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Cablegate: Post-Mfa Sri Lankan Garment Sector Faring Well,

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

UNCLAS SECTION 01 OF 03 COLOMBO 002122

SIPDIS

DEPT PASS TO USTR JON ROSENBAUM; GENEVA TO USTR

SENSITIVE

E.O 12958: N/A
TAGS: ECON ETRD CE ECONOMICS
SUBJECT: Post-MFA Sri Lankan Garment Sector Faring Well,
But Nervous About Increasing Challenges

REF: Colombo 965

1. (SBU) Summary: The first post-MFA year for the Sri
Lankan garment industry has been an up and down year for
exports, with annual sales finishing slightly above their
2005 mark. As Sri Lanka faces increasing price pressure
from other countries, especially China, it is seeking
advantages in both constructive ways, such as through its
efforts to brand Sri Lanka as ?the ethical source for
apparel? via the Global Reporting Initiative, and less
useful ways, such as the continued quixotic attempt to
pursue a free trade agreement with the US, despite no clear
evidence that such an agreement would actually benefit the
apparel sector. While Sri Lanka?s large garment
manufacturers are continuing to do well in a quota-free
world, its small and medium-sized producers are feeling the
pinch, and initial indications are that some (though not
many) have folded. Nonetheless, sector outlook remains
strong, with the country?s Joint Apparel Association Forum
continuing to forecast growth into 2007 (though possibly
not as strong as growth forecast prior to the MFA
expiration). End Summary

2. (U) In the year since the expiration of the multi-fiber
agreement?s (MFA) quota system (reftel), Sri Lanka has
faced a tumultuous ride of export increases and decreases
on a month-to-month basis, though overall exports are up
slightly for the year. Sri Lanka's textile and apparel
exports increased 3.3 percent in the first ten months of
2005. Exports declined 7.2 percent in October.

3. (SBU) The story becomes more complicated when broken
into component parts, however. Sri Lanka?s high-end
manufacturers have increased their exports significantly
(MAS Holdings, Sri Lanka?s largest manufacturer expects
sales to have increased by 17 percent in 2005), taking
advantage of their strong customer relationships and
building on their efforts to create backward and forward
linkages to the entire garment design, manufacture and
retailing process. Sri Lanka?s Joint Apparel Association
Forum (JAAF) the apparel sector interest group formed
specifically to guide the garment sector through the quota
phase out, continues to project that overall Sri Lankan
garment exports will double by 2007, to over USD 4 billion
annually, though their Assistant Secretary General recently
told EconFSN they may have to revise this target, in light
of increased global price pressure.

Sri Lanka: the ?Ethical? Source for Apparel
------------------------------------------
4. (U) Many Sri Lankan manufacturers are looking at other
ways to improve competitiveness, including investing in
brands (MAS recently bought into a well-known Indian brand,
hoping to gain experience in brand management and
development) and promoting non-price differentiation, such
as a recent JAAF-promoted initiative, in partnership with
the Global Reporting Initiative, to ?brand? Sri Lanka as
the ?ethical sourcing destination for apparel.? This
program, which is designed to highlight Sri Lanka?s
commitment to strong labor practices, environmental
protection and corporate social responsibility, is aimed at
attracting garment buyers whose parent companies want to
avoid sourcing from sweatshops and countries with poor
labor and environmental standards.

5. (U) The Global Reporting Initiative?s mission is to
?develop and disseminate a generally accepted framework for
reporting sustainability information.? It seeks to do this
through ?Sustainability Reporting? which is the
communication by an organization about their economic,
environmental and social performance. Sustainability
reporting is seen as complementary to financial reporting
and helps to provide an assessment of the ?quality and
quantity of an organization?s intangible assets, risks,
opportunities, governance, stakeholder relationships and
quality of management.? On 13 December, JAAF and several
key garment manufacturers hosted a stakeholder?s forum to
discuss the benefits of sustainability reporting.

6. (U) While JAAF and the large manufacturers are enthused
about the prospects for sustainability reporting, they
continues to face the challenge that buyers are usually not
willing to offer any premium for ?ethically? manufactured
clothes. This forces Sri Lanka to compete directly against
poor labor practices and perceived unfair trade practices
in competitor countries like China, which is a significant
challenge.

Small and Medium Sector Not Faring So Well
------------------------------------------
7. (U) While the signs look positive for most of the big
players, the picture is more mixed for the small and
medium-sized players, whose competitiveness has waned
considerably in the face of competition from companies and
countries with much greater economies of scale. Oxfam
recently prepared a survey in preparation for its study on
the affects of the MFA phase-out, which reported that since
January 2005, 15 garment factories have closed, displacing
as many as 3,000 workers. All 15 factories were small-
scale producers. Small producers comprise about 80 percent
of the 735 garment factories in Sri Lanka. Nonetheless, it
is not clear that there has been an overall negative impact
on employment in the sector, as larger JAAF members have
consistently reported a need for several thousand new
workers in the industry.

