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Cablegate: Big Compromises Push Japan-Thai Fta Into Final

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

UNCLAS SECTION 01 OF 04 BANGKOK 003963

SIPDIS

SENSITIVE

DEPARTMENT PASS USTR FOR BWEISEL AND LCOEN
GENEVA FOR USTR
COMMERCE FOR ITA/MAC/AP/OKSA/JKELLY

E.O. 12958: N/A
TAGS: ECON EAGR ETRD EINV TH
SUBJECT: BIG COMPROMISES PUSH JAPAN-THAI FTA INTO FINAL
STAGES

REF: BANGKOK 2298

1. (U) Sensitive but unclassified. Please treat accordingly.

2. (SBU) Summary. As the negotiation of the Japan-Thailand
Economic Partnership Agreement (JTEPA) enters its final
stages, Thai and Japanese negotiators have moderated some key
demands to avoid a stalemate. A Japanese economic official
involved in the negotiations said the last round of talks in
March ended in deadlock over a few major issues --
particularly steel and auto tariffs. Quiet consultations over
the last two months may have resulted in an agreement that
packages most of the issues in a first round, and a few,
contentious issues left for negotiation in a later second
round. Nevertheless, local Thai industrialists and
steelmakers have publicly questioned the wisdom of this
agreement, urging the RTG to focus on "mutual benefits." As
Thai negotiators have exhausted their mandate, the final and
most difficult parts of the negotiations have been elevated
to the highest political levels -- Prime Minister Thaksin and
Deputy Prime Minister and Finance Minister Somkit
Jatusripitak -- a move which probably foreshadows the
treatment of other free trade agreements currently under
negotiation. While this FTA shows that it is possible to
negotiate a deal with Thailand within a short timeframe,
precedents set in Thailand's FTA with Japan will not be
helpful as we seek a comprehensive, single undertaking FTA
with Thailand. End Summary.

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Japanese Investors Carry -- and Expect -- Weight in Thailand

3. (SBU) For more than 25 years, Japan has been the largest
single source of FDI in Thailand. Much of Thailand's
export-driven growth was fueled by Japanese investors, who
saw Thailand as U.S. investors saw Mexico: an inexpensive and
stable environment for increasingly sophisticated
manufacturing. In 2004, FDI from Japan totaled 733 million
USD, and in 2003, 816 million USD (US FDI inflow was 394
million USD in 2004). While Japan trails the U.S. and the EU
in market share of Thai exports, Japan is by far the largest
source of imports to Thailand, fueling Japan's continuing
investments in manufacturing. Befitting their status as the
single biggest foreign participant in the Thai economy,
Japanese officials and commercial interests have repeatedly
asked for preferential trade and investment provisions. Aside
from reducing tariffs on industrial goods, Japanese officials
in particular have sought to receive national treatment on
investment, similar to the treatment Americans receive under
the Thai-U.S. Treaty of Amity and Economic Relations (AER).

March Round Ends in Stalemate

4. (SBU) The last round of talks was held at the end of March
in Khao Yai National Park in Thailand. The first day of talks
focused on agriculture. In the September 2004 Asia-Europe
Meeting (ASEM) meeting, PM Thaksin agreed to exclude rice
from the discussions, which had proven the biggest sticking
point until then. According to a Japanese official, in Khao
Yai RTG negotiators moderated their demands for market access
on raw chicken, tapioca, and sugar. Japan agreed to cut the
current 6% tariff on Thai chickens in half, boost annual
tapioca starch quotas to 200,000 tons from 70,000, and end
the current 9.6% tariff on canned tuna within five years.
Japan has also offered to cut tariffs on several fruit
products and shrimp, and expand quotas in some other
products, such as canned pineapple. At the end of this day of
talks, the two chief negotiators signed a "record of
discussion" announcing the provisional agreement on
agricultural goods.

5. (SBU) During the industrial goods discussion the next day,
Japanese negotiators asked for the immediate elimination of
tariffs on completely-built-up (CBU) cars with engines larger
than 3000cc (now at 80%), a reduction of tariffs on CBU cars
with engines less than 3000cc by 2010, and the elimination of
all tariffs on automobile parts, automobile steel, electrical
appliances, moulds, and machinery from Japan. Thai
negotiators countered by offering gradual tariff reductions
over 15 years for auto parts, the maintenance of steel
import tariffs for another 10 years, after which they would
be phased out by the 15th year, and have offered to negotiate
the CBU car issue in a second round of negotiations over the
next 3-5 years.

