USTR NOVELLI ADVANCES US-TUNISIA TRADE

UNCLAS SECTION 01 OF 05 TUNIS 001495

SIPDIS

SENSITIVE

STATE FOR EB AND NEA/MAG (LAWRENCE)
STATE PLEASE PASS TO COMMERCE FOR ITA/MAC/ONE (DAVID ROTH)
AND ADVOCACY CENTER (CHRIS JAMES),TO USTR (DOUG BELL),AND
TO USPTO (MICHAEL ADLIN)
CASABLANCA FOR FCS (GAIL DEL ROSAL)

E.O. 12958: N/A
TAGS: ECON EFIN ETRD TS EFTA
SUBJECT: USTR NOVELLI ADVANCES US-TUNISIA TRADE
RELATIONSHIP THROUGH TIFA COUNCIL

REF: A. TUNIS 898 (BOOZ ALLEN HAMILTON VISIT)


B. TUNIS 1238 (A/S LASH W/ JOUINI)

C. TUNIS 1257 (EVE OF TIFA/ECON REFORMS)


1. (SBU) Summary. Assistant Trade Representative Catherine
Novelli, in Tunis June 14-15 for the second TIFA Council
meeting, firmly emphasized to Minister of Development and
International Cooperation Jouini that the U.S. wants to
expand our free trade community and is working at a modest
pace, but stressed that Tunisia would need to address
comprehensive requirements for a Free Trade Agreement (FTA)
and adapt its economic and legal framework before
negotiations could begin. Jouini noted that significant
economic reform efforts were underway in Tunisia, but
repeatedly expressed concern about job creation and export
promotion, while spotlighting special sensitivities such as
services and retail franchising. USG and GOT experts will
form working groups to address specific differences on
services, investment, intellectual property, and standards.
End Summary.


2. (SBU) During her two-day visit to Tunisia, Assistant U.S.
Trade Representative Catherine Novelli delivered a frank and
positive message to GOT and private sector representatives on
free trade with the U.S. Novelli and Minister Mohamed Nouiri
Jouini (Ministry of Development and International
Cooperation) led delegations through a day-long Trade and
Investment Framework Agreement (TIFA) Council that
systematically covered the Tunisian context and U.S.
expectations for an FTA. The main topics were services,
investment, government procurement, customs, intellectual
property, and market access. This was the second TIFA
Council since the TIFA was signed in October 2002; the first
Council was in Washington in October 2003.


3. (SBU) While the Tunisians showed no immediate intent to
depart from their current, gradual approach to economic
reform, Novelli's comprehensive enumeration of FTA
requirements (and the benefits of adopting them) helped frame
the GOT's responsive rhetoric positively toward international
economic integration. Throughout her discussions, Novelli
stressed the benefits from regional integration as envisioned
in the Middle East Free Trade Area, and articulated the
desire to see Tunisia play a leadership role in realizing
that objective. Minister Jouini spoke frankly about the
current state of Tunisia's economic landscape and the
challenges that lie ahead and expressed hope that the gap
between our trade and investment issues will be narrowed.

Economic Overview: Employment is Number One
--------------

4. (SBU) In his introductory overview of the economy, Jouini
expressed concern about Tunisia's official unemployment rate
(currently 14-plus percent). He noted that "all countries of
the region are converging toward the same economic model to
attract foreign investment with export-led growth" and that
competition is increasing. Jouini desires greater engagement
with the U.S. that can help address Tunisian concerns in
practical ways. Jouini noted that Tunisia, as a small
country, must exploit "niches" where Tunisia's comparative
labor advantages might find new markets.


5. (SBU) Jouini summarized Tunisia's economic situation and
successes, but expressed concern that globalization has
resulted in highly-competitive, rapid-response businesses
that, for example, threaten the destruction of Tunisia's
textile sector, which has reportedly lost 50,000 jobs since
January 2005. He also outlined continued privatization of
state-owned enterprises, increasing investment in research
and development, improving the banking system, and
liberalizing the services sector as particular challenges
ahead. Jouini also noted the heavy dependence on the
European Union, which accounts for 80 percent of Tunisia's
trade, for both imports and exports. Tunisia will eliminate
tariffs with the EU on manufactured items by 2008; Novelli
noted that Tunisia's heavy lifting in this regard would mean
that expanding those reforms to encompass U.S. interests
would be a far less challenging endeavor.

