SCENESETTER FOR COMMERCE SECRETARY GUTIERREZ'S

C O N F I D E N T I A L SECTION 01 OF 04 MANAMA 000238

SIPDIS

SIPDIS

COMMERCE FOR SECRETARY GUTIERREZ
ALSO FOR ITA/MAC/AMESA - T HOFFMAN
ALSO FOR FCS/ANESA - B ORR
STATE FOR NEA/ARPI, EB
USTR FOR J BUNTIN

E.O. 12958: DECL: 02/14/2016
TAGS: PREL ECON ETRD BEXP OVIP BA BILAT ECTRD OFFICIALS
SUBJECT: SCENESETTER FOR COMMERCE SECRETARY GUTIERREZ'S
FEBRUARY 26-28 VISIT TO BAHRAIN


Classified by Ambassador William T. Monroe for reasons 1.4
(b) and (d).

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FTA Implementation and Outreach
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1. (C) Mr. Secretary, we warmly welcome your February 26-28
visit to Bahrain. Interest in doing business with the United
States is at a peak with recent ratification by both
countries' legislatures of the U.S.-Bahrain Free Trade
Agreement (FTA). We are now working closely with the senior
Bahraini leadership on finalizing the last pieces of
implementing legislation - all related to protection of
intellectual property rights - so that the agreement can
enter into force in the very near future.


2. (C) Our greatest challenge related to the FTA is the
deficit in understanding about what the agreement means for
Bahraini business people. Some members of the private sector
believe that bringing the benefits of the FTA to Bahrain is a
government responsibility; others think American trade and
investment will naturally gravitate to Bahrain without any
action on their part. Your visit represents a perfect
opportunity to highlight for Bahrainis and others in the
region the potential benefits of a free trade agreement with
the United States, the U.S. vision of a Middle East Free
Trade Area by 2013, and to spur Bahraini business people to
seek out opportunities to enhance their trade and investment
relations with American companies.

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Suggested Points to Raise
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3. (C) We have requested meetings for you with Crown Prince
Shaikh Salman bin Hamad Al Khalifa, Minister of Industry and
Commerce Dr. Hassan Fakhro, Minister of Finance Shaikh Ahmed
bin Mohammed Al Khalifa, and Economic Development Board CEO
Shaikh Mohammed bin Issa Al Khalifa. In your meetings, we
suggest you raise the following points:

-- FTA Implementation: The FTA cannot be implemented, and
business people from both countries cannot benefit from it,
until Bahrain passes all required IPR legislation. Members
of Congress are asking questions about the need to rush FTAs
through Congress when our partner countries take so long to
implement the agreements. We urge Bahrain to finalize all
outstanding issues as soon as possible, shooting for a July 1
implementation date at the latest.

-- Enhancing Trade and Investment Relations: We understand
that Bahraini business people are anxious to benefit from the
FTA and are asking questions about how they can find
commercial opportunities under the agreement. We proposed
this regional conference with exactly this question in mind
and hope it will kick off the trade promotion component of
the FTA. We urge the Bahraini government and the FTA
Implementation Committee to continue to spread awareness
about the agreement. It provides a framework for expanding
trade and investment relations between our two countries, but
it is up to the business people themselves to negotiate the
deals and conclude the business that will bring the benefits
of the agreement to Bahrain.

-- Trade Missions: We are pleased that the EDB and AmCham
Bahrain conducted a trade mission to Washington and New York
in December. Ambassador Balooshi's travels to key cities and
markets in the United States to promote business with Bahrain
is an important activity. The Bahraini government and the
FTA Implementation Committee should plan additional
activities in the United States, such as trade missions and
road shows. Using our network of Commercial Service offices
in the United States and around the world and our
relationships with business organizations, we are promoting
the agreement and can assist you in doing so. Outreach is
the key to realizing the benefits.

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Points the Bahrainis Will Raise
--------------


4. (C) Your Bahraini interlocutors will likely raise the
following issues:
-- U.S. Promotion of FTA: Realizing that Bahrain is a small
country with little name recognition in the United States,
the Bahraini officials will likely ask that the Department
employ its resources and linkages to promote the FTA and
doing business in Bahrain.

-- CP Visit in April: Crown Prince Salman is currently
planning a visit to the U.S. in April that will include a
focus on the FTA. He and your other interlocutors may ask
for your advice and support in making the visit a success,
including ways to reach out to business communities in key
U.S. markets.

-- Bahrain as a Regional Center: Bahrain seeks to market
itself as a regional center for foreign companies, with a
focus on the services sector. It already has a strong
regional reputation for its financial sector and for the
Bahrain Monetary Agency's regulation of the industry.
Bahrain also wants to expand into tourism, education, health,
and information technology. The officials may ask your views
and advice on how to build up the country as a regional
center.

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Issues Briefs
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Economy
--------------


5. (SBU) Bahrain is widely considered to be one of the most
open countries in the region and generally follows an
open-market philosophy. It has been able to make significant
progress in recent years in its ongoing process of economic
liberalization, diversification of national income, and
openness to investment policies. Bahrain has already amended
existing legislation and promoted new laws aimed at
facilitating and encouraging foreign investment, and senior
government officials believe it is imperative to continue
working toward economic diversification and increase the
volume of investment in services, tourism, industry, and the
financial sector. Officials make frequent public statements
citing the importance of foreign direct investment,
bolstering the private sector's role in the economy,
lessening the burden on government, and eventually decreasing
government subsidies.


