Merits and Demerits of Regional Free Trade Agreements in reference to the Gulf Cooperation Council - Case Study Example

MERITS AND DEMERITS OF REGIONAL FREE TRADE AGREEMENTS IN REFERENCE TO GCC Table of contents Introduction…………………………………………………………………….3 GCC…….. ..………………………………………………………………4 Structure of GCC………………………………………………………………..4 Conflict of GCC with WTO……………………………………………………..6 Theories of Free Trade Agreements……………………………………………..8 Achievements of GCC…………………………………………………………..12 Advantages and disadvantages of GCC…………………………………………14 Future plans of GCC…………………………………………………………….16 Conclusion………………………………………………………………………17 Bibliography ……………………………………………………………………18 Appendices ………………………………………………………………….….18 List of tables…………………………………………………………………….20 Introduction In post second world war, there has been a sustained and growing ‘Balkanization’ of what hitherto has been unified global trading system. Most free trade agreements play a very vital role of liberalizing trade between the member states and other countries. They aim at making business conduct to be less complicated across the regions and attract more investors enabling the growth in business within a region. The Gulf Cooperation Council (GCC) was formed by countries in the Arabia peninsula to forge unity among the Arabic countries. These countries which hold most of the oil reserves in the world have through GCC formed a major global block for trading in the world (PTA dossier 2008). There are many merits and demerits that are associated with Free Trade Agreements within a region. This paper intends to look deeply at these advantages and disadvantages of FTAs within GCC. A description of the structure of GCC will be given, member states, areas where they cooperate, the advantages and disadvantages of FTA and the achievements it has made both politically and economically will be addressed. The future plans it has for its members will be looked into and a conclusion will be drawn. The Gulf Cooperation Council (GCC) The GCC is an economical, social, regional and political organization which was forged between the Arab states in the Gulf region. Six leaders from this region signed GCC in Riyadh in 1981 on 25th may. Its charter stipulates that it was formed in a bid to effect interconnection, integration and coordination among the states who are its members. It was aimed at achieving unity in all fields stressing the qualities which are common, special relations and similar governing systems which are based on the Islamic creed and faith where they are bound by the same destiny and a single goal under the identity of Arabs. (BBC News 2008). The main aims of the GCC are: developing regulations that are common in financial and economic affairs, communications and customs, culture and education. The GCC boasts of having six states in its membership. They include; Oman, Qatar, Saudi Arabia, Kuwait, Bahrain and United Arab Emirates. The Structure of GCC An administrative structure is present in GCC and it is made up by the following: 1. Supreme council- This is the highest organ with most authority in GCC and it comprises the member states heads. The presidency is annually rotated based on the members’ states names in the alphabets. This body is responsible for provision of direction in policies, review of recommendations and reports from subsidiary bodies. The council also makes an appointment of the secretary general and makes an approval on the secretariat general budget. An annual meeting is held by the council but a session which is extraordinary can be held if a member makes a request and gets seconded by another (BBC News 2008). 2. Ministerial council- This is made up by foreign ministers or ministers at the same level as delegated by the member states. The chairmanship is annually rotated with the state hosting the summit taking the chairmanship during the year. Its main duties is proposal of policies and preparation of recommendations, projects and studies whose main aim is development of cooperation within the member states. It also endeavors to develop, encourage and coordinate existing activities in every field within the member states (BBC News 2008). 3. Secretariat general- The secretary general who gets an appointment from the supreme council is the head of this body. The appointment is made for a term of three years and can be renewed once. This body oversees the preparation of meetings and sees to it that the implementation of policies is duly done (BBC News 2008). 