Nicolas Sarkozy is confronted with more than the messy aftermath of the Lisbon Treaty as he takes over the presidency of the EU this month. The French president also has to try to reinvigorate the stalled trade negotiations between the EU and the GCC.

The prospects for a long-awaited free trade agreement (FTA) between the two blocs are receding, according to recent public statements.

On 10 June, GCC secretary general Abdulrahman al-Attiyah announced that the six-member body would not accept any political conditions for a trade agreement. It signalled that the GCC could pull out of talks if Brussels insists on imposing human rights clauses.

In a sign of the growing hostility towards Brussels, one member of Saudi Arabia’s Majlis al-Shura, a legislative body that advises the king, says the trade talks have already dragged on for too long.

He says the GCC should instead turn its attention to striking a deal with Asian countries, which are far more important to the GCC’s long-term strategic interests.

Shrinking optimism

Such words reflect a widespread feeling in the Gulf that the EU has allowed a purely commercial agreement to become politicised. The optimism earlier this year that an FTA might be signed in 2008 has largely disappeared.

A visit to the Gulf in April by EU external relations commissioner Benita Ferrero-Waldner fuelled the animosity. A well-organised lobbying campaign by Bahraini opposition groups helped ensure that human rights and democracy were high on the agenda in free trade talks with the GCC.

The attempt to re-engineer the trade agreement with a political agenda is a case of wanting too much too soon, says the GCC. “We have suggested to the EU Commission a couple of times in the past year that we should sign an agreement on what has been agreed on and then continue discussions on the details that remain,” says Abdelaziz Abu Hamad Aluwaisheg, the GCC’s director of economic integration.

The EU insists that as well as market access for goods and services and common rules on intellectual property rights, competition and dispute settlement, any agreement needs to cover issues such as human rights, the labour market and illegal immigration.

There is little reason to believe that any substantive progress can be made on these latter issues in the near future. Although human rights are always on the agenda at meetings between the GCC and the EU, the wording of the communiques that follow barely changes from year to year.

The most recent meeting was held in Brussels in late May, after which the two sides did little more than reaffirm their “respect for human rights and democratic principles”.

Gulf negotiators hope that France will now steer the EU talks back towards trying to remove the remaining economic barriers.

The main negotiations for the world’s first ever FTA between two customs unions began in earnest in 2002. Since the beginning of 2006, the pace has accelerated, particularly in 2007, when five negotiating rounds took place.

Brussels remains upbeat about the chances of a deal being reached. “Good progress has been made in the negotiations and now we are very close to an agreement that has the potential to open doors for new investment and new trade beyond what both sides have offered through the WTO [World Trade Organisation],” says Peter Power, spokesman for EU trade commissioner Peter Mandelson.

The aim is for a trade deal that grants preferential treatment and greater market access for both sides. The EU already absorbs about 10 per cent of GCC exports and supplies about 30 per cent of its imports. In all, EU-GCC trade totalled $129bn in 2007. Of this, $91bn comprised EU exports to the GCC and $38bn GCC exports to the EU, leaving a trade surplus of $54bn in the EU’s favour.

“The FTA will bring deeper and more stable trade and investment relations between the Gulf region and the EU, and new trade and investment opportunities to economic operators on both sides,” says Power.

Other than human rights, the outstanding issues for the EU are in the areas of market access and export restrictions. A recent paper from London-based thinktank Chatham House, Prospects for an EU-Gulf Co-operation Council Free Trade Area, argues that access to the market for services in the GCC is the key prize for Brussels. This is in line with the new EU trade policy of targeting emerging economies and energy producers, using preferential agreements as the main instruments for improving trade.

With more limited ambitions, the GCC wants to sign up to what has already been agreed and to leave more substantive issues to be covered later.

GCC negotiators are adamant this does not mean they are trying to block progress.

“We are in a hurry to sign the agreement, not because it would make major changes to the economic relations but because we want to get it out of the way and get down to the business of the GCC-EU relationship,” says Aluwaisheg. “The EU has brought up minor technical issues and political clauses that we thought were settled years ago. That is what triggered the secretary general’s recent reaction.”

