ECONOMYNEXT – Germany’s Supply Chain Act could marginalise Sri Lanka’s small and medium enterprises (SME) in the apparel industry as the cost of auditing and acquiring certifications increase, industry representatives and analysts have said.
“Industry stakeholders make clear that most apparel manufacturers in Sri Lanka are SMEs, and that the top 20 companies in the industry account for around 80 percent of the exports,” attorney-at-law Shyamali Ranaraja told a forum on the act’s implications.
The forum on ‘Exploring the Impact of Germany’s Supply Chain Act on Sri Lanka’s Key Industries’ was organised by the Friedrich Naumann Foundation in Sri Lanka as it exited the country.
FNF’s policy paper on the German Supply Chain Act and its implications for Sri Lanka’s tea and apparel industries were discussed by industry representatives, including stakeholders from Sri Lanka’s tea and apparel sectors who pointed out that Sri Lanka’s ethical production standards position it as a potential beneficiary of the act, but compliance costs could be a concern for SMEs.
Sri Lanka’s apparel industry, on the whole, complies with human rights and environmental conventions positioning Sri Lanka as an ethically aligned export hub.
Therefore, the effects of the German supply chain act are mild on the island nation’s economy, the panelists pointed out.
However, the cost to be borne on reports are significant on the economies of SMEs.
This could impact many SMEs as they face the burden of financing audits to enter the German market, potentially forcing them away from the German market.
The act does not offer any kind of economic incentives to the companies that follow it, making the German market unattractive to businesses.
SMEs largely depend on inconsistent seasonal orders, forcing them to employ workers for more than 45 hours a week exceeding the International Labour Organization hours of work (industry) convention 1919.
Small and medium enterprises generate up to 20 percent of yearly revenue from apparel exports.
“The act does not define any new human rights or environmental standards,” the German Federal Ministry for Economic Cooperation and Development showed.
This leaves third party certification bodies with the power of interpreting the act, likely to their own benefit.
Sri Lanka’s apparel industry has seen some adjustments, including additional audits.
“Our feedback to the authorities have been you have to come up with something more black and white. You have to come up with a document that says, this is your checklist”, Secretary General of Joint Apparels Association Federation Yohan Lawrence said addressing the vagueness in the Act.
“Unfortunately, the act does not have an accountability, or a monitoring, mechanism built because the German government certainly can’t enforce workers’ rights or environmental rights here,” Ranaraja said.
Non-existing intergovernmental dialogues could also be a possible setback in complying with the legislation, as complying with different legislations needs government intervention, Ranaraja pointed out.
“These barriers could ultimately mean that as a result of the Supply Chain Act, large companies eventually benefit at the cost of smaller companies.”
Germany is the fourth largest export destination for Sri Lankan apparel after the United States, United Kingdom and Italy, according to the Export Development Board.
German Supply Chain Act was put forth following the Rana Plaza in Bangladesh incident killing nearly 1,000. The act has been put in place to ensure human rights and environmental conventions are protected in each part of the apparel producing process assuring a quality product to the end user while also protecting the living standards of the manufacturers.
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The forum underscored the importance of balancing sustainability, human rights, and competitiveness in global trade.
European countries annually pass 10-12 acts and conventions on fair trade. Complying with all could result in further expenses.
Recommendations included enhancing indirect supplier compliance, creating economic incentives, and raising awareness among vulnerable communities. (Colombo/Dec20/2024)
