US embassy cable - 05COLOMBO1899

C O N F I D E N T I A L SECTION 01 OF 03 COLOMBO 001899 
 
SIPDIS 
 
DEPT FOR SA/INS: MGOWER/CSIM; 
DEPT PASS USTR 
TREASURY FOR SCHUN; 
MCC FOR DNASSIRY AND EBURKE 
 
E.O. 12958: DECL: 11/02/2015 
TAGS: ETRD, ECON, CE, ECONOMICS, External Relations 
SUBJECT: SRI LANKA SEES POTENTIAL FOR SAFTA, BUT HEDGING 
WITH ENHANCED INDIA PACT; LESS ENGAGED ON WTO 
 
REF: A. STATE 199861 
     B. COLOMBO 1842 
 
Classified By: Econchief Dean R. Thompson, Reasons 1.4 b, d and e 
 
1. (C) Summary: During a wide ranging discussion with 
Econchief, Sri Lankan Commerce Ministry Director General K.N. 
Weerasinghe (Note: Weerasinghe is Sri Lanka's senior-most 
career trade official) said that a successful conclusion to 
the South Asia Free Trade Agreement (SAFTA) talks was close, 
but hinged on Bangladesh's willingness to show more 
flexibility in the talks and stop "hijacking" SAFTA 
less-developed country (SLDC) issues originally designed to 
benefit Maldives.  Weerasinghe believes a Comprehensive 
Economic Partnership Agreement (CEPA) with India can be 
forged by late January, which will expand the current 
Indo-Lanka FTA.  On WTO Weerasinghe was less forthcoming, and 
previous attempts to engage on WTO issues lead us to believe 
that Sri Lanka tends to "play defense" on WTO issues from 
Colombo, leaving their WTO rep in Geneva with fairly wide 
latitude and engaging only on the most immediate issues that 
might have negative repercussions on Sri Lankan welfare.  End 
Summary 
 
2. (C) Econchief met with Sri Lankan Commerce Ministry 
Director General K.N. Weerasinghe, Sri Lanka's senior-most 
career trade official, on November 2.  In a wide ranging 
discussion, Weerasinghe touched on Sri Lankan trade strategy 
and opinions related to SAFTA, Indo-Lanka trade and the WTO. 
 
SAFTA: CLOSE, BUT BANGLADESHI INITIATIVES GETTING TEDIOUS 
--------------------------------------------- ------------ 
 
3. (C) When queried about the status of the SAFTA 
negotiations, Weerasinghe indicated that he refused to attend 
talks last weekend in Nepal, as Bangladesh and Maldives were 
unwilling to offer new concessions on issues related to rule 
of origin and the "compensation mechanism" (Note: the 
compensation mechanism is a SAFTA-specific initiative to 
reimburse SLDCs for customs revenue lost to trade 
liberalization. End note).  Weerasinghe said three main 
sticking points remain on SAFTA: the negative lists, the 
rules of origin question on apparel (which are linked to the 
negative list issue), and the compensation mechanism.  He 
suggested that Sri Lanka is relaxed about the potential for 
SAFTA since, regardless of the SAFTA outcome, Sri Lanka 
already has FTAs with India and Pakistan. 
 
4. (C) On the negative lists, Weerasinghe said all sides are 
close to agreement, but that Sri Lanka is holding up final 
agreement, pending Bangladeshi movement on apparel 
rules-of-origin.  Bangladesh has reportedly requested a 
reduction in value-addition requirements on apparel from the 
40 percent SAFTA standard to 20 percent.  Sri Lanka would be 
willing to discuss 35 percent, but could not go to 20 
percent, given the interests of their own domestic industry, 
Weerasinghe commented. 
 
5. (C) Under the compensation mechanism, India, Pakistan and 
Sri Lanka would agree to compensate the SLDCs for customs 
revenue lost to SAFTA-related trade liberalization.  Sri 
Lanka has complained about this provision of the agreement 
for months, concerned that any potential gains from increased 
trade would be offset by compensation requirements. 
Weerasinghe praised India for coming up with a complex but 
thorough formula that would separate SAFTA trade from 
rest-of-the-world trade, and calculate revenue loss based on 
SAFTA tariff reduction formulas.  Weerasinghe thought they 
were close to agreement, but Bangladesh began requesting the 
removal of caps on compensation liability (which would be 
established based on the tariff cutting formulas for SLDCs 
under SAFTA) and additional compensation based on "trade 
diversion."  Under the trade diversion argument, Weerasinghe 
explained, as trade is diverted from higher rate countries in 
the rest of the world to the lower tariff SAFTA nations, 
Bangladesh believes compensation should be based on the 
post-diversion SAFTA share of trade (which should potentially 
be higher than pre-SAFTA trade, based on lower SAFTA 
tariffs).  This is a non-starter for Sri Lanka. 
 
