Tricks of the trade

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The negotiator: Peter Mandelson states that the removal of business restrictions in the Gulf is crucial.

After 18 years of empty promises and numerous unfulfilled resolutions, the GCC/EU free trade talks finally look to be coming to an end — if the words of the European trade commissioner are to be believed, that is. Last week, the Rt Hon. Peter Mandelson told Arabian Business that he was confident a free trade agreement (FTA) would be signed by June this year, if Gulf states are willing to make a “determined effort to go the extra mile” in the negotiations. With so many FTA false dawns between the two regions occurring since talks began in 1989 however, analysts remain sceptical on whether or not a deal is finally on the cards. “The goalposts have been moved several times,” says Giacomo Luciani, senior consultant and professor of political economy at the Switzerland-based Gulf Research Centre. “People who are involved in EU and GCC relations have become so frustrated with the deal, which has been announced as imminent almost every month but then never signed,” he continues.

According to Luciani, the major stumbling block to the FTA in the past has been the short-sighted attitude of the EU towards doing business with the GCC. “For a long time throughout the 1990s the EU was not very interested in concluding a GCC deal because the prices of oil were low, and so Europe had a very myopic attitude towards the GCC and took it for granted,” he says.

“There has also been an insistence on the GCC forming a customs union before the FTA could be concluded but there has been no effort on the part of the EU to facilitate the process of creating this union,” he adds.

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The long-running EU/GCC free trade saga began in 1989 with the aim of facilitating trade relations and strengthening stability in this strategically vital part of the world. For much of the 1990s however, negotiations were put on standstill pending the decision from the GCC in 1999 to move towards a customs union by 2005. In 2001, the EU adopted a new set of negotiating directives, including services and other areas included in the recent FTAs.

Mandelson played an important role in negotiating an end to the dispute between the European Union and the People’s Republic of China over textile imports in the summer of 2005, although the solution, which involved tariffs and imports quotas, failed within its first two months and had to be promptly re-renegotiated.

Wherever the blame lies for the 18-year delay in talks, the net result is that: “The GCC is signing FTAs with everybody else except the EU, although the EU was by far the first [trade block] to initiate discussions with the GCC,” according to Luciani.

However, with Mandelson and his entourage now making positive noises about access for GCC businesses to Europe’s service sector, alongside various other incentives, perhaps a June 2007 resolution will become a reality. Yet if the long-awaited FTA is signed, will it bring sweeping tide of change across the Gulf or, with the GCC’s increasing focus on Asian markets, will it have little impact on the region?

According to Mandelson, the EU is prepared to offer “100% liberalisation for goods over four years, access to services markets [and] excellent investment conditions in Europe for Gulf investors”.

In return, the EU’s main demand is the “removing of restrictions and limitations that currently operate in the Gulf”.

For Mandelson, the key to the deal from the European perspective is the reform of the ownership rules that exist in the Gulf. Currently the cap on foreign equity ownership means that overseas businesses have to cede 51% of their company to local partners or sponsors. Referring to the benefits of softening ownership laws in the Gulf, Mandelson says: “The reason why this is so important is because it will encourage European investment in the Gulf. I appreciate that there is a desire to maintain local ownership, because people associate local sovereignty and local identity, but you can accommodate both these things — the desire to maintain a strong sense of local identity in the Gulf and greater benefits from European investment.”

“It takes a balanced approach to combine these two things, and at the moment we feel that the emphasis being placed on local ambition is too great, and certainly greater than the Gulf’s economic interests would suggest,” he adds.

Mandelson also believes the relaxing of ownership laws could play a huge role in the GCC’s battle against the impending job shortfall. With its ever-expanding and youthful population it is estimated that 100 million new jobs need to be created in the MENA region by 2020. According to the EU trade commissioner, the growth of the private sector through European investment could be an integral part of the region’s future employment drive.

“The region has a youthful population with so many under 20 years of age who will need jobs in the future. These jobs won't come from the energy sector alone or from the hands of the state. You need a strong and expanding private sector covering the range of economic activities, rather than [being] restricted to the energy sector,” he says. “I’m not saying that foreign ownership for European investment is the magic wand for the Gulf, all I’m saying is that it is an indispensable element or condition for the economy’s future diversification and strength.” Mandelson goes on to explain why, despite the success of the region’s free zones — that offer overseas companies 100% ownership in special designated zones — a change in ownership laws is essential to bring more European businesses to the region. “Free zones are only a partial way of doing what the economy as a whole should do or would benefit from, and I regard them as a stepping stone and not the answer.

“[They] can just as easily be closed down and their terms changed as they were created in the first place, and therefore they don’t give the certainty that foreign investors desire,” he adds.

However, while the European trade chief talks up the effect the reform of ownership rules will have on bringing more foreign investment into the GCC, Luciani remains sceptical. “The process of opening up to 100% foreign ownership is already advancing in this part of the world anyway. To me it’s not a serious matter to be discussed as a great deal, and I don’t understand what this has to do with the FTA.”

