SCENESETTER FOR DEPUTY USTR HUNTSMAN'S NOVEMBER

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
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
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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
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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
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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
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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
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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