UAE’s Cepa deals at odds with global shift towards protectionism

For the UAE and GCC, trade has played an important role in terms of supporting overall economic growth

The UAE is working towards signing 26 Comprehensive Economic Partnership Agreements. AFP

Trade in goods and services is often credited with being an engine of global growth, with most cross-country studies identifying a significant positive link between the two.

The World Bank suggests that trade has increased global incomes by 24 per cent since the 1990s, and the World Trade Organisation credits globalisation with being a major contributor to the substantial reduction in global poverty seen over the last 30 years.

Trade drives growth by increasing the size of markets available to domestic firms to sell into, as well as exposing these firms to increased international competition.

Heightened levels of competition should in turn increase innovation, productivity and domestic firms’ exposure to new technologies. High levels of trade can furthermore encourage inflows of foreign direct investment, as sufficient demand may make it efficient to set up additional production facilities in the importing country.

For the UAE and other GCC countries, trade has undoubtedly played an important role not only in terms of supporting overall economic growth, but as a key tool to diversify economies away from hydrocarbons.

This is particularly evident in the UAE where the share of oil exports in total exports has declined sharply since 2010, with non-oil and, increasingly, services exports driving the growth of total UAE exports.

Since the global financial crisis in 2008, and particularly since the Covid-19 pandemic in 2020, there has been rising negative sentiment towards globalisation, free trade and integrated supply chains.

Critics point to higher inequality in advanced economies as well as increased risk of contagion from exogenous shocks such as the global financial crisis, the pandemic and regional conflicts.

This has given rise to calls for (and action towards) greater protectionism and the desire to increase the resilience of supply chains by moving the manufacture of critical components closer to home markets: onshoring or friendshoring.

After more than doubling between 1970 and 2008, the share of goods trade relative to global gross domestic product has been relatively stable since the global financial crisis, declining slightly during recessions and then recovering along with the global economy.

This probably reflects a shift in preferences away from goods towards services, but geopolitics has also played a role, particularly the US’s trade war with China and the imposition of higher tariffs on imports from China in 2018, which was then reciprocated.

Incidentally, while the Trump tariffs did reduce trade between the US and China, they didn’t result in an overall decline in global trade before the pandemic. Since then, there has been a rise in the number of trade restrictions and distortions, such as quotas and subsidies, being imposed globally.

A second Trump term may well add impetus to this trend with reports suggesting that, if elected, he plans to apply a 60 per cent tariff on imports from China and 10 per cent on all other imported goods.

Interestingly, the UAE is moving in the opposite direction by reducing tariffs and other barriers to trade rather than increasing them.

At last count, the UAE has already concluded Comprehensive Economic Partnership Agreements with India, Israel, Indonesia, Turkey, Georgia, Cambodia, Colombia, South Korea, Costa Rica and Kenya. The country is working towards signing 26 Cepas.

Cepas are usually more ambitious in their coverage than free trade agreements, including not just goods but also services, investment, regulatory issues, easier movement for workers and visitors and dispute resolution.

While it is still early days, there is some evidence that these agreements are already boosting the UAE’s non-oil trade, which rose to Dh3.5 trillion ($953 billion) in 2023.

Dr Thani Al Zeyoudi, Minister of State for Foreign Trade, noted that non-oil foreign trade with countries with whom Cepas have either been implemented or are nearing implementation rose 24.5 per cent year-on-year last year to Dh390.5 billion.

More broadly, the International Monetary Fund suggests that tariff reduction as part of 11 Cepas considered in their research could increase competition, quality of inputs and the transfer of technology, boosting the level of real gross domestic product by up to 2 per cent over the medium term.

Building new trade and investment channels should also reduce the UAE’s reliance on any single market for exports or imports, thereby increasing resilience to shocks or sudden regulatory changes in any of those markets.

Continuing investment into infrastructure will allow businesses and trade partners to capitalise on the UAE’s enviable location at the meeting point of three continents.

The UAE is the 14th best connected country in the world at present, the Unctad Liner Connectivity Index said, and its infrastructure scores highly on the World Economic Forum's Global Competitiveness Index.

The recent announcement at the G20 summit of a rail and shipping corridor linking the UAE with India and the EU also speaks of the country’s ambitions in this regard and will further underpin the country’s position as a global trade hub.

Khatija Haque is chief economist and head of research at Emirates NBD