US embassy cable - 02COLOMBO1740

UNCLAS SECTION 01 OF 02 COLOMBO 001740 
 
SIPDIS 
 
STATE PLEASE PASS TO USTR: EBRYAN 
DOC FOR JFERNANDEZ 
 
E.O. 12958: N/A 
TAGS: ETRD, KTEX, EAID, CE, USTR, ECONOMICS 
SUBJECT: SRI LANKA PREPARES FOR POST-QUOTA WORLD 
 
Ref: (A) State 160692 (B) Colombo 671 
 
1.  Summary: Well aware of the potential impact of the 
expiration of the MFA on its number one export (apparel), 
Sri Lankan players are beginning to explore their options, 
ranging from special trade agreements with the US to 
strengthening the domestic industry and diversifying the 
export base. Post engaged major players in the garment 
industry as requested in ref A and learned that two 
important steps, a five-year strategy plan, and 
establishment of a government/business working group have 
been taken.  These actions prove that Sri Lanka is not ready 
to give up on its apparel industry yet.  Creative thinking 
on areas of engagement with the US, Sri Lanka's primary 
market, has begun.  End summary. 
 
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TIFA NOW, FTA LATER 
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2.  Sri Lanka is unique among garment producing countries in 
that it imports almost all fabric inputs (from Asian 
sources), with negligible domestic production.  Sri Lanka is 
thus in a good position to argue for a bilateral FTA with 
the U.S. based on a rule of origin on apparel, whereby 
apparel exports to the U.S. would be duty free only if they 
used U.S. fabric.  Such an agreement could provide major 
benefits to the U.S. textile industry, creating as much as 
$600 million in new exports a year (see ref B).  Sri Lanka 
intends to use the recently signed Trade and Investment 
Framework Agreement (TIFA) to make its case for an FTA.  In 
the interim, private business and government representatives 
have voiced a commitment to investigate the possibility of 
sourcing fabric from the US, hoping to win Section 809-like 
treatment that would exempt the fabric portion of any 
apparel exports from U.S. duty.  Government sources, 
including Secretary of Enterprise Development Ranjith 
Fernando, said this consideration is now a priority since 
the GSL realized a Free Trade Agreement with the US would 
take several years. 
 
3.  The GSL is hopeful that it will get a sympathetic 
hearing if it focuses on the benefits that would accrue to 
the shrinking US fabric-producing industry.  The possible 
reduction of the 10:1 trade imbalance with the US is 
recognized as another selling point.  The government will 
raise this issue with Deputy USTR Huntsman during his 
planned visit later this year.  It may also ask for benefits 
to be extended based on the industry's high labor standards. 
(Note: Though building domestic fabric mills is in the 
Strategic Plan, the broad manufacturing community has not 
endorsed this measure. End note.) 
 
4. Garment manufacturers have also begun a discussion on the 
competitiveness of US fabric, and suggested a catalog 
show/trade fair and or visits of US fabric manufacturers be 
organized to introduce American products to the Sri Lankan 
market.  The government, buyers and manufacturers are 
investigating the economics of using dedicated air shipments 
to reduce turnaround times.  The Amcham is contemplating its 
role in advocacy efforts. 
 
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5-YEAR PLAN TO STRENGTHEN APPAREL INDUSTRY 
------------------------------------------ 
 
5. Stakeholders in the industry (producers, buyers, 
government ministries and customs) met earlier this year to 
design a survival strategy for 2005 and beyond.  The 
resulting five-year strategic plan has five major 
objectives: 1) increase apparel industry turnover from $2.3 
billion to $4.5 billion by 2007, 2) transform the industry 
from manufacturing to fully integrated service, 3) increase 
penetration of premium market segments, 4) excel 
internationally in certain product categories, and 5) 
consolidate and strengthen the industry.  It includes a 
framework, initiatives and implementation scheme. 
 
6.  Steps identified in the plan are designated for 
government, industry or firm level action. Government-level 
actions would help across the entire spectrum of industries, 
and are steps that should be taken in any case. These 
include EDI facilities at the ports, lobbyists in key 
markets, establishment of Chambers of Commerce, reform of 
labor laws and development of infrastructure.  Industry is 
tasked with improving marketing and competitive 
intelligence, while individual firms are encouraged to form 
strategic partnerships and invest in human resource 
management. 
 
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DIVERSIFICATION 
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7.  Sri Lanka's economy is heavily dependent on apparel 
exports, which together represent 15% of GDP.  USAID's 
Competitiveness Initiative (TCI) is working with eight 
"clusters," identified as Sri Lanka's highest potential 
export sectors, to diversify the country's export base.  The 
GSL has praised TCI, and has created its own seven clusters, 
modeled on USAID's.  These fifteen sectors (excluding 
garments) are expected to provide much of the economic 
growth in the future.  USAID is currently evaluating this 
initiative and others related to competitiveness for future 
funding.  Other efforts to diversify the country's economic 
base include a major international campaign to attract 
investment into a variety of fields.  Also, many company 
representatives who remember International Executive Service 
Corps's work here in the 1990s have welcomed the prospect of 
USAID's revival of this program to provide firm-level 
support.  Both government and business representatives 
appreciated learning about TDA and OPIC and said they would 
explore options for utilizing these programs. 
 
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COMMENT 
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8.  GSL and industry welcomed Embassy efforts to focus 
attention on MFA expiration.  Post sees merit in the Sri 
Lankan proposal to use U.S. fabric inputs as the basis for a 
bilateral free-trade agreement.  Such an approach - with the 
prospect for significant new business for U.S. textile 
manufacturers - would fulfill the Textile Working Group's 
dual objectives of supporting the U.S. textile industry 
while minimizing the impact of 2005 on Sri Lanka.  In the 
meantime, Sri Lanka will welcome our continued assistance in 
diversifying its export base. 
 
Amselem