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Cablegate: Sri Lanka: Textile and Apparel Sector Concerns for 2008:

VZCZCXRO9902
RR RUEHLMC
DE RUEHLM #0092/01 0241139
ZNR UUUUU ZZH
R 241139Z JAN 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 7592
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1789
RUEHKA/AMEMBASSY DHAKA 0701
RUEHIL/AMEMBASSY ISLAMABAD 7692
RUEHKT/AMEMBASSY KATHMANDU 5871
RUEHKP/AMCONSUL KARACHI 2323
RUEHCG/AMCONSUL CHENNAI 8299
RUEHGV/USMISSION GENEVA 2595
RUEHBS/USEU BRUSSELS
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 000092

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/INS AND EEB/TPP/ABT JOHN FINN AND GARY A CLEMENTS
COMMERCE/ITA/OTEXA FOR MARIA D'ANDREA
STATE PLS PASS TO USTR CAROYL MILLER AND ADINA ADLER

E.O. 12958: N/A
TAGS: ECON ETRD KTEX CE
SUBJECT: SRI LANKA: TEXTILE AND APPAREL SECTOR CONCERNS FOR 2008:
U.S. RECESSION AND EU GSP+

REF: 07 COLOMBO 1355

1. (U) Summary: Sri Lanka's garment sector remains healthy, but is
concerned about the possible impact of a U.S. recession. An even
more pressing worry is the possibility of losing preferential access
to the EU market under the EU's GSP+ program. The industry is
frustrated that the government is not doing enough to help maintain
GSP+. On an upbeat note, major garment producer Brandix will soon
announce plans to open three factories in the war-torn East. Other
positive industry initiatives, involving ethical and environmental
production practices, are helping the Sri Lankan garment industry
differentiate itself from its lower cost competitors. End summary.


2. (U) On January 8 EconOff met Ajith Dias, Chairman of the Joint
Apparel Association Forum (JAAF), which represents all apparel and
textile businesses in country. Dias underscored his concerns for
both the U.S. and EU markets, while highlighting positive actions by
several JAAF members. Dias also noted that he hoped the GSL and
India would soon sign an agreement that will allow additional
duty-free access of garments to the Indian market under the Indo-Sri
Lanka Free Trade Agreement.

Garments 50% of Sri Lanka's Exports
-----------------------------------

3. (U) A three-plus billion dollar industry, SL apparel and textile
production accounts for approximately 50% of Sri Lanka's total
exports and 67% of its industrial production. It employs
approximately 270,000 individuals directly and nearly one million
indirectly. It is the single largest employer in the manufacturing
sector and the single largest employer of women. Its focus on
high-end production and ethical business practices (no child labor,
empowerment of women, a move towards eco-friendly production) places
it at the top of producers in South Asia, both in terms of respect
for worker rights and in price-per-garment charges.

4. (U) Basic Data: (2007 Estimates)

Total industrial production: $9.81 billion
Total textile/apparel/leather production: $3.35 billion
Textile/apparel exports: $3.20 billion
Textile/apparel exports to the US: $1.63 billion
Textile/apparel share of total exports: 43%
Textile/apparel share of total imports: 15%
Total manufacturing employment: 1,363,000 (2006)

U.S. Market Concerns Looming
----------------------------

5. (U) The entire sector is watching the U.S. economy with concern.
Although sales to the U.S. remained significant, there was a 5%
decline during the first eleven months of 2007. Companies are
concerned that a further downturn in the economy or recession will
cause orders to decline considerably in 2008. Sri Lanka also
remains worried that the industry will suffer significantly if China
safeguards are lifted as planned at the end of 2008. (Note: Twenty
percent of Sri Lanka's exports to the U.S. are concentrated in
categories currently protected by China safeguards.) While industry
heavy-hitter Brandix CEO Ashroff Omar does note that not all
business will be lost to cheaper Chinese factories because of a
desire by U.S. buyers to diversify geographically, the losses due to
a lifting of safeguards will be substantial.

6. (U) Following its "Garments Without Guilt" roadshow to the U.S.
in 2007, JAAF has continued to engage -- via a D.C. lobbying firm --
with Members and staff in Congress to heighten interest in securing
preferential treatment for Sri Lanka. Nevertheless, Sri Lanka has
not been added to various trade bills that would allow import
concessions for developing countries. Dias admitted that garnering
interest in Sri Lanka during the election season will be difficult.
The current perception of Sri Lanka on the Hill as a country with
serious human rights concerns is also hampering efforts to portray
Sri Lanka, and specifically the textile/apparel industry,
positively. Nevertheless, Dias hopes that efforts directed at

COLOMBO 00000092 002 OF 003


Senators and committee staff will help to convince Congress of the
necessity of preferential treatment legislation in advance of the
removal of Chinese safeguards.

