LONDON, 16 June — After almost a decade of posturing and negotiations, the six-nation Gulf Cooperation Council (GCC) states finally seem to be closing in on that elusive Customs Union, which will have a dramatic impact on the Gulf economies and their relations with other economic blocs, in particular, the European Union (EU).
GCC finance ministers, meeting in Riyadh recently, finally approved a mechanism for distributing customs revenues, which will be on the basis of “customs one-point entry and on the basis of the final destination of imports.” Some member countries preferred the distribution of revenues on the basis of percentages, but this strategy was abandoned following objections from the larger economies.
While the establishment of a Customs Union, due to start operating by Jan. 1 2003, has logical implications for the setting up later of a monetary union and eventually a single currency, observers will be assessing what impact it will have in the immediate future in fast-tracking a free trade agreement with the EU.
Just recently GCC and EU officials had met in the Saudi capital to kick-start negotiations on a free trade agreement and to review technical details relating to such matters as intellectual property rights, patents, counterfeit goods, and compliance issues.
There seems to be a new-found urgency in the GCC states relating to a number of reforms such as the GCC Customs Union; the free-trade pact with the EU; the introduction of capital market laws and private foreign ownership in certain economic sectors; privatization; the introduction of compulsory insurance in areas such as health and motor car insurance; and so on.
There are some who would like reforms to include more sectors such as education, the labor market, immigration, tourism and leisure, and political representation.
For instance, they point out to the Malaysian experience, especially in the financial services sector. Malaysia’s Financial Sector Masterplan lays down a timetable for the liberalization of the financial services sector, first to domestic players and then to qualified foreign players, with 100 percent foreign ownership of financial institutions feasible by 2010.
However, as the Governor of Bank Negara Malaysia, the central bank, Dr. Zeti Akhtar Aziz recently explained to me the Plan was a mere set of guidelines, and acknowledged that the international environment post 9/11 has necessitated a far more flexible approach in implementing the Plan.
This could mean the entry of both domestic and foreign players well before the target date, if the situation so demanded. A more liberalized Malaysian financial services market would also mean that Malaysian institutions would be better placed to attract inward flows from Gulf investors for example, who may be repatriating funds from the US and Europe and looking for alternative but reliable investment locations.
Others still, such as one senior British banker with knowledge of the Gulf markets, question whether the commitment to wholesale privatization, ala the Thatcherite model in the UK, is there. They see the Gulf approach to privatization as too cautious and half-baked. They feel that the Gulf private sector should operate on a level playing field and should not be over-protected by their respected governments. But then the Western institutions would say that, because they have the advantage of capital, expertise, marketing etc. The type and pace of reforms should be underpinned by the quality of and commitment to these reforms.
There is a danger in rushing into a reform program dictated by external forces. Not so in the case of the GCC Customs Union nor the trade pact with the EU. On the contrary, these have been festering for more than a decade, and at times both officials and business have been exasperated by the sheer lack of political will and movement in negotiations.
GCC Secretary-General Abdul Rahman Al-Attiya could not have been more frank at the recent meeting in Riyadh when he declared that “GCC countries want to close negotiations and sign a free-trade accord with the EU as quickly as possible.”
The EU has been insisting for the last 12 years that there would be no such accord if the GCC states do not have a Customs Union of their own. The other major stumbling bloc was the 13 percent tariff on Gulf petrochemcial exports to the EU. Although progress has been made in this respect, a final resolution is still pending, although the issue is no longer considered a major stumbling bloc.
A trade pact would give the GCC access to 15 European markets with a combined population of over 250 million. Further enlargement of the EU has already been agreed, and this means that the market size will increase even further. This could give GCC exporters at least a chance of narrowing the trade gap between the two regions which last year was still heavily in favor of the EU. Exports from the EU to the GCC last year totaled $25.2 billion, and imports from the GCC totaled $22 billion. The EU is the GCC’s second largest supplier after Japan.
The GCC, at a meeting in Muscat last December, had decided to set a monetary union in 2005 and a single currency in 2010. Monetary Union necessitates a pre-condition of the convergence of vital economic and financial indicators; and by implication the establishment of a single GCC Central Bank to independently set monetary policy and an interest rate regime, which would apply to the whole of the GCC. Just as there are disparate economies in the EU, so there are in the GCC, although on a much-reduced scale.
Similarly, the agreement for the Customs Union will take effect in January 2003 and will run initially for three years, after which it will be reviewed for possible amendments. Last December, GCC leaders agreed a common customs duty of five percent which will come into effect in January 2003.
As far as economic integration of the GCC states is concerned, the leaders have set the agenda. It is up to them now to deliver and implement this agenda in a pragmatic and flexible way. As far as the trade pact with the EU is concerned, the ball is now firmly in the court of Brussels.