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Cablegate: 5th Round of Tifa Talks Highlight On Obstacles to Us

VZCZCXRO5834
RR RUEHLMC
DE RUEHLM #2070/01 3481101
ZNR UUUUU ZZH
R 141101Z DEC 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4924
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0353
RUEHKA/AMEMBASSY DHAKA 9692
RUEHIL/AMEMBASSY ISLAMABAD 6628
RUEHKT/AMEMBASSY KATHMANDU 4688
RUEHKP/AMCONSUL KARACHI 2066
RUEHCG/AMCONSUL CHENNAI 7177
RUEHGV/USMISSION GENEVA 1586
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 06 COLOMBO 002070

SIPDIS

SENSITIVE, SIPDIS

DOL/ILAB FOR TINA MCCARTER

DRL/IL FOR LAUREN HOLT

STATE FOR SA/INS

MCC FOR D NASSIRY AND E BURKE

GENEVA PASS USTR

DEPARTMENT PASS TO US TRADE REPRESENTATIVE
USTR FOR K BHATIA AND D HARTWICK

E.O 12958: N/A
TAGS: ECON ELAB EIND ETRD EAID CE
SUBJECT: 5TH ROUND OF TIFA TALKS HIGHLIGHT ON OBSTACLES TO US
INVESTMENT


COLOMBO 00002070 001.2 OF 006


This message is sensitive but unclassified.

1. (SBU) Summary. The Office of the US Trade Representative and
the Sri Lankan Ministry of Trade, Commerce, Consumer Affairs and
Marketing Development held the Fifth Joint Council Meeting under the
bilateral US-Sri Lanka Trade and Investment Framework Agreement
(TIFA) in Colombo on December 1. Minister Jeyaraj Fernandopulle
raised the importance of apparel to Sri Lanka's exports and noted
the recent challenges affecting Sri Lanka's economy including the
2004 tsunami, the high price of oil in the past year, and the
increase of global competition in key industries. The U.S.
delegation stressed the importance of pursuing sound macro-economic,
tariff, intellectual property and investment policies. The two
sides discussed how Sri Lanka can make effective use of US trade
capacity building programs. Both sides expressed the desire to see
a successful and ambitious outcome to the Doha Round of trade
negotiations. End Summary.

2. (SBU) DUSTR Karan Bhatia, AUSTR Douglas Hartwick, AUSTR Mary
Ryckman, USTR Special Assistants Manpreet Anand and Neil Herrington,
Intellectual Property Officer Dominic Keating, and Agricultural
Attache to New Delhi Gerald Smith, accompanied by Ambassador Robert
O. Blake and Econoffs, attended the fifth round of US-Sri Lanka TIFA
talks held in Colombo on December 1. Jeyaraj Fernandopulle,
Minister of Trade, Commerce, Consumer Affairs and Marketing
Development, led the Sri Lankan delegation.

----------------------------
Trade Liberalization Status
----------------------------

3. (SBU) Minister Fernandopulle opened the talks by commenting on
his desire to recommence discussions for a Free Trade Agreement
(FTA) between the U.S. and Sri Lanka, noting the positive movements
made in this direction under the previous government. The Minister
went on to note how Sri Lanka has embarked on trade liberalizing
policies with other countries, including an FTA with Pakistan in
2005, a bilateral investment agreement with India, and participation
in the South Asia Free Trade Agreement (SAFTA). Ambassador Bhatia
responded that while it is not likely that FTA discussions could
commence soon, continued trade liberalization policies are necessary
precursors to future FTA negotiations.

4. (SBU) Minister Fernandopulle also explained that, despite
economic growth of 7%, Sri Lanka faces several economic challenges
including high fuel costs, recovering from the tsunami, adjusting to
tougher global competition, and the ongoing conflict. The
Minister emphasized that Sri Lanka was one of the first countries to
liberalize trade in South Asia and that Sri Lanka's current
liberalization commitments are reflected in various bilateral and
regional free trade agreements. However, the Sri Lankan economy is
still largely based on agriculture, making agricultural
liberalization difficult. Sri Lanka is seeking protection under the
special products mechanism for agricultural products that it
produces locally. Ambassador Bhatia noted that there is a cost to
Sri Lanka's economic future in staying agriculturally-based as
opposed to moving towards industrialization, especially in terms of
subsidies.

