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After some rather shaky trade relations with the US in recent months, this week has seen some tentative steps forward for the UAE in its pursuit of closer economic ties with the superpower.

The recent Dubai Ports World controversy and the cancellation of a scheduled round of talks on a Free Trade Agreement (FTA) in March were widely seen as setbacks in bilateral trade relations.

But last week, the two governments held what UAE Minister of Economy Sheikha Lubna al-Qassimi referred to as a "technical meeting" in Abu Dhabi, despite media reports that it was in fact the fifth round of FTA talks. At these, she said the main subject under discussion had been investment.

At the same time, Sheikha Lubna declined to comment on whether or not Washington was pressuring Abu Dhabi to open up its telecoms sector, despite a World Trade Organisation (WTO) deadline of 2015.

As Minister of Public Sector Development Sultan Said bin al-Mansouri told Gulf News, "The American side is pressing hard toward the liberalisation of the UAE telecom sector with immediate effect." He also told the daily that the sector remains a key point of contention.

Al-Mansouri then added that the UAE would not allow foreign investment in the telecoms sector before 2010.

"The entry of foreign companies into the sector is one of the main stumbling points in the negotiations," he was quoted in al-Hayat. "We must give the current operators the chance to develop before we allow new ones in."

The state-owned Emirates Telecommunication Corporation (Etisalat) maintains a monopoly in the sector on fixed and mobile telephone lines and internet access. A second operator is due to be licensed this year, but it would be 50% owned by the government.

Etisalat also has extensive operations abroad, recently buying a controlling stake in Pakistan's largest telecoms network, the state-owned Pakistan Telecommunication Company, for $2.6bn. This and other deals have been made partly in preparation for future domestic competition.

The penetration rate for mobiles in the UAE is over 80%, while Pakistan's penetration rate stood at 10% earlier this year, indicating a huge potential for growth.

In a drive to become a major international mobile and fixed-line operator, the company also currently holds a 1% stake in Qatar's Qtel and a 4.6% stake in Sudatel, Sudan's incumbent telecoms operator. That market is severely underserved, with a 2.8% penetration rate, plus Etisalat also holds a 34% stake in Zanzibar Telecom (Zantel) and a mobile service provider licence in Tanzania and one in Saudi Arabia, which it bought for $3.45bn in a hotly contested tender.

Etisalat's overseas operations are run by its wholly owned subsidiary, Etisalat International.

Work began in April 2004 to prepare the company for a liberalised sector, with a new law allowing the sector to open up and laying the groundwork for the creation of the Telecommunications Regulation Authority (TRA) to oversee the industry.

The TRA's mission is to create an enabling environment for competition (for example, by laying down rules for the relationship between Etisalat and a second operator), establish a national spectrum plan, manage and license new entrants in the market, and protect consumers.

The company is in fact seen as a high-quality service provider. Like so many state-owned companies in the UAE, it must run a profit, whereas similar companies in other countries usually have net losses. With many UAE residents subscribing to two lines, one personal and one for business, and many non-residents maintaining local mobile lines, penetration is expected to surpass 100% in the coming years. Yet the TRA has already found areas for Etisalat to improve upon, especially in the deployment of the latest in telecommunications technology, such as wireless networks.

Some 85% of UAE mobile users are in the pre-paid segment, which bases rates on price sensitivity rather than loyalty. This could result in considerable churn rates when the second operator comes online.

Meanwhile, the country still hopes to complete its FTA with the US this year. Yet telecoms is not the only point of contention - the US is also demanding improvements in the labour market. The UAE has recently made some moves in this area, announcing that draft legislation to allow for the formation of trade unions and collective bargaining - both of which remain banned at moment - will be presented by the end of the year.

The talks may then be getting back on track, and with similar agreements elsewhere in the Gulf signed in record time, it is not impossible that the 2006 deadline will be met, despite some recent hiccups.

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