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Cablegate: Tunisia Tifa Council Meeting: A Moment Of

VZCZCXRO7434
PP RUEHTRO
DE RUEHTU #0211/01 0661739
ZNR UUUUU ZZH
P 061739Z MAR 08
FM AMEMBASSY TUNIS
TO RUEHC/SECSTATE WASHDC PRIORITY 4547
INFO RUEHAS/AMEMBASSY ALGIERS PRIORITY 7634
RUEHEG/AMEMBASSY CAIRO PRIORITY 1573
RUEHLO/AMEMBASSY LONDON PRIORITY 1428
RUEHNK/AMEMBASSY NOUAKCHOTT PRIORITY 0966
RUEHFR/AMEMBASSY PARIS PRIORITY 1901
RUEHRB/AMEMBASSY RABAT PRIORITY 8516
RUEHTRO/AMEMBASSY TRIPOLI PRIORITY 0206
RUEHCL/AMCONSUL CASABLANCA PRIORITY 4196
RUEHBS/USEU BRUSSELS PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY

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

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