5. (SBU) Ambassador Bhatia spoke briefly about Sri Lanka's import
tariff regime, noting that investment can be stymied with large
import tariff structures. Ambassador Bhatia said that it seemed a
significant amount of Sri Lanka's revenues came from import tariffs,
which can make liberalization reforms politically difficult. The
Sri Lanka delegation responded that in the next ten years, Sri Lanka
will continue moving substantially towards a tax structure, rather
than an import tariff regime for its revenue.


COLOMBO 00002070 002 OF 006


---------------------------
The Doha Development Round
---------------------------

6. (SBU) Ambassador Bhatia stressed the importance of the Doha
round and U.S. commitment to the Doha Development Agenda. He noted
that the U.S. wants to reduce tariffs as well as domestic subsidies
and that the Doha round should be a collective effort of countries
around the world, not just the U.S. and the EU. Minister
Fernandopulle confirmed that Sri Lanka will support the U.S. on
Doha. However, as a net food importer, Sri Lanka is concerned that
a reduction of agricultural subsidies would increase import prices.
Sri Lanka is also seeking increased market access for professional
services, industrial products, and particularly for garments.

------------------------------------------
Securing Greater Market Access to the U.S.
------------------------------------------

7. (SBU) The Sri Lankan delegation made their case for preferential
tariffs for apparel exported to U.S. and highlighted Sri Lanka's
positive record of labor standards and welfare. They pointed out
that some of Sri Lanka's competitors have free or preferential
access to U.S. Sri Lanka seeks support through the extension of
benefits granted to least-developed countries (LDCs) and hopes that
the U.S. will consider Sri Lanka's vulnerability and extend these
benefits.

8. (SBU) Ambassador Bhatia had a pre-TIFA briefing with the Joint
Apparel Association Forum (JAAF) on this same topic. Sri Lanka's
apparel exports to the U.S. have declined 1% in the first 9 months
of 2006. JAAF participants said they faced severe price competition
from China which could disrupt the apparel industry; especially the
smaller factories. They stressed the importance of a stable garment
industry for Sri Lanka's political stability and economic
development. JAAF also said that once peace returns, the garment
industry could be a catalyst for growth in the North and East. JAAF
has already embarked on a program to showcase Sri Lanka's strong
adherence to international labor standards. JAAF requested that
concessions be granted at least for apparel made with US yarn or
fabric. Ambassador Bhatia stressed that market based principles
are the way to move forward in apparel and suggested that Sri Lanka
undertake a trip to the U.S. to showcase the good work they are
doing in the apparel sector.

---------------------
National Drug Policy
---------------------

9. (SBU) Sri Lanka imports USD 20 million worth of pharmaceutical
items from the US. These U.S. exports could be negatively impacted
if certain clauses of the National Drug Policy (NDP) are
implemented. Sri Lankan Ministry of Health officials stated that the
current procurement procedure is based on competitive prices and WHO
recommendations. The Health Ministry buys largely from known
suppliers and decides on quality and quantity. The GSL is committed
to providing free health care to the population, especially in the
face of changing demographics and increasingly prevalent terminal
illnesses. Importers registered with the Ministry of Health can have
free access to the local market. A panel will determine what drugs
Sri Lanka requires. However, this does not mean that other drugs
cannot be imported. Users can also import on user license, the GSL
will continue to procure drugs recommended by WHO, and private
sector health providers can import drugs once they are registered.
The NDP's purpose is to prevent unwanted drugs coming in. Ambassador
Bhatia suggested a digital video conference between the two sides on
this issue and the GSL agreed to look into setting up a working
committee on the NDP.

COLOMBO 00002070 003 OF 006

-----------------------
GMO Food Certification
-----------------------

10. (SBU) The USG sees Sri Lanka's proposed GMO food labeling
requirements as a non-tariff barrier and has provided comments on
the draft legislation that will be tabled at the next Food Advisory
Committee meeting. According to the USDA, the draft regulation has
inconsistencies and is not based on scientific justification. Dr.
Shanmugarajah of the Sri Lankan Health Ministry said Sri Lanka was
obliged to develop a GM regulation as a signatory to the Cartegena
Protocol, that certain consumer groups were lobbying for the
regulation, and that there is a Supreme Court order to expedite the
labeling regulation. He explained that the regulation is not a ban
and that its purpose is to regulate the import of GMOs into the
country. An expert committee will be set up to recommend approval or
rejection of the products on a case by case basis. There is no
capacity in Sri Lanka for risk analysis, so the Health Ministry will
review certificates of food from other countries (eg. USDA). The
onus of responsibility will lie with the importer to prove that the
food is safe and a transition period will be allowed when the
regulations come into effect. Dr. Ratnayake of the Ministry of Trade
reassured the US delegation that these regulations would not become
a barrier. The GSL agreed to nominate the Director General for
Department of Commerce as a POC on this issue.

