VZCZCXRO2494
RR RUEHBI RUEHLMC
DE RUEHLM #0735/01 2170931
ZNR UUUUU ZZH
R 040931Z AUG 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8496
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 2201
RUEHKA/AMEMBASSY DHAKA 1032
RUEHIL/AMEMBASSY ISLAMABAD 8026
RUEHKT/AMEMBASSY KATHMANDU 6200
RUEHKP/AMCONSUL KARACHI 2383
RUEHCG/AMCONSUL CHENNAI 8630
RUEHBI/AMCONSUL MUMBAI 6065
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 02 COLOMBO 000735 
 
SENSTIVE 
 
SIPDIS 
 
STATE FOR SCA/INS, SCA/PB AND EEB/CBA 
COMMERCE FOR EROL YESIN 
CHENNAI FOR FCS 
 
E.O 12958: N/A 
TAGS: ECON ETRD EAID CE PK
SUBJECT: Pakistan-Sri Lanka FTA Presents Opportunities for U.S. 
Businesses 
 
¶1. (U) Summary:  Trade between Pakistan and Sri Lanka has increased 
significantly following signing of the Pakistan-Sri Lanka Free Trade 
Agreement in June 2005.  Total trade in 2004 was valued at USD 147.4 
million; by 2007 it grew to USD 233.4 million, an increase of 58 
percent.  As tariffs are reduced in coming years, trade is expected 
to continue to grow.  U.S. companies currently operating or 
considering operations in Sri Lanka may take advantage of the FTA by 
adding value to goods in Sri Lanka and exporting -- duty free -- to 
the larger Pakistani market.  End Summary. 
 
Agreement Details 
------------------ 
 
¶2. (U) Following an initial framework agreement in 2002 and several 
rounds of bilateral negotiations, the Pakistan-Sri Lanka Free Trade 
Agreement (FTA) was finalized in February 2005 and implemented in 
June of the same year.  At its inception, Pakistan offered duty free 
entry for 206 products from Sri Lanka.  To date Pakistan has reduced 
tariffs by 67 percent on all other imports from Sri Lanka with the 
exception of garments, ceramic products, betel leaves, and natural 
cosmetics -- which have quotas or preferential rates -- and an 
additional 540 items included on a no-concession list.  Sri Lanka 
initially offered duty free entry to 102 products from Pakistan.  To 
date Sri Lanka has reduced tariffs by 40 percent on the balance of 
items and plans to completely phase out tariffs by 2010, excluding 
697 items covered by its no-concession list.  Sri Lankan quotas on 
basmati rice and potatoes will remain intact.  Products must meet a 
minimum of 35 percent domestic value-added in order to be eligible 
for FTA trade benefits.  (Note: For complete lists please go to: 
http://www.doc.gov.lk/web/ pakissrilanka_agreement_duty.php) 
 
Scheduled Tariff Reductions Delayed 
Due to Budget Constraints 
------------------------------------ 
 
¶3. (SBU) Both countries were scheduled to undergo the next phase of 
tariff reductions in June 2008.  Sri Lanka was to reduce tariffs by 
20 percent and Pakistan to completely eliminate them except for 
quota and no-concession items.  However, to date neither government 
has implemented this phase of the FTA, in part due to delays by the 
GSL and, in part, due to a severe economic downturn in Pakistan and 
delays by the newly elected Government of Pakistan in announcing 
economic policy.  According to GSL sources, the Finance Ministry 
delayed granting concessions primarily due to revenue concerns, as 
additional duty concessions would constrain the government's ability 
to raise much-needed revenue.  If and when Sri Lanka proceeds with 
reductions, Pakistan has promised to eliminate its remaining 
tariffs; however, given the current economic climate in Pakistan, 
the likelihood of this is uncertain, at least in the short-term. 
 
¶4. (U) The FTA with Pakistan is not the only trade agreement to 
suffer this year.  Pursuant to the March 2008 Indo-Sri Lanka FTA, 
Sri Lanka was to offer duty-free access for imports from India, with 
the exception of 1,180 no-concession items.  However, these duties 
still remain in place. 
 
Benefits to Date: 
Substantial Increase in Trade 
------------------------------- 
 
¶5. (U) Pakistani exports to Sri Lanka grew by 65 percent and Sri 
Lankan exports to Pakistan by 40 percent from 2004 to 2007.  During 
this same period, Sri Lanka's real GDP grew by 22 percent and 
Pakistan's by 30 percent.  Pakistani cotton exported to Sri Lanka is 
at present the largest good traded, and it has experienced 
significant growth due to the FTA. In 2002, Pakistan exported USD 
24.1 million in cotton to Sri Lanka; by 2006 cotton exports grew to 
USD 86.6 million - an increase of over 350 percent.  Sri Lanka 
experienced strong growth particularly in export of natural rubber 
to Pakistan.  In 2002 natural rubber exports were valued at USD 4.9 
million; by 2006 they increased to USD 17.3 million.  Other goods 
saw similar increases. 
 
Potential Opportunities for U.S. Companies 
------------------------------------------- 
 
 
COLOMBO 00000735  002 OF 002 
 
 
¶5. (U) The Pakistan-Sri Lanka FTA provides good opportunities for 
U.S. exporters and foreign investors that are active, or interested 
in becoming active, in the region.  U.S. businesses may be able to 
reduce their cost of doing business and increase profits by adding 
value to goods in Sri Lanka and then exporting -- duty free -- to 
the larger Pakistani market.  Exports from Sri Lanka that have 
potential to be profitable include rubber products, ceramics, 
motorcycles, and motor parts. 
 
Comment 
-------- 
 
¶7. (SBU) In addition to the Pakistan-Sri Lanka FTA and the Indo-Sri 
Lanka FTA, Sri Lanka is also party to the South Asia Free Trade 
Agreement (SAFTA) and Asia Pacific Free Trade Agreement (APTA).  The 
country is ideally located at the crossroads between eastern and 
western trade routes and has an excellent port.  Labor costs are 
relatively low and the work force is well-educated with a 91 percent 
literacy rate.  Nevertheless, foreign direct investment (FDI) 
remains low as significant deterrents to investment remain; in 2007, 
Sri Lanka received only USD 734 million in FDI.  The protracted 
ethnic conflict with the Liberation Tigers of Tamil Eelam (LTTE), 
combined with an inefficient governmental bureaucracy and concerns 
of corruption, spur investor uncertainty.  If Sri Lanka is to 
utilize FTAs to maximum capacity, the GSL needs to promote a more 
investor-friendly climate, including a political, rather than 
military, solution to the LTTE conflict.  Post encourages U.S. 
companies and investors interested in doing business in Sri Lanka to 
contact the Embassy and the American Chamber of Commerce in Sri 
Lanka (www.amcham.lk) for further information.