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

UNCLAS SECTION 01 OF 04 MANAMA 000272 
 
SIPDIS 
 
DEPT FOR EB/TPP/BTA, EB/TPP/MTA, EB/TPP/ATT AND NEA/ARP 
DEPT PASS USTR JASON BUNTIN 
CAIRO FOR STEVE BONDY 
 
E.O. 12958: N/A 
TAGS: ETRD ECON BA
SUBJECT: GEARING UP FOR FTA ROUND TWO: STICKY ISSUES 
 
REF: A. MANAMA 219 
 
     ¶B. MANAMA 249 
     ¶C. MANAMA 203 
 
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SUMMARY 
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¶1.  FTA round one produced remarkable progress.  Round two 
promises to be more difficult because negotiators will have 
to tackle sticky issues.  Eliminating physical presence 
requirements and disclosure of judicial decisions will likely 
require extensive revision of local laws.  Textiles, 
technology choice for telecommunications, duty-free market 
access for motor vehicles and patenting of animals will 
require resolution.  Jameel Al Alawi, Legal lead negotiator, 
told EMBOFFS that he had instructed negotiators to agree to 
FTA texts in principle only.  Yet overall, there is a strong 
push to conclude as many chapters as possible during round 
two.  IPR, financial services, and market access lead 
negotiators told ECONOFF that they did not want their groups 
to delay a June signing.  Ministry of Finance and National 
Economy's Yousif Humood, de facto coordinator for the 
Bahraini delegation, assured ECONOFF February 25 that 
schedules of negative lists requested during round one 
negotiations were being approved by the ministers responsible 
and would be ready for round two.  END SUMMARY. 
 
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Overarching Legal Issues 
------------------------- 
 
¶2.  Jameel Al Alawi, legal lead negotiator and Ministry of 
Cabinet Affairs Director of Agreements and Treaties, told CDA 
February 24 that Bahrain's negotiators are not necessarily 
legal experts and are sometimes unaware of changes that FTA 
provisions would require to existing laws.  Therefore, he has 
cautioned all lead negotiators that they may agree to texts 
in principle only.  Legal Affairs will need to check for 
conflicts between the text and existing laws.  Negotiators 
will have to obtain authorization from the relevant ministry 
or ministries to accept provisions that would require changes 
to Bahraini law. 
 
¶3.  Al Alawi Emphasized to CDA that it is much more difficult 
to change laws once drafted than to write them appropriately 
to begin with.  Reworking laws would require much time and 
GOB resources would be stretched.  He alerted CDA that many 
of the ministries lack legal advisors altogether, and that 
those advisors that are on staff are not always good enough, 
experienced enough, or have the appropriate specialty to 
draft good laws.  Specifically, Al Alawi said that many of 
Bahrain's legal advisers are Egyptians who are computer 
illiterate and lack sufficient English language skills to 
remain up-to-date.  When CDA suggested that the GOB ask for 
technical assistance funding to support (re-)drafting of laws 
to enact FTA, Al Alawi countered that the GOB had not had 
good experience with outsourcing legal advice, since lawyers 
thus procured tended to be unfamiliar with Bahraini law, 
tended to be commercially minded, and substituted 
cookie-cutter copying of other countries' existing laws for 
drafting expertise.  (COMMENT:  Bahrain's Constitution was 
largely drafted by foreigners.  END COMMENT.) 
 
¶4.  Looking ahead, Al Alawi alerted CDA that there is a 
constitutional provision that allows for fast track enactment 
of laws of an "important economic nature".  This provision 
requires parliament to act on the draft within 15 days. 
(Note:  Al Alawi was not explicit about which article of the 
Constitution he was referring to.  Post is checking the 
constitution to verify the pertinent provision.  END NOTE.) 
 
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Schedules of negative lists 
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¶5.  Ministry of Finance and National Economy Director of 
Economic Planning Yousif Humood told ECONOFF February 25 that 
all the requested schedules (services, financial services, 
market access, government procurement) had been forwarded to 
the relevant ministerial-level authorities for approval.  He 
said he hoped to have them ready to pass to the U.S. side by 
February 26th to give U.S. negotiators the opportunity to 
study the lists. 
 
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Textiles 
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¶6.  Lead negotiator for textiles Haitham Al Gahtani told 
Senate Finance/Commerce Committee Staffdel visitors February 
21 that Bahrain will seek fabric-forward and TPL to allow 
time for a gradual, "cooperative integration" of the 
industry, with Bahrain moving away from ready-made garment 
production and developing in its place textile design, 
shipping and financing capabilities. 
 