GSP+: Can Sri Lanka Maintain
Preferential Access to the EU?
------------------------------

7. (U) The U.S. aside, by far the greatest fear for the apparel
sector is that Sri Lanka will fail to qualify for GSP+ in 2008. The
GSP+ program gives duty free treatment to most exports from
developing countries that qualify by having ratified and implemented
key international political, human and labor rights conventions.
Under GSP+, Sri Lanka can export finished garments duty free to the
EU, as long as there is over 50% domestic value addition and
domestic double transformation (i.e., yarn to fabric conversion, and
fabric to clothing conversion). Under GSP+, which came into effect
in 2005, Sri Lanka's garment exports to the EU have grown at an
impressive rate. In 2006, Sri Lanka's market share in the EU grew
by 12%. In 2007, it grew another 22%. However, increasing concerns
over Sri Lanka's commitment to human rights are endangering Sri
Lanka's eligibility. JAAF is trying to emphasize to the EU that
rights within the industry are excellent. However, to get its
message across effectively, the industry needs the government's
assistance.

8. (SBU) According to Dias, the industry was alarmed by the
government's plan earlier this year to replace Sri Lanka's current
ambassador and commercial attache to the EU, both of whom have
extensive experience with GSP+ issues, with less experienced people.
The industry registered its concerns with the government, and now
is confident that the government will send qualified people.
Specifically, the new ambassador is to be Ravinath Ariyasinghe, who
is currently the Foreign Ministry's communications director and was
DCM in Washington until 2006. The new commercial attache, the
government has promised, will be a senior Commerce Department
official familiar with trade issues like GSP+. Dias reports that
JAAF feels the government was, in this case, responsive to its
concerns. Likewise, apparel industry leaders' recent pleas to
President Rajapaksa for more support on the GSP+ issue led the
president to appoint a "GSP+ Defender" team composed of four
ministers. Unfortunately, according to Dias, these ministers have
little experience in trade negotiations.

9. (SBU) The industry is receiving help from an unlikely source --
local trade unions. Anton Marcus, General Secretary of the Free
Trade Zones and General Services Employees' Union, stated recently
that the union will support continuation of GSP+, as its removal
would cause a negative impact on workers. The unions had previously
threatened to lobby the EU against renewal of GSP+ on the grounds
that the government and industry are not fully adhering to ILO
conventions. Specifically, the unions are critical of garment
factory management for encouraging "workers councils" in lieu of
unions. These councils have elected representatives who negotiate
with management like unions, but do not charge union fees and are
generally less confrontational and less political than unions.

Positive Developments:
Factories in the East, Ethical Business Practices
--------------------------------------------- ----

10. (U) Although serious concerns for the export market weigh
heavily on the industry, there are also many positive developments.
Brandix will announce its plans to open three factories in a
predominately Tamil and Muslim area of the Batticaloa district in
the East. It will be the first company to take advantage of
government incentives aimed at rebuilding the war-torn area.
Brandix also recently won "Fairtrade" and organic certification for
its woven fabric mill. MAS, another large producer, recently opened
what it billed as the world's first eco-friendly industrial park
dedicated to fabric and apparel manufacturing. Building on its
knowledge and experience as the largest producer of intimate wear in
South Asia, MAS also recently launched the first brand-name lingerie
from Sri Lanka; it will be marketed throughout India by mid-2008.
Active in corporate social responsibility, the apparel sector

COLOMBO 00000092 003 OF 003


continues to look at ways to "Go Beyond" (as one campaign is
entitled) the basic employer-employee relationship to help further
educate and empower the workforce.

11. (SBU) Comment: The textile/apparel industry effort to market
itself to foreign companies and consumers as the alternative,
ethical choice is a logical one. Recognizing that it will never
beat China, India, or most other countries in terms of production
costs, its future lies in marketing to companies who want to
demonstrate to their clients that their products were made under
ethnical conditions in factories supporting
internationally-recognized labor practices, and without undue damage
to the environment. To date, the industry has been able to attract
buyers particularly interested in ethical practices. Victoria's
Secret, Gap, and Marks and Spencer, among many other apparel giants,

SIPDIS
source clothing from Sri Lanka, and regularly highlight Sri Lankan
companies in their annual reports to shareholders. Production under
ecologically-friendly conditions is gaining interest among buyers as
well, and industry leaders expect such interest to increase in the
near and long-term. However, time will tell if the industry's
efforts are enough in light of the challenges it faces from China,
the EU, and a slowing U.S. economy.
BLAKE

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