6. (SBU) The 2006 Heritage Foundation's "Index of Economic
Freedom" ranked Bahrain 25th, marking a decline from the
previous year's ranking of 20th. The Index rated Bahrain as
"mostly free," and the Kingdom was recognized as the freest
among the Arab economies. The United Nations Conference on
Trade and Development's World Investment Report 2005 ranked
Bahrain as the highest and best among all Arab countries for
its FDI performance, reporting an FDI influx of $865 million
in 2004, an increase of over 40 percent from 2003, and third
among all Arab countries for its potential FDI performance.
The UN Economic and Social Commission for Western Asia
estimated Bahrain's 2005 real economic growth at seven
percent, the highest in the Arab world.


7. (SBU) Crown Prince Salman takes the lead on the Kingdom's
economic reform initiatives. Following ministerial changes
in January 2005, King Hamad issued Royal Decree No. 31 for
2005 delegating the national economic and investment
portfolio to the Economic Development Board, which had
formerly served as an economic think tank. Under the
chairmanship of the Crown Prince, the EDB was entrusted with
the implementation and execution of a three-tiered reform
initiative, focusing on labor, economic and education reform.
The EDB's main strategic functions are to promote investment
in key economic sectors, support and encourage foreign
investment, attract foreign companies to establish a presence
in Bahrain, support and develop local entrepreneurial skills,
simplify and eliminate investment obstacles, and secure
Bahrain's economic leadership and competitiveness in the
region.

Status of FTA
--------------


8. (SBU) The President signed the U.S.-Bahrain FTA into law
on January 11 of this year following ratification by Congress
in late 2005. The Bahraini parliament ratified and the King
approved the agreement in July 2005. Congressional
requirements for U.S. ratification generated some blowback in
Bahrain, most notably when Bahrain formally closed its Israel
boycott office in connection with ratification. Bahrain also
committed to seek passage of additional labor legislation.
The agreement will enter into force when the Bahraini
parliament approves a few outstanding IPR laws (copyright,
international treaties) and the government implements
regulations covering several other IPR areas. Bahrain's
parliament voted strongly in favor of ratification of the FTA
but quick action on the IPR legislation is not guaranteed.
We were disappointed the GOB did not complete all the
implementing legislation in time for a January 1 entry into
force. We are now pushing for the FTA to enter into force on
April 1, but that date is slipping and July 1 appears to be
more realistic. We must advocate rapid movement on any
outstanding issues holding up full implementation of the
agreement.

Political Environment
--------------


9. (C) King Hamad launched a political and economic reform
program when he ascended to the throne in 1999 following the
death of his father, Emir Shaikh Issa. The King held a
referendum on a National Action Charter in 2001 and issued a
new constitution in early 2002 that called for municipal and
parliamentary elections later that year. Because of
discrepancies between the Charter and the constitution,
leading Shia opposition group Al Wifaq and others led a
boycott of the parliamentary elections, claiming both the
constitution and parliament are illegitimate. That said,
some 53 percent of eligible voters participated in the 2002
elections for the lower house of parliament, the Council of
Representatives (COR),which were judged to be mostly free
and fair. The COR is increasingly growing into its role as a
legislative, monitoring, and accountability body and had a
real influence on the biannual budget issued by the
government in mid-2005. The country will again hold both
municipal and parliamentary elections, in May and October
2006 respectively. There are strong indications that the
boycotters will decide to participate this time, providing a
major boost for the reform program and the legitimacy of the
institution of parliament.


10. (C) As Al Wifaq edges closer to participation, a
hardline breakaway Shia group, known as the Haq Movement, has
adopted more confrontational tactics in dealing with the
government. There have been repeated clashes between
security forces and Haq Movement supporters (never numbering
more than a few hundred) since the end of November 2005. The
atmosphere is likely to remain charged as Al Wifaq and Haq
battle for the support of the Shia community, which
represents some 70 percent of Bahrain's citizens, and as the
October elections approach. Many officials and business
people have complained that the tension, protests, and
clashes are hurting Bahrain's commercial climate.

U.S. Corporate Presence
--------------


11. (U) Over 200 American companies have a presence in
Bahrain, not including agencies. All of the big names in
consumer and industrial products are present, and American
franchises blanket the country. Many financial institutions,
including American Express and Citibank, have established
their regional offices in Bahrain, and companies such as
Bechtel, Parsons, and KBR pursue infrastructure and
development projects. FedEx has its regional hub in Bahrain.
Two large joint ventures are Kimberly-Clark Bahrain and
Shaw-Nass, a manufacturer of complex pipe systems for the
petroleum industry. The local AmCham received formal
recognition from the U.S. Chamber of Commerce in early 2005
and recently organized and led a trade mission to Washington
and New York. The Embassy works closely with the AmCham to
develop it as an institution. Total trade between the U.S.
and Bahrain (in $ millions) was:


Year US Exp US Imp Tot Vol Trd Bal
-------------- -------------- -------------- -------------- --------------
2005 350.6 431.6 782.2 -80.9
2004 301.8 405.3 707.1 -103.5
2003 508.4 378.2 886.6 130.2
2002 419.5 394.7 814.2 24.8
2001 432.8 424.0 856.8 8.8
2000 448.9 337.6 786.5 111.3

MONROE