US embassy cable - 04ABUDHABI3526

C O N F I D E N T I A L SECTION 01 OF 05 ABU DHABI 003526 
 
SIPDIS 
 
STATE PASS USTR 
 
USTR FOR AMBASSADOR ZOELLICK FROM AMBASSADOR SISON 
DEPT FOR NEA, NEA/ARP, NEA/RA, ECON, EINV, ETRP, TC 
 
E.O. 12958: DECL: 10/04/14 
TAGS: OVIP, TC, ETRD, ECON, EINV, PREL 
SUBJECT: SCENESETTER FOR USTR ZOELLICK'S TRAVEL TO THE UAE 
 
REF: ABU DHABI 3410 
 
1.  (U) Classified by Ambassador Michele J. Sison for 
reasons 1.5 (b) and (d). 
 
2.  (C) Ambassador Zoellick:  I would like to welcome you 
to the UAE.  Your visit comes during a dynamic period in 
the U.S.-UAE bilateral relationship.  Over the last few 
years, relations between the UAE and the U.S. have deepened 
and expanded in the military, counter-terror, and 
nonproliferation arenas. Senior UAEG officials want our 
economic links to become as close as our other ties and 
argue that a Free Trade Agreement would be the best way to 
cement this relationship. 
 
3.  (SBU) Coming a week after the October 4-5 TIFA meetings 
in Washington, your visit is an opportunity to highlight 
the UAE political commitment for an FTA, which the UAEG 
views as an economic and strategic issue.  As a federation 
of seven emirates, the UAE is enthusiastic regarding the 
prospect of negotiating an FTA with the United States.  At 
both federal and Emirate-levels, you will find the leaders 
to be engaged and cooperative.  However, as was apparent 
during this week's TIFA meetings, the Ministry of Economy 
and Commerce stands out from the rest of the UAE government 
agencies and departments and has not been forward-leaning 
on issues such as the Arab League boycott and the companies 
law.  Getting this ministry on board and working as a 
productive agent of change will be a challenge that the 
Emiratis must manage over the next few months.  However, 
this Minister is not in the inner leadership circle and we 
expect that the Abu Dhabi and Dubai political leadership 
will pull him and his Ministry along. 
 
-------------------------- 
Meetings and Interlocutors 
-------------------------- 
 
4.  (C) We have requested meetings for you with: 
 
-- Crown Prince of Abu Dhabi Emirate Sheikh Khalifa bin 
Zayed Al-Nahyan.  The eldest son of President Zayed, Crown 
Prince Khalifa effectively holds the purse strings for the 
Abu Dhabi emirate, the wealthiest and most populous of 
UAE's seven emirates, as well as for the federation. 
(Note: President Sheikh Zayed's health is precarious, and 
the country is on the verge of leadership succession (see 
reftel). End note.)    Khalifa also serves as Chairman of 
the Abu Dhabi Executive Council, which decides which 
projects to fund in Abu Dhabi, Chairman of the Supreme 
Petroleum Council, which formulates oil policy, and 
Chairman of the Abu Dhabi Investment Authority, which 
decides how the richest emirate will invest its vast 
wealth.  On the federal level, Khalifa is the Deputy 
Supreme Commander of the UAE Armed Forces.  Crown Prince 
Khalifa will succeed Zayed, with the consensus of the other 
emirates.  Khalifa is soft spoken and can appear as 
disengaged.  He values the strategic relationship with the 
U.S. 
 
-- Deputy Crown Prince of Abu Dhabi Emirate and UAE Armed 
Forces Chief of Staff Sheikh Mohammed bin Zayed Al-Nahyan 
(MbZ).  Last November, Sheikh Zayed removed all doubt about 
UAE succession by appointing MbZ (the third son of the 
President) as Deputy Crown Prince of Abu Dhabi.  As a 
result of this designation, MbZ would succeed Khalifa as 
Crown Prince.  MbZ is widely regarded as a man of action 
and vision and as Chief of Staff of the UAE Armed Forces, 
he has built his power base in the UAE military and wields 
considerable influence over the country's military 
expenditures.  He has also sought to build close ties with 
senior policy makers of the UAE's principal allies, the 
U.S., France, and the United Kingdom.  MbZ is a key arbiter 
of the draft labor law, and was just appointed honorary 
chairman of the newly established Higher Committee for 
Coordination of Economic Policies, Programs and Plans of 
the Emirates. 
 