Services
--------------

6. (SBU) Discussions indicated that services could remain
problematic for some time, especially for retail
establishments. Jouini noted that Tunisia had met the
WTO-agreed May 31, 2005, deadline for the submission of WTO
services offers, but that the issue remains contentious.
According to Jouini, the EU and Tunisia had intended to begin
negotiations on services in 2003, but have yet to do so
because Tunisia opposes the EU's attempt to frame the issue
within an approach covering the Mediterranean region. Jouini
stated that he does not believe the region is ready to open
up under a collective agreement on services, nor that Tunisia
has the resources to invest abroad. Tunisia's expatriate
workforce is provider of "services" and a form of external
investment abroad, therefore according to Jouini, the
"movement of natural persons and population flows" should be
included into the trade and investment dialogue, though he
acknowledged that security and immigration are also factors
under this topic.


7. (SBU) Novelli suggested that opening up financial and
banking services might provide a much needed jump start to
the Tunisian economy and explained how a "negative list"
approach (opening of all services, except for limited
exceptions) would guide FTA negotiations with the U.S.
Jouini responded that foreign banks are permitted in Tunisia
under Tunisia's Universal Banking Law of 2001. Novelli asked
whether banks may enter under any form, but Jouini cautioned
he would have to verify that. He then shifted direction by
noting that Tunisia still suffers from a glut of banks that
are still in the process of consolidation and weaning from
full or partial state ownership.


8. (SBU) Jouini detailed a list of services where foreign
investment is restricted or which are subject to "case by
case" authorization from the Ministry of Commerce. The list
of restricted services is long and, effectively closure is
the norm and opening the exception. Professional services
(doctors, lawyers, engineers) require Tunisian nationality.
Advertising, telecommunications, education, venture capital,
insurance, and retail distribution all require prior approval
to enter. Jouini claimed in slightly different terms that
anticipated negative "social impact" has mandated the
current, restrictive approach to opening these sectors.


9. (SBU) Jouini explained that Tunisian nationality is also
still required for top management positions at banks or
universities. Novelli took issue with Tunisia's limitation
of senior foreign management which requires authorization by
the Ministry of Employment to exceed 4 foreign executives.
Jouini indicated that the GOT will alter laws in the near
term to permit foreign executive presence to be a percentage
of total employees, but Jouini did not provide this
percentage.

Investment: Some Stirrings of Opening
--------------

10. (SBU) Jouini highlighted the positive developments
occurring with private sector entrants into mobile telephone
operations and envisioned more overall investment as Tunisia
strives to attain 66 percent private sector contribution to
GDP. Jouini suggested that further private investment will
occur in the energy and banking sectors in the near term.
The energy sector is open to foreign investment for
production (especially oil and gas),although distribution of
electricity remains under the state monopoly, STEG. For
manufacturing industries (currently clumped into exporting
and non-exporting categories with differential treatment),
Jouini advised that the GOT intends to eliminate the
distinction between onshore and offshore companies by 2009.


11. (SBU) Despite this, investing in Tunisia remains very
restricted, with the only significant, unrestricted
investment allowed in manufacturing industries that directly
create jobs. The retail sector limits foreign ownership to
49 percent, which is subject to screening processes run by
the Ministry of Commerce. Effectively, the GOT analyses
foreign investment based on the sector, then uses
"economic/social impact" criteria in determining whether to
grant "authorization" to participate, though there are no
written regulations guiding this process. Novelli contended
that such an "authorization" process can be used to create
"performance requirements" that are not transparent and which
raise significant questions regarding actual implementation.


12. (SBU) Novelli responded favorably to the positive steps
Tunisia is taking to encourage greater foreign investment,
but advised that such pre-screening and limits on foreign
ownership and management are antithetical to FTA norms and
that a significant overhaul of Tunisia's approach would still
be required. According to Jouini, the Tunisian legal
framework does not address franchising rights or procedures
for handling them as separate legal constructs; thus,
franchises are treated as an investment issue subject to the
above stipulations. Novelli noted the absence of U.S
franchises in Tunisia and said that clearly more must be done
to address this issue for further progress in discussions on
investment.


