TUNISIA TIFA COUNCIL MEETING: A MOMENT OF

UNCLAS SECTION 01 OF 04 TUNIS 000211 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/MAG (HARRIS) USEU BRUSSELS FOR AUSTR (DONNELLY) STATE PASS USTR (BURKHEAD) USDOC FOR ITA/MAC/ONE (NATHAN MASON),ADVOCACY CTR (REITZE),AND CLDP (TEJTEL AND MCMANUS) USDOC PASS USPTO (ADAMS, BROWN AND MARSHALL) CASABLANCA FOR FCS (ORTIZ) CAIRO FOR FINANCIAL ATTACHE (SEVERENS) LONDON AND PARIS FOR NEA WATCHER E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV KIPR TS SUBJECT: TUNISIA TIFA COUNCIL MEETING: A MOMENT OF OPPORTUNITY REF: A. TUNIS 172 ¶B. TUNIS 52 ¶C. TUNIS 17 ¶D. 07 TUNIS 1581 ¶E. 07 TUNIS 1528 ¶F. 07 TUNIS 1521 ¶G. 07 TUNIS 1443 ¶H. 07 TUNIS 1433 -------------- Summary -------------- ¶1. (SBU) Embassy Tunis warmly welcomes the US delegation to the TIFA Council, March 10 - 11. The TIFA Council follows a series of recent bilateral economic events and represents an opportunity to translate GOT statements of interest into concrete action. Despite the positive official GDP growth rates, significant real inflation, low domestic investment, and persistently high unemployment represent challenges for Tunisia's economic future. As the GOT aims to double per capita income and reduce unemployment by 2016, we have an excellent opportunity to emphasize that economic reform will help attract the US trade and investment necessary to achieve these ambitious targets. GOT interlocutors are clamoring for increased US trade and investment and have stated strong support for an eventual FTA. They view the TIFA Council as an opportunity for frank discussions on how we can advance bilateral economic engagement in the near-term. End Summary. -------------- A Moment of Opportunity -------------- ¶2. (SBU) As the GOT embarks on its 11th Development Plan (2007 - 2016),the time is right to emphasize that economic reform will help attract the US trade and investment necessary to meet the ambitious 11th Plan targets. Over the next decade, the GOT aims to double per capita income, reduce the unemployment rate by four points, and in 2007 alone raise FDI to 3 percent of GDP or 1.3 billion dinars (roughly US $1 billion). In meeting after meeting, GOT ministers have asked for greater US investment in agriculture, tourism, industry, information technology, and energy. Following President Ben Ali's own statements in support of increased economic ties, GOT Ministers have now 
expressed strong interest in an eventual Free Trade Agreement. GOT officials have been clear, however, that Tunisia is not ready for an FTA immediately, and they understand that the Administration no longer has "fast track" negotiating authority. They view the TIFA Council as an opportunity for frank discussions on how we can advance and strengthen our economic ties with an FTA as an eventual goal. The GOT working groups have been busy updating their respective papers from the 2005 TIFA Council, demonstrating the seriousness with which they approaching these discussions. -------------- Challenges for the Tunisian Economy -------------- ¶3. (SBU) Even as Tunisia can trumpet its economic success, the slow pace of reform -- both economic and political -- is beginning to take a toll on the economy. While the GOT undertook liberal economic reforms under an IMF structural adjustment program in the mid-eighties, rigid state control and the continued protection of key sectors have created an anemic private sector with low levels of investment. TUNIS 00000211 002 OF 004 Although the GOT points to solid and steady official growth rates -- an average of five percent for the past 10 years -- Tunisians are increasingly skeptical of Tunisia's economic success. The GOT boasted of 6.3 percent GDP growth for 2007, but many Embassy contacts distrust the numbers. Official inflation for 2007 was a modest 3.1 percent, but many economists estimate real inflation is closer to 8 percent and Tunisians are complaining loudly about the rising cost of living (Ref E). The persistently high unemployment rate of 14 percent (Ref G) is a serious cause for concern for a government that touts its image as a development success story, particularly with estimates of unemployment of university graduates over 40 percent. -------------- EU Association Agreement Paves the Way -------------- ¶4. (SBU) On January 1, 2008 the Association Agreement with the European Union went into effect, liberalizing trade on most industrial goods and paving the way toward eventual liberalization of services and agriculture. The immediate impact of the Association Agreement has been limited, as tariffs have been gradually reduced since 1996, but the GOT and the Tunisian private sector are waiting to see what the long-term impact will be on Tunisian manufacturers. Closures of Tunisian companies or negative public reaction to the agreement could influence the GOT's timeline for further liberalization. The Association Agreement not only serves as a test case for free trade, but also suggests a path forward for US negotiations. The GOT's elimination of tariffs on industrial goods should pave the way for US progress in this area, while the ongoing negotiations with the EU over services