 -- UAE Deputy Prime Minister and Minister of State for 
Foreign Affairs Sheikh Hamdan bin Zayed Al-Nahyan (HbZ). 
HbZ, the fourth son of the President, is another ruler who 
shapes the political and economic landscape. As the de 
facto Foreign Minister since 1990, HbZ is highly capable 
and works to cement political and economic ties with UAE's 
key partners.  He is a key bilateral interlocutor and 
proponent of an FTA.  He plays a critical role in 
coordinating policy among the seven emirates and exerting 
discipline in the cabinet.  He chairs the Red Crescent 
Authority that took lead on UAE's humanitarian assistance 
to Afghanistan, Iraq and Palestine. 
 
-- Crown Prince and de-factor ruler of Dubai Emirate Sheikh 
Mohammed bin Rashid Al-Maktoum (MbR).  MbR, the most 
dynamic and pro-business leader in the Emirates, is one of 
our most important contacts in the UAE. He is an 
intelligent, pragmatic, and decisive interlocutor who 
responds best to straight talk.  MbR and MbZ have developed 
a good rapport over the years, and they generally cooperate 
closely on most federal-level decisions.  MbR will play a 
key role in "selling" an FTA to Dubai's powerful merchant 
class, some of whom are expressing concern about their 
ability to maintain their longstanding agency relationships 
with U.S. companies when agency requirements are 
eliminated. 
-- Deputy Ruler of Dubai Emirate and Minister of Finance 
and Industry Sheikh Hamdan bin Rashid Al-Maktoum. Sheikh 
Hamdan bin Rashid is the titular Finance Minister, though 
MinState for Finance Khirbash (a fellow Dubayyan) actually 
fills most aspects of the Finance Minister role for the 
UAE. HbR is quiet, introspective, and sometimes reclusive, 
but despite his deceptively low-key style, he is a savvy 
operator, often representing the interests of more 
conservative elements of Dubai society. 
 
-- Minister of State for Finance and Industry Dr. Mohammed 
Khalfan bin Kharbash.  Khirbash will join HbR for your 
meeting with him.  Dr. Khirbash negotiated the TIFA with 
the U.S. and chaired the first TIFA Council session.  He is 
a practical, results-oriented individual, who is 
particularly adept at refereeing and settling bureaucratic 
turf battles inherent to the loose, confederal structure of 
the UAE.  He also appears to have the support of the ruling 
families of both Abu Dhabi and Dubai.  He has also recently 
begun reaching out to Dubai's leading merchant families to 
help them see the advantages of an FTA. 
 
5.  (U) In addition to your formal meetings with government 
officials, we will hold roundtable discussions with 
influential business and community leaders in Abu Dhabi and 
Dubai.  On the way from Abu Dhabi to Dubai, your delegation 
will have the opportunity for site visits at the Jebel Ali 
Port and Dubai Internet City.  At Jebel Ali, you will 
receive a briefing regarding the movement of container 
traffic in Jebel Ali port. Sultan bin Sulayem, Executive 
Chairman of Dubai Ports, Customs, and Free Zone 
Corporation, will join you for this briefing.  At Dubai 
Internet City, you will have a roundtable meeting with 10 
to 15 senior American managers from Hewlett Packard, 
Oracle, Cisco, Microsoft, and Sun to discuss how an FTA 
could open up the rest of the UAE to U.S. investment 
opportunities like those currently in the free zones. 
Additionally, we propose a press roundtable with print and 
TV reporters. We are in the process of coordinating this 
event with Rich Mills. 
 
----------------- 
Economic Synopsis 
----------------- 
 
6.  (U) The UAE has followed a market-oriented growth 
strategy aimed at diversifying the economy.  It is the 
third largest economy in the Arab world, just behind Saudi 
Arabia and Egypt.  2003 GDP stood at $74 billion (larger 
than Bahrain, Qatar and Kuwait combined), with per capita 
GDP more than $20,000.  Oil accounts for about 40 percent 
of the UAE's GDP, and major non-oil industries include 
manufacturing (11 percent), wholesale and retail trade (10 
percent), government services (9.6 percent), and 
construction (8 percent).  There are over 500 U.S. 
companies physically present in the UAE, and the U.S. trade 
surplus is significant; in 2003 the U.S. exported $3.5 
billion to the UAE and imported $1.1 billion in UAE goods. 
With an estimated real economic growth rate this year of 
5.5% to 6%, it can be a growth market for U.S. exports in 
goods and services rticularly in the sectors of 
construction/engineering, information technology, and oil 
and financial services. 
 
