SCENESETTER FOR THE VISIT OF COMMERCE A/S LASH TO

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


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Executive Summary
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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.

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Promoting U.S. Exports
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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.

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Improving the Investment Climate
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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.

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Conclusion: South Asia and the Bigger Picture
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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