US embassy cable - 03COLOMBO1673

C O N F I D E N T I A L SECTION 01 OF 04 COLOMBO 001673 
 
SIPDIS 
 
DEPT PLEASE PASS TO E, EB, SA/INS, SA/RA, DRL, USAID 
FOR BERNADETTE BUNDY - ANE/SA 
TREASURY FOR JERRY ADKINS 
DOL FOR SUDHA HALEY 
NSC FOR ELIZABETH MILLARD 
DEPT PLEASE TO USTR FOR AUSTR WILLS 
COMMERCE FOR ARIADNE BENAISSA 
 
E.O. 12958:  DECL:  ONE YEAR AFTER CONCLUSION OF US-SL FTA 
TAGS: ETRD, EAID, ECON, EFIN, KIPR, ELAB, PREL, CE, ECONOMICS 
SUBJECT:  "When do we sign an FTA?"  GSL perspectives, 
Embassy assessments on upcoming TIFA Talks 
 
Ref:  A) Colombo 1386, B) Colombo 772 
 
1.  (U) Classified by Ambassador Jeffrey J. Lunstead for 
reasons 1.5 B and D. 
 
2.  (C) Summary:  Given the high profile in Sri Lanka of 
this issue and local expectations for the upcoming TIFA 
round, Post believes it is time to take concrete steps to 
move towards an FTA.  Specific recommendations are below in 
para 10.  FTA negotiations can be beneficial to the US-Sri 
Lankan bilateral relationship for political, economic and 
trade policy reasons.  Politically, it would show support 
for a forward-thinking Sri Lankan administration. 
Economically there are potential benefits to both 
countries.  On US trade policy, the timing of this TIFA 
Round gives the USG a chance to respond in a concrete way 
to Sri Lanka's strong support for U.S. positions in Cancun, 
and to show that we will go forward with bilateral trade 
agreements. 
 
3.  (C) Sri Lanka is undergoing a tremendous 
transformation, not only with the peace process, but also 
through its pursuit of economic reforms.  The business 
outlook is improving and the investment climate is good. 
Major U.S. companies are actively pursuing opportunities 
here and the potential for U.S. investment over the next 
five to ten years is in the billions of dollars.  Pursuing 
FTA negotiations would send the right signal in Sri Lanka, 
in the U.S. and internationally.  The FTA process would 
also complement the major assistance efforts of the 
international community. 
 
4.  (C) We recommend Washington seriously consider a 
positive, systematic response to Sri Lanka's desire for an 
FTA.  We suggest proposing to the GSL at the upcoming TIFA 
talks our intent to pursue FTA negotiations, based upon 
results during a six month review period.  During this 
time, Sri Lanka would meet specific benchmarks, 
particularly in the areas of labor, IPR enforcement, trade, 
investment and government procurement. USAID has indicated 
it could provide technical assistance to the GSL during 
this period, to help attain these goals.  At the end of the 
six months, assuming Sri Lanka has met the benchmarks, the 
U.S. and Sri Lanka would announce that they would begin 
formal negotiations.  End Summary. 
 
5.  (SBU) This cable lays out our thoughts on how to move 
forward with an FTA in the context of the upcoming TIFA 
talks.  Separate cables will follow on specific aspects, 
including the investment climate, IPR protection, labor, 
etc. 
 
When Do We Sign an FTA? 
----------------------- 
 
6.  (U) This question sums up the GSL attitude toward the 
bilateral trade relationship with the U.S.  Post looks 
forward to supporting the visit by DUSTR Shiner and AUSTR 
Wills in October and pursuing an invigorated bilateral 
trade agenda with Sri Lanka. 
 
