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Cablegate: U.S.-Thailand Fta: Status and Prospects

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 07 BANGKOK 008485

SIPDIS

SENSITIVE

STATE PASS TO USTR FOR A/USTR BWEISEL

E.O. 12958: N/A
TAGS: ETRD ECON PREL TH US FTA
SUBJECT: U.S.-THAILAND FTA: STATUS AND PROSPECTS

SUMMARY

1. (SBU) The November 22 announcement by the Thai lead
negotiator that the RTG was seeking a postponement of the
December 2004 FTA round was the culmination of several
complex crosscurrents within the RTG and Thai society. The
ostensible reason for the postponement, the upcoming
(February 6) elections, is genuinely believed by some senior
officials, as is the need for additional time for
preparation, but is probably the least important element of
the whole story. Key elements within the RTG are
dissatisfied with the comprehensiveness of the U.S.
negotiating framework, particularly its inclusion of labor,
environment, and financial services, as well as the emphasis
on negative lists in services and investment. Key private
sector organizations, notably the Thai Bankers Association,
also have voiced their objections to U.S. requests. The
prospective U.S. offer has disappointed some here, especially
in areas such as temporary entry. The RTG currently is split
into two camps on how to proceed: the first, led by Finance
Minister Somkid and Chief Economic Adviser Pansak, argues for
a go-slow, narrowly focused market access agenda; the second,
led by lead FTA negotiator Nitya (who is allied with Foreign
Minister Surakiart), favors a faster, more comprehensive
approach, arguing that such an FTA would transform and
modernize the Thai economy. They also stress the high costs
of non-participation as other countries pursue FTAs with the
U.S.

2. (SBU) Resolution of this debate awaits the February
elections. Our opportunity for input is limited, although we
may be able to make our negotiating framework more attractive
here by emphasizing benefits to small and medium sized
enterprises, a politically favored sector of the Thai
economy. In spite of the delay and internal RTG
soul-searching, we remain basically optimistic about the
FTA's prospects because we don't see how either side's
fundamental interests in having an FTA have changed. For the
U.S., it is our best chance to maintain a favored trading and
investment position with Thailand that is jeopardized by
several imminent developments. Equally important, an FTA
will be transformational for Thailand, effecting a shift in
many of its governmental institutions towards a more
rules-based economy. That will be good for Thailand, good
for the U.S., and will serve as a positive precedent for the
many other developing economies which are weighing economic
development and trade policy options. In asking for a
comprehensive, transformational FTA with the U.S., we are
asking Thailand to do something unprecedented, something that
it will find very hard. Negotiations are likely to take some
time. Progress could prove non-linear, with periods of rapid
movement forward, followed by some regression, a hiatus, and
repetitions of this cycle. It will require patience,
determination, and judgment, with no guarantee of success.
But we believe it is worth the considerable effort likely to
be required. End Summary.

FTA TALKS PUT ON HOLD

3. (SBU) On November 22, the RTG's chief negotiator announced
that his government was proposing to the USG that the FTA
negotiating round scheduled for the week of December 13 be
postponed. The reasons he cited for the request were the
upcoming Thai national elections (currently scheduled for
February 6, 2005), and the need for additional time to
prepare for further talks with the U.S. This announcement
was pursuant to a decision made the previous day by the RTG's
newly created FTA Oversight Committee. In addition to the
postponement request, the Committee ordered the relevant
agencies to further study the major issues in the FTA and
provide recommendations on a future course of action.

4. (SBU) While the explanations publicly provided by the lead
RTG negotiator are undoubtedly genuine, no one here believes
they represent the complete story -- or even the primary
story -- behind the postponement request. Rather, the
postponement was the culmination of several complex
crosscurrents within the RTG and Thai society.

THE ELECTIONS

5. (SBU) Prime Minister Thaksin's Thai Rak Thai Party and its
allies have gone into full campaign mode for the February 6
national elections, and all other issues are being viewed
through the election prism. It is an unfortunate fact that
public sentiment concerning Thailand's several free trade
initiatives is almost entirely negative. Perhaps the most
talked about trade deal is Thailand's "early harvest" tranche
of the ongoing FTA talks with China. While the early harvest
provisions contain significant benefits for prospective Thai
exporters to China, press coverage has centered almost
entirely on increased imports of Chinese onions and garlic,
and resulting depressed prices for Thai farmers in this
sector. (We have yet to see a mass media article that
mentions any increase in consumer welfare due to lower food
prices.)

