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US-Bahrain trade deal exposes GCC chinks

The Daily Star (Beirut)

U.S.-Bahrain trade deal exposes GCC chinks

By N. Janardhan and Emilie Rutledge

Tuesday, December 28, 2004

It is logical that some of the Gulf Cooperation Council (GCC) countries, chiefly Saudi Arabia, are not convinced about Bahrain’s decision to sign a free trade agreement (FTA) with the United States. Such has been the opposition to the September pact - which is yet to come into force - that some of them are even urging Manama to back away from the deal and "honor a regional agreement."

While Saudi Arabia fears U.S. goods, imported tariff-free into Bahrain, will be re-sold within its borders, the disagreement is essentially linked to the deal abolishing external tariffs, giving Bahrain trade advantages over fellow member states, which have signed a customs union fixing tariffs at 5 percent.

According to the U.S.-Bahrain FTA, both sides will receive immediate duty free access to 100 percent of bilateral trade in non-textiles industrial goods, 100 percent of Bahrain’s agricultural exports and 98 percent of U.S. agricultural exports. Further, along with preferential access to Bahrain’s goods markets, the U.S. will also have commitments to increased access for U.S. firms in Bahrain’s service sectors, including in finance, tourism and energy.

But the deal violates the basic tenets of the economic agreement signed by the Supreme Council of the GCC states in Muscat in 2001, which stipulates that "no member state may grant to a non-member state any preferential treatment exceeding that granted herein to member states, nor conclude any agreement that violates provisions of this agreement."

While there are ample reasons to justify the Bahrain-U.S. FTA at the economic level, politics appears to have played its role as well.

Bahrain likes to view the FTA as the cornerstone of the growing relationship between the kingdom and the U.S., like the North American Free Trade Agreement fostered links between the U.S., Canada and Mexico. In suggesting that Bahrain is an "oasis of progress" in a region "swept by the bitter winds of extremism," the deal can be viewed as a political reward for the close support that Bahrain, home to the U.S. Navy’s Fifth Fleet, has consistently provided the United States.

The FTA also serves as a reconciliatory gesture for the U.S. after it had warned of a possible militant attack on U.S. and Western interests in Bahrain, and issued a mandatory evacuation of its non-emergency defense staff and family members of U.S. military personnel in July, irking Manama immensely.

The political argument gets reinforced with King Hamad becoming the first Arab leader to meet President George W. Bush since his re-election as U.S. president.

Though Bahrain’s FTA sets a precedent for the GCC by letting national interests and bilateral talks over-ride collective interests and multilateral talks, Manama’s desire to raise its economic profile internationally and attract increasing levels of foreign investment is no doubt one of the main reasons behind the deal. It has always been keen on strengthening its economic ties with the U.S., and that keeping in pace with its political relations. With the lowest oil reserves and production among the GCC states, Bahrain has had to diversify its economic base more urgently than its neighbors. The banking, finance and tourism sectors now contribute significantly to Bahrain’s economic growth, but face stiff competition from other GCC countries such as the U.A.E.

In addition, Bahrain has had to tackle some economic setbacks recently. Saudi Arabia suspended a donation of 50,000 barrels per day (bpd) of oil to Bahrain in July pending talks on sharing the output of the joint offshore field of Abu Saafa. Bahrain, a non-Opec producer, had been receiving the entire 143,000 bpd production of the Gulf field, in addition to the 50,000 bpd, since 1996.

Against this backdrop, the deal with the U.S. brings much cheer to the Bahraini camp. With Washington lauding Bahrain for opening its services market to U.S. products "wider than any previous Free Trade Agreement partner," the FTA held much promise.

In signing the deal with Bahrain, the U.S. has worked like always - to negotiate and conclude deals with countries in the region on an individual basis rather than work with them as a bloc under the rules of the 9/11 Commission initiated by President George W. Bush to encourage political and economic reforms in the Middle East.

