Cablegate: Gearing Up for Fta Round Two: Sticky Issues

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 MANAMA 000272

SIPDIS

DEPT FOR EB/TPP/BTA, EB/TPP/MTA, EB/TPP/ATT AND NEA/ARP
DEPT PASS USTR JASON BUNTIN
CAIRO FOR STEVE BONDY

E.O. 12958: N/A
TAGS: ETRD ECON BA
SUBJECT: GEARING UP FOR FTA ROUND TWO: STICKY ISSUES

REF: A. MANAMA 219

B. MANAMA 249
C. MANAMA 203

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SUMMARY
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1. FTA round one produced remarkable progress. Round two
promises to be more difficult because negotiators will have
to tackle sticky issues. Eliminating physical presence
requirements and disclosure of judicial decisions will likely
require extensive revision of local laws. Textiles,
technology choice for telecommunications, duty-free market
access for motor vehicles and patenting of animals will
require resolution. Jameel Al Alawi, Legal lead negotiator,
told EMBOFFS that he had instructed negotiators to agree to
FTA texts in principle only. Yet overall, there is a strong
push to conclude as many chapters as possible during round
two. IPR, financial services, and market access lead
negotiators told ECONOFF that they did not want their groups
to delay a June signing. Ministry of Finance and National
Economy's Yousif Humood, de facto coordinator for the
Bahraini delegation, assured ECONOFF February 25 that
schedules of negative lists requested during round one
negotiations were being approved by the ministers responsible
and would be ready for round two. END SUMMARY.

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Overarching Legal Issues
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2. Jameel Al Alawi, legal lead negotiator and Ministry of
Cabinet Affairs Director of Agreements and Treaties, told CDA
February 24 that Bahrain's negotiators are not necessarily
legal experts and are sometimes unaware of changes that FTA
provisions would require to existing laws. Therefore, he has
cautioned all lead negotiators that they may agree to texts
in principle only. Legal Affairs will need to check for
conflicts between the text and existing laws. Negotiators
will have to obtain authorization from the relevant ministry
or ministries to accept provisions that would require changes
to Bahraini law.

3. Al Alawi Emphasized to CDA that it is much more difficult
to change laws once drafted than to write them appropriately
to begin with. Reworking laws would require much time and
GOB resources would be stretched. He alerted CDA that many
of the ministries lack legal advisors altogether, and that
those advisors that are on staff are not always good enough,
experienced enough, or have the appropriate specialty to
draft good laws. Specifically, Al Alawi said that many of
Bahrain's legal advisers are Egyptians who are computer
illiterate and lack sufficient English language skills to
remain up-to-date. When CDA suggested that the GOB ask for
technical assistance funding to support (re-)drafting of laws
to enact FTA, Al Alawi countered that the GOB had not had
good experience with outsourcing legal advice, since lawyers
thus procured tended to be unfamiliar with Bahraini law,
tended to be commercially minded, and substituted
cookie-cutter copying of other countries' existing laws for
drafting expertise. (COMMENT: Bahrain's Constitution was
largely drafted by foreigners. END COMMENT.)

4. Looking ahead, Al Alawi alerted CDA that there is a
constitutional provision that allows for fast track enactment
of laws of an "important economic nature". This provision
requires parliament to act on the draft within 15 days.
(Note: Al Alawi was not explicit about which article of the
Constitution he was referring to. Post is checking the
constitution to verify the pertinent provision. END NOTE.)

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Schedules of negative lists
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5. Ministry of Finance and National Economy Director of
Economic Planning Yousif Humood told ECONOFF February 25 that
all the requested schedules (services, financial services,
market access, government procurement) had been forwarded to
the relevant ministerial-level authorities for approval. He
said he hoped to have them ready to pass to the U.S. side by
February 26th to give U.S. negotiators the opportunity to
study the lists.

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Textiles
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6. Lead negotiator for textiles Haitham Al Gahtani told
Senate Finance/Commerce Committee Staffdel visitors February
21 that Bahrain will seek fabric-forward and TPL to allow
time for a gradual, "cooperative integration" of the
industry, with Bahrain moving away from ready-made garment
production and developing in its place textile design,
shipping and financing capabilities.