¶7.  As in the U.S., textiles is a politically-charged issue 
here with real economic ramifications for segments of the 
population.  Textiles, comprising ready-made garments (80 
percent) and gray cloth (20 percent), are Bahrain's primary 
non-oil export to the United States.  While Bahrain's 
contribution to overall U.S. textile imports is negligible, 
Gahtani said, in Bahrain the sector represents at least 
10,000 jobs, including roughly 3,500 for less educated, hard 
to re-employ female Bahraini Shia.  The rise of the industry 
is attributed to foreign investors seeking to take advantage 
of the existing U.S. textile quota system; most of the 
industry is not expected to survive the end of quotas on 
December 31, 2004.  Some factories here may relocate to 
countries where labor is significantly cheaper, especially in 
East Africa, Asia, and the Indian sub-continent.  Direct and 
indirect impact of the loss of textile jobs in Bahrain would 
shock the local economy, Al Gahtani said.  It is widely 
feared that this shock would negatively affect political 
stability in Bahrain. 
 
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Financial Services 
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¶8.  The financial services group has been communicating by 
e-mail with U.S. negotiators, Dr. Abdulrahman Saif, financial 
services lead negotiator, told ECON February 25.  They sent a 
list of issues for clarification to their U.S. counterparts 
early this week and are waiting for a reply.  A February 26 
meeting is scheduled with the Minister to review and approve 
Bahrain's proposed financial services negative list in time 
for round two.  Abdulrahman Saif said that he had not yet 
received the U.S. negative list for financial services, but 
looked forward to discussing both sides' offers at the 
negotiations. 
 
¶9.  Regarding discussions during round one of a moratorium 
limiting commercial banks in Bahrain to those 19 with 
existing licenses,  Abdulrahman Saif said that he considers 
this moratorium lifted, since over the last few years, five 
new licenses were issued.  Abdulrahman Saif told ECONOFF 
February 25 that he would check with his legal advisor to 
find out more details about this. 
 
¶10.  On insurance, Abdulrahman Saif stressed to ECONOFF 
February 25 that he expects a positive discussion of 
cross-border supply of insurance services.  Ghalib Hammoudi, 
AIG's local representative, has told EMBOFFS on numerous 
occasions that he is concerned about market access as 
provided for in the draft insurance law.  The draft law does 
not make provision for agents, AIG's principal way of doing 
business.  In addition, the BMA has not responded to AIG's 
application to expand its business lines to all insurance 
products.  AIG is in the process of applying to USDOC's 
advocacy center for USG and Embassy support. 
 
¶11.  Bahrain looks to bring Islamic banking, investment, and 
insurance to the U.S. market, particularly to serve the U.S. 
Muslim community, but also to attract non-Muslims looking for 
ethical investment products, CitiIslamic Bank's Raj Mittal 
told ECONOFF on numerous occasions.  Bahrain has become a 
global Islamic banking center by introducing regulations 
standards and creating new Islamic products.  Afaq Khan, Head 
of Islamic banking at Standard Chartered in Dubai and 
formerly at HSBC told ECONOFF February 25 that HSBC had had 
less than stellar results when it introduced Islamic home 
mortgages in New York State.  Because of the asset structure 
of Islamic mortgages, double-taxation (capital gains) and 
increased legal costs made the mortgages uncompetitive in the 
market.  In addition, when HSBC tried to expand their offer 
to Connecticut and New Jersey, they faced these legal 
challenges anew, producing limited positive outcomes. 
 
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Services 
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¶12.  Holidays and ministerial travel prevented a number of 
involved ministries from submitting their the services list 
of non-conforming measures in a timely fashion, Eman Al 
Doseri, Ministry of Commerce Head of Foreign Trade and 
International Organizations and a member of the services 
negotiating team told ECONOFF February 21 and again February 
¶24.  However, on February 25, Yousif Humood assured ECONOFF 
that the list was awaiting ministerial approval and should be 
ready for round two. 
 
¶13.  Current GCC non-conforming measures are based on current 
laws and regulations, Al Doseri said, so they might be 
difficult to change, especially since they involve other 
countries.  The Bahraini delegation will likely seek 
grandfathering.  (COMMENT:  In exchange for grandfathering 
these non-conforming measures, Bahrain may well be prepared 
to offer the United States treatment equal to that of GCC 
members.  END COMMENT.) 
 
