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Asia's share down, but not out

Asian Textile & Apparel Industries

by A. H. H. SAHEED Marketing Specialist Textile Training & Services Centre.

The year 2000 witnessed the strongest global trade and output growth in more than a decade. This outstanding expansion of the world economy was the result of the continued acceleration of the output growth in the already fast expanding economies of North America and developing Asia, a recovery from output stagnation in South America and Russia and activity picking up in other regions. North America and Western Europe, which together account for about 60% of the global output and trade, recorded in 2000, being their fastest annual GDP growth in the 1990s. In addition to the outstanding global growth, the dispersion of regional growth rates was very low in 2000 indicating that the stronger world economy was beneficial to all regions.

However, in the second half of the year there were numerous signs that the expansion of the world economy had begun to slow down. In 2000 the value of total merchandise exports rose by 12.5% to US$6.2 trillion.

Three main factors shaped the developments of global merchandise trade in nominal dollar terms: First, the high level of economic activity worldwide that boosted, overall volume growth; Second, the sharply divergent sectoral price trends concealed by the near stability of average dollar prices in international trade; Third, the variations among the three currencies-dollar, euro and yen - not only had an impact on regional but also on sectoral trade flows. While the yen appreciated by 6%, the euro depreciated by 13% against the US dollar in 2000.

The prospects for year 2001 have become more clouded in recent months. The deceleration of global trade growth set in during the final months of 2000 and was expected to continue for most of 2001. For the year 2001, the volume of global merchandise trade is expected to grow at 7%, a market reduction from 12% in year 2000.

A major uncertainty in the outlook is the economic activity and trade growth in Western Europe, as Western Europe accounts for about 40% of world trade, and also the slowdown in the US. Although textile and apparel imports by the US only increased by 2.4% for the first-half of this year the American Textile Manufacturers Institute said the declines were caused by high levels of imports in 2000, which saw imports climb by 19.2% in the first of 2000 and 11% in the second half. Once inventory levels were reduced imports were again expected to increase.

September 11th Shock

However, since the terrorist attacks in New York and Washington on September 11th, the market has worsened and this will affect almost all the textile and apparel exporting countries, as America is the largest buyer for most of these countries.

Due to these tragic attacks, the American economy, which has already been growing at a slower rate for the last one year, may encounter further difficulties in the coming months. As a result, Asian countries, which are highly dependent on the US, have no other option than to revise their economic growth rate downward by 2-3% as against the initial forecasts for the year 2001.

In addition, the terrorist attacks have also thrown dark shadows on consumer sentiment in the US. It is possible that many households will restrict purchases due to anxiety caused by the act. Therefore it is predicted that year-end sales may decline. It is also assumed that the series of U.S. countermoves to retaliate the attacks will further affect the textile business. With the breakout of war against Afghanistan, the business negotiation/contracts and distribution channels in the Middle East have also become affected. The Middle East being a huge consuming market for fabric from Asian countries, Asian exports will be adversely affected.

The September 11th attacks and the angry American feelings leading to the retaliation are likely to have serious consequences for the business and investment climate in U.S. and the countries targeted by the anti-terrorism actions. The events of September 11th have effectively redrawn the map of Asia in the eyes of Western investors. Foreign capital is migrating to larger, more diverse Asian markets with stronger domestic demand - principally South Korea, China, Taiwan and Hong Kong as against Indonesia, Malaysia and the Philippines. The general feeling is that Southeast Asia will lose its flavour among international investors looking at Asia. The September 11th attacks have changed the whole perspective. The appetite for businessmen to expand their business is not there. But the hope is that current attitudes are a temporary hiccup, and when things settle down it will be business as usual.