7. As in the U.S., textiles is a politically-charged issue
here with real economic ramifications for segments of the
population. Textiles, comprising ready-made garments (80
percent) and gray cloth (20 percent), are Bahrain's primary
non-oil export to the United States. While Bahrain's
contribution to overall U.S. textile imports is negligible,
Gahtani said, in Bahrain the sector represents at least
10,000 jobs, including roughly 3,500 for less educated, hard
to re-employ female Bahraini Shia. The rise of the industry
is attributed to foreign investors seeking to take advantage
of the existing U.S. textile quota system; most of the
industry is not expected to survive the end of quotas on
December 31, 2004. Some factories here may relocate to
countries where labor is significantly cheaper, especially in
East Africa, Asia, and the Indian sub-continent. Direct and
indirect impact of the loss of textile jobs in Bahrain would
shock the local economy, Al Gahtani said. It is widely
feared that this shock would negatively affect political
stability in Bahrain.

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Financial Services
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8. The financial services group has been communicating by
e-mail with U.S. negotiators, Dr. Abdulrahman Saif, financial
services lead negotiator, told ECON February 25. They sent a
list of issues for clarification to their U.S. counterparts
early this week and are waiting for a reply. A February 26
meeting is scheduled with the Minister to review and approve
Bahrain's proposed financial services negative list in time
for round two. Abdulrahman Saif said that he had not yet
received the U.S. negative list for financial services, but
looked forward to discussing both sides' offers at the
negotiations.

9. Regarding discussions during round one of a moratorium
limiting commercial banks in Bahrain to those 19 with
existing licenses, Abdulrahman Saif said that he considers
this moratorium lifted, since over the last few years, five
new licenses were issued. Abdulrahman Saif told ECONOFF
February 25 that he would check with his legal advisor to
find out more details about this.

10. On insurance, Abdulrahman Saif stressed to ECONOFF
February 25 that he expects a positive discussion of
cross-border supply of insurance services. Ghalib Hammoudi,
AIG's local representative, has told EMBOFFS on numerous
occasions that he is concerned about market access as
provided for in the draft insurance law. The draft law does
not make provision for agents, AIG's principal way of doing
business. In addition, the BMA has not responded to AIG's
application to expand its business lines to all insurance
products. AIG is in the process of applying to USDOC's
advocacy center for USG and Embassy support.

11. Bahrain looks to bring Islamic banking, investment, and
insurance to the U.S. market, particularly to serve the U.S.
Muslim community, but also to attract non-Muslims looking for
ethical investment products, CitiIslamic Bank's Raj Mittal
told ECONOFF on numerous occasions. Bahrain has become a
global Islamic banking center by introducing regulations
standards and creating new Islamic products. Afaq Khan, Head
of Islamic banking at Standard Chartered in Dubai and
formerly at HSBC told ECONOFF February 25 that HSBC had had
less than stellar results when it introduced Islamic home
mortgages in New York State. Because of the asset structure
of Islamic mortgages, double-taxation (capital gains) and
increased legal costs made the mortgages uncompetitive in the
market. In addition, when HSBC tried to expand their offer
to Connecticut and New Jersey, they faced these legal
challenges anew, producing limited positive outcomes.

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Services
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12. Holidays and ministerial travel prevented a number of
involved ministries from submitting their the services list
of non-conforming measures in a timely fashion, Eman Al
Doseri, Ministry of Commerce Head of Foreign Trade and
International Organizations and a member of the services
negotiating team told ECONOFF February 21 and again February
24. However, on February 25, Yousif Humood assured ECONOFF
that the list was awaiting ministerial approval and should be
ready for round two.

13. Current GCC non-conforming measures are based on current
laws and regulations, Al Doseri said, so they might be
difficult to change, especially since they involve other
countries. The Bahraini delegation will likely seek
grandfathering. (COMMENT: In exchange for grandfathering
these non-conforming measures, Bahrain may well be prepared
to offer the United States treatment equal to that of GCC
members. END COMMENT.)

