VZCZCXRO1154
PP RUEHIK RUEHPOD RUEHTRO RUEHYG
DE RUEHTU #0598/01 1561517
ZNR UUUUU ZZH
P 041517Z JUN 08
FM AMEMBASSY TUNIS
TO RUEHC/SECSTATE WASHDC PRIORITY 5098
INFO RUCNMGH/MAGHREB COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY

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 
----------------------------- 
 
¶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 
--------------- 
 
¶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 
------------ 
 
¶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