Oxford Business Group
Emerging Markets Economic Briefings
Speeding Free Trade
Emirates, Volume 63
The first round of trade negotiations between the United States and the United Arab Emirates, which took place in Abu Dhabi last week, were reportedly so successful that the next round could take place as early as April - and the final document could be signed by the end of 2005.
"We are scheduling such an early second round because we have made such progress in the first and because our countries share such a similar vision for our economies," Catherine Novelli, assistant US trade representative, told reporters in Abu Dhabi at the end of three days of negotiations.
If the talks are successful, the UAE will be the fourth Arab country to sign such an agreement, following Jordan, Morocco and Bahrain, as part of President Bush’s Middle East Free Trade Initiative. Washington wants to sign Free Trade Agreements (FTAs) with every country in the MENA region by 2013, to promote economic and political development in line with recommendations made by the 9/11 Commission.
However, the US role in the region is often unpopular, and there is fear that this agreement is just another tool to advance American hegemony. Nonetheless, the UAE government is enthusiastic about the FTA, albeit for different reasons than the US.
The new Emirates leadership under Sheikh Khalifa bin Zayed is keen to instigate a new wave of economic development in the country. In this, the focus is on diversification away from oil and gas revenues and encouragement of the private sector through partnerships with leading international companies. In particular, the government wants to encourage industry, which accounts for an increasing proportion of GDP. Downstream industries in particular should be highly successful in the UAE, where gas for power stations and labour from the Indian subcontinent are both abundant and cheap.
The government apparently considers FTAs to be a central pillar of its economic policy, in the hope that preferential trade agreements with leading industrialised nations will allow entrepreneurs to exploit these comparative advantages. Even as the US trade delegations were leaving Abu Dhabi on route to Oman, Sheikha Lubna al-Qasimi, the UAE’s recently appointed minister of economy and planning, was winging her way to the Far East to open negotiations with Australia and Singapore.
At present, trade with the US is drastically underdeveloped. Exports amounted to just $1bn in 2003 and imports were around the same, according to the Abu Dhabi Chamber of Commerce and Industry (ADCCI). Considering the size of the US economy, there is a great deal of room for improvement. Jordan’s US-FTA has resulted in an increase in bilateral trade from $11m to $1.2bn in just five years. The US is now Jordan’s number one trade partner. Were such success to be replicated in the Gulf, the boost to the region’s already robust economy would be enormous.
But Sheikh Khalifa’s government is keen on the FTA for reasons beyond simple economics. The leadership hopes that the FTA will encourage further partnerships with US companies within the private sector. Under the leadership of the late Sheikh Zayed, such partnerships with leading international players were used as a useful tool to encourage transfer of technology and expertise. But since the first Gulf War (1991-92) these partnerships have taken on a more strategic dimension, creating vested interests in the UAE that make the small, vulnerable country worth defending. The government has increasingly sought to establish strong trading links with powerful friends, most notably the UK, the US and France, but more recently Germany, Russia and Australia.
Speaking at a seminar for UAE business leaders at the Abu Dhabi Chamber of Commerce and Industry (ADCCI) last week, Novelli reiterated this objective. "This FTA will complete the circle of political and military co-operation between the US and the UAE," she said.
Whilst the government is keen to push the talks forward, there also seems to be a strong appetite for the FTA among the UAE’s business leaders. Hussein al-Nuwais of the ADCCI, speaking at the same seminar, expressed great enthusiasm for the project on behalf of its members. "The FTA is going to bring strong opportunities for the business community. We are very excited about it," he said.
Some concerns have been expressed, however, that UAE companies are not ready to compete with large US firms. Why, people ask, is the US only interested in pursuing these talks with small countries that do not have the clout of larger trading blocs? Perhaps more sensitive, however, are the areas that will have to be reformed in order to comply with the standards demanded by the FTA.
Some UAE families, for example, have become rich on the back of agency laws, which demand that foreign companies find a local partner or sponsor in order to do business in the country.
Trying to reassure such agencies that the FTA poses no threat, Novelli said that "Agency agreements and local partnerships seem to make business sense for companies that have no direct knowledge and experience of the country... We have no quarrel with agencies." However, "we would want companies to be free to make that decision on their own. It should not be imposed on them."
Other areas of concern are labour and environmental laws, which will have to be brought up to international standards to avoid raising objections in the US. The UAE has been built using cheap labour from the Indian subcontinent, with human rights standards often criticised. The government has been quick to respond to the US Trade Commission’s concerns and has committed itself to implementing international labour standards. Already steps have been taken to establish a government agency on workers’ rights, and there has been tough talking from the interior ministry about heavy punishment for companies that exploit their workers. For Novelli, these areas pose "challenges", but are by no means "insurmountable".
A far more serious challenge to the proposed FTA comes from Saudi Arabia, which argues such agreements contravene Gulf Cooperation Council (GCC) rules. As a precursor to a customs union, the six GCC member states signed an economic agreement in 2001 which committed members to draw their policies and economic relations in a collective manner vis-à-vis non-members. They cannot, therefore, enter into preferential trade agreements with other states individually.
Following Bahrain’s FTA with the US last year, Prince Abdullah, Saudi Arabia’s Crown Prince and de facto ruler, boycotted the GCC heads of government meeting in protest, and Saudi has since threatened to re-impose duties on goods entering the kingdom through Bahrain. Yet despite its objections, all four of Saudi Arabia’s other GCC partners are pursuing trade agreements with the US.
Throughout her tour, Novelli denied the US was actively seeking to undermine the GCC. "We are strong supporters of the GCC," she told OBG question at the ADCCI seminar. "We do not see this agreement as in any way incompatible." The US, she explained, is pursuing bilateral agreements because it is keen to move partnerships forward as quickly as possible, but Saudi Arabia must first qualify for membership of the World Trade Organisation as a precondition for entering into FTA talks. It is this failure on Saudi Arabia’s part that has so far stalled EU-GCC trade negotiations.
Nonetheless, Saudi Arabia’s concerns do reflect deepening divisions between the kingdom, which has dominated the GCC since its inception, and the resurgent Gulf states, which seem increasingly prepared to incur Saudi displeasure. There is a mood of increased co-operation between the reform-minded leaders of Qatar, Bahrain, the UAE and Oman in particular that is often independent of their neighbour. This is perhaps best depicted by a proposal for a bridge between Bahrain and Qatar, and a causeway from the UAE to Qatar, allowing inter-state trade to by-pass Saudi territory altogether.
As Saudi Arabia struggles to contain political unrest and overcome its economic inequalities, the kingdom is perhaps seen as something of a liability, as its more stable and increasingly prosperous neighbours seek to boost their economic and international standing. Increasingly it is the UAE, with its financial clout and exemplary political stability, which is seen as the regional leader. With security guaranteed by more powerful friends, there is less reliance on Saudi Arabia for protection. Again, the resurfacing of a long dormant border dispute between the UAE and Saudi is indicative of Sheikh Khalifa’s confidence.
In this context, it is unlikely that Saudi pressure will sway the leadership’s mind against the FTA, and considering the levels of support both among business leaders and in government, it seems safe to say that a successful conclusion to the FTA negotiations is a given. How long before an agreement is reached, however, is harder to predict. Bahrain reached an agreement in a record four months, but, as one US official pointed out to OBG, the UAE’s political structure is a little more convoluted: the negotiations might be called bilateral, but seven rulers must achieve consensus on the issue before the government can sign. This might take a little more time, but no one expects the ruling council to raise many objections. In the meantime, the US will let talks proceed at whatever pace everyone is comfortable with.