Emirates Business 24/7 | 21 December 2008
GCC may have more FTAs in near future
By Shashank Shekhar
The GCC-Singapore Free Trade Agreement (FTA) signed last week comes almost a year after the six gulf nations announced a common market to remove trade barriers within themselves and to deal with the world as one entity.
Economists predict that the agreement will serve as a precursor to more FTAs between Gulf and prominent Asian economies. The accord is the first sign of the evolution of the GCC as an economic bloc, they say.
Marios Maratheftis, Dubai-based regional head of research at Standard Chartered, believes a GCC FTA with countries like China is "very much possible" in the not very distant future.
"We have seen so many high level business visits to China from the region in the past one year. The GCC-Singapore FTA is an indication of the growing trade relationship between Middle East and Asia. If we don’t see concrete FTAs being signed between the GCC and Asian economic powers in future, we will at least see a good growth in trade activity. The fact that’s evident is that GCC now identifies Asia as an economic power."
The FTA signed on Monday signifies two aspects. First, the GCC is bracing to act as one unit for international trade, setting aside (or at least looking beyond) the differences that have existed on issues like a common currency and the dollar peg. Second, the FTA has shown that Asia now has a greater or at least an equal importance for the region.
Countries like Singapore emerged on the business radar of the GCC once they made a paradigm shift in their policy and looked at education and economy with one glass. Most of the GCC countries have been trying to move away from the oil and gas as their prime contributors of GDP and are trying to become knowledge-based economies (KBEs).
Qatar in fact aspires to bring down the contribution of hydrocarbons to its economy to zero as early as 2020. It may not therefore be surprising to note that when Qatar FoundationQatar FoundationLoading..., Qatar’s premium educational organisation called experts from across the world to gather suggestions on becoming a KBE, many of them came form Singapore. It is also essential to note here that countries like Singapore and Japan rank well above several EU members on the list of KBEs.
"Free trade fosters innovation and competition among trading partners and promotes economic diversification. With the FTA with developing countries, the GCC not only benefits from the trade of goods but also of services. As the GCC tries to create a knowledge based economy, these FTAs will only help bring the GCC one step closer to achieving that goal," said Shayne Nelson, Standard Chartered’s Chief Executive for the Middle East and North Africa.
There has always been the crucial question of who would gain more if the GCC countries sign an FTA. Analysts believe that the benefits would be mutual or perhaps the GCC would gain more in the end. "While hydrocarbons are the comparative advantage, the GCC serves to gain from a FTA with Singapore and other countries. The GCC relies heavily on imports of food and capital goods. Therefore, a free trade agreement will allow goods to enter the country tariff free. Also GCC consumers stand to benefit with increased competition as more goods enter the market," Nelson said.
The GCC-Singapore agreement will allow tariff-free access for 99 per cent of Singapore domestic’s exports while all goods from the GCC will get free entry to Singapore. The tie-up also specifies that Singapore-based firms will be granted easier access to the UAE, Qatar and Saudi Arabia markets in certain sectors.
Singapore is particularly excited about the agreement. As of now just 10 per cent of the country’s exports to the GCC arrive tariff free. Singaporean companies say that exports to the region can grow prominently in the next few years. "The Middle East as a whole is an important sector for us, making up 10 to 15 per cent of our business. This can probably grow to about 20 per cent after the tariffs are removed," says Tham Ngo Hock, General Manager of sales and marketing at Aalast Chocolate.
The GCC-Singapore FTA comes at a time when the other agreements between the GCC and its trading partners have been stalling. And when, the GCC has been falling apart as an economic block it terms of cementing one to one economic ties.
Bahrain and Oman have edged out of the GCC fold in order to enter into a FTA with the US. Individual FTAs with as major an exporter as the US not only make trade (and political) equations in GCC vulnerable, but threaten the very basic tenets on which the concept of a GCC ’common market’ continues to struggle to emerge.
While Bahrain and Oman now charge zero per cent duty to goods being imported from the US, countries like Saudi Arabia and Qatar continue to levy a five per cent tax duty. No wonder, signals of warning have already emerged. "Thus, if all other GCC countries don’t follow suit and reach FTAs with the US themselves, the Bahrain and Oman FTAs would render the GCC customs union mere ink on paper," said Eckart Woertz, Program Manager, Economics, at the Gulf Research Centre.
There is another important point that Woertz raised in a published paper. "Oman and Bahrain may develop into refining and re-exporting hubs for cheap Asian goods to the US, which would otherwise face considerable tariffs in the US," he wrote. What’s particularly important to note is that FTAs between the GCC and trade partners like Australia, EU and India have been pending. The authorities who conceptualised the GCC ’common market’ and gave it a formal shape now need to ensure that any of their associates do not edge out in frustrations and enter into separate agreements themselves.
FTAs are particularly attractive considering the immediate and focused impact on trade that they bring - much brighter than what WTO enshrines. "The WTO talks are a broader platform, and thus imply more complicated negotiations and global concerns. While one cannot be a substitute for the other, FTAs are bilateral agreements and thus can be very focused, tailored to the needs of the involved parties, and easier to negotiate. As such, they provide an effective alternative," said Armen V Papazian, an economist and consultant.
FTAs are considered particularly supportive to the small and medium enterprises (SMEs). All the GCC countries have been promoting establishment of small scale industries in recent years and a series of FTA can provide good support to the fledgling sector. Not only does a FTA eliminate tariffs, but it updates and enforces laws on intellectual property rights (IPRs), facilitates customs operations for manufactured goods and addresses market issues for specific industries.
Now that the GCC has begun cementing FTAs as a block, they need to be careful about certain fundamental aspects. A bilateral FTA helps only when trade between the two partners is substantial. The relatively modest level of trade with some prospective partners has in the past been one reason why Australia has been avoiding pursuing a FTA with individual countries. Well-tested rules are also essential to ensure that a third party does not manage to sell its goods to the two trading partners.