Downward risk are primarily seen in the repercussions of severe stock market corrections on investments and on consumer expenditures in advanced economies. While there is no doubt the apparel industry is seeing a production shift from Asia to the Americas, it is also evident that Asia will remain a dominant player in the global market. Although major Asian exporters such as Taiwan and South Korea have seen percentage decrease in their slice of the U.S. apparel pie, they still are far from forgotten, as Asian production continues to expand its influence in the Western Hemisphere. Practically, almost all major U.S. apparel players continue to source in the Far East, especially for high quality goods, requiring complex operations and detailed work. Among those with major sourcing programs in the region are retailers such as Federated Department Stores and JC Penney, major discounters such as Kmart and Wal Mart, and branded giants such as Liz Claiborne, Donna Karna and Nike. The level of interest in Far Eastern apparel resources will continue to hold its ground in anticipation of the elimination of the quotas in 2005, under the Uruguay Round Agreement on Textiles and Clothing (ATC) which applies to World Trade Organisation (WTO) member countries.

After World War II, in the 1950s and 1960s, Japan became the hub of world garment production when its exports displaced much of the Western Hemisphere's textile and clothing production. Over the past 20 years, however, Japan's exports have become more high-tech and sophisticated, as the country's emphasis has turned, to producing automobiles and gradually reduced to electronic equipment.

Hence sourcing by U.S. garment buyers changed to South Korea, Hong Kong and Taiwan who became the "Big Three"

Asian apparel producers in the 1970s and 1980s, succeeding Japan's apparel market and rising to dominance in global textile and clothing exports. However, in recent years, South Korea has begun to compete in automobile and electronics production and also Taiwan as its industrial sector has gravitated towards production of electronics, namely computers and computer chips. The above changes enabled the Hong Kong - China alliance as the favoured - sourcing resource for U.S. buyers. Hong Kong has been one of the biggest beneficiaries of Chain's booming apparel industry which has been going full blast since the opening of the Chinese economy in 1978.

From the 1980s to the early 1990s, just before Hong Kong sovereignty as a British Colony ended, and it reverted back to China, Hong Kong-based manufacturers began subcontracting production to China's state-owned factories in Southeastern China. This outward processing arrangement eventually turned into a relocation of the Hong Kong apparel industry as more and more Hong Kong manufacturers became enticed by China's low-cost but highly motivated labour force and relatively cheap real estate.

When the British handed over Hong Kong to China on July 1, 1997, Hong Kong effectively became the managing body of China's exports for a number of reasons such as: 1. Hong Kong is known for its adeptness as a regional sourcing hub, able to handle apparel orders from around the world and allocate production to offshore manufacturing bases, from as close as China to as far away as Latin America according to cost, level of sophistication and quality and 2) Hong Kong clothing firms can leverage low cost production with efficient management, the Hong Kong industry is also experienced in providing services such as product development, material sourcing, quality control, marketing, merchandising, trade financing and logistic arrangements. In addition, with its strategic position and close business links with the Pacific Rim in general and China in particular. Hong Kong is an ideal operational base and contact point for US companies opting to penetrate the Chinese market. Then, emerged countries in Southeast Asia such as Thailand, Singapore, Malaysia, Indonesia, the Philippines, etc., and they were followed by South Asian countries such as India, Pakistan, Bangladesh and Sri Lanka. Recently Vietnam, Cambodia etc., have also entered the apparel business. The main attractions of Asian countries such as China, Indonesia, Bangladesh, Vietnam, etc., are their low-cost labour and in the case of China, their huge potential as consumer markets. Foreign investors are attracted to Asia, by the fact that markets for clothing are potentially big and developing rapidly.

At the same time, the region's textile and clothing industries are forging ahead as governments increasingly realise the potential of these industries for achieving export growth and generating foreign exchange. Within Asia, China dominates in production terms. With the return of Hong Kong to the mainland, China has become by far the world's largest manufacturer and exporter of textiles and garments.

US/EU imports shifting from Asia

During the year 2000, the US imported textile and apparel to a value of US$71 billion of which, US$13 billion from NAFTA (North America Free Trade Agreement) countries and US$58 billion from countries of restrained sources. However, during the year 1995 US imports of apparel from NAFTA countries only come to a value of US$4.7 billion and as such during the last five years the imports from NAFTA countries to the US have grown over by 178%. US imports from countries of restrained sources during the year 1995 were US$36 billion and the growth during the last five years from these countries came to only 60%.