4. Consultative commission- Five representatives from each member state make this commission which is mandated with giving guidance to the supreme council. 5. Consultative for settlement of disputes- This is separately formed for each case on the basis of the dispute nature. Its main aim is providing resolutions that are peaceful to disputes that arise within the member states. This body can solve political problems such as border disputes amicably. The recommendation it makes are submitted to the supreme council for review and consideration (BBC News 2008). 6. Secretary General- He is elected by the supreme council on a term of three years and renewal is only done once. The main objectives of GCC are formulation of regulation in various fields such as economics, financial affairs, security, commerce, industry, agriculture, communication, customs education, health and social affairs, tourism, information, culture, administrative and legislative affairs. It also aims at stimulating progression in technology and science in multiple fields, establishment of research centers for science which will lead to implementation of projects that are common within the member states (Beatrice 2008). The other objective is to give an encouragement to the private sector as this will spur growth in the economy. PTA stands for Preferential Trade Agreement which is a trading block that often gives the countries participating, the privilege of preferentially accessing certain products. PTA does not normally abolish taxes but rather reduces them. A good example is whereby the member states reduce their trading taxes among them from 15% to 10 % but not completely abolishing them (PTA dossier 2008). PTA normally precedes FTA as most member states reduce tariffs at first and later on completely abolish them. The creation of Free Trade Agreements takes place once the members do away with conditions and taxes. Conflict of GCC with WTO PTA was the first phase of integration to be carried out by GCC member states as they lowered tariffs among them and this allowed trading. The member countries in GCC integrated FTA in the second phase as an agreement was made towards abolishment of quotas, tariffs and a preference made on certain services and goods among them (PTA dossier 2008). The World trade organization (WTO) has fully supported the efforts by GCC to protect their markets as long as they do not violate the rules and regulation laid down by it. The WTO is responsible for formulation of rules pertaining to trading and aims at protecting the local industries and markets. The countries in GCC have all joined WTO with Saudi being the last one to join. The WTO does this through its coordination with Arabia, other countries and GCC on issues that have been negotiated and topics that fall under WTO. They may also raise awareness of those who are concerned on the issues and themes that have been laid down by WTO and Free Trade Agreements through the use of workshops, seminars, newsletters and releasing articles that are analytical in nature. The WTO does all this in a bid to disseminate relevant information to all the concerned parties (WTO 2006). 0000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 Theories of Free Trade Agreements Trade diversion Table 1: EU trade with GCC in 2001 (Derosa and Kernohan 2004) Imports (I) to EU Share of EU total imports % of each in total (I/Ex) Energy Energy as % of (I) Exports (X) from EU Share of all EU(X) Bahrain 434 0.04% 5% 230 53.0% 895 0.1% Kuwait 2380 0.2% 17% 2184 91.7% 2747 0.3% Oman 284 0.03% 2% 115 40.4% 1441 0.1% Qatar 669 0.1% 5% 115 17.2% 1937 0.2% Saudi 13,085 1.3% 17% 10756 82.2% 13,230 1.3% UAE 2813 0.3% 6% 813 28.9% 13,781 1.4% Totals 19,665 1.97% - 14,213 72.3% 34,031 3.4% Direction of trade of the GCC economies, 2001 (US$ millions) Table 2: Imports (Derosa and Kernohan 2004) Imports Bahrain Kuwait Oman Qatar Saudi UAE GCC Other GCC 1185 271 1737 260 1114 2916 7483 Other Arab 165 794 305 281 1651 420 3616 Other Islamic 150 461 233 109 1291 3218 5390 EU 1416 2137 1044 1419 8936 11 582 26534 US 488 936 345 195 5738 3372 11074 Japan 182 975 816 284 2786 3186 8229 Row 867 2044 895 703 8856 14890 28255 Total imports 4453 7696 5375 3251 30299 39584 90582 GCC has increased the level of trading in the gulf with the rest of the world as shown by the table above. Table 3: Exports (Derosa and Kernohan 2004) Bahrain Kuwait Oman Qatar Saudi UAE GCC Other GCC 518 44 1029 530 2903 2829 7853 Other Arab 99 331 288 198 3581 518 5015 Other Islamic 301 1566 490 239 3932 1895 8423 EU 316 2226 