The U.S. State Department’s annual Trafficking in Persons report also upgraded Cuba from its lowest rank for the first time since it was included in the annual report in 2003.
South Sudan, Burundi, Belize, Belarus and Comoros were downgraded to the lowest rank, Tier 3, where Thailand remained for a second year, alongside countries with some of the world’s worst trafficking records, including Iran, North Korea and Zimbabwe.
Congress approved legislation in June, giving Obama expanded trade negotiating powers but prohibiting deals with Tier 3 countries such as Malaysia.
After a July 8 Reuters report on plans to upgrade Malaysia, 160 members of the U.S. House of Representatives and 18 U.S. senators wrote to Secretary of State John Kerry, urging him to keep Malaysia on Tier 3. They said there was no justification for an upgrade and questioned whether the plan was motivated by a desire to keep the country in the TPP.
U.S. Under Secretary of State for Civilian Security, Democracy, and Human Rights Sarah Sewall rejected the notion that any political considerations had influenced Malaysia's ranking.
“No, no, no,” she told a news briefing when asked whether the upgrade was connected to a desire to maintain Malaysia's TPP eligibility. She said the decision was based on standards for how well it was dealing with the trafficking problem.
Sewall said Malaysia had made efforts to reform its victim-protection regime and its legal framework, and had increased the number of investigations and prosecutions compared to 2013.
Even so, she said: “We remain concerned that low numbers of trafficking convictions in Malaysia is disproportionate to the scale of Malaysia’s human trafficking problem.”
Sewall said Cuba was upgraded due to progress it had made in addressing sex trafficking, although Washington remained concerned about its failure to combat forced labor.
Rights groups said Malaysia's upgrade undermined the credibility of the U.S. report.
“Malaysia’s record on stopping trafficking in persons is far from sufficient to justify this upgrade," Human Rights Watch said. "This upgrade is more about the TPP and U.S. trade politics than anything Malaysia did to combat human trafficking."
Sander Levin, a Democratic congressman from Michigan who has campaigned against TPP over labor rights, called Malaysia's upgrade "extremely concerning."
Malaysia's upgrade comes despite international scrutiny and outcry following the discovery in May of scores of graves in people-smuggling camps near its northern border with Thailand.
The State Department said that while Malaysia was making significant efforts, its trafficking convictions had dropped in the 12 months to March, falling to three from nine in the period covered by the report.
The report also described conditions under which migrants were still forced into labor, and women and children coerced into the sex trade.
Thailand, a key U.S. ally, whose relations with Washington have cooled since a military coup last year, said it "strongly disagrees" with the decision to keep it on the lowest ranking.
A statement from the Thai embassy said this failed to take account of "significant efforts undertaken by the Thai Government on all fronts during the past year."
At a ceremony to honor individuals for their anti-trafficking work, Kerry highlighted a report in Monday's New York Times about a Cambodian man who had been trafficked into Thailand and forced to work on fishing boats, including one on which he was shackled by his neck to prevent him escaping.
"We must never, ever allow a price tag to be attached to the heart and soul and freedom of a fellow human being," Kerry said.
Kerry is expected early next month to visit Malaysia, current chair of the 10-nation Association of Southeast Asian Nations (ASEAN), of which Thailand is also a member.
Washington is seeking to promote ASEAN unity in the face of China's increasingly aggressive pursuit of territorial claims in the South China Sea, a subject of U.S. criticism.
CUBA, UZBEKISTAN UPGRADED
The U.S. report organizes countries into tiers based on trafficking records: Tier 1 for nations that meet minimum U.S. standards; Tier 2 for those that make significant efforts to do so; Tier 2 "Watch List" for those that deserve special scrutiny; and Tier 3 for countries that fail to fully comply with the minimum U.S. standards and are not making significant efforts to do so.
In its upgrade of Cuba to Tier 2 Watch List status, the report said the country was making “significant efforts” to comply with the minimum standards for the elimination of trafficking, including sharing data, improving cooperation, and offering services to trafficking victims.
It said there remained reports of forced labor in Cuba's government-backed overseas work missions that send 51,000 workers to more than 67 countries.
The upgrade removes a longstanding irritant between the former Cold War foes following the July 1 re-establishment of diplomatic relations after more than 50 years of estrangement.
Uzbekistan, which has faced criticism by rights groups over allegations of forced labor in its cotton industry, was upgraded to Tier 2 Watch List from Tier 3.
The report cited an Uzbek government decree prohibiting forced child labor in the 2014 cotton harvest and new fines against college directors and farms for using child labor.
"Despite these efforts, serious concerns persist, as government-compelled forced labor of adults remained endemic in the 2014 cotton harvest," it said.
Saudi Arabia was upgraded from Tier 3 following progress in prosecuting offenders and protecting victims, the report said, while Egypt was downgraded to Tier 2 Watch List after failing to boost anti-trafficking efforts compared to the previous year.
(Additional reporting by Matt Spetalnick and Patricia Zengerle; Editing by David Storey, Susan Heavey and Bernadette Baum)