US embassy cable - 05BANGKOK3963

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. 
 
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