Identifier
Created
Classification
Origin
05COLOMBO1899
2005-11-03 03:48:00
CONFIDENTIAL
Embassy Colombo
Cable title:  

SRI LANKA SEES POTENTIAL FOR SAFTA, BUT HEDGING

Tags:  ETRD ECON CE ECONOMICS 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 COLOMBO 001899 

SIPDIS

DEPT FOR SA/INS: MGOWER/CSIM;
DEPT PASS USTR
TREASURY FOR SCHUN;
MCC FOR DNASSIRY AND EBURKE

E.O. 12958: DECL: 11/02/2015
TAGS: ETRD ECON CE ECONOMICS
SUBJECT: SRI LANKA SEES POTENTIAL FOR SAFTA, BUT HEDGING
WITH ENHANCED INDIA PACT; LESS ENGAGED ON WTO

REF: A. STATE 199861

B. COLOMBO 1842

Classified By: Econchief Dean R. Thompson, Reasons 1.4 b, d and e

C O N F I D E N T I A L SECTION 01 OF 03 COLOMBO 001899

SIPDIS

DEPT FOR SA/INS: MGOWER/CSIM;
DEPT PASS USTR
TREASURY FOR SCHUN;
MCC FOR DNASSIRY AND EBURKE

E.O. 12958: DECL: 11/02/2015
TAGS: ETRD ECON CE ECONOMICS
SUBJECT: SRI LANKA SEES POTENTIAL FOR SAFTA, BUT HEDGING
WITH ENHANCED INDIA PACT; LESS ENGAGED ON WTO

REF: A. STATE 199861

B. COLOMBO 1842

Classified By: Econchief Dean R. Thompson, Reasons 1.4 b, d and e


1. (C) Summary: During a wide ranging discussion with
Econchief, Sri Lankan Commerce Ministry Director General K.N.
Weerasinghe (Note: Weerasinghe is Sri Lanka's senior-most
career trade official) said that a successful conclusion to
the South Asia Free Trade Agreement (SAFTA) talks was close,
but hinged on Bangladesh's willingness to show more
flexibility in the talks and stop "hijacking" SAFTA
less-developed country (SLDC) issues originally designed to
benefit Maldives. Weerasinghe believes a Comprehensive
Economic Partnership Agreement (CEPA) with India can be
forged by late January, which will expand the current
Indo-Lanka FTA. On WTO Weerasinghe was less forthcoming, and
previous attempts to engage on WTO issues lead us to believe
that Sri Lanka tends to "play defense" on WTO issues from
Colombo, leaving their WTO rep in Geneva with fairly wide
latitude and engaging only on the most immediate issues that
might have negative repercussions on Sri Lankan welfare. End
Summary


2. (C) Econchief met with Sri Lankan Commerce Ministry
Director General K.N. Weerasinghe, Sri Lanka's senior-most
career trade official, on November 2. In a wide ranging
discussion, Weerasinghe touched on Sri Lankan trade strategy
and opinions related to SAFTA, Indo-Lanka trade and the WTO.

SAFTA: CLOSE, BUT BANGLADESHI INITIATIVES GETTING TEDIOUS
-------------- --------------


3. (C) When queried about the status of the SAFTA
negotiations, Weerasinghe indicated that he refused to attend
talks last weekend in Nepal, as Bangladesh and Maldives were
unwilling to offer new concessions on issues related to rule
of origin and the "compensation mechanism" (Note: the
compensation mechanism is a SAFTA-specific initiative to
reimburse SLDCs for customs revenue lost to trade
liberalization. End note). Weerasinghe said three main
sticking points remain on SAFTA: the negative lists, the
rules of origin question on apparel (which are linked to the

negative list issue),and the compensation mechanism. He
suggested that Sri Lanka is relaxed about the potential for
SAFTA since, regardless of the SAFTA outcome, Sri Lanka
already has FTAs with India and Pakistan.


4. (C) On the negative lists, Weerasinghe said all sides are
close to agreement, but that Sri Lanka is holding up final
agreement, pending Bangladeshi movement on apparel
rules-of-origin. Bangladesh has reportedly requested a
reduction in value-addition requirements on apparel from the
40 percent SAFTA standard to 20 percent. Sri Lanka would be
willing to discuss 35 percent, but could not go to 20
percent, given the interests of their own domestic industry,
Weerasinghe commented.


5. (C) Under the compensation mechanism, India, Pakistan and
Sri Lanka would agree to compensate the SLDCs for customs
revenue lost to SAFTA-related trade liberalization. Sri
Lanka has complained about this provision of the agreement
for months, concerned that any potential gains from increased
trade would be offset by compensation requirements.
Weerasinghe praised India for coming up with a complex but
thorough formula that would separate SAFTA trade from
rest-of-the-world trade, and calculate revenue loss based on
SAFTA tariff reduction formulas. Weerasinghe thought they
were close to agreement, but Bangladesh began requesting the
removal of caps on compensation liability (which would be
established based on the tariff cutting formulas for SLDCs
under SAFTA) and additional compensation based on "trade
diversion." Under the trade diversion argument, Weerasinghe
explained, as trade is diverted from higher rate countries in
the rest of the world to the lower tariff SAFTA nations,
Bangladesh believes compensation should be based on the
post-diversion SAFTA share of trade (which should potentially
be higher than pre-SAFTA trade, based on lower SAFTA
tariffs). This is a non-starter for Sri Lanka.


