SCENESETTER FOR FIRST ROUND OF US-UAE FTA

UNCLAS SECTION 01 OF 04 ABU DHABI 000992

SIPDIS

SENSITIVE

STATE FOR EB/TPP/MTA, NEA/ARPI, NEA/PI
STATE PASS USTR FOR DOUG BELL

E.O. 12958: N/A
TAGS: ECON ELAB ETRD PREL TC EINV USTR
SUBJECT: SCENESETTER FOR FIRST ROUND OF US-UAE FTA
NEGOTIATIONS



1. (U) Summary: The UAE is a federation of seven emirates
(Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al-Qaiwain, Fujairah,
and Ras Al-Khaimah) founded in December 1971. Over the last
34 years, the UAE has developed into the third largest
economy in the Arab world, with an estimated 2004 GDP of at
least $85 billion. The UAE has pursued free market, pro
free-trade policies to diversify its economy away from a
dependence on oil. Despite possessing 9-10% of the world,s
proven oil reserves and the fourth largest proven gas
reserves in the world, rapid growth in the non-oil economy
reduced oil,s share of GDP from 65% in 1980 to about 30% in

2004.


2. (U) Summary Continued: The federal structure of the UAE,
like that of the U.S., cedes certain powers to the federal
government, while reserving others to the individual
emirates. Individual emirates maintain ownership of natural
resources within their borders. In effect, this means that
Abu Dhabi, which controls 90% of the proven oil and gas
reserves in the UAE, is by far the wealthiest emirate. Sheikh
Zayed, the late longtime Ruler of Abu Dhabi and President of
the UAE (he died in November 2004),had used the emirate,s
wealth to promote greater integration, by funding the federal
government and providing development aid to the poorer
emirates. Current Abu Dhabi Ruler and UAE President Sheikh
Khalifa bin Zayed (Sheikh Zayed,s eldest son) has recently
pledged USD 680 million in infrastructure projects to rural
areas in the less wealthy northern emirates. End Summary.

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Government Structure
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3. (U) When the UAE was founded, the individual emirates
surrendered some of their sovereignty to a federal
government, while retaining a great deal of autonomy over
their internal affairs. Under the constitution, the federal
government assumed the responsibility and authority for
certain areas that affect the federation as a whole, such as
foreign affairs, while the individual emirates retain
authority in areas not specifically delegated to the
federation. In all cases, however, federal laws and decrees
&trump8 emirate-level laws. The Federal Supreme Council
(FSC),made up of the rulers of the seven emirates or their
designees, is the highest federal authority. A majority of
the members of the FSC must pass all federal legislation, and
this majority must include the emirates of Abu Dhabi and
Dubai, giving both emirates an effective veto over
legislation.


4. (U) Local authorities have the right to legislate on
affairs within their own emirates, providing that legislation
does not contradict the constitution or federal law.
Individual emirates also have the authority to implement
federal law dealing with local matters.


5. (SBU) On November 2, 2004, the day of Sheikh Zayed,s
death, the government announced a Cabinet shake-up bringing
in younger, more reform-minded technocrats, as well as the
first woman ever to serve in the Cabinet (see para 23). We
have seen a stable transition of power since Sheikh Zayed,s
death and we expect President Khalifa will continue to
promote the same foreign and economic policies as his father.
Sheikh Khalifa has pledged USD 680 million for development
projects in the less developed northern emirates.

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Economic Synopsis
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6. (U) The UAE has followed a market-oriented growth
strategy aimed at diversifying the economy. It is the third
largest economy in the Arab world, just behind Saudi Arabia
and Egypt. 2004 GDP was approximately $85 billion, with a
per capita GDP of more than $20,000. Oil accounts for about
30 percent of the UAE,s GDP, and major non-oil industries
include manufacturing (11 percent),wholesale and retail
trade (10 percent),government services (9.6 percent),and
construction (8 percent). There are over 500 U.S. companies
physically present in the UAE, and the U.S. trade surplus is
significant; in 2004 the U.S. exported $4 billion to the UAE
and imported $1.1 billion in UAE goods. With an estimated
economic growth rate in 2004 of 6.6%, the UAE can be a growth
market for U.S. exports in goods and services*particularly
in the sectors of construction/engineering, information
technology, and oil and financial services.


7. (U) The UAE is a member of the GCC Customs Union, which
has fixed tariffs on most goods at 5% (cigarettes at 100% and
alcohol at 50% are two notable exceptions). (Note: The UAE
needed to raise its external tariff to meet the GCC common
external tariff. End note.) The UAE has benefited from its
membership in the customs union. In the first year after the
GCC customs union was founded, the UAE's exports and
re-exports increased by about 33% to about $ 1.85 billion.
This total does not include the volume of transshipped goods
that passed through the UAE's free trade zones. Exports and
re- exports include goods manufactured in the UAE or imported
into the UAE, modified and then re-exported. The UAE's
participation in the customs union was also the main
contributing factor to the creation of a federal customs
authority, which is beginning to coordinate the efforts of
the customs departments of the individual emirates. The UAE
was unable to get agreement from its GCC partners to have
goods produced in its free zones eligible for duty free entry
to other GCC countries.