As well as private sector growth, the FTA could offer the GCC tariff-free trade in goods with Europe.

According to the EU’s ‘Sustainability Impact Assessment (SIA)’ on the GCC FTA, the “winners” in the GCC will be the labour intensive sectors such as clothing and textiles, and energy-intensive sectors that require skilled labour such as petrochemicals and metal products.

With the region increasingly turning to the rapidly emerging markets of China and India, the impact of the FTA’s tariff-free incentives could be minimal according to Luciani. In 2006, the value of trade between India and Dubai alone was US$10.9bn, while bilateral trade between China and the GCC was estimated at US$21.1bn in the first half of 2006.

By 2020, the Middle East will provide 69.4% of China’s oil, according to the US government’s Energy Information Administration. “For the GCC, access to the EU’s petrochemicals market is not as important as access to the Asian market. The focus of attention is now clearly towards Asia. That is where they will go and expand and Europe is declining in interest,” Luciani says.

A trade deal between the EU and GCC would see tariffs scrapped on aluminium and basic petrochemicals imported into Europe, according to Karl-Friedrich Falkenberg, deputy director for trade in the European Commission. Aluminium imports currently attract a 6% tariff.

Of course, with China and India currently going through a period of unprecedented growth, it’s no surprise that GCC countries are increasingly heading East instead of West. But, the region still has a lot to gain from improving its trading ties with the EU. In fact, according to an EU analysis, an FTA between the GCC and the EU would increase trade between the two parties by US$5bn in just its first twelve months.

Of all the positive effects to come from a GCC/EU agreement, perhaps the most important will be the removal of a huge barrier that has existed between the two trading blocks since the FTA talks began.

Luciani explains: “I think the [FTA] has been used instrumentally by certain interests within the EU to slow down progress in GCC relations — the FTA has become an obstacle instead of a promise.“

“There are many more important items for discussion in issues of financial, monetary and energy cooperation that will require a forwarding decision, but everything had been put in the freezer until the FTA has been signed. So the FTA has become a necessary preliminary for everything else,” Luciani adds.

So, if Mandelson’s prediction is correct and the FTA is signed this summer, sectors across the GCC could witness the dawn of a new age, in which cooperation with European businesses is an obstacle-free process.

Alternatively, with an increasing focus on Asian markets and European businesses already being drawn to the GCC region by the attraction of its many free zones, the deal may have little impact on the current business climate.

Or perhaps there will be another twist in the tail of the longest-running free trade saga in history, and we’ll be left waiting for years to come for its ultimate conclusion? Watch this space.

Peter Mandelson: The long road to Europe

It is a colourful journey that has taken Peter Mandelson from his role as a Member of Parliament (MP) for Hartlepool — a small town in the north of England — to the head of the European Union’s trade office.

Once dubbed ‘the prince of darkness’ by a section of the British media, Mandelson is widely regarded as the driving force behind the rebranding of the UK’s Labour Party as ‘new labour’ and in Tony Blair’s rise to power as the British Prime Minister.

Following Blair’s landslide victory in the 1997 general election, Mandelson was appointed minister in the Cabinet Office where his job was to coordinate with the government. In 1998, he joined the Cabinet as Britain’s Secretary of State for Trade and Industry but resigned following accusations surrounding an interest-free loan in the region of US$715,000 he allegedly received from a fellow MP. The following year, Mandelson became Secretary of State for Northern Ireland and oversaw the creation of a devolved legislative assembly and the reform of the police service. Mandelson joined the EU in 2004, playing a major role in negotiating an end to the dispute between the EU and the People’s Republic of China over textile imports the following year. Recalling his initial appointment to the EU, Mandelson insists that he had no difficulty making the transition from looking after British interests to overseeing European matters, he tells Arabian Business: “They chose to give me the authority and confidence to negotiate trade policy on their behalf and Britain is simply one part, albeit an important part, of that mix. The attitudes to trade that I have learnt from my time in Britain, a commitment to free trade, open markets, to a liberal economic approach but one that must essentially be balanced by a sense of solidarity, and social responsibility [are suited to the EU].”

So what else did he learn in his life in British politics that he has applied to his role at the EU? “That in negotiation, recognising the needs and priorities and sensitivities of your counterparts is as important as advocating your own interests, and that a successful negotiation is one that balances ambition with realism,” he says.

Deflecting the question of whether or not he would ever make a return to UK politics, he insists: “I’m negotiating on behalf of Britain as well as the other 16 EU members. So in that sense, I never left it.”

Having played a major role in helping Tony Blair to power back in 1997, Mandelson is “looking forward” to finding out who the next leader of the Labour Party will be once Tony Blair steps down later this year.

Asked how the appointment of Gordon Brown — the man widely touted as Blair’s replacement despite recent criticism — might affect this region, he says: “I don’t know what his Middle East policy would be, but I suspect there would be a sense of continuity [from Blair].”

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