LOSS OF EU GSP-PLUS TRADE BENEFITS WOULD BE A

C O N F I D E N T I A L SECTION 01 OF 03 COLOMBO 001015 SENSITIVE SIPDIS E.O. 12958: DECL: 11/04/2019 TAGS: ECON ETRD PGOV EINV KTEX CE SUBJECT: LOSS OF EU GSP-PLUS TRADE BENEFITS WOULD BE A SIGNIFICANT BLOW TO SRI LANKAN GARMENT EXPORTERS REF: A. COLOMBO 976 ¶B. COLOMBO 967 COLOMBO 00001015 001.2 OF 003 Classified By: Deputy Chief of Mission Valerie Fowler, Reasons 1.4 (B) and (D). ¶1. (U) SUMMARY: The European Union granted Sri Lanka GSP-Plus trade benefits after the 2004 tsunami, and Sri Lanka has substantially increased its EU-bound exports. However, an EU Commission recommended on October 19 the withdrawal of the GSP-Plus benefits because its investigation found that the GSL has not met the international human rights commitments required of GSP-Plus beneficiary countries. The Sri Lankan apparel industry is particularly concerned about the economic impact of the withdrawal of GSP-Plus and is actively working to save the benefit. Industry insiders estimate the withdrawal could lead to as many as 150,000 jobs lost, with additional tariff requirements costing at least $120 million. On the other hand, the threat of the loss of GSP-Plus may serve as pressure on the GSL to accelerate IDP returns and take other steps to improve its human rights record. End Summary. TREMENDOUS IMPACT ¶2. (U) GSP-Plus offers 0 percent tariff rates for a range of products (including apparel, seafood, bicycles and footwear) from Sri Lanka (vice the 9.6 percent EU GSP rate for apparel). In place since 2005, GSP-Plus is a huge benefit to Sri Lankan exporters, particularly apparel exporters who operate on thin profit margins. Exports to the EU have increased from 1.6 billion euro in 2005 to roughly 2.2 billion euro in 2008, and are expected to increase another 3 percent in 2009 (despite the global financial crisis and the war in Sri Lanka). Apparel exports during the same period increased from 827 million euro to 1.2 billion euro. Indeed, the EU has surpassed the U.S. as the primary export market for Sri Lankan apparel under GSP-Plus, representing 51 percent of apparel exports. Of Sri Lanka's total EU-bound exports, roughly 60 percent enter tariff-free as a result of GSP-Plus. According to Mr. K.J. Weerasinghe, senior advisor at JAAF, Sri Lanka's main apparel trade organization, the withdrawal of GSP-Plus would have a "tremendous impact on the apparel industry and the Sri Lankan economy." (NOTE: Weerasinghe is a former Director General at the Sri Lankan Department of Commerce and a former Sri Lankan Ambassador in Geneva. END NOTE.) EUROPEAN COMMISSION RECOMMENDS WITHDRAWING GSP-PLUS ¶3. (U) The EU requires that all GSP-Plus beneficiary countries ratify and fully implement 27 international labor and human rights conventions. The Sri Lankan government has been accused of breaking three of the conventions, including the International Covenant on Civil and Political Rights, the Convention on Torture, and the Convention on the Rights of the Child, over the past several years. ¶4. (SBU) The EU Commission recommended withdrawal of Sri Lanka's GSP-Plus benefits on October 19. That report can be found at: http://trade.ec.europa.eu/doclib/docs/2009 /october/tradedoc 145152.pdf. The GSL has until November 6 to respond, at which point the report will be forwarded to the European Council. The Council has two months from the receipt of the report (expected sometime in December due to Council translation demands) to decide whether to accept the Commission's recommendations. Roshan Lyman, economic and trade advisor at the European Commission's (EC) mission in Sri Lanka, expects the Council to concur with the Commission's recommendation, as they have in past cases. Sri Lanka would then have six months to "rectify the situation." ROAD MAP TO SAVE GSP-PLUS ¶5. (C) Lyman and others anticipate that the European Council COLOMBO 00001015 002.2 OF 003 will provide the GSL with a "road map" of specific benchmarks that they much achieve to maintain the GSP-Plus benefit. Mark Gooding, British Deputy High Commissioner to Sri Lanka, noted that the issue "is really about the direction of steps taken by" the GSL. He suggested that there is wiggle room in meeting the set benchmarks. Others, however, have painted a much less political picture, indicating the steps the GSL must take will be "judicially observed" -- either the steps are accomplished fully, or they are not. Mr. Ashroff Oman, CEO of Brandix Lanka, a key apparel manufacturer in Sri Lanka with excellent contacts within the GSL, said that if the road map focuses on IDP returns, both the EU and the GSL would win as both sides want to resettle the IDPs. However, if the roadmap requires devolution of power (such as implementation of the 13th or 17th Amendments) then the GSL may refuse for political reasons. But as Bernard Savage, European Commissioner to Sri Lanka, recently stated, what happens next is up to the GSL and "the specific actions (to be) taken by the government determined by the report." DOUBLE WHAMMY ¶6. (SBU) Ms. Moji Akingbade, General Manager of Paxar Lanka (and AMCHAM President) primarily exports