6. (SBU) Against this backdrop, the U.S.-Thai FTA talks are
regarded by the RTG as a potential political liability best
avoided in an election campaign. From the perspective of the
RTG, the only way the FTA talks with the U.S. could have been
a useful campaign tool would have been an early harvest
component which contained some attractive market access
improvements for Thai exporters. The U.S. preference for a
single undertaking that addresses substantially all trade and
investment barriers meant that there would be no pre-election
"presents" for Thailand (and the Thai Rak Thai party). Once
that fact was recognized by PM Thaksin and the relevant RTG
ministries, support for a pre-election negotiating round
largely evaporated.

7. (SBU) But we don't accept the claim that the postponement
request is all about -- or even primarily about -- an
exogenous factor like the elections. For one thing, trade
policy, while recently controversial and a political
negative, is not a big vote-mover here. Many issues
overshadow it. For another, Thailand's FTA talks with Japan
are about as controversial here as those with the U.S., and
yet the previously scheduled FTA talks with that country,
scheduled for the week of December 6 in Bangkok, have gone
ahead (and with very little media scrutiny). We doubt the
December 13 FTA talks with the U.S. in remote Hawaii would
have generated much in the way of media attention here.

NEED FOR ADDITIONAL PREPARATION TIME

8. (SBU) There is no question that the RTG has found itself
ill prepared for negotiations with the U.S. The belated
formation (in early November, five months after the start of
negotiations) of the RTG's FTA Oversight Committee (chaired
by Finance Minister Somkid) is, in part, a belated
recognition that more work on positions has to be done,
especially in (but not limited to) labor, environment, and
financial services (the Committee's creation is also partly
motivated by internal power struggles within the RTG -- para
15). One of our working level contacts in the Ministry of
Commerce said, "If you look at the guys on our (the RTG's)
labor and environment teams, you can see right away that they
are not prepared to negotiate anything." A Labor Ministry
source said that as of late November, his ministry had yet to
complete translating into Thai the text presented by the U.S.
in the October FTA round.

9. (SBU) But like the elections, we don't accept that the
need for greater preparation time is the major reason for the
postponement. Only a minority of the negotiating groups were
faced with serious preparation related obstacles that would,
arguably, delay further meetings. Preparation for 90 percent
of the negotiating groups would have been advanced by the
December talks, since the talks would have provided
opportunities for information exchange, clarification of
positions, and so forth. It is evident that factors other
than the need for additional time for preparation played a
role in the postponement.

"REQUEST SHOCK"

10. (SBU) While the RTG thought that it had done its
homework in preparation for the FTA talks with the U.S., it
has found out that much more remains to be done. The RTG --
or at least many of its key officials -- were seemingly
caught off guard by the scope and depth of U.S. requests in
many areas. These areas include labor; environment;
financial services. When we express our astonishment to RTG
officials at their surprise at the U.S. agenda (after all,
the U.S. must rank as the most transparent country in the
world in terms of negotiating goals in our trade relations --
our complete negotiating agenda has been available on the
Internet for several months prior to the start of
negotiations), they respond that 1) the full impact and
ramifications of the U.S. requests had not been fully
appreciated; and 2) not all RTG officials had been fully
briefed in advance on the U.S. negotiating position. A
prominent official that probably falls into this category is
the Prime Minister; while he is a supporter of an FTA with
the U.S. -- indeed, he claims authorship of the idea -- he is
probably unaware of what its contents are likely to be. All
indications are that he has been caught off guard by the
overall U.S. request list, and is disappointed that the U.S.
is unwilling to negotiate a quick and politically attractive
"early harvest" package. (Note: We believe the RTG's "early
harvest" plan for the FTA with the U.S. largely involved
formally renewing key provisions (Articles 4 and 10) of the
U.S.-Thailand Treat of Amity and Economic Relations.)

"LITTLE DEALS WITH BIG COUNTRIES"

11. (SBU) Seen through Thai eyes, the U.S. requests suffer
from comparison with the other recent trade deals Thailand
has concluded. Many of these deals lack (at least for now)
comprehensive market opening substance, opting instead for
relatively easy "early harvests." This is the case for both
China and India. Even the FTA with Australia is fairly
slow-pitch: aside from reductions in goods tariffs, very
little was accomplished. By comparison, the breadth of the
FTA with the U.S. is wildly ambitious -- maybe too ambitious
for some. One knowledgeable local observer said, "Thaksin
wants little deals with big countries; they make good
headlines without causing too much trouble."