RTG Compromise a "Serious Miscalculation"
6. (SBU) According to a Japanese official involved in the
discussions, Thailand calculated that by compromising on
several of its most contentious agriculture requests, Japan
would return the favor by moderating some of their demands in
the industrial goods section. The Japanese official said that
the Thai negotiators had made a serious miscalculation. The
official explained that the two main Japanese ministries
engaged in the negotiations, the Ministry for External Trade
and Industry (METI) and the Ministry of Agriculture, Forestry
and Fisheries (MAFF) did not cooperate on negotiating
strategies, or coordinate big picture gains. Therefore, the
Thai compromise on issues important to MAFF earned them no
currency on the second day of negotiations with METI. When
METI negotiators refused to temper their demands, Thai
negotiators grew angry and disappointed; the Japanese
official acknowledged that this disappointment was
"understandable."

7. (SBU) The following week, the Thai chief negotiator and
experienced diplomat Pisan Manawapat told papers, "The ball
is in the Japanese court. If METI changes its ambitious and
unrealistic attitude, there is a chance that a balanced deal
can be reached. Now they are demanding more than what is in
my capacity to deliver, so let's allow the high-level
policymakers to work it out." Thai officials told Econoff
that the provisional agreement on agriculture was not
binding, and was predicated on the successful conclusion of
the industrial good talks; Japanese officials, who announced
the results of the agricultural talks, say that they will not
re-open those negotiations.

JTEPA Sparks Public Interest and Controversy

8. (SBU) JTEPA has received widespread coverage in the local
press, focused unusually on the disputes between local
steelmakers and the Thai government over tariff reductions.
Thai steelmakers (see reftel) have complained that they
cannot compete with higher quality Japanese imports; Japanese
automakers, primarily, maintain that the quality of local
steel is not high enough for locally produced vehicles, and
high steel import tariffs (between 5-15%) reduce
competitiveness. Japanese automakers have moved much of their
ancillary parts production to Thailand, and have long sought
lower tariffs for imported, high-quality, hot rolled steel,
which they say cannot be manufactured in Thailand. (In 2004,
Thailand imported over 2 billion USD of steel from Japan,
close to 13% of total Japanese imports. Thailand also
imported close to 2.8 billion USD of parts and vehicles from
Japan last year. On average, Thailand consumes between 12-13
million tons of steel annually; in 2004, 7 million tons were
produced locally.) Access to higher quality and lower cost
inputs has been made even more important, as tensions with
China have spurred Japan's car manufacturers to place greater
emphasis on boosting their production in Thailand.

9. (SBU) In recent weeks, anger between Thai steel companies
and Japanese automakers has reached a boiling point. Japanese
automakers have pressed hard for reduced tariffs on both
high-quality steel products -- including car parts -- and
automobiles with engines larger than 3000cc, publicly taking
their concerns to PM Thaksin. Local steelmakers have accused
the Thai government -- and Thaksin in particular -- of
"selling out" to Japanese business interests. In turn,
Japanese automakers have gone far to reassure the Thai
government that they will move forward with major production
capacity investments of over one billion USD, no matter which
way JTEPA goes -- much to the chagrin of Japanese negotiators
who hoped to use this investment as a bargaining chip.

10. (SBU) According to the Japanese official, negotiators
have now divided industrial goods demands into two
categories: products which can be made in Thailand and
products which cannot. Japanese negotiators have focused
their requests on eliminating tariffs on products they
believe can't be made in Thailand, and a phased reduction for
other products. The Japanese official acknowledges that local
Thai steelmakers are "furious," especially with their
political leadership. Steelmakers have long promoted an
ambitious plan to build a 500 billion baht (12.5 billion USD)
steel smelting plant in Thailand to develop the upstream
capabilities of Thai steel producers. PM Thaksin and other
ministers have greeted this proposal with public skepticism,
increasing local steelmakers perception that PM Thaksin is
"in the pocket" of the Japanese.

