US embassy cable - 05COLOMBO1247

UNCLAS SECTION 01 OF 02 COLOMBO 001247 
 
SIPDIS 
 
DEPT PASS USTR FOR JROSENBAUM 
 
STATE FOR EB 
 
STATE FOR SA/INS 
 
GENEVA PASS USTR 
 
E.O 12958: N/A 
TAGS: ECON, ETRD, CE, ECONOMICS 
SUBJECT:  SRI LANKA QUALIFIES FOR EU GSP PLUS BENEFITS 
 
REF:  (a) 05 COLOMBO 965 (b) 04 COLOMBO 1604 (c) 04 
COLOMBO 1271 
 
1. Summary:  Sri Lanka is among a group of 14 developing 
countries which qualified for duty free access to 
European Union (EU) under the EU GSP plus scheme from 
July 1, 2005.  As a result, most Sri Lankan exports from 
apparel (Sri Lanka's main export) to ceramics will be 
eligible to enter EU markets free of duty.  Initial 
benefits will be limited for products with high import 
content, such as apparel, due to tough rules of origin 
(ROO) criteria.  Nonetheless, the apparel industry 
welcomes the EU concession as a great boost to the 
industry currently facing increased competition from 
China.  Sri Lanka is hopeful of more relaxed ROO 
criteria next year.  End Summary. 
 
2.  The EU GSP plus scheme was given to about 14 poorly 
diversified (and therefore vulnerable) developing 
countries, subject to their ratification and application 
of 27 international conventions on human rights, labor 
standards, environmental protection and governance 
principles.  According to a Sri Lanka Department of 
Commerce official, Sri Lanka has ratified most of the 27 
conventions that need to be ratified before the GSP plus 
implementation.  A couple of conventions still 
outstanding are to be ratified before the formal 
enforcement of the EU GSP plus scheme on January 1, 
2006.  It covers 7,200 items, which will enjoy duty free 
access to EU from July 1, 2005.  It will be initially 
operational for three years, until 2008, except in the 
case of textiles and clothing which will be reviewed 
annually. 
 
3.  Sri Lanka's apparel sector has been looking forward 
to EU GSP plus to overcome Chinese competition following 
the expiration of the multi fiber agreement.   The 
scheme provides duty free access to Europe compared with 
the MFN duty rates ranging from about 6.5% to 12%.  (Sri 
Lanka's exports were charged duty at 4.5% to 7.2% due to 
general GSP concessions and preferences for protection 
of labor rights).  However, since Sri Lanka imports most 
of its fabric, initial benefits from GSP plus will be 
limited.  Apparel made from local and EU fabric can be 
exported to EU free of import duty.  EU's tough ROO 
criteria require local value addition of over 50% for 
fabric sourced from the South Asia Region (i.e. SAARC 
countries).  Fabric from other countries does not 
qualify as the ROO criteria require double 
transformation, i.e., EU rules of origin for cotton 
clothing require that the production process be from 
yarn to fabric to clothing.  For knitted clothing, the 
production process needs to start from fiber onwards. 
These rules will exclude GSP plus benefits to apparel 
made from fabric sourced from China and other South East 
Asian countries, Sri Lanka's top suppliers of fabric. 
Therefore, Sri Lanka is likely be slow to draw on 
benefits of the EU plus scheme.  According to industry 
sources, some products like children's clothing, which 
require embroidery, washing and finishing, are likely to 
benefit from the new scheme.  In addition, large 
manufacturers with vertically integrated businesses are 
also likely to benefit from the EU GSP plus as they will 
be in a better position to meet ROO criteria.  With the 
EU in the process of reforming ROO governing the GSP 
scheme, Sri Lankan exporters might be able to make full 
use of the benefits of this scheme in 2006.  Sri Lanka 
is hopeful that rules of origin will be flexible with 
local value addition requirement lowered to at least 
35%.  Sri Lanka also hopes that new rules will extend 
the benefits to fabric from China and South East Asia. 
 
4.  In addition to apparel, other major Sri Lankan 
exports that will qualify for duty free entry subject to 
ROO criteria include footwear, ceramic ware, flowers, 
fruits, vegetables, fisheries products, and rubber 
products.  Some of these products will benefit greatly 
from the GSP plus due to high MFN duty rates on them in 
the EU.  The Department of Commerce has recently 
received applications for registration under the scheme 
from various sectors such as tuna, cashew, pineapple, 
gems, jewelry, fruits, tobacco and garments. 
 
5.  Comment:  EU GSP plus, even with limited benefits, 
has been welcomed by the apparel industry, which is 
acutely aware of the need to face competition from 
China.  The industry considers this concession as a 
great boost in the quota free era.  The Joint Apparel 
Associations Forum (JAAF), the top textile industry 
federation, at a media briefing on July 6 expressed 
confidence on the potential of the EU GSP scheme to 
bring immediate relief to the industry.  Together with 
US safeguards imposed on Chinese apparel, 
EU GSP can help the Sri Lankan garment industry to 
remain competitive in international markets.  EU is the 
second largest market for Sri Lankan apparel after the 
U.S., with the EU accounting for 37% and U.S. accounting 
for 58% of exports. The two markets account for 95% of 
Sri Lankan apparel exports.  EU GSP plus with duty free 
access to other Sri Lankan exports will also help 
diversify Sri Lankan exports to EU markets.  End 
Comment. 
 
Lunstead