USTR, DOC VISIT ILLUSTRATES TRADE AND INVESTMENT

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
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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