The MFA and the Textile and Clothing Sector in Sri Lanka

Rationale

In the two decades since the liberalization of the Sri Lankan economy, the garment industry has emerged as the mainstay of the Sri Lankan industrial sector. However, the impetus for the rapid expansion of the industry did not arise solely from the liberal economic policies. A key factor for the growth of the apparel industry was the Multi Fibre Arrangement (MFA)-- an existing anomaly in the global trading system that provided quota guaranteed markets for garment exporters. Under the Agreement on Textiles and Clothing (ATC) reached at the Uruguay Round of GATT trade talks, items covered by the MFA are gradually being phased out over a span of ten years, and the complete abolition of quotas are expected to culminate in 2005.

The abolition of quotas is likely to have mixed results for both developed and developing economies. While developed countries are expected to face severe competition from low-cost imports, developing countries will have an even more difficult task of retaining their market shares that have been protected under the current quota system. For Sri Lanka, too, the removal of quotas by the year 2005 is likely to pose many challenges for the industry and for the economy as a whole.

Objectives

This paper examines: the salient features of the ATC reached at the Uruguay Round, and assesses its implications for the future of the industry; the role of the garments industry in the Sri Lankan economy in terms of its share of output, FDI, employment, etc.; the performance of the garment industry in Sri Lanka in both quota and non-quota products and markets; and, the implications of the MFA phase-out on Sri Lanka's garments sector.

Dushni Weerakoon, Janaka Wijayasiri
The World Bank