Proposed U.S.-Bahrain Free Trade Agreement
U.S.-Bahrain Free Trade Agreement
Martin A. Weiss
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
U.S. Trade Representative Robert B. Zoellick signed the U.S.-Bahrain Free Trade
Agreement (FTA) on September 14, 2004. The implementing legislation was passed by
the House on December 7, 2005, and passed by the Senate and cleared for the White
House on December 13, 2005. The agreement was signed into law by the President on
January 11, 2006, as the United States-Bahrain Free Trade Agreement Implementation
Act (P.L. 109-169).
Under the agreement, all bilateral trade in consumer and industrial goods will be
duty free and 98% of U.S. agricultural exports will be duty free. The FTA is to support
economic reform, both within Bahrain, and throughout the Middle East. This report will
be updated as events warrant. For more information on Bahrain’s politics, security, and
US policy, see CRS Report 95-1013, Bahrain: Reform, Security, and U.S. Policy, by
Kenneth Katzman.
Introduction
On September 14, 2004, U.S. Trade Representative Robert B. Zoellick signed a free
trade agreement (FTA) between Bahrain and the United States. Formal negotiations were
launched in Manama, Bahrain on January 26, 2004, and were completed on May 27,
2004. The House Ways and Means Committee approved draft legislation implementing
the agreement on November 3, 2005, with no amendments. Following approval of the
draft legislation by the Senate Finance Committee on November 9, the Administration
submitted implementing legislation (S. 2027/H.R. 4340) on November 16. Formal
approval of the implementing legislation was given in separate votes by the House Ways
and Means Committee and the Senate Finance Committee on November 18. The
implementing legislation was passed by the House on December 7 and passed by the
Senate and cleared for the White House on December 13. The agreement was signed into
law by the President on January 11, 2006, as the United States-Bahrain Free Trade
Agreement Implementation Act (P.L. 109-169).
The agreement entered into force on August 1, 2006, following the passage of
legislation in Bahrain providing increased intellectual property rights (IPR) protection.
According to the Bahrain-based Gulf Daily News, six new IPR laws were passed by both
houses of Bahrain’s parliament.1 The agreement entered into force following approval
of the new laws by King Hamad bin Isa Al Khalifa.
In the United States, the AFL/CIO provided the only significant opposition to the
Agreement. Some House Democrats expressed labor concerns during the November 3rd
vote but eventually supported the agreement after receiving assurances from the Bahraini
government that they would make progress on new legislation offering additional labor
protections. The FTA is supported by the National Association of Manufacturers, the
Bankers’ Association for Finance and Trade, the Motion Picture Association of America,
and PhRMA, the association of pharmaceutical manufacturers, among other groups.2
There has been some dissent in the Middle East region over the U.S.-Bahrain FTA.
Saudi Arabia, a member of the Gulf Co-operation Council (GCC),3 has alleged that GCC
countries that sign bilateral trade agreements with the United States violate a GCC
economic agreement that members cannot grant greater trade preferences to non-GCC
countries. According to press reports, Saudi Arabia has threatened imposing a 5% duty
on any U.S. goods that are imported into the GCC and then exported to Saudi Arabia.
According to one source, Saudi Arabia may be concerned that U.S. agricultural products,
especially wheat, may be exported to Saudi Arabia via other GCC countries such as
Bahrain. Bahrain officials have argued that Saudi Arabia has not contested other bilateral
FTAs that Bahrain has signed, and alleges that Saudi Arabia’s complaints are political,
not economic, in nature.4
Domestically, some analysts have raised concern that the U.S. government strategy
of completing FTAs with countries such as Bahrain, whose U.S. trade is relatively small,
is not necessarily the best use of USTR’s resources.5 Others argue that the USTR should
be investing more resources into potentially more economically significant agreements
such as the proposed Free Trade Area of the Americas (FTAA). The Administration
contends that its FTA agreements are effective as building blocks to future agreements
and increased political and economic reform.
Why Bahrain?
