SRI LANKA: DEPUTY USTR HUNTSMAN PUSHES FURTHER

C O N F I D E N T I A L SECTION 01 OF 04 COLOMBO 002194

SIPDIS

STATE PASS USTR FOR DEPUTY USTR AMBASSADOR HUNTSMAN

E.O. 12958: DECL: 11/26/2012
TAGS: ETRD ECON EINV CE USTR ECONOMICS
SUBJECT: SRI LANKA: DEPUTY USTR HUNTSMAN PUSHES FURTHER
LIBERALIZATION


Classified By: Charge d'Affaires W. Lewis Amselem. Reasons:
1.5 (b, d)


1. (U) Summary: Deputy U.S. Trade Representative Ambassador
Jon M. Huntsman Jr. used his November 19-22 visit to Sri
Lanka to push the GSL to move forward with key economic
reforms. He delivered this message during separate meetings
with President Kumaratunga, Prime Minister Wickremesinghe and
G.L. Peiris, Minister of Enterprise Development. Ambassador
Huntsman also engaged leading business representatives to
hear their concerns on Sri Lanka's investment climate and the
threat to the apparel industry post 2004. The visit
succeeded in focusing the GSL on the steps it needs to take
to enhance its trade relationship with the U.S. End Summary.

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First TIFA Meeting
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2. (U) Deputy U.S. Trade Representative Ambassador Jon M.
Huntsman Jr. visited Sri Lanka November 19-22 to take part in
the first meeting of the U.S. - Sri Lankan Joint Council on
Trade and Investment established under the bilateral Trade
and Investment Framework Agreement (TIFA). He was
accompanied by Elena Bryan, USTR Senior Director for
Southeast Asia and the Pacific. The Joint Council meeting,
which consumed most of the first full day of the visit, will
be reported septel.

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The President on her economic record, LTTE misdeeds
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3. (U) Ambassador Huntsman called on President Kumaratunga
November 21 at her official residence. He was accompanied by
Ambassador Wills and Econoff (notetaker). Former Foreign
Minister Lakshman Kadirgamar and Ambassador-designate to the
U.S. Davinda Subasinghe were also present.


4. (C) Ambassador Huntsman opened the meeting by affirming
U.S. interest in expanding the bilateral trade relationship.
With peace on the horizon and a government in place that is
pursuing further economic reform, he said, a new era is
dawning in Sri Lanka. Kumaratunga then launched a long and
discursive apologia of her administration's economic reform
efforts. Every economic initiative the current government is
pursuing, she claimed, started with her: from privatization
to infrastructure development to regional FTAs and the plan
for reconstructing the North/East. Kumaratunga struck a
statesman-like tone as she described how the government of
the Prime Minister was carrying out her vision of Sri Lanka
as a hub for South Asian trade. Ambassador Huntsman replied
that her cooperation on the current government's economic
reform plan was vital to the prospects for renewed economic
growth in Sri Lanka.


5. (C) As the discussion shifted toward the peace process,
however, Kumaratunga's conciliatory tone toward the Prime
Minister and his government grew more venomous. Ambassador
Huntsman asked her what sort of peace dividend she expected
for the nation. Kumaratunga said there would be a big peace
dividend - provided peace is achieved. Based on the actions
of the LTTE, she was not sure that peace was imminent for Sri
Lanka. The LTTE, she said, is breaking the Memorandum of
Understanding (MoU) signed with the GSL at will, and the
Prime Minister is allowing them to do so with impunity. She
repeatedly listed LTTE misdeeds she claimed were still going
on today - recruitment of soldiers (including children),
opening of new training camps and importation of arms.
"These things," she added cryptically, "I don't know about
officially," implying that her own intelligence sources were
keeping her informed, in spite of deceptions by the Prime
Minister and his government.