7.  (C) We suggest a more forward-leaning line on FTA 
negotiations, with some very specific cautions to the GSL. 
Pursuing FTA negotiations, in a systematic way, is in the 
USG's best interest for three reasons: 
 
--  Politically we would be supporting a progressive, pro- 
U.S. government (in a volatile, important region), that is 
actively pursuing a peaceful end to twenty years of 
communal violence, and is vigorously implementing economic 
reforms. 
--  Economically, over the long term, the US stands to gain 
from increased exports not only to Sri Lanka, but as this 
nation realizes its potential as a regional hub, to the 
rest of South Asia, and beyond.  We are ramping up aid, and 
see SL as a serious contender for Millennium Challenge 
Account (MCA) money.  Promoting free trade and increased 
commercial activity provides the proper balance to 
complement these activities. 
 
--  In the post-Cancun environment, we could seize the 
opportunity to reward a country that stood with us in the 
WTO, in the face of considerable pressure.  Sri Lanka's 
support for USG positions at the WTO talks was obvious, 
notable and unprecedented.  Sri Lanka would be an excellent 
candidate to fulfill USTR's stated intent to pursue 
bilateral FTAs after Cancun. 
 
8.  (C) While the Embassy views a potential FTA with Sri 
Lanka as a good idea for the reasons outlined above, we 
should set some clear benchmarks to be met before we 
formally agree to begin negotiations, in order to gauge the 
GSL's willingness and ability to deliver.  Whatever the 
U.S. decision, however, we need to start giving some 
concrete answers to the GSL, as they have been forthcoming 
with us regarding their desires.  This cable outlines a 
proposal that provides enough flexibility to allow the GSL 
to walk away from TIFA with a domestic political victory, 
yet still buys time for them to bring their policies and 
programs up to snuff before serious FTA discussion begin. 
 
Post Recommendation on TIFA Talks 
--------------------------------- 
 
9.  (C) Post recommends that 1) we use the TIFA talks as a 
forum to express our interest in pursuing an FTA, noting 
Sri Lanka's efforts to date on economic reform and their 
particularly helpful efforts in Cancun, and 2) at the TIFA 
meeting, we propose minimum steps that the GSL take, in 
order to commence formal negotiations, to be reviewed in 
six months.  Those steps would be: 
 
--  a summary outline of gaps between GSL 
capabilities/standards and the Chile and Singapore FTA 
agreements, along with a plan of action for closing those 
gaps before December 2004. 
 
--  strong IPR enforcement measures, including raids, 
public education campaigns, law enforcement and judicial 
training, and prosecution of offenders. 
 
--  resolution of outstanding labor issues, particularly 
implementation of pending amendments to labor laws; and 
actions taken to ensure enforcement of labor regulations 
and rights in the EPZs. 
 
--streamlining the decision-making process, and increasing 
transparency in government procurement and tenders. 
 
Progress in the areas outlined above by April 2004 would 
prompt a TIFA/FTA Review session, at which point the U.S. 
and Sri Lanka could commit to begin FTA negotiations. 
 
10. (C) The USG public line following TIFA could be 
something like: 
 
"The US and Sri Lanka have held productive discussions 
under the rubric of the Trade and Investment Framework 
Agreement and agree in principle that a bilateral Free 
Trade Agreement could serve both countries' best interests. 
In that vein, the two sides have discussed several areas of 
mutual concern, including labor conditions, IPR 
enforcement, investment climate, various governmental 
processes and the ongoing Sri Lankan analysis of previous 
U.S. free trade agreements.  We see the next six months as 
crucial to making the progress necessary on both sides to 
allow formal negotiations to begin.  Therefore, it is our 
intent to hold a TIFA review meeting in six months to 
consider progress and discuss the most appropriate next 
steps." 
 
11.  (C) We believe this plan has several benefits: 
 
--  it increases U.S. credibility in the WTO, particularly 
following USTR Zoellick's announcement that, in light of 
the failure to reach agreement in Cancun, the U.S. intends 
to place a higher priority on bilateral FTAs. 
 
--  it allows the GSL more time to review and prepare 
discussion on the Singapore and Chile FTA models, while 
still being able to hold up U.S. interest in an FTA as an 
achievement. 
 
--  it allows the USG more flexibility to use the FTA bully 
pulpit in public to promote reform processes and could 
prompt additional or enhanced programming from USAID, DOL 
and other USG sources, in order to build capacity for Free 
Trade implementation. 
 
