* State Department takes both off list of worst offenders
* Upgrade removes hurdle to Malaysia joining trade pact (Adds TPP details, comment from Senator Menendez)
By Jason Szep and David Brunnstrom
WASHINGTON, July 27 (Reuters) - The United States took Malaysia off its list of worst offenders in human trafficking on Monday, removing a potential barrier to a signature Asia-Pacific trade pact despite opposition from human rights groups and nearly 180 U.S. lawmakers.
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.
Egypt was downgraded, to the so-called "Tier 2 Watch List" status, while Cuba, Saudi Arabia and Uzbekistan were upgraded to "Tier 2 Watch List."
Malaysia's expected upgrade to the "Tier 2 Watch List" from Tier 3 removes a potential barrier to President Barack Obama's signature 12-nation Trans Pacific Partnership trade agreement, or TPP, which Washington hopes to conclude this year.
Congress approved legislation in June giving Obama expanded trade negotiating powers, but prohibiting "fast-track" approval of a deal that included Tier 3 countries, as Malaysia then was.
After a July 8 Reuters report on plans to upgrade Malaysia, 160 members of the U.S. House 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 the TPP. She said it was based on standards for how well Malaysia was dealing with trafficking.
Sewall said Malaysia had made efforts to reform its victim-protection regime and 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, with which Washington reestablished diplomatic relations on July 1 after more than 50 years of Cold War estrangement, was upgraded due to progress in addressing sex trafficking, although Washington remained concerned about its failure to battle 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."
OBAMA ACCUSED OF PUTTING POLITICS AHEAD OF FACTS
Members of Congress who protested against the plan to upgrade Malaysia reacted angrily and accused Obama's administration of putting politics ahead of facts.
Sander Levin, a Michigan Democrat who has campaigned against TPP over labor rights, called Malaysia's upgrade "extremely concerning."
Representative Chris Smith, a New Jersey Republican who was one of the authors of the law that brought the U.S. trafficking report into being, criticized the upgrades of Malaysia and Cuba as well as relatively lenient ratings for Vietnam and China.
He said the report had "careened off into a new direction where the facts regarding each government's actions in the fight against human trafficking are given almost no weight when put up against the president's political agenda."
Democratic Senator Robert Menendez, who authored the trafficking-related trade amendment, said he was "profoundly disappointed."
He said that by upgrading Malaysia and Cuba the administration had "elevated politics over the most basic principles of human rights" and vowed to do all he could "from hearings to legislation to investigations" to challenge the moves.
International scrutiny and outcry followed the discovery in May of scores of graves in people-smuggling camps near Malaysia's northern border with Thailand.
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 Thai embassy statement 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 due to visit Malaysia, current chair of the 10-nation Association of Southeast Asian Nations (ASEAN), of which Thailand is also a member, from Aug. 4-6.
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.
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, the report said Havana 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. (Additional reporting by Matt Spetalnick and Patricia Zengerle; Editing by David Storey, Bernadette Baum and Howard Goller)
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