US embassy cable - 02COLOMBO1979

C O N F I D E N T I A L SECTION 01 OF 04 COLOMBO 001979 
 
SIPDIS 
 
DEPT PLEASE PASS TO DEPUTY USTR AMBASSADOR HUNTSMAN FROM AMBASSADOR 
WILLS 
 
E.O. 12958:  DECL:  10/23/2012 
TAGS: ECON, ETRD, CE, WTO, USTR, ECONOMICS, LTTE - Peace Process 
SUBJECT:  SCENESETTER FOR DEPUTY USTR HUNTSMAN'S NOVEMBER 
VISIT TO SRI LANKA 
 
Classified By:  Ambassador E. Ashley Wills.  Reasons 1.5 (b, d) 
 
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Executive Summary 
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1.  (U) I extend to you a warm welcome in advance of your 
visit to Sri Lanka next month for the first meeting of the 
U.S. - Sri Lankan Trade and Investment Council (TIC).  I am 
sending this message now, nearly a month before your visit, 
because I know that you and your team are already busy 
preparing for your meetings here.  I see your visit, and the 
Trade and Investment Framework (TIFA) process in general, as 
critical to advancing U.S. trade interests here in Sri Lanka, 
and I want to provide now the context needed to make your 
visit a success. 
 
2.  (C) Your visit comes at an exciting time, with Sri Lanka 
facing its best chance for peace in many years.  A cease-fire 
has been in place since December 2001, and the government and 
Tamil Tigers just sat down for constructive face-to-face 
talks, which are due to continue later this year.  The 
situation remains fluid, however, with the intentions of the 
Tamil Tigers unclear.  The peace process could also be 
undermined by domestic fissures, such as cohabitation 
stresses between the PM and the President, and tensions 
between the Muslim community and the LTTE.  Even if GSL and 
the LTTE do reach a peace settlement, its efficacy and 
durability will depend largely on economic factors - 
specifically the extent to which Sri Lanka is able to achieve 
economic growth island-wide in the coming years.  Strong 
growth will vest all Sri Lankans in peace; if growth falters, 
the government and the peace process will be especially 
vulnerable to the pressures noted above. 
 
3.  (C) The U.S. is by far the largest trading partner of this 
trade-dependent nation, consuming nearly 40% of total exports 
in 2001.  It is thus no exaggeration to say that the U.S. 
trade relationship plays a critical part in Sri Lanka's quest 
for peace.  The Sri Lankans understand this, and they are 
likely to ask you for trade concessions in support of the 
peace process.  Still, as much as we want to see Sri Lanka 
achieve peace and increased prosperity, I do not believe we 
should be seduced into granting one-way trade concessions. 
Far from it: I see your upcoming visit and the longer-term 
TIFA process as an opportunity to push GSL to make the right 
choices on economic reform and further opening its markets to 
U.S. goods.  Making these tough choices will do more to 
strengthen Sri Lanka's economy and bolster the chances for 
long-term peace than trade concessions from the U.S. ever 
could.  For me, trade concessions should be reciprocal. 
 
4.  (SBU) Consistent with the draft agenda that your team has 
developed, I see three main areas where your visit can 
advance U.S. interests.  First, the TIFA can promote U.S. 
exports by focusing the GSL's attention on the massive 10:1 
trade imbalance between our two nations, and by discussing 
specific ways to right it.  Second, the TIFA can help GSL 
summon the courage to make the difficult economic reforms 
necessary to improve the investment climate here.  Third, the 
TIFA can identify ways to work with GSL in promoting our 
common WTO goals, thereby lending additional support to 
objectives one and two above.  I believe strongly that 
pursuing these goals with vigor will result in big benefits 
to U.S. business, not just in Sri Lanka but in South Asia as 
a whole.  If GSL makes real progress on these fronts, I 
believe further that it is in the U.S. interest to consider 
an FTA with Sri Lanka.  End Executive Summary. 
 
