Impact of Multifibre

arrangement (MFA) on
Sri-lanka
 Multi fibre arrangement(MFA)
• The Multi-Fibre Arrangement (MFA) was established in 1974 to regulate
global trade in textile and apparel products.
• The MFA replaced the 1964 Agreement in International Trade in Cotton
Textiles.
• Under the MFA, Canada, the US, and the European Union (EU) could set
limits, called quotas, on the amount of foreign made apparel and textiles
they would allow into their countries from any specific producing country.
• It was designed as a short term measure to give industrilised countries
time to adjust to competition from imports from developing industries or
developed world was using it as a form of protectionism to secure their
own textile industries against the threat posed by low-cost competition
from less developed countries.
• On 1 January 1995 it was replaced by the WTO Agreement on Textiles
and Clothing, under which quotas were phased out in four stages over a
ten-year period and eliminated on January 1, 2005.
• January 1, 2005 marked a new era in the world garment industry.
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 The following supply and demand diagram outline the
theoretical affects of imposing quotas such as the MFA.

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 However, the MFA operates under a system where
some countries are restricted and others are not. The
following diagram looks at the effects of this situation.

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 Effect of removal of MFA on various
countries
• Beneficiaries from the removal of the MFA, large scale and low cost producers are
likely to benefit most, such as China, India and Pakistan
• Smaller producers, and those with higher costs, such as South Africa and Nepal ,
may lose out from its removal.
• Competition levels are also likely to increase following the removal of quotas, with
those countries which depend on clothing and textiles exports likely to suffer the
most, such as Mauritius, Bangladesh, and Lesotho. Cambodia will have to compete
with larger and cheaper rivals, like China and Vietnam
• The effects of the MFA expiration on the Bangladeshi and Sri Lankan

garment and textile industry are ambiguous.

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 MFA and Sri-lanka

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 Sri- lanka during MFA
The textile and clothing industry has emerged to become an important industry to Sri-
Lanka largely under the Multi-Fibre Agreement (MFA) which governed international
trade in textile and clothing.

• Protectionism in the form of MFA quotas helped Sri Lanka and many other developing
countries to develop their export-oriented garment industries by insulating them from
direct competition from established producers.

• When Sri Lanka liberalized its economy in 1977, the country’s garment industry took off
immediately, mainly as a result of quota-hopping East Asian garment exporters who
were attracted due to this.
• Relocated their already well-established garment businesses to Sri Lanka.
• Encouraged local entrepreneurs to start their own garment enterprises to exploit markets
guaranteed by quotas.

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By the late 1980s, garment industry in Sri Lanka was referred to as “glorified tailor
shops” because, of low links with other industries

In 1983, Sri Lanka experienced civil conflict and many foreign investors,
including foreign garment industrialists, shied away from the country. Some moved to
Bangladesh; others moved to newly emerging low labour-cost East Asian countries,
such as Cambodia and Viet Nam because of Labour costs

By the mid-1990s, Sri Lanka could no longer compete on the basis of low-cost labour
and measures had to be taken to improve the productivity of the sector.

Sri Lanka did not have a well-developed export-quality textile industry and garment
industry accessories base
Thus, from the very beginning, garment production was based on imported inputs and
the value added remained low – close to 30 per cent.
By about the early 1980s, garment exports were growing rapidly and by 1986
garments accounted for the largest share of all exports (27per cent).

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STRENGTHS
Competitive strength of the Sri Lankan garment industry
• cheap labour
• literate labour force
• high labour standards
• investment-friendly government policies and strategic shipping lanes

WEAKNESS
On the other hand, there are also competitive disadvantages, such as
• long lead times
• weak marketing
• lack of product development
• low labour productivity partly due to outdated technology.

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 P0ST MFA
Ending of the multi-fibre agreement lead to the innovation in Sri lankan textile
and clothing industry .
The gradual phasing out of the MFA in 2005 gave way to intensified competition
which triggered numerous innovations in the clothing and textile industry in Sri
Lanka, especially in leading companies, in terms of product, process, marketing
and organizational structures.

NEW TRENDS IN THE GLOBAL TRADING

ENVIRONMENT: MEETING THE CHALLENGES
The Sri Lankan garment industry needed to become competitive to face
the post-2004 quota-free global challenges and also has to take notice of the new trends in
the global trading environment.
Sri Lanka gained quota-free status entry to the European Union market in March
2001, with the expectation of increased garment supply to that market

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 The full brunt of the quota phaseout
has not been felt as two developments have
cushioned the impact of the phase out.
First, Sri Lanka was granted duty free and quota free access
to the EU in mid 2005 under the GSP plus scheme Granting
of the GSP plus scheme provided some relief following the
elimination of the MFA and Sri Lanka has managed to
capitalise on the concessions granted with a dramatic
increase in garment exports to the EU and a shift in exports
from the US to the EU market

Second, both the EU and US imposed safeguards on a number of textile

and apparel imports from China – some of which Sri Lanka produces and
exports to the EU and US18 in 2005. The application of safeguards has
restricted subsequent annual growth of textile and apparel imports from
China into the US to 10-15% and from China into the EU to 8-12.5%.
With nearly one third of its exports to the EU and onefifth of its exports
to the US in categories which are placed under safeguards to be removed
by end of 2008, Sri Lanka appears to be the most at risk within the
region.19
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A comparison of Sri Lankan export performance with other countries’ export
performance in that market during 2000-2003 does not provide strong evidence that
the quota-free entry has resulted in significant gains for Sri Lankan garment exports
It appears that the window of opportunity for European Union market
consolidation has been lost because of the relatively late quota-free entry.
Sri Lanka has managed to maintain relatively high labour standards in factories to
convince European Union inspectors that working conditions in factories are
relatively satisfactory.

Sri Lanka did not feel the full impact of the final phasing out of the MFA until early
2005.
It has been estimated that the items for which restrictions were relaxed in 2002
constituted only about 4 per cent of all restricted products exported by Sri Lanka to
the United States.
The remaining 96 per cent were under restraint until end-2004

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The industry has shifted to exporting value added garments such as lingerie, and
manufacturers like MAS Holdings, and Brandix Lanka, which are the largest garment
exporters in the country The garment industry has come a long way from its humble
beginnings and has built up an international reputation for quality and reliability,
catering to a wide range of internationally reputed brandnames such as

Abercrombie and Fitch

GAP
Liz Claiborne
Marks & Spencer
Nike
Ralph Lauren
Tommy Hilfiger
Victoria’s Secrets

Over the years, the industry has shifted to exporting value added garments such as
lingerie, and manufacturers like MAS Holdings, and Brandix Lanka, which are the
largest garment exporters in the country, have established an international reputation in
this field.

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 Conclusion
Sri Lankan garment industry is at a crossroads. The challenge lies in improving its
competitiveness. Methods of increasing competitiveness should be explored.

One strategy is to reposition the Sri Lankan garment industry from a South Asian
context and increase competitiveness by increasing vertical integration, capturing
economies of scale, focusing on horizontal specialization, incorporating innovative
designs and building a stake in global marketing networks.

Sri Lanka would like to see is a minimum disruption in the adjustment

process because the garment sector is the largest foreign exchange earner and a key
generator of employment. However, if Sri Lanka can no longer maintain its
comparative advantage in the garment sector, then new sectors will emerge to
replace it; in the short run, however, the economy will incur a significant cost from
such industrial restructuring and there will be social costs.

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 THANK YOU

Submitted by- Shashi Amrita Bara(24)

Shiny Pangotra(25)

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