6. (C) Ambassador Wills countered that the LTTE were under
great pressure from the people of the North/East - those whom
the LTTE claims as constituents - to uphold the peace
process. Kumaratunga agreed that this was a positive factor
that had not been present to the same extent in previous
attempts at peace. That is why, she said, we need
development of the North/East as soon as possible - to "win
the hearts and minds of the Tamil people." Nonetheless,
Kumaratunga added, LTTE leader Prabhakaran is "obsessed" with
the idea of a separate state, and it is "very dangerous" to
proceed in the absence of a formal political solution. The
Prime Minister's strategy of engaging the LTTE without
addressing the "core issues" (devolution of power,
de-mobilization) would be fine if the LTTE were adhering to
the terms of the MoU, but they are not. Ambassador Huntsman
pressed Kumaratunga, asking if her doubts about the peace
process meant that foreign investors should "wait and see"
before coming into Sri Lanka. She said, again cryptically,
"No. As a Sri Lankan I must say the foreign investors should
come in now."

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The Prime Minister on trade, WTO
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7. (U) Ambassador Huntsman also called on Prime Minister
Ranil Wickremesinghe November 21 in his office at Temple
Trees. Ambassador Huntsman was accompanied by Ambassador
Wills, USTR Senior Director Bryan and Econoff (notetaker).
From the Sri Lankan Embassy in Washington,
Ambassador-designate Subasinghe and Commercial Minister Saman
Udagedara were also present.


8. (U) Ambassador Huntsman began by remarking that the
previous day's TIFA meeting had gone well and was a good
first step toward strengthening bilateral trade and
investment. Ambassador Huntsman highlighted the large $1.8
billion trade deficit in Sri Lanka's favor, saying he saw it
not as a threat but as an opportunity. Wickremesinghe,
clearly briefed on the TIFA meeting, proceeded to list
several new areas where U.S. companies could do business in
Sri Lanka. On agri-business, he promised the GSL would make
large tracts of land available to U.S. companies under
long-term (99 year) freehold leases. He promised to re-start
the stalled proposal by U.S. firm IMC Agrico (the so-called
"Eppawala" project) to mine phosphate in north-central Sri
Lanka, a potential $400 million investment. Wickremesinghe
also vowed not to restrict the import of biotech foods into
Sri Lanka, saying such a move would hurt his efforts to
develop a local biotechnology industry.


9. (U) Turning to WTO matters, Ambassador Huntsman asked for
Sri Lankan cooperation in the Doha Development Agenda.
Working together in the WTO, he said, was a key way to
enhance the bilateral relationship. Wickremesinghe assured
Ambassador Huntsman that as a trade dependent nation, Sri
Lanka also had an interest in seeing the Doha round succeed.
Ambassador Huntsman pressed on agriculture, noting that the
U.S. saw great danger in a "two-track" system, one for
developed economies and one for developing economies. "We
don't want a two-track system either," Wickremesinghe said;
we just want enough of a transition period to allow us to
shift out of subsistence agriculture. Ambassador Huntsman
underscored that Sri Lanka's early cooperation on these
issues was vital; we must work hard to meet the deadlines we
have set for ourselves in the WTO.

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G.L. Peiris on peace and economic development
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10. (U) Hunstman also met with Minister G.L. Peiris on
November 21, accompanied by USTR Senior Director Bryan and
Econoff (notetaker). (Note: Peiris' duties in the government
extend well beyond is official title of Minister of
Enterprise Development, Industrial Policy and Investment
Promotion. Peiris is also government spokesman, as well as
head of the GSL delegation to peace talks with the LTTE. End
Note.) Ambassador Huntsman began by saying that Sri Lanka is
on the verge of a virtuous cycle, whereby peace encourages
foreign investment, which in turn bolsters peace. The U.S.,
he said, sees great potential for American companies in Sri
Lanka in a variety of sectors - from infrastructure to
services to information technology. Peiris agreed that peace
and economic development are closely linked, adding that a
lack of economic growth could ultimately threaten the peace
process. Ambassador Huntsman queried Peiris on whether the
peace process was sufficiently advanced for U.S. companies to
enter Sri Lanka in a big way. Yes, Peiris said: the de facto
situation on the ground is the only one that matters, and
peace reigns right now in Sri Lanka. We should not worry
about the minutiae of a political settlement to the ethnic
conflict, nor should the foreign investor.