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Promoting U.S. Exports 
---------------------- 
 
5.  (U) The bilateral trade picture is dominated by a massive 
10:1 trade imbalance in Sri Lanka's favor.  The imbalance is 
mainly due to large Sri Lankan apparel exports to the U.S. 
($1.5 billion in 2001, or nearly 75% of total Sri Lankan 
exports to the U.S.)  Sri Lanka's success in apparel 
manufacturing is partly attributable to a favorable deal on 
U.S. quotas, and partly attributable to Sri Lanka's success 
in positioning itself as a low-cost, reliable supplier to the 
upper-middle end of the U.S. retail sector (with The Limited, 
Inc., Liz Claiborne and Federated Department stores some of 
the major importers of Sri Lankan apparel). 
 
6.  (SBU) While the U.S. absorbs nearly 40% of Sri Lankan 
exports, our share of Sri Lankan imports is less than 4%. 
(Note: Main U.S. exports to Sri Lanka are wheat (35% of the 
total), followed by yarns/fabric and electrical machinery. 
End Note.)  Yet Sri Lanka runs an overall trade deficit of $1 
billion.  It is importing plenty of goods, just not from the 
U.S.; main sources of Sri Lanka's imports are India (10%), 
Hong Kong (8%) and Singapore (7%).  While this trend is due 
in part to stronger commercial and historical links with 
Asia, it is also due to a lack of transparency that 
disadvantages American suppliers. 
 
7.  (U) I have been pushing GSL hard on every bid that comes 
up here, and have made good progress recently with 
significant power deals going the way of AES and General 
Electric.  Still, there is a lot of business here yet to be 
won by U.S. companies.  Your visit is an opportunity to put 
GSL on notice that we are keeping score, and that doing more 
for U.S. exports will help the overall trade relationship. 
Key areas where U.S. exports can be competitive are mass 
transit (buses, locomotive engines), power equipment, and 
textile fabric. 
 
8.  (SBU) Sri Lanka flirted last year with a ban on biotech 
foods that would have set a precedent injurious to our global 
trade interests.  This mission's aggressive lobbying, along 
with a strong letter from USTR Zoellick, helped convince GSL 
to drop the ban.  Your visit is an opportunity to press GSL 
to keep its market open to biotech products and especially to 
steer clear of any harmful labeling schemes. 
 
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Improving the Investment Climate 
-------------------------------- 
 
9.  (U) Sri Lanka is eager to lure more U.S. investment to the 
country.  Sri Lanka as a whole is under-invested, and U.S. 
investment here (book value) is a modest $150 million.  The 
ethnic conflict is only partly to blame; the local investment 
climate, while much better than elsewhere in South Asia, is 
far from perfect.  Sri Lanka has the advantage of having 
opened its economy in the late 1970s, earlier than its 
neighbors.  That wave of reforms led to a surge in foreign 
investment (mainly from Asia) and a rise in living standards 
in and around Colombo, where most of the investment was 
focused. 
 
10.  (U) Twenty five years later, in spite of a long-running 
civil war, Sri Lankans enjoy the highest GDP per capita 
($850) of any nation in the region (except tiny Maldives). 
Now GSL stands on the brink of enacting a second wave of 
economic reforms that have the potential (against a backdrop 
of peace) to lead to unprecedented rates of economic growth. 
GSL has been vocal about what reforms need to take place - 
better protection of intellectual property, further 
privatization, shrinking of the regulatory role of 
government, more employer-friendly labor laws and improved 
transparency.  Yet GSL has taken very little action, 
preferring to move with caution given the government's thin 
parliamentary majority and the fragility of the peace 
process.  A downturn in economic growth or increase in 
joblessness - precisely the kind of short-term pain that 
reforms often produce - could leave GSL vulnerable to attack 
from a leftist/socialist party that can sway large numbers of 
voters. 
 
11.  (U) GSL is right to be wary of moving too fast, but at 
the same time it cannot let another year slip by without 
taking steps to improve the investment climate.  Your visit, 
and the longer-term TIFA process, can give GSL the 
encouragement it needs to enact reforms decisively.  Once the 
peace process is on solid footing, any delay in these reforms 
could endanger the prospects for foreign investment, and 
economic growth, for the rest of the decade. 
 
