VZCZCXRO9902
RR RUEHLMC
DE RUEHLM #0092/01 0241139
ZNR UUUUU ZZH
R 241139Z JAN 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 7592
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1789
RUEHKA/AMEMBASSY DHAKA 0701
RUEHIL/AMEMBASSY ISLAMABAD 7692
RUEHKT/AMEMBASSY KATHMANDU 5871
RUEHKP/AMCONSUL KARACHI 2323
RUEHCG/AMCONSUL CHENNAI 8299
RUEHGV/USMISSION GENEVA 2595
RUEHBS/USEU BRUSSELS
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 000092 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/INS AND EEB/TPP/ABT JOHN FINN AND GARY A CLEMENTS 
COMMERCE/ITA/OTEXA FOR MARIA D'ANDREA 
STATE PLS PASS TO USTR CAROYL MILLER AND ADINA ADLER 
 
E.O. 12958: N/A 
TAGS: ECON ETRD KTEX CE
SUBJECT: SRI LANKA: TEXTILE AND APPAREL SECTOR CONCERNS FOR 2008: 
U.S. RECESSION AND EU GSP+ 
 
REF:  07 COLOMBO 1355 
 
¶1.  (U) Summary:  Sri Lanka's garment sector remains healthy, but is 
concerned about the possible impact of a U.S. recession.  An even 
more pressing worry is the possibility of losing preferential access 
to the EU market under the EU's GSP+ program.  The industry is 
frustrated that the government is not doing enough to help maintain 
GSP+.  On an upbeat note, major garment producer Brandix will soon 
announce plans to open three factories in the war-torn East.  Other 
positive industry initiatives, involving ethical and environmental 
production practices, are helping the Sri Lankan garment industry 
differentiate itself from its lower cost competitors.  End summary. 
 
 
¶2.  (U) On January 8 EconOff met Ajith Dias, Chairman of the Joint 
Apparel Association Forum (JAAF), which represents all apparel and 
textile businesses in country.  Dias underscored his concerns for 
both the U.S. and EU markets, while highlighting positive actions by 
several JAAF members.  Dias also noted that he hoped the GSL and 
India would soon sign an agreement that will allow additional 
duty-free access of garments to the Indian market under the Indo-Sri 
Lanka Free Trade Agreement. 
 
Garments 50% of Sri Lanka's Exports 
----------------------------------- 
 
¶3.  (U) A three-plus billion dollar industry, SL apparel and textile 
production accounts for approximately 50% of Sri Lanka's total 
exports and 67% of its industrial production.  It employs 
approximately 270,000 individuals directly and nearly one million 
indirectly.  It is the single largest employer in the manufacturing 
sector and the single largest employer of women.  Its focus on 
high-end production and ethical business practices (no child labor, 
empowerment of women, a move towards eco-friendly production) places 
it at the top of producers in South Asia, both in terms of respect 
for worker rights and in price-per-garment charges. 
 
¶4. (U) Basic Data: (2007 Estimates) 
 
Total industrial production: $9.81 billion 
Total textile/apparel/leather production: $3.35 billion 
Textile/apparel exports: $3.20 billion 
Textile/apparel exports to the US: $1.63 billion 
Textile/apparel share of total exports: 43% 
Textile/apparel share of total imports: 15% 
Total manufacturing employment: 1,363,000 (2006) 
 
U.S. Market Concerns Looming 
---------------------------- 
 
¶5.  (U) The entire sector is watching the U.S. economy with concern. 
 Although sales to the U.S. remained significant, there was a 5% 
decline during the first eleven months of 2007.  Companies are 
concerned that a further downturn in the economy or recession will 
cause orders to decline considerably in 2008.  Sri Lanka also 
remains worried that the industry will suffer significantly if China 
safeguards are lifted as planned at the end of 2008.  (Note:  Twenty 
percent of Sri Lanka's exports to the U.S. are concentrated in 
categories currently protected by China safeguards.)  While industry 
heavy-hitter Brandix CEO Ashroff Omar does note that not all 
business will be lost to cheaper Chinese factories because of a 
desire by U.S. buyers to diversify geographically, the losses due to 
a lifting of safeguards will be substantial. 
 
¶6.  (U) Following its "Garments Without Guilt" roadshow to the U.S. 
in 2007, JAAF has continued to engage -- via a D.C. lobbying firm -- 
with Members and staff in Congress to heighten interest in securing 
preferential treatment for Sri Lanka.  Nevertheless, Sri Lanka has 
not been added to various trade bills that would allow import 
concessions for developing countries.  Dias admitted that garnering 
interest in Sri Lanka during the election season will be difficult. 
The current perception of Sri Lanka on the Hill as a country with 
serious human rights concerns is also hampering efforts to portray 
Sri Lanka, and specifically the textile/apparel industry, 
positively.  Nevertheless, Dias hopes that efforts directed at 
 
COLOMBO 00000092  002 OF 003 
 
 
Senators and committee staff will help to convince Congress of the 
necessity of preferential treatment legislation in advance of the 
removal of Chinese safeguards. 
 