-------------
Seed Potatoes
-------------

11. (SBU) On the seed potatoes issue, FAS New Delhi pointed out
that the United States is actively working with the GSL officials to
provide market access for U.S. seed potatoes. The United States
Department of Agriculture (USDA) and the Sri Lankan Department of
Agriculture (DOA) are currently in technical discussion to resolve
this issue. FAS New Delhi informed the meeting that as of November
14, 2006 the Director General of Agriculture permitted the
importation of seed potatoes subject to two requirements. FAS New
Delhi informed the Sri Lankan side that a formal technical letter
from APHIS/PPQ with further details regarding our position on the
above referenced requirements is forthcoming. The USG suggested
that this would require more discussion between APHIS and the
Ministry of Agriculture.

--------------------------------
The Current Investment Climate
-------------------------------

12. (SBU) The Sri Lanka Board of Investment gave a presentation on
the current investment climate, stressing reforms in their
government procurement policies.

13. (SBU) Ambassador Hartwick pointed out that the trade balance,
surprisingly, is 10 to 1 in favor of Sri Lanka. The U.S. delegation
raised the issues of high tariffs, creeping cesses, and other duties
on imports. The GSL explained that there are low tariffs for
inputs, machinery and intermediate goods, and high tariffs for
finished goods. Sri Lanka is dependent on tariffs of finished
goods as most goods fall under categories with low duties.
Intermediate goods account for 62% of imports, food accounts for
17%, and finished products 20%. Recent FTAs and regional trading
agreements have eroded the border tariffs, which are an important
source of income and account for 12% of revenue. Until domestic
revenue is more broadly based, they will not be able to reduce the
border tariffs. The Sri Lankan delegation offered to consider
reducing tariffs on items of interest to US exporters on a product
by product and case by case basis. Ambassador Bhatia suggested that

COLOMBO 00002070 004 OF 006


they look at reducing tariffs on a sector by sector basis.

14. (SBU) Ambassador Bhatia said he would like to see more US
investments in Sri Lanka and trade promotion elements in projects
promoted by the MCC. He said roads, training and SME development
could all have a high component of trade promotion.

15. (SBU) The GSL is looking for foreign investment in
infrastructure and in backward integration in the textile industry.
The Board of Investment (BOI) is in a position to grant incentives
in those areas, and the FTAs with India and Pakistan make Sri Lanka
an attractive location for foreign investors who are interested in
exporting to those countries. Sri Lanka has the highest market
access (4,500 items duty free) to India in the region. The BOI
identified automobile and electrical components as two possible
intermediate products that can be made in Sri Lanka. Sri Lanka
also hopes to develop an IT industry with links to South India.
Ambassador Bhatia suggested that Sri Lanka may have to target
companies looking at India and convince them to come to Sri Lanka.


--------------------------------------
Transparency in Government Procurement
--------------------------------------

16. (SBU) Sri Lankan government procurement totals USD 1 billion per
year. President Rajapaksa has stressed the need for transparency in
government procurement and the GSL has drawn up procurement
guidelines to increase transparency. According to Dr. D.M.
Karunaratne, Director General of the National Procurement Agency
(NPA), each Technical Evaluation Officer in the Technical Evaluation
Committee (TEC) has individual responsibility for certain aspects of
the tender review process. Most malpractice in procurement takes
place when urgent procurements are requested. The Treasury will not
fund procurement unless a procurement plan is prepared. Bidding
documents are prepared in line with similar documents of funding
agencies. If specifications are biased, the TEC has to re-examine
the tender. Specifications of bidding documents have to be of a
generic nature and reflect functional aspects. Several improvements
have been made to the tender guidelines, according to Karunaratne.
Bidders also have the opportunity to protest if the specifications
are biased. Post procurement auditing does not take place.

-----------------
Contract Sanctity
-----------------

17. (SBU) Ambassador Hartwick raised the issue with Jacobi Carbons,
indicating that this kind of case sends a bad signal to potential
investors to Sri Lanka. The GSL responded that the Gazette
notification that effectively restricted Jacobi Carbons from
obtaining local raw material was not made with the concurrence of
Minister Fernandopulle, which was required. The cabinet has
reviewed the issue and determined that the local material
restriction was incorrect and would be removed. The court was to be
advised of this determination. As such, the Chief Justice's order
for a settlement was no longer valid. This determination was being
conveyed to Jacobi Carbons.

