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Cablegate: Island Insights: Mini Fta Backgrounder

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS E F T O SECTION 01 OF 03 MANAMA 000644

SIPDIS

NOFORN
SENSITIVE

DEPT FOR EB AND NEA/ARP
DEPT PASS USTR FOR CNOVELLI, JBUNTIN AND JCBLISS
COMMERCE FOR CLOUSTAUNAU
TREASURY FOR LMOGHTADER

E.O. 12958: N/A
TAGS: ETRD ECON BA
SUBJECT: ISLAND INSIGHTS: MINI FTA BACKGROUNDER


1. (U) This cable contains company-proprietary information.
Please protect accordingly. Not for intrnet distribution.

-------
SUMMARY
-------

2. (SBU/NF) We offer in this cable insights into four major
remaining FTA issues: insurance, government procurement, car
tariffs and textiles.
Industry indicates that the draft insurance law is
inadequate. This protected insurance sector is likely the
slowest financial service to open to market forces.
The Royal Court, Prime Minister's Court and Crown Prince's
Court are the most sensitive entities the U.S. has requested
for Government Procurement chapter coverage. However, giving
in to Bahrain on these points could set an unwelcome
precedent for future FTA negotiations in the GCC.
On automobiles, contrary to GOB assertions, car dealers do
not expect that zero tariffs on U.S. automobiles would affect
market volume growth rate. Rather, consumers are more likely
to shift their preferences to larger or more prestigious
U.S.-made cars as they become more affordable.
Post-FTA textile industry expectations have spun out of
control. These must be reined in. The failure for
unreasonable expectations to materialize will tarnish
regionally the FTA's reputation for economic effectiveness
and could hinder negotiation of subsequent FTAs in the GCC.
END SUMMARY

---------
INSURANCE
---------

3. (U) MOFNE officials Yousif Humood and Selma Waheedi
pointed out to EconOff April 28 that a policy-level decision
was needed regarding Bahrain's request for a 2-year grace
period to liberalize insurance. Bahrain's Financial Services
lead negotiator Abdulrahman Saif clarified for EconOff May 4
that this grace period is requested for direct non-life
insurance only. Bahrain needs this time, Saif said, to
transition from an established industry that was closed since
its inception to an open sector. Bahrain Monetary Agency
Insurance Supervision Director Tawfiq Shehab explained to
EconOff May 4 that single-class insurers must be registered
offshore, while onshore licenses stipulate either life or
non-life. (NOTE: Shehab said that there are currently 9 or
10 local insurers, plus 9 branches onshore, while there are
80 offshore companies. END NOTE). Onshore non-life insurers
are currently required to offer all classes of non-life
insurance, including compensatory auto insurance at
government pre-set rates, Shehab continued. Bahrain is in
the process of formulating a new insurance law as part of the
transition of the industry from the Ministry of Commerce to
the Bahrain Monetary Agency, Saif added.
PriceWaterhouseCoopers London has already prepared three
consultative papers to address the regulatory regime, which
is scheduled to begin implementation in 2005. However, Saif
said, the underlying reason for Bahrain's request for a two
year transition phase is that the BMA needs to train
regulators and establish procedures to enforce the new law.

4. (SBU) However, ALICO has alerted post to another
insurance-related concern. ALICO-AIG Bahrain Group Managing
Director Ghaleb Hammoudi shared with PolEconOff April 28
e-mail correspondence from ALICO Gulf COO Fadi Chammas to
Bahrain Monetary Agency Executive Director of Financial
Institutions Supervision Anwar Al Sadah, in which Chammas
expressed his disappointment with Bahrain's draft insurance
law. Hammoudi elaborated to EconOff May 4 that the draft law
does not allow for commission-based sales agents, but
requires instead a European-style employer-employee
relationship. ALICO-AIG would be forced to change their
sales system to one they consider less effective and less
motivating. The change, he said, would also open the company
up to employee litigation and subject the company to
Bahrainization quotas. Hammoudi anticipated that, as a
result of the new law, ALICO would experience losses, not
growth, and would likely shut its doors to its current 12,000
client families in Bahrain after two to three years.
Hammoudi described the proposed legal framework as "a
protectionist, sentimental, spoon-feeding employment policy,"
adding that Chammas had characterized the draft law as "even
worse than the existing law." In his e-mail, Chammas wrote
that as a result, Insurance and Reinsurance companies are
racing to establish operations in Dubai.

----------------------
GOVERNMENT PROCUREMENT
----------------------

5. (U) Two outstanding government procurement issues are GCC
preferences and coverage. Ministry of Finance and National
Economy (MOFNE) Director of Economic Affairs Yousif Humood
and MOFNE Senior Economist Selma Waheedi assured EconOff
April 28 that GCC preference in government procurement is a
non-issue. This preference ends at the beginning of 2005 per
WTO to meet national treatment requirements. Furthermore, at
the upcoming mid-May GCC summit Bahrain intends to raise the
prospect of ending preferences before the end of the year.

