Cablegate: Sri Lanka Prepares for Post-Quota World

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 COLOMBO 001740

SIPDIS

STATE PLEASE PASS TO USTR: EBRYAN
DOC FOR JFERNANDEZ

E.O. 12958: N/A
TAGS: ETRD KTEX EAID CE USTR ECONOMICS
SUBJECT: SRI LANKA PREPARES FOR POST-QUOTA WORLD

Ref: (A) State 160692 (B) Colombo 671

1. Summary: Well aware of the potential impact of the
expiration of the MFA on its number one export (apparel),
Sri Lankan players are beginning to explore their options,
ranging from special trade agreements with the US to
strengthening the domestic industry and diversifying the
export base. Post engaged major players in the garment
industry as requested in ref A and learned that two
important steps, a five-year strategy plan, and
establishment of a government/business working group have
been taken. These actions prove that Sri Lanka is not ready
to give up on its apparel industry yet. Creative thinking
on areas of engagement with the US, Sri Lanka's primary
market, has begun. End summary.

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TIFA NOW, FTA LATER
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2. Sri Lanka is unique among garment producing countries in
that it imports almost all fabric inputs (from Asian
sources), with negligible domestic production. Sri Lanka is
thus in a good position to argue for a bilateral FTA with
the U.S. based on a rule of origin on apparel, whereby
apparel exports to the U.S. would be duty free only if they
used U.S. fabric. Such an agreement could provide major
benefits to the U.S. textile industry, creating as much as
$600 million in new exports a year (see ref B). Sri Lanka
intends to use the recently signed Trade and Investment
Framework Agreement (TIFA) to make its case for an FTA. In
the interim, private business and government representatives
have voiced a commitment to investigate the possibility of
sourcing fabric from the US, hoping to win Section 809-like
treatment that would exempt the fabric portion of any
apparel exports from U.S. duty. Government sources,
including Secretary of Enterprise Development Ranjith
Fernando, said this consideration is now a priority since
the GSL realized a Free Trade Agreement with the US would
take several years.

3. The GSL is hopeful that it will get a sympathetic
hearing if it focuses on the benefits that would accrue to
the shrinking US fabric-producing industry. The possible
reduction of the 10:1 trade imbalance with the US is
recognized as another selling point. The government will
raise this issue with Deputy USTR Huntsman during his
planned visit later this year. It may also ask for benefits
to be extended based on the industry's high labor standards.
(Note: Though building domestic fabric mills is in the
Strategic Plan, the broad manufacturing community has not
endorsed this measure. End note.)

4. Garment manufacturers have also begun a discussion on the
competitiveness of US fabric, and suggested a catalog
show/trade fair and or visits of US fabric manufacturers be
organized to introduce American products to the Sri Lankan
market. The government, buyers and manufacturers are
investigating the economics of using dedicated air shipments
to reduce turnaround times. The Amcham is contemplating its
role in advocacy efforts.

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5-YEAR PLAN TO STRENGTHEN APPAREL INDUSTRY
------------------------------------------

5. Stakeholders in the industry (producers, buyers,
government ministries and customs) met earlier this year to
design a survival strategy for 2005 and beyond. The
resulting five-year strategic plan has five major
objectives: 1) increase apparel industry turnover from $2.3
billion to $4.5 billion by 2007, 2) transform the industry
from manufacturing to fully integrated service, 3) increase
penetration of premium market segments, 4) excel
internationally in certain product categories, and 5)
consolidate and strengthen the industry. It includes a
framework, initiatives and implementation scheme.

6. Steps identified in the plan are designated for
government, industry or firm level action. Government-level
actions would help across the entire spectrum of industries,
and are steps that should be taken in any case. These
include EDI facilities at the ports, lobbyists in key
markets, establishment of Chambers of Commerce, reform of
labor laws and development of infrastructure. Industry is
tasked with improving marketing and competitive
intelligence, while individual firms are encouraged to form
strategic partnerships and invest in human resource
management.

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DIVERSIFICATION
---------------

7. Sri Lanka's economy is heavily dependent on apparel
exports, which together represent 15% of GDP. USAID's
Competitiveness Initiative (TCI) is working with eight
"clusters," identified as Sri Lanka's highest potential
export sectors, to diversify the country's export base. The
GSL has praised TCI, and has created its own seven clusters,
modeled on USAID's. These fifteen sectors (excluding
garments) are expected to provide much of the economic
growth in the future. USAID is currently evaluating this
initiative and others related to competitiveness for future
funding. Other efforts to diversify the country's economic
base include a major international campaign to attract
investment into a variety of fields. Also, many company
representatives who remember International Executive Service
Corps's work here in the 1990s have welcomed the prospect of
USAID's revival of this program to provide firm-level
support. Both government and business representatives
appreciated learning about TDA and OPIC and said they would
explore options for utilizing these programs.

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COMMENT
-------

8. GSL and industry welcomed Embassy efforts to focus
attention on MFA expiration. Post sees merit in the Sri
Lankan proposal to use U.S. fabric inputs as the basis for a
bilateral free-trade agreement. Such an approach - with the
prospect for significant new business for U.S. textile
manufacturers - would fulfill the Textile Working Group's
dual objectives of supporting the U.S. textile industry
while minimizing the impact of 2005 on Sri Lanka. In the
meantime, Sri Lanka will welcome our continued assistance in
diversifying its export base.

Amselem

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