DEPUTY U.S. TRADE REPRESENTATIVE KARAN

UNCLAS SECTION 01 OF 04 KUALA LUMPUR 000571

SIPDIS

SIPDIS

SENSITIVE

DEPT FOR EB/TPP/BTA
DEPT PASS USTR FOR DUSTR BHATIA AND AUSTR B.
WEISEL
USDOC FOR DAVID BISBEE AND JENNIFER BAKER
USDA FAS FOR OA/BIG, ITP/AAD
GENEVA FOR USTR

E.O. 12958: N/A
TAGS: ETRD KIPR MY
SUBJECT: DEPUTY U.S. TRADE REPRESENTATIVE KARAN
BHATIA'S VISIT TO KUALA LUMPUR - PREPARING FOR THE
FTA

Sensitive But Unclassified - Not for Internet
Distribution

Summary and Introduction
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1. (SBU) Deputy U.S. Trade Representative Karan
Bhatia discussed upcoming negotiations for a U.S.-
Malaysia Free Trade Agreement with key economic
officials and a leading Malaysian think tank
during his March 16-17, 2006 visit to Kuala
Lumpur. Ambassador Bhatia's interlocutors
provided a positive and pragmatic assessment of
the prospects for the FTA, noting in particular
that an FTA would support Malaysia's long-term
economic goal of transitioning the economy towards
a more advanced technology base. The upcoming
launch of Malaysia's five-year economic plan would
demonstrate more clearly how an FTA would further
Malaysia's goals. Many Malaysians are concerned
that negotiations on government procurement could
force changes to the government's broader
socioeconomic policies. However, our explanation
of U.S. goals in a government procurement chapter
seem to be convincing our interlocutors that we
can reach agreement without overturning Malaysia's
sensitive preference policies. Both sides agreed
to hold the first round of negotiations in
Malaysia during the week of June 12. End summary.

Minister Datuk Mohd Effendi Norwawi
--------------


2. (SBU) Ambassador Bhatia discussed the Malaysian
economy and our strengthening bilateral economic
relations, as exemplified by the launch of FTA
negotiations, with Minister Effendi Norwawi,
Minister in the Prime Minister's office. Effendi
oversees the Malaysian Economic Planning Unit and
the National Economic Action Council, and has
primary responsibility for the Ninth Malaysian
Plan (9MP),the government's five-year economic
planning document, expected to be announced March

31. Bhatia was accompanied by Ambassador LaFleur,
A/USTR Barbara Weisel, and econoffs.


3. (SBU) Effendi told Bhatia that Malaysia viewed
an FTA with the United States as a positive,
pragmatic step that would compliment Malaysia's
primary economic goals. He noted that the 9MP
would be very compatible with our mutual FTA
goals, in particular through its emphasis on
attracting more foreign investment to Malaysia in
order to help steer the economy towards more
cutting-edge, high technology sectors. Effendi
said the government is concerned about increasing
competition for foreign investment from China and
India, as well as the rest of Southeast Asia.
Some statistics show that Malaysia is attracting
significantly less foreign investment in recent
years, despite the advantages of modern
infrastructure and an advanced legal system.
Effendi said the 9MP would emphasize new sources
of economic growth, including biotechnology and
information and communications technology, in
which the U.S. holds a predominant advantage.
Increased bilateral cooperation through an FTA
thus would mesh well with Malaysia's goal of
seeking a competitive regional edge in these areas
to help Malaysian companies become global leaders.


4. (SBU) Bhatia agreed that the FTA would help
Malaysia achieve its goal of creating a more
knowledge-based economy. He said the disciplines
created in FTA chapters on investment and IPR
protection would encourage more U.S. firms to
invest in these advanced sectors in Malaysia.
Effendi noted that Malaysia's advanced IP
legislation and its creation of the Multimedia

KUALA LUMP 00000571 002 OF 004


Super Corridor demonstrated the country's
seriousness about the sector, though he added that
Malaysia's investment in computer hardware
development and manufacturing had not been
followed so far by significant development in
computer software. Effendi also suggested that
increased collaboration between U.S. and Malaysian
institutions on research and development would be
a non-controversial but potentially far reaching
result of an FTA. Bhatia agreed, and added that
our other FTAs were followed by a burst of
cooperation in a range of areas, including tourism
and education.


5. (SBU) Bhatia underscored that a comprehensive
FTA would need to encompass such areas as
government procurement. He emphasized that our
insistence on such a chapter did not mean that we
approached FTA negotiations with a goal of
revising our partner's socioeconomic policies. He
added that the United States had its own
preference programs with regard to government
procurement. Effendi acknowledged that government
procurement would be a particularly difficult
chapter for FTA negotiators, given the
socioeconomic conditions that underpin the
government's procurement policies (conditions that
include the continued dominance of more than three-
fifth's of the economy by less than twenty percent
of the population, he noted). Nevertheless,
Effendi said that the government's recent efforts
to make government procurement more efficient and
transparent evidenced the government's
increasingly practical approach that should enable
negotiators to reach an agreement. Speaking more
broadly, Effendi also suggested that the FTA could
facilitate more partnerships between U.S. firms
and Bumiputera (ethnic Malay) businesses, and thus
help further, rather than inhibit, the
government's socioeconomic development goals.


6. (SBU) Bhatia conveyed President Bush's strong
support for an FTA with Malaysia, and said that we
would welcome similar expressions of support from
the PM, either publicly or privately. He also
welcomed Minister of International Trade and
Industry (MITI) Rafidah Aziz's participation in
the March 8 FTA rollout in Washington, which had
also attracted a broad range of support within the
U.S. Congress and among U.S. industries. Effendi
said that Malaysia's commercial sector welcomed
the advent of FTA talks as well and would be an
ally as we seek to conclude negotiations on an
accelerated schedule. He noted that Rafidah's
strong support for an FTA was rooted in her
pragmatic approach to seek an agreement that would
benefit Malaysia. While not as vocal as Rafidah,
the PM's strong hand in the development of the 9MP
likewise indicated his pragmatic, reformist
approach, in sync with what Malaysia would seek in
an FTA.