During the last five years US apparel imports from the Latin American and Caribbean countries have increased at a more rapid rate than the Asian countries. The values given below of major exporting countries in the above category will provide an indication. EU textile and apparel imports from countries under preferential agreements such as Bulgaria, the Czech Republic, Hungary, Romania Slovakia, Malta, Morocco, Tunisia and Turkey which registered US$18 billion in 1995 rose to US$21 billion in 1999 indicating a growth of 15% during the last five years, whereas imports from countries of restrained imports, which cover most Asian countries, was US$26 billion in 1995 and rose only to US$28 billion in 1999 indicating only a growth of 8%.

During recent times exports from Eastern Europe and Mediterranean countries to the EU are increasing at a faster rate than from Asian countries. However, imports from Bangladesh, China, South Korea and Sri Lanka have grown over the last few years.

In the EU recently the growth rate of imports is high from Eastern European countries such as Romania, Bulgaria, Poland and Mediterranean countries such as Tunisia and Morocco. The share of imports totalling those from the EU neighbouring countries increased to 44%. Apparel imports increased both in quantity and value.

China accounts for the largest share in terms of quantity in apparel imports, However, production is being shifted to Eastern Europe, Turkey and North African countries, especially Morocco and Tunisia, for shortening of the delivery period and employing low cost labour forces. The only consolation for Asian exporters is that recent indications reveal, inter alia, that in the year 2000, the previously observed rapid growth of US imports from its two NAFTA partners somewhat slowed down. This continued a trend first observed in 1999.

Combined imports of textiles and clothing from Mexico and Canada grew more slowly in 2000 than imports from all sources. While imports from sources increased, in volume terms, by 14.8% those from Canada increased by 13% and from Mexico by 14.6%. More significantly, while total imports of clothing from all sources grew by 13.7% in volume terms, imports from Mexico increased by 9.5%.

Rather than NAFTA countries the driving force behind the increase of textile and clothing imports in 2000 was apparently a surge of imports from Asia, in particular from ASEAN countries (up 16.6%), Pakistan (up 29.3%) and Bangladesh (up 24.2%). Textile and clothing imports (combined) from some other Asian members remained, however much below the average growth rate (Hong Kong an increase of 10.4%, India, up 8.6%, Korea up 7.3%). Lower performances

During the first-half of 2001, US textile and apparel imports rose only by 2.5%. Yarn and fabric showed a decline of 8.6% and 7.4% respectively whereas apparels showed a slight increase by 3.9%/. As indicated above in 2000, the two NAFTA countries performances were lower, with Canada showing a negative growth of 2.7% and Mexico showing only a marginal growth of 0.9% although Mexico was the largest exporter for the US market with US$4.687 billion followed by China US$2.853 billion.c28brg06.dc

Similarly Asian countries had mixed successes, but Pakistan achieved a growth of 57%, Indonesia a growth of 23.4%, Bangladesh, a growth of 9%; Sri Lanka, up 7.2% and Thailand, up 6.8%. Other major Asian countries showed negative growth: Hong Kong, down 9.2%, Taiwan, down 8.8%, India, down 5.2%, Korea, down 4.6% and China down 2.7%.

The US tragedy on September 11th, 2001 also worsens the supply from Asian countries to the US market. Business negotiations for fabric exports for fall/winter 2002-2003 usually commence in September. However the situation has delayed negotiations and contracts. Inevitably, clothing manufacturers in Asia, Mexico, the Caribbean and other countries who mainly focus on US market, will be affected by the fall in the US consumption. This may create big blows to exports from Asia.

The US-Caribbean Basin Trade Partnership Act allows imports of qualifying apparels from Caribbean Basin Economic Recovery Act (CEBRA) beneficiary countries to enter free of duty and quota during a transition period beginning on October 1, 2000 and ending on September 30, 2008 or the date on which the free trade area of the Americas or a similar free trade agreement between US and CEBRA beneficiary countries enter into force.

