SUCCESSFUL TRADE TALKS FEATURE TARIFF, INVESTMENT, IPR,

UNCLAS SECTION 01 OF 05 PHNOM PENH 001438

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STATE PLEASE PASS TO USTR-FOR BISBEE AND WEISEL
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HANOI FOR FAS--WADE AND RALPH, FCS--NAY
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GENEVA FOR USTR--PALLGEIER, STATE--CHICK
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STATE PLEASE PASS TO US PATENT AND TRADEMARK OFFICE--FOR CHAITOVITZ


E.O. 12958: N/A
TAGS: ETRD KTEX EINV ELAB EAGR CB
SUBJECT: SUCCESSFUL TRADE TALKS FEATURE TARIFF, INVESTMENT, IPR,
AND LABOR ISSUES


PHNOM PENH 00001438 001.2 OF 005



1. (SBU) Summary: A strong bilateral partnership and Cambodia's
commitment to economic reform were on display November 21 as U.S.
Trade Representative Susan Schwab and Commerce Minister Cham Prasidh
led Trade and Investment Framework Agreement (TIFA) joint council
discussions. The Commerce Minister listed an impressive number of
trade and business-related laws passed since the last TIFA meeting
in February, many of which help to meet Cambodia's WTO accession
commitments. Cambodia is also taking substantial positive steps in
protecting intellectual property rights and creating an environment
conducive to collective bargaining, although other areas--such as
passage of a long-awaited anti-corruption law--remain problematic.
Minister Prasidh was outspoken in his enthusiasm for a bilateral
investment treaty and in his worries that the all-important
Cambodian garment sector cannot survive the end of U.S. safeguards
against China, a concern which has led to his strong support for
proposed U.S. legislation designed to allow duty-free imports of
Cambodian garments. End Summary.

Commerce Minister Highlights Growth, Appeals for Tariff Review
-------------- --------------


2. (U) Commerce Minister Cham Prasidh's opening statement
highlighted Cambodia's impressive economic performance and concerns
about tariffs facing garments and other goods entering the U.S.
market. Prasidh noted that the Cambodian economy has been growing
at a average of 9.6% per year since 1999, with trade growing by 20%
per year and foreign direct investment increasing 13-fold in just
three years. Prasidh also said that the U.S. is Cambodia's number
one export market, although Cambodian imports account for only 0.1%
of total U.S. imports. The Commerce Minister appealed to the U.S.
to review its tariffs on Cambodian products, highlighting that due
to the high tariff rates on garments, Cambodia pays as much in U.S.
tariffs as does France, despite the enormous differences in
development levels and trade volume between the two countries.


3. (U) In response, U.S. Trade Representative Susan Schwab praised
the growth and increased global integration of the Cambodian economy
and the country's engagement on trade issues. Schwab highlighted
the recent conclusion of a handicrafts agreement which will allow
for duty-free imports of handmade Cambodian textiles, noted growing
U.S.-Cambodian trade, and the U.S. hope that the TIFA would continue
to increase bilateral trade and investment. She noted the increased
visits by U.S. officials, members of Congress and Congressional
staffers, and business representatives this fall and hoped that the
Cambodian Government would use these visits to underscore its
economic potential.

Enhanced Integrated Framework
--------------

4. (U) Cambodia is one of three pilot least developed countries
(LDCs) to participate in the Enhanced Integrated Framework, the
World Trade Organization's (WTO) program to coordinate donor support
for WTO implementation through a country-driven development
strategy. Prasidh outlined recent developments in this area,
including great progress towards fully funding the initiative and
the upcoming launch of Cambodia's trade integration strategy. The
strategy, based on the recently updated Diagnostic Trade Integration
Study, identifies priority product or service sectors for promotion;
highlights bottlenecks which hamper exports; links trade development
more clearly with human development and poverty reduction goals; and
seeks to better coordinate efforts by donors and various branches of
the Cambodian government via a trade sector-wide approach (Trade
SWAp). The first phase of this strategy will focus on capacity
building and management of trade development, and is expected to be
funded at approximately USD 1.5 million over 3 years.


PHNOM PENH 00001438 002.2 OF 005


Legislative Progress on WTO Implementation
--------------


5. (U) Cambodia's parliament has been busy reducing its backlog of
WTO-related legislation, a priority area identified in the TIFA
Action Plan developed after the last TIFA meeting in February 2007,
as well as other laws designed to promote a transparent and
well-regulated business environment. The Parliament has passed a
Criminal Procedures Code, Civil Procedures Code, and a nightshift
amendment to the Labor Law; and relevant government ministries are
implementing them, Minister Prasidh said. A sub-decree on the
implementation of the Law on Marks, Trade Names and Acts of Unfair
Competition was recently adopted and implementation is underway.
The Parliament has passed Laws on Insolvency, Customs, Secured
Transactions, Standards, Government Securities, Non-Government
Securities, and Money Laundering but the laws have not yet been
implemented. The National Assembly passed the Civil Code and the
legislation is awaiting Senate approval. The Telecommunications
Act, Law on Insurance, and Law on the Establishment and Management
of Special Economic Zones have been or are being drafted, and
Minister Prasidh requested USG comments on several of these draft
laws. Ambassador Schwab agreed to provide comments on key pieces of
legislation, including the Law on Insurance and on Government
Securities, among others.