to the EU and opined that without GSP-Plus the additional tariff cost will be tough to build into garment prices and would have a "huge long-term impact." Although she is already looking at ways to further reduce costs with layoffs and other means, when coupled with the global recession the loss of GSP-Plus is a "double whammy" she likens to adding "salt to the wound." Others, like industry giant MAS Capital, which exports nearly 80 percent of its goods to the U.S., may fare better. Still, Jay Keller, Chief Information Officer for MAS, said the company's expected year-over-year growth of 15 percent would be completely wiped out should GSP-Plus be withdrawn. INDUSTRY ENGAGING TO SAVE GSP-PLUS ¶7. (SBU) Industry leaders have been engaging with senior members of the GSL to prevent the withdrawal of GSP-Plus. After Sri Lankan President Rajapaksa refused to allow the EC inspectors to enter the country to conduct their own investigation, the EC had to rely on already-available information such as UN reports (not considered third-party because the EC countries are also UN member states). The GSL has subsequently appointed a commission of four cabinet members charged with saving GSP-Plus. At the same time, GSL officials such as the Central Bank Governor are emphasizing publicly that GSP-Plus is not needed. Such statements may be intended to prepare the public if GSP-Plus is lost at the same time as the GSL prepares for spring parliamentary (and perhaps presidential) elections. The private sector points out the GSL appears to be increasing the number of IDP returnees and the GSL's attempts to focus investment in the former conflict region (see Ref A). Industry insiders are telling GSL leadership that the withdrawal of GSP-Plus could lead to as many as 150,000 jobs lost with additional tariff requirements costing at least $120 million -- a huge blow for a developing country. They are also looking at ways for friends in Europe to "shut this down." Following talks with Sri Lankan leadership, Sir Stuart Ross, chairman of Marks & Spencer (and a key purchaser of Sri Lankan products) stated on October 28 that "GSP-Plus is advantageous for the company and our customers and important for Sri Lanka." PREPARING FOR THE WORST ¶8. (U) As Moji Akingbade stated, if GSP-Plus is withdrawn Sri Lankan industry "will be looking to government for assistance." The GSL has said it will respond to industry concerns, suggesting ways it could "soften the blow." According to JAAF, the GSL will counter the loss in the short term, perhaps for four months or so, with an export incentives package to negate the 9.6 percent tariff on apparel. The Central Bank has already planned a package to COLOMBO 00001015 003.2 OF 003 support the industry (see Ref B). (NOTE: According to Brandix's Omar, this would be WTO compatible as a short-term strategy. END NOTE.) The GSL is also considering an exchange rate adjustment to ameliorate the hit. The GSL is also reportedly considering filing a case with the WTO, claiming that the action is discriminatory. ¶9. (U) Industry is also preparing for the worst. Sri Lankan companies plan to export more to Japan -- as yet a "relatively untapped market." Furthermore, if GSP-Plus is lost, it will no longer be necessary to source fabric from SAARC countries, allowing industry to cut costs by purchasing cheaper Chinese fabrics. With this in mind, local fabric mills are now looking to supply their wares to the U.S. and other markets. According to Brandix head Oman, buying cheaper fabrics and other cost-cutting measures should mitigate about 4 percent; the industry's profit margins will likely take a hit of about 2-3 percent; and buyers will have to absorb the remaining 2-3 percent at least over the medium-term. POTENTIAL NEGATIVE ECONOMIC IMPACT IN THE NORTH AND EAST ¶10. (SBU) Nearly all contacts expressed their worry that a downturn in the industry would mean reduced investment into the war-torn northern and eastern parts of the country as factories will not be built there while the industry contracts. MAS, for example, is investigating investment opportunities in the post-conflict zone. There are areas in the East where unused factories could be refurbished and used by MAS (and others) and the goods would then be shipped by boat to larger ships at the Port in Trincomalee. If the industry contracts, those new investment opportunities would be put on hold. COMMENT ¶11. (SBU) If GSP-Plus is lost, Sri Lankan exports will take a big hit despite mitigation measures, and there will be significant employment and economic losses. Post expects extensive lobbying by the GSL and European retailers to save GSP-Plus. At the same time, it appears that the prospect of the loss of the GSP-Plus benefits, as well as the appearance of the U.S. report on incidents during the war, is putting pressure on the GSL for results. The accelerating release of IDPs in the past weeks could be a direct result of this pressure, and we have also seen a decline in disappearances and extra-judicial killings. We will continue to encourage the GSL to do more to meet their international obligations. BUTENIS