EU's free trade pact offer to GCC 'tilted towards Europe'

The European Union is set to speed up talks to finalise a free trade agreement (FTA) with the Gulf states, according to a report by the Studies and Research Department of the GCC Secretariat-General.

The aim is to finalise a deal as quickly as possible. This follows the success of the US in signing bilateral agreements with some GCC countries and the Gulf states' continuing negotiations to set up FTAs with other nations.

These factors will encourage the European side to sweep aside obstacles to an agreement that it has created over the past 20 years, says the report. Negotiations over an FTA began in June 1988.

The study – Economic Relations Between GCC States and the European Union: Reality and Future Horizons, by Department Director Najeeb Abdullah Al Shamsi – says the signing of an FTA would lead to nine benefits:

1: The GCC states' confirmed reserves of oil and natural gas and the increasing demand from Europe make it necessary for the EU to work with GCC members to meet its future energy needs.

2: The oil and gas sector and petrochemical industries in the GCC states represent major investment opportunities for European firms.

3: A free market would encourage European investment and open up GCC markets to European goods.

4: Oil and gas would be supplied to EU states at stable prices.

5: The EU states would be encouraged to place their investments and capital in European banks, companies and international economic groups.

6: Commercial partnerships would be able to establish joint projects with GCC capital and European technology.

7: The EU states would work with all countries seeking peace and stability to support security and political stability in the Gulf.

8: An FTA would remove obstacles to establishing commercial and economic partnerships between the two sides.

9: The GCC states would be able to obtain help from the EU to establish economic, human and social development projects.

The study says the EU would be the biggest beneficiary from the signing of an FTA since it is the stronger party and the commercial balance is in its favour.

If the GCC countries agree to the EU's conditions there will be an imbalance in the economy of the region, and the freeing up of the government procurement sector would end the protection currently given to national industries.

The establishment of a free trade area incorporating the GCC and EU would not necessarily result in comprehensive development in the Gulf. This is due to the obvious difference between the two parties in terms of educational and technical levels.

The setting up of such a free trade area would restrict the GCC states' opportunities to trade with traditional partners such as Japan, China, India and the former Soviet republics.

And the GCC's interest in signing an FTA with the EU is distancing it from moves to establish an Arab free trade area and improve economic and commercial ties with other Arab countries.

"For all these reasons the two parties should speed up the signing of an FTA, though the GCC states must not neglect their strategic interests," adds the report.

Al Shamsi gives a number of reasons why the balance of trade between the two regions is greatly in the EU's favour. They include obstacles placed in the way of free trade by the Europeans and the imposition of high duties on imports from the GCC.

In addition, the GCC states have signed weapons deals worth billions of dollars with EU countires, while the EU has not helped the Gulf countries to improve their ability to compete in global markets.

And he identifies a number of areas of difference between the two sides. "The EU's insistence on linking the signing of an FTA to the tackling of concerns over the rights of minorities in the GCC is seen as interference with the Gulf states' internal affairs," he says.

Other contentious issues include the Europeans' insistence on increasing the level of EU ownership allowed in the capital of national shareholding companies to more than 49 per cent and the absence of any serious attempt by the EU to tackle obstacles that have arisen in each round of negotiations.

The EU's opposition to the signing of an FTA between the US and Bahrain is also noted.

Al Shamsi draws attention to four economic characteristics of the GCC states that the EU can benefit from:

1: The strategic importance of GCC oil and gas. The Gulf states supply 25 per cent of the EU's energy needs and oil accounts for 70 per cent of the EU's imports from the region.

2: The GCC markets are characterised by purchasing power and strong demand for European goods. The Gulf markets play a major role in the consolidation of the EU's trade surplus. The GCC is the fifth biggest market for EU exports.

3: The EU's markets, companies and banks are the biggest beneficiary from the influx of GCC liquidity generated from oil. GCC deposits in EU banks are estimated at tens of billions of dollars.

4: The EU economy benefits from the GCC economy through remittances by European expatriates, the influx of GCC tourists into the EU states and the contracting and investment services supplied to the GCC states by EU companies.

The study stresses the strategic economic importance of the EU countries, saying: "Once an FTA is signed, the EU can become a market for petrochemical industries, petroleum derivatives and the aluminium industry as well as some commodities and food products such as fish and seasonal fruits.

"EU countries represent the second-largest world market for GCC oil and gas exports, and GCC investments in EU countries are the most diversified and long-lasting."

Al Shamsi says the GCC countries are linked to EU states through historical economic relations based on common interests.

"European firms, and British ones in particular, established the first presence in GCC countries. They have had a prominent role in oil prospecting, extraction and exporting.

"Also the GCC countries have become a market for European commodities, goods and products. Gulf-European economic relations have developed extensively over the past few decades, particularly with the signing of the framework agreement in June 1988 that set the stage for negotiations to establish a free trade zone that would help encourage trade and economic partnerships."

He says the GCC has adopted a strategy of co-operation with international economic groups. The aims include boosting trade and economic relations between GCC and EU countries in the light of common interests and equality of opportunities.

"Despite the historical relations, today's changes make it necessary to head towards the adoption by both parties of a joint development vision that would consolidate and deepen economic and political relations in the interest of the people of both sides."

And the report identifies four key areas that the GCC should concentrate on as talks proceed:

1: Energy. GCC countries enjoy abundant energy sources, mainly oil and gas, and which should be taken into account in any negotiations, especially in the light of growing European demand for Gulf oil and gas and in the light of fierce world conflict over energy sources.

2: Investment. The GCC has a strong interest in investing in quality European companies and acquiring technical expertise to assist development projects. Also Europe wishes to keep Gulf deposits and capital in their banks, companies and financial markets.

3: Trade exchange. EU countries wish to maintain the volume of exports of commodities, goods and services to Gulf markets. Also GCC countries seek to boost exports to the EU, especially of petrochemicals, oil derivates, aluminium, fish and food.

4: Economic stability. The two parties should work together to achieve political, economic and social stability and security in the GCC and to keep the region free of any conflicts or tensions that might lead to upheavals or wars.


Trade imbalance

The trade balance is tilted sharply on the side of the European Union and this has affected the balance of payments of some GCC countries.

In 1988, the trade exchange between the two sides amounted 1to $22 billion (Dh80bn) and by 1999 it had risen to $38.6bn.

EU exports to GCC countries doubled to $26.6bn from $13bn over the same period. Meanwhile EU imports – mainly oil and gas – rose to $12 billion from $9 billion. And the balance has remained in the EU's favour ever since. In 2006 the trade exchange amounted to more than $110bn, of which $64.4bn were EU exports to the GCC.

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