US embassy cable - 03COLOMBO1827

C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 001827 
 
SIPDIS 
 
DEPARTMENT FOR SA, SA/INS, E, EB, DRL, USAID FOR B. 
BUNDY - ANE/SA 
NSC FOR E. MILLARD 
TREASURY FOR J. ADKINS 
DOL FOR S. HALEY 
DEPARTMENT PLS PASS TO USTR FOR AUSTR A. WILLS 
DEPARTMENT ALSO PASS TOPEC 
 
E.O. 12958:    DECL:  10-21-13 
TAGS: PREL, ETRD, ECON, EAID, EFIN, KIPR, PGOV, CE 
SUBJECT:  Sri Lanka:  The political importance of 
signing an FTA for the GSL and the peace process 
 
Refs:  (A) Colombo 1808  (D) Colombo 1686 
-      (B) Colombo 1702  (E) Colombo 1673 
-      (C) Colombo 1689 
 
(U) Classified by Ambassador Jeffrey J. Lunstead. 
Reasons 1.5 (b,d). 
 
1.  (C) SUMMARY:  Mission has reviewed the key economic 
issues involved in possibly signing a Free Trade 
Agreement with Sri Lanka in Reftels.  In this message, 
Mission sketches out the domestic political context.  In 
a nutshell, the GSL, deeply worried about maintaining 
support for the peace process in the south, is selling 
peace as vital for jobs and economic growth, and an FTA 
as an important factor in providing such benefits. 
Conversely, however, the GSL is worried that not signing 
an FTA could undermine public confidence that the peace 
process will bring real prosperity.  The GSL concerns 
have a real foundation:  with the expiration of the 
Multi-Fiber Agreement (MFA) in 2005, thousands of jobs 
are projected to disappear, and an FTA could play a role 
in preventing that from occurring.  We think the GSL's 
argument that an FTA can play a role in realizing 
economic gains and thus help the peace process -- the 
success of which is the USG's number one goal in Sri 
Lanka -- is one that has considerable merit.  END 
SUMMARY. 
 
2.  (C) In Reftels, Mission has reviewed in detail the 
key economic issues involved in possibly signing a Free 
Trade Agreement with the Sri Lankan government.  In this 
message, Mission sketches out the domestic political 
context. 
 
3.  (C) In a nutshell, the GSL, deeply worried about 
maintaining public support for the peace process in the 
south, is emphasizing that peace will lead to increased 
economic growth and jobs.  In making this point, the GSL 
sees a possible FTA as important in ensuring such 
benefits.  Regarding the situation in the south, the 
Prime Minister and his ministers underscore to Mission 
staff all the time the point that the peace process 
cannot work unless the Sinhalese Buddhist majority 
remains on board.  Thus far, based on polling and what 
we hear anecdotally, the peace process has proven 
extremely popular among all of Sri Lanka's ethnic 
communities, including the Sinhalese Buddhists.  The 
GSL, however, is worried that the many bumps in the way 
of getting to a possible final settlement, which mostly 
involve dealing with the difficult Tamil Tigers and a 
tense cohabitation situation, could eventually unhinge 
public opinion in the south. 
 
4.  (C) In light of this deep concern, the government -- 
in a concerted effort to maintain public support in the 
south -- is relentlessly hammering home the point that 
the peace process means increased jobs and economic 
growth for Sri Lanka.  Prime Minister Ranil 
Wickremesinghe, and G.L. Peiris and Milinda Moragoda, 
two highly sophisticated ministers, as well as more 
grassroots politicians in the PM's party, directly 
emphasize in nearly every speech they make that peace 
and prosperity are inextricably linked.  As part of this 
argument, the point is often made that an FTA with the 
U.S. would enhance the peace dividend.  Given the 
economic importance attached to reaching an FTA by the 
government, the proposal has become of interest to the 
public, which, we believe, sees the fact that the idea 
is even being taken seriously by the U.S. as a natural 
benefit flowing from peace. 
5. (C) Conversely, however, the government is worried 
that the ramifications of not attaining an FTA would be 
severe for the economy and thus for its peace process 
policies.  In essence, the government fears that jobs 
will be lost without an FTA, and, due to this, the 
public will become disgruntled about the economic 
situation and take its anger out on the peace process. 
It will also be seen, they fear, as disproving the PM's 
thesis that the international community, and especially 
the U.S., will support Sri Lanka's peace process with 
deeds as well as words.  The ultimate concern is that a 
serious letdown on the economic front could lead to 
protests against the peace process and instability 
across the south.  This is not an idle concern:  many 
previous efforts to attain peace in Sri Lanka have been 
wrecked or severely undercut by protests in the south. 
 
6.  (C) We think the broad outlines of the GSL's 
argument described above have a solid foundation.  The 
expiration of the MFA in January 2005 is correctly seen 
as a hugely important economic event in Sri Lanka, with 
five percent of the workforce potentially negatively 
affected.  While there have been commendable efforts 
towards vertical integration of the garment sector, and 
a move toward consolidation into the high-end garment 
area, the GSL still views an FTA as a must for 
preserving market access to the U.S., which buys over 60 
percent of the country's garment exports.  Most senior 
GSL officials recognize that an FTA is not a panacea, 
and recognize that rule-of-origin constraints, 
particularly with regard to textiles, will be a key 
challenge.  Nonetheless, the increased opportunities for 
market access provided by an FTA, particularly as Sri 
Lanka consolidates the garment industry and works to 
diversify its export base, is seen to be an offset to 
the potential loss of jobs projected as a result of the 
MFA expiration.  Essentially, if an FTA is signed, at 
the end of the day the GSL can argue that it was due to 
international confidence in the peace process that jobs 
were saved. 
 
7.  (C) COMMENT:  In addition to the domestic political 
angle and as reviewed in Reftels, the GSL's pursuit of 
an FTA with the U.S. has a core substantive policy 
aspect involving its support for trade liberalization 
designed to enhance Sri Lanka's reputation as a regional 
trading hub.  The GSL supported U.S. positions in 
Cancun, continues to be a voice of reason in 
multilateral trade fora, and has embraced the view that 
global trade liberalization is necessary for its future 
economic well-being.  All that said, the government's 
political concerns described above are imperatives that 
are playing a key role in its strongly pro-FTA position. 
In Mission's estimation, the GSL's argument that an FTA 
can play a role in realizing economic gains and thus 
help the peace process -- the success of which is the 
USG's number one goal in Sri Lanka -- is one that has 
considerable merit.  END COMMENT. 
 
8.  (U) Minimize considered. 
 
LUNSTEAD