- The DCTS mirrors rules of origin restrictions that existed under the EU GSP + concessions
- The scheme offers extended cumulation which is an opportunity for Sri Lanka to increase utilisation of the scheme and help boost exports to the UK
Exceptional circumstances need extraordinary solutions that help navigate unprecedented challenges. The macroeconomic crisis that Sri Lanka is grappling with is such a set of circumstances, compounded by geopolitical factors including the Russia-Ukraine war, global inflation and a slowdown in the global economy which makes overcoming the crisis much harder.
As Sri Lanka negotiates an external debt restructuring plan, apparel exports will play a crucial part in meeting some of the conditions within that plan. Yet, a recent report estimated that Sri Lanka’s apparel exports would fall by USD 1 billion in 2023, putting tremendous pressure on Sri Lanka’s external debt obligations since apparel accounts for nearly half the country’s merchandise exports.
The United Kingdom has traditionally been a critical export market for Sri Lanka’s apparel industry; nearly 13% of apparel exports were to the UK in 2022. Sri Lanka’s apparel and clothing accessories have a demonstrated history of attracting British buyers. Investors in high-quality locally manufactured goods include over 100 UK companies operating in Sri Lanka.
The Developing Countries’ Trading Scheme (DCTS), which replaced the UK’s Generalized Scheme of Preferences (GSP) has strengthened trade relations between Sri Lanka and the UK. Sri Lanka’s access to the UK market has benefited from duty-free exports on more than 80% of products and the removal of tariffs on over 150 additional products.
At a time when the Sri Lankan economy is very much in need of foreign exchange from exports, trade and investment relations with the UK is of vital importance, not only to the apparel industry but also the Sri Lankan economy. However, more can be done.
While the DCTS has provided Sri Lankan exporters with the opportunity to broaden market access and investments, the Joint Apparel Association Forum (JAAF) believes that the DCTS mirrors restrictions that existed under the UK’s GSP plus concessions. To successfully navigate the current crisis and strengthen our resilience, more is needed.
Consider extended cumulation. Under GSP concessions, rules of origin requirements have particularly limited Sri Lanka’s utilization rate for goods that qualify for duty-free imports at only around 50%. . As defined by the International Trade Centre, rules of origin establish the nationality of a product and thereby determine whether it is eligible to receive trade concessions under a set scheme.
Clothing is considered to have originated in a particular country depending on the number of “transformation stages” carried out in that country. Sri Lanka imports a large part of its textiles and raw material from non-originating countries, thus meeting the rules of origin requirements is particularly challenging.
Even with the many benefits the DCTS accrues for Sri Lanka, the scheme’s rules of origin – at this difficult point – hinder the apparel industry’s ability to reap benefits from the trading scheme. However, the DCTS does allow businesses and governments from non-LDCs to make case-by-case applications for extended cumulation.
Cumulation allows material from another country to be considered as “originating” when used in production, as long as that final product has been processed beyond minimal levels. To enable Sri Lanka to draw greater benefits from the scheme, extended cumulation particularly with ASEAN countries should be sought to apply to Sri Lankan apparel, at least for the period during which Sri Lanka is able to overcome the crisis.
The EU’s GSP+ scheme is also being extended in its current format for another three years. The government should use this opportunity and seek to apply the “de minimis” principle for the non-originating components of Sri Lanka’s apparel exports to the EU. This will support the process of getting the country back on its economic growth path, rather than being reliant on financial aid.
A successful negotiation for these exemptions will foster faster recovery from the economic crisis, prevent the decline in exports and restore these to pre-crisis levels, while protecting jobs that could otherwise be lost as export orders fall for a long period.
The Joint Apparel Association Forum (JAAF) urges the government to support the apparel industry by applying for extended cumulation and seek a relaxation for non-originating materials with the EU and the UK. The UK’s DCTS is a good place to start.
