In the 30 years since the GCC was created in Abu Dhabi on 25 May 1981, there have been some notable achievements. Within months, the six nations had signed an economic agreement laying the foundations for a GCC-wide free trade area and, on 1 January 2008, a common market between the states was created.

The EU-GCC [talks] were difficult … you had two different types of organisations negotiating with each other

Christian Koch, Gulf Research Centre

Since 2009, the first phase of the GCC electricity grid has proven its worth in preventing summer power outages and progress has also been made towards establishing a common rail network. A degree of military integration has been achieved and common political stances have been taken on several global and regional issues.

But the integration of the six members, which was the GCC’s stated aim in its charter agreed on in Abu Dhabi, has been restricted by a lack of political will to deepen ties between the states at the expense of national sovereignty. Military and political co-operation has been limited by a lack of real co-ordination and plans for a currency union, due to be introduced in 2010, have collapsed.

GCC trade agreements

This pattern of ambitious aims with mixed success in delivering results has been mirrored when it comes to trade, both within the GCC, and between the organisation and other international trading blocs. The GCC has signed free trade agreements (FTAs) with the European Free Trade Association, Syria, Lebanon and Singapore. But similar trading accords with the EU, India, China and South Korea have so far failed to materialise.

The GCC has come to realise the importance of synchronising its policies and making its regulations uniform

Sulayman al-Qudsi, Gulf Investment Corporation

 “There are a lot of ambitious plans, but very few of them have come to fruition,” says Christian Koch, director of international studies at the Gulf Research Centre in Dubai. “A while ago, there was an expectation that an FTA with India would be signed quite quickly, but there have been no talks for three years. Negotiations with the EU have been frozen since 2008 and, although both parties say they are interested in bringing the talks to a conclusion, nothing is really happening.”

Intra-GCC trade growth
(Percentage)
2003 15
2004 28
2005 38
2006 14
2007 25
2008 29
Source: GCC

There remains some optimism that a deal can be agreed with China. “The negotiations are quite advanced,” says Eckart Woertz, visiting fellow at Princeton University in the US and a specialist in the GCC.

“They have already agreed on the goods section of the FTA and are negotiating the services section. It’s potentially more promising [than the talks with other countries],” he says.

GCC trade, 2008
(Percentage)
Rest of world 38.2
EU 21.8
Intra-GCC trade 11.6
Islamic countries 8.9
US 7.9
Japan 6.7
Arab countries 4.9
Source: GCC

Progress towards a FTA with the EU was halted when Brussels said it wanted to include clauses on the protection of human rights in the deal. There were also suspicions within the GCC that the EU was under pressure from the European petrochemicals lobby to stall any potential agreement.

“The human rights clause that the European Parliament wanted to introduce at the last moment angered the GCC,” says Woertz. “The technicalities had all pretty much been agreed and everyone was expecting that the FTA would be signed. The GCC was suspicious that the EU petrochemicals industry wanted to ward off competition from the Gulf.”

Gulf political will

There are also wider institutional problems that limit the GCC’s scope to form effective trade links with other parts of the world. “The EU-GCC negotiations were difficult because you had two different types of organisations negotiating with each other,” says Koch. “The European Commission [the EU’s executive body] has the right to negotiate on behalf of its members, but the GCC has to take every decision back to its members, which complicates things.”

The will of the GCC member states to pursue greater economic integration is also questionable. Bahrain and Oman have each agreed FTAs with the US that run counter to the spirit of regional co-operation. Such was Saudi Arabia’s anger at the Bahrain deal that it temporarily halted oil deliveries to the emirate. “Saudi Arabia was angry because there was no prior consultation and it was simply against the terms of the customs union,” says Woertz. “If you have a customs union, you can’t follow FTAs on a national level.”