¶14.  Further, on mode 3 supply of services, Al Doseri 
stressed that Bahrain's commercial law requires physical 
presence for Bahrainis as well as non-Bahrainis.  Yet, it is 
clear from anecdotal evidence that Bahrain does not restrict 
products from entering Bahrain through companies such as 
amazon.com or e-bay.  In fact, the Directorate of 
Publications and Press cited amazon.com to ECONOFF as one of 
the principal sources of parallel imports of Zone 1 DVDs (see 
Manama 249).  Local laws may need to be amended to conform 
with standard practice and to legalize cross-border supply, 
especially in light of Bahrain's eagerness to develop 
e-commerce opportunities. 
 
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Telecommunications 
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¶15.  Lead Telecommunications negotiator Sheikh Hamad bin 
Mohamed Al Khalifa told ECONOFF February 24 that he does not 
want the pace of telecoms liberalization, scheduled in the 
telecoms law for completion by the end of 2004, to hold up 
signing an FTA in June.  He is concerned that the U.S. side's 
understanding of the Bahraini licensing requirement for 
cross-border provision of telecoms services (e.g., 
long-distance, internet) is incomplete:  there is no pre-set 
limit on international licensing; a switch constitutes 
physical presence; Bahraini concern over cost-oriented 
interconnection revolves around the inability to enforce 
regulations on a non-licensed company that is providing 
services in Bahrain. 
 
¶16.  Issues subject to ongoing consultation by the 
Telecommunications Regulatory Authority (TRA), such as number 
portability, are also of concern to Al Khalifa.  He said that 
including such provisions in the FTA pre-judges outcomes of 
the consultative process.  In exchange for "greater 
understanding" on the above issues, Al Khalifa is prepared to 
engage on the "more substantive" issue of technology choice 
for mobile operators. 
 
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Market Access 
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¶17.  Market access lead negotiator Hassan Ali Al Majed told 
ECONOFF February 21 that he had sent forward to USTR 
Bahrain's WTO list of prohibited items.  He said that Bahrain 
was prepared immediately to put up for consideration 92 
percent of U.S. trade with Bahrain, the initial offer would 
be subject to ministerial approval.  Al Majed said that the 
underlying reason for the auto exclusion is that there were 
already too many cars on this small island, causing traffic 
congestion and pollution, and that eliminating the 5 percent 
tariff would make cars affordable to many more potential 
owners.  Separately, a key Bahraini negotiator told CDA 
February 17 that import tariffs collected on imported 
vehicles is important to the Finance Ministry.  (COMMENT:  We 
would not be surprised if there were pressures from prominent 
Bahraini families who import non-American cars.  END COMMENT.) 
 
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Government Procurement 
---------------------- 
 
¶18.  The GOB is seeking clarifications as to whether existing 
government procurement laws meet FTA requirements and are 
waiting for requested documents from the U.S. negotiators to 
prepare offers.  Legal lead negotiator Jameel Al Alawi told 
CDA February 24 that one point of contention may be that 
Bahrain extends preferential treatment in government 
procurements to GCC suppliers. 
 
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IPR 
--- 
 
¶19.  Bahrain will need to develop its enforcement laws, 
including establishing standardized and sufficiently punitive 
damages provisions for IPR infringements, Legal lead 
negotiator Jameel Al Alawi told CDA February 24.  He also 
mentioned to ECONOFF on numerous occasions over the past few 
weeks that Bahrain would have difficulty with the patenting 
of animals because the concept is inconsistent with the 
Islamic tenet that only God can create and destroy life.  He 
added that disclosure of judicial decisions is not normal 
modus operandi here generally.  Such a provision would 
require Bahrain to amend its laws. 
 
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Labor 
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¶20.  On Labor, lead legal negotiator Jameel Al Alawi expects 
Bahrainisation policies (i.e., industry-specific quotas for 
minimum percentages of Bahraini national employees applied at 
the company level) to present some problems in negotiation. 
He stressed to CDA February 24 that U.S. immigration policies 
and Bahrainisation are different means to the same end -- job 
protection for the local labor force.  An FTA, he said, aims 
for free movement of goods and services, not necessarily of 
people. 
 
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Customs 
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¶21.  In a February 24 discussion with CDA, Bahrain's lead 
legal negotiator Jameel Al Alawi wondered how the FTA would 
work on a practical level relative to the existing GCC 
customs union.  At present, re-export tariffs are levied at 
the border when goods exit Bahrain for another GCC country. 
However, beginning in 2005, the GCC customs union envisions a 
single point of entry, so that once goods have arrived in one 
GCC country, they can be transported freely within the GCC. 
A mechanism will have to be established to assure that goods 
arriving duty-free to Bahrain from the United States would 
not be re-exported duty-free throughout the GCC after FTA 
implementation. 
FORD