8. (U) There are sharp differences in the wealth of the
various emirates. The Emirate of Abu Dhabi owns over 90% of
the oil and gas reserves in the UAE. In 2002, Abu Dhabi's
share of total GDP was about 58%. Dubai, the commercial
capital, produced the next largest share at 26.5% (estimated
at 31.4% in 2004),followed by Sharjah at just under 10%.
The four northern emirates are poorer, have fewer resources,
and fewer economic opportunities.


9. (U) Given the decentralized decision-making structure of
the UAE, different emirates have encouraged privatization and
foreign direct investment (FDI) to different degrees. Many
of the large industries are owned either by the federal
government or by the individual emirates. The Abu Dhabi
National Oil Company is a holding company owned by the
emirate of Abu Dhabi, which owns the majority of oil
producing assets in the emirate. Unlike most other GCC
countries, however, the UAE never fully nationalized the oil
sector. Foreign oil companies, including Exxon-Mobil, BP,
and Total all own "upstream" oil assets. Abu Dhabi is also
tendering a 28% stake in the Upper Zakum offshore oil field.


10. (U) Abu Dhabi has begun to privatize the water and power
generation sectors, which are about now 33% privately owned.
U.S. companies have substantial interests in this sector. An
American firm was awarded the first Independent Water and
Power Project in 1998 for an estimated value of $750 million.
The firm was selected as part of an Anglo-American consortium
to manage a second IWPP in 2001. Unlike state-owned
enterprises (SOEs) in many countries, however, the SOEs in
the UAE generally are profitable. Especially in Dubai, they
are traditionally given assistance to start, and then forced
to compete freely in the market. According to one
oft-recounted story, the chairman of Dubai-owned Emirates
Airlines reportedly went to the ruler of Dubai and requested
protection for the fledgling airline. The ruler replied that
he couldn't do that, because he "loved the airline, but he
loved Dubai more."


11. (U) UAE law limits foreign ownership of companies to 49%
outside the free zones (Companies Law). There is no income
tax in the UAE. Foreign banks pay 20% tax on profits and
foreign oil companies with equity in oil concessions pay
taxes and royalties on the proceeds. Companies operating in
the free zones can be 100% foreign-owned, but require a local
distributor if they sell products in the UAE (Agencies Law).

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Free Zones
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12. (U) One of the ways that the UAE attracts FDI is through
the free zones. Free zones are areas set aside by decree,
that are exempt from the UAE Companies law that requires all
firms to be at least 51% owned by a UAE national. Free zones
are attractive to foreign investors for several reasons.
First, they allow 100% foreign ownership, and, like the rest
of the UAE, allow full repatriation of profits and no taxes.
Second, free zones offer a one-stop shop for government
services, providing assistance with everything from
incorporation to sponsoring and bringing in foreign workers.
Third, firms in free zones can import and export without
paying any customs duty. Fourth, Dubai free zones are
managed to Western standards, with reliable energy supplies,
internet access, cargo facilities, and so on. Finally, the
free zones in Dubai have the advantage of being synergistic
clusters of related-industry firms, such as Dubai Healthcare
City and Dubai Internet City.


13. (U) From the perspective of a company interested in FDI
in the UAE, there are two main downsides to free zones. If a
free zone wants to sell its products into the UAE, the Agency
law requires it to find an Emirati distributor outside the
free zone. The distributor basically &imports8 the goods
from the free zone, paying the 5% Customs tax in the process.
Second, all the perks of the free zones mean that rents are
significantly higher inside a free zone than out.

14. (U) UAE free zones have attracted approximately 5,000
companies and an estimated investment of over $ 4 billion.
Dubai has led the UAE in its establishment of free zones.
Dubai has pioneered concepts such as Dubai Internet City (for
IT firms) and the Dubai International Financial Center. With
highly varying degrees of success, six of the UAE's seven
emirates have at least one active free zone. (Abu Dhabi does
not have any active free zones.) The oldest and largest free
zone, Dubai,s Jebel Ali, was established in 1985 and is home
to over 2,200 companies from over 100 countries. Despite the
free zones' proven ability to attract foreign direct
investment, the UAE has, so far, not liberalized its FDI
environment outside the zones.

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Key Discussion Issues
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15. (SBU) Labor: The current UAE Labor Law does not provide
for labor unions, the right of association or collective
bargaining, though collective labor dispute resolution is
common. In June 2004 the UAE Cabinet approved a memo calling
for the establishment of labor unions. The UAEG has
committed to moving forward on developing labor unions that
comply with ILO,s core labor standards, but the process will
engender considerable debate among UAE stakeholders
(including the chambers of commerce and the Emirati teachers,
engineers, and lawyers associations). At present, two laws
are being drafted; one that revises the existing labor code,
and a new trade union law that will stipulate the details of
labor unions. The UAE hopes that the new trade union law
will be in effect by mid-2005.