175 364 12082 2107 17270 US 296 2248 135 422 12353 827 16281 Japan 246 4436 2567 4995 11872 9979 34095 Row 3924 8723 6635 4778 32031 25140 81231 Total exports 5700 19574 11319 11527 78756 43294 170170 From the above tables, it clear that GCC has managed to divert and create trade with the rest of the world since its formation. GCC has played a big role in managing to successfully divert trade from India. Dubai, which is in UAE, has become a business hub for most businesses in the world. The trading in GCC has been made possible by the FTA since most goods are cheap and affordable. Travel is also easy in most GCC countries and this has opened them up to the rest of the world. The local industries have also succeeded in diverting trade from European countries which are low in cost and Japan. The countries in the Gulf can easily access products from the GCC area cheaply and this makes them less dependant on other countries (Looney 2003). Trade creation To create more trade between GCC and the rest of the world, some measures need to be taken such as: Foreigners should be allowed to own companies fully through the Foreign Direct Investment (FDI). The GCC countries have not been open to the idea of allowing foreigners to own industries and properties in a large scale. Tough conditions are put into place before a foreigner is allowed to own any property or business. The GCC countries have always been wary of investors from the west as they fear their culture will be ruined by western morals which they consider decadent (Looney 2003). GCC should also be open about domestic investment as this is likely to encourage more trade. In most GCC countries, women are not allowed to own or operate business due to the discriminatory nature of the Muslim culture. This should be addressed since in other countries, women have proved to be real assets by lending their expertise in making businesses successful. The GCC should promote diversification in economy by benefiting with expertise from other FTA such as the European Union. By opening to the EU, GCC can greatly benefit from many areas and especially technologically. Achievements of GCC Since its formation in 1981, GCC has made tremendous achievements both economically and politically. It was formed on a basis of forging unity within the Arab peninsula and ensuring tranquility is maintained. Political Achievements GCC negotiated with the United Nations to take harsh stances on several countries in the Gulf that were at war with each other. Its formation was triggered by the threat that was posed by the Iran -Iraq war that was happening in the 1980s. The GCC was formed with an aim of collectively challenging the security threat that was posed by the war. Through pressure from GCC, the United Nations was able to issue a statement that led to the end of the war. When Kuwait was invaded by Iraq, GCC supported Kuwait and pressured the United Nations to issue a statement. United Nations intervened by sending troops which led to the end of the war. The peninsula shield force that was formed in 1982 comprising of soldiers from the members states and military equipments, successfully checked the military threat from Iraq (Bilateral Organization 2009). The Kuwait summit in 1997 accomplished a very important achievement since a resolution was made to link the member states from GCC with communication network for the military to trigger an early warning. GCC also helped in disarming Iraq by making sure that they were ridded off all their weapons and no others were sent to Iraq. Iraq had been a major threat to the Gulf region tranquility and stability. GCC has also been in the forefront of fostering peace within the Middle East region and they have always encouraged amicable resolutions to any disputes that arise within the region (Bilateral Organization 2009). Economic Achievements of GCC Through GCC, many laws concerning trade have been signed. The free trade area was implemented in 1983 and has since increased the level of trade among the member states and other countries. GCC has also forged free trade laws with the European Union in 2003 and a declaration was made on cooperation with EFTA. This diversification is likely to open up trade between the member states and the countries allied to the EU (PTA dossier 2008). Together both EU and GCC can be able to protect their market from threat, as trade will be enhanced between them. Great integration has been created in both imports and exports between the countries that are allied to GCC. The