VZCZCXRO2494
RR RUEHBI RUEHLMC
DE RUEHLM #0735/01 2170931
ZNR UUUUU ZZH
R 040931Z AUG 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8496
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 2201
RUEHKA/AMEMBASSY DHAKA 1032
RUEHIL/AMEMBASSY ISLAMABAD 8026
RUEHKT/AMEMBASSY KATHMANDU 6200
RUEHKP/AMCONSUL KARACHI 2383
RUEHCG/AMCONSUL CHENNAI 8630
RUEHBI/AMCONSUL MUMBAI 6065
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION
UNCLAS SECTION 01 OF 02 COLOMBO 000735
SENSTIVE
SIPDIS
STATE FOR SCA/INS, SCA/PB AND EEB/CBA
COMMERCE FOR EROL YESIN
CHENNAI FOR FCS
E.O 12958: N/A
TAGS: ECON ETRD EAID CE PK
SUBJECT: Pakistan-Sri Lanka FTA Presents Opportunities for U.S.
Businesses
1. (U) Summary: Trade between Pakistan and Sri Lanka has increased
significantly following signing of the Pakistan-Sri Lanka Free Trade
Agreement in June 2005. Total trade in 2004 was valued at USD 147.4
million; by 2007 it grew to USD 233.4 million, an increase of 58
percent. As tariffs are reduced in coming years, trade is expected
to continue to grow. U.S. companies currently operating or
considering operations in Sri Lanka may take advantage of the FTA by
adding value to goods in Sri Lanka and exporting -- duty free -- to
the larger Pakistani market. End Summary.
Agreement Details
------------------
2. (U) Following an initial framework agreement in 2002 and several
rounds of bilateral negotiations, the Pakistan-Sri Lanka Free Trade
Agreement (FTA) was finalized in February 2005 and implemented in
June of the same year. At its inception, Pakistan offered duty free
entry for 206 products from Sri Lanka. To date Pakistan has reduced
tariffs by 67 percent on all other imports from Sri Lanka with the
exception of garments, ceramic products, betel leaves, and natural
cosmetics -- which have quotas or preferential rates -- and an
additional 540 items included on a no-concession list. Sri Lanka
initially offered duty free entry to 102 products from Pakistan. To
date Sri Lanka has reduced tariffs by 40 percent on the balance of
items and plans to completely phase out tariffs by 2010, excluding
697 items covered by its no-concession list. Sri Lankan quotas on
basmati rice and potatoes will remain intact. Products must meet a
minimum of 35 percent domestic value-added in order to be eligible
for FTA trade benefits. (Note: For complete lists please go to:
http://www.doc.gov.lk/web/ pakissrilanka_agreement_duty.php)
Scheduled Tariff Reductions Delayed
Due to Budget Constraints
------------------------------------
3. (SBU) Both countries were scheduled to undergo the next phase of
tariff reductions in June 2008. Sri Lanka was to reduce tariffs by
20 percent and Pakistan to completely eliminate them except for
quota and no-concession items. However, to date neither government
has implemented this phase of the FTA, in part due to delays by the
GSL and, in part, due to a severe economic downturn in Pakistan and
delays by the newly elected Government of Pakistan in announcing
economic policy. According to GSL sources, the Finance Ministry
delayed granting concessions primarily due to revenue concerns, as
additional duty concessions would constrain the government's ability
to raise much-needed revenue. If and when Sri Lanka proceeds with
reductions, Pakistan has promised to eliminate its remaining
tariffs; however, given the current economic climate in Pakistan,
the likelihood of this is uncertain, at least in the short-term.
4. (U) The FTA with Pakistan is not the only trade agreement to
suffer this year. Pursuant to the March 2008 Indo-Sri Lanka FTA,
Sri Lanka was to offer duty-free access for imports from India, with
the exception of 1,180 no-concession items. However, these duties
still remain in place.
Benefits to Date:
Substantial Increase in Trade
-------------------------------
5. (U) Pakistani exports to Sri Lanka grew by 65 percent and Sri
Lankan exports to Pakistan by 40 percent from 2004 to 2007. During
this same period, Sri Lanka's real GDP grew by 22 percent and
Pakistan's by 30 percent. Pakistani cotton exported to Sri Lanka is
at present the largest good traded, and it has experienced
significant growth due to the FTA. In 2002, Pakistan exported USD
24.1 million in cotton to Sri Lanka; by 2006 cotton exports grew to
USD 86.6 million - an increase of over 350 percent. Sri Lanka
experienced strong growth particularly in export of natural rubber
to Pakistan. In 2002 natural rubber exports were valued at USD 4.9
million; by 2006 they increased to USD 17.3 million. Other goods
saw similar increases.
Potential Opportunities for U.S. Companies
-------------------------------------------
COLOMBO 00000735 002 OF 002
5. (U) The Pakistan-Sri Lanka FTA provides good opportunities for
U.S. exporters and foreign investors that are active, or interested
in becoming active, in the region. U.S. businesses may be able to
reduce their cost of doing business and increase profits by adding
value to goods in Sri Lanka and then exporting -- duty free -- to
the larger Pakistani market. Exports from Sri Lanka that have
potential to be profitable include rubber products, ceramics,
motorcycles, and motor parts.
Comment
--------
7. (SBU) In addition to the Pakistan-Sri Lanka FTA and the Indo-Sri
Lanka FTA, Sri Lanka is also party to the South Asia Free Trade
Agreement (SAFTA) and Asia Pacific Free Trade Agreement (APTA). The
country is ideally located at the crossroads between eastern and
western trade routes and has an excellent port. Labor costs are
relatively low and the work force is well-educated with a 91 percent
literacy rate. Nevertheless, foreign direct investment (FDI)
remains low as significant deterrents to investment remain; in 2007,
Sri Lanka received only USD 734 million in FDI. The protracted
ethnic conflict with the Liberation Tigers of Tamil Eelam (LTTE),
combined with an inefficient governmental bureaucracy and concerns
of corruption, spur investor uncertainty. If Sri Lanka is to
utilize FTAs to maximum capacity, the GSL needs to promote a more
investor-friendly climate, including a political, rather than
military, solution to the LTTE conflict. Post encourages U.S.
companies and investors interested in doing business in Sri Lanka to
contact the Embassy and the American Chamber of Commerce in Sri
Lanka (www.amcham.lk) for further information.