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