16. (SBU) Our interlocutors stress that labor unions and the
foreign worker population are serious issues for the UAE, and
the UAEG is concerned about balancing its commitment to
improving workers' rights with the security and social
challenges of having a 98 percent foreign worker population
in the private sector. UAEG officials recognize that
inclusion of expatriates in the new laws is a key issue. A
key question for the UAEG was the level and type of foreign
participation that would be allowed.


17. (SBU) Camel Jockeys: UAEG officials have committed to
eliminating the use of underage foreign minors (under 15
years of age) as camel jockeys through a new law expected in
spring 2005, but abuse of these trafficked boys has
persisted. The presence and abuse of underage camel jockeys
violates three core precepts of labor standards: child labor,
forced/bonded labor, and work conditions. Previous visitors
have noted to UAE officials that a lack of enforcement of
local laws is as damaging as a lack of laws.


18. (SBU) Agencies Law/Companies Law: UAE officials
recognize that the existing agency law is a key area of
concern for the U.S. in moving toward an FTA; however, many
UAE nationals benefit from the agencies law requiring
foreigners to contract with a UAE national in order to import
or trade goods in the UAE. The elimination of this law will
require active engagement by federal and Emirati-level
leaders to overcome the concerns of nationals who fear they
may lose their income from agency relationships. During the
October 4th TIFA council meetings, UAE officials noted that
an additional concern on the part of the UAEG is that, by
allowing foreign ownership, the UAE would end up with even
more foreign workers taking jobs away from UAE citizens.


19. (SBU) Progress is being made regarding the companies
law, which limits foreign ownership of commercial entities in
the UAE to 49 percent. The draft of a revised companies law
includes a provision that will grant foreign companies an
exception to the 51/49 percent ownership requirement,
provided the foreign company meets certain criteria, such as
having direct capital investment in the UAE, providing a
feasibility study, and guaranteeing to the UAEG that it will
hire a significant percentage of Emirati nationals. This
draft law has been in process for several years now as part
of the UAE's efforts to comply with WTO investment rules. It
is not clear when it will be enacted. But UAE officials
have said that they recognize that some changes will be a
necessary part of FTA negotiations.

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Bilateral FTA Clear Preference Over Regional FTA
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20. (SBU) Saudi Arabia,s opposition to Bahrain,s FTA with
the United States has also put pressure on the UAE. Senior
UAEG officials have made it clear that the UAE intends to
pursue bilateral trade agreements with the United States,
regardless of GCC initiatives. UAEG officials point to the
GCC/EU FTA negotiations as a dead end. Saudi pressure to
stop the GCC states from pursuing bilateral FTAs with the US
has had no effect on the UAEG, whose officials have pledged
both publicly and privately to move ahead on the
negotiations.

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UAE Delegation Leaders
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21. (U) The UAE FTA Negotiations will be headed by Minister
of State for Financial and Industrial Affairs, Dr. Mohammed
Khalfan bin Khirbash and Minister of Economy and Planning
Sheikha Lubna Al-Qasimi. Their respective deputies are
Khalid Al-Bustani and Abdulla Al-Saleh.


22. (SBU) Dr. Mohammed Khalfan bin Khirbash serves as de
facto Minister of Finance. He is a well-regarded reformer
who appears to have the support of both the Abu Dhabi and the
Dubai ruling families. He is a big proponent of expanding
the UAE,s trade relations internationally. He is also
Chairman of the Dubai Islamic Bank. He completed a BA at
Boston University and a Ph.D. in Economics from Exeter
University.


23. (U) Sheikha Lubna Al-Qasimi is the first female
minister. Despite having achieved prominence in Dubai,
Sheikha Lubna is actually a member of Sharjah Emirate,s
ruling family. In April 2000, Sheikh Mohammed bin Rashid (de
facto ruler of Dubai) appointed Sheikha Lubna as Chief
Executive Officer of Tejari.com, an online marketplace.
Under her management, the company experienced quick growth.
Sheikha Lubna holds a Bachelor of Science degree from
California State University at Chico and an Executive MBA
from the American University of Sharjah. She frequently
represents the UAE at international conferences, including
last year,s Arab American Forum in Detroit where she led a
delegation of UAE businesswomen.


24. (U) Khalid Al-Bustani, Assistant Undersecretary for
Revenue and Budget, is the main MinFin coordinator for the
FTA. He completed a BA at Boston University and has known
Dr. Khirbash since high school. He has an IT background and
is responsible for preparing the UAE Federal Budget. He
speaks fluent English.


25. (U) Abdulla Al-Saleh, Assistant Undersecretary for
Economic Affairs and International Cooperation will be
coordinating the Ministry of Economy,s role in the
negotiations and the efforts of the negotiating groups led by
that Ministry. He served as the commercial attach in
Washington and speaks fluent English.

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Visit SIPR Net Website
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24. (U) We encourage you to visit Embassy Abu Dhabi,s SIPR
Net Website at www.state.sgov.gov/p/nea/abudhabi for more
economic reporting.


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