countries have been able to access products from each other due to the FTA that was implemented (Looney 2003). A lot of cultural and beneficial information has been exchanged by member countries during the annual meeting that are held. The countries are able to exchange and share ideas and a lot of peace and unity have been fostered between the states within GCC. The common market was launched in 2008 in January which aimed at creating a market that is common in all the members, raising efficiency in production and ensuring optimization of all the resources that were available in the countries. The common market was to be used in improving the position of negotiating by GCC among the forums of economics in the world (Zainab, 2007) Advantages and disadvantages of GCC There are many advantages that are associated with the introduction of FTA in GCC since its formation. Conversely, there are also demerits that arise from the introduction of FTA within GCC. Advantages a) The European Union has cancelled the custom duty that was present on petrochemicals and aluminum from countries that belong to GCC. This has increases the profit margin from member states and those in the EU since the taxes imposed prior to cancellation were high. (Mohamad 2009). This will also protect the GCC market since there has been an influx of cheap aluminum imports from Asia (PTA dossier 2008) b) GCC has improved citizen travel between the member states as there are no barriers that limit this. This has led to a lot of integration and cultural exchanges, though similar cultures exist between these states. c) In 2007, GCC commenced with negotiations with Australia aimed at establishing FTA within the two as Australia reckoned that GCC was ranked number 9 as a merchandiser in the export market. The talks are going on positively and soon a deal will be reached (Australia government 2009). d) The GCC common market that was launched in 2008 was expected to have several advantages for the regional companies. If GCC does launch a common currency as expected in 2010 then the unification of financial and economic policies will endow the bloc with higher powers of negotiations, scale of economy, reduce the costs of transactions and increase the investment activity intra-region wise. This will be a big benefit to the GCC since they will reap all this benefits. The common market which GCC is launching is likely to support corporations from the small markets that provide big services enabling them in the expansion of their presence in other countries outside their homes within the GCC. This will benefit small countries within the GCC such as Bahrain and Kuwait. Disadvantages a) All governments that initiate FTAs end up loosing their earnings due to the abolished or lowered tariffs. The economic prosperity in all member countries differs and the lowered taxes normally rob the country the money that it needs to spur economic growth. Tariffs are some of the major earners of government income in any country and FTA will force the government to look for alternative means to earn income and fulfill the various needs of the citizens (Looney 2003). b) The local industries are at a risk of loosing business or eventually closing down since their products are in competition with those from other countries. The products from those other countries are cheap and the local industries will have to under price their goods. If a high cost was incurred during production of goods within the country, the business will be forced to close down since it cannot effectively compete with cheaper goods from elsewhere (Looney 2003). c) GCC is in the process of integrating a monetary union which will be at a par with the American dollar. This is going to be achieved by 2010 as the plan is underway to make sure this is successful. This monetary union will lead to lack of control within the individual states since their currency differ in strength. The member states will lose out in control of their economies, financial policies and this will be detrimental for small countries such as Bahrain (Looney 2003). GCC Future Plans A monetary integration is expected and the countries are debating on having a single currency by 2010. This currency is expected to be at par with the dollar and this union was initiated in 2003. In 2007, GCC launched negotiations to implement FTA with Australia, in order to improve and increase trade between the two regions. The negotiations are in top gear and the third round was in Canberra in February, 