"OFFER SHOCK"

12. (SBU) The RTG has also had to review its strong desire
for a temporary entry chapter (or at least strong temporary
entry provisions as part of a services chapter) in the FTA.
The desire for a U.S. visa is strong in Thailand (the U.S.
has long been the country of choice for education, for
example); one of the strongest appeals of the U.S.-Thailand
Treaty of Amity and Economic relations are the reciprocal
preferential visa provisions. We believe the RTG has been
counting on reaffirming and perhaps upgrading this provision
as a big part of its public sales campaign for the FTA.
Adding insult to injury is the inclusion of temporary entry
chapters in the Chile and -- most importantly -- Singapore
FTAs. Thailand's rivalry with the latter country is an
important reason behind the RTG's persistence in asking for
temporary entry provisions. Lead Thai negotiator Nitya
recently cited the temporary entry provisions negotiated in
the U.S. FTA with Singapore in wondering aloud to the
Ambassador whether an FTA without temporary entry provisions
would be acceptable to the RTG. He said, "Of course, it
isn't my call, but you know what the Old Colonel (PM Thaksin)
thinks about Singapore." We believe the RTG's basic position
on somehow addressing temporary entry is inflexible, and as
such is probably one of a handful of issues that falls
outside the normal give and take of the negotiating process.
In the absence of some treatment of temporary entry in some
context (not necessarily within the FTA), we question whether
the RTG will agree to an FTA.

13. (SBU) The RTG hopes that the post-U.S. election climate
will be more amenable to the discussion of temporary entry.
In noting that the President's party has strengthened its
majority in Congress, some officials here are hopeful that
the U.S. may re-think its position on temporary entry and
trade agreements. In arguing for a delay in further FTA
talks, the Prime Minister's chief economic adviser, Dr.
Pansak Vanyaratyn, asked the Embassy's Economic Counselor,
"Why don't we wait until both of our governments have a
mandate?" The "mandate" Pansak probably was referring to in
the case of the U.S. was a reconsideration of our position on
excluding temporary entry from trade agreements.

PRIVATE SECTOR OPPOSITION

14. (SBU) The corporate elites of Thai society are viewed by
many here as highly insecure. "They don't see any
opportunities in liberalization, only the loss of privilege,"
one source told us. While there is considerable truth in
this statement, we think it is somewhat exaggerated; in
reality, private views are mixed. In general, the Federation
of Thai Industry (which accounts for much of the
manufacturing sector here) generally is supportive of the
FTA. Opposition to the FTA is centered in the Thai Bankers
Association and large swathes of the Thai Chamber of
Commerce. These are powerful organizations, and they no
doubt have made their voices heard.

INTER-MINISTERIAL CONFLICT

15. (SBU) Long simmering differences over policy and
jurisdiction boiled over in the November 21 FTA Oversight
Committee meeting that called for the December round's
postponement. Far from being resolved, these differences
could become sharper in the coming months. Normally (and by
law), trade negotiations are led by the Ministry of Commerce.
For the U.S. FTA, the Foreign Ministry has the lead. Lead
Thai FTA negotiator Nitya has the title of Adviser to the
Foreign Minister. This is not a very powerful position. The
Chair of the FTA Oversight Committee is Finance Minister
Somkid. Somkid is a politically powerful Cabinet minister (a
coterie of MPs owe him allegiance); he is thought to be a
leading proponent of the skeptical, "go-slow" school
regarding the FTA with the U.S., favoring a narrow agenda
that focuses on traditional market access issues. His major
ally on the FTA Oversight Committee is Dr. Pansak. This pair
have found common cause in blocking Nitya's plans for the
FTA, which included the December negotiating round. Nitya
(allied with FM Surakiart) favors a full speed ahead,
comprehensive FTA agenda. In terms of both institutional and
personal political power, this pair easily outguns Nitya.
This intra-governmental conflict could continue -- and even
worsen -- beyond the February elections.

16. (SBU) At the inaugural November 22 meeting of the RTG's
newly created FTA Oversight Committee, the various themes of
the several dissenting factions -- those concerned over the
elections, inadequate preparations, "request shock", or
"offer shock," -- came together, finding common cause in a
call to stop forward progress on the FTA pending a
reassessment of the entire FTA exercise. Most observers here
think the FTA talks will be re-started after the elections,
but such an eventuality awaits a formal decision to that
effect by the FTA Oversight Committee.

