While there is still some slim hope that a European Union (EU) and Gulf Cooperation Council (GCC) Free trade Agreement (FTA) might be signed by June of this year, it now seems doubtful that similar FTA’s will be signed with the US by several GCC members, notably the UAE and Qatar. The reason is more political than economic, as President George Bush’s fast track trade authority for such FTA’s expires in June, while FTA agreements in principle had to be signed by March 31, 2007 — the deadline required by the US Congress to consider any FTA proposals before the end of June. With the Democrats flexing their political muscles in Washington, it would seem that President Bush’s trade authority, through which he can ask US legislators to have a single vote on a treaty without amendments, has not been extended by the Democratic Congress.
Economics has also played a part though, as delays in not signing FTA’s on time has affected other countries’ negotiations with the US ,such as Malaysia and South Korea. The areas of contention for the Malaysians was access to Malaysia’s car and banking industries, and US worries over laws giving Malay firms preference for government contracts. Opening up these protected industries had held up FTA negotiations with the US, although there was optimism that a free trade deal would double the existing $44 billion flow of two-way trade between the two countries. The South Korean FTA fell foul over disputes in such areas such as beef and rice imports from the US. The South Korean FTA would have been a significant step for the US, as this Asian country is Washington’s seventh largest trading partner.
What are the advantages of these FTA’s, and what do the GCC countries hope to achieve from them, over and above their World Trade Organization (WTO) accession benefits? Do they need FTA’s now, given their expanded trade relation with key economic strategic trading partners such as China, India, Russia and other Asian countries?
Firstly, concerning the FTA discussions with the US and the UAE and Qatar, there were several major stumbling blocks from the viewpoint of these GCC countries — revolving around oil concessions, labor issues and foreign trade. As far as the UAE was concerned, oil concessions and the opening up of this sector to US FTA stumbled on the different policies of granting oil exploration concessions between each emirate in the UAE and the lack of a unified agreement.
The US began free trade talks with the UAE over two years ago, about the same time it began negotiations with Oman, and which led to a free trade deal with that country, as well as with Bahrain. Any FTA agreement with the UAE would also be significant for the US, as it shipped around $12 billion of goods to the UAE in 2006, making it the number one US export destination in the Middle East, compared with around $9 billion exports to Saudi Arabia. Besides unified oil concessions, the US had insisted that the UAE had to change its rules to encourage more foreign direct investment (FDI) from the US, particularly in the services sector such as telecoms and banking. The UAE signaled that it would not allow foreign investment within the telecoms sector before 2010, arguing that the UAE must give current operators the chance to develop before allowing new ones in.
On the banking side, the UAE felt that this sector would face tough competition once the UAE signs FTA’s with the US and the EU. Another key challenge was the US stand on Emirates labor laws, with the US urging the UAE to apply international standards to its work force, which would affect low-wage expatriate workers. To its credit, the UAE has recently tightened up in this regard — FTA agreements or not — and has introduced more stringent labor laws. Labor rights seemed to have been the major stumbling block in Washington’s FTA talks with Qatar, which led to negotiations being frozen in April 2006.
If the US FTAs have come to dead ends, what of the EU-GCC free trade discussions, and is this the new beginning for the region? On the surface, there have been optimistic notes made, with high level visits from both sides, involving such personalities as German Chancellor Angela Merkel and European Trade Commissioner Peter Mandelson, who urged the GCC countries to open up their lucrative financial services and construction markets to European investments in order to finalize a free trade deal with the EU. It would seem, once again, as was the case with the US free trade talks, European businesses wanted access to sectors such as banking, telecoms and infrastructure projects, and particularly ports which are booming in the GCC. This seems somewhat ironic, given the fiasco over Dubai Ports World acquisition of six US ports, a deal that was heavily politicized in the US, due to alleged “security concerns,” and which came as a shock to the UAE.
And what do the GCC countries want from the EU in return? It would seem that this centers around energy — the GCC has requested access to Europe’s fuel distribution market, both retail and wholesale, although GCC negotiators are also hoping for new export markets for textiles and light machinery. All this seems reasonable, and so the question is posed — what seems to be the last remaining obstacles in getting an agreement with the EU, given that negotiations had began with the GCC since 1990? Is Peter Mandelson’s recent optimism justified, that a deal is imminent, or was his optimism due to his rumored departure from Brussels to go back to more exciting UK politics, after Blair’s departure this year? Maybe EU’s optimism on a free trade deal is more justified this time round since 1990, but is the feeling of the GCC on the matter equally warm, or has the enthusiasm in the region diminished for such deals? According to the EU, the GCC will be “winners” in labor-intensive sectors such as clothing and textiles, and in energy-intensive sectors that require skilled labor such as petrochemicals and metal products.
While the latter — the energy sector — seems logical, one finds it hard to identify any large scale labor-intensive clothing and textile sector in any of the GCC countries to cause great GCC excitement.
What direction then for the GCC? Once again, the indications point East, rather than West, as one GCC country after another signs up to long-term strategic economic relationship with Asian countries, particularly China and India. Companies from these new economic giants, as well as from European businesses, are already setting up businesses in the GCC, attracted by the region’s free trade zones, enhanced FDI regimes and an oil-based boom. In the final analysis, a formal free trade agreement with the EU may have little impact on the region. Businessmen on the ground are moving at a faster pace, to put into practice, what formal and long-drawn out negotiations have failed to do.
(Dr. Mohamed A. Ramady is visiting associate professor in finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.)