2009. They also have plans to launch a military force which is unified aimed at deterring foes and supporting friends. Yemen is expected to join the GCC since they solved their boundary dispute with Saudi Arabia in 2000. This is likely to foster more unity and increase trading between Yemen and those other countries already in GCC. Conclusion From the above reviews, it is quite evident that the formation of GCC has improved trade between the member states and also with other countries. This has been successfully done through the signing of both PTA and FTA between the members. The integration of the monetary union should be speeded up since this will improve the level of trading between the member states. By opening up industries to for Foreign Direct Investment, GCC countries are likely to benefit in such areas such as ICT. The culture should be less harsh upon women as this is likely to increase the level of domestic investment. GCC should reach out and form FTA with other regions such as EU and Australia as this is likely to increase trade in all the regions. Bibliography: Australia government 2009, Australia- GCC free trade agreements negotiations, Retrieved on May 16, 2009 from http://www.dfat.gov.au/trade/fta/gcc/index.html BBC news 2008, profile: Gulf cooperation council. Retrieved on May 16, 2009 from http://news.bbc.co.uk/1/hi/world/middle_east/country_profiles/4155001.stm Beatrice M 2008, The GCC: A Union to be Reckoned with, Rutledge publishers, Pg 6-8 Bilateral Organization 2009, GCC to launch common markets, Retrieved May 16, 2009 from http://www.bilaterals.org/article.php3?id_article=10721&var_recherche=GCC Derosa, A & Kernohan, D 2004, measuring the economic impact of an EU-GCC FTA, retrieved on May 19, 2009 fromhttp://74.125.113.132/search?q=cache:_lodQw91_qgJ:www.ciaonet.org/wps/ded02/ded02.pdf+statistics+on+trade+diversion+created+by+GCC&cd=2&hl=en&ct=clnk&gl=ke Legrenzi M 2003, Long road ahead: Economic integration of GCC, Wiley and sons publishers, Pg 39 Looney, R 2003, Economic Integration in the Gulf Region: does the future hold more promise than the past: strategic insights, Vol. 2 (3), Retrieved on May 16, 2009 from http://www.ccc.nps.navy.mil/si/mar03/middleEast2.asp Mohamad, A 2009, GCC Urged to act against cheap steel imports, Retrieved on May 16, 2009 from http://www.business24-7.ae/articles/2009/4/pages/14042009/04142009_0733f234a70c4fdaa311d547398907cd.aspx PTA dossier 2008, GCC and EFTA, Retrieved on May 16, 2009 from http://www.cuts-citee.org/pdf/PTADossier-April2008.pdf Tristan, P 2009, Glossary: GCC, Retrieved on May 16, 2009 from http://middleeast.about.com/od/oilenergy/g/me080117.htm WTO 2006, Trade policy review, retrieved on May 16, 2009 from http://www.wto.org/english/tratop_e/tpr_e/g162_e.doc Zainab, A 2007, GCC to launch common market in January 2008, Retrieved on May 16, 2009 from http://www.bilaterals.org/article.php3?id_article=10721&var_recherche=GCC Appendices List of tables Table 1: EU trade with GCC in 2001 Imports (I) to EU Share of EU total imports % of each in total (I/Ex) Energy Energy as % of (I) Exports (X) from EU Share of all EU(X) Bahrain 434 0.04% 5% 230 53.0% 895 0.1% Kuwait 2380 0.2% 17% 2184 91.7% 2747 0.3% Oman 284 0.03% 2% 115 40.4% 1441 0.1% Qatar 669 0.1% 5% 115 17.2% 1937 0.2% Saudi 13,085 1.3% 17% 10756 82.2% 13,230 1.3% UAE 2813 0.3% 6% 813 28.9% 13,781 1.4% Totals 19,665 1.97% - 14,213 72.3% 34,031 3.4% The above table shows the trading of the countries in GCC with EU which is one of the economical benefits that GCC has achieved since its formation. There is evidence that increased trading has been achieved by formation of GCC as a trading block. Direction of trade of the GCC economies, 2001 (US$ millions) Table 2: Imports Imports Bahrain Kuwait Oman Qatar Saudi UAE GCC Other GCC 1185 271 1737 260 1114 2916 7483 Other Arab 165 794 305 281 1651 420 3616 Other Islamic 150 461 233 109 1291 3218 5390 EU 1416 2137 1044 1419 8936 11 582 26534 US 488 936 345 195 5738 3372 11074 Japan 182 975 816 284 2786 3186 8229 Row 867 2044 895 703 8856 14890 28255 Total imports 4453 7696 5375 3251 30299 39584 90582 Table 3: Exports Bahrain Kuwait Oman Qatar Saudi UAE GCC Other GCC 518 44 1029 530 2903 2829 7853 Other Arab 99 331 288 198 3581 518 5015 Other Islamic 301 1566 490 239 3932 1895 8423 EU 316 2226 175 364 12082 2107 17270 US 296 2248 135 422 12353 827 16281 Japan 246 4436 2567 4995 11872 9979 34095 Row 3924 8723 6635 4778 32031 25140 81231 Total exports 5700 19574 11319 11527 78756 43294 170170 Read More