POSSIBLE FUTURE DEVELOPMENTS

17. (SBU) Frustrated by the proliferation of ill-informed
FTA oversight committees (we currently count four that play
some role in the FTA) and his inability to chart the course
of the FTA talks, Nitya is lobbying to be given the title of
Thai Trade Representative. This can be designated a Cabinet
level position, and would give him a fighting chance of
regaining control over the FTA agenda. We understand a
decision regarding this is not likely until after the
elections. Everyone here thinks that Thaksin's Thai Rak Thai
party and its allies will win handily, probably increasing
their majority in the lower house of parliament. If the
post-election Minister of Commerce is a politically powerful
figure, it is possible that Commerce may seek to assert its
leadership in the U.S.-Thai FTA talks. In that case,
Commerce probably would resist increasing Nitya's power, and
the latter could find his position untenable. But, while a
Commerce takeover of the talks could spell trouble for Nitya,
it might not be all bad for the FTA; what is needed to drive
negotiations forward is 1) strong commitment 2) from a
powerful figure. A new Commerce Minister might prove just
the ticket. In this regard, we find it significant that the
Commerce-led FTA talks with both India and China continue to
move forward, while the MFA-led FTA talks with the U.S. and
Japan have been delayed.

18. (SBU) Somkid and Pansak are thought to be dissatisfied
with both the U.S. negotiating framework and (derivatively)
proposed pace of the FTA negotiations. Somkid (seconded by
Pansak) has described the negotiating mandate set forth in
U.S. Trade Promotion Authority legislation as negotiating
"pre-conditions," (they count 17 such TPA pre-conditions in
total) and as such undermine the RTG's desire for both sides
to negotiate from a clean slate. They also object (in
varying degrees) to various U.S. positions (as cited in paras
10-12). Their initial response has been to halt the talks,
albeit temporarily. Somkid and Pansak surely have the
support of PM Thaksin, at least for now. Said one long time
Thai observer, "This is a classic Thai response to being
pushed faster or farther than they want to go; they step
back."

19. (SBU) But the temporary delay is only a tactical move; we
think major strategic decisions have been deferred until
after the February elections. Foreign Minister Surakiart
recently told the Ambassador, "We have a mandate to pursue
these talks after the elections," and vowed to resume talks
once "the necessary parliamentary and legal processes are
complete." Surakiart added that he had made these points to
U.S. Trade Representative Zoellick during the recent APEC
meeting in Santiago, Chile. The full speed ahead school,
which includes FM Surakiart, have been arguing that with the
proliferation of FTAs, the costs of non-participation are
likely to be very high.

20. (SBU) In a separate meeting with the Ambassador, Finance
Minister Somkid was somewhat less encouraging, telling the
Ambassador, "We will not do anything we cannot explain to the
Thai people. After the elections, we will meet with our
entire FTA team and look at every position; I think we can
handle everything." He then made an indirect pitch for an
"early harvest" approach: he described a meeting he had with
the lead Japanese FTA negotiator, where he had urged the
Japanese to consider immediate FTA concessions, leaving other
areas for later. He concluded by saying, "We need to be
careful. Many in Thai society are ready to be opposed to an
FTA with the U.S. We don't want to let that happen." While
he didn't spell out exactly how he proposed to avoid such an
eventuality, the overall message seemed to be, "Go slow, be
moderate in your requests."

21. (SBU) We find it significant that no RTG official has
told us they are opposed to the FTA per se. The opposition
for now seems mostly short term and tactical. We think there
is a good chance that even hard core opponents of Nitya, such
as Pansak, may change their tune after the elections; in
Pansak's economic writings, he touts the modernizing effect
of FTAs. Whatever its short term political advantages may
be, a narrow market access type of FTA will not yield much in
the way of economic modernization.

WHAT WE SHOULD DO

22. (SBU) While it is easy to be discouraged by some of the
attitudes toward the FTA that are prevalent here, we see the
current hiatus as a temporary setback that in no way alters
the overall situation. A Free Trade Agreement with Thailand
clearly remains in our interest. Usually, an FTA is designed
to take bilateral relations to a new level. In the case of
Thailand, however, much of our motivation is the preservation
of our current position. The U.S. currently is Thailand's
largest trading partner. In investment, U.S. firms have
privileged access to the Thai market under the Treaty of
Amity and Economic Relations (AER). But our status is
imminently threatened by current trends. In view of GATS MFN
issues, we doubt the AER has much of a future as a
stand-alone document. The relentless rise of China's
economic profile in this region represents a challenge to the
U.S.'s trade and investment leadership. Additionally,
Thailand is negotiating a number or other FTAs, which
probably will create some trade diversion that disadvantages
U.S. exporters. Given these developments, without a new
framework for our commercial relationship we will find it a
challenge to maintain our current position.

