Cablegate: Sri Lanka: 2010 National Trade Estimate Report (Resubmit)

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UNCLAS SECTION 01 OF 07 COLOMBO 001121

SIPDIS

STATE FOR SCA/INSB, EEB/IFD APRATTIPATI
STATE PASS USTR FOR VICKY KADER
TREASURY FOR SUSAN CHUN
COMMERCE FOR ITA EROL YESIN
GENEVA PASS USTR

E.O 12958: N/A
TAGS: ETRD ECON EFIN CE
SUBJECT: SRI LANKA: 2010 NATIONAL TRADE ESTIMATE REPORT (Resubmit)

REF: SECSTATE 105978
COLOMBO 1011

1. The following is in response to Ref A's request for information
on the National Trade Estimate in Sri Lanka. Ref B includes
information for the Sanitary and Phytosanitary (SPS) and Standards
Related Foreign Barriers to trade in Sri Lanka, submitted November
4, 2009 (and also included here).

TRADE SUMMARY

2. The U.S. goods trade deficit with Sri Lanka was $1.7 billion in
2008, a decrease of $160 million from $1.8 billion in 2007. U.S.
goods exports in 2008 were $283 million, up 24.7 percent from the
previous year. Corresponding U.S. imports from Sri Lanka were $2
billion, down 5.0 percent. Sri Lanka is currently the 116th largest
export market for U.S. goods.

3. The stock of U.S. foreign direct investment (FDI) in Sri Lanka
was $80 million in 2007 (latest data available), up from $69 million
in 2006.

IMPORT POLICIES

4. Despite an economy open to foreign investment, the pace of reform
in Sri Lanka has been uneven. President Rajapaksa's broad economic
strategy focuses on poverty alleviation and steering investment to
disadvantaged areas, large scale infrastructure projects, developing
the small- and medium-sized enterprise sector, promotion of
agriculture, and expanding the already large civil service.

5. The Trade, Tariff, and Investment Policy Division of the Ministry
of Finance and Planning is charged with the formulation and
implementation of policies in these areas. In addition, the Trade
and Tariff cluster of the National Council of Economic Development
(NCED) also examines trade and tariff issues and sends
recommendations to the Ministry of Finance and Planning. In July
2009, the President appointed a Presidential Taxation Committee to
examine the entire tax system including import tariffs.

IMPORT CHARGES

6. Sri Lanka's main trade policy instrument has been the import
tariff. According to the WTO, in 2006, Sri Lanka's average applied
tariff for nonagricultural goods was 9.2 percent. Its average bound
tariff for these goods was 19.6 percent. However, approximately 70
percent of Sri Lanka's nonagricultural tariffs are unbound under WTO
rules and can be increased at any time. Sri Lanka's average applied
agricultural tariff in 2006 was 23.8 percent.

7. Currently in Sri Lanka, there are five tariff bands: 0 percent;
2.5 percent; 6 percent; 15 percent; and 28 percent. Textiles,
pharmaceuticals, and medical equipment are duty free. Basic raw
materials are generally assessed a 2.5 percent duty. Semi-processed
raw material tariffs are 6 percent, while intermediate product
tariffs are 15 percent. Most finished product tariffs are 28
percent. There are also a number of deviations from the five band
tariff policy. Some items are subject to an ad valorem or a
specific duty, whichever is higher, and there is intermittent use of
exemptions and waivers. Footwear, ceramic products, and
agricultural products carry specific duties.

8. In addition to tariffs, a variety of taxes introduced (see below)
in the past several years have effectively increased Sri Lanka's tax
rates on a range of imported items to between 60 and 100 percent of
the cost, insurance, and freight (CIF) value of the product. The
government has imposed these charges on imports primarily to raise
revenue, to defray the costs of specific government services, or to
promote local producers. Most of these charges are revised upwards
annually. In addition, the government imposed a new Nation Building
Tax of 1 percent on imports on February 1, 2009; it was increased to
3 percent on May 1, 2009. The frequent changes (mostly upward) of
these rates have added unpredictability to foreign exporters' and
local importers' cost calculations. Affected products from the
United States include fruits, processed/packaged food, and personal

COLOMBO 00001121 002 OF 007

care products.

