UAE Looks to Greater Gulf Unity

Turkey

Economic News

22 Jul 2010
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The heads of state of the six nations of the Gulf Cooperation Council (GCC) held their annual summit meeting in Muscat at the end of the December, and the new year saw a signed agreement for the establishment of a customs union by 2003 and monetary union and single currency in 2010 after over a decade of negotiations. Since its establishment in 1981, the GCC has also been in talks with the EU over a possible free trade agreement, but the EU had always insisted on any such agreement being with a unified trading bloc. On the first day of the summit on December 30th, the delegates were presented with an IMF report that calls on the Gulf states to cut spending and increase taxes.



The GCC customs union will probably be rather easier to achieve than the monetary union according to most observers. Original plans had called for the customs union to come into being by 2005, but following a meeting of GCC ministers in December the date was brought forward two years. By January 1st 2003 all six countries will have a common tariff of five percent on imports from outside the group, requiring most countries to lower their tariffs- from a current maximum of 15%, and for the UAE to raise it from the current four percent. A total of 53 specified goods, largely related to pharmaceuticals and medicine will be exempt from taxes, while some goods such as tobacco and related products will continue to be taxed at a rate of around 100%.



The UAE has said that it will increase its tariffs to the required level by the end of 2002, despite the added trade that the low tariffs bring to the UAE, and Dubai especially. The worry is that an increase may compromise Dubai's position as the region's main trade transit point. However, the general belief is that the benefits of a common tariff will provide greater market security and will allow importers more flexibility, ultimately making the region more attractive. The five percent figure is in line with the World Trade Organisation requirements, which all the GCC states bar Saudi Arabia are committed to.



But aside from vested national interests hindering progress over the last few years the coming months will have to see other structural problems ironed out. Saudi Arabia, for example, has traditionally tried to substitute imports with domestic industrial production and protectionist measures to support that. The UAE, again largely Dubai, has taken the opposite road, focussing on re-export and customs liberalisation, with other GCC countries somewhere in between. Furthermore, common tariffs would require common institutions throughout the GCC to enforce policies, but no such body has yet been established.



Once the customs union is implemented trade relations with the EU should become significantly easier. Annual bilateral trade is estimated to be around $40bn, with a $10bn surplus in favour of the EU, with the GCC accusing the EU of slowing the process of establishing free trade between the two blocs. The two large aluminium smelters in Bahrain and Dubai together account for around five percent of the world's raw aluminium, but are subject to six percent tariffs in the EU. This and petrochemical imports from the Gulf have been sticking points in discussion with the EU, which had always wanted to discuss these issues on the basis of a single Gulf market anyhow, on the grounds that these industries receive government subsidies in the form of cheap natural gas.



The plans for a single currency will be even more difficult to implement, although the apparent success of the Euro thus far will provide material from which the Gulf states can learn. The first step will be to peg all the local currencies to the US Dollar- not too tricky as all but the Kuwaiti Dinar are already pegged, as the main revenue for them all is in oil dollars. The Dinar is pegged to a basket of currencies- whose components are a state secret- but analysts estimate the dollar to provide about 80% of the weight for that.



Some analysts have compared the GCC agreement of December 31st 2001 with the European Maastricht Agreement of 1993, but this is not realistic as Europe then consisted of far more developed economies than the GCC does today, although the process can still provide guidance. At least in the Gulf political interests are much closer and all the countries have a common language and culture, but such differences in interests as there are, are likely to be amplified. The original GCC economic agreement of 1981 envisaged a customs union by 1986, but the process soon become mired in bureaucracy and sluggish implementation. Even basic requirements such as a central bank and common interest rates have not been seriously considered.



The Gulf countries hope that a common currency and market will help the states face the growing problems of unemployment through growing national populations, dependence on oil revenue- which makes up around 70% of GCC revenue- and low oil prices. Total oil revenue to the six states was estimated to have been $135bn in 2000, falling to around $100bn in 2001.



To make the point the IMF circulated a document at the GCC summit, calling on the countries involved to stabilise their economies through levying taxes such as income tax, corporate tax and value added tax, cut expenditure, work to attract more foreign capital and cut down on the cradle-to-grave welfare system. Some Gulf countries have already been taking slow steps in that direction, with the UAE and obvious example. By law foreigners can get involved in the stock market, although only one company will allow them to buy its shares at the moment, and efforts have been made to liberalise trade and encourage foreigners to invest in the economy.

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