GCC TRADE: Trading blocs move closer

28 July 2006
They now rank as the longest trade negotiations in history. But 16 years after they first began, hopes are rising that a free trade agreement (FTA) between the GCC and the EU could be signed by the end of the year, if not sooner.
Heightened activity in recent weeks certainly suggests an end may be in sight. EU Trade Commissioner Peter Mandelson was in Abu Dhabi in early June to attend a meeting of GCC finance ministers. He departed with a message from the EU that all that was needed to conclude a deal was the political will to resolve outstanding issues. A month later, representatives from the European Commission and the GCC held
technical-level talks in Brussels.

Further multilateral meetings are
planned over the coming weeks, as are internal EU talks to clarify specific details.

An FTA has been on the cards since 1989, when the EU and GCC signed a co-operation agreement calling for closer collaboration on political and economic issues and a commitment by the two blocs to start trade talks. A year later, negotiations began, but it soon became apparent that a major obstacle stood in the path of the FTA. From the EU's standpoint, a region-to-region FTA could be achieved only if the GCC first demonstrated 'region-like behaviour'. On 1 January 2003, it established a customs union, which paved the way for talks to resume in earnest.

Nevertheless, a number of country and sector-specific issues still stand in the way of a deal. The discount formula applied by Riyadh on natural gas liquid (NGL) feedstock has been a persistent stumbling block. As it stands, the kingdom applies a 30 per cent discount on NGLs such as butane and propane sold to local petrochemicals producers, using a complex formula based on the Japanese naphtha export price. According to the EU, the discount constitutes a de facto subsidy that leaves European producers at a comparative disadvantage.

The issue was a longstanding sticking point in Riyadh's entry negotiations to the World Trade Organisation (WTO), but one which the kingdom, with US support, managed to win. The discount is likely to remain in place until 2011 at least.

As for the GCC, it has taken issue with the EU's 6 per cent tariff on primary aluminium imports, which it claims protects unprofitable production in Europe. The EU is widely expected to drop the tariff, given that European capacity is being shut down and the remainder is struggling to meet demand. Tuna fishing quotas in Oman are another issue that will need to be resolved.

The EU already enjoys strong trade ties with the Gulf, benefiting from a long-term trade surplus, which in 2005 amounted to Eur 13,000 million ($16,281 million). The GCC ranks as the EU's sixth biggest source of imports, on account of energy sales that in 2005 reached Eur 24,135 million ($30,233 million). The trading bloc is also the EU's fifth largest export market, with machinery sales alone totalling Eur 21,476 million ($26,903 million) last year.

In view of the already strong trading relationship, some wonder how much impact an FTA will have on boosting commercial ties. 'The FTA is barely relevant to the GCC, which will only gain marginally from its conclusion. The GCC is already open to international trade and investment and the EU already has access to GCC markets,' says Giacomo Luciani, co-author of a report entitled The EU and the GCC: A new Partnership.

The European Commission disagrees. It argues that the long-running FTA negotiations have in themselves encouraged greater openness between the two blocs. 'It is difficult to separate the negotiations from trade openness,' it says. 'There has been a positive feedback loop from the process and it would be wrong to say that the conclusion of the FTA will be an anti-climax.'
For the GCC, the benefits of an FTA would appear to outweigh the drawbacks. Unlike Tunisia and Morocco, which saw overall government revenues drop as a result

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