US Remains Sri Lanka?s Best Customer
------------------------------------
8. (U) The US remains by far Sri Lanka?s primary garment
sector customer, importing approximately 60 percent of Sri
Lanka?s garment exports. The GSL, JAAF and other entities
in Sri Lanka continue to lament the lack of preferential
access to the US market for Sri Lankan garments. There are
several reasons that Sri Lanka developed a sense of
entitlement to these preferences, despite the fact that it
has never been particularly likely they would be realized.

Prior FTA Momentum Recalled
---------------------------
9. (SBU) The GSL and Sri Lankan business community continue
to push the idea of a free trade agreement with the US.
This effort is almost entirely driven by the garment
sector, which views such an agreement as an opportunity for
preferential market access. Under former Prime Minister
Ranil Wickremesinghe, Sri Lanka was close to beginning
negotiations with the US on a Free Trade Agreement (a point
still, at a minimum, years away from a final agreement).
But Wickremesinghe?s government fell soon after this
process got underway, and more protectionist United
People?s Freedom Alliance (UPFA) and Sri Lanka Freedom
Party (SLFP) governments have come to power since. While
these subsequent Governments continue to desire a free
trade agreement ? they view it narrowly as a means to
increase garment market access. They do not tend to
understand the scope or nature of an FTA.

10. (SBU) The GSL has also become less supportive and less
helpful toward US pursuits in the WTO and has adopted
tariffs and fees that have had a detrimental impact on
imported US products in Sri Lanka. Furthermore, Sri Lanka
seems to be blissfully ignorant of the fact that, as a net
importer of textiles, normal rules-of-origin requirements
would probably significantly restrict the value of an FTA
to the garment export trade.

Tsunami Aid as Trade?

SIPDIS
---------------------
11. (SBU) Beyond the desires for an FTA, Sri Lanka has also
pursued legislation in the US that would grant duty free
access for all Sri Lankan products (including garments) for
five years, as a form of post-tsunami assistance. Sri
Lanka?s former Ambassador to the US, who is now a lobbyist
for JAAF, has been pushing this measure. He continues to
represent its potential for success favorably in Colombo,
despite what Post understands to be very long odds on
Capitol Hill.

12. (SBU) The US was recently accused in the press by Sri
Lanka?s Trade Minister as having ?reneged? on a promise to
provide duty-free access under this legislation, based on
the Ambassador?s recent explanation to him that despite the
fact it might be presented to Congress, its likelihood of
passage, given the fact that the garment sector had been
largely unaffected by the tsunami, and the well-coordinated
anti-trade lobbying on the part of the US textile
industries, was virtually nil.

EU and GSP ?Plus?
-----------------
13. (U) Sri Lanka?s recognition by the EU for its strong
labor standards and eligibility for GSP ?Plus? status,
which provides duty free access for Sri Lankan products,
including garments, was widely seen as a huge potential
growth opportunity. Nonetheless, initial indications are
that Sri Lankan exports to the EU have not performed well,
largely as a result of the restrictive rules-of-origin
requirements (Note: the same problem it would likely face
in any kind of preferential agreement with the US. End
Note). It is expected that the EU rules of origin will be
relaxed in 2006, but it is not clear how much relaxation
would be required in order for Sri Lanka to recognize
significant gains in the EU market.

Comment
-------
14. (SBU) Sri Lanka?s large apparel manufacturers are well
run and forward thinking. Nonetheless, their continued
fear of China and other Asian competitors appears to lead
them into unhealthy pursuits, such as the desire for
preferential trade agreements that may or may not have much
direct benefit. Sri Lanka is a net importer of textiles
for the garment sector (over USD 1.5 billion imported each
year) so normal rules of origin standards would probably
erase any significantly useful gains from a preferential
trade agreement. Furthermore, even when the industry does
gain some breathing space (such as when the US and China
reached an agreement to control the growth of China?s
garment exports to the US), it immediately begins to pursue
the next option to promote preferential access, rather than
more fully exploring useful ways to use the breathing space
for productivity enhancements, supply chain consolidations
or investments in other industries (such as textiles) to
make the overall sector more competitive (Note: some
garment manufacturers are pursuing these innovations, but
not all. End Note). The Ambassador and Econchief have been
using increasingly blunt language to urge the Sri Lankan
garment community and the GSL to recognize and accept the
low likelihood of a US-Sri Lanka trade agreement, the lack
of usefulness of such an agreement to the garment sector,
and that the increasingly unhelpful policies and positions
that Sri Lanka is adopting both in its domestic economic
and trade policies and in its pursuits in international
trade fora, particularly the WTO, could have consequences.
While we expect to see Sri Lanka?s calls for preferential
access continue, given the simplistic and one-dimensional
views of the GSL?s Trade Minister, we also believe that the
sector has a strong future, once it accepts that it will
have to compete with China on price and as an equal in
terms of access to large markets and begins to focus its
attention on needed domestic economic policy reforms that
could further liberalize the economy and promote a
stronger, more dynamic business sector. End Comment
Entwistle

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