US embassy cable - 05MANILA5067

UNCLAS SECTION 01 OF 02 MANILA 005067 
 
SIPDIS 
 
STATE FOR EAP/EP, EB/IFD, EB/TPP/BTA/ANA, EB/TPP/MTA/IPC 
STATE ALSO PASS USTR FOR BWEISEL AND DKATZ 
STATE ALSO PASS USAID, OPIC, USDA 
TREASURY FOR OASIA FOR AJEWELL 
USDOC FOR 4430/ITA/MAC/DBISBEE 
USDOC PASS USPTO FOR PFOWLER 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, KIPR, RP 
SUBJECT:  USTR, DOC VISIT ILLUSTRATES TRADE AND INVESTMENT 
TRENDS 
 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
 
1.  (SBU)  Summary:  USTR, Department of Commerce (DOC) and 
U.S. Patent and Trademark Office (USPTO) officials, 
accompanied by econoffs, met with congressional leaders, GRP 
officials and U.S. business leaders to discuss general 
economic issues including the upcoming WTO meeting, ASEAN, 
IPR protection, and banking and investment. American 
business representatives expressed concern over the overall 
investment climate, pointing to political uncertainties, 
increased taxation and a declining labor pool.  There is 
genuine concern on the part of both U.S. interests and GRP 
leaders that the RP stands to lose substantial economic 
ground relative to other ASEAN countries.  End Summary. 
 
2.  (U)  U.S. Trade Representative (USTR) Director for 
Southeast Asia and Pacific Affairs David Katz, U.S. 
Department of Commerce (DOC) Deputy Director David Bisbee 
and U.S. Patent and Trademark Office (USPTO) Senior Counsel 
Peter Fowler visited Manila October 16-17 to meet with RP 
Congressional leaders, executive branch counterparts and 
U.S. business leaders to discuss IPR and general economic 
issues.  While the primary purpose of the visit was to 
prepare for an upcoming 301 IPR Out-of-Cycle Review 
(septel), the visit also highlighted some trade and 
investment trends. 
 
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DISCUSSING TRADE AND INVESTMENT WITH SENATOR RECTO 
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3.  (SBU) USTR, DOC and EconCouns briefed Senate Ways and 
Means Committee Chairman Ralph Recto on bilateral trade and 
investment issues, especially the importance of intellectual 
property rights protection to overall trade and economic 
growth.  Recto's main priority is to codify all investment 
laws and to create one investment office, which may include 
collapsing the Philippine Economic Zone Authority and the 
Board of Investments. 
 
4.  (SBU) Recto expressed interest in the possibility of a 
Free Trade Agreement (FTA) with the U.S.  USTR stated that 
the GRP can demonstrate its commitment to an FTA by 
addressing applied tariff rates rather than bound rates. 
Recto indicated that such a reduction would be difficult at 
this time largely because of the effect on overall 
government revenues. 
 
5.  (SBU)  Senator Recto will likely be one of the GRP's 
official delegates to the WTO meeting in December, as well 
as to ASEAN.  Katz highlighted the recent U.S. agricultural 
proposal and emphasized that the U.S. is putting enormous 
political equities on the table in order to pursue greater 
global trade.  He added that if the GRP is willing to open 
agricultural markets, U.S. companies would probably seek 
more investment opportunities in the Philippines based on 
its comparative advantage over other countries in the 
region.  DOC added that if the RP can become a leader in 
biotechnology, the country would gain an important economic 
niche in the regional market. 
 
