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Sat 10 Oct 2015 01:12 AM

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Let's talk free trade

Import tariffs are becoming a thing of the past, and the GCC can’t afford to miss out on lucrative new trade agreements, says Courtney Trenwith

Let's talk free trade

It’s being hailed as one of the planet’s biggest ever trade deals, binding 40 percent of global GDP and covering everything from kiwi fruit to car parts. But why should anyone in the Gulf care about the Trans-Pacific Partnership (TPP)?

The GCC’s economic bloc, formed in 1981, has been successful in significantly increasing intra-regional trade by removing tariffs between the six members and enforcing a common 5 percent import duty.

The Greater Arab Free Trade Area (GAFTA) has also seen tariffs between 17 Arab states rapidly decline from an average 15 percent in 2002 to 6 percent in 2009, although it has failed to have much impact on reducing trade costs.

But the TPP, signed between 12 countries on the Pacific Rim last week, is the latest evidence of a growing momentum in breaking down trade barriers and emphasises the Gulf states’ need to re-join the trade table talk.

In June, 26 African states, stretching from Egypt, down the the continent’s east coast to South Africa, signed an historic deal that integrates three existing economic blocs, with a combined GDP of $1.3 trillion.

Asian states have been leading the way in using FTAs to price out competitors, with reduced import tariffs eroding previous cost disadvantages. For example, Singapore has 20 FTAs, while India and South Korea each have 10, with about 20 more under negotiation in each state. The 10-member Association of South East Asian Nations (ASEAN) has also grown to become the world’s seventh-largest economy, if considered as a single entity, with a combined nominal GDP of more than $2.6 trillion.

In addition, the European Union’s economic bloc has made it the world’s largest trading partner, accounting for about 16 percent of world imports and exports in 2013 and giving it an enormous cost advantage.

The GCC, meanwhile, has not signed a major free trade deal since before the global financial crisis.

“As a bloc, [the GCC states] probably under-appreciate the importance of free trade,” IHS Middle East and India vice president Sanjay Sharma told this magazine in August.

The GCC cannot risk languishing and must now turn its focus to large economic partners likely to generate greater returns. The two most obvious are India and China, the top two trade partners for most of the GCC states, other than themselves.

China is forecast to be the GCC’s largest export market by 2020, while India’s $2.1 trillion economy is as close as a three-hour flight. The potential for free trade with these two economic powerhouses is enormous and ought to put them at the top of the priority list. Talks have been initiated, but concerns about the threat of cheap GCC imports to local petrochemicals industries has been a stumbling block for both China and India.

The problem is GCC states have previously pushed their products into markets based on the cost advantage but as more economic blocs are formed, that strategy is becoming weaker, while the issue is becoming more heightened as the region rapidly needs to diversify from oil and gas exports.

The GCC is also yet to complete a deal with another globally important trading partner, the US. Negotiations have not been helped by Bahrain and Oman’s unilateral agreements, in 2006 and 2009, but those two countries, the poorest of the six GCC member states, should be willing to relinquish their bilateral deals to make way for an inevitably stronger regional FTA.

The world is moving towards greater free trade cooperation. The GCC risks falling behind if it does not jump on the bandwagon and recognise the impetus for more free trade.