6. (U) Kun Nhem, Deputy Director of the Customs and Excise
Department (CED),highlighted customs reform efforts that have
accompanied the passage of the new Law on Customs. The CED is
moving towards a WTO-compliant customs valuation system; automating
customs processing with a system known as ASYCUDA, to be piloted at
Sihanoukville port starting in December 2007; introducing a single
administrative document; and developing new risk management
procedures. Nhem also highlighted a February 2008 workshop on the
development of a framework for World Customs Organization (WCO)
implementation to be conducted in Cambodia in conjunction with the
WCO. Nhem said the government would send invitations to this
meeting to donors shortly. He thanked USAID for their efforts in
reviewing customs and other procedures as part of the Southeast Asia
Commercial Legal and Institutional Reform (SEACLIR) report.
Cambodia looks forward to hosting officials from other Southeast
Asian nations who participated in SEACLIR evaluations at a regional
seminar to be held in Siem Reap early next year.

Cambodia as a Model: IPR and Labor Issues
--------------


7. (U) Cambodia's recently increased efforts to strengthen
intellectual property (IP) enforcement earned praise from Amb.
Schwab, who noted that intellectual property is "another area where
Cambodia is showing great potential to be a model for other
countries." Minister Prasidh noted that Cambodia was the first
country to link trade to labor standards and wanted to develop a
program over the next couple of years that would similarly put
Cambodia in the forefront in IP. He stated that draft Laws on
Geographical Indicators and Layout Designs of Integrated Circuits
are under review while the Cambodian Government is drafting
sub-decrees on IP border measures, compact disc production and
trade, and collective management organizations for remuneration to
performers and music producers. Minister Prasidh stated that
Cambodia wanted to develop a policy to link intellectual property
and trade by ensuring that anyone producing IP-sensitive goods in
Cambodia would be scrutinized to ensure that they did not export
pirated materials. Cambodia would like to pursue parallel tracks of
IPR enforcement and public awareness simultaneously, but will need
significant USG support to do so, he said. Amb. Schwab praised the
idea of a trade link and offered to send an intellectual property

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and capacity building team to Cambodia to assist and could enlist
private sector groups in helping Cambodia define its vision of an IP
model country.


8. (U) Turning to an area where Cambodia is acknowledged as a
leader, labor conditions and worker rights, Minister Prasidh stated
that the Ministry of Labor and Vocational Training was working
closely with the International Labor Organization, the American
Center for International Labor Solidarity, the Garment Manufacturers
Association of Cambodia, and several unions to improve the process
of certifying unions as most representative, an initiative stemming
from the last TIFA meeting in February 2007. While other unions can
be active at a factory, only most representative unions can engage
in collective bargaining. At present, most representative union
status is not enforced, and many garment factories have multiple
unions competing for workers' allegiance and often engaging in
harassment, intimidation, and illegal strikes, making collective
bargaining all but impossible. Prasidh noted that he believes
firmly in worker rights and believes that clarifying and enforcing
rules about most representative status will encourage Cambodian
unions to mature and help ensure that there are fewer production
disruptions so Cambodian products can remain competitive with those
from China and Vietnam. The Commerce Minister praised Ambassador
Mussomeli's role in averting a general strike last year, and asked
for continued embassy support on the most representative status
issue. Ambassador Schwab offered to talk to the AFL-CIO and UNITE
to see if they could provide support on this issue.

Investment Climate and Bilateral Investment Treaty
-------------- --------------


9. (U) Cambodia is poised for sustainable economic growth thanks to
political stability, macroeconomic stability, a sound and
transparent legal framework, and preferential access to key markets
via the Generalized System of Preferences (GSP),Minister Prasidh
said during a detailed presentation on the Cambodian investment
climate. He emphasized that tourists have been coming to Cambodia
in increasing numbers, with 2 million tourist arrivals expected this
year. Garment exports have also grown, particularly to the U.S.
market, where Cambodia has gone from being the 17th largest exporter
to the 5th largest in just a few years. He also made a strong
appeal for negotiating a bilateral investment treaty (BIT) with the
U.S. Cambodia has already signed 21 BITs, including with Western
countries such as Germany, France, and Australia. "The U.S. should
be number 22," Prasidh opined, adding that he was ready to start
negotiating as soon as December 12.