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Pursuing Common WTO Goals 
------------------------- 
12.  (U) Sri Lanka ought to play a bigger role - and a 
constructive one - in WTO fora than it has in recent years. 
(Note:  It was a virtual non-participant at Doha last year; 
consumed with internal politics, it did not send a 
Ministerial representative and made do instead with a few 
delegates from its local Embassy.  End Note.)  As a 
trade-dependent nation it has much to gain from faster 
elimination of trade barriers worldwide.  You can expect 
enthusiastic cooperation from GSL on the Doha Development 
Agenda. 
 
13.  (SBU) I cannot promise, however, that Sri Lanka will be 
able to execute on a par with its enthusiasm.  Frankly, Sri 
Lanka will need our help if it is to help us in the WTO. 
That is why I was happy to see your agenda for the TIC 
included WTO capacity building programs.  I am confident that 
a U.S. investment in Sri Lanka's WTO capacity will pay off in 
the form of an enthusiastic (and increasingly capable) 
partner on trade issues. 
 
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South Asia:  The Bigger Picture 
------------------------------- 
 
14.  (U) With just 19 million of South Asia's 1.3 billion 
people, Sri Lanka would seem at first glance to form a small 
part of our overall trade interests with the subcontinent. 
But Sri Lanka is capable of playing a catalytic role in 
opening the region up to U.S. exports, and we can use the 
TIFA process to help it assume this role. 
 
15.  (U) First, Sri Lanka can serve as an attractive entry 
point into South Asia for U.S. companies.  Sri Lanka has an 
FTA in place with India, is currently finalizing one with 
Pakistan and plans to negotiate one with Bangladesh.  These 
agreements are admittedly far from "free," being plagued by 
negative lists and restrictions on both sides.  Yet they have 
the potential to make Sri Lanka into a hub for South Asian 
trade.  The Indo-Lankan FTA, for example, would allow U.S. 
businesses to export products to Sri Lanka and re-export them 
(with local value-addition) to India on preferential duty 
terms.  With import duties into Sri Lanka low and still high 
in other South Asian nations, these agreements mean Sri Lanka 
can act as an attractive gateway to a largely closed South 
Asian market. 
 
16.  (U) Second, Sri Lanka has the potential to act as a model 
for economic reform and open markets in the rest of South 
Asia.  For 25 years Sri Lanka has been the region's most open 
economy.  Now, especially if it is freed of the ethnic 
conflict that has hobbled growth, Sri Lanka can quickly 
become a force for liberalization in the region.  We have 
seen in East Asia how small, dynamic economies such as Hong 
Kong and Singapore have prodded their larger neighbors toward 
greater economic openness.  South Asia lacks a Hong Kong or 
Singapore; Sri Lanka can play that role.  We can use the TIFA 
process to help it do so. 
 
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Conclusion:  Toward an FTA 
-------------------------- 
 
17.  (SBU) You are well aware that Sri Lanka is eager to enter 
into FTA negotiations with the U.S.  I believe there is 
considerable merit in the idea of a U.S.-Sri Lankan FTA, 
especially if it includes a rule of origin on apparel exports 
requiring Sri Lankan apparel to use U.S. inputs in order to 
qualify for duty free treatment.  Sri Lanka has no domestic 
textile industry to speak of and currently imports about $1 
billion in fabric a year, nearly all of it from Asia.  Under 
an FTA, the duty break on the finished garment would more 
than compensate for the higher cost of U.S. fabric, creating 
an economic incentive for Sri Lankan apparel producers to use 
U.S. material.  An FTA with Sri Lanka could therefore mean 
big business for the U.S. textile industry. 
 
18.  (SBU) I see the TIFA process as an opportunity for Sri 
Lanka to prove it is ready for an FTA with us.  To do so, GSL 
will need to boost U.S. exports (particularly where it is the 
customer), improve the local investment climate and work with 
us productively in the WTO.  If GSL shows real progress on 
these fronts during the coming year, I believe it would serve 
our regional trade interests well to consider an FTA with Sri 
Lanka. 
WILLS