7.  (U) According to the National Bank of Abu Dhabi, 
exports are projected to have reached $56 billion while 
imports grew to $37 billion, giving the UAE a trade surplus 
of $19 billion and a current account surplus of $11 
billion.  Oil and gas exports made up between 40-45% of 
total exports in 2002 (depending on the source of the 
data), with major trading partners including Japan, the EU, 
Iran, and the U.S.  Japan buys about 65% of UAE oil exports 
and constitutes the largest overall export market.  Other 
major markets are India and Iran (the largest market for 
"re- exports").  The UAE imports almost half of its goods 
from Asia, and about 30% from the EU. 
8.  (U) The UAE is a member of the GCC Customs Union, which 
has fixed tariffs on most goods at 5% (cigarettes at 100% 
and alcohol at 50% are two notable exceptions).  (note: The 
UAE needed to raise its external tariff to meet the GCC 
common external tariff.  End note.)  The UAE has benefited 
from its membership in the customs union.  In the year 
since the GCC customs union was founded, the UAE's exports 
and re-exports increased by about 33% to about $ 1.85 
billion.  This total does not include the volume of 
transshipped goods that passed through the UAE's free trade 
zones.  Exports and re- exports include goods manufactured 
in the UAE or imported into the UAE, modified and then re- 
exported.  The UAE's participation in the customs union was 
also the main contributing factor to the creation of a 
federal customs authority, which is slowly beginning to 
coordinate the efforts of the customs departments of the 
individual emirates.  The UAE was unable to get agreement 
from its GCC partners to have goods produced in its free 
zones eligible for duty free entry to other GCC countries. 
 
9. (U) There are sharp differences in the wealth of the 
various emirates.  The Emirate of Abu Dhabi, which owns 90% 
of the oil and gas reserves in the UAE, is the richest 
emirate.  In 2002, Abu Dhabi's share of total GDP was about 
58%.   Dubai, the commercial capital, produced the next 
largest share at 26.5%, followed by Sharjah at just under 
10%.   The four northern emirates are much poorer, have 
fewer resources, and fewer economic opportunities.  They 
have been much less successful in developing their 
economies and are highly dependent on grants from the 
emirate of Abu Dhabi and the federal government. 
 
10. (C) Given the decentralized decision-making structure 
of the UAE, different emirates have encouraged 
privatization and foreign direct investment (FDI) to 
different degrees.  Many of the large industries are owned 
either by the federal government or by the individual 
emirates.   The Abu Dhabi National Oil Company is a holding 
company owned by the emirate of Abu Dhabi, which owns the 
majority of oil producing assets in the emirate. Unlike 
most other GCC countries, however, the UAE never fully 
nationalized the oil sector.  Foreign oil companies, 
including Exxon-Mobil, BP, and Total all own "upstream" oil 
assets.  Abu Dhabi is also tendering a 28% stake in the 
Upper Zakkum offshore oil field.  Exxon-Mobil is one of the 
3 companies short-listed in the bid for the field. 
 
11. (U) Abu Dhabi has begun to privatize the water and 
power generation sectors, which are about now 33% privately 
owned.  U.S. companies have substantial interests in this 
sector.  An American firm was awarded the first Independent 
Water and Power Project in 1988 for an estimated value of 
$750 million. The firm was selected as part of an Anglo- 
American consortium to manage a second IWPP in 2001. 
Unlike state-owned enterprises (SOEs) in many countries, 
however, the SOEs in the UAE generally are profitable. 
Especially in Dubai, they are traditionally given 
assistance to start, and then forced to compete freely in 
the market.  According to one oft-recounted story, the 
chairman of Dubai-owned Emirates Airlines reportedly went 
to the ruler of Dubai and requested protection for the 
fledgling airline.  The ruler replied that he couldn't do 
that, because he "loved the airline, but he loved Dubai 
more." 
 
