US embassy cable - 02COLOMBO2315

UNCLAS SECTION 01 OF 03 COLOMBO 002315 
 
SIPDIS 
 
DEPT PLEASE PASS USTR 
 
NEW DELHI FOR A/S LASH FROM AMBASSADOR WILLS 
 
E.O. 12958:  N/A 
TAGS: ETRD, ECON, EINV, CE, USTR, ECONOMICS 
SUBJECT:  SCENESETTER FOR THE VISIT OF COMMERCE A/S LASH TO 
SRI LANKA 
 
 
----------------- 
Executive Summary 
----------------- 
 
1.  On behalf of the country team and the entire mission 
community, I extend to you a warm welcome in advance of your 
visit to Sri Lanka.  Your visit comes at an exciting time, 
with the government of Sri Lanka (GSL) making real progress 
toward its twin goals of peace and economic development. 
This is also a time of heightened U.S. engagement with Sri 
Lanka on multiple fronts, including trade and commercial 
matters; your visit, following closely on the successful 
visit of Deputy USTR Jon Huntsman last month, is a strong 
sign of our commitment to greater engagement with GSL. 
 
2.  Sri Lanka now faces 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 a third 
round of face-to-face talks, which are due to continue in the 
coming year.  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 domestic political 
pressures. 
 
3.  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 have 
been vocal about their desire to enter into FTA negotiations 
with us.  We, for our part, see the Trade and Investment 
Framework Agreement (TIFA) signed with GSL in July as a 
platform for enhancing our bilateral trade relationship.  As 
Deputy USTR Huntsman outlined during the first round of TIFA 
meetings here last month, we want to see GSL make real 
progress on economic reform and further opening its markets 
to U.S. goods.  Making these tough choices is the best way to 
strengthen Sri Lanka's economy and bolster the chances for 
long-term peace. 
 
4.  I see two main areas where your visit can advance our 
trade interests here. First, your visit 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, you can encourage GSL to 
make the difficult economic reforms necessary to improve the 
investment climate here.  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. 
End Executive Summary. 
 
---------------------- 
Promoting U.S. Exports 
---------------------- 
 
5.  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).  This success, 
however, has led to an over-dependence on the apparel sector 
for employment and economic growth.  GSL knows it needs to 
diversify its export base; your visit will reinforce the 
message that improving the local investment climate (see 
below) is a necessary first step in achieving this 
diversification. 
 
6.  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.  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.  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. 
 
-------------------------------- 
Improving the Investment Climate 
-------------------------------- 
 
9.  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.  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.  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, in the 
context of the 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. 
 
--------------------------------------------- - 
Conclusion:  South Asia and the Bigger Picture 
--------------------------------------------- - 
 
12.  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 help it assume this 
role. 
 
13.  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. 
 
14.  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 assume that role.  Creating 
competition in liberalization in South Asia, with Sri Lanka 
leading the way, would go a long way toward promoting our 
regional trade interests. 
 
WILLS