Prospects and Challenges of Free Trade Agreements

Unlocking Business Opportunities in Gulf Co-Operation Council (GCC) Markets

Doren Chadee, Banjo Roxas, Tim Rogmans

• Publisher: Palgrave Pivot
• Year: 2014
• ISBN:
  9781137479884
• Topic: Business
• Subtopic: International Business
• Index: Business

This book assesses the effectiveness of free trade agreements (FTAs) in unlocking international business opportunities in member states of the Gulf Cooperation Council (GCC). It takes an institutional perspective in explaining the existence and effects of non-tariff barriers and how FTAs can address these barriers to attract foreign investors.

1

Background and Context of the Study

Abstract: This chapter provides the necessary background and context for the study. Australia and the Gulf Cooperation Council (GCC) states have a long history of trade and investment activities between them. Trade and investment have evolved gradually over the years. However, the acceleration of globalisation and the resulting changes taking place in the structure of the world economy have led many small economies such as Australia and the GCC states to engage strategically with their trading partners in order to remain an integral part of the global economy. Australia and GCC started to negotiate a free trade agreement (FTA) in 2007 with negotiations slowing down for a number of years. Recently, Australia has shown a strong determination to conclude a successful FTA with the GCC. Such a prospect raises a number of interesting questions regarding the potential benefits of a successful Australia–GCC FTA which is the subject of this research.

Chadee, Doren, Banjo Roxas and Tim Rogmans, Prospects and Challenges of Free Trade Agreements: Unlocking Business Opportunities in Gulf Cooperation Council (GCC) Markets. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137479884.0007.

1.1Background of study

Bilateral and regional trade agreements have become an increasingly popular strategy for countries to speed up the process of liberalising trade in order to enjoy the benefits often associated with free trade. This is a particularly attractive approach for smaller isolated economies which are often locked out of international business opportunities available in larger markets. Australia and the countries comprising the GCC (Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates [UAE]) are examples of small countries in pursuit of bilateral and regional trade agreements in order to expand their economies and become integral parts of the global economy.

The GCC was formed in 1981 to safeguard regional security and to foster regional economic integration and growth among member states. Some of the stated objectives of the GCC include economic harmonisation in the region, scientific cooperation, investment promotion, military cooperation and the establishment of a common currency (see Appendix). The GCC launched a common market initiative in 2008 which grants national treatment to all GCC firms through the elimination of trade and investment barriers between member states. The adoption of a common external tariff structure in 2009 and talks of a monetary union also signal the intention of the GCC states to eventually achieve a fully integrated regional economy.

The GCC economies are among some of the world’s wealthiest and fastest growing economies which have been built largely on oil and natural gas exports. The GCC countries account for approximately 40% of proven world reserves and approximately 23% of proven world gas reserves (BP 2007). Saudi Arabia, Kuwait and the UAE are among the world’s top ten countries in terms of oil reserves, while Qatar alone holds approximately 14% of world reserves of natural gas (BP 2007). The record energy prices over much of the last ten years have meant that the GCC states have experienced unprecedented increases in wealth, foreign investments, imports, capital expenditure and consumer spending (Sturm et al., 2008). World crude oil prices have more than tripled since 2002, while the cost of exploiting oil reserves and processing crude oil in the GCC remain the world’s lowest, thereby making the GCC countries the most competitive in the oil and oil derivative markets.

The boom in oil prices during much of the last decade led to the accumulation of substantial wealth in the GCC states. In 2013 the GCC’s countries had a population of approximately 50 million and a combined Gross Domestic Product (GDP) of approximately US$1,381 billion. With some of the highest per capita incomes in the world, the GCC market has attracted the attention of businesses from around the world. GCC imports have increased from US$48 billion in 1990 to US$406 billion in 2008, before dropping to US$318 billion in 2009 with the onset of the Global Financial Crisis (GFC) (UNCTAD 2013). Since then, imports have recovered gradually to US$469 billion in 2012. During the last decade, GCC total imports have increased by an average of 20% a year. The GCC have also run a consistent and sizable trade surplus over the last two decades which has allowed it to weather the GFC better than most other countries.