13. (SBU) Novelli raised investment problems for a U.S.
company subsidiary, EnerCiel, which is seeking to develop
renewable wind energy projects here (see reftels for more
background). Jouini pledged that EnerCiel's landlease would
be reinstated and honored, though he noted the problem has a
complicated genesis. Jouini also pledged to resolve the
dispute by bringing EnerCiel and STEG together at his
Ministry.

Intellectual Property Rights
--------------

14. (SBU) Novelli introduced the topic of intellectual
property by noting that the rapid evolution of technology has
raised many new issues since the WTO's inception and its
Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPs). Therefore, Novelli explained that U.S. FTAs
require provisions considered "TRIPs-plus" to cover advances
in intellectual property protections and enforcement that
have become part of contemporary international practices.
Novelli outlined the "national treatment" concept to protect
all creators of intellectual property, without regard to
author's nationality, and indicated this would be an
important issue to address.


15. (SBU) Patents. Novelli also firmly advised the Tunisian
side that it must bolster its protections against "unfair
commercial use" (TRIPs Art. 39.3) of marketing and licensing
materials. She encouraged the GOT to protect more
effectively research and development in patent fields, such
as pharmacology and biotechnology and noted that the USG
would be following Tunisia's commitments to Art. 39.3 through
the annual Special 301 interagency review process.


16. (SBU) Novelli encouraged the GOT to adopt the WIPO
Copyright and Performances and Phonograms treaties to come
into fuller compliance with international standards. The
Tunisian side admitted that, while not yet adopted, these
treaties were currently under consideration at the Ministry
of Culture. The Tunisian delegation also stated that
Tunisia's Law 36-1994 is applicable and extends by logical
deduction to copyrightable works, including those on the
internet and thus the failure to ratify these treaties was
not determinative or a bar to effective enforcement.


17. (SBU) Finally, Novelli raised the growing incidence of
software piracy in Tunisia, citing a recent Business Software
Alliance report that claims 84 percent of all software in
Tunisia is pirated. Jouini and team sought to explain this
by arguing that both government and private sector bear
responsibility for policing piracy and that government should
not be expected to enforce if industry was not bringing
infractions to the government's attention. The Tunisian side
also stated that piracy is a global phenomenon that countries
like Tunisia are ill-equipped to deal with.

Market Access
--------------

18. (SBU) The Tunisian side noted that U.S. imports are a
mere 2 percent of total Tunisian imports. For Tunisian
exporters, the U.S. Generalized System of Preferences (GSP),
which excludes most textiles from preferred tariffs, poses
difficulties. The Tunisian delegation also noted
difficulties in shifting from European product "standards" to
U.S. ones, and requested USG technical assistance.


19. (SBU) Tariffs. GOT interlocutors noted that Tunisia is
guiding its general tariff policy under WTO
tariff-elimination goals, but is currently preoccupied with
bringing its applied tariff rates into line with EU rates.
Jouini's team indicated that Tunisia's trade agreement with
the EU, however, only covers manufactured goods, and not, for
example, agricultural products. Tunisia's agricultural
sector employs approximately 22 percent of the workforce.
Novelli noted that certain transition periods can be
negotiated for a limited number of products or sectors from
both sides in any U.S. FTA.

Other Issues
--------------

20. (SBU) Government Procurement. Novelli raised government
procurement and decision appeals for aggrieved bidders as an
area where improvement could also be made. Jouini stated
that all Tunisian public tenders are awarded on a competitive
basis and the GOT enacted legislation in Decree #2003-1638 of
August 2003 to bring Tunisian practices and procedures to
international standards. Jouini also noted that sole-source
government contracting is not permitted by Tunisian law,
except where the contractee holds a monopolistic position.


21. (SBU) Customs. Novelli explained FTA requirements on
customs cooperation, transparency, and the current U.S.
position on rules of origin. Ministry of Commerce expert
Khadija Chaloul digressed into micro-detail on rules of
origin and what constitutes "sufficient transformation", also
noting specific criteria that depend on type of product.
Novelli suggested that given Chaloul's expertise these topics
would best be left for more detailed expert discussions later.


