GEARING UP FOR FTA ROUND TWO: STICKY ISSUES

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 -------------- SUMMARY -------------- ¶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. -------------- Overarching Legal Issues -------------- ¶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, �0A;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.) -------------- Schedules of negative lists -------------- ¶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. -------------- Textiles -------------- ¶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. -------------- Financial Services -------------- ¶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. -------------- Services -------------- ¶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. -------------- Telecommunications -------------- ¶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. -------------- Market Access -------------- ¶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.) -------------- 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. --- IPR --- ¶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. -------------- Labor -------------- ¶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. -------------- Customs -------------- ¶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