US embassy cable - 05TUNIS1495

UNCLAS SECTION 01 OF 05 TUNIS 001495 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB AND NEA/MAG (LAWRENCE) 
STATE PLEASE PASS TO COMMERCE FOR ITA/MAC/ONE (DAVID ROTH) 
AND ADVOCACY CENTER (CHRIS JAMES), TO USTR (DOUG BELL), AND 
TO USPTO (MICHAEL ADLIN) 
CASABLANCA FOR FCS (GAIL DEL ROSAL) 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, TS, EFTA 
SUBJECT: USTR NOVELLI ADVANCES US-TUNISIA TRADE 
RELATIONSHIP THROUGH TIFA COUNCIL 
 
REF: A. TUNIS 898 (BOOZ ALLEN HAMILTON VISIT) 
 
     B. TUNIS 1238 (A/S LASH W/ JOUINI) 
     C. TUNIS 1257 (EVE OF TIFA/ECON REFORMS) 
 
1. (SBU) Summary.  Assistant Trade Representative Catherine 
Novelli, in Tunis June 14-15 for the second TIFA Council 
meeting, firmly emphasized to Minister of Development and 
International Cooperation Jouini that the U.S. wants to 
expand our free trade community and is working at a modest 
pace, but stressed that Tunisia would need to address 
comprehensive requirements for a Free Trade Agreement (FTA) 
and adapt its economic and legal framework before 
negotiations could begin.  Jouini noted that significant 
economic reform efforts were underway in Tunisia, but 
repeatedly expressed concern about job creation and export 
promotion, while spotlighting special sensitivities such as 
services and retail franchising. USG and GOT experts will 
form working groups to address specific differences on 
services, investment, intellectual property, and standards. 
End Summary. 
 
2. (SBU) During her two-day visit to Tunisia, Assistant U.S. 
Trade Representative Catherine Novelli delivered a frank and 
positive message to GOT and private sector representatives on 
free trade with the U.S.  Novelli and Minister Mohamed Nouiri 
Jouini (Ministry of Development and International 
Cooperation) led delegations through a day-long Trade and 
Investment Framework Agreement (TIFA) Council that 
systematically covered the Tunisian context and U.S. 
expectations for an FTA.  The main topics were services, 
investment, government procurement, customs, intellectual 
property, and market access.  This was the second TIFA 
Council since the TIFA was signed in October 2002; the first 
Council was in Washington in October 2003. 
 
3. (SBU) While the Tunisians showed no immediate intent to 
depart from their current, gradual approach to economic 
reform, Novelli's comprehensive enumeration of FTA 
requirements (and the benefits of adopting them) helped frame 
the GOT's responsive rhetoric positively toward international 
economic integration.  Throughout her discussions, Novelli 
stressed the benefits from regional integration as envisioned 
in the Middle East Free Trade Area, and articulated the 
desire to see Tunisia play a leadership role in realizing 
that objective.  Minister Jouini spoke frankly about the 
current state of Tunisia's economic landscape and the 
challenges that lie ahead and expressed hope that the gap 
between our trade and investment issues will be narrowed. 
 
Economic Overview: Employment is Number One 
------------------------------------------- 
4. (SBU) In his introductory overview of the economy, Jouini 
expressed concern about Tunisia's official unemployment rate 
(currently 14-plus percent).  He noted that "all countries of 
the region are converging toward the same economic model to 
attract foreign investment with export-led growth" and that 
competition is increasing.  Jouini desires greater engagement 
with the U.S. that can help address Tunisian concerns in 
practical ways. Jouini noted that Tunisia, as a small 
country, must exploit "niches" where Tunisia's comparative 
labor advantages might find new markets. 
 
5. (SBU) Jouini summarized Tunisia's economic situation and 
successes, but expressed concern that globalization has 
resulted in highly-competitive, rapid-response businesses 
that, for example, threaten the destruction of Tunisia's 
textile sector, which has reportedly lost 50,000 jobs since 
January 2005.  He also outlined continued privatization of 
state-owned enterprises, increasing investment in research 
and development, improving the banking system, and 
liberalizing the services sector as particular challenges 
ahead.  Jouini also noted the heavy dependence on the 
European Union, which accounts for 80 percent of Tunisia's 
trade, for both imports and exports.  Tunisia will eliminate 
tariffs with the EU on manufactured items by 2008; Novelli 
noted that Tunisia's heavy lifting in this regard would mean 
that expanding those reforms to encompass U.S. interests 
would be a far less challenging endeavor. 
 