----------------------------------------
IPR Enforcement and Technical Assistance
----------------------------------------

18. (SBU) Dominic Keating, US PTO officer from Delhi, stressed the
importance of effective enforcement of the 2003 intellectual
property law in order to enhance investment in Sri Lanka. Keating
encouraged the GSL to ratify and implement the World Intellectual
Property Organization (WIPO) Copyright Treaty (WCT) and the WIPO

COLOMBO 00002070 005 OF 006


Performances and Phonograms Treaty (WPPT). Keating also requested
an update on the implementation of the GSL 2003 IPR law.

19. (SBU) Karunaratne reported that Sri Lanka is discussing with the
World Intellectual Property Organization (WIPO) the development of a
national strategy on IPR (NSIPR). He hopes to initiate work on the
NSIPR in 2007. The strategy will encompass IP norms,
implementation, enforcement, public awareness, and using IP for
economic development. A new customs implementing regulation will be
published soon which will improve customs enforcement. The IPR
office will also be automated. Some classes of trademarks require a
long period for registration, some as long as 1 to 2 years, but
there is no back-log on patents and designs. The IP office also
acts as a mediator in disputes involving copy rights and related
rights. Ambassador Bhatia suggested that someone from the GSL meet
with Jon Dudas, the Department of Commerce Under Secretary for
Intellectual Property and Director of the Patent and Trademark
Office, when he visits India in mid-December.

20. (SBU) The GSL requested assistance in developing a database to
find the owners of trademarks and in human resource development and
training. Keating responded that he would take these requests back
to the relevant USG officials.

-------------------------------
GSP Status and Diversification
-------------------------------

21. (SBU) Ambassador Bhatia discussed the GSP program and the
upcoming re-authorization. He informed the Sri Lankan delegation
that GSP now accepts SAARC accumulation for rules of origin
purposes. Sri Lanka's GSP utilization rate is about 88% and in line
with the global average.

22. (SBU) The GSL requested that products exported to the US but
made with yarn imported from the US be eligible for duty-free
treatment. Ambassador Bhatia acknowledged the rationale behind this
request and said that the USG would respond on this issue.

--------------------------------
Millennium Challenge Corporation
--------------------------------

23. (SBU) The discussion on the MCC was held over lunch with the
new lead for GSL's MCC team, Dhara Wijayatilake. She is well-versed
in the current proposal and aware that the MCC has decided not to
invest in the large irrigation project, including four dams, that
was part of the initial GSL's proposal. The GSL understands the
reasons why the MCC took this decision, as extensive due diligence
remains to be done on environmental impact assessments and related
issues. The GSL is likely to press ahead with the remaining elements
of the initial proposal, but would like to discuss with the MCC if
it would be possible to include an investment in an existing
information technology program which aims to bring technology to the
rural schools. Ms. Wijayatilake would like to have this considered,
but does not want to cause extensive delay in completing the MCC
compact.

------------------------
Trade Capacity Building
------------------------

24. (SBU) Sonali Wijeratne of the Department of Commerce explained
various programs Sri Lanka has undertaken to build awareness of the
benefits of global trade. Sri Lanka has recently established a
trade remedy unit which works on anti-dumping and counter-vailing
duties legislation, and requested assistance to do this. Ryckman
noted that the US Department of Commerce has conducted some training

COLOMBO 00002070 006 OF 006


in this area to help countries set up WTO-consistent trade rules.
The GSL also would like additional training in international trade
law. The US suggested this might be an area where the WTO-provided
assistance could help. Finally, the GSL provided a paper on a
request to expand IT capabilities of the government to better
connect its offices overseas, including its 23 offices that are
responsible for the promotion of Sri Lanka's economic and trade
interests. The USG said it would take the proposal back to capital
to for consideration.

25. (SBU) Comment: Sri Lanka's proposed GMO regulation, the NDP and
government procurement practices could have adverse effects on U.S.
trade to Sri Lanka unless these issues are addressed in a meaningful
manner. Despite reassurances from the GSL, if the NDP and GMO
regulations are implemented in their current form we expect that
there will be a negative impact on U.S. exports. Heavy political
influence continues to prevent procurement systems from being
effective, a problem that is reflected in Sri Lanka's slide on
Transparency International's corruption perception index from 78 in
2005 to 84 in 2006. For the Sri Lankan side, the most critical
issue with regard to bilateral trade remains seeking preferred U.S.
market access for apparel through an FTA or other trade preference
vehicles.

BLAKE

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