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GCC and European Union: 17-year old FTA negotiations

Khaleej Times

GCC and European Union:17-year old FTA negotiations


16 December 2005

DUBAI -The Free Trade Agreement (FTA) negotiations between the Gulf Cooperation Council (GCC) countries and European Union (EU) have started since 1988. However, there have been always obstacles that prevented the achievement of a final agreement.

According to a report issued by Dubai Chamber of Commerce and Industry (DCCI) in October 2005, the two parties’ latest negotiations round in Abu Dhabi (UAE) unveiled the possibility of finally concluding the agreement early next year.

Why the EU is so interested in the GCC countries? Latest observed steps and policies of the GCC countries are characterised by one main aspect: opening up their economies to international competition. Perhaps, the FTA negotiations with the USA are a good example in this context. Given the significant economic relationship between the EU and GCC, the former is aware of the on-going liberalisation aimed by GCC countries and wishes to play a major role in it. The on-going negotiations between the GCC and EU reveal that the latter is targeting three major issues, among others: trade in goods and services, foreign direct investment (FDI) and government procurement.

Trade in Goods & Services

Average import tariff rates on goods in GCC were considerably higher than those in the EU but with the establishment of the Customs Union in 2003 -which encompasses the introduction of a 5 per cent Common External Tariff -this disparity is reduced substantially. Of course, the elimination of these tariffs on goods traded between the EU and GCC after according a FTA would impact trade in goods between the two involved parties.

According to the most recent data available about GCC countries, their exports to the EU stood at $11,649 million in 2002, representing 11per cent of GCC total exports to the whole world. On the other hand, GCC imports from the EU surpass exports by around two times and half ($29,100 million). The latter figure corresponds to one third of GCC total imports from the world. This fact reflects the high dependence of GCC countries on the EU as a source of their imports.

It is well known that one of the main reasons behind complex trade negotiations is the demand of the GCC to eliminate import tariffs on primary aluminum and petrochemicals. Both products are crucial for GCC economy. Despite this fact, the GCC is not dependent on the EU as regards exports of these two products as they are highly demanded. This reality gave the GCC an additional pressure tool in the negotiations with the EU.

On the other hand, the size of the GCC services sectors is relatively smaller and less developed than in the EU. The EU instead performs well in the services sector, being one of the world’s largest exporters of services. In this context, the EU will unambiguously benefit from the forthcoming FTA with the GCC as the latter is an importer of services.

However, the GCC could enhance their services sectors by taking advantage of the FTA in a number of areas where services liberalization in the GCC could have a direct impact on economic, environmental and social sustainability as for example through consumer protection standards, consumer security and safety, pricing levels, professional training and education, environmental standards, consumer relevant quality, diversity of choices and cultural diversity.

Foreign Direct Investment

Statistics published by EUROSTAT show that the Gulf investments in EU increased from $ 585 million in 1999 to $1,394 million in 2001. At the same time, the EU investment flows to the Gulf region have been increasing in the recent years and were of $ 1,264 million in 2001. The same applies to the outward stocks. EU capital employed in the Gulf has increased from 0.3per cent of total EU outward stock in 1999 to 0.4per cent in 2001. The latter modest ratio is expected to grow remarkably if the GCC accept the EU request of opening the investment door in GCC companies by the ratio of 100 per cent.

Government Procurement

The very heavy government ownership and control of the GCC economies make government procurement a core issue of the FTA from a EU perspective. Preferential procurement policies directed to local companies exist throughout the GCC and many require that a portion of public tenders be subcontracted to local entities. Up-to-date, none of the GCC countries has committed themselves to the WTO Agreement on Government Procurement. All the above facts made the EU strive through the on-going FTA towards achieving reciprocal and progressive liberalisation of public procurement to ensure comparable and effective access to GCC procurement markets on the basis of the principles of national treatment.

Finally, concluding a FTA with the EU might not be that fruitful at the short-run. Nevertheless, GCC countries might reap its fruits at the medium- and long-run as it attracts more FDI to the region, enhances their services sectors, transfers know-how technology, and increases competition. This FTA gains more importance giving that it will take place at the same time a FTA is being negotiated with the USA. Opening up GCC economies to these two highly competitive markets at the same time would clearly be more advantageous and efficient than allowing the access of only one party.

 source: Khaleej Times