DAUSTR Douglas Bell's FTA Discussions in Malaysia

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001422

SIPDIS

SENSITIVE

SIPDIS

DEPT FOR EB/TPP/BTA AND EAP/MTS
DEPT PASS USTR FOR BARBARA WEISEL AND DOUGLAS BELL
USDOC FOR JENNIFER BAKER
USDA FAS FOR OA/BIG, ITP/AAD

E.O. 12958: N/A
TAGS: ECON ETRD EINV MY
SUBJECT: DAUSTR Douglas Bell's FTA Discussions in Malaysia


Sensitive But Unclassified - Not for Internet Distribution

Summary and Introduction
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1. (SBU) In his meetings with Malaysian government officials
September 6-10, Deputy Assistant USTR for Southeast Asia and the
Pacific Douglas Bell pushed Malaysia to continue to work with U.S.
negotiators to make progress on outstanding issues, in advance of a
possible next FTA round in November. Malaysian lead negotiator
Jayasiri from the Ministry of International Trade and Industry
(MITI) noted progress on market access discussions for goods and
agriculture. The Malaysian leads on investment and services pledged
to keep working with their U.S. counterparts to resolve outstanding
issues. However, they said the U.S. was insufficiently flexible in
addressing serious Malaysian concerns in both sectors; these include
the U.S. proposals on investor state dispute resolution and
elimination of performance requirements in the investment chapter,
and U.S. insistence on early and complete market access in the
services sector. Malaysia also seeks U.S. concurrence to negotiate
a mutual recognition agreement on services. Malaysia's lead on the
telecom and e-commerce chapters acknowledged good progress in both
chapters, while noting continued Malaysian insistence that the
government maintain some control over technology choice, as well as
the sector's regulatory bodies. Former Malaysian Ambassador to the
U.S. Ghazzali noted significant progress in the talks over the
course of five rounds, and agreed another round would help maintain
and improve the necessary momentum to reach conclusion. He
cautioned that with MITI more of a coordinator than a driver for the
FTA, Cabinet decisions will continue to drive the negotiating
process in Malaysia.

Ministry of International Trade and Industry (MITI)
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2. (SBU) MITI's Jayasiri, the overall GOM lead for the U.S.-Malaysia
FTA, told DAUSTR Bell, along with Econ Counselor and econoff, that
much work needed to be done to move the FTA process forward, and he
warned that results might not lead always to what the U.S. expected.
Key contentious issues such as government procurement and financial
services were outside of MITI's control, and negotiators continued
to follow the decisions made by the Cabinet in May, which also
included a decision not to negotiate a competition chapter.
However, he said momentum still existed, after waning somewhat when
TPA expired at the end of June. Jayasiri said Malaysia wanted to
work through technical details as much as possible before next
meeting face-to-face with the U.S. side, possibly in November. He
noted that the market access discussions for both goods and
agriculture were in good shape, while noting that the U.S. had not
moved much in some areas, namely textiles.


3. (SBU) Bell responded that both sides needed to translate the
recent commitment made at senior levels to move the talks forward,
into a specific work plan that would help negotiators work through
remaining obstacles. The U.S. viewed another round with some
urgency, and believed early November to be a good time to hold such
a round, provided working groups made good progress in the
meantime.


4. (SBU) On investment, Malaysian lead negotiator Wong Seng Foo said
U.S. insistence that it could move little from its proposed text was
unhelpful, since Malaysia could not sell the investment text to its
stakeholders absent some changes. Particularly sensitive areas
included performance requirements (PRs) and investor-state
relations. On PRs, Bell requested that Malaysia provide the U.S.
with more details of its existing PRs so that U.S. side could
determine more accurately whether this was a large or a small
obstacle to agreement; more dialogue was needed so both sides could
resolve the issue, as much as possible before the next round. Wong
committed to providing this information. Bell also said the U.S.
awaited further information from Malaysia on its specific concerns
regarding investor state disputes before the U.S. makes a capacity
building proposal. Wong said the Attorney General's office would
need to provide this, and would welcome examples of how such a
dispute mechanism was used in other U.S. FTAs (Bell noted that we
had few examples to provide, since most such disputes are resolved
without invoking the mechanism).


