Published in the February 2009 issue of Business Today
Taimur Malik
The US-Oman Free Trade Agreement (FTA) came into force on January 1, 2009. FTA contains trade facilitation measures for increasing the movement of goods and the provision of services between Oman and the US. It includes investment provisions intended to strengthen protections for investors of either country operating in the other country.
FTA also includes provisions on safeguards, intellectual property rights, government procurement, labour, environment, and dispute settlement to improve the regulatory climate for bilateral trade and investment between the two countries. This article aims to provide an overview of the various features of FTA, highlight the important benefits and implications and raise pertinent questions regarding various aspects of its implementation.
General benefits
There are high hopes on both sides about the benefits of FTA. At a seminar held recently at the Oman Chamber of Commerce & Industry, H E Maqbool bin Ali Sultan, Minister of Commerce & Industry, said that “the pact would result in significant benefits to the sultanate’s economy by virtue of its guarantee of duty free access and preferential treatment to bilateral trade and investment”. One of the expected benefits of FTA is that its implementation will act to improve Oman’s competitiveness within the region.
Cross-border trade in services
FTA guarantees national and most favoured nation treatment for services relating to cross-border trade in services such as the production, distribution, marketing, sale and delivery of a service. It implies that each country shall accord to service suppliers of the other country treatment no less favourable than that it accords, in like circumstances, to its own service suppliers.
Government procurement
The provisions relating to government procurement reflect the WTO Agreement on Government Procurement. FTA imposes an obligation of non-discrimination in the case of procurement by the entities of either government.
FTA provides that in respect of any ‘covered procurement’, each country shall accord national treatment to the goods and services of the other country and to the suppliers of the other country. A minimum figure in terms of the value of the procurement (US$260,000 in the case of Oman) has also been specified by FTA and any procurement below that value does not qualify as a ‘covered procurement’.
Investment conditions
FTA incorporates important investor protections including freedom from performance requirements, free repatriation of capital and protections related to expropriation and fair and equitable treatment. The investment chapter also includes an investor-state dispute settlement mechanism. Under FTA, the limits on foreign equity ownership in Oman would not apply to the US investors (with a few exceptions), as they would be accorded the same treatment as Omani investors in most respects.
Financial services
FTA aims to enhance the participation of financial institutions of the two countries in both economies and provides, inter alia, that the countries would be required to permit a financial institution of the other state to provide new financial services that it permits its own domestic institutions to provide without additional legislative action.
Custom duties
Under the terms of FTA, the US has undertaken to eliminate duties on all items, most of them immediately upon entry into force of FTA, and a few after the transitional period. Oman will provide immediate duty free access for most US items as well. However, duties on products such as vegetables shall be reduced in five equal annual stages and on certain products including dates, lemons and tobacco over a period of ten years.
It is expected that this preferential tariff treatment will result in increased Omani exports to the US and also encourage foreign investment in Oman by investors wishing to export goods to the US and take advantage of the preferential tariff.
Rules of origin
FTA has a detailed chapter on the rules of origin with provisions including those relating to what constitutes an ‘originating good’ and requirements for importation. The rules of origin are essential determining factors for imports to qualify for preferential tariff treatment under FTA.
Textile sector
FTA provides duty free access for textiles and apparel products as long as they satisfy the relevant rules of origin requirements. The Omani textile industry is likely to benefit from this move especially since the US has agreed to allow duty free imports of an annual total quantity of 50mn square meters for the next ten years, even if the rules of origin requirements are not completely fulfilled.
Safeguards
FTA includes a separate chapter on safeguards and provides necessary protection for local industries by either country. FTA allows either country to suspend the further reduction of any rate of custom duty on a good or increase the rate of customs duty to a certain level.The chapter also provides provisions relating to the conditions and limitations on the application of a safeguard measure as well as the compensation to be provided by the country applying the safeguard measure to the other country.
Dispute settlement
An important feature of FTA is the comprehensive dispute resolution mechanism provided in a separate chapter and under the chapters relating to investment and finance. The dispute resolution mechanism provides the investors with an option of forum shopping to choose the forum of dispute settlement best suited to them in the particular situation. The forum may include the choices available under the WTO agreement, FTA or any other relevant agreement or treaty.
The investor-state dispute resolution section in the investment chapter provides that in the event of an investment dispute the parties should initially seek to resolve the dispute through consultation and negotiation failing which the matter may be submitted for arbitration. The preference is clearly towards arbitration under the ICSID Convention.
ICSID was established by the Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965). The purpose of the Convention, prepared under the auspices of the World Bank, was to provide a special forum for the settlement of investment disputes in order to encourage foreign investment and world development.
ICSID arbitration by definition involves a state party and so the rules are based on the assumption that no state can invoke its sovereign immunity in order to challenge the jurisdiction of the tribunal.
Issues to be addressed
There are many issues which will need to be addressed in the coming months and years. These would include the assessment and analysis of the existing laws and regulations to undertake any necessary amendments to them in order to fulfil commitments made under FTA.
Other pertinent questions will also need to be resolved such as whether the minimum capital requirement of RO150,000 for an LLC with foreign shareholding will apply to the US investors establishing companies in Oman or whether the minimum capital threshold will now be RO20,000 for the US investors since the higher capital requirement will be contrary to the national treatment provisions of FTA.
Moreover, Omani authorities and negotiating teams would now need to carefully assess the advantages when granting concessions or preferential treatment to another country under any agreement since the application of the ‘most favoured nation’ treatment would mean that the US investors would be able to claim the same treatment if it is more favourable.
The US investors with shareholding in Omani companies will need to undertake an analysis of FTA and its impact on their businesses in order to benefit from this new preferential regime of rules.
Omani industries will need to maintain and undertake regular data analysis to foresee any threat of serious injury to their industry as a result of FTA and be aware of the process for the application of safeguard measures by Oman, if necessary, during the transition period and beyond. It remains to be seen whether this FTA will have any impact on regional GCC trade with respect to Oman.
If foreign and local investors set-up industries producing value added Omani products to gain access to the US market, the same products may also qualify for preferential treatment and export to other GCC countries.
The interpretation, classification and application of the rules of origin are also likely to lead to further discussions and deliberations. The Omanisation targets will remain very high for US companies and investors as well and specific provisions have been incorporated in FTA in this respect.
Awareness of the dispute resolution mechanisms and understanding of the ICSID arbitration procedures will be essential for Omani businesses operating in the US as well as Omani government entities doing business with the US companies. In the wake of FTA provisions relating to government procurement, government entities would now need to be aware of the procurement and tendering obligations and requirements provided in FTA and adjust their internal procedures accordingly.
Generally, businesses and individuals in all sectors of the economy would need to be aware of the rights available to US investors and obligations of non-discrimination and national treatment. At the same time, they need to be conscious of the goods and services that are on the negative list and remain off limits for the US investors and suppliers.
The way forward
According to a study published in November 2007 by Booz Allen Hamilton “these opportunities will not materialise simply from the ratification and implementation of FTA by both the countries. Rather, implementation of FTA creates a context for liberalisation that places these opportunities within reach”.
It will take some time before the provisions of FTA can be fully implemented and the impact of the same can be measured. Nonetheless, it presents new challenges and opportunities for local businesses and foreign investment in Oman and the stakeholders need to prepare themselves to benefit from FTA. The readers are encouraged to consult the black letter text of FTA for further reading and clarification since most of the provisions discussed above cannot be interpreted in isolation and are subject to many qualifications in the detailed text of FTA.