The different GCC states have slightly diverse economic structures and face different challenges. The mono energy-based structure of the GCC economies is very vulnerable to volatile world oil and gas prices as well as the prospect of running out of oil in some of the GCC states (DFAT, 2005). The distribution of oil reserves varies substantially across the GCC countries and various estimates exist on how long reserves will last in the region. According to estimates by BP (2012), oil reserves are projected to last for more than 100 years in Kuwait and the UAE, while reserves in Bahrain and Oman are expected to last for less than 20 years.¹ Gas reserves in most GCC countries are expected to last for another 100 years at current levels of production (Sturm et al., 2008), except for Oman and Bahrain which have reserves for another 25 years or so. Oil and gas revenues continue to be the dominant source of income for the GCC countries, except for the UAE which has undertaken major reforms to diversify its economic base. All states have an under-developed manufacturing sector and rely on imports for much of their consumer and manufactured products, including food and beverages and most manufactured consumer goods. Given the under-developed nature of the domestic manufacturing sector, employment opportunities for the large young population are also limited. Although official statistics differ somewhat, unemployment rates in the GCC among nationals varies between 12% and 15% and are higher in the age group between 20 and 29 (Sturm et al. 2008).

For these reasons, the GCC has embraced economic reforms which encourage the diversification of their economies away from oil and gas towards the development of new industries in services and manufacturing. The liberalisation of foreign trade and foreign investment through FTAs has also been identified as an integral diversification and growth strategy for the GCC states. FTAs are international agreements between two or more countries to eliminate tariffs on merchandise and services trade. Comprehensive FTAs are wider in scope to include the harmonisation of a larger range of cross-border trade and investment related issues generally considered to be trade enablers, such as services, customs cooperation, intellectual property, foreign investment and finance. The elimination of restrictive and discriminatory trade and investment policies between FTA partners leads to greater integration of economies, more export opportunities and access to a greater variety of goods and services to consumers at overall lower prices. Generally, FTAs have been found to be welfare-enhancing through higher incomes and economic growth and the elimination of inefficiencies. Inefficiencies arise from protectionist trade and investment measures such as subsidies, tariffs, quotas, embargoes and administrative measures. The elimination of such measures leads to improved production efficiencies through more efficient allocation of resources and improved consumer welfare through access to a greater variety of goods and services at overall lower prices and improved economic growth and employment. The conventional wisdom is that FTAs improve welfare although it is acknowledged that, theoretically, under exceptional circumstances an FTA can have negative effects on welfare due to trade diversion. In practice, instances where an FTA leads to the displacement of more efficient non-partner imports in favour of less efficient partner-country imports remain rare to date. Thus, a comprehensive FTA has the potential to lead to overall economic gains for all FTA partners.

The GCC has signed a number of trade agreements to facilitate the movement of goods, services, capital and technology, all of which can contribute towards the development of new industries and the creation of jobs which are not directly linked to the volatility of the global oil market. To date, the GCC has signed comprehensive trade agreements with Singapore (2008), the European Free Trade Area (EFTA)² (2009) and New Zealand (2010). Free trade negotiations are under way with a number of other countries including Pakistan, Japan, Iran and Australia.