Services 
-------- 
6. (SBU) Discussions indicated that services could remain 
problematic for some time, especially for retail 
establishments.  Jouini noted that Tunisia had met the 
WTO-agreed May 31, 2005, deadline for the submission of WTO 
services offers, but that the issue remains contentious. 
According to Jouini, the EU and Tunisia had intended to begin 
negotiations on services in 2003, but have yet to do so 
because Tunisia opposes the EU's attempt to frame the issue 
within an approach covering the Mediterranean region.  Jouini 
stated that he does not believe the region is ready to open 
up under a collective agreement on services, nor that Tunisia 
has the resources to invest abroad.  Tunisia's expatriate 
workforce is provider of "services" and a form of external 
investment abroad, therefore according to Jouini, the 
"movement of natural persons and population flows" should be 
included into the trade and investment dialogue, though he 
acknowledged that security and immigration are also factors 
under this topic. 
 
7. (SBU) Novelli suggested that opening up financial and 
banking services might provide a much needed jump start to 
the Tunisian economy and explained how a "negative list" 
approach (opening of all services, except for limited 
exceptions) would guide FTA negotiations with the U.S. 
Jouini responded that foreign banks are permitted in Tunisia 
under Tunisia's Universal Banking Law of 2001.  Novelli asked 
whether banks may enter under any form, but Jouini cautioned 
he would have to verify that.  He then shifted direction by 
noting that Tunisia still suffers from a glut of banks that 
are still in the process of consolidation and weaning from 
full or partial state ownership. 
 
8. (SBU) Jouini detailed a list of services where foreign 
investment is restricted or which are subject to "case by 
case" authorization from the Ministry of Commerce.  The list 
of restricted services is long and, effectively closure is 
the norm and opening the exception.  Professional services 
(doctors, lawyers, engineers) require Tunisian nationality. 
Advertising, telecommunications, education, venture capital, 
insurance, and retail distribution all require prior approval 
to enter.  Jouini claimed in slightly different terms that 
anticipated negative "social impact" has mandated the 
current, restrictive approach to opening these sectors. 
 
9. (SBU) Jouini explained that Tunisian nationality is also 
still required for top management positions at banks or 
universities.  Novelli took issue with Tunisia's limitation 
of senior foreign management which requires authorization by 
the Ministry of Employment to exceed 4 foreign executives. 
Jouini indicated that the GOT will alter laws in the near 
term to permit foreign executive presence to be a percentage 
of total employees, but Jouini did not provide this 
percentage. 
 
Investment: Some Stirrings of Opening 
-------------------------------------- 
10. (SBU) Jouini highlighted the positive developments 
occurring with private sector entrants into mobile telephone 
operations and envisioned more overall investment as Tunisia 
strives to attain 66 percent private sector contribution to 
GDP.  Jouini suggested that further private investment will 
occur in the energy and banking sectors in the near term. 
The energy sector is open to foreign investment for 
production (especially oil and gas), although distribution of 
electricity remains under the state monopoly, STEG.  For 
manufacturing industries (currently clumped into exporting 
and non-exporting categories with differential treatment), 
Jouini advised that the GOT intends to eliminate the 
distinction between onshore and offshore companies by 2009. 
 
11. (SBU) Despite this, investing in Tunisia remains very 
restricted, with the only significant, unrestricted 
investment allowed in manufacturing industries that directly 
create jobs.  The retail sector limits foreign ownership to 
49 percent, which is subject to screening processes run by 
the Ministry of Commerce.  Effectively, the GOT analyses 
foreign investment based on the sector, then uses 
"economic/social impact" criteria in determining whether to 
grant "authorization" to participate, though there are no 
written regulations guiding this process.  Novelli contended 
that such an "authorization" process can be used to create 
"performance requirements" that are not transparent and which 
raise significant questions regarding actual implementation. 
 
12. (SBU) Novelli responded favorably to the positive steps 
Tunisia is taking to encourage greater foreign investment, 
but advised that such pre-screening and limits on foreign 
ownership and management are antithetical to FTA norms and 
that a significant overhaul of Tunisia's approach would still 
be required.  According to Jouini, the Tunisian legal 
framework does not address franchising rights or procedures 
for handling them as separate legal constructs; thus, 
franchises are treated as an investment issue subject to the 
above stipulations.  Novelli noted the absence of U.S 
franchises in Tunisia and said that clearly more must be done 
to address this issue for further progress in discussions on 
investment. 
 
