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TPP trade deal to challenge Sri Lanka’s apparel export sector

In today's world of Instagram and fast fashion, Sri Lanka's garment exporters have found a nice niche thanks to their design-to-deliver supply chain. But the industry could get caught out by challenges from a fast-changing global trade environment.

With the U.S.-led Trans-Pacific Partnership (TPP) trade pact — of which Sri Lanka is not a signatory — on the horizon, competition from TPP signatories such as Vietnam could deal a blow to the South Asian nation's apparel export industry, which currently employs half a million Sri Lankans and provides 44 percent of all manufactured goods exported by the country.

It wouldn't be the first time Sri Lanka is up against trade practices that are not in its favor.

Since 2010, when the European Commission revoked Sri Lanka 's Generalized System of Preferences Plus (GSP+) status as a penalty for alleged human rights abuses committed at the end of the country's civil war, the industry has suffered from the loss of preferential tax treatment.

Still, heavy investment in a value-added supply chain that enables prompt turnaround has kept the industry going in the face of unfriendly trade treatment.

"How many days would it take you from design to delivery? In this industry it used to be months. [Now] a chase order [for] something that's selling in the U.S., we could produce it and ship it across to the stores in 14 days. How this is possible is that the supply chain is closer to needle point," said Sharad Amalean, deputy chairman of the country's Joint Apparel Association Forum.

A design-to-delivery solution means that the design, manufacture and logistics such as delivery are all carried out in Sri Lanka. The country exports about $5 billion worth of apparel a year.

Despite this innovation, growth in exports to the European Union — Sri Lanka's biggest garment export market — fell from 13-14 percent from 2005-2010 to about 7 percent a year after the GSP+ status was revoked, according to a report by consultancy Oxford Business Group, citing numbers from a Joint Apparel Association Forum official.

But Ashroff Omar, group chief executive of Brandix, Sri Lanka's largest apparel exporter, told CNBC he was hopeful of another about-turn. The exporter shipped $750 million worth of goods to its clients last year.

"[Sri Lanka was] duty-free to the E.U., and due to various reasons, we lost [the status]," he said. "We believe we will regain it by the end of this year, so we're very bullish on the European market. Already, we [see] buyers coming in in anticipation of the GSP+ coming in by early next year."

Even so, the TPP will deal a blow. Competition with Vietnam, Sri Lanka's closest garment-making competition, will be particularly stiff, but Sri Lanka may be able to buy some time while hiccups in the TPP's implementation are ironed out.

"We believe if it comes, the earliest would be 2018," Omar said. "And there's a 10-year phase-out period to remove duties on most apparel products."

During this decade-long run-up, costs in Vietnam will likely go up, the 40-year garment trade veteran said.

"Vietnam does not have unlimited population," he said. "I think it will suck up the available labor and the cost will keep on going up, so we believe we would be available to compete quite well, [even] with the TPP."

He is aware that the trade deal may still impact Sri Lanka's share of the apparel export pie; after all, China grabbed most of Mexico's share of the global trade when the Multi-Fiber Arrangement - a deal that set quotas on the amount of textiles and clothing developing countries could export to developed countries - expired in 2004, he noted. Today, the world's second-largest economy controls almost 40 percent of the global $400 billion market.

So, along with expectations Vietnam's cost base will rise while the TPP is phased in, Sri Lanka's strategy is to specialize, by focusing on providing vertically-integrated design-to-delivery solutions not just in the country but also with partners in places as farflung as China and Hong Kong.

Exporters like Brandix are also teaming up with industry players in China and Hong Kong to improve overall supply chain management.

"They are our joint venture partners, they run the show, but we can influence by having an equity proposition and are heavily involved with them in management," Omar said. "So on one side we have secured our raw material or fabric supplies. We have invested in printing, in laundry, in processing—everything the customer needs."

Source: World Trade Organization

Sri Lanka could also reposition itself as a hub for supplier countries in the region, Omar said, noting that neighbors India, Bangladesh and Pakistan were large producers of cotton, yarns and textiles.

Sri Lanka's reputation as a no-sweatshop, ethical garment center was another advantage, said Amalean, who is also CEO of MAS Holdings, a garment maker.

Higher-end brands including Victoria Secrets, Nike, Gap, Marks & Spencer and Ralph Lauren are among the names manufactured in Sri Lanka in part due to this reason.

While productivity and speed are Sri Lanka's hallmarks in the current fast fashion landscape, its garment makers are acutely aware that changes are afoot. But just what will prove to be the "iTunes of apparel" is not yet clear, Omar said.

"We've seen whole industries wiped out or completely changed because of technology," he said. "And will it come to the apparel industry most certainly, there is no doubt about it."