6. (U) On coverage, MOFNE's Humood and Waheedi stressed to
EconOff April 28 that Bahrain would have great difficulty in
accepting the additional government entities the United
States has requested for inclusion. Unsurprisingly, they
cited the Amiri (Royal) court, the Prime Minister's Court,
and the Crown Prince's Court as political non-starters. The
officials included the Bahrain Monetary Agency (BMA),
Bahrain's central bank, among the most problematic because of
the agency's "need for autonomy," they said.

-------------------
MARKET ACCESS: CARS
-------------------

7. (SBU) The Government of Bahrain's stock answer for not
including automobiles--five percent of U.S.exports to Bahrain
in 2003--in its duty-free market access offer is that the
resultant five percent reduction in cost to consumers would
cause a run on cars, yielding increased traffic congestion
and pollution problems. However, car buyers in Bahrain are a
price sensitive population, Director of Zayani Motors Nawaf
Zayani, whose family's company represents Chrysler,
Mitsubishi, BMW, Range Rover and MG in Bahrain, told Econoff
May 3. At the same time, cars are a high-prestige item, and
families will spend up to fifty percent of their monthly
income on a car, he added. Almoayed Motors (Ford, Lincoln,
Mercury) General Manager Sunil George told EconOff May 3 that
he would not expect the total market size to change as a
result of reduced tariffs on U.S. automobiles; rather he
expects a shift to more expensive models or from Japanese or
European makes to U.S. cars. Jeff Thomas, National Motor
Company General Manager (Chevrolet, Cadillac, GMC, Honda)
noted May 3 to EconFSN that as a result of the soft dollar,
NMC had seen a noticeable shift from Honda purchases to their
more competitively priced American brands. Mannai Motors
owner Talal Mannai (Saab, Opel) also told EconFSN that U.S.
vehicles already have a built-in price advantage over cars
valued in Euros.

8. (SBU) Car dealers in Bahrain appreciate the difference
between an American brand car and a car made in America.
Almoayed Motors General Manager Sunil George told EconOff May
3 that more than fifty percent of their fleet--Ford, Lincoln
and Mercury--are produced in Europe. Small "American" cars,
which represent Almoayed's high-volume sales in Bahrain, tend
to be produced in Europe (Ford) and small GM cars for the
region are produced in Korea. Only Almoayed's large, luxury
vehicles, such as the Lincoln Towncar or Crown Victoria, are
produced in America, George added. Conversely, Nawaf Zayani
noted that certain "non-American" makes stood to benefit from
a reduction in tariffs on U.S. cars. For example, popular
models such as Toyota Camry, Honda Accord and the BMW X-5,
are made in America.

-------------------------------
TEXTILES: MANAGING EXPECTATIONS
-------------------------------

9. (U) As if reading from the same script, representatives
from the Ministry of Industry, Ministry of Labor, the
National Assembly and the business community repeat to anyone
who will listen the message that the FTA is the panacea that
will rescue and reinvigorate Bahrain's textile/garment
industry. The rapidly spreading urban legend maintains that
FTA's zero tariffs and TPLs will not only compensate for
Bahrain's higher costs of production--including highest labor
costs in the region--to make Bahrain's products highly
competitive in the post-quota marketplace, but will even
cause the sector to grow and generate new jobs. Members of
the Bahrain Chamber of Commerce and Industry Textiles
Committee (Garment Section) expect that companies that closed
because they were uncompetitive would be revived and would
thrive in a post-FTA world. That Bahrain's garment
manufacturers tend to use third-country cloth that would not
meet yarn-forward tests does not enter into the equation.
Instead, there is an unfounded expectation that FTA will make
a powerhouse out of Bahrain's garment industry and in so
doing will magically free Bahrain of its unemployment-related
social ills. Emboffs have heard these same fables repeated
to congressional staffers, FTA negotiators, and in private
meetings.

10. (U) EconOff often discussed with MOFNE officials the need
for public outreach to explain what FTA can and cannot do and
to rein in unreasonable expectations. May 3, MOFNE Director
of Economic Relations Yousif Humood addressed the Bahrain
Chamber of Commerce and Industry. EconFSN, who attended the
open session, reported that even after this forum, the public
still harbors many misconceptions and questions about FTA.

-------
COMMENT
-------

11. (SBU/NF) On insurance, U.S. companies' perspectives and
their interests in the region indicate that we need to push
harder for an agency model in Bahrain's insurance law as well
as quicker transition to openining the sector.
Post firmly believes that backing down on our Government
Procurement entities list is inadvisable because the optics
are atrocious and would ultimately have implications for
future Gulf FTAs. Based on our survey, anectotal evidence at
the microeconomic level does not support the GOB Market
Access stance on cars. We recommend sustaining our position.
Textile hysteria needs to be calmed, both to conclude the
chapter and to give FTA implementation a reasonable chance
for public perception of economic success. END COMMENT.
FORD

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