5. (SBU) Regarding services, Bell said the U.S. would like to hold a
DVC covering the audiovisual and telecom sectors as a means to focus
discussions. This could increase confidence that would lead to
further productive discussion on broader services issues. Dr.
Sarinder Kumari, the Malaysian lead, complained that the U.S. had
remained inflexible on its proposed text, except in a few

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non-substantive areas. Malaysian negotiators found it difficult to
negotiate a services chapter that appeared to provide limited
benefit for Malaysian firms, especially at a time of increased
attention in Malaysia to the services sector as an engine for future
growth. Malaysia did not disagree that further competition from
U.S. services providers would provide benefits to the sector's
development in Malaysia, but the U.S. needed to better consider
Malaysia's need to phase-in liberalization so that Malaysian firms
would not be overwhelmed. Sarinder said Malaysia viewed its
proposed phase-in of liberalization as a concession to the U.S., but
noted no analogous flexibility from the U.S.


6. (SBU) Malaysian firms might benefit from the negotiation of
mutual recognition agreements (MRAs),but the U.S. side has shown
little response to this suggestion, said Sarinder. Bell pushed back
noting that at present the Malaysian services offer provided minimal
market access making an MRA discussion premature. He also noted
that Malaysia's services sector stood to gain a great deal from an
increased U.S. presence through increased employment, exposure to
new technology and management practices and by improved
competitiveness.


7. (SBU) Sarinder further noted that, while more senior USTR
officials profess no intention in changing Malaysia's bumiputera
policies, working level negotiators insisting on 100% equity
participation across the board were, in effect, seeking to change
fundamental aspects of the NEP. Sarinder said she is still
discussing with her team the scheduling of a DVC and subsequently
proposed dates to the U.S. side.


8. (SBU) On Malaysia's proposal on temporary safeguards for the
financial system, Wong said Bank Negara would submit proposed
language to the U.S. in October.

Communications Ministry - Anbalagan
--------------


9. (SBU) Under Secretary Anbalagan K noted a few areas of concern in
the talks on telecom and e-commerce (he leads the Malaysian team in
both areas). Malaysia wishes to retain some control in the area of
technology choice, given the country's relatively small market and
its desire to maintain interoperability among technologies. For
socioeconomic reasons Malaysia also wished to retain some control
over regulatory bodies. Bell noted that the U.S. had just recently
received Malaysia's offer and will assess how much access it
provides to U.S. firms. Anbalagan acknowledged receiving USTR's
telecom questions and committed to responding as soon as possible.

MFA - Ambassador Ghazzali
--------------


10. (SBU) Former Malaysian ambassador to the U.S. Ghazzali S.A.
Khalid told Bell that there has been "tremendous movement" in the
bilateral talks since June 2006, with the most progress taking place
in those groups that have perceived joint ownership of their
chapters, such as IPR. Progress has been achieved despite the hard
approaches of some U.S. and Malaysian negotiators. At this point it
is important for both sides to sustain momentum and to show that
movement has been made over the course of our discussions. By
completing the majority of the agreement Ghazzali believes it will
be possible to convince the politicians to make the right decisions
in the end on the most difficult areas of the talks.


11. (SBU) On government procurement, Ghazzali believed that
differences could be bridged if real discussions take place, and he
suggested that it may be larger corporate (GLC) interests that are
inhibiting discussion, and only to a lesser extent the political
fear of change to Malaysia's bumiputera policies. The negotiating
process has been hamstrung in Malaysia in part due to lack of a
single player to move the process; MITI was initially in that role,
but as discussions became more intense MITI shifted to a role of
coordinator instead. The Malaysian Cabinet-led process makes
negotiation difficult; it would be helpful for Malaysian negotiators
to have some Cabinet mandates in hand before meeting for the next
round.

SHEAR