9. Other charges on imports include:

9A. An Export Development Board (EDB) levy, ranging from 10 percent
to 35 percent ad valorem on a range of imports identified as
"nonessential." Most of the items are subject to specific duties as
well; for example, shampoo (35 percent or Rs 175 per kg), apparel
(30 percent or Rs 75 per unit), biscuits (35 percent or Rs 60 per
kg) and oranges (20 percent or Rs 15 per kg). Whichever levy is
higher - percentage versus a flat rate - is applied. Also, when
calculating the EDB levy, an imputed profit margin of 10 percent is
added onto the import price. In some cases, such as on biscuits,
chocolates and soap, the tax is charged not on the import price but
on 65 percent of the maximum retail price. The EDB levy on most
imports was increased by raising the specific duties (unit rate) in
November 2008 and in 2009.

9B. An import duty surcharge of 15 percent on all dutiable imports
(increased from 10 percent as of November 8, 2007).

9C. A Ports and Airports Development Levy of 5 percent on imports
(increased from 2.5 percent to 3 percent in January 2007; and to 5
percent from January 1, 2009).

9D. A VAT of 0 percent, 12 percent, or 20 percent. When calculating
the VAT, an imputed profit margin of 10 percent (increased from 7
percent on January 1, 2007) is added on to the import price.
Locally manufactured products are also subject to VAT but not the
imputed profit margin. The new VAT rate of 12 percent was
introduced on January 1, 2009 replacing the VAT rates of 5 percent
and 15 percent.

9E. Excise fees on some products such as aerated water, liquor,
beer, motor vehicles, and cigarettes. The list of products subject
to these fees was expanded in 2007 to include certain household
electrical items. When calculating the excise fee, an imputed
profit margin of 15 percent (increased from 10 percent on October
11, 2007 and from 7 percent on January 1, 2007) is added on to the
import price. Locally manufactured products are also subject to
excise fees.

9F. A Social Responsibility Levy, a surcharge of 1.5 percent
assessed on the import duty to fund the National Action Plan for
Children. This tax was increased from 1 percent as of November 8,
2007.

9G. A new Nation Building Tax (NBT) on imports was introduced on
February 1, 2009 at 1 percent. It was increased to 3 percent on May
1, 2009.

10. A regional infrastructure fee of 5 percent, 7.5 percent or 10
percent (based on engine capacity) is imposed on automobiles. This
tax, first introduced in January 2007 at a flat rate of 2.5 percent,
was increased in 2008.

11. Textiles and Apparel: Textiles are free of customs import duty.
There is an Export Development Board Levy (often referred to as a
cess) of 50 Rupees (approximately $0.45) per kilogram on imported
textiles not intended for use by the apparel export industry. All
textile imports are subject to a Nation Building Levy of 3%, Ports
and Airports Tax of 5%, Social Responsibility Levy of 1.5% and a
Value Added Tax (VAT) of 12%.

12. Currently, apparel imports are subject to a 15 percent import
duty, a 30 percent or Rs 75 per unit Export Development Board Levy,
a 12 percent Value Added Tax, a 5 percent Ports and Airports Levy, a
1.5 percent Social Responsibility Levy and a 3 percent Nation
Building Tax.

13. In October and November 2008, the Central Bank introduced limits
on forward contracts for the sale and purchase of foreign exchange,
prevented prepayments on import bills, and imposed a 100 percent
deposit requirement on Letters of Credit for the import of
non-essential items. In the case of motor vehicle imports, the

COLOMBO 00001121 003 OF 007

deposit requirement was 200 percent of the import value. These
restrictions were introduced to discourage imports due to a foreign
exchange shortage and were later lifted.