22. (SBU) Labor and Environment. Novelli laid out FTA
requirements for "effective enforcement of existing labor and
environmental laws" as they affect bilateral trade. Jouini
foresaw no major issues in this regard, noting Tunisia's
long-standing tradition of labor rights and significant
spending on environmental protection, which he cited at 1.5
percent of GDP. Novelli also emphasized throughout the day
that "transparency" and the existence of a clear channel for
public comment on law and regulation procedures are woven
throughout an FTA and its underlying principles and should be
better addressed by the GOT.

Conclusion/Technical Assistance
--------------

23. (SBU) Novelli and Jouini agreed to establish formal
working groups on services, investment, intellectual
property, market access and standards to refine issues and
study gaps between systems, as well as to create better
understanding of where USG technical assistance might help
bridge those gaps. One particular request for technical
assistance was in the area of "standards," specifically how
Tunisian products targeted primarily for European markets
could be adapted to conform with U.S. market standards. The
Tunisians have also previously expressed interest in
additional information on franchising practices and benefits
(ref B).

Outside meetings with Private sector
--------------

24. (SBU) Novelli addressed three separate, private sector
audiences on June 14. Fifty members of the Tunisian American
Chamber of Commerce (TACC) expressed their generally strong
support for USG engagement with the Tunisian government to
spur economic growth through small and medium-sized company
entrepreneurial initiatives, as many of the local Chamber
members are part of that community. Novelli also spoke to a
forty-person group from Tunisia's key exporting sectors,
including textiles, agriculture, and manufacturing, to inform
Tunisian stakeholders of FTA benefits and commitments, and to
seek greater understanding for local industrial concerns.
Finally, the Arab Institute of Business Leaders (a local
think-tank) hosted a small private dinner for the U.S.
delegation. At this event, President Chekib Nouira of
Tunisia's leading private bank, the Bank Internationale Arabe
de Tunisie, questioned whether U.S. business would not
essentially devour Tunisia's economic interests if the
economy opened more rapidly. Other business leaders however
were quietly more positive on Tunisia's opening to the U.S.

Comment and Recommendation
--------------

25. (SBU) Assistant U.S. Trade Representative Novelli,s
visit sparked renewed interest regarding enhancing economic
liberalization, the process of international regional
integration, and whether the pace it has set should be
accelerated. Novelli,s visit clearly helped define some key
areas where we can expect resistance from the Tunisians and
highlighted areas where less work will be needed.


26. (SBU) The GOT is balancing the near-term costs of
economic reform with the necessity of staying competitive in
a global context and providing a counterweight to its
economic dependence on the EU. Thus, while agreeing to the
principles of open trade and investment, the GOT nonetheless
emphasizes the virtues of maintaining a deliberate pace on
key reforms. Restrictions on foreign ownership of retail
services, franchises, education and several other key sectors
of the economy will likely remain very resistant to near-term
liberalization. Major reform of customs procedures will
continue to be difficult, as it is a bureaucracy that appears
resistant to reform and subject to arbitrary practices, as
well as anecdotally implicated in Tunisia's burgeoning black
market economy. Tunisia has some serious gaps regarding
protection of intellectual property, whether due to the
magnitude of the problem or due to a lack of understanding of
the benefits derived from a robust intellectual property
regime. The will to enforce IPR norms in Tunisia is still in
its infancy. Agriculture will remain a high hurdle to
overcome, and it is likely the Tunisians would seek long
transition periods in this sector.


27. (SBU) We note that telecommunications and
technology-related industries clearly offer opportunities for
more accelerated liberalization, as the GOT has emphasized
its urgent need to create jobs in that sector. Foreign
ownership of IT businesses, unlike retail, is less prone to
displacing existing owners or workers and is thus more likely
to follow manufacturing, a virtually open sector. Our
engagement with technical assistance programs--such as the
U.S. Patent and Trademark Office--on intellectual property
enforcement could be accelerated to support this trend.
HUDSON