China makes top priority of free-trade deal with Gulf

China has made securing a free-trade agreement with the GCC a high priority as demand for energy and industrial imports in the fast-emerging global superpower rises.

China has made securing a free-trade agreement (FTA) with the GCC a high priority as demand for energy and industrial imports in the fast-emerging global superpower rises. Formal talks could start as early as this year as China aims to lower barriers on trade to ease its access to oil and petrochemical imports needed to fuel its expansion, officials from the country say. "It's a top priority for China," said Professor Zhao Zhongxiu, the deputy secretary general of the China Association of International Trade. "A free-trade agreement with the GCC is under consideration."

Analysts say an agreement between the world's top exporter and the leading oil-exporting region would make economic sense for both. Trade between China and the GCC is expected to more than triple to at least US$350 billion (Dh1.28 trillion) in the next decade, the US global consultancy McKinsey forecasts. China's demand for oil is forecast to grow by 4.7 per cent this year to 8.9 million barrels a day, the International Energy Agency forecasts. That bodes well for the GCC, which supplies about 35 per cent of China's crude imports.

FTAs work by lowering tariffs on goods and services traded between countries. While such an agreement could lower the cost of exporting oil, petrochemicals and other goods to China, it could also include products such as electronics and clothes heading to the GCC. Reducing tariffs could also help boost the competitiveness of goods from the countries involved compared with exports from outside countries.

"The basis of free trade agreement has to be mutually supplementary," said Cheng Siwei, the chairman of the International Finance Forum in China. "In the Middle East, energy is the most important component as China is a net importer of energy, but beyond that we have many other things that could be mutual supplementary issues. "China is now producing many electronic products and we have the market in the GCC for them."

China has surpassed the US as the biggest exporter to the GCC, with annual exports growing more than 10-fold to about $60bn in the past decade. China already has free-trade agreements with eight countries including Peru and Chile. It is negotiating similar arrangements with its neighbours South Korea and Japan. Now it is looking for an agreement with the GCC. "It makes sense for China to deepen its relationship with the world's leading oil producer," said Jarmo Kotilaine, the chief economist of NCB Capital of Saudi Arabia.

There was also a recognition of how growing demand from GCC consumers for Chinese goods could help to diversify the country's export base away from advanced economies such as the US and Europe, Mr Kotilaine said. Beyond that, there may also be a desire to form closer political and economic co-operation in the East as an alternative to "Washington or Brussels-led models", he said. Initial contact between officials has already started but formal talks could begin as early this year, with the process likely to take two to three years, said Prof Zhongxiu.

GCC officials will hope the negotiating process proves less problematic than attempts to strike an FTA with the EU, which appear to have broken down over disagreement on issues such as petrochemical subsidies. While China and the GCC appear to be heading towards closer trade links, investment ties are largely undeveloped apart from some mainly within the energy, industry and construction sectors.

Borouge, a plastics producer based in Abu Dhabi, is planning to build a second factory in China, a little more than a month after inaugurating its first plant in the country to produce polypropylene compounds used in the car industry. Within the UAE, foreign ownership caps on international companies setting up outside the free zones was proving a deterrent to Chinese investment, said Mr Cheng. "This is why some Chinese people are reluctant," he said. "They were interested but found this out and this is a problem."