Many attribute Bahrain’s selection as the first U.S. free trade agreement in the
Persian Gulf to (1) the strong U.S.-Bahrain political military relationship, and (2)
1 Mohammed Al A’Ali, “FTA clears last hurdle with Shura go-ahead”, Gulf Daily News, May 9,
2 Elizabeth Becker, “U.S. and Bahrain Reach a Free Trade Agreement,” New York Times, May
3 Other GCC members are Bahrain, Oman, the United Arab Emirates (UAE), Kuwait, and Qatar
4 “Saudi Arabia Threatens Tariff Hikes in Retaliation for U.S. Middle East FTAs,” Inside U.S.
Trade, January 28, 2005.
5 See General Accounting Office (GAO) Report, GAO-04-233 International Trade, Intensifying
Free Trade Negotiating Agenda Calls for Better Allocation of Staff and Resources, January 2004.
political and economic reform in Bahrain. This FTA is intended to be a building block
for President Bush and Congress’s Middle East free trade initiatives.6
U.S.-Bahrain Political/Military Relationship. Bahrain is a close U.S. partner
in the Persian Gulf. It consists of 35 islands along the Persian Gulf between the east coast
of Saudi Arabia and Qatar along the Persian Gulf. Virtually its entire domestic population
of 667,000 is Muslim (70 % Shi’a/30% Sunni). It is a constitutional monarchy, ruled by
the al-Khalifa family since 1783.
Bahrain has hosted a U.S. military presence since World War II. It currently hosts
the Fifth Fleet, which is the headquarters for the U.S. Persian Gulf naval forces. The Fifth
Fleet headquarters is a command and administrative facility only; no U.S. warships are
actually based in Bahrain’s ports. In October 2001, Bahrain was designated a Major Non-
NATO Ally (MNNA).7 Bahrain endorsed the U.S. campaign in Afghanistan and deployed
a frigate to support allied operations during Operation Enduring Freedom. While Bahrain
did not endorse the Iraq campaign, King al-Khalifa did not criticize it.
Political Reform and the Bahraini Economy. King al-Khalifa, installed in
1999, has pushed for political and economic liberalization. In February 2001, Bahraini
voters approved a referendum on the National Action Charter — the centerpiece of the
King’s political liberalization program. Since then, parliamentary elections have been
held (October 2002), and in December 2002, the first legislative session since 1975 took
place.
Oil was discovered in Bahrain in 1932 by Standard Oil Company of California.
Current production is around 40,000 barrels per day (b/d). The Bahrain National Gas
Company operates a gas liquification plant that utilizes gas piped directly from Bahrain’s
oilfields. Gas reserves should last about 50 years at present rates of consumption.
Revenues from oil and natural gas currently account for 16.5% of GDP and provide about
60% of government income. Among the Cooperation Council of the Arab States of the
Gulf (GCC) — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab
Emirates — Bahrain has the smallest proven oil reserves. The International Monetary
Fund (IMF) estimates that Bahrain will run out of petroleum in 2018 if pumping continues
at current levels.8 Bahrain and Saudi Arabia share ownership of the Abu Saafa oilfield,
and since 1997, Saudi Arabia has given Bahrain the entire proceeds of the 140,000 b/d
field.
6 See CRS Report RL32335, Middle East Trade Initiatives: S. 1121/H.R. 2267 and the
Administration’s Plan, by Mary Jane Bolle.
7 MNNA Status does not entail the same mutual defense and security guarantees afforded to
North Atlantic Treaty Organization (NATO) members. Title 10 U.S. Code Section 2350a
authorizes the Secretary of Defense, with the concurrence of the Secretary of State, to designate
MNNAs for purposes of participating with the Department of Defense (DOD) in cooperative
research and development programs. Section 517 of the Foreign Assistance Act of 1961 (FAA),
as amended, authorizes the President to designate a country as a MNNA after 30-days notification
to Congress, for purposes of the FAA and the Arms Export Control Act (AECA).
8 Ugo Fasano and Zubair Iqbal, GCC Countries: From Oil Dependence to Diversification,
International Monetary Fund, 2003.
