US embassy cable - 05ABUDHABI992

UNCLAS SECTION 01 OF 04 ABU DHABI 000992 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/TPP/MTA, NEA/ARPI, NEA/PI 
STATE PASS USTR FOR DOUG BELL 
 
E.O. 12958: N/A 
TAGS: ECON, ELAB, ETRD, PREL, TC, EINV, USTR 
SUBJECT: SCENESETTER FOR FIRST ROUND OF US-UAE FTA 
NEGOTIATIONS 
 
 
1. (U) Summary:  The UAE is a federation of seven emirates 
(Abu Dhabi, Dubai, Sharjah, Ajman, Umm  Al-Qaiwain, Fujairah, 
and Ras Al-Khaimah) founded in December 1971.  Over the last 
34 years, the UAE has developed into the third largest 
economy in the Arab world, with an estimated 2004 GDP of at 
least $85 billion.  The UAE has pursued free market, pro 
free-trade policies to diversify its economy away from a 
dependence on oil.  Despite possessing 9-10% of the world,s 
proven oil reserves and the fourth largest proven gas 
reserves in the world, rapid growth in the non-oil economy 
reduced oil,s share of GDP from 65% in 1980 to about 30% in 
2004. 
 
2. (U) Summary Continued:  The federal structure of the UAE, 
like that of the U.S., cedes certain powers to the federal 
government, while reserving others to the individual 
emirates.  Individual emirates maintain ownership of natural 
resources within their borders.  In effect, this means that 
Abu Dhabi, which controls 90% of the proven oil and gas 
reserves in the UAE, is by far the wealthiest emirate. Sheikh 
Zayed, the late longtime Ruler of Abu Dhabi and President of 
the UAE (he died in November 2004), had used the emirate,s 
wealth to promote greater integration, by funding the federal 
government and providing development aid to the poorer 
emirates.  Current Abu Dhabi Ruler and UAE President Sheikh 
Khalifa bin Zayed (Sheikh Zayed,s eldest son) has recently 
pledged USD 680 million in infrastructure projects to rural 
areas in the less wealthy northern emirates.  End Summary. 
 
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Government Structure 
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3.  (U) When the UAE was founded, the individual emirates 
surrendered some of their sovereignty to a federal 
government, while retaining a great deal of autonomy over 
their internal affairs.  Under the constitution, the federal 
government assumed the responsibility and authority for 
certain areas that affect the federation as a whole, such as 
foreign affairs, while the individual emirates retain 
authority in areas not specifically delegated to the 
federation.  In all cases, however, federal laws and decrees 
&trump8 emirate-level laws.  The Federal Supreme Council 
(FSC), made up of the rulers of the seven emirates or their 
designees, is the highest federal authority.  A majority of 
the members of the FSC must pass all federal legislation, and 
this majority must include the emirates of Abu Dhabi and 
Dubai, giving both emirates an effective veto over 
legislation. 
 
4.  (U) Local authorities have the right to legislate on 
affairs within their own emirates, providing that legislation 
does not contradict the constitution or federal law. 
Individual emirates also have the authority to implement 
federal law dealing with local matters. 
 
5.  (SBU) On November 2, 2004, the day of Sheikh Zayed,s 
death, the government announced a Cabinet shake-up bringing 
in younger, more reform-minded technocrats, as well as the 
first woman ever to serve in the Cabinet (see para 23).  We 
have seen a stable transition of power since Sheikh Zayed,s 
death and we expect President Khalifa will continue to 
promote the same foreign and economic policies as his father. 
 Sheikh Khalifa has pledged USD 680 million for development 
projects in the less developed northern emirates. 
 
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Economic Synopsis 
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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.  2004 GDP was approximately $85 billion, with a 
per capita GDP of more than $20,000.  Oil accounts for about 
30 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 2004 the U.S. exported $4 billion to the UAE 
and imported $1.1 billion in UAE goods.  With an estimated 
economic growth rate in 2004 of 6.6%, the UAE can be a growth 
market for U.S. exports in goods and services*particularly 
in the sectors of construction/engineering, information 
technology, and oil and financial services. 
 
7.  (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 first year after 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 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. 
 
8.  (U) There are sharp differences in the wealth of the 
various emirates.  The Emirate of Abu Dhabi owns over 90% of 
the oil and gas reserves in the UAE.  In 2002, Abu Dhabi's 
share of total GDP was about 58%.   Dubai, the commercial 
capital, produced the next largest share at 26.5% (estimated 
at 31.4% in 2004), followed by Sharjah at just under 10%. 
The four northern emirates are poorer, have fewer resources, 
and fewer economic opportunities. 
 
9.  (U) 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 Zakum offshore oil field. 
 
10.  (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 1998 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." 
 
11.  (U) UAE law limits foreign ownership of companies to 49% 
outside the free zones (Companies Law).  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 (Agencies Law). 
 
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Free Zones 
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12. (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 Companies law that requires all 
firms to be at least 51% owned 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.  Fourth, Dubai free zones are 
managed to Western standards, with reliable energy supplies, 
internet access, cargo facilities, and so on.  Finally, the 
free zones in Dubai have the advantage of being synergistic 
clusters of related-industry firms, such as Dubai Healthcare 
City and Dubai Internet City. 
 