23. (SBU) We also think pursuing an FTA is the right thing
to do for reasons that go beyond maintaining our position
here. A close precedent to what we are trying to accomplish
with our FTA with Thailand is the Mexico component of NAFTA.
Like Mexico, Thailand is a medium-sized developing economy.
Like Mexico, Thailand is essentially not a rules-based
economy, relying, instead, to a great extent on personal,
informal arrangements. As envisioned by the U.S., our FTA
with Thailand will effect a transformation within the Thai
economy, by moving it towards a more rules-based, transparent
way of conducting commerce. Such a transformation will be
hard to achieve; it will be much harder than anything
Thailand is likely to ask the U.S. to do. It is also a safe
bet that, similar to the case with Mexico, that a
comprehensive FTA will see Thailand make the vast majority of
the concessions, since the vast majority of the existing
trade and investment barriers are on the Thai side. Leading
RTG policy makers are aware of the transformational,
modernizing potential of the FTA and, in their more visionary
moments, cite that potential as the FTA's chief attraction.
But, it is an open question whether the Thai Government or
people are willing and capable of effecting such a
transformation. The chief architect of PM Thaksin's economic
plan ("Thaksinomics"), Pansak Vanyaratyn, wrote, "I am not
sure we have the iron will to stay the course. I am not
certain that we, meaning, the Thai State or the Thai private
sector, have the will or the stamina to complete the change
that we have set in motion." We share Dr. Pansak's
uncertainty.

24. (SBU) While posing great challenges, the
transformational potential of an FTA with Thailand is what
makes it worthy of great effort on our part. By helping
Thailand move toward more rules-based, transparent, and
efficient governance, an FTA with the U.S. will be the
catalyst for much higher output and living standards in
Thailand. It will be a world showcase, serving as a positive
precedent for the many other developing economies which are
weighing economic development and trade policy options.

25. (SBU) Deciding on the future course of the FTA is
largely a Thai question which eventually will be resolved by
a debate within the Thai Government and society. Our
opportunity for input is limited. As far as the U.S.
management of the FTA negotiations goes, we don't have a lot
of fine tuning to recommend since there are few, if any,
complaints in this area. On the contrary, Amb. Nitya has on
several occasions publicly expressed his appreciation for the
professionalism of the lead USTR negotiator.

EMPHASIS ON SMEs COULD HELP

26. (SBU) The Thaksin Government has placed a heavy emphasis
on small and medium sized businesses. Following the 1997
economic crisis, the RTG believed that the potential in SMEs
and the traditional sector, given its great flexibility,
diversity, and low import content, would provide a new source
of economic growth and income. The RTG has introduced a host
of economic programs aimed at boosting this sector of the
Thai economy, which already accounts for almost 40 percent of
Thailand's GDP. This sector also represents a core
constituency of Thaksin's Thai Rak Thai party.

26. (SBU) Our FTA framework could be more attractive to the
RTG if there was a greater emphasis on SMEs across the
various negotiating groups. This would mainly involve
changes in formatting and emphasis, not new concessions. RTG
officials point out that an FTA that could be marketed in
Thailand as an "SME FTA" would be a much easier sell to Thai
public opinion (and would be much more attractive to PM
Thaksin, whose exact position on the RTG's internal FTA
debate remains uncertain). Our nascent "Group on Small and
Medium Enterprises and Other Cooperation" represents a good
start; it is possible that other opportunities to emphasize
SMEs could be identified and exploited in other negotiating
areas. For example, in the government procurement chapter it
might be possible to highlight the small business set-aside
provisions, and gear our efforts in trade capacity building
toward this area. It might be possible to enlist the aid of
the U.S. Small Business Administration on this project.

27. (SBU) In spite of the delay and internal RTG
soul-searching, we remain basically optimistic about the
FTA's prospects because we don't see how anyone's fundamental
interests in having an FTA have changed. It is
overwhelmingly in Thailand's interest to have an FTA with the
U.S., whether one argues on the grounds of its
transformational, modernizing effect; the high costs of
non-participation; market access; strategic alliances; or
some combination of these. An FTA with Thailand remains
overwhelmingly in our interest, whether one argues on the
grounds of maintaining our strong position here; the hugely
beneficial transformational effects in the Thai economy
likely to accrue from the FTA; or the demonstration effect on
other developing economies. In asking for a comprehensive,
transformational FTA with the U.S., we are asking Thailand to
do something unprecedented, something that it will find very
hard. Negotiations are likely to take some time. Progress
might be non-linear, with periods of rapid movement forward,
followed by some regression, a hiatus, and a repetition of
this cycle. It will require patience, determination, and
judgment, with no guarantee of success. But we believe it is
worth the considerable effort likely to be required.
JOHNSON

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