and agriculture indicate the continued sensitivity of these sectors. Of particular note is that the EU Association Agreement has been implemented with substantial funding for technical assistance programs. The GOT may expect significant technical assistance to support reforms suggested by the TIFA working groups. -------------- Missed Opportunities for US Investment -------------- ¶5. (SBU) Paltry domestic investment rates -- 12.5 percent, only half the rate in Morocco -- reveal weaknesses in Tunisia's investment climate and illustrate that the economy faces significant challenges to future growth (Ref H). Low levels of domestic investment, not only jeopardize continued economic success and efforts to reduce unemployment, but signal a broader lack of confidence in the Tunisian economy. American and Tunisian investors complain that currency exchange controls, customs procedures, limits on the number of expatriate employees, and real estate authorizations prevent companies from doing business and discourage further investment. Even as Gulf companies have made sizeable investments, they have also been vocal in noting the need for financial and legal reforms (Ref B). While red tape and unpredictability deter investors, ultimately these problems are rooted in the lack of transparency. We can point to several cases of resulting missed opportunities for US investment: SemGroup is ready to invest in Tunisia, but it has encountered significant difficulty moving a potential project through the GOT bureaucracy. Enerciel has been embroiled in a dispute with the state-owned utility over its investment of several million dollars in wind energy. Meanwhile, the Coca-Cola Company is poised to substantially upgrade its bottling and distribution operation in Tunisia, pending resolution of what it considers a discriminatory tax on its products. TUNIS 00000211 003 OF 004 -------------- Limited Openings in Services -------------- ¶6. (SBU) Liberalization of the service sector remains slow. GOT restrictions on franchising continue to act as a barrier to further US trade and investment. At present, foreign investment in financial services and insurance is primarily limited to successful privatization bids. However, there are indications that the GOT is ready to take steps to liberalize telecommunications and to permit franchising. The GOT is currently drafting new services legislation which will address franchising and has expressed interest in USG technical assistance on the topic (Ref D). The Minister of Communications Technology told the Ambassador that authorization for a second fixed-line carrier is before parliament and that there are plans to license a third mobile carrier (Ref C). -------------- Progress on IPR -------------- ¶7. (SBU) Since the 2005 TIFA Council, the GOT has taken positive steps to address IPR protection -- ending the "correlation" system, removing most US pharmaceuticals from the list of correlated products, and removing pirated optical discs from the shelves of one major retailer (Ref A). New legislation designed to improve enforcement and ensure compliance with international obligations is currently before the Parliament. Although there has been progress, more work remains to be done to prevent the retail sale of pirated optical disks and protect US pharmaceutical products. Eli Lilly and Abbot Labs continue to have pharmaceuticals on the list of correlated products (blocking their importation) and pharmaceutical companies have ongoing concerns that the GOT is not TRIPS-compliant on data exclusivity. The GOT asserts it is TRIPS-compliant, and Minister Jouini has indicated that if, in fact, the GOT is not compliant it will take steps to address the problem. -------------- Market Access Barriers Remain -------------- ¶8. (SBU) Tariff reductions will be critical for many American companies to remain competitive now that the EU Association Agreement has gone into effect. High tariffs, in some cases as high as 125 percent, and quotas constitute a significant disadvantage for many American firms already doing business in Tunisia and keep American exports out of the market. The Tunisian private sector is also likely to raise questions regarding access to the US market. Tunisian businesses note confusion over regulations, high transportation costs, the large quantities demanded by American importers, and foreign competition (particularly from Chinese businesses) as problems that prevent increased exports to the United States. -------------- Comment: The Bottom Line -------------- ¶9. (SBU) Liberalization of the Tunisian economy is in Tunisia's best interest and will help attract the trade and investment necessary for the economy's continued growth. Although the United States can encourage increased US trade and investment, it is ultimately US companies who will make their own decisions about the attractiveness of the Tunisian market. By taking concrete steps to improve the business TUNIS 00000211 004 OF 004 climate for US investors, the GOT will send an important signal that Tunisia is open for business. Please visit Embassy Tunis' Classified Website at: http://www.state.sgov.gov/p/nea/tunis/index.c fm GODEC