13.  (U) From the perspective of a company interested in FDI 
in the UAE, there are two main downsides to free zones.  If a 
free zone wants to sell its products into the UAE, the Agency 
law requires it to find an Emirati distributor outside the 
free zone. The distributor basically &imports8 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. 
14. (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. 
Dubai has pioneered concepts such as Dubai Internet City (for 
IT firms) and the Dubai International Financial Center.  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. 
 
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Key Discussion Issues 
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15.  (SBU) Labor:  The current UAE Labor Law does not provide 
for labor unions, the right of association or collective 
bargaining, though collective labor dispute resolution is 
common.  In June 2004 the UAE Cabinet approved a memo calling 
for the establishment of labor unions.  The UAEG has 
committed to moving forward on developing labor unions that 
comply with ILO,s core labor standards, but the process will 
engender 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.  The UAE hopes that the new trade union law 
will be in effect by mid-2005. 
 
16.  (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 its 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.  A 
key question for the UAEG was the level and type of foreign 
participation that would be allowed. 
 
17.  (SBU) Camel Jockeys:  UAEG officials have committed to 
eliminating the use of underage foreign minors (under 15 
years of age) as camel jockeys through a new law expected in 
spring 2005, but abuse of these trafficked boys has 
persisted.  The presence and abuse of underage camel jockeys 
violates three core precepts of labor standards: child labor, 
forced/bonded labor, and work conditions.  Previous visitors 
have noted to UAE officials that a lack of enforcement of 
local laws is as damaging as a lack of laws. 
 
18.  (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 benefit 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 lose their income from agency relationships.  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. 
 
19.  (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 in the UAE, providing a 
feasibility study, and guaranteeing 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 UAE officials 
have said that they recognize that some changes will be a 
necessary part of FTA negotiations. 
 
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Bilateral FTA Clear Preference Over Regional FTA 
--------------------------------------------- --- 
20.  (SBU) Saudi Arabia,s opposition to Bahrain,s FTA with 
the United States has also put pressure on the UAE.  Senior 
UAEG officials have made it clear that the UAE intends to 
pursue bilateral trade agreements with the United States, 
regardless of GCC initiatives.  UAEG officials point to the 
GCC/EU FTA negotiations as a dead end.  Saudi pressure to 
stop the GCC states from pursuing bilateral FTAs with the US 
has had no effect on the UAEG, whose officials have pledged 
both publicly and privately to move ahead on the 
negotiations. 
 
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UAE Delegation Leaders 
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21.  (U) The UAE FTA Negotiations will be headed by Minister 
of State for Financial and Industrial Affairs, Dr. Mohammed 
Khalfan bin Khirbash and Minister of Economy and Planning 
Sheikha Lubna Al-Qasimi.  Their respective deputies are 
Khalid Al-Bustani and Abdulla Al-Saleh. 
 
22.  (SBU) Dr. Mohammed Khalfan bin Khirbash serves as de 
facto Minister of Finance.  He is a well-regarded reformer 
who appears to have the support of both the Abu Dhabi and the 
Dubai ruling families.  He is a big proponent of expanding 
the UAE,s trade relations internationally.  He is also 
Chairman of the Dubai Islamic Bank.  He completed a BA at 
Boston University and a Ph.D. in Economics from Exeter 
University. 
 
23.  (U) Sheikha Lubna Al-Qasimi is the first female 
minister.  Despite having achieved prominence in Dubai, 
Sheikha Lubna is actually a member of Sharjah Emirate,s 
ruling family.  In April 2000, Sheikh Mohammed bin Rashid (de 
facto ruler of Dubai) appointed Sheikha Lubna as Chief 
Executive Officer of Tejari.com, an online marketplace. 
Under her management, the company experienced quick growth. 
Sheikha Lubna holds a Bachelor of Science degree from 
California State University at Chico and an Executive MBA 
from the American University of Sharjah.  She frequently 
represents the UAE at international conferences, including 
last year,s Arab American Forum in Detroit where she led a 
delegation of UAE businesswomen. 
 
24. (U) Khalid Al-Bustani, Assistant Undersecretary for 
Revenue and Budget, is the main MinFin coordinator for the 
FTA.  He completed a BA at Boston University and has known 
Dr. Khirbash since high school.  He has an IT background and 
is responsible for preparing the UAE Federal Budget.  He 
speaks fluent English. 
 
25. (U) Abdulla Al-Saleh, Assistant Undersecretary for 
Economic Affairs and International Cooperation will be 
coordinating the Ministry of Economy,s role in the 
negotiations and the efforts of the negotiating groups led by 
that Ministry.  He served as the commercial attach in 
Washington and speaks fluent English. 
 
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Visit SIPR Net Website 
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24. (U) We encourage you to visit Embassy Abu Dhabi,s SIPR 
Net Website at www.state.sgov.gov/p/nea/abudhabi for more 
economic reporting. 
 
 
Sison 
SISON