13. (SBU) Novelli raised investment problems for a U.S. 
company subsidiary, EnerCiel, which is seeking to develop 
renewable wind energy projects here (see reftels for more 
background).  Jouini pledged that EnerCiel's landlease would 
be reinstated and honored, though he noted the problem has a 
complicated genesis.  Jouini also pledged to resolve the 
dispute by bringing EnerCiel and STEG together at his 
Ministry. 
 
Intellectual Property Rights 
---------------------------- 
14. (SBU) Novelli introduced the topic of intellectual 
property by noting that the rapid evolution of technology has 
raised many new issues since the WTO's inception and its 
Agreement on Trade-Related Aspects of Intellectual Property 
Rights (TRIPs).  Therefore, Novelli explained that U.S. FTAs 
require provisions considered "TRIPs-plus" to cover advances 
in intellectual property protections and enforcement that 
have become part of contemporary international practices. 
Novelli outlined the "national treatment" concept to protect 
all creators of intellectual property, without regard to 
author's nationality, and indicated this would be an 
important issue to address. 
 
15. (SBU) Patents.  Novelli also firmly advised the Tunisian 
side that it must bolster its protections against "unfair 
commercial use" (TRIPs Art. 39.3) of marketing and licensing 
materials.  She encouraged the GOT to protect more 
effectively research and development in patent fields, such 
as pharmacology and biotechnology and noted that the USG 
would be following Tunisia's commitments to Art. 39.3 through 
the annual Special 301 interagency review process. 
 
16. (SBU) Novelli encouraged the GOT to adopt the WIPO 
Copyright and Performances and Phonograms treaties to come 
into fuller compliance with international standards.  The 
Tunisian side admitted that, while not yet adopted, these 
treaties were currently under consideration at the Ministry 
of Culture.  The Tunisian delegation also stated that 
Tunisia's Law 36-1994 is applicable and extends by logical 
deduction to copyrightable works, including those on the 
internet and thus the failure to ratify these treaties was 
not determinative or a bar to effective enforcement. 
 
17. (SBU) Finally, Novelli raised the growing incidence of 
software piracy in Tunisia, citing a recent Business Software 
Alliance report that claims 84 percent of all software in 
Tunisia is pirated.  Jouini and team sought to explain this 
by arguing that both government and private sector bear 
responsibility for policing piracy and that government should 
not be expected to enforce if industry was not bringing 
infractions to the government's attention.  The Tunisian side 
also stated that piracy is a global phenomenon that countries 
like Tunisia are ill-equipped to deal with. 
 
Market Access 
------------- 
18. (SBU) The Tunisian side noted that U.S. imports are a 
mere 2 percent of total Tunisian imports.  For Tunisian 
exporters, the U.S. Generalized System of Preferences (GSP), 
which excludes most textiles from preferred tariffs, poses 
difficulties.  The Tunisian delegation also noted 
difficulties in shifting from European product "standards" to 
U.S. ones, and requested USG technical assistance. 
 
19. (SBU) Tariffs.  GOT interlocutors noted that Tunisia is 
guiding its general tariff policy under WTO 
tariff-elimination goals, but is currently preoccupied with 
bringing its applied tariff rates into line with EU rates. 
Jouini's team indicated that Tunisia's trade agreement with 
the EU, however, only covers manufactured goods, and not, for 
example, agricultural products.  Tunisia's agricultural 
sector employs approximately 22 percent of the workforce. 
Novelli noted that certain transition periods can be 
negotiated for a limited number of products or sectors from 
both sides in any U.S. FTA. 
 
Other Issues 
------------ 
20. (SBU) Government Procurement.  Novelli raised government 
procurement and decision appeals for aggrieved bidders as an 
area where improvement could also be made.  Jouini stated 
that all Tunisian public tenders are awarded on a competitive 
basis and the GOT enacted legislation in Decree #2003-1638 of 
August 2003 to bring Tunisian practices and procedures to 
international standards.  Jouini also noted that sole-source 
government contracting is not permitted by Tunisian law, 
except where the contractee holds a monopolistic position. 
 
21. (SBU) Customs.  Novelli explained FTA requirements on 
customs cooperation, transparency, and the current U.S. 
position on rules of origin.  Ministry of Commerce expert 
Khadija Chaloul digressed into micro-detail on rules of 
origin and what constitutes "sufficient transformation", also 
noting specific criteria that depend on type of product. 
Novelli suggested that given Chaloul's expertise these topics 
would best be left for more detailed expert discussions later. 
 