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Business leaders on investment climate, post quota world
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11. (U) In a working lunch hosted by the American Chamber of
Commerce, Ambassador Huntsman elicited the views of senior
AmCham members on the investment climate in Sri Lanka.
Overall, U.S. companies described the climate as positive -
few restrictions on imports, a talented and literate labor
force and a Board of Investment that truly streamlines
investment approvals. AmCham members had several concerns,
though. All members agreed that Sri Lanka's rigid labor
laws, especially restrictions on termination, are in need of
reform. Members said that the GSL was moving toward positive
changes, but hoped for faster progress on a flexible
Termination Act. Some members also expressed frustration at
persistent capital and current account restrictions, which
increase the cost of international transactions. Ambassador
Huntsman underscored that one of the central goals of the
TIFA was to improve the atmosphere for U.S. companies doing
business in Sri Lanka. Doing so would increase trade and
investment in both directions. He asked AmCham reps to
continue to offer input to the TIFA process, so that Sri
Lanka could move faster toward openness and transparency.


12. (U) Ambassador Huntsman also engaged leading Apparel
Exporters about their concerns as they near the expiration of
the Multi Fiber Agreement at the end of 2004. Ambassador
Huntsman began by acknowledging the importance of the apparel
industry (55% of total exports) to the Sri Lankan economy.
But, he said, the U.S. believes strongly that Sri Lanka needs
to diversify its economy, particularly its export base, to
ensure strong economic growth in the coming years. The
apparel exporters queried Ambassador Huntsman on what the
industry needed to do to stay competitive post 2004. He
offered that the competitive threat from China might not be
as big as many now forecast, because most U.S. buyers will
want to diversify their supply-base. Furthermore, Sri
Lanka's investment in high labor standards will differentiate
it from many other apparel exporting countries in the region,
especially as compliance issues become increasingly important
to the apparel buyer and consumer. Still, Ambassador
Huntsman stressed, increased efforts to diversify out of
apparel are clearly in the interest of Sri Lanka's economic
development.

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Press highlights closer trade ties
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13. (U) Ambassador Huntsman's visit generated lavish press
coverage. A November 18 Embassy press release announcing his
visit appeared in independent and government-owned dailies,
both English and vernacular, under headings such as "American
trade representative to meet Sri Lankan business leaders,"
"American deputy in trade is visiting Sri Lanka," "US deputy
trade rep here," and "Special American envoy in Sri Lanka
this week." On November 20 he starred on "In Black and
White," an interview-format television program hosted by Sri
Lanka's Minister of Economic Reform Milinda Moragoda and
shown on Sri Lanka's MTV, an independent telecaster with
national penetration. On November 21 Ambassador Huntsman and
Ambassador Wills convened a press conference for Sri Lanka's
business, commercial and finance journalists. The conference
resonated in English and vernacular newspapers throughout the
weekend. "Framework trade agreement signifies USA's
attachment to SL" said the ISLAND (opposition English daily).
LAKBIMA (independent Sinhala daily) quoted Ambassador
Huntsman: "Both countries will benefit by the implementation
of the Sri Lanka-US Trade agreement." Headlines in the DAILY
MIRROR (independent English daily) said "Peace alone will not
make Sri Lanka competitive" and "US participation a boost to
Sri Lanakan peace." The government-owned English DAILY NEWS
ran headlines such as "TIFA signifies USA's attachment to
Lanka as trade partner" and "US keen on Lanka's
infrastructure development - Huntsman." And the government
owned weekly, the SUNDAY OBSERVER, said "Lanka gets closer to
FTA with USA."

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Comment
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14. (U) The U.S. consumes 40% of Sri Lanka's annual exports
and constitutes by far this nation's most important trade
relationship. Our commercial interests here are small by
comparison, with $200 million in annual exports and only
modest U.S. investment. Yet Ambassador Huntsman's visit
demonstrated to GSL, and to the Sri Lankan business
community, that the U.S. sees great trade potential in a
peaceful Sri Lanka - if the nation aggressively pursues
further liberalization. Ambassador Huntsman delivered the
message at the highest levels of government that the U.S.
seeks to foster competition in liberalization throughout
South Asia, with Sri Lanka setting the standard for its
neighbors to follow. For GSL - which wants an enhanced trade
relationship with the U.S. - the path forward is now clearly
marked.

AMSELEM