FTA'S DOMINATE SRI LANKA'S TRADE POLICY

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...
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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
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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