The deals have created practical difficulties for US trade with the region. “The GCC customs union has a unified external tariff of 5 per cent, but for trade between the US and Bahrain and Oman it’s zero, which is an obvious contradiction,” says Woertz. “If goods from the US leave Bahrain and Oman, they are subject to the 5 per cent tariff, so they have to find a way to separate the goods.”

Political spats and institutional problems have also prevented the region from fulfilling its potential for intra-regional trade. In one striking case in 2010, Riyadh prevented trucks from entering the kingdom from the UAE because the maps included in their papers showed a border between the UAE and Qatar that ignored land in between claimed by Saudi Arabia.

“I’m not sure that the free trade area is all that free,” says one UAE-based economist. “There are still a lot of issues when it comes to red tape. There have been cases of trucks waiting for days to take goods across the borders, which clearly wouldn’t happen in a well-functioning trade area.”

Intra-GCC trade

Sulayman al-Qudsi, head of economics and strategy at Gulf Investment Corporation in Kuwait, agrees that institutional problems persist, but argues that progress is being made. “The issue of institutional maturity is extremely important and, in the case of the GCC and other developing regions, it is likely to be an issue. But over the past few years, there has been a change in mindset. Institutional capacity is improving and the GCC has come to realise the importance of synchronising its policies and making its regulations as uniform as possible.”

The creation of a common market within the GCC has certainly played a key role in facilitating trade between the six states. “A lot has been achieved by the customs union,” says Woertz. “We have seen growth rates of 20-30 per cent in trade between the GCC states, although overall trade has also increased.”

Practical hurdles are not the only barrier to a more effective economic union between the GCC states. A more fundamental problem is the lack of obvious benefits to such a close trading relationship between the six states. The greatest challenge faced by the GCC as a region is the pressing need to diversify the economy and create employment. But the fact that these are challenges shared by all the GCC’s members means the scope for an increase in mutual trade is limited.

“The common market has had some positive results,” says John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi. “But these countries are producing more or less the same goods. All of them tend to produce hydrocarbons and import everything else, so there’s a limit to what they can do. If you are Saudi Arabia, what are you going to import from Kuwait? And if you are the UAE, what are you going to import from Saudi Arabia?”

Intra-regional trade represents about 10 per cent of total GCC trade. “Oil is still dominant, so there is not a large variety of goods to trade with each other,” says Woertz. “It’s not like the EU, where two-thirds of the trade is with other EU members. The GCC will never have that proportion.”

Trade with other parts of the world, meanwhile, is increasing, even without the introduction of new FTAs. “There’s a question of how important these agreements are,” says Koch. “Trade keeps extending with the EU, despite there being no agreement, and the same is true for Asia. There is no reason to think that the growth of trade in the future will be curtailed by the absence of formal agreements.”

Woertz agrees: “Most of the liberalisation has already taken place; 70-80 per cent of the progress towards completely free trade has already happened.”

But there are wider benefits to deepening overseas trade ties. “There are tangible reasons beyond the purely economic to pursue these agreements,” says Koch. “International arrangements are not only a means of increasing trade, but are also a way of showing that the political relationship between the two partners is valued by those entering into the agreement.”

Stalled negotiations

At the moment, though, the momentum for new deals has been lost. Many of the negotiations had ground to a halt even before the political concerns that have preoccupied the region for the past five months started. Now the focus of many GCC members is on maintaining domestic political stability, rather than pursuing new international relationships.

“There’s a wariness that, in many cases, these negotiations have dragged on for a long time without a tangible outcome,” says Koch. “Many of the agreements are not straightforward and I don’t see the political will at the moment to make the concerted push necessary to make them happen. Given other developments, priorities are elsewhere. Economic arrangements have taken a back seat.”

For Al-Qudsi, however, it is imperative that progress towards greater co-operation between the Gulf states is not derailed in the long term: “You can build as much as you want at the country level and black swan events can wipe out what you have built up. But if you enhance the mobility of labour and capital, you’ll see more cohesiveness and better integration, and the benefits will be apparent for all citizens.”