FREE TRADE WITH THE U.S.: ARE THE TUNISIANS READY?

UNCLAS SECTION 01 OF 03 TUNIS 000898

SIPDIS

SENSITIVE

STATE FOR EB, NEA/MAG (LAWRENCE),AND NEA/PI (FRANCESKI)
COMMERCE FOR CLDP (MARC TEJTEL),ITA/MAC/ONE (DAVID ROTH),
AND ADVOCACY CENTER (CHRIS JAMES)
CASABLANCA FOR FCS (GAIL DEL ROSAL)
STATE PLEASE PASS USTR (DOUG BELL)

E.O. 12958: N/A
TAGS: ECON EINV EFIN TS
SUBJECT: FREE TRADE WITH THE U.S.: ARE THE TUNISIANS READY?

REF: A. 04 TUNIS 2422

B. 05 TUNIS 00610

C. 04 TUNIS 872


1. (SBU) Summary. Booz Allen Hamilton's Emad Tinawi visited
Tunis April 4 ) 8, to consult with U.S. Embassy and GOT
officials, private sector representatives, and academics on
U.S.-Tunisian trade and investment issues. Tinawi's visit,
as a private sector consultant to the Department, aimed to
assess Tunisia's "political will" regarding our Trade and
Investment Framework Agreement (TIFA) and Tunisia's
preparedness for the next TIFA Council. Tinawi's visit
reinforced our understanding that Tunisia is articulating its
long-term desire to move ahead, but may not fully appreciate
or be ready to undertake the magnitude of effort required to
get there. Tinawi's visit assisted Post with conveying the
scale of further TIFA negotiations and with highlighting what
more could be done proactively to address TIFA issues and to
raise public awareness in support for freer trade. USTR has
tentatively agreed to convene a second TIFA Council in June

2005. End Summary.

General Support for TIFA
--------------

2. (SBU) GOT interlocutors, including Secretary of State
Lajimi from the Ministry of Development and International
Cooperation (MDIC),on repeated occasions noted that the GOT
possesses the necessary technical expertise and resources to
handle major trade agreements. (MDIC is the lead Ministry on
TIFA issues.) The GOT believes its Association Agreement
with the European Union, which will eliminate trade tariffs
by 2008, is bringing Tunisia up to international standards.
The EU Association Agreement, however, excludes important
sectors like "agriculture" and "services", which are
anticipated to be major issues in further U.S. negotiations.


3. (SBU) We delivered the message that U.S. trade
negotiations are comprehensive, and thus more demanding than
WTO requirements, ratcheting up commitments based on other
bilateral trade agreements. Lajimi expressed a strong desire
to see the U.S.-Tunisian dialogue jump-started and pointedly
requested that the USG "put an FTA on the table."

Financial Services and the Banking Sector
--------------

4. (U) According to Tinawi, the banking sector and
liberalization of Tunisia's financial services are strategic
areas we can promote for advancing reform in Tunisia.
Tunisia is engaged in significant, deliberate efforts to
modernize its economy and to integrate into international
financial systems. A Ministry of Finance representative
noted that helping banks handle international competition is
a key prerequisite to further liberalization of the financial
services sector; and clean-up of Tunisia's bad loans (See Ref
A) is similarly a precondition to opening up the sector.
Technical assistance in these and other areas is still
required to upgrade Tunisia's economy and the GOT often
requests such assistance of the Embassy to foster the TIFA
process. We are continuing to develop such programs under
our Middle East Partnership Initiative agenda and appreciate
the Department's support in this regard.


5. (U) A representative from Tunisia's Central Bank
reiterated these messages in another meeting: Tunisia's
ongoing policy is to clear its bad loans and to privatize
banks to encourage foreign investors, capital. (Comment:
Post notes these as encouraging signs that bode well for
continued liberalization in the short-to-medium term and
which acknowledge required reforms. End Comment.) The
Central Bank representative also noted that Tunisia's
liberalization of exchange policy and movement toward
convertibility of the dinar is similarly introducing
competitive forces on a gradual basis. (See Ref B for more
on Tunisia's preparations for currency convertibility.)


6. (U) Representatives from MDIC also noted that, although
the U.S. and GOT have agreed to move forward on TIFA issues,
no significant national debate or public/private sector
dialogue has yet occurred and they recognized this as an area
for further action. We also suggested that acceleration of
the process might occur if the GOT were to articulate further
concrete action plans to address specific USG concerns, and
that progress on certain issues would serve as a signal to
USTR that the GOT is committed to greater economic
cooperation and trade relations with the U.S.


7. (U) Customs officials in separate meetings additionally
noted that they are working on the complete dismantling of
tariffs with Europe under the EU Association Agreement, as
well as ongoing administrative issues, such as rules of
origin and customs valuations. Emboff raised a past issue
with the GOT's valuation mechanisms (essentially a mark-up of
25 percent for valuations for certain imported goods). This
issue has never been resolved (See Ref C) and will need
addressing. Customs officials did seem willing to engage on
this and other issues. (Comment: There is no doubt that
Customs has the ability to accommodate and implement new
rules and procedures when required. End Comment.) Customs
officials again requested USG technical assistance for better
education on U.S. standards and practices, vice European ones.

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

8. (U) IPR issues continue to complicate our commercial
relationship and our commercial advocacy efforts here.
According to representatives at OTPDA (Organisme Tunisien de
Protection de Droits d'Auteurs),the body responsible for
copyright protection, IPR enforcement still remains a
challenge, and there needs to be a "mentality shift" on IPR
issues. OTPDA clearly notes that the "political will" exists
to attack these problems because Tunisia wishes to create its
own information society predicated on protection of
intellectual wares. OTPDA is taking a proactive approach and
is creating formulaic contracts for artists to better enable
them to protect their rights. OTPDA has also taken the lead
in establishing an interagency commission to undertake an
"evaluation designed to assess IPR compliance in Tunisia and
to propose a responsive action plan." (Comment: We will
follow such developments closely and report activity septel.
End Comment.)

