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