The GCC says the FTA contains mechanisms that could be used to develop the relationship further, by establishing joint committees on a range of issues. It believes this would support European Commission president Manuel Barroso’s vision of a “strategic partnership” between the GCC and the EU.

Barroso floated the idea of a strategic relationship in late 2007 in a bid to persuade the GCC to accelerate trade talks. But the push for the inclusion of non-trade-related issues in the FTA talks may stop this plan moving forward.

With progress on the talks slowing down, the Gulf states resent the suggestion that they are seeking to restrict free trade, citing EU tariffs on GCC aluminium and petrochemicals exports as the real hurdles.

“There is a misconception that the EU does not restrict foreign investment,” says Aluwaisheg. “It does, and it took a long time to get them to agree to remove barriers to petrochemicals exports in the European market, which is a big benefit to us.”

Clearly, improved market access for non-oil products from the Gulf is a major incentive for the region’s exporters. Yet the benefits of the FTA are not so great that the GCC will let the EU dictate a political reform agenda on the back of it.

“Right now, the agreement is more beneficial to the EU than the GCC, as the latter is already exporting items that are enforceable through the WTO,” says John Sfakianakis, chief economist at Saudi bank Sabb. “So there is very little to be gained in addition to what has already been achieved on market access.”

Soaring oil prices have substantially increased the Gulf’s global commercial weight. It is this that endows it with the confidence to negotiate strongly over an FTA with the Europeans. It is somewhat different for the EU, says Sfakianakis.

“There is much more to lose because the EU, especially its SMEs [small to medium-sized enterprises], don’t have equitable access to the GCC market,” he says. “An FTA would give them a level playing field.”

The sense that the EU is keener on an FTA than the GCC is supported by the growing importance that Brussels is placing on energy security. Although the mechanism for connecting the FTA to energy security is still unclear, deeper trade and political relationships are seen as firming up the EU’s energy supply options. In contrast, the immediate benefits to the GCC states of better access for its petrochemicals and aluminium exports appear more prosaic.

The GCC can therefore afford to sit tight, at least until it feels the EU has diluted its political conditions. But with the commission’s attention now absorbed by the recent rejection of the Lisbon Treaty by the Irish, it will take a substantial push from Paris to put the EU back on track towards signing a trade deal with the Gulf states.

However, there is a danger in that an extended delay to any deal could dissipate the economic cohesion of the Gulf states. Over the past few years, Bahrain has implemented a bilateral trade deal with the US, and Oman and the UAE have started negotiations for deals of their own, all of which undermine the idea of a common Gulf trade policy.

Although the UAE is still keen to sign an FTA with the US, the GCC insists that the six-member bloc is acting as one. As further proof that it is united, the GCC cites a series of FTAs already concluded in 2008, with Singapore, Turkey, Lebanon and the European Free Trade Area.

Developing ties

More such deals are being planned, many with Asian economies with which the oil-rich Middle East states are seeking to develop closer strategic ties.

A compromise between the Gulf and Brussels is still within reach but remains a challenge for both sides. For the GCC, it means accepting that the EU’s international policy does not allow it to ignore all reference to human rights issues. For the EU, it implies an understanding that most of the Gulf states have engaged in serious political reform and do not like being lectured by a trading bloc that has delivered billions of dollars in aid to regimes with worse human rights records, such as Egypt.

Two-way trade will continue, whether or not it is formalised through an FTA. But the closer strategic relationship sought by Brussels may only be built on the stronger foundations of a signed and sealed trade pact.

The GCC says it is ready to sign up to what has already been agreed. The EU will have to decide between cutting its losses and agreeing to a restricted FTA, or holding out for a treaty that reaches beyond trade and covers political and environmental issues.

President Sarkozy, no slouch when it comes to seizing a public relations opportunity, may be able to announce a date for signing an FTA with the Gulf states in the next six months. But if dealing with the Lisbon fallout takes priority, the waiting game may last a while longer.