22. (SBU) Labor and Environment.  Novelli laid out FTA 
requirements for "effective enforcement of existing labor and 
environmental laws" as they affect bilateral trade.  Jouini 
foresaw no major issues in this regard, noting Tunisia's 
long-standing tradition of labor rights and significant 
spending on environmental protection, which he cited at 1.5 
percent of GDP.  Novelli also emphasized throughout the day 
that "transparency" and the existence of a clear channel for 
public comment on law and regulation procedures are woven 
throughout an FTA and its underlying principles and should be 
better addressed by the GOT. 
 
Conclusion/Technical Assistance 
------------------------------- 
23. (SBU) Novelli and Jouini agreed to establish formal 
working groups on services, investment, intellectual 
property, market access and standards to refine issues and 
study gaps between systems, as well as to create better 
understanding of where USG technical assistance might help 
bridge those gaps.  One particular request for technical 
assistance was in the area of "standards," specifically how 
Tunisian products targeted primarily for European markets 
could be adapted to conform with U.S. market standards.  The 
Tunisians have also previously expressed interest in 
additional information on franchising practices and benefits 
(ref B). 
 
Outside meetings with Private sector 
------------------------------------ 
24. (SBU) Novelli addressed three separate, private sector 
audiences on June 14.  Fifty members of the Tunisian American 
Chamber of Commerce (TACC) expressed their generally strong 
support for USG engagement with the Tunisian government to 
spur economic growth through small and medium-sized company 
entrepreneurial initiatives, as many of the local Chamber 
members are part of that community.  Novelli also spoke to a 
forty-person group from Tunisia's key exporting sectors, 
including textiles, agriculture, and manufacturing, to inform 
Tunisian stakeholders of FTA benefits and commitments, and to 
seek greater understanding for local industrial concerns. 
Finally, the Arab Institute of Business Leaders (a local 
think-tank) hosted a small private dinner for the U.S. 
delegation.  At this event, President Chekib Nouira of 
Tunisia's leading private bank, the Bank Internationale Arabe 
de Tunisie, questioned whether U.S. business would not 
essentially devour Tunisia's economic interests if the 
economy opened more rapidly.  Other business leaders however 
were quietly more positive on Tunisia's opening to the U.S. 
 
Comment and Recommendation 
-------------------------- 
25. (SBU) Assistant U.S. Trade Representative Novelli,s 
visit sparked renewed interest regarding enhancing economic 
liberalization, the process of international regional 
integration, and whether the pace it has set should be 
accelerated.  Novelli,s visit clearly helped define some key 
areas where we can expect resistance from the Tunisians and 
highlighted areas where less work will be needed. 
 
26. (SBU) The GOT is balancing the near-term costs of 
economic reform with the necessity of staying competitive in 
a global context and providing a counterweight to its 
economic dependence on the EU.  Thus, while agreeing to the 
principles of open trade and investment, the GOT nonetheless 
emphasizes the virtues of maintaining a deliberate pace on 
key reforms.  Restrictions on foreign ownership of retail 
services, franchises, education and several other key sectors 
of the economy will likely remain very resistant to near-term 
liberalization.  Major reform of customs procedures will 
continue to be difficult, as it is a bureaucracy that appears 
resistant to reform and subject to arbitrary practices, as 
well as anecdotally implicated in Tunisia's burgeoning black 
market economy.  Tunisia has some serious gaps regarding 
protection of intellectual property, whether due to the 
magnitude of the problem or due to a lack of understanding of 
the benefits derived from a robust intellectual property 
regime.  The will to enforce IPR norms in Tunisia is still in 
its infancy.  Agriculture will remain a high hurdle to 
overcome, and it is likely the Tunisians would seek long 
transition periods in this sector. 
 
27. (SBU) We note that telecommunications and 
technology-related industries clearly offer opportunities for 
more accelerated liberalization, as the GOT has emphasized 
its urgent need to create jobs in that sector.  Foreign 
ownership of IT businesses, unlike retail, is less prone to 
displacing existing owners or workers and is thus more likely 
to follow manufacturing, a virtually open sector.  Our 
engagement with technical assistance programs--such as the 
U.S. Patent and Trademark Office--on intellectual property 
enforcement could be accelerated to support this trend. 
HUDSON