In the aftermath of the Sept. 11, 2001, attacks, the U.S. has aimed to create a Middle East Free Trade Area by 2013. Besides Bahrain, the United States has signed FTAs with Morocco and Jordan. Similar pacts are planned with the U.A.E., Kuwait, Qatar and Tunisia. However, Saudi Arabia and others like Algeria will have to await their entry to the World Trade Organization.

Though Oman and the U.A.E. are in the advanced, and Kuwait in the preliminary, stages of negotiations with the U.S. for similar deals, all the GCC countries claim to be committed to collective, rather than bilateral, negotiations with trade partners. The same is the case with the ongoing trade negotiations with India, with whom the GCC signed a Framework Agreement on Economic Co-operation in August. However, that deal has a clause stating that "individual member states are free to undertake bilateral activities with India in various fields."

But, with the U.S. undisputedly being the most influential player in the region, there is little room for contradicting U.S. interests and diktats. Apart from gaining preferential access to Bahrain’s goods markets, the U.S. stands to gain by having commitments to increased access for American firms in Bahrain’s service sectors, including the energy sector. In fact, its deal with Bahrain is the bait that it hopes will attract the others in the region.

Negotiated at a bilateral level, the immense bargaining power of the U.S. may allow it to extract deals that will generate the much desired opportunity and results for U.S. companies in the GCC energy markets, something that is in the interests of major U.S. energy companies, as well as its national energy security.

The U.S. decision to go in for bilateral talks hinges on the belief each GCC country may be able to extract different concessions from it. With their vast oil and gas reserves, Saudi Arabia, Kuwait and Qatar are less likely to offer generous concessions to the U.S., particularly since foreign investment in their energy sectors remains a highly contentious issue. If the U.S. were to encourage adherence to the GCC economic agreement and negotiated collectively, these countries would have obtained more preferential terms from the FTA.

Ultimately, despite the relatively small size of the Bahraini market, substantial new international markets will arise for American goods. In the long term, the FTA, covering 12 areas of investment including higher education, textile and financial services, will guarantee that the historically beneficial relationship between the U.S. and Bahrain will not only continue, but grow.

The U.S.-Bahrain deal also comes in the wake of Saudi-American relations suffering a serious economic setback in 2003. Riyadh rejected two major proposals by U.S. energy companies - ExxonMobil and Conoco/Phillips - to develop Saudi natural gas resources. Instead, Saudi Arabia struck important deals with the European Union and Russia on trade and energy issues respectively, signaling that the kingdom’s economic future was less tied to the United States than in the past.

The U.S. has recently shown its preference for negotiating bilateral trade agreements, as events at the WTO ministerial meeting in Cancun showed. Such an approach allows the U.S. to use its immense bargaining power and economic weight to extract more favorable trading terms from its partners and this tactic is being used in its trading relations with the GCC countries.

In contrast, the European Union has chosen to negotiate a FTA with the GCC at a regional level. Negotiations with the EU have led to greater economic integration between the GCC countries, which the EU has strongly favored. For example, the establishment of a GCC Customs Union was an EU precondition to its eventual signing of an FTA. The EU also views GCC integration as a step toward greater regional stability and prosperity. Yet, negotiations with the EU have taken considerable time, as is often the case with regional discussions, and have yet to be concluded.

In conclusion, there is little doubt that the U.S.-Bahrain deal is a win-win situation for the two parties concerned. At the same time, however, the deal undermines the GCC as a collective body. The GCC countries have to learn to delegate their negotiating powers to the GCC, at least in the agreed areas, like in the case of the EU. Or, more needs to be done to design free trade agreements that do not violate the GCC economic agreement, thereby sparing internal bickering.

N. Janardhan is editor, Gulf in the Media, Gulf Research Center and Emilie Rutledge is economic researcher in Gulf Research Center. This commentary was printed with the permission of the center. The center has the following website:

 source: Daily Star