Cablegate: Indo-Sri Lanka Free Trade Agreement -- Booming Trade

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




E.O. 12958: N/A
SUBJECT: Indo-Sri Lanka Free Trade Agreement -- Booming Trade

Ref: (a) 03 Colombo 001161, (b) 03 Colombo 000772

1. Summary: Trade between India and Sri Lanka has grown
significantly -- by 30 percent in 2003 to USD 1.3 billion.
Indian exports to Sri Lanka grew by 28 percent and Sri
Lankan exports to India grew by 43 percent over the same
time period. The rapid increase in trade between India and
Sri Lanka is largely attributed to the Indo-Lanka Free
trade agreement. Total trade has doubled since the FTA
entered into force in 2000. The two countries are expected
to enter into an expanded economic agreement covering other
areas in the near future. End Summary.

2. According to Sri Lankan Central Bank trade data
released on February 26, Indian exports to Sri Lanka grew
by 28 percent to approximately USD 1.1 billion and Sri
Lanka's exports to India grew by 43 percent to
approximately USD 0.24 billion in 2003. The rapid increase
in trade between India and Sri Lanka is largely attributed
to the Indo Lanka Free trade agreement, which entered into
force in March 2000, although official 2003 FTA related
trade data are not yet available. Total bilateral trade
has doubled since the FTA, increasing to USD 1.3 billion in
2003 from USD 560 million in 1999.

3. Under the FTA, India has phased out tariffs for imports
from Sri Lanka, except for 429 items covered under an
exempted or "negative" list, and tea and garments, which
are under quotas or preferential rates. The most recent
liberalization was in March 2003, when India removed
tariffs on 2,799 items. Consequently, 4,150 items from Sri
Lanka (with at least 35 percent domestic value addition) to
India are duty free now. Sri Lanka has offered 100% duty
concessions on about 1,100 items. The import duty on the
balance is to be phased out by 2008 except for 1,180 items
on a negative list. India is the largest exporter to Sri
Lanka with 16 percent of the market, and the fifth largest
export destination for Sri Lankan goods with about 5%
market share. Sri Lanka is continuing its efforts to
increase its exports to India under the FTA. On February
26, the GSL opened a trade center in Chennai to showcase
Sri Lankan products, services and companies. Over 15 Sri
Lankan companies in various sectors, from apparel and shoes
to bicycles leased space at the trade center. Further,
several third country investors have expanded their
investment in Sri Lanka to access the Indian market duty
free, with a required local value addition of 35 percent.
Among them are US companies Celetron, which exports memory
modules, and Navini Networks, which exports wireless
internet broad band routers and modems through its local

4. India and Sri Lanka are now working towards a
Comprehensive Economic Partnership Agreement (CEPA), to
expand the cooperation into other areas. In October 2003,
a joint expert group made recommendations on a CEPA
covering four areas:

--expansion of trade through improved market access (trade
facilitation and removal of non tariff barriers)

--trade in services

--promotion of investment and

--enhanced economic cooperation in areas such as
transportation, infrastructure, education, tourism and
information and communications technology.

The latter includes the modernization of Sri Lankan
railways, and establishment of an educational institute on
the lines of Indian Institute of Technology. Negotiations
and discussions on the draft CEPA were in progress, but due
to the dissolution of parliaments in both countries, the
work is currently on hold.

5. Even without an agreement, the Indian commercial
presence in Sri Lanka has increased significantly. India
is the third largest foreign investor in Sri Lanka.
According to the CEPA expert study, total Indian investment
in Sri Lanka over the last decade has reached $400 million,
and one half of Indian investment in the SAARC region is
located in Sri Lanka. Among the top Indian investors are
the state owned Indian Oil Company, which entered Sri
Lanka's petroleum retail business in 2003, Apollo hospital
group, and TATA. Indian investments are also visible in
the tourism sector. Further, many Indian nationals are
working in Sri Lanka including doctors, nurses, advertising
and banking professionals. Sri Lankan investment in India
has also increased, though in overall terms it remains
miniscule (approximately USD 4 million).

6. Comment: The US should consider the improving trade ties
between India and Sri Lanka (and possibly even wider
regional trade ties with the advent of the South Asia Free
Trade Agreement process) as it ponders next steps on a US-
Sri Lanka FTA. As mentioned above, firms that add at least
35 percent value for many products can then import into
India duty free. At least two US firms are currently
taking advantage of this feature. One exports refurbished
microchips, the other assembles broadband wireless base-
stations. Both have seen duties on their products into
India reduced from over 35 percent to zero. End comment.


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