Ministry of International Trade and Industry
(MITI)
-------------- --------------
-


7. (SBU) Bhatia met with MITI Secretary General
Sidek Hassan and other MITI officials (including
Deputy Secretary General Ooi Say Chuan and
principal negotiator Jayasiri) to discuss the
recent FTA launch and to prepare the way for
negotiations. Bhatia emphasized our intention to
work closely with MITI to present a common public
stance in the course of negotiations. He noted
that USTR necessarily emphasized the benefits of
the FTA to the U.S. in its publicly released
documents, but the United States clearly believed
that the FTA would be of benefit to Malaysia as

KUALA LUMP 00000571 003 OF 004


well. Sidek noted that FTAs, in particular the
recently completed Malaysia-Japan economic
cooperation agreement as well as the pending FTA
with the U.S., were receiving increasing attention
both within the Malaysian parliament and among non-
state actors in Malaysia. MITI already had heard
from NGOs such as the Consumers Association of
Penang with concerns that a developing country
like Malaysia would be at a disadvantage in
negotiating FTAs with developed countries. Sidek
said MITI plans to engage with concerned NGOs
before and during the negotiations, but would do
so privately. Jayasiri and Ooi both suggested
that the U.S. should concentrate its in-country
FTA engagement on relevant business stakeholders,
and leave MITI to handle NGO concerns.


8. (SBU) Bhatia said his visit demonstrated the
United States' strong commitment to successful FTA
negotiations. His diverse schedule of meetings
was a means to further exchange views in advance
of the talks. He strongly suggested that Malaysia
do likewise by raising the level of its engagement
in Washington. USTR would keep Congress informed
of our progress as we moved through the
negotiations, but Congress would also expect more
direct interaction with senior Malaysian
officials. Such contact would be crucial in
building a coalition on the Hill in favor of FTA
ratification. Bhatia called for both sides to
conduct ambitious negotiations in order to
demonstrate the real, positive changes that an FTA
would bring for both economies. Sidek noted that
MITI, including Minister Rafidah, was already
feeling political heat regarding possible changes
to Malaysia's government procurement policies as a
result of the FTA. Weisel responded that USTR
wished to discuss government procurement with MITI
in more detail prior to the first round so that
both sides would be well prepared to negotiate the
procurement chapter. Bhatia said that negotiations
of all parts of the FTA must be pragmatic. He
emphasized that the U.S. would not seek to
overturn Malaysia's socioeconomic policies through
an FTA. Sidek responded that negotiators should
be able to reach a common position that would be
acceptable to both sides.


9. (SBU) Turning to logistical issues, Sidek said
Malaysia agreed to the dates suggested earlier by
USTR for five rounds of negotiations during the
weeks of June 12, July 17, September 17, October
30, and December 11. Both sides agreed that the
first round would be held in Malaysia, probably in
Kuala Lumpur, while the second round would likely
take place in the western United States.

Institute of Strategic and International Studies
(ISIS)
-------------- --------------
--------------


10. (SBU) Senior officials of this leading
Malaysian think tank provided Ambassador Bhatia an
outside, relatively independent Malaysian view of
the prospects for an FTA between the U.S. and
Malaysia. Assistant Director General Steven Wong
told Bhatia that the time was right politically
for Malaysia to negotiate an FTA, as the current
government had demonstrated the will to negotiate
an agreement, and conclusion of the FTA was slated
to occur well before the next round of national
elections take place. Wong warned that there will
be significant resistance to some of the measures
that the U.S. will propose in the course of FTA
talks, especially regarding services
liberalization, but that such reform will be
necessary sooner or later even absent an FTA,
given the direction of liberalization in the WTO

KUALA LUMP 00000571 004 OF 004


and through the ASEAN FTA. Wong said that the
government wants the Malaysian economy to continue
to evolve into new areas, but for political
purposes likely would not promote the FTA in a
very public way. Wong's colleague Stephen Leong
noted that the United States was an attractive
destination for Malaysian investment, but that
Malaysia is increasingly concentrating its foreign
investment closer to home, particularly in China
(in the manufacturing sector) and in India (in
telecommunications). Leong added that one of the
tenets of Malaysian foreign economic policy was
"prosper thy neighbor," thus its interests in
investing closer to home, but he said the
government would seek investment wherever it made
sense.


11. (SBU) Wong and Leong said that Trade Minister
Rafidah would be the key decision maker on most
aspects of the FTA. They suggested that the
Cabinet would look to the Prime Minister for
guidance when it comes to any particularly
controversial decisions related to the FTA,
however, adding that they believed the PM should
be able to overcome any dissent if that is his
desire.

Comment
--------------


12. (SBU) Bhatia's interlocutors were uniformly
positive about the prospects of the U.S.-Malaysia
FTA. They also conveyed an expectation that
Malaysians would judge an FTA with the United
States to support Malaysia's primary economic
development objectives, and thus an FTA would be
broadly welcomed in the end. For now government
procurement appears to be the most prominent
potential impediment. However, we believe
additional education of our negotiating partners
on our government procurement sector (including
our own preference programs and the opportunities
that will be created for Malaysian firms to bid on
USG procurements),in particular before the first
round, would help alleviate GOM concerns and pave
the way for productive negotiations of this
chapter.


13. (U) Ambassador Bhatia has cleared this cable.

LAFLEUR