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CHECKING IN WITH THE BANKING SECTOR 
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6.  (SBU)  The Bankers Association of the Philippines (BAP) 
reported that Philippine banks have adopted stricter lending 
policies and lowered the percentage of non-performing loans 
to single digits, not out of a fear of lending, but as an 
effective risk management tool.  BAP officials stated that 
the banking market in the RP is constrained by a general 
lack of capital.  An additional barrier is that the 
requirements for opening a branch are difficult to fulfill. 
However, one of the biggest RP banks, the Bank of the 
Philippine Islands, has formed a strategic alliances with 
Singapore banks, notably SDI and DBS.  The BPI-DBS alliance 
in particular is quietly taking over other, smaller banks. 
BAP officials described significant collaboration among 
banks in the ASEAN region, noting that support for intra- 
regional trade is a priority.  Banks are looking at 
correspondent banking as one mechanism for competing with 
larger Western banks.  BAP noted that quite a few government 
reforms have been initiated since 1997, but that fixed 
income exchange and infrastructure reform remain key issues. 
 
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VIEWS ON FOREIGN DIRECT INVESTMENT FROM AMCHAM 
--------------------------------------------- - 
 
7.  (SBU)  In a breakfast meeting with the American Chamber 
of Commerce of the RP (AmCham), AmCham board members noted 
three key industries for investment:  IT enabled services, 
semiconductors and services markets.  The AmCham Chairman 
described IT business (call centers and business process in 
and out sourcing) as "red hot" and that the RP is "running 
neck in neck with India."  Eight to ten new companies a 
month are getting into the IT-enabled services market, with 
Dell as a recent example.  The semiconductor industry 
accounts for about 70 percent of exports, but it is slowing 
down, experiencing year-on-year export growth of only about 
one percent.  The goods and services industry in the 
domestic market is also declining.  Manufacturing operations 
are moving out of the RP to other countries in the region 
because of high labor costs and litigious labor unions. 
 
8.  (SBU)  US company representatives expressed concern over 
the investment climate.  Companies are looking for 
substantially larger growth rates, regulatory stability and 
market certainty.  One concern was the new EVAT tax, which 
energy executives estimate will increase their costs by ten 
to fifteen percent.  Some expressed growing concern over the 
quality of the labor market.  One of the biggest advantages 
of the RP labor market has been its English language skills, 
but investors report that the overall skill level is 
declining as the available pool of qualified workers also 
declines.  Representatives stressed that the window of 
opportunity for the RP is relatively small because China is 
training millions of its workers to speak English, which 
could begin to push the RP out of the market in the near 
future.  AmCham company reps indicated that they would like 
to see fundamental, constitutional changes on all industry 
specific investment and ownership restrictions, but some 
feel that such change is probably at least ten years away. 
 
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THOUGHTS FROM A LOCAL THINK TANK 
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9. (SBU)  The Director of the Asia Institute for Management, 
a local think tank, stated that the RP economy has been on a 
historically low-level growth path due to poor population 
policy, which has affected both per capita and overall GDP. 
Until an effective population policy is in place, the RP 
faces an uphill economic climb.  However, the Director 
indicated that the services sector is what could really make 
a difference for the RP, especially in medical and health 
fields, tourism, IT, accounting and franchising.  He added 
that Filipinos have a "natural, cultural" tendency toward 
"caring" and that if they could capitalize on this skill, it 
would give the RP a comparative advantage over other 
economies in the region.  With respect to ASEAN's role, the 
Director commented that ASEAN is looking for leadership 
especially with respect to ideas; ASEAN needs the kind of 
leadership that would push the organization in a clearly 
defined direction.  He sees ASEAN as a reactive 
organization.  However, he pointed out that we should look 
closely at sub-regional arrangements within the ASEAN 
context, as this is where significant economic activities 
might be occurring. 
 
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COMMENT 
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10.  (SBU)  The visit by USTR, USPTO and the DOC provided an 
opportunity to look at several important trade and 
investment issues.  American investors are worried about the 
investment climate and see little prospect for significant 
improvement in the near term.  Leaders and scholars alike 
are all too aware of the challenges and are concerned about 
the RP's potential decline in comparative advantage with 
respect to the region.  They are also concerned about losing 
attractiveness as a candidate for US trade and investment. 
Leaders such as Senator Recto are working hard to stop these 
trends but appear to need more help from colleagues as well 
as the business community. 
 
JONES