer in Sri Lanka, Hirdaramani Group which has been a vocal advocate for GSP+. The company, which employs over 10,000 workers, has leveraged GSP+ to expand its exports to the EU. However, they have also highlighted the challenges posed by rules of origin, particularly for high-value products like lingerie, where sourcing specific components within the region can be difficult. They stress the need for greater flexibility in these rules to maximize the benefits of GSP+.

The road ahead

Maintaining GSP+ is crucial for Sri Lanka's economic stability and the livelihoods of its workers. The government must continue to demonstrate its commitment to the 27 conventions and work towards improving GSP+ utilization rates. This includes:

Enhanced cumulation: Increasing the cumulation of non-originating materials, as seen in the recent EU approval of cumulation between Sri Lanka and Indonesia, can significantly benefit the apparel sector.

Rules of origin reform: Advocating simpler and more flexible rules of origin that reflect the realities of global supply chains is essential.

Long-term strategies: Exploring options like a free trade agreement with the EU can provide a more permanent solution for preferential market access, especially as Sri Lanka potentially moves towards upper-middle-income status, which would disqualify it from GSP+.

The GSP+ program is a lifeline for Sri Lanka's textile and apparel industry, supporting jobs, promoting inclusive growth, and driving sustainable development. By addressing the challenges and maximizing its utilization, Sri Lanka can ensure that GSP+ continues to be a powerful engine for its economic future.