Financial institutions operate in Bahrain, both offshore and onshore,9 without
impediments, and the financial sector is currently the second largest contributor to GDP.
There are no restrictions on capital flows. More than 100 offshore banking units and
representative offices are located in Bahrain, as well as 65 American firms. In the past
two years, Bahrain has passed laws liberalizing foreign property ownership and tightening
its anti-money laundering laws.
Bahrain is the United States’ 88th largest goods export market. In 2005, U.S. exports
to Bahrain were $351 million, up 16.2% from 2004. Aircraft, miscellaneous
manufactures and agricultural products account for the majority of U.S. exports. U.S.
imports from Bahrain in 2005 were $432 million, a 6.5% increase from 2004. Since
tariffs between the United States and Bahrain are already low, the USTR estimates that
the FTA will have little effect on U.S. imports from Bahrain.
As a member of the Arab League, trade between Bahrain and Israel is technically
subject to the Arab League boycott of Israel.10 However, in the case of Bahrain, the
boycott is not strictly enforced and of little commercial significance. The Arab League
boycott of Israel was raised at a June 2003 joint press conference by USTR Robert
Zoellick and Bahraini Minister of Finance Abdullah Saif. Both Ambassador Zoellick and
Minister Saif stressed that Bahrain was a member in good standing of the WTO, which
does not permit boycotts of any kind. Nonetheless, neither specifically addressed if
Bahrain would officially remove itself from the boycott.11 In September 2005, Bahrain
announced that it will make efforts to remove the boycott. According to Bahrain’s
Treasurer, Ahmed bin Mohammed Al-Khalifa, “Bahrain recognizes the need to withdraw
the primary boycott against Israel and is developing the means to achieve this.”12
Promoting Middle Eastern Economic Reform. In May 2003, President Bush
announced his goal of creating a free trade area of the Middle East by 2013, by
accumulating bilateral agreements with individual countries in the region. A Middle East
Free Trade Area (MEFTA) is an Administration strategy to create a free trade area among
the United States has FTAs in force with Bahrain, Jordan, Morocco, and Israel. The13
proposed MEFTA plan was announced by President Bush on May 9, 2003. The United
States also plans to expand its network of trade and investment framework agreements14
(TIFAs) and bilateral investment treaties (BITs) throughout the region.
9 Onshore financing is the provision of financial services to residents, offshore finance is the
provision to non-residents.
10 CRS Report RL33961, Arab League Boycott of Israel, by Martin A. Weiss.
11 In September 1994, Bahrain and the other five Persian Gulf monarchies agreed to stop
enforcing the secondary and tertiary boycotts while retaining the primary (direct) boycott.
12 Yoav Stern, “Bahrain tells U.S. it is repealing anti-Israel boycott,” Haaretz Online, September
13 CRS Report RL32638: Middle East Free Trade Area: Progress Report, by Mary Jane Bolle.
14 Office of the United States Trade Representative, “Middle East Trade Initiative: Trade Facts,”
June 23, 2003.
Key Provisions15
The FTA negotiations included thirteen working groups: Services, Financial
Services, Telecommunications and E-Commerce, Sanitary and Phytosanitary Measures
(SPS), Environment, Government Procurement, Legal, Technical Barriers to Trade
(TBT), Customs, Market Access (both industrial and agricultural products), Intellectual
Property Rights (IPR), Textiles, and Labor.
The FTA eliminates tariffs on all consumer and industrial products. For agricultural
products, 98% of U.S. exports to Bahrain are now duty free, with 10-year phase-outs for
the remaining items. Textiles and apparel trade will be duty free immediately if the
product contains either U.S. or Bahraini yarn. A temporary transitional allowance would
allow duty free trade in products that do not yet meet these standards.