12. (U) According to the UNDP, the stock of inward FDI in 
the UAE is $1.4 billion, whereas the UAE is estimated to 
have around $3 billion in FDI overseas.  UAE law limits 
foreign ownership of companies to 49% outside the free 
zones.  There is no income tax in the UAE.  Foreign banks 
pay 20% tax on profits and foreign oil companies with 
equity in oil concessions pay taxes and royalties on the 
proceeds. Companies operating in the free zones can be 100% 
foreign-owned, but require a local distributor if they sell 
products in the UAE. 
 
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Free Zones 
---------- 
 
13. (U) One of the ways that the UAE attracts FDI is 
through the free zones.  Free zones are areas set aside by 
decree that are exempt from the UAE agency law requiring 
all firms to be owned at least 51% by a UAE national.  Free 
zones are attractive to foreign investors for several 
reasons.  First, they allow 100% foreign ownership, and, 
like the rest of the UAE, allow full repatriation of 
profits and no taxes.  Second, free zones offer a one-stop 
shop for government services, providing assistance with 
everything from incorporation to sponsoring and bringing in 
foreign workers.  Third, firms in free zones can import and 
export without paying any customs duty.  Next, free zones 
(particularly in Dubai) are managed to Western standards, 
with reliable energy supplies, internet access, cargo 
facilities, and so on.  Finally, the free zones have the 
advantage of being synergistic clusters of related-industry 
firms, such as Dubai Healthcare City and Dubai Internet 
City. 
 
14.  (U) From the perspective of a company interested in 
DFI in the UAE, there are two main downsides to free zones. 
If a free zone wants to sell its products into the UAE, it 
must find a distributor outside the free zone.  The 
distributor is subject to the UAE agency law, so must be at 
least 51% Emirati owned.  The distributor basically 
"imports" the goods from the free zone, paying the 5% 
Customs tax in the process.  Second, all the perks of the 
free zones mean that rents are significantly higher inside 
a free zone than out. 
 
15. (U) UAE free zones have attracted approximately 5,000 
companies and an estimated investment of over $ 4 billion. 
Dubai has led the UAE in its establishment of free zones, 
with about a dozen either operating or almost open. Dubai 
has pioneered concepts such as Dubai Internet city (for IT 
firms), and the Dubai International Financial Center (which 
hopes to set up a major regional financial center and 
exchange).  With highly varying degrees of success, six of 
the UAE's seven emirates have at least one active free 
zone.  Abu Dhabi does not have any active free zones. The 
oldest and largest free zone, Dubai's Jebel Ali, was 
established in 1985 and is home to over 2,200 companies 
from over 100 countries.  Despite the free zones' proven 
ability to attract foreign direct investment, the UAE has 
so far not liberalized its FDI environment outside the 
zones.  Dubai Internet City, one of the locations you will 
visit, houses a total of 560 companies, 80 of which are 
U.S. companies that employ approximately 100 U.S. 
employees. 
 
--------------------- 
Key Discussion Issues 
--------------------- 
 
16.  (SBU) Labor:  The current UAE Labor Law does not 
provide for labor unions, the right of association or 
collective bargaining.  However, in June the UAE Cabinet 
approved a memo calling for the establishment of labor 
unions.  The UAE Minister of Labor and other UAE labor 
officials have told us recently that the UAE is committed 
to moving forward on developing labor unions, but that the 
process will be a slow and deliberative one, with 
considerable debate among UAE stakeholders (including the 
chambers of commerce and the Emirati teachers, engineers, 
and lawyers associations).  At present, two laws are being 
drafted; one that revises the existing labor code, and a 
new trade union law that will stipulate the details of 
labor unions.  UAEG officials tell us that the Ministry of 
Justice technical committee has completed about 70 percent 
of the review process for the revised labor law and should 
complete the review within the next two months.  The new 
trade union law is still in the drafting stage, but the UAE 
hopes that the law will be in effect by mid-2005. 
 
