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Cablegate: Sri Lanka Qualifies for Eu Gsp Plus Benefits

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 001247

SIPDIS

DEPT PASS USTR FOR JROSENBAUM

STATE FOR EB

STATE FOR SA/INS

GENEVA PASS USTR

E.O 12958: N/A
TAGS: ECON ETRD CE ECONOMICS
SUBJECT: SRI LANKA QUALIFIES FOR EU GSP PLUS BENEFITS

REF: (a) 05 COLOMBO 965 (b) 04 COLOMBO 1604 (c) 04
COLOMBO 1271

1. Summary: Sri Lanka is among a group of 14 developing
countries which qualified for duty free access to
European Union (EU) under the EU GSP plus scheme from
July 1, 2005. As a result, most Sri Lankan exports from
apparel (Sri Lanka's main export) to ceramics will be
eligible to enter EU markets free of duty. Initial
benefits will be limited for products with high import
content, such as apparel, due to tough rules of origin
(ROO) criteria. Nonetheless, the apparel industry
welcomes the EU concession as a great boost to the
industry currently facing increased competition from
China. Sri Lanka is hopeful of more relaxed ROO
criteria next year. End Summary.

2. The EU GSP plus scheme was given to about 14 poorly
diversified (and therefore vulnerable) developing
countries, subject to their ratification and application
of 27 international conventions on human rights, labor
standards, environmental protection and governance
principles. According to a Sri Lanka Department of
Commerce official, Sri Lanka has ratified most of the 27
conventions that need to be ratified before the GSP plus
implementation. A couple of conventions still
outstanding are to be ratified before the formal
enforcement of the EU GSP plus scheme on January 1,
2006. It covers 7,200 items, which will enjoy duty free
access to EU from July 1, 2005. It will be initially
operational for three years, until 2008, except in the
case of textiles and clothing which will be reviewed
annually.

3. Sri Lanka's apparel sector has been looking forward
to EU GSP plus to overcome Chinese competition following
the expiration of the multi fiber agreement. The
scheme provides duty free access to Europe compared with
the MFN duty rates ranging from about 6.5% to 12%. (Sri
Lanka's exports were charged duty at 4.5% to 7.2% due to
general GSP concessions and preferences for protection
of labor rights). However, since Sri Lanka imports most
of its fabric, initial benefits from GSP plus will be
limited. Apparel made from local and EU fabric can be
exported to EU free of import duty. EU's tough ROO
criteria require local value addition of over 50% for
fabric sourced from the South Asia Region (i.e. SAARC
countries). Fabric from other countries does not
qualify as the ROO criteria require double
transformation, i.e., EU rules of origin for cotton
clothing require that the production process be from
yarn to fabric to clothing. For knitted clothing, the
production process needs to start from fiber onwards.
These rules will exclude GSP plus benefits to apparel
made from fabric sourced from China and other South East
Asian countries, Sri Lanka's top suppliers of fabric.
Therefore, Sri Lanka is likely be slow to draw on
benefits of the EU plus scheme. According to industry
sources, some products like children's clothing, which
require embroidery, washing and finishing, are likely to
benefit from the new scheme. In addition, large
manufacturers with vertically integrated businesses are
also likely to benefit from the EU GSP plus as they will
be in a better position to meet ROO criteria. With the
EU in the process of reforming ROO governing the GSP
scheme, Sri Lankan exporters might be able to make full
use of the benefits of this scheme in 2006. Sri Lanka
is hopeful that rules of origin will be flexible with
local value addition requirement lowered to at least
35%. Sri Lanka also hopes that new rules will extend
the benefits to fabric from China and South East Asia.

4. In addition to apparel, other major Sri Lankan
exports that will qualify for duty free entry subject to
ROO criteria include footwear, ceramic ware, flowers,
fruits, vegetables, fisheries products, and rubber
products. Some of these products will benefit greatly
from the GSP plus due to high MFN duty rates on them in
the EU. The Department of Commerce has recently
received applications for registration under the scheme
from various sectors such as tuna, cashew, pineapple,
gems, jewelry, fruits, tobacco and garments.

5. Comment: EU GSP plus, even with limited benefits,
has been welcomed by the apparel industry, which is
acutely aware of the need to face competition from
China. The industry considers this concession as a
great boost in the quota free era. The Joint Apparel
Associations Forum (JAAF), the top textile industry
federation, at a media briefing on July 6 expressed
confidence on the potential of the EU GSP scheme to
bring immediate relief to the industry. Together with
US safeguards imposed on Chinese apparel,
EU GSP can help the Sri Lankan garment industry to
remain competitive in international markets. EU is the
second largest market for Sri Lankan apparel after the
U.S., with the EU accounting for 37% and U.S. accounting
for 58% of exports. The two markets account for 95% of
Sri Lankan apparel exports. EU GSP plus with duty free
access to other Sri Lankan exports will also help
diversify Sri Lankan exports to EU markets. End
Comment.

Lunstead

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