14. Further, on mode 3 supply of services, Al Doseri
stressed that Bahrain's commercial law requires physical
presence for Bahrainis as well as non-Bahrainis. Yet, it is
clear from anecdotal evidence that Bahrain does not restrict
products from entering Bahrain through companies such as
amazon.com or e-bay. In fact, the Directorate of
Publications and Press cited amazon.com to ECONOFF as one of
the principal sources of parallel imports of Zone 1 DVDs (see
Manama 249). Local laws may need to be amended to conform
with standard practice and to legalize cross-border supply,
especially in light of Bahrain's eagerness to develop
e-commerce opportunities.

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Telecommunications
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15. Lead Telecommunications negotiator Sheikh Hamad bin
Mohamed Al Khalifa told ECONOFF February 24 that he does not
want the pace of telecoms liberalization, scheduled in the
telecoms law for completion by the end of 2004, to hold up
signing an FTA in June. He is concerned that the U.S. side's
understanding of the Bahraini licensing requirement for
cross-border provision of telecoms services (e.g.,
long-distance, internet) is incomplete: there is no pre-set
limit on international licensing; a switch constitutes
physical presence; Bahraini concern over cost-oriented
interconnection revolves around the inability to enforce
regulations on a non-licensed company that is providing
services in Bahrain.

16. Issues subject to ongoing consultation by the
Telecommunications Regulatory Authority (TRA), such as number
portability, are also of concern to Al Khalifa. He said that
including such provisions in the FTA pre-judges outcomes of
the consultative process. In exchange for "greater
understanding" on the above issues, Al Khalifa is prepared to
engage on the "more substantive" issue of technology choice
for mobile operators.

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Market Access
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17. Market access lead negotiator Hassan Ali Al Majed told
ECONOFF February 21 that he had sent forward to USTR
Bahrain's WTO list of prohibited items. He said that Bahrain
was prepared immediately to put up for consideration 92
percent of U.S. trade with Bahrain, the initial offer would
be subject to ministerial approval. Al Majed said that the
underlying reason for the auto exclusion is that there were
already too many cars on this small island, causing traffic
congestion and pollution, and that eliminating the 5 percent
tariff would make cars affordable to many more potential
owners. Separately, a key Bahraini negotiator told CDA
February 17 that import tariffs collected on imported
vehicles is important to the Finance Ministry. (COMMENT: We
would not be surprised if there were pressures from prominent
Bahraini families who import non-American cars. END COMMENT.)

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Government Procurement
----------------------

18. The GOB is seeking clarifications as to whether existing
government procurement laws meet FTA requirements and are
waiting for requested documents from the U.S. negotiators to
prepare offers. Legal lead negotiator Jameel Al Alawi told
CDA February 24 that one point of contention may be that
Bahrain extends preferential treatment in government
procurements to GCC suppliers.

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IPR
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19. Bahrain will need to develop its enforcement laws,
including establishing standardized and sufficiently punitive
damages provisions for IPR infringements, Legal lead
negotiator Jameel Al Alawi told CDA February 24. He also
mentioned to ECONOFF on numerous occasions over the past few
weeks that Bahrain would have difficulty with the patenting
of animals because the concept is inconsistent with the
Islamic tenet that only God can create and destroy life. He
added that disclosure of judicial decisions is not normal
modus operandi here generally. Such a provision would
require Bahrain to amend its laws.

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Labor
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20. On Labor, lead legal negotiator Jameel Al Alawi expects
Bahrainisation policies (i.e., industry-specific quotas for
minimum percentages of Bahraini national employees applied at
the company level) to present some problems in negotiation.
He stressed to CDA February 24 that U.S. immigration policies
and Bahrainisation are different means to the same end -- job
protection for the local labor force. An FTA, he said, aims
for free movement of goods and services, not necessarily of
people.

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Customs
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21. In a February 24 discussion with CDA, Bahrain's lead
legal negotiator Jameel Al Alawi wondered how the FTA would
work on a practical level relative to the existing GCC
customs union. At present, re-export tariffs are levied at
the border when goods exit Bahrain for another GCC country.
However, beginning in 2005, the GCC customs union envisions a
single point of entry, so that once goods have arrived in one
GCC country, they can be transported freely within the GCC.
A mechanism will have to be established to assure that goods
arriving duty-free to Bahrain from the United States would
not be re-exported duty-free throughout the GCC after FTA
implementation.
FORD

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