14. The U.S. Government engaged in bilateral Trade and Investment
Framework Agreement (TIFA) talks with the government of Sri Lanka in
October 2009. In response to U.S. concerns that combined tariffs,
levies, and taxes greatly exceed Sri Lanka's bound rates for many
imports, the GSL explained that it had established a Presidential
Tariff Commission to simplify its tax and tariff structure and to
bring it into compliance with international agreements. The United
States stressed the importance of reducing Sri Lanka's high tariffs
on agricultural products; opening the Sri Lankan market for U.S.
agricultural biotechnology products; providing more certainty and
transparency in Sri Lanka's government procurement, and integrating
U.S. technical assistance into the government of Sri Lanka's overall
intellectual property rights enforcement plan. The Embassy
continues to follow up and press the Sri Lankan government to take
action.

IMPORT LICENSING

15. Sri Lanka requires import licenses for over 400 items at the
6-digit level of the Harmonized Tariff System code, mostly for
health, environment, and national security reasons. Importers must
pay a fee equal to 0.1 percent of the import price to receive an
import license.

CUSTOMS ADMINISTRATION

16. The government of Sri Lanka implemented the WTO Customs
Valuation Agreement in January 2003 and follows the transaction
value method to determine the CIF value. The scheme has operated
quite successfully and major companies have not faced problems.
Customs is also in the process of installing an Electronic Data
Interchange system to support an automated cargo clearing facility.
When implemented, this system should improve customs administration
and facilitate trade.

STANDARDS

17. The Sri Lanka Standards Institution (SLSI) is operating a
Compulsory Import Inspection Scheme (covering 102 items) per
regulations framed under the Imports and Exports Control Act, No. 1
of 1969 as amended by Act No. 28 of 1987. According to the Imports
Standardization and Quality Control Regulations of 2006, conformity
of the imported products to the relevant Sri Lankan Standards is
monitored. Samples are drawn from consignments accompanied by a
quality certificate from an accredited laboratory or manufacturer
registered with SLSI, which could be subject to testing or random
check, or if there is a reasonable doubt regarding the quality of
the consignment.

18. Sri Lanka has introduced new food safety regulations. According
to the Adoption of Standards Regulations of 2008 (Ref. No. 1589/34 -
FEB 2009), 158 SLSI standards were made mandatory starting in
September 2009 for certain food and beverage products. (NOTE: Post
will provide a PDF document containing notification of the
regulations per request. END NOTE.) The SLSI standards range from
commodities to processed products. Though these standards did exist
previously, they were for the most part voluntary. Some U.S.
companies are concerned that these newly-mandatory measures do not
factor in market preferences and could restrict trade. The Ministry
of Health, which is the CODEX focal point, plans to notify the WTO
with regard to this new regulation.

TECHNICAL BARRIERS TO TRADE

19. In January 2007, the Ministry of Health adopted a regulation for
the import, sale and mandatory labeling of genetically engineered
(GE) food products, potentially costing U.S. industry as much as $20
million. This regulation is moving towards full implementation,
although some aspects of it are irregularly enforced or not enforced
at all. Key problems with the regulation include: mandatory Sri
Lankan regulatory approval of foods with 0.05 percent or more of GE

COLOMBO 00001121 004 OF 007

content; labeling for products with more than 0.05 percent of GE
content; and the requirement that shipments of bulk commodities be
accompanied by documentation certifying that there is no GE content.
Sri Lankan importers have raised several concerns about the
regulation, including that conformity with a 0.05 percent GE content
labeling threshold would be costly and that mandatory labeling could
needlessly raise consumer concerns with biotechnology.
Additionally, importers fear that bureaucratic procedures in
granting approvals - as well as Sri Lanka's technical inability to
carry out approvals - may obstruct and limit future imports of GE
products. For example, a 2008 U.S. GE corn shipment was cancelled
due to excessive bureaucratic delays. This decision has discouraged
many Sri Lankan importers from attempting to import unprocessed GE
bulk commodities, as it is understood that their import license
application will be ignored, delayed or refused.