11. (SBU) European and American automakers are also wary of
lowered steel and vehicle import tariffs from Japan. The
Ambassadors of France and Germany issued a public
announcement expressing their concern that lowered tariffs on
CBU cars will hurt their plants in Thailand, and forestall
further expansion and investment. The heads of 8 non-Japanese
automakers in Japan also sent a letter to PM Thaksin
expressing similar sentiments. (Note: Thailand granted
Australia duty-free status for cars with engines over 3000 cc
in the Thai-Australia Free Trade Agreement (TAFTA).
Reportedly, GM may export Australian models to Thailand in
the future, but Ford has no plans to take advantage of this
provision at the moment.) Members of the local Federation of
Thai Industries (FTI) have also opposed lowered tariffs on
imported cars, fearing that this will hurt the domestic auto
industry. European and American auto manufacturers also feel
that lower imported steel prices from Japan would work
against them, rather than for them. Asked why cheaper steel
wouldn't help all local automakers, regardless of
nationality, local steelmakers told Econoff that the Japanese
traditionally do not sell outside their production chains.
(However, Ford, which is a partner in the Auto Alliance
Thailand with Mazda, would benefit from reduced tariffs on
parts, a fact they do not like to trumpet.) Officially, the
RTG opposes ending duties on cars with engines larger than
3000 cc because of fuel consumption and environmental
concerns. However, in a meeting with representatives from
non-Japanese carmakers, Pisan explained that he had "made
this whole argument up on the spot," and was still amused
that the Japanese continue to take this position seriously.

The Next Steps are Political

12. (SBU) According to Japanese officials, almost 80% of
JTEPA has been completed. Chapters in JTEPA include goods,
services, investment, IPR, cooperation, "mutual recognition"
(standards), and dispute settlement. A senior Thai negotiator
said the Japanese have accepted a positive list approach "for
everything." As with other FTAs, the Thai government has
insisted that the agreement require no legal changes.
Japanese negotiators have largely respected this request,
except in one crucial area -- investment. Japanese officials
are seeking national treatment rights for investment, similar
or near to those enjoyed by Americans under the AER. A
Japanese official said that if negotiators do not achieve at
least 51% ownership rights, they will not be able to finish
the FTA. The official believes that attitudes have changed
among Thai officials, and the issue will be taken up again at
the end of the month when the two chief negotiators meet
again in Tokyo. (Note: A senior Thai official involved in the
talks would say only that the RTG will allow majority
ownership for "investments in services related to
manufacturing.") Concerned over recent RTG trends gradually
rolling back the rights and privileges of foreign investors,
Japanese negotiators hope to achieve a standstill on
investments rules and regulations. Honoring a Thai request,
Japanese negotiators have agreed to allow higher or special
quotas for cooks and masseurs working in Japan.

13. (SBU) The Japanese official told Econoff that Deputy
Prime Minister and Finance Minister Somkit Jatusripitak will
travel to Japan during the week of June 13 to meet with
senior Japanese officials. The official expected that the two
sides would settle the tariff and trade issues during this
visit. Reportedly, Japanese negotiators have already backed
down on some of their tariff requests, agreeing to "discuss"
auto tariff reductions over the next three years. According
to this official, PM Thaksin is hoping to sign the agreement
by July 2005, with a proposed entry into force date of 1
January 2006. Similarly, Thai officials predict that the
agreement will be agreed upon in principle "before Montana,"
meaning by mid-July.

14. (SBU) Comment: The controversies surrounding JTEPA are
normal for any two major trading partners involved in FTA
negotiations. For U.S. trade negotiators, the good news is
that Thailand is about to demonstrate that it can negotiate a
fairly wide coverage FTA with a major trading partner in a
fairly short timeframe. On the other hand, several patterns
of concern have emerged. First, Thai industry is again
complaining over the lack of transparency of PM Thaksin and
his government. Second, the most significant issues have been
bumped up to the highest political levels, belying the
limited mandate of RTG negotiators. The Thai government
appears to be willing to sacrifice many of their offensive
demands in order to protect key sectors the RTG wants to
defend -- including packaging the agreements of the FTA in
multiple rounds. In FTA negotiations with Japan and
Australia, RTG negotiators have learned that if they wait
long enough, their negotiating partners will cave on key
issues like positive lists, inclusion of financial services,
and even important manufacturing sectors. Undoubtedly, the
RTG will bring these "lessons learned" into the Thai-U.S. FTA
negotiations -- if they haven't already. Finally, the RTG's
success (albeit limited) in obtaining increased labor
mobility rights in this FTA will encourage a push for
temporary entry provisions in the FTA with the U.S. All in
all, precedents set in Thailand's FTA with Japan will not be
helpful as we seek a comprehensive, single undertaking FTA
with Thailand. End Comment.
BOYCE

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