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EU-AGCC FTA to be signed next year

Khaleej Times

EU-AGCC FTA to be signed next year

21 December 2005

DUBAI - A free trade agreement (FTA) between the EU and the AGCC, the first region to region trade agreement outside Europe, will not be concluded by the end of this year as originally scheduled, according to a high-ranking EU official.

"The inking will take place by mid 2006 latest", Bernard Savage, head of the EU delegation dedicated to the individual AGCC states, told Khaleej Times.

Due to surging trade, which exceeded $81 billion last year, almost double the figure of 2000, both parties are under pressure to close the agreement as soon as possible.

"The political part of the negotiations have been completed, yet there are clauses on trade elements, technical questions and concrete market actions that still need to be finalised," Savage said.

Final negotiation rounds will be held in Brussels on February 8 and 9 between the EU trade commission and the AGCC negotiation team headed by the Saudi Arabian deputy minister of finance Dr Hamid Al Bazae.

Although negotiations started in 1988, serious steps towards the agreement commenced in 2003 when the AGCC formed a customs union, which is a requirement of the EU for an FTA. Last year, AGCC imports from the EU amounted to $54 billion, or two-thirds of the total. AGCC imports from the EU have been growing faster than Gulf exports to the EU, indicating that the trade surplus in favour of the EU is also on the rise.

An FTA will result in EU exports no longer being subject to the five per cent import tariff imposed by the AGCC. Although this is unlikely to result in a flood of imports, as major items such as aircraft and capital goods are exempted from the tariff and consumer goods imports from the EU are not price-sensitive.

Exports of oil and gas from the AGCC to the EU are not subject to any tariffs, although the Gulf States are unhappy about the high taxes imposed by EU states at the point of retail sales. These taxes, however, are unlikely to be reduced, since they are a significant source of national governmental revenue. The green environmentalist lobby as well as the leftist public transport lobby also favour high fuel taxes to discourage motorists from using their vehicles.

EU companies are increasingly attracted to invest in Dubai, mainly through joint ventures with AGCC investors. The region is also a key location to access wider markets in Asia. The FTA will probably accelerate such investments, as a rule-based framework makes investors more confident. The major immediate benefits to the AGCC from the FTA are mainly in respect of petrochemicals and aluminium. Petrochemicals already account for seven per cent of Gulf exports to the EU; with the FTA this proportion may raise to over 10 per cent by 2010.

In cases of aluminium, the EU imposes a six per cent tariff that affects exports from both Bahrain and Dubai that have large smelters. Dubai Aluminium already exports over 170,000 tons of aluminium annually to the EU, around 20 per cent of the smelter’s output, which is of much significance as the facility in Dubai is the largest world-wide. With the abolition of the tariff, the proportion of output sold in the EU market may rise to 25 per cent.

Dubai also exports textiles that are mostly manufactured by migrant workers from South Asia and the Philippines to the EU. As the EU is the world’s largest single market, freer access to that market will undoubtedly be beneficial for AGCC businesses.

According to a report of the Gulf Research Centre, the multilateral FTA is likely to be of much greater significance for both sides than the US-FTAs, as the value of AGCC-EU trade is much larger than EU-US trade.