US embassy cable - 04MANAMA644

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. 
 
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SUMMARY 
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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 
 
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INSURANCE 
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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. 
 
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GOVERNMENT PROCUREMENT 
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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. 
 
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MARKET ACCESS: CARS 
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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. 
 
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TEXTILES: MANAGING EXPECTATIONS 
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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. 
 
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COMMENT 
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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