Australia which is also committed to FTAs is currently engaged in negotiations at different stages of progress with several countries and regional groupings (see Appendix for a summary). To date, Australia has FTAs in force with the following seven countries: New Zealand (1983), Singapore (2003), United States (2005), Thailand (2005), Chile (2009), Japan (2014) and South Korea (2014), as well as Association of South East Asian Nations (ASEAN)³ (2010) (see Table 1.1). Together, these countries account for approximately 50% of Australia’s two-way trade. The seven countries, Japan (2nd), United States (3rd), South Korea (4th), Singapore (5th), New Zealand (7th), Thailand (9th) and Malaysia (10th) rank among Australia’s top ten trading partners. Australia is also engaged in FTA negotiations with several of its top 20 trade partners including China, India, Indonesia and the GCC. Australia is also actively involved in negotiations for a Trans-Pacific Partnership Agreement (TPP)⁴ and the Pacific Agreement on Closer Economic Relations (PACER) Plus.⁵ The TPP is intended to be a comprehensive FTA for the wider Asia Pacific region, while the PACER Plus takes a regional focus on trade liberalisation and economic integration with member states of the Pacific Forum.

TABLE 1.1 Australia’s top ten two-way trading partners 2011 ($ billion)

1.2 Context of the study

Negotiations for an Australia–GCC FTA started with a preparatory meeting in Saudi Arabia in 2007. Since then, four rounds of negotiations have taken place on the overall scope of the proposed FTA and the identification of strategic issues specific to both regions. Substantial progress has been made to identify critical issues for both regions. However, the diversity of the economies of the GCC and Australia’s trade relationships with each of the GCC states suggest that there is still some way to go before a comprehensive FTA which is mutually beneficial for both Australia and the GCC member states, is agreed on.

To date, several studies have been undertaken which provide greater insights into the GCC economies in general and into each economy specifically as a way of informing policy makers about Australia’s trade opportunities in the GCC (DFAT 2011). This research builds on previous research and attempts to assess the potential benefits of an eventual Australia–GCC FTA from the perspective of Australian businesses. The study takes a particular focus on how Australian businesses are likely to be affected by an eventual FTA by probing businesses about the most pressing issues they face when conducting business with clients in the GCC. Research on business level difficulties has been overlooked in most investigations of Australia’s trade in the GCC states. Most investigations of FTAs to date have tended to take a macro level focus while the issues confronting businesses in their day-to-day activities are rarely addressed. The behaviour and conduct of small and medium enterprises (SMEs) in relation to an eventual FTA is also poorly understood as most studies tend to focus on large firms. SMEs are more likely to be the linchpin of success in an eventual FTA given the fact that SMEs dominate the business landscape by their sheer numbers. Greater understanding of the problems that Australian SMEs face in GCC countries can also help to speed up the FTA negotiations and increase SMEs uptake of any market opportunities arising out of an FTA. Knowledge of the behaviour and conduct of businesses vis-à-vis an eventual FTA can also inform trade policy makers on issues which should form an integral part of an eventual FTA given their practical relevance for businesses.

1.3Objectives and structure of the study

This study sets out to investigate the likely benefits for Australian businesses from an eventual Australia–GCC FTA. The overall objective is to assess the extent to which Australian businesses are likely to benefit from the proposed Australia–GCC FTA. More specifically, this study fulfils the following objectives:

1To provide an overview of the political economy of FTAs.

2To assess the potential benefits of an eventual Australia–GCC FTA for Australian businesses.

3To make recommendations to businesses and policy makers on how to optimise the potential benefits from FTAs.

In order to achieve these objectives, the study starts by discussing the merits of trade liberalisation from both economics and institutional perspectives. Then the study uses a potential Australia–GCC FTA as a basis for evaluating the potential benefits which are likely to arise from such an agreement from the perspectives of exporters in Australia. The study provides an overview of recent trends and emerging patterns in the GCC markets as well as the structure of trade between the two regions. Then we present the results of an industry survey which identifies the main barriers faced by Australian exporters and importers doing business in GCC countries in order to...

Table of contents

• Cover
• Title
• 1  Background and Context of the Study
• 2  The Political Economy of Free Trade
• 3  GCC Market Scope and Competitiveness
• 4  GCCAustralian Trade and Investment Trends and Patterns
• 5  Challenges and Opportunities for Australian Businesses in GCC
• 6  AustraliaGCC FTA: International Business Prospects and Limitations
• Appendix: Additional Resources on Australias FTAs
• Bibliography
• Index