EU ASSOCIATION AGREEMENT DEMONSTRATES BENEFITS OF

UNCLAS SECTION 01 OF 02 TUNIS 000598

SENSITIVE
SIPDIS

STATE FOR NEA/MAG (HARRIS)
STATE PASS USTR (BURKHEAD)
USDOC FOR ITA/MAC/ONE (NATHAN MASON),ADVOCACY CTR
(REITZE),AND CLDP (TEJTEL AND MCMANUS)
CASABLANCA FOR FCS (ORTIZ)
CAIRO FOR FINANCIAL ATTACHE (SEVERENS)
LONDON AND PARIS FOR NEA WATCHER

E.O. 12958: N/A
TAGS: ETRD ECON ECIN XG TS
SUBJECT: EU ASSOCIATION AGREEMENT DEMONSTRATES BENEFITS OF
FREE TRADE


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Summary
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1. (SBU) With the first phase of the EU Association Agreement
in effect, both the EU and the GOT are largely satisfied with
the results. On January 1, Tunisia eliminated tariffs on
manufactured goods -- one year ahead of schedule. Aside from
the protracted negotiations on processed agricultural goods
and pharmaceutical IPR concerns, the European Commission
tells us tariff dismantlement has gone smoothly. Many
Tunisians feared an influx of European goods and widespread
company closures, but neither have come to pass. Tunisia's
trade deficit with the EU has actually decreased as tariffs
were progressively dismantled, reflecting the gains from free
trade. Even as the Association Agreement and a
soon-to-be-released World Bank study demonstrate the positive
economic impact of trade liberalization, the GOT is taking
its time in pursuing further liberalization. EU negotiations
on agricultural liberalization are moving slowly and
discussions on scheduling services liberalization have not
even begun. End Summary.

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Round One: Manufactured Goods
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2. (SBU) On January 1, Tunisia eliminated tariffs on
manufactured goods as part of the first phase of the
Association Agreement signed with the European Union in 1995.
Tariffs on these products have been progressively dismantled
over a period of more than ten years. Fabian Seiderer,
Macroeconomist at the European Commission, stated that for
the most part the dismantling of tariffs had gone smoothly
and that the GOT had actually implemented the elimination one
year ahead of schedule. The GOT decided to advance tariff
reductions because investment in the manufacturing sector
began to slow, with many companies taking a "wait and see"
approach. He recounted, however, that there had been
problems with processed agricultural products and
pharmaceuticals. Negotiations on tariff reductions for
processed agricultural products were not completed until the
very end of 2007, with implementation delayed for several
years. Seiderer highlighted that EU pharmaceutical companies
had shared many of the same IPR concerns as US firms,
particularly in regard to the "correlation" system. (Note:
Pharmaceuticals could not be imported if there was a locally
produced equivalent, even if generic.) He indicated that the
December 2006 end of "correlation" appeared to alleviate this
concern. Habib Guida, Director General at the
Tunisian-French Chamber of Commerce and Industry, complained
that in eliminating customs tariffs the GOT had raised the
value-added tax. Seiderer remarked that although this was
true it was non-discriminatory and could also be seen as a
way for the GOT to recoup the fiscal loss from the absence of
customs.

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Productivity Up
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3. (SBU) Although many Tunisians feared the agreement would
lead to widespread company closures and job loss, the impact
has been extremely positive. Tunisia's trade deficit with
the EU has actually decreased. From 2003 to 2007, Tunisia's
exports to the EU have increased from 8.7 million dinars (US
$7.4 million) to 16 million (US $13.6 million). In 2007,
Tunisia's trade deficit with the EU narrowed nearly 13
percent over 2006. Seiderer emphasized that the agreement
has helped to demonstrate the positive benefits of free
trade. Guida stated that Tunisian companies have become more
competitive. The GOT places great stress on the success of
its "mise-a-niveau" program to upgrade Tunisian companies.
He argued that the efficiency gains were not the result of
the "mise-a-niveau" program. Instead, this represented the
first time many companies seriously evaluated their
competitiveness -- from adopting new production technologies
to examining pricing and profit structure. While Guida and
Seiderer acknowledged that some Tunisian companies have gone
out of business, they both argued that these companies would
have failed anyway because they were simply not profitable.
A World Bank (WB) study that has not yet been publicly

TUNIS 00000598 002 OF 002


released, confirms that the sectors that are the most open
are the most productive. The report shows that productivity
in the manufacturing sector has gone up and has been
accompanied by a significant increase in FDI to the sector.

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No New Goods
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4. (SBU) Despite the fanfare surrounding the elimination of
tariffs on January 1, the Tunisian market has yet to witness
an influx of new European products. Seiderer remarked that
there had been an increase in some consumer goods, but noted
that the strong euro made imports particularly expensive at
the moment. In the past several years there has also been a
shift away from sourcing goods from Europe, with Tunisian
manufacturers importing materials from countries such as
Turkey. Additionally, a high proportion of EU-Tunisian trade
has been with Tunisia's offshore sector rather than the
domestic market. In response to laments about the continued
absence of European cheeses and wines, Seiderer highlighted
that tariffs for many of these products should be reduced in
the coming years as part of the now completed negotiations on
processed agricultural goods.

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Round Two?
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5. (SBU) Seiderer noted that although the EU and GOT have
technically begun negotiating agriculture, the GOT is
"dragging its feet." He believed that the GOT agreed to
start negotiations merely due to the optics of being among
the last countries to start discussions. Since the World
Bank is currently working with the Ministry of Agriculture to
develop a new strategy for the sector, he admitted this might
explain the lack of action. On services liberalization,
Seiderer stressed that the GOT has not begun to negotiate and
has not even discussed scheduling negotiations. He stated
that services are still technically scheduled to be
liberalized by 2010, but that the EU does not expect this
timeline to be met. Seiderer lamented that the GOT continues
to demand extensive external financing and often complains
that the EU is not providing enough in the way of funding.
He complained that the GOT expects the EU to fund upgrades
for each sector that is liberalized as compensation.

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Comment
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6. (SBU) In many ways, Tunisia's Association Agreement with
the EU represents a trial balloon for further trade
liberalization. The agreement and the soon-to-be-released WB
report demonstrate that liberalization yields positive
results for Tunisian economic performance. The strong
performance of Tunisia's offshore sector provides additional
evidence. While we would hope that these successes would
spur greater and faster liberalization, the GOT has long
favored a cautious, go-slow approach. The GOT's foot
dragging on EU negotiations indicates they have not abandoned
their traditional strategy. Regardless of the pace, the GOT
is headed in the right direction -- more, rather than less,
liberalization.

Please visit Embassy Tunis' Classified Website at:
http://www.state.sgov.gov/p/nea/tunis/index.c fm
GODEC