--  it provides Sri Lanka with a performance incentive - 
possible FTA implementation around the time of the Multi- 
Fiber Agreement (MFA) expiration. 
 
Whither an FTA? 
--------------- 
 
12.  (C) FTA is a political hot potato here.  The GSL has 
built up expectations and will face a real drubbing if they 
do not deliver.  This is largely a problem of their own 
making as they have hyped an FTA despite USG reminders that 
an FTA is difficult and uncertain.  Nonetheless, it is a 
fact we have to acknowledge and deal with.  They may, 
however, still fail to fully grasp the magnitude of FTA 
negotiations and implementation.  Note: USAID technical 
assistance could help the GSL better understand the process 
and develop its analysis capability.  PD outreach could 
improve overall transparency by educating the public as 
well.  End note. 
 
13.  (C) The GSL's seriousness of purpose is illustrated by 
its ongoing line-by-line analysis of the Singapore and 
Chile FTAs.  They see four main areas of concern: national 
treatment (particularly in the business sector), government 
procurement, investment (BOI incentive programs) and 
financial services (most likely capital account 
liberalization).  We will be discussing these issues with 
the GSL in the next days and will report further 
conclusions septel. 
 
14.  (C) In many respects, though, Sri Lanka is a leader in 
the region and a bright spot in a global context.  The GSL 
is committed to reform, but struggling with implementation. 
As inter-ethnic feuds simmer and boil over elsewhere in the 
region, the GSL and the LTTE are pursuing a peaceful 
solution based somewhere in the federalism spectrum.  U.S. 
businesses show increasing interest in Sri Lanka.  Demand 
by American companies for commercial advocacy is growing 
because of sharply increased private sector interest.  An 
FTA would certainly help promote additional U.S. exports, 
increasing our now relatively small (around 3 percent) 
share of the USD 6 Billion that Sri Lanka imports every 
year. 
 
15.  (C) Through its other bilateral FTAs and central 
location, Sri Lanka provides a tremendous opportunity to 
add value to U.S. content and sell to the larger South 
Asian regional market of over 1.5 billion people.  Sri 
Lanka is also looking to expand market access to Southeast 
Asia as well.   These markets hold significant potential. 
Also, since the Sri Lanka garment industry has virtually no 
fabric production capability, U.S. textile and fabric 
manufacturers would have the opportunity to lock in 
significant supply relationships under the rule of origin 
requirements of a potential FTA. 
 
16.  (SBU) The investment climate is sound, overall labor 
conditions are a strength and IPR enforcement, while 
currently weak, is a work in progress (we are reporting on 
these areas septel). 
 
17.  (C) U.S. companies such as Microsoft, Dell, Honeywell, 
Program Development International, Bechtel, Lockheed 
Martin, GE and Caterpillar are either already here, or are 
exploring opportunities.  The potential for investment in 
infrastructure and market development programs over the 
next five to ten years is over USD 5 billion. 
 
18.  (C) As a serious contender for Millennium Challenge 
Account funding, Sri Lanka has shown it is moving forward 
with the kinds of policies that the U.S. supports. 
Pursuing an FTA would complement the assistance we are 
giving and considering. 
 
19.  (C) Finally, the GSL has fulfilled every marker we 
have laid down in bilateral discussions and during previous 
TIFA talks.  Though never explicitly relating these steps 
to FTA, it is obvious where their motivation lies. 
Examples of this include passing new IPR legislation, 
resisting efforts to label GMO foods, supporting the U.S. 
in the WTO (not an easy thing to do) and attempting to ease 
visa restrictions. 
 
20.  (C) We can support the peace process, good governance, 
economic reform and U.S. companies by engaging the GSL in 
the free trade arena.  We believe the steps outlined above 
can move the process forward in a way that helps Sri Lanka 
absorb the enormous requirements of free trade 
negotiations, pushes the needed reforms and drives the GSL 
to think strategically about its overall policy and 
economic structures. 
 
LUNSTEAD