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

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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

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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

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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