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Stronger regional FTA to mitigate falling oil prices
January 3, 2016, 5:00 pm

In the decade and half since start of this century, there has been an unprecedented increase in the number of free trade agreements (FTA) signed bilaterally between countries and, increasingly, between economic blocs. In many cases these FTAs have contributed to increased trade and stronger political and security relations between the concerned parties.

The EU, the world’s largest trading bloc, the ASEAN, the seventh largest economy in the world, and the USAN in South America are all successful FTA blocs that have benefitted from their intra and inter-regional economic relations. The newly formed African Free Trade Union, that groups together 26 nations and accounts for nearly 60 percent of the continent’s GDP, and the recently signed Trans-Pacific Partnership (TPP), between 12 Pacific nations that could bind 40 percent of the world’s economy, are other instances where trading blocs could provide significant economic advantage for participating nations.

Compared to all this regional and bilateral economic integration, the Gulf Cooperation Council (GCC) has been slow to implement free trade agreements, both regionally and internationally. Though the six-nation bloc, which came into existence in 1981, is well ahead of the rest of MENA in terms of both intra-regional and international trade, there is plenty more potential that remains unrealized.

Intra-regional trade flow among GCC countries, which was about $8 billion in 1980 and represented around 3.8 percent of its total trade with the rest of the world, jumped to nearly $100 billion by the end of 2012. Although this was a considerable hike in trade, it nevertheless represented less than 10 percent of the $1.2 trillion in trade between GCC and the rest of the world.

While the increased trade is commendable, there are several non-tariff hurdles that inhibit greater intra-GCC trade. The Gulf Common Market, which came into force in 2008 and envisioned monetary union by 2010, has been all but quashed following disagreements on where the union’s headquarters should be based. Similarly, a pan-GCC railway that would have greatly facilitated the movement of goods and people has been mapped out, but is yet to gain traction among the six governments. Likewise, early plans for a combined value-added tax (VAT) were largely put on ice, but have garnered interest in recent months following the fall in oil prices.

Currently, the GCC has few FTAs as a bloc. A free trade deal with the EU, under discussion since 1990, floundered in 2008 apparently over disagreements on human rights issues. The GCC maintained that the linking of FTA to human rights was an attempt to interfere in domestic policies that had nothing to do with economic cooperation. Also, discussions to seal a trade deal between the bloc and the US have not been helped by Bahrain and Oman signing separate bilateral agreements with the US in 2006 and 2009, respectively.

Given the difficulties associated with sealing FTAs with Europe and the US and the rising clout of Asian economies, it is not surprising that the GCC has been looking east for new trade deals. In Asia, freer trade with China and India would arguably have the greatest impact, given the growth in their economies. China is forecast to be the GCC’s largest export market by 2020, while India’s $2.1 trillion economy has the advantage of close proximity and a growing middle-class consumer base.

Greater integration between GCC and other Arab states could also have significant impacts, not only on trade but on employment. Though the Greater Arab Free Trade Area (GAFTA) liberalized the markets of the 18 states with the elimination of all tariffs in 2005, it has had little effect. A decade after removal of all tariffs, total inter-Arab trade as a percentage of total Arab foreign trade remains only around 10 percent. The World Bank says MENA’s intraregional exports averaged less than 8 percent of total exports between 2008-10, compared to 25 percent in ASEAN and 66 percent in the EU.

With Gulf economies losing precious oil revenues and export diversification becoming ever more essential, intra and inter-regional trade agreements will undoubtedly require greater emphasis in the days ahead.

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