20. During October 2009 discussions under the United States-Sri
Lanka Trade and Investment Framework Agreement (TIFA), the United
States raised concerns regarding Sri Lanka's mandatory labeling
requirement, noting a lack of scientific justification, and adding
that the regulation would essentially act as a nontariff barrier.
Sri Lanka stated that they would follow CODEX Alimentarius
guidelines pertaining to the labeling of GE foods, and noted that
CODEX had not yet ruled on this issue. The United States also
reminded Sri Lanka of the trade ramifications of their GE policy,
including the previously mentioned corn shipment as well as a
rejected November 2008 food aid shipment of rice. Sri Lankan
regulators were not persuaded to change their position. The USG
will continue to raise the issue.

21. USDA has sent several local scientists and regulators for
training in biotechnology and biosafety at Michigan State
University. The most recent regulator to participate in this
program is the Director of Biosafety at the Ministry of Environment,
who is a senior regulator with respect to agricultural
biotechnology. He is also the coordinator for the National
Biosafety framework. His view of biotechnology was positively
transformed by the training, and he acknowledged several previous
personal misconceptions. USDA and the State Department will
continue to work with Ministry of Environment officials to affect
regulatory change.

22. Poultry: Sri Lanka has banned the importation of U.S. chicken
meat that is not mechanically deboned. During the October 2009
United States-Sri Lanka Trade and Investment Framework Agreement
(TIFA) meeting, Sri Lanka openly admitted that this measure was in
place to protect its domestic industry and contended that this was
permitted under the use of a WTO safeguard mechanism. The U.S.
government responded that if this were the case, that safeguard
should be formally raised within the WTO. Additionally, Sri Lanka
had imposed avian influenza bans on all poultry and poultry products
imported from several U.S. states. As of October 2009, these bans
were all removed. Sri Lanka imposed these bans due to the detection
of low pathogenicity notifiable avian influenza, an action which is
not supported by the World Organization for Animal Health (OIE).
Sri Lanka was reluctant to remove the bans and continues to believe
that their actions were justified - raising concerns that such
action may reoccur.

23. Beef: A ban on U.S. beef imports remains in effect due to the
detection of bovine spongiform encephalopathy (BSE) in the United
States in 2003. This ban is also not supported by the OIE, and Sri
Lanka is one of five countries in the world to have taken absolutely
no action to lift any part of their BSE-related U.S. beef ban. This
issue was raised during the October 2009 TIFA. Sri Lanka defended
their position by incorrectly citing the guidelines and
recommendations of the OIE's guidelines for meat and poultry.

24. Microbiological Testing of Meat Imports: In September 2009, Sri
Lanka started 100% testing of all imported meat products for various
pathogens. This policy change was not notified to the WTO.
Importers have complained that the additional demurrage costs
associated with the testing are unnecessary, and that government
testing methods are not sound. The U.S. Department of Agriculture
additionally argues that the USDA Food Safety Inspection Service

COLOMBO 00001121 005 OF 007

attestation which mandatorily accompanies all meat exports is a
sufficient assurance of wholesomeness. During the October 2009
TIFA, Sri Lanka was asked to provide its regulation on
microbiological testing, especially as it relates to their testing
protocol, targeted pathogens, and acceptable pathogen levels. The
U.S. government also emphasized the importance of notifying the WTO
SPS committee of this regulation.

25. Seed Potatoes: Sri Lanka lifted a ban on imports of seed potato
from the United States in March 2007, initially instituted due to
fears that the Colorado Potato Beetle (CPB) could have been
introduced into Sri Lanka by these imports. However, Sri Lanka now
requires a certificate from a plant entomologist stating that the
CPB does not exist in the potato tuber to accompany the seed potato
imports. The United States has pressed for the removal of this
certificate requirement on the grounds that it was not
scientifically justified. In July 2008, Sri Lankan officials
visited the U.S. potato industry to further review the issue. It is
hoped that as a result of this visit, the issue will be resolved and
a visual inspection at the time of shipment will be considered
sufficient to address any concerns. Although this issue may be
addressed, recent 2008 import permits have included overly
restrictive virus tolerances and requirements on generations of seed
potatoes. There is concern that the generation requirements are
not being applied to seed potatoes imported from other markets such
as Europe. The CPB area freedom certificate, virus tolerances, and
restrictive generation requirements all need to be addressed before
the Sri Lankan market can grow into a strong commercial export
market for U.S. seed potatoes.