17.  (SBU) Our interlocutors stress that labor unions and 
the foreign worker population are serious issues for the 
UAE, and the UAEG is concerned about balancing their 
commitment to improving workers' rights with the security 
and social challenges of having a 98 percent foreign worker 
population in the private sector.  UAEG officials recognize 
that inclusion of expatriates in the new laws is a key 
issue for the United States, and the Minister of Labor 
emphasized that he was not interested in having Emirati- 
only labor unions.  A key question for the UAEG was the 
level and type of foreign participation that would be 
allowed. 
 
18.  (C) Arab League Boycott:  Although the UAE  a matter 
of policy  longer enforces the secondary or tertiary 
aspects of the Arab League Boycott, U.S. companies have 
occasionally faced contracts in the UAE with a boycott 
provision.  This issue has been raised with senior UAEG 
officials, and we believe the UAEG has the political 
commitment to respond positively to our concerns.  There 
appears to be confusion on the part of some Emirati 
companies as to what constitutes a secondary or tertiary 
boycott, and in some instances, officials at the Ministry 
of Economy and Commerce may be using outdated forms.  The 
Ministries of Foreign Affairs and Finance are actively 
working this problem and have assured us that the UAE will 
absolutely not boycott U.S. companies.  Ministry officials 
realize that resolving this issue is key to proceeding 
forward with FTA negotiations, and they are fully engaged 
to ensure that it does not continue to be a problem. 
 
19.  (SBU) Agencies Law/Companies Law:  UAE officials 
recognize that the existing agency law is a key area of 
concern for the U.S. in moving toward an FTA; however, many 
UAE nationals (including royal family members and prominent 
merchant families) profit from the agencies law requiring 
foreigners to contract with a UAE national in order to 
import or trade goods in the UAE.  The elimination of this 
law will require active engagement by federal and Emirati- 
level leaders to overcome the concerns of nationals who 
fear they may loose their income from agency relationships. 
UAEG reformers would plan to use the carrot and stick of 
FTA negotiations with the U.S. to make changes to the 
agencies law and the commercial companies law (at least as 
they apply to U.S. firms).  A senior official from the 
Ministry of Economy and Commerce noted that the ministry 
believes an open and free market benefits the nation's 
economy, but he acknowledged that vocal lobbies are working 
to protect their interests, just as they do anywhere.  He 
opined that his government needs to convince consumers that 
changing the agency law is in their best interest, thus 
energizing them to participate in an informed debate with 
those advocating the status quo.  During the October 4th 
TIFA council meetings, UAE officials noted that an 
additional concern on the part of the UAEG is that by 
allowing foreign ownership, the UAE would end up with even 
more foreign workers taking jobs away from UAE citizens. 
 
20.  (SBU) Progress is being made regarding the companies 
law, which limits foreign ownership of commercial entities 
in the UAE to 49 percent.  The draft of a revised companies 
law includes a provision that will grant foreign companies 
an exception to the 51/49 percent ownership requirement, 
provided the foreign company meets certain criteria, such 
as having direct capital investment, providing a 
feasibility study, and guarantying to the UAEG that it will 
hire a significant percentage of Emirati nationals.  This 
draft law has been in process for several years now as part 
of the UAE's efforts to comply with WTO investment rules. 
It is not clear when it will be enacted.   But Ministry of 
Economy and Commerce officials recognize that now 
advance of potential FTA negotiations  the most opportune 
time to enact this piece of legislation. 
 
--------------------------------------------- --- 
Bilateral FTA Clear Preference Over Regional FTA 
--------------------------------------------- --- 
 
21.  (SBU) The GCC Secretariat's February proposal to the 
USG regarding initiating region-wide free trade 
negotiations with the United States put UAE officials in 
the uncomfortable position of formally having to support 
the GCC 'party line,' but senior UAEG officials have made 
it very clear that the UAE intends to pursue bilateral 
trade agreements with the United States, regardless of GCC 
initiatives.  UAEG officials have said that GCC talks, 
which include Saudi Arabia, would "bog down" negotiations, 
and indeed, the GCC/EU FTA negotiations are an example of 
this.  The GCC countries are having a difficult time 
reaching consensus positions regarding the liberalization 
of certain services sectors, and as a result, the GCC/EU 
FTA negotiations have essentially stalled. 
 
22. (U) I look forward to welcoming you and your team on 
October 12th. 
 
SISON