10. (U) Amb. Schwab praised Cambodia's efforts to create a good
investment climate, and asked for an update on the long-stalled
anti-corruption law. Prasidh stated that it had been submitted to
the Council of Ministers, but said that streamlining procedures and
setting deadlines for government action--such as for customs
clearance--were more important steps and were already underway.
Surprised by Prasidh's proposal for launching BIT negotiations in
December, Amb. Schwab explained that the USG was interested in a
potential BIT in the future. She said that the process typically
involved preliminary detailed exchanges of information to be sure
that both sides were clear about the process and that all questions
were answered. This would then be followed by an intense series of
exchanges in person, by email, or by digital video conference and
then begin a pre-negotiation phase. Only once the two sides have
essentially reached agreement on all the issues are the start of
formal negotiations announced, and these then tend to move quickly
to an agreement. She said she appreciated his interest in a BIT and
that her staff would be in touch on appropriate next steps.


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Technical Assistance
--------------


11. (U) The U.S. has provided most of the technical assistance (TA)
requested at the February 2007 meeting, Amb. Schwab reported,
including strengthening private sector ties via several business
missions and providing information, documentation, and legal
comments on standards and e-commerce. Additionally, the U.S. Trade
and Development Agency plans to provide assistance in the area of
energy development, customs, and telecommunications. Prasidh
thanked the USG for its assistance, including the USAID-funded
Southeast Asia Commercial Legal and Institutional Reform report
(SEACLIR),which the Ministry intends to make public once finalized.
The Commerce Minister presented an extensive five-page list of new
TA requests ranging from seafood quality assurance guidelines to
refurbishing hearing rooms. The two sides agreed that these
requests will be considered over the coming months at the working
level.

The McDermott NPDA Bill, the Doha Round, and Other Duty-Free
Initiatives
-------------- --------------


12. (SBU) In response to a question from Prasidh about the
prospects for passage of Sen. McDermott's New Partnership for
Development Act (NPDA),proposed legislation which would allow
duty-free entry for LDC products, Amb. Schwab noted that she was
increasingly optimistic about Congress' stance on trade issues. She
noted that the new Senate, which many had predicted would be
strongly protectionist, just passed a Free Trade Agreement with Peru
by a wide bipartisan margin and that a House vote was expected
shortly. Nonetheless, the McDermott bill and a similar initiative
by Smith and Feinstein were "not likely to move very far very fast,"
she remarked, as a large trade deficit and U.S. sensitivities around
the garment industry hurt prospects for passage.


13. (SBU) Instead, Amb. Schwab said, USTR was more focused on
efforts to extend duty-free, quota-free (DFQF) treatment to 97% of
LDC goods via the Doha Round of WTO negotiations. USTR has begun
the process of getting more input on what the U.S. will list in the
3% of tariff lines that the U.S. can exclude from DFQF treatment.
Amb. Schwab emphasized that Cambodia stands to gain a lot from a
completed Doha Round, and urged Cambodia to "advocate for its
economic self-interest" rather than follow the efforts of some
middle-income countries to water down the commitments.


14. (SBU) Despite statements from Schwab that the 3% of tariff
lines would include garment lines plus other sensitive industries,
Prasidh launched a passionate plea for garment tariffs to be
included in the 97% of tariff lines that are subject to DFQF.
Cambodia's garment industry is fighting to survive, the Commerce
Minister said, with factories "bleeding white" trying to keep buyers
placing orders in Cambodia through the end of U.S. safeguards
against China in December 2008. Putting garment tariff lines in the
3% exclusion group will send the wrong signal to buyers, Prasidh
argued, saying that Cambodia's garment industry can't survive if put
on the same footing as other (non-LDC) countries. He said that the
Cambodian Government recognizes the importance of diversification of
its economy, but that will take 10-15 years, while the U.S.
safeguards on China will expire at the end of 2008. The garment
industry was like a "time bomb" he said, with garment buyers ready
to move out if there were any negative developments. Cambodia's aim
is not to erode the garment industry in the U.S., but rather to cut
into China's market share, he clarified. Cambodia was happy to play
a role in the Doha Round short of leading the LDC group, he said,
comparing the negotiations to a big boat in which China, Brazil,

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India, and others were all fighting over the steering wheel while
Cambodia and the other LDCs were standing near the lifeboats.


15. (SBU) In response, Amb. Schwab repeated her encouragement to
Cambodia to stand up against the middle-income countries who were
attempting to hijack the Doha Round. Amb. Schwab also encouraged
Cambodia to consider proposing a textile sectoral negotiation as
part of the Non-Agricultural Market Access negotiations, which could
help LDCs, including Cambodia. Further, Amb. Schwab pledged that
DFQF will move forward in a transparent process and that the 3% of
tariff lines excluded would not be prejudicial against specific
countries as Cambodia fears.

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


16. (SBU) Cambodia's recent commitment to trade and investment
reform warrants serious USG attention and action. Despite suffering
from tremendous human capacity limitations, Cambodia has made
significant progress since February's meeting, particularly in the
area of legislative change. Cham Prasidh has a sophisticated and
realistic understanding of the precariousness of Cambodia's
successful economy, particularly as its narrow economic base in
garment exports faces the impending end of U.S. textile safeguards
against China. While some of Cambodia's requests would be tough to
agree to--such as not including any textiles in the 3% of tariff
lines excluded from DFQF access--others, such as the intense
interest in a bilateral investment treaty, warrant USG action.