GOVERNMENT PROCUREMENT

26. Sri Lanka is not a signatory to the WTO Agreement on Government
Procurement and has no plans to join it beyond its current observer
status.

27. Government procurement of goods and services is primarily
undertaken through a public tender process. Some tenders are open
only to registered suppliers. Procurement is also undertaken
outside the normal competitive tender process. Examples of such
procurement include agreements in 2006 with the government of China
to build a coal power plant and for two Chinese companies to build a
new bulk cargo port in Hambantota, and an agreement with India to
build a coal power plant.

28. The government publicly subscribes to principles of
international competitive bidding, but charges of corruption and
unfair awards are common. In 2006, Sri Lanka published new
guidelines, as well as a new procurement manual, to improve the
public procurement process. However, in early 2008 the government
disbanded the National Procurement Agency, which it had established
in 2004, and shifted its functions to a unit in the Ministry of
Finance. This move has raised concerns about the government's
commitment to improve the transparency of procurements. Despite
being discussed during the 2009 TIFA talks, the government of Sri
Lanka has yet to respond to the concerns raised.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

29. In 2003, Sri Lanka's new intellectual property law - governing
copyrights, patents, trademarks, and industrial design - came into
force. Under the new law, IPR infringement is a criminal offense
and IPR infringement is subject to both criminal and civil
jurisdiction. Sri Lanka also passed a new Computer Crimes Act in
2007 strengthening Sri Lanka's IPR regime pertaining to software.

30. Notwithstanding the new laws, weak IPR enforcement remains a
problem. Piracy levels remain very high for sound recordings and
software. According to a study commissioned by the Business
Software Alliance, as much as 90 percent of personal computers in
Sri Lanka used pirated software in 2008. The study estimates retail
revenue losses of $97 million in 2008 due to software piracy.
Further, government use of unauthorized software continues to be a
problem.

COLOMBO 00001121 006 OF 007

31. Redress through the courts for IPR infringement is often a
frustrating and time-consuming process. While police can take
action against counterfeiting and piracy without complaints by
rights holders, they rarely do so. In 2008-2009, the Business
Software Alliance successfully worked with government authorities to
increase prosecutions for IPR infringement in the software sector.
In the apparel sector, right holders have scored some legal
successes in combating trademark counterfeiting.

32. The Sri Lankan Government's Director of Intellectual Property,
along with international experts, continues to have IPR legal and
enforcement training for customs, judicial and police officials.
The U.S. Embassy, the United States Patent and Trademarks Office,
the American Chamber of Commerce of Sri Lanka, and the European
Chamber of Commerce are also working with the government of Sri
Lanka and the private sector to improve enforcement, provide
enforcement training, and enhance public awareness. Sri Lankan
Customs has created a computer based Customs Trade Mark recordation
system, although it is yet to be launched.

SERVICES

33. Insurance: Sri Lanka does not allow cross-border supply of
insurance, with the exception of health and travel insurance. In
order to provide all other insurance services to resident Sri
Lankans, insurance companies must be incorporated in Sri Lanka. Sri
Lanka allows 100 percent foreign ownership for locally incorporated
insurance firms, but branching is not allowed. Although Sri Lanka's
insurance regulatory body has the authority to establish minimum and
maximum premiums for motor, fire and employers liability policies,
in practice these premiums are not regulated. In early 2008, the
Sri Lankan government implemented a new regulation requiring all
insurance companies to reinsure 20 percent of their insurance
business with a state-run insurance fund.

