US embassy cable - 03COLOMBO1161

UNCLAS SECTION 01 OF 02 COLOMBO 001161 
 
SIPDIS 
 
DEPT PLEASE PASS TO USTR 
TREASURY FOR GRAO 
DOC FOR ITA:  ABENAISSA, LDROKER 
 
E.O. 12958:  N/A 
TAGS: ECON, EINV, ETRD, CE, ECONOMICS 
SUBJECT:  FTA'S DOMINATE SRI LANKA'S TRADE POLICY 
 
Refs:  (A) Colombo 1146, (B) Colombo 772 
 
1.  Summary:  The Government of Sri Lanka (GSL) is 
in the process of developing a coherent trade 
policy, focused on increasing market access for Sri 
Lankan goods through free trade agreements.  Two US 
Representatives who recently were in Sri Lanka on a 
private visit sponsored by a local business chamber 
(to be reported septel) heard much about GSL's 
ambitious plans for negotiating FTAs.  Aiming to 
create economic growth and ease the adjustment to 
the post-Multi-Fiber Agreement (MFA) world, the GSL 
wants Sri Lanka to become the region's trading hub, 
connected through a series of bilateral 
arrangements.  Sri Lanka is now deepening economic 
ties with India under a comprehensive economic 
partnership and is looking in other directions, 
especially toward the US.  End Summary. 
 
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Sri Lanka aims for 30 FTAs... 
----------------------------- 
 
2.  On June 26, in an interview with "Daily News," 
Sri Lanka's Commerce Minister said he wanted to 
sign over 30 FTAs, with countries primarily in SE 
Asia and the Middle East.  These agreements are 
intended to help combat the negative impact of the 
termination of the MFA, which favors Sri Lanka by 
limiting external competition to its all-important 
apparel exports. Heavily dependent on exports, Sri 
Lankans are worried by the free trade arrangements 
and concessions which allow other low-income 
countries quota- and tariff-free access to some 
developed markets, especially the EU. 
 
3.  The GSL hopes to utilize FTAs and the country's 
strategic location to become a regional hub for 
trade, manufacturing and transport.  Emphasizing 
Sri Lanka's advantages to British investors in 
London last week, Prime Minister Ranil 
Wickremesinghe referred to trade liberalization as 
one of the key pillars of his government's economic 
reforms program.  He said that Sri Lanka's goal is 
to reduce barriers and maximize access to key 
markets throughout the region and the world.  He 
also reiterated the Government's interest in 
pursuing multiple free trade agreements. 
 
4.  INDO-LANKA FTA:  Sri Lanka's first free trade 
arrangement, the Indo-Lanka Free Trade Agreement 
(ILFTA), covering only goods, has been in operation 
since March 2000.  Although the agreement has 
doubled two-way trade between India and Sri Lanka 
to almost $1 billion, it is far from a perfect FTA, 
being flawed by large negative lists on each side 
(see ref B for a fuller assessment of the 
agreement).  Planning to expand the ILFTA, the 
Prime Ministers of the two countries met in March, 
and agreed in principle to enter into an Economic 
Partnership Agreement (EPA).  Currently, an Indo- 
Lanka Study group is exploring areas of cooperation 
including trade in services, investment, IPR 
protection, electronic trade, trade facilitation, 
and movement of persons in order to formulate a 
framework agreement. 
 
5.  OTHER FTAS:  In addition to the ILFTA, talks are 
getting underway for FTAs with Pakistan and Egypt. 
(The Egyptian Ambassador told us the last trade 
talks with Sri Lanka had taken place six years ago 
but said the current Commerce Minister was eager to 
get a new round started.)  Pakistan and Sri Lanka 
have already signed a framework agreement, but 
conclusion of the final agreement has been delayed 
due to disagreement over access of agricultural 
commodities.  Sri Lanka also plans to discuss an 
FTA with Bangladesh.  Working regionally, Sri Lanka 
actively participates with Bangladesh, India, 
Myanmar, and Thailand (together, the so-called 
BIMST grouping) in an effort to create a free trade 
agreement among BIMST-Economic Commission 
countries.  In June, the group held negotiations in 
Colombo on a draft framework agreement for a BIMST 
area-FTA.  This agreement is expected to be signed 
at the next meeting of BIMST heads of state in 
February 2004.  According to sources at the Sri 
Lankan Department of Commerce (DOC), most of the 
other FTAs are still in conceptual stage. 
 
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...as SAARC trade liberalization stalls 
--------------------------------------- 
 
6.  These attempts to open markets through other 
trade agreements, especially the ILFTA, show the 
lack of progress on a South Asia Free Trade 
Agreement (SAFTA) mooted by South Asian Association 
for Regional Cooperation (SAARC).  For the past 
several years, the South Asian nations have been 
formulating a framework agreement for a SAFTA, 
originally planned to come into effect by 2005. 
According to DOC sources, SAARC officials will meet 
in Nepal later in July in a bid to finalize a 
framework agreement. 
 
7.  Meanwhile, the success of South Asian 
Preferential Trade Arrangement (SAPTA), the 
precursor to SAFTA, which came into force in 
December 1995, has also been limited.  After three 
rounds of negotiations, SAPTA covers only about 10% 
of tariff lines.  This is perhaps because no 
country has seriously considered promoting intra- 
regional trade by including most traded commodities 
under the agreement.  The exchange of tariff 
concessions under SAPTA came to a standstill from 
1998-2001, due to political problems between India 
and Pakistan, two key members of SAARC.  The fourth 
round of SAPTA talks was held in December 2001 but 
member countries are yet to exchange tariff 
concessions agreed at this round. 
 
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But a US FTA would set a new standard 
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8.  While pursuing new markets through free trade 
arrangements, the GSL is anxious to move forward 
with the US Trade and Investment Framework 
Agreement (TIFA) process and on to a comprehensive 
FTA.  From the GSL point of view, a FTA with US is 
vitally important to stay competitive in its 
largest export market.  Unlike its other regional 
and bi-lateral agreements, however, the higher 
standards and more comprehensive nature of a US FTA 
will require that Sri Lanka overhaul its regulatory 
regime and practices.  As described in ref A, Sri 
Lanka is beginning to understand just how high US 
standards are for FTAs, as it studies the Singapore 
and Chile texts as possible models. 
 
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Comment 
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9.  Given this nation's dependence on trade, as 
well as its ongoing reform agenda, relatively open 
market and small size, Sri Lanka appears to be the 
South Asian nation best suited to become a free 
trade hub.  While GSL may intellectually understand 
the level of liberalization required under a US 
FTA, it will need to prove it has the capacity and 
political will to carry out the necessary reforms. 
In particular, the government will need to lower 
tariffs and further open the agriculture and 
services markets, as well as improve intellectual 
property protection, transparency and the 
regulatory regime.  An FTA with the US would also 
establish new standards for the labor and 
environment sectors.  Meanwhile, Sri Lanka's 
efforts to conclude more limited agreements 
continue. 
 
CAMP