Why the GCC and EU should restart negotiations on a free trade agreement

On June 27 and 28, a large Gulf delegation traveled to Berlin to participate in the first Gulf-German forum on security and cooperation, organized by the German Federal Academy for Security Policy and the German-Arab Friendship Association. Discussions at the conference, attended by Prince Turki Al Faisal, Chairman of the King Faisal Center for Research and Islamic Studies, touched upon the need to restart negotiations over a GCC-EU free trade agreement (FTA), after previous negotiations collapsed in 2009. Coincidentally, the EU has just concluded an FTA with several South American states, so there is now space for the GCC to conclude a similar deal.

Since the negotiations ten years ago, both parties’ interests in an FTA have changed. The GCC’s economic reality is now fundamentally different. Whereas previously the GCC’s interests in a deal may have been driven by the desire to forge stronger political ties with the EU, in the era of Vision 2030 the GCC is primarily motivated by economic interests.

The big prize for the GCC is gaining access to the EU’s huge market, which at almost $19 trillion in 2018 is over 10 times larger than the GCC economy. At present, the Gulf economy’s Achilles’ heel has been its dependence on hydrocarbons, especially in the domain of exports, where oil and oil-related products typically account for over 50 percent of economic activity. Consequently, the Gulf countries have developed long-term economic plans which emphasize diversifying their economic output by developing new exports.

In 2019’s competitive global marketplace, FTAs are crucial for developing a dynamic and diverse range of exports for two reasons.

First, and most obviously, FTAs confer an immediate, significant price advantage, as the GCC’s exports will no longer be subjected to tariffs.

Second, many of the most advanced – and hence most profitable – goods in the value chain must be produced in large volumes so that the manufacturer can exploit economies of scale. The GCC economy is large by global standards, but it is still dwarfed by the EU’s economy, which contains over 500 million residents and 28 member states.

In the previous era of high oil prices and massive budget surpluses, these sorts of considerations were irrelevant for the GCC states. This has changed due to the recent decline in oil prices and the growth of large budget deficits in the Gulf. Historically, the basic structure of GCC-EU trade is the Gulf countries primarily exporting hydrocarbons and minerals, and the EU primarily exporting advanced manufactured products.

More specifically, in 2015, total GCC-EU trade was $160 billion: fuel represented 64 percent of the GCC’s exports, with the rest coming from precious stones (9.9 percent), plastics (6.6 percent), and organic chemical products (3.7 percent). The EU’s exports were much more diverse; the largest categories were machines and parts (17.3 percent), cars and parts (11.3 percent), electrical products and appliances (8.3 percent), and airplane parts (6.2 percent).

Facilitated by the stability and complementary structure of GCC-EU trade prior to the recent oil price crash, the previous negotiations reached an advanced stage during the 2000s. However, they were suspended due to disagreements over export tariffs. Export tariffs are an uncommon class of tariff that countries place upon their own, strategically valuable basic commodities to ensure that they are consumed domestically; they are a tax-based analogue to the export ban that the US had imposed on its oil up until 2017. The GCC was keen to retain the right to export tariffs without restrictions, in line with World Trade Organization defaults, but the EU had specific constraints it wanted implemented. Today, both parties, especially the GCC, have different approaches, and so the opportunity to restart negotiations exists.

Two questions arise.

First, in light of the German parliament’s blocking of arms sales to Saudi Arabia, is there a chance that political disagreements can undermine a deal?

This is unlikely, because historically, the EU (and its antecedents, such as the European Community) have preferred to separate economics from politics in foreign relations. Even at the height of the Cold War, western European countries continued to trade with eastern Europe and the Soviet Union, most notably Germany’s energy imports from the USSR. Germany could have procured energy from alternative sources, but the USSR was the most sensible source on economic grounds, and these considerations trumped geopolitical ones, despite the fact that Germany itself was divided between East and West for geopolitical reasons.

In fact, the EU’s separation of geopolitical and geo-economic considerations has been a major source of EU-US friction during the last 50 years, as the Americans typically consider trade a legitimate component of an integrated geostrategic toolbox. This difference in approach was most recently seen in the EU-US dispute over the Iranian nuclear deal: regardless of security considerations in the Middle East, the EU insists that it has the right to continue trading with Iran and is keen to exercise this right. President Donald Trump has also repeatedly criticized Germany for importing gas from Russia.

Second, will EU-GCC negotiations be hindered by the Qatar boycott? Probably not, as the GCC continues to perform its military, security, and economic functions, both outside of the Gulf and in the GCC customs union.

Securing an FTA with the EU would be a successful result for the GCC, especially considering the current climate of protectionism and isolationism. Although officials familiar with the process indicate that an FTA will take time due to its complexity, the Gulf countries are meanwhile engaged in long-term plans as they continue to restructure their economies and diversify their exports. Indeed, the comprehensive free trade agreement recently concluded between the EU and South America took 20 years and 39 rounds to negotiate, indicating that persistence pays off – eventually.

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