34. Telecommunications: Telecommunications, especially mobile
services, is increasingly competitive and may be the most dynamic
service industry in Sri Lanka. The government of Sri Lanka
maintains a majority share in one of the fixed line carriers, Sri
Lanka Telecom (SLT), which was previously a wholly owned government
entity. All other operators are privately owned.

35. Telecommunications (continued): Due to SLT's past monopoly
status, it continues to own most of the national fixed line
telephone infrastructure (including the main switches and the only
two international cable landing stations) and continues to dominate
the fixed line sector, affecting the competitiveness of other
operators in this segment of the market. The government liberalized
international telecommunications in 2003 and issued 33
non-facilities based gateway licenses, ending the SLT monopoly over
international telephony.

36. Broadcasting: The government imposes taxes on foreign movies,
programs, and commercials to be shown on television, ranging from Rs
25,000 (approximately $220) for an imported English-language movie
to Rs 90,000 (approximately $790) per half hour of a
foreign-language program dubbed in the local language Sinhala.
Foreign television commercials are taxed at Rs 500,000 (roughly
$4,400) per year. Rates for non-English foreign programming are
higher. Government approval is required for all foreign films and
programs shown on television.

37. Professional Services: There is no formal national policy on
liberalization of professional services. In practice, many foreign
doctors, nurses, engineers, architects, and accountants work in Sri
Lanka. Most of them are employed by foreign companies. Unless the
government has recognized a foreign national's professional
qualifications, such professional cannot sign documents presented to
government institutions or regulatory bodies.

38. Professional Services (continued): The Immigration Department
grants resident visas for foreign professionals whose services are
required for projects approved by the government or by companies
approved by the Board of Investment (BOI). Non-BOI companies, such
as banks, can also employ foreign staff; however, in practice the

COLOMBO 00001121 007 OF 007

Immigration Department has limited the number of resident visas to
levels below those desired by companies.

39. Legal Services: Any person, including foreigners, can provide
legal consultancy services without being licensed to practice law in
Sri Lanka. Only Sri Lankan citizens can register in the Supreme
Court and practice law (i.e., appear in courts) in Sri Lanka.

INVESTMENT BARRIERS

40. While Sri Lanka welcomes foreign investment, there are
restrictions in a wide range of sectors. Foreign investment is not
permitted in the following areas: nonbank money lending;
pawn brokering; retail trade with a capital investment of less than
$1 million (with one notable exception: the BOI permits retail and
wholesale trading by reputable international brand names and
franchises with an initial investment of not less than $150,000);
coastal fishing; education of students under 14 years of age for
local examinations; and local degree-awarding university education
(institutions awarding overseas degrees are permitted).

41. Investment in the following sectors is restricted and subject to
screening and approval on a case-by-case basis when foreign equity
exceeds 40 percent: shipping and travel agencies; freight
forwarding; higher education; mass communications; deep sea fishing;
timber-based industries using local timber; mining and primary
processing of nonrenewable national resources; and growing and
primary processing of tea, rubber, coconut, rice, cocoa, sugar, and
spices.

42. Foreign investment equity restrictions and government
regulations also apply to air transportation, coastal shipping,
lotteries, large-scale mechanized gem mining, and "sensitive"
industries such as military hardware, illegal narcotics, and
currency.

43. The BOI offers a range of incentives to both local and foreign
investors. To qualify for BOI incentives, investors need to meet
minimum investment and minimum export requirements. In general, the
treatment given to foreign investors is nondiscriminatory. Even
with incentives and BOI facilitation, however, foreign investors can
face difficulties operating in Sri Lanka. Problems range from
difficulties in clearing equipment and supplies through customs to
obtaining land for factories. The BOI encourages investors to
locate their factories in BOI-managed industrial processing zones to
avoid land allocation problems. Investors locating in industrial
zones also get access to slightly better infrastructure facilities
such as improved power reliability, telecommunications, and water
supply.

44. Information contained in this cable will also be provided to
requesting offices as a Word document via email. Questions should
be directed to EconOff Ken Kero-Mentz at keroka@state.gov.

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