Services. According to the USTR, the agreement provides U.S. firms among the
highest degree of access to service markets of any U.S. FTA to date. Key services sectors
covered by the agreement include audiovisual, express delivery, telecommunications,
computer and related services, distribution, healthcare, services incidental to mining,
construction, architecture and engineering. U.S. financial service suppliers will have the
right to establish subsidiaries, branches, and joint ventures in Bahrain and enjoy the
benefits of strong regulatory transparency, including prior notice and comment and license
approval within 120 days. For life and medical insurance, Bahrain agreed to allow access
upon entry into force of the Agreement, and for non-life insurance will allow access
within six months after entry into force of the Agreement. Bahrain has agreed that in
revising its insurance laws and regulations, it will not discriminate against U.S. insurance
suppliers and will allow existing insurance suppliers to continue current business
activities.
The agreement underscores Bahrain’s open and developed financial sector, which
includes both conventional and Islamic financial services. Bahrain will allow U.S.-based
firms to offer services cross-border to Bahrainis in areas such as financial information and
data processing, and financial advisory services. Bahrain will also allow U.S.-based asset
managers (including insurance companies) to manage the portfolios of collective
investment schemes established in Bahrain.
Under the FTA, each government agreed that users of the telecom network will have
reasonable and nondiscriminatory access to the network, preventing local firms from
having preferential or “first right” of access to telecom networks. U.S. phone companies
will have the right to interconnect with former monopoly networks in Bahrain at
nondiscriminatory, cost-based rates, and will be able to build a physical network in
Bahrain with nondiscriminatory access to key facilities, such as telephone switches and
submarine cable landing stations.
Intellectual Property Rights (IPR). The Agreement requires each government
to criminalize end-user piracy, providing strong deterrence against piracy and
counterfeiting. Each government commits to having and maintaining authority to seize,
15 Office of the United States Trade Representative, “Free Trade With Bahrain: Trade Facts,”
May 27, 2004.
forfeit, and destroy counterfeit and pirated goods and the equipment used to produce
them. IPR laws will be enforced against goods-in-transit, to deter violators from using
U.S. or Bahraini ports or free-trade zones to traffic in pirated products. Ex officio action
may be taken in border and criminal IPR cases, thus providing more effective
enforcement. The Agreement mandates both statutory and actual damages under Bahraini
law for IPR violations, which will deter piracy. Under these provisions, monetary
damages can be awarded even if actual economic harm (retail value, profits made by
violators) cannot be determined.
According to both countries, the intellectual property chapter does not “affect the
ability of either Party to take necessary measures to protect public health by promoting
access to medicines for all, in particular concerning cases such as HIV/AIDS,
tuberculosis, malaria, and other epidemics as well as circumstances of extreme urgency
or national emergency.” The FTA also expressly states that it will not prevent effective
utilization of the 2003 WTO consensus allowing developing countries that lack
pharmaceutical manufacturing capacity to import drugs under compulsory licenses.16
Workers Rights. According to the Bush Administration, the agreement fully
meets the labor objectives set out by the Congress. Labor obligations are part of the core
text of the Agreement. Each government commits to strive to ensure that its laws provide
for labor standards consistent with internationally recognized labor rights. The
Agreement includes a cooperative mechanism to promote respect for the principles
embodied in the ILO Declaration on Fundamental Principles and Rights at Work, and
compliance with ILO Convention 182 on the Worst Forms of Child Labor. The labor
ministries, together with other appropriate agencies, agree to establish priorities and
develop specific cooperative activities.
Labor rights have been arguably the only major area of contention. Several Members
of Congress and the AFL-CIO have criticized Bahrain for not making enough advances
in reforming its labor laws. Issues of concern include a ban on workers in the same
company forming more than one union, laws regarding penalties for anti-union
discrimination, the ability of companies to withhold foreign workers’ salaries for up to
three months, and restrictions on unions calling strikes. However, Bahrain has
introduced reforms and recently agreed to apply International Labor Organization (ILO)17
and to introduce labor law changes to make its laws fully ILO-consistent.
16 Office of the United States Trade Representative, “U.S.-Bahrain FTA: Fact Sheet on Access
to Medicines,” September 14, 2004.
17 Washington Trade Daily, November 17, 2006.