With export earnings of at $4.7 billion, apparels accounted for 42 per cent of total exports in 2014 in Sri Lanka. The sector faces several challenges in the international market. Erosion of cost competitiveness due to higher costs and a shortage of labour at home, sluggish growth in demand from key markets (e.g. US and EU account for 90 per cent of apparel exports) and having to pay import duties in foreign markets while competitors’ products enjoy duty free access through trade deals are a few of these challenges.
For Sri Lanka, trade deals with potential emerging markets such as India and China are considered useful in overcoming some of these challenges. Between 2010-2014, total apparel imports into India and China grew at 26 per cent and 24 per cent respectively compared to lower or negative single digit growth rates recorded by leading importers in North America and Europe. Apparel exports from Sri Lanka to India and China grew at 46 per cent and 62 per cent respectively during the same period compared to single digit growth rates in exports to USA and EU.
The country already has a free trade agreement (FTA) with India since 2000 and has agreed to enter into a FTA with China.