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Cablegate: Sri Lanka Textiles and Apparel Sector: Updated Stats And

VZCZCXRO4139
RR RUEHLMC
DE RUEHLM #1355/01 2751015
ZNR UUUUU ZZH
R 021015Z OCT 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6904
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1417
RUEHKA/AMEMBASSY DHAKA 0439
RUEHIL/AMEMBASSY ISLAMABAD 7426
RUEHKT/AMEMBASSY KATHMANDU 5564
RUEHKP/AMCONSUL KARACHI 2245
RUEHCG/AMCONSUL CHENNAI 8020
RUEHGV/USMISSION GENEVA 2348
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

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

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