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22 July 2024

Massive GCC trade imbalance at heart of failed FTA with EU

By Nadim Kawach

Gulf oil producers have accused their main economic partner the European Union (EU) of lacking interest in signing the long-sought free trade deal as it shifts interest to partners in East Europe.

The six-nation Gulf Co-operation Council (GCC), which decided last month to suspend free trade negotiations with the Europeans, said the EU looks at the region as a mere consumer market and is not interested in its development.

In a study released this week, the Riyadh-based GCC Secretariat blamed the Europeans for the failure to reach a free trade agreement (FTA) despite 20 years of negotiations, saying the EU has presented unacceptable political demands.

The study said the GCC had sought the deal to support their economic diversification programmes and bridge a deficit in their trade balance with the EU due to a steady rise in European exports to the region and customs barriers imposed by the EU on Gulf exports.

"One of the main obstacles that faced the FTA negotiations is that the EU has not been interested in tackling this massive trade imbalance with the GCC because it is shifting its interest to East Europe," the study said.

"Another key obstacle is that the Europeans are not meant with the development of the GCC economies and their diversification programmes…this is illustrated in the limited EU investments in GCC productive sectors and their concentration in the oil sector because they need it. They also do not appear to be meant with any effort to facilitate the transfer of technology to the GCC countries and have been dealing with the region as a key consumer market."

Its figures showed the EU has remained the GCC's largest economic partner, with their two way trade peaking at nearly $132.5 billion (Dh486.2bn) in 2007 compared with more than $110bn in 2006 and $107bn in 2005.

But the surplus has been largely in favour of the EU due to a sharp growth in its exports to the Gulf and the fact that the GCC's exports to the European markets are confined to oil, gas, petrochemicals and aluminium.

According to the study, the trade surplus for the EU hit an all-time high of around $54.9bn in 2007 compared with about $17bn in 2006.

"This imbalance in the trade exchange with the EU is mainly a result of the limited GCC commodity exports to the Europe countries and the barriers imposed by the EU on most Gulf exports, including 50 per cent on oil and its products, and nearly six per cent on aluminum exports," it said.

"The problem is underscored by the fact that aluminium and petrochemicals constitute the bulk of the GCC's non-oil exports, while aluminium exports alone account for six to seven per cent of the GDP of Dubai and Bahrain. Another problem is that other Gulf states are pumping massive investments to build new aluminium smelters as part of their efforts to diversify their sources of income."

In a recent statement, a GCC private sector leader said regional states give priority to the EU in their investment programmes given the fact that it is their largest trading partner but accused the Europeans of failing to reciprocate.

Abdul Rahim Naqi, Secretary General of the Federation of the GCC Chambers of Commerce and Industry, said that between 2002 and 2006, the cumulative foreign investments by the GCC members totalled around $542bn, of which $100bn were pumped into the EU.

"In contrast, the EU capital flow into the GCC stood at $2.6bn in 2006, less than one per cent of the European capital outflow," he said.

The figures showed the GCC was the fifth largest market for European products in 2006, with EU exports to the region standing at nearly €55bn (Dh281.2bn).

Its imports from the GCC, mostly oil and petroleum products, were estimated at €37.5bn, with a surplus of Dh95bn.

"Gulf banks have also established strong presence in key EU markets, mainly London and Paris, and are participating in major projects there," Naqi said.

In another statement, a former Saudi economy official said the EU was raising unaccepted political issues and urged the GCC to suspend the negotiations.

Abdullah Quwaiz, former Saudi Finance and National Economy Ministry Under-Secretary, said so many years of talks over the FTA with the EU have not produced results despite what he described as the GCC's strong interest in reaching a trade pact with the Europeans.

"There has been progress on most issues except those which have nothing to do with our economic ties," said Quwaiz, who also served as an economy under-secretary for the GCC since it was created in 1981 until 1995.

"Those issues include EU demands to discuss democracy, human rights, weapons of mass destruction and immigration, as the GCC is serious about reaching an agreement, they agreed to those demands, but during another round of talks in November 2007, the EU came up with another demand, which stipulates that either party has the right to suspend the FTA if the other party fails to honour its commitments in the political aspect.

"If the GCC countries wish to improve their negotiating position with the EU, it will be better for them to do this through the World Trade Organisation (WTO) as they will find allies who will support their demands…so, what is required now is to halt the FTA negotiations with the EU and begin serious discussions about issues that touch upon the daily lives of our citizens and businessmen, such discussions should contribute to attracting more EU investments into the GCC states and redress our trade imbalance with the Europeans."

GCC states – the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman – have been negotiating the FTA with the EU for 20 years but an agreement has been held up by differences on some economic and political issues and the EU's high customs tariffs on Gulf petrochemical exports. The EU has also demanded that the GCC nations must first unify their laws and tariffs on foreign imports, which materialised through the GCC customs union created three years ago and the Gulf common market that was launched at the start of 2008.

Senior officials from the UAE and other Gulf countries said in 2008 they had finalised most issues and a deal could be struck at the end of the year.

GCC states, sitting atop nearly 45 per cent of the world's oil and 20 per cent of the gas, hope the FTA with the EU would boost their petrochemicals and other exports and at the same time trigger an influx of EU industrial investments, which are needed to support the region's economic diversification programmes.

The free trade agreement is also expected to benefit the Europeans as it means bigger access to GCC markets and stable oil supplies in the long term.