GSP+: Can Sri Lanka Maintain 
Preferential Access to the EU? 
------------------------------ 
 
¶7.  (U) The U.S. aside, by far the greatest fear for the apparel 
sector is that Sri Lanka will fail to qualify for GSP+ in 2008.  The 
GSP+ program gives duty free treatment to most exports from 
developing countries that qualify by having ratified and implemented 
key international political, human and labor rights conventions. 
Under GSP+, Sri Lanka can export finished garments duty free to the 
EU, as long as there is over 50% domestic value addition and 
domestic double transformation (i.e., yarn to fabric conversion, and 
fabric to clothing conversion).  Under GSP+, which came into effect 
in 2005, Sri Lanka's garment exports to the EU have grown at an 
impressive rate.  In 2006, Sri Lanka's market share in the EU grew 
by 12%.  In 2007, it grew another 22%.  However, increasing concerns 
over Sri Lanka's commitment to human rights are endangering Sri 
Lanka's eligibility.  JAAF is trying to emphasize to the EU that 
rights within the industry are excellent.  However, to get its 
message across effectively, the industry needs the government's 
assistance. 
 
¶8.  (SBU) According to Dias, the industry was alarmed by the 
government's plan earlier this year to replace Sri Lanka's current 
ambassador and commercial attache to the EU, both of whom have 
extensive experience with GSP+ issues, with less experienced people. 
 The industry registered its concerns with the government, and now 
is confident that the government will send qualified people. 
Specifically, the new ambassador is to be Ravinath Ariyasinghe, who 
is currently the Foreign Ministry's communications director and was 
DCM in Washington until 2006.  The new commercial attache, the 
government has promised, will be a senior Commerce Department 
official familiar with trade issues like GSP+.  Dias reports that 
JAAF feels the government was, in this case, responsive to its 
concerns.  Likewise, apparel industry leaders' recent pleas to 
President Rajapaksa for more support on the GSP+ issue led the 
president to appoint a "GSP+ Defender" team composed of four 
ministers.  Unfortunately, according to Dias, these ministers have 
little experience in trade negotiations. 
 
¶9.  (SBU) The industry is receiving help from an unlikely source -- 
local trade unions.  Anton Marcus, General Secretary of the Free 
Trade Zones and General Services Employees' Union, stated recently 
that the union will support continuation of GSP+, as its removal 
would cause a negative impact on workers.  The unions had previously 
threatened to lobby the EU against renewal of GSP+ on the grounds 
that the government and industry are not fully adhering to ILO 
conventions.  Specifically, the unions are critical of garment 
factory management for encouraging "workers councils" in lieu of 
unions.  These councils have elected representatives who negotiate 
with management like unions, but do not charge union fees and are 
generally less confrontational and less political than unions. 
 
Positive Developments: 
Factories in the East, Ethical Business Practices 
--------------------------------------------- ---- 
 
¶10.  (U) Although serious concerns for the export market weigh 
heavily on the industry, there are also many positive developments. 
Brandix will announce its plans to open three factories in a 
predominately Tamil and Muslim area of the Batticaloa district in 
the East.  It will be the first company to take advantage of 
government incentives aimed at rebuilding the war-torn area. 
Brandix also recently won "Fairtrade" and organic certification for 
its woven fabric mill.  MAS, another large producer, recently opened 
what it billed as the world's first eco-friendly industrial park 
dedicated to fabric and apparel manufacturing.  Building on its 
knowledge and experience as the largest producer of intimate wear in 
South Asia, MAS also recently launched the first brand-name lingerie 
from Sri Lanka; it will be marketed throughout India by mid-2008. 
Active in corporate social responsibility, the apparel sector 
 
COLOMBO 00000092  003 OF 003 
 
 
continues to look at ways to "Go Beyond" (as one campaign is 
entitled) the basic employer-employee relationship to help further 
educate and empower the workforce. 
 
¶11.  (SBU) Comment:  The textile/apparel industry effort to market 
itself to foreign companies and consumers as the alternative, 
ethical choice is a logical one.  Recognizing that it will never 
beat China, India, or most other countries in terms of production 
costs, its future lies in marketing to companies who want to 
demonstrate to their clients that their products were made under 
ethnical conditions in factories supporting 
internationally-recognized labor practices, and without undue damage 
to the environment.  To date, the industry has been able to attract 
buyers particularly interested in ethical practices.  Victoria's 
Secret, Gap, and Marks and Spencer, among many other apparel giants, 
 
SIPDIS 
source clothing from Sri Lanka, and regularly highlight Sri Lankan 
companies in their annual reports to shareholders.  Production under 
ecologically-friendly conditions is gaining interest among buyers as 
well, and industry leaders expect such interest to increase in the 
near and long-term.  However, time will tell if the industry's 
efforts are enough in light of the challenges it faces from China, 
the EU, and a slowing U.S. economy. 
BLAKE