The Non-official View: Very supportive
--------------

9. (U) University of Tunis Professor of International Finance
Ben Marzouka believes that a comprehensive liberalized trade
regime with the U.S. is feasible and desirable, given the
positive experience of integration into the EU trading
system. Ben Marzouka noted several challenges that will need
to be addressed directly in the course of discussions with
U.S. counterparts. Again, Ben Marzouka echoed a lack of
modernization in the banking sector, possibly requiring
technical assistance to upgrade competitiveness. He also
cited bad loans that will require "structural adjustments"
and government buy-back of loans to resolve the "Resolution
Trust-like Corporations" that each Tunisian bank has created
and into which bad loans have been shifted. Other barriers
to progress in our trade negotiations with Tunisia will be
resistance from some EU quarters to perceived U.S.
competition, lack of general competitiveness in Tunisia,
which may spawn protectionist tendencies, or force
"transition-implementation" periods, and concerns about
employment dislocation, social stability, and sovereignty
regarding foreign ownership of national interests.


10. (U) In another meeting, Tunisian-American Chamber of
Commerce (TACC) representatives stated that TIFA (and an
eventual Free Trade Agreement with the U.S.) are key
priorities of their current membership. TACC is currently
conducting a membership survey to cull information on current
perceived obstacles to achievement of greater economic
cooperation with the U.S. TACC has also recently submitted a
small grant proposal under the Middle East Partnership
Initiative (MEPI) to organize a conference and website
dedicated to free trade with the U.S.


11. (U) According to TACC, differences of opinion on the
benefits of freer trade with the U.S. do exist. A number of
sectors clearly desire greater access to U.S. markets, but
other elements note that the EU will likely jealously guard
its vested interests in Tunisia. TACC also speculates that
if trade does not liberalize more significantly with the
U.S., then the EU's current 75 percent of Tunisian imports
and exports, will very likely increase to 80 or 85 percent in
the coming years.


12. (SBU) Demographic Pressures. TACC also noted that with
economic growth correlating directly with job growth,
Tunisia's growing demographic labor bubble will put strains
on unemployment figures. Estimates range from 70,000 to
80,000 new jobs required annually to keep GDP growth at
current 5 percent or higher.


13. (U) Tunisian businesses are beginning to explore the U.S.
market and many are doing so aggressively, according to TACC.
Nevertheless, concerns over consistency, quality, and
competitiveness hinder the effort. The intensely competitive
U.S. corporate environment is also perceived as a threat to
Tunisian companies, especially in the agricultural sector,
which employs approximately 22 percent of Tunisia's labor
force and indirectly affects a majority of Tunisian
households. Other barriers to a more advanced trade
agreement with the U.S. are language, geography, business
culture, and limited knowledge of U.S. regulations,
especially those for U.S. Customs. Increased awareness of
the TIFA process and the benefits of liberalized trade will
help advance the cause in Tunisia.


14. (U) Tunisia's employer's union (UTICA),which represents
80 per cent of Tunisia's industries numbering 200,000
companies, also strongly supports greater trade
liberalization, diversification, and cooperation with the
U.S. In fact, UTICA initiated with the GOT steps toward
Tunisia's recent FTA with Turkey with the submission of a
white-paper on the topic, later becoming a stakeholder on a
Joint Commission organized to handle issues related to the
FTA's negotiation and implementation. UTICA hopes to be an
active participant at the next U.S.-Tunisia TIFA Council and
will likely be a key component in pushing any agreement
through Tunisian approval and legislative processes.

Comment
--------------

15. (SBU) The Tunisians obviously desire the symbolic seal of
approval of an FTA or at least to be seen as engaged with the
U.S. on this level. We should capitalize on their enthusiasm
to move forward on trade and investment, as part of our
broader reform agenda. If not, we risk sending mixed signals
regarding our commitment to reform. The creation of
incentives for new high-value-added jobs in a population of
only 10 million will support our agenda in the direction of
greater economic opportunity. U.S. competitive advantages in
high-tech sectors are already being leveraged in our MEPI
assistance programming to positive effect here.
Additionally, competitive tendencies among North
African/Middle Eastern countries could also be emphasized as
part of a chain-reaction of reform in the Middle East.
Morocco beating Tunisia to the punch in achieving an FTA with
the U.S. has left the Tunisians consciously envious of
Morocco's enhanced status and desiring to join the club.


16. (SBU) Tinawi's visit reaffirmed Post's position that our
TIFA dialogue with the Tunisians is a positive relationship
that also sends a broader message of economic reform
throughout the region. Tunisia has already embarked on an
ambitious path of reform as part of its greater economic
development plan in conjunction with the implementation of
its Association Agreement with the European Union. We
encourage USTR to continue its engagement on our TIFA process
so as not to lose forward momentum. Open markets, greater
transparency, job creation, and higher quality of life are
the strongest reasons for using our TIFA agenda as incentives
for bringing reform to the Arab world. Failing to move
forward with our TIFA dialogue at this juncture will risk
sending precisely the opposite message, consequently
fortifying those in the Arab world who seek to diminish
economic ties with the U.S. and reduce our ability to
influence political reform in the region. We will need to
guide them through further trade and investment negotiations
in order to achieve our objectives.
HUDSON