Will The EU And GCC Ever Come Close?

A EU-GCC Free Trade Agreement is highly beneficial but remains elusive, writes GCC-EU analyst Johann Weick.

Seeking improvement of bilateral trade and stability in one of the most strategic regions in the world, the EU began to develop relations with the GCC in the late 1980s with a EU-GCC Cooperation Agreement.

The mutually welcomed idea to sign a EU-GCC Free Trade Agreement providing progressive and reciprocal liberalisation of trade was expected to boost import and export, and offered chances in region-to-region cooperation.

Optimism over a deal-in-the-making had to be tempered every time it was expected that the long-awaited agreement was going to be concluded though.

GCC worries over the actual EU import duty level for jet fuel and the EU ending GCC assigned Generalized System of Preferences (GSP-rules), one of the lowest category of international trade rules permissible non-reciprocal trade preferences, have come to surface recently.

Bilateral Deal Blocked

In a period of economic and geopolitical re-alignment, countries and regional blocs have compelling reasons to seek and secure long-term preferential trade deals with partners who can guarantee them a steady supply of those goods which they themselves lack, or are unable to produce in self-sufficient quantities at a reasonable cost.

GCC states are short in foodstuffs but abundant in oil and natural-gas. EU member states remain, on the other hand, import dependent in terms of fossil fuels but have surpluses, and therefore export capacity in agricultural goods.

Talks over impediments to reciprocal market liberalisation have been subject to breakdowns though, with the GCC deciding to suspend the negotiations in 2008. Since then both parties, have, apart from a Joint Action Program in 2010, applied the brakes.

GCC states willing to retain the right to impose duties on their exports is not to the likening of the EU, which wants to be frank with an open discussion, even if there is difference in perspective, e.g. on popular participation in decision-making and human rights.

Despite negotiations on hold, trade thrives well. The 28-member state EU remains a significant trading-partner for the GCC, while the six nations large GCC still constitutes one of the top export markets of the EU.

EU exports include machinery, railway equipment, commercial aircraft, medical equipment, power generation plants and services, like engineering and education.

GCC exports are, on the other hand, apart from ship-loads of oil and natural-gas, limited to aluminium, petro-chemicals, port and facilities management and dates.

EU interests are, apart from seeking enhanced investment opportunities in GCC energy sectors, structured on taking a larger chunk of GCC tourism, telecom, transportation, construction, infrastructure, insurance and financial services markets.

GCC states, on the other hand, want the EU scrapping its six per cent import duty on aluminium along concessions on hydro-carbons, energy taxes and fuel distribution.

Benefits Other Than Trade

The EU and the GCC have vested interests in import/export, and accordingly have signed-up to the World Trade Organization (WTO), the international body which provides contractual obligations how governments should frame and implement their trade policies.

The passing and enforcement of domestic legislation to impose international standards related to WTO rules has implications for government policies in GCC states.

Moving away from guaranteed state employment and developing a flexible workforce for a diversified, competitive and modern economy capable to resist the downside of economic development are major challenges for GCC states.

From Western standards, GCC states are often viewed as undemocratic. It is, however, reasonable to say that the absolute, hereditary-ruled Gulf monarchies are responsibly run.

Stability and domestic calm have created economic confidence, attracting investments and businesses from both within and outside the GCC.

The road to economic diversification, international competitiveness, market liberalisation and the openness of the ever more economic and political interdependent world of today will put pressure on the entitlement economy GCC nationals have become accustomed to.

Finding viable government budget sources to eventually depleting revenues derived from oil and natural-gas exports means introduction of taxation systems, modifications in labor markets, like reductions in dependence on migrant labour and employability of ever more highly educated local populations, and cut-backs in subsidised utilities.

The EU should realise that GCC states are therefore not expected to let their oil/natural-gas, services, labour and investment markets become unrestricted.

GCC states are essentially not against conditionality, but oppose the idea of the EU holding the right to unilaterally suspend the EU-GCC Free Trade Agreement if it feels a violation on the GCC side on human rights.

A deal with the EU will acknowledge that their projects are taken seriously, and give the GCC states further status in the emerging multi-polar global political economy.

European companies will be able to root themselves more firmly in the Gulf once full ownership of businesses outside the designated free zones has become a reality.

The EU holds a considerable, unmatched expertise in regulatory reform related to customs unions, common markets and monetary integration, EU-styled concepts which have attracted GCC interest: a EU-GCC Free Trade Agreement is likely to assist GCC states in their drive to economic diversification, international competitiveness and other reforms.

The GCC, the economic and financial wealthy regional bloc on the Arabian-side of the Gulf, has come of age, and accordingly deserves more attention/priority in the external relations of the EU.

Johann Weick analyses GCC-EU relations and teaches EU policy in Brussels, Belgium and Dubai, UAE.