However, CBI is not growing as anticipated. The duty and quota benefits under the Caribbean Basin Partnership Act should mean that trade is surging, but instead exports from Honduras and the Dominican Republic have been down for the year to date. The only bright spot in the CBI is Guatemala, which is up 21%for the year to date. The African bill, which provides Quota Free/Duty Free access for apparel made in Sub-Saharan Africa (SSA), also affects Asian countries. The Africa bill extends to the countries of Sub Saharan Africa the most beneficial US trade and investment program available to any region in the world, second only to NAFTA.

The five main provisions of the Africa bill are 1) Quota free/duty free access for apparel made in Sub-Saharan Africa (SSA), 2) Special Generalized System of Preference (GSP) benefits for Africa (an eight-year extension from October 1st 2000 to September 30th 2008), 3) US-Africa Economic Cooperation Forum, 4) Possibility of Free-Trade Agreement (FTA) with Africa, a remarkable long-term opportunity, 5) a President's partnership initiative confirms expanded OPIC (Overseas Private Investment Cooperation) and an Ex-Im Bank for US/Africa Trade and Investment Program.

Under these circumstances, it is not surprising that many Asian countries are alarmed about the rise of regionalism. Regional preference agreements mean that those not included are effectively discriminated against. As of mid-2000, the WTO secretariat had enumerated 114 regional trade agreements (RTA) in effect and notified to the WTO by one or more WTO members. Virtually all WTO members were partners in at least one RTA, and many were partners in two or more. Only China, Hong Kong, Japan, Macau and Mongolia are not currently partners in an RTA.

(Source: Asian Textile Business, December 2001)

The dream of developing Sri Lanka as an Offshore Financial Centre

by Sudam Chandima Kaluarachchi Union Bank of Colombo Ltd

Continued from March 19

Well developed infrastructure facilities are pre requisites for a fully fledged OFC Modern IT facilities, uninterrupted power supply, highways and expressways with modern equipment, multi-model transport facilities etc will attract more and more investors into the country and provide them with a solid platform to perform their transactions. Today Sri Lanka has faced a serious power crisis due to lack of hydropower capacity. Sri Lanka is also lacking a good highway network and none of expressways have been built as yet. In case of IT, Sri Lanka is not far behind but it should be further improved and developed to compete with other well developed OFCs. If Koggala is selected as the OFC, the Galle harbour should be modernized and the Koggala airport should be upgraded as a fully operational domestic airport. The Bandaranaike International Airport (BIA) in Katunayake should be modernized and upgraded as an international airport such as Changi in Singapore, Hong Kong International or Narita in Tokyo. A local company can be appointed to operate the domestic passenger and cargo flights from Katunayake to Koggala and vice versa. Sri Lanka is famous as a country with high tax profiles. Tax concession is a very important ingredient in case of international tax planning of non-resident HNWIs and rich corporate clients. The Inland Revenue Act of Sri Lanka must be amended accordingly in order to provide them with full range of tax concessions. These concessions should be applicable to expatriate workers who are working in the OFC of Sri Lanka as well in line with the other OFCs in the world. Unfortunately at present Sri Lanka does not have any comprehensive tax guidelines for OFIs.

The OFC of Sri Lanka should be exempted from the exchange control regulations in order to provide a platform for foreign investors to perform their transactions efficiently and effectively. The Exchange Control Act must be amended accordingly to enable investors to accumulate their profits and transfer same offshore freely and quickly like the other OFCs in the world. These reforms are necessary to maintain the competitiveness with the regional OFCs such as Singapore, Hong Kong, Mauritius and Labuan.

A set of comprehensive guidelines for the registration fees, licensing fees, bank deposits for expenses must be properly documented under the Companies Act or any other Act to enable the investors to pan and select the type of the investment. The Companies Act No: 17 of 1982 provides only a brief description about these fees. It only says that the offshore shipping companies should pay the registration fee of USD 250.00 and maintain a deposit of USD 250.00 in a bank account to meet the working capital. In case of a non shipping company it should be Rs. 15,000 .00 and USD 33,000.00 respectively. This information is not adequate and confusing. Therefore a set of separate amounts for different offshore companies should be given in a logical and acceptable manner.