6. (C) Weerasinghe then launched into a short diatribe 
against Bangladeshi negotiators, indicating that they were 
intent on "hijacking" issues that were originally meant to 
help Maldives.  According to Weerasinghe, when he raised this 
point in the last round of meetings, Maldives also 
acknowledged that they were the original target beneficiary, 
and that the mechanisms were designed to allow time for 
Maldives, which is almost completely dependent on customs 
revenue, to construct a new domestic revenue package. 
 
7. (C) According to Weerasinghe, the final sticking point on 
the compensation mechanism could prove to be the 
implementation timeline.  Sri Lanka wants the mechanism to 
begin on entry-into-force of the agreement for three years, 
with an additional year for Maldives  (India and Pakistan 
reportedly agreed to a "four plus one" formula).  Bangladesh 
wants the mechanism to begin in 2007 (to take into account 
the trade diversion situation) and to run for seven years. 
 
8. (C) Econchief laid out US interests in SAFTA moving 
forward, focusing on the importance of increased regional 
trade for economic development and more harmonious regional 
relationships.  Weerasinghe said that those same issues were 
the driving force for a January 1 conclusion.  He remained 
hopeful that such an accomplishment is still possible. 
Weerasinghe believes Bangladesh will ultimately cave on its 
demands, as participants to the SAARC Summit in Dhaka on 
November 12 will put pressure on Bangladesh to ensure a 
successful summit conclusion. 
 
India Showing More Creative Leadership on Trade Issues 
--------------------------------------------- --------- 
 
9. (C) Weerasinghe expressed great satisfaction with Indian 
leadership on the SAFTA process, noting that they seemed to 
be driven more by international perception than by economic 
factors.  India wants to show that it can conclude a regional 
agreement.  Weerasinghe implied that India believes failure 
to do so would reflect badly on their aspirations in global 
fora.  He said India has proposed a number of far-reaching 
initiatives, such as a regional economic union (Weerasinghe 
suggested that a Customs Union would be a more appropriate 
first step, and complex enough as a task, given the 
difficulties with SAFTA negotiations).  India has also 
proposed ideas such as linking the Indian and Sri Lankan 
rupee, allowing the countries to engage in greater 
rupee-denominated trade, thus protecting foreign exchange 
reserves.  While none of these ideas seemed to be high on 
Weerasinghe's "to do" list, he was nonetheless impressed with 
India's initiatives. 
 
10. (C) Weerasinghe said there has been pressure to conclude 
the CEPA agreement by January 1, but he believes an 
additional round of meetings will be needed in January to 
finalize.  The rate of progress could depend on the Sri 
Lankan Presidential elections, however.  Weerasinghe believes 
if Opposition Leader Ranil Wickremesinghe wins, the pressure 
to conclude the CEPA immediately will be strong. 
 
WTO: Tough Issues, Doha Looks Difficult 
--------------------------------------- 
 
11. (C) On the WTO, Weerasinghe, who has previously served as 
Sri Lanka's Representative to the WTO in Geneva, was far more 
reserved, seeming almost unaware of some of the bigger 
issues.  When Econchief pressed on the EU agricultural 
proposals from Ref A, Weerasinghe merely nodded and 
acknowledged the situation seems to be "mucked up."  He said 
he has been reading more about the proposals and thinks 
coming to an agreement in December in Hong Kong will be 
difficult. 
 
12. (C) There could be two issues at play here.  First, 
Weerasinghe is angling to become Sri Lanka's Ambassador to 
the EU, so he may not want to insert himself into a US-EU 
spat at this juncture.  In previous conversations, he has 
suggested that he would instruct their current rep in Geneva 
to raise the issue (Ref B).  Secondly, as in previous 
discussions on WTO issues, Sri Lanka appears to take a more 
defensive posture, giving its WTO rep in Geneva wide 
latitude, and looking out for initiatives that could harm 
their interests and trying to engage with like-minded 
countries on those. 
 
Comment 
------- 
 
13. (C) Weerasinghe is knowledgeable, experienced and a 
helpful interlocutor on trade matters.  If his comments on 
SAFTA are accurate, then it appears things are moving 
forward, except for some problematic issues with the 
Bangladeshis.  It's interesting to see how Sri Lanka has 
become more passive on the WTO, however, from its role in 
Cancun, where it was recognized as having made efforts to 
keep the talks, and thus the round, on track.  Weerasinghe 
alluded to some dissatisfaction with the US and EU at the 
political level in Sri Lanka, and noted that the Trade 
Minister had asked him to draft "tough remarks" for the Hong 
Kong Ministerial, so he could take aim at the US and EU, who 
are "always asking us to do things, but never giving in 
return" (Note: in the case of the US, this is clearly a 
reference to Sri Lankan desire for either an FTA, or duty 
free access for apparel. End note).  Weerasinghe said the 
Minister's ire has waned of late, however, as he thinks if 
his party wins the upcoming presidential elections, he will 
move to a different portfolio (should the opposition win, he 
will be out completely).  End Comment 
LUNSTEAD