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UAE FTA with USA: Impact will be on services sector

UAE FTA with USA: Impact will be on Services Sector

Emirates News Agency (WAM) - 05/04/2006

ABU DHABI, April 5, 2006 (WAM) - On its route to achieve more open and competitive economy, the UAE is negotiating several Free Trade Agreements (FTAs).

Perhaps one of the most important and imminent FTAs is that with the USA which is supposed to be concluded shortly. The USA has one of the most powerful economies worldwide (i.e. it is ranked first in the World Competitiveness Scoreboard 2005 and second in the Growth Competitiveness Index 2005).

A new study by the DCCI’s Economic Bulletin analyses the impact of the UAE’s FTA with the US. The study states that "by having a comparable look at the size of the UAE and USA economies (USA GDP is US$ 11.75 trillion while the UAE GDP is US$ 63.67 billion in 2004), we expect that the forthcoming FTA between the two countries will impact more the UAE economy than that of the USA." "Interestingly, the following question arises: Would the effect of the FTA be more pronounced in goods or services sector? Below we attempt to answer this question," the study said.

According to latest statistics published by the International Monetary Fund (IMF), the UAE exports & re-exports -including oil- to the USA stood at US$ 1,104 millions and imports were around US$ 4,470 millions in 2004.

Data from the UAE Ministry of Planning shows that UAE non-oil exports to USA mainly comprise essential oils, resinous and cosmetics, pearls, precious metals, aluminum, articles of apparel (not knitted or crocheted).

UAE imports from USA mostly include nuclear reactors, boilers, vehicles other than railway or tramway, electrical machinery, aircraft, spacecraft, & parts. Figure 1 shows the UAE foreign trade with the USA between 1997 and 2004.

In 2004, the UAE exports to the USA represent only 1.7% of its total exports while its imports from the USA represent 6% of total imports.

Hopefully, the FTA will open new doors to UAE exporters, think of textiles and garment industries and related products, processed sugar and sugar products etc, and all re-exported goods. According to these figures, even though UAE exports get enhanced by the FTA, the effect on the country’s foreign trade would not be very significant if below mentioned items are not given sufficient weight in the negotiations as exports to USA occupy low ranking in the UAE export list. On the other hand, the impact of the increase in imports from the USA would be more obvious, the study said.

"From the above argument, one might expect that the USA will benefit more as its exports to the UAE will boost. In fact, this is not totally convincing.

From the USA perspective, exports to the UAE represent only 0.5% of its total exports while imports from the UAE represent 0.08% of total imports.

Both figures show how insignificant is the current effect of the UAE exports/imports on the USA trade balance. However, we expect the FTA to have larger impact on services sector than on trade in goods." "The USA is considered one of the largest exporters of services in the world. Thus, we expect the FTA between the two countries to rely more on services sector. This fact is enhanced by the attractiveness of the services sector of the UAE. For instance, a former study by the DCCI showed that profitability in the UAE banking sector is higher than that of the USA. More concretely, in 2003 Return on Assets (ROA) in the UAE banks was of 2.3% compared to 1.4% in the USA. Similarly, Return on Equity (ROE) was 16.4% in the UAE and 15.3% in the USA. One of the reasons that might encourage the USA banks to consider penetrating the UAE market -through providing more efficient management- is the high ratio of non performing loans in the UAE (15%) compared to only 1.2% in the USA." Another study conducted by the DCCI revealed that the UAE insurance sector unveil higher returns than that of the USA. Specifically, in 2004, the rate of return of the insurance sector of the former is around 15% compared to 10.2% in the latter. Furthermore, the growth in the insurance premiums in the UAE was of 21% while it was only 5% in the USA.

Growth and profitability ratios of many other UAE services sectors (such as telecommunications, healthcare, educational private sector, etc.) are very attractive to USA investors as well. The participation of larger and more experienced US companies in the services sector could have negative effect on smaller and less competitive UAE companies. Some companies might see their profits and market share falling while others could exit the market. Therefore, UAE companies must start adopting themselves to new challenges and develop new market strategies.

Finally, the presence of new tough US rivals would transfer valuable services, skills, know-how, and technology to the UAE which will result unambiguously beneficial to the country. In line with this context, UAE companies should learn how to absorb high technology and high standards of services from US firms in order to increase their competitiveness.

 source: MENAFN