Approaching the target market

The HNWIs and rich corporate clients should be attracted from the neighbour countries specially from India. The Indian investors have already invested a considerable amount of money in Mauritius and the other OFCs. Maldives might commence operations of its OFC in the near future and attract lots of investors from the nearby countries. Very soon Male will develop as a fully fledged OFC in the region.

They can hire the required professionals and expertise from Sri Lanka and India without any difficulty in addition it is suggested to give a wide publicity through the international media regarding the facilities, incentives and products and services offered by the OFC in Sri Lanka. Sri Lanka is more closed to India and has been maintaining a strong relationship with them for centuries. Both countries have agreed to implement the proposals of the SARRC Free Trade Agreement. Therefore India will be the number one target market for the OFC in Sri Lanka. The OFCs located in Mauritius, Singapore, Labuan and Hong Kong are the main competitors of Sri Lanka. Since they are located close by and already attracted a considerable portion of HNWIs and rich corporate clients to their OFCs Sri Lanka will have to offer more competitive products and services to the investors with some attractive incentives. Maldives will also create a severe competition in the future.

Maintaining the bank secrecy and customer confidentiality

The secrecy and confidentiality provided by the OFC is very important to attract HNWIs and rich corporate clients since they consider this as an utmost important factor. This is an important ingredient of International tax planning. In Sri Lanka this is assured by the Banking Act No: 30 of 1988 in case of the banking activities. Our provisions for secrecy and confidentiality should be amended to suit the requirements of an OFC.

It is suggested that the full secrecy should be provided by the OFIs in case of rich corporate clients as well. When it comes to banking business it should be comparatively relaxed to avoid illegal activities such as drug trafficking, money laundering, terrorism etc. However the legal system of the country must have the full authority to compel for any information to avoid the aiding and abetting in laundering of illegal funds.

A committee must be appointed to look into the matters which will cause badly in the progress of the OFC and the factors which have affected the progress of the FCBUs. It should also study the activities of the most successful OFCs in the world and the methods of techniques used by them and their suitability for implementing in Sri Lanka.

The main reasons for the non development of the OFC of Sri Lanka might be the following;

* Lack of political and economical stability

* Weak national currency

* High competition from the OFCs in Hong Kong, Singapore, Labuan and Mauritius

* Lack of modern IT facilities and other infrastructure

* Strong exchange control and immigration laws

* Only commercial banks can establish the Offshore Banking Units to perform the offshore banking activities.

* Lack of foreign reserves and prolonged budget deficit

* Lack of professionalism and expertise

* Strong taxes, levy and duties

* Non availability of proper guidelines for investment, source of information and institutions

* Pre matured and inadequate offshore legislations

* Facilities are limited to a few products and services

* Partially developed money market, foreign exchange market and stagnant stock exchange

It can be concluded by stating that the following are the immediate requirements for Sri Lanka to establish as a fully fledged OFC in the region.

* Economical and political stability through PEACE

* Budget surplus to develop the OFC and related infrastructure

* Integrity, dedication and commitment of the decision and policy makers of the country

* Relevant professionalism and expertise

* Strong propaganda locally and abroad, specially in the South Asian region

* Suitable methods to avoid money laundering and illegal activities.

The pre requisite of the concept of the OFC is the economical and political stability.

It needs a lot of money. It also needs the investor confidence, an assurance for safety of lives and money of professionals. The most important factor which has caused the economical and political instability of Sri Lanka is the ethnic problem. It destroys the country, investors' confidence, foreign reserves etc. Therefore this main constraint must be eradicated if Sri Lanka wants to become an OFC in the region. It is important that the government should go ahead with a satiable solution for this burning problem. Otherwise the dream of developing Sri Lanka

as a fully fledged OFC in the region will never come true.

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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