GCC Accelerates Trade Talks with Europe

Economic News

22 Jul 2010
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Foreign ministers from the six-member Gulf Cooperation Council (GCC) and the EU held meetings in Granada on February 27th-28th. While GCC officials had hoped that the talks would focus on a possible free trade pact, but Saudi Crown Prince Abdallah’s Middle East peace initiative dominated the talks instead. Nevertheless, both sides agreed to accelerate trade discussions following the GCC’s announcement last December that it would move forward the organisation’s deadline for internal customs union to 2003. Analysts continue to say that the Gulf countries still have to reform their political and economic systems in order to fully compete in the global economy. Meanwhile opportunities for European companies, especially in the energy construction sector, still look bright, despite the global economic slowdown.

Although talks of a free trade agreement with the EU- the GCC's largest trade partner- have been underway for around 13 years, progress has been slow. Instead of a number of bilateral trade accords with Gulf states, Brussels has long advocated a forging a deal with the GCC as a whole. Therefore, GCC customs union is a vital step towards a Gulf common market, worth an estimated $80bn in total imports. The EU's exports to the GCC were around $25bn in 2001, while the EU imported around $22bn from the GCC, mostly petroleum products. The GCC has always maintained that Europe imposes unfair duties on the two main Gulf exports- aluminium and petroleum products- and GCC officials hope that cuts in these duties will allow these industrial products to have more of an impact.

The decision to bring forward the implementation date for the customs union appears to have spurred progress in the trade talks. Gulf officials had hoped that the whole event would be centred on a trade agreement that would be finalised this year. Instead, much of the discussion centred on Middle Eastern politics, specifically the proposal from the Saudi Crown Prince Abdullah for normalisation of relations with Israel in return for the latter’s withdrawal from the West Bank and Gaza. Most Arab countries have welcomed the proposals, as has much of the international community, largely because of the lack of other options. The final statement from the meeting called on Israel to lift restrictions on Yassar Arafat, amongst a number of other measures. The EU said the Saudi proposal was a "significant contribution to the reactivation of the Middle East peace process".

The two sides discussed trade and a possible free trade agreement, with officials still hopeful that it will be signed this year, although no specific target date was announced. A joint statement issued on February 28th said that trade negotiations would take place in Brussels on March 20th and 21st, and that the process towards a free trade zone would be accelerated. In a further important development towards accelerating the process, the GCC states said on March 11th that they had agreed on a method for the collective distribution of import duties on items brought into the Gulf. This was regarded as the last hurdle before the customs union could be implemented.

One of the remaining obstacles to a free trade zone, and indeed, economic diversification in the GCC, is the relatively closed nature of their economies and political systems. This point was emphasised by foreign delegates at the Emirates International Forum held in Dubai in early March. The Gulf leaders were encouraged to look outwards, and not take their oil riches for granted but to invest for the future. The deputy secretary-general of the Organisation of Economic Cooperation and Development (OECD) Herwig Schlogl called for reform and transparency in the government, financial and judiciary systems, or risk being shunned by investors. Announcing that "openness is key", he noted that only open societies can succeed in the global arena.

The Gulf economies have suffered during the course of the last few months, largely because of the 25% fall in the price of oil after September 11th. The UAE minister of planning Sheikh Humaid al-Mualla said on February 17th that the UAE's GDP had fallen by almost 4% in 2001 to around $67.79bn. Oil sector revenues fell by 17% over the previous year, contributing only 28% to GDP, as the average price of UAE crude fell from $27.6 per barrel in 2000 to $23 last year.

Lower oil profits do not seem to have had an effect on a number of regional energy projects. Some $10bn worth of power projects are going ahead in the GCC, partially in light of a study conducted in 2000 that showed that Gulf countries had to invest some $100bn over the next ten years and accelerate privatisation in order to meet energy requirements. The UAE has been leading the way in opening the sector to private investment, with the German giant Siemens recently signing the contract for the $872m Shuweihat project in Abu Dhabi. Bids are expected to be submitted this year for a further two projects in the UAE, with an estimated cost of $2.1bn. Officials from the French company Alstom claim that over the last three years they have seen an average annual turn-over of around $500m, and that they expect the industry in the region to grow by around seven to eight percent annually over the next few years.

The Middle East is considered to have one of the world's largest demands for electricity, and the Gulf essentially has the money to finance such large projects. Rapidly growing populations, economic diversification away from petroleum and the abundance of cheap energy sources for these new industries have raised this demand. The GCC is also planning a $2.5bn project to integrate their electricity grids.

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