6. (C) Weerasinghe then launched into a short diatribe
against Bangladeshi negotiators, indicating that they were
intent on "hijacking" issues that were originally meant to
help Maldives. According to Weerasinghe, when he raised this
point in the last round of meetings, Maldives also
acknowledged that they were the original target beneficiary,
and that the mechanisms were designed to allow time for
Maldives, which is almost completely dependent on customs
revenue, to construct a new domestic revenue package.


7. (C) According to Weerasinghe, the final sticking point on
the compensation mechanism could prove to be the
implementation timeline. Sri Lanka wants the mechanism to
begin on entry-into-force of the agreement for three years,
with an additional year for Maldives (India and Pakistan
reportedly agreed to a "four plus one" formula). Bangladesh
wants the mechanism to begin in 2007 (to take into account
the trade diversion situation) and to run for seven years.


8. (C) Econchief laid out US interests in SAFTA moving
forward, focusing on the importance of increased regional
trade for economic development and more harmonious regional
relationships. Weerasinghe said that those same issues were
the driving force for a January 1 conclusion. He remained
hopeful that such an accomplishment is still possible.
Weerasinghe believes Bangladesh will ultimately cave on its
demands, as participants to the SAARC Summit in Dhaka on
November 12 will put pressure on Bangladesh to ensure a
successful summit conclusion.

India Showing More Creative Leadership on Trade Issues
-------------- --------------


9. (C) Weerasinghe expressed great satisfaction with Indian
leadership on the SAFTA process, noting that they seemed to
be driven more by international perception than by economic
factors. India wants to show that it can conclude a regional
agreement. Weerasinghe implied that India believes failure
to do so would reflect badly on their aspirations in global
fora. He said India has proposed a number of far-reaching
initiatives, such as a regional economic union (Weerasinghe
suggested that a Customs Union would be a more appropriate
first step, and complex enough as a task, given the
difficulties with SAFTA negotiations). India has also
proposed ideas such as linking the Indian and Sri Lankan
rupee, allowing the countries to engage in greater
rupee-denominated trade, thus protecting foreign exchange
reserves. While none of these ideas seemed to be high on
Weerasinghe's "to do" list, he was nonetheless impressed with
India's initiatives.


10. (C) Weerasinghe said there has been pressure to conclude
the CEPA agreement by January 1, but he believes an
additional round of meetings will be needed in January to
finalize. The rate of progress could depend on the Sri
Lankan Presidential elections, however. Weerasinghe believes
if Opposition Leader Ranil Wickremesinghe wins, the pressure
to conclude the CEPA immediately will be strong.

WTO: Tough Issues, Doha Looks Difficult
--------------


11. (C) On the WTO, Weerasinghe, who has previously served as
Sri Lanka's Representative to the WTO in Geneva, was far more
reserved, seeming almost unaware of some of the bigger
issues. When Econchief pressed on the EU agricultural
proposals from Ref A, Weerasinghe merely nodded and
acknowledged the situation seems to be "mucked up." He said
he has been reading more about the proposals and thinks
coming to an agreement in December in Hong Kong will be
difficult.


12. (C) There could be two issues at play here. First,
Weerasinghe is angling to become Sri Lanka's Ambassador to
the EU, so he may not want to insert himself into a US-EU
spat at this juncture. In previous conversations, he has
suggested that he would instruct their current rep in Geneva
to raise the issue (Ref B). Secondly, as in previous
discussions on WTO issues, Sri Lanka appears to take a more
defensive posture, giving its WTO rep in Geneva wide
latitude, and looking out for initiatives that could harm
their interests and trying to engage with like-minded
countries on those.

Comment
--------------


13. (C) Weerasinghe is knowledgeable, experienced and a
helpful interlocutor on trade matters. If his comments on
SAFTA are accurate, then it appears things are moving
forward, except for some problematic issues with the
Bangladeshis. It's interesting to see how Sri Lanka has
become more passive on the WTO, however, from its role in
Cancun, where it was recognized as having made efforts to
keep the talks, and thus the round, on track. Weerasinghe
alluded to some dissatisfaction with the US and EU at the
political level in Sri Lanka, and noted that the Trade
Minister had asked him to draft "tough remarks" for the Hong
Kong Ministerial, so he could take aim at the US and EU, who
are "always asking us to do things, but never giving in
return" (Note: in the case of the US, this is clearly a
reference to Sri Lankan desire for either an FTA, or duty
free access for apparel. End note). Weerasinghe said the
Minister's ire has waned of late, however, as he thinks if
his party wins the upcoming presidential elections, he will
move to a different portfolio (should the opposition win, he
will be out completely). End Comment
LUNSTEAD