Much is being said about the prospects of free trade and globalisation these days. The new US president, Donald Trump, has threatened to impose tariffs of up to 45 per cent on Chinese goods, accusing the country of economically “raping” the US. Political opposition to globalisation has unfolded worldwide as global trade has slowed. Between 2012 and 2015, growth in world trade slowed to an average 3.2 per cent a year. This is about half the average between 1986 and 2008, according to the World Trade Organization. Trade can grow only if economies are performing well. China’s slowdown and the stagnation in the euro zone are suppressing world trade.
In this context where does the GCC region stand on trade integration?
Last week, at a retreat on Abu Dhabi’s Saadiyat Island, Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, said that combining the capabilities of the UAE and Saudi Arabia could create historic opportunities for the region.
“Through our integration, solidarity and unity, we can protect our gains, enhance our economies and build a better future for our people,” he said at the retreat, which was attended by 150 Emirati and Saudi officials. Named after the Arabic word for determination, the Al Azm retreat was intended to create projects to benefit the people of both countries. It followed Saudi King Salman’s visit to Abu Dhabi in early December as part of a tour of the region that also included Qatar, Bahrain and Kuwait.
The new proposal for greater integration comes at an opportune time as both countries look to the post-oil era with trade and cooperation playing an important part of their strategies.
Over the past decade, much has been said about the need to remove intra-GCC barriers to trade and investment. Efforts to this end paved the way for the establishment of a customs union and a common market. The lesson learnt from the European Union is the need for robust economic policy coordination.
Saudi Arabia and the UAE can do a lot to increase non-oil, intra-GCC trade and investment, support export diversification, reduce volatility in export earnings and contribute to overall economic activity. The two countries can jointly develop alternative sectors, such as renewables, and economic diversification can improve productivity growth and generate technological spillovers for manufacturing.
The road has been bumpy, but the spirit of integration has often withstood challenging times. Since the GCC’s inception in 1981, it has emphasised the role of “coordination, integration and inter-connection between member states in all fields”. Because of security threats at that time, political cooperation became foremost, with culture and education taking a back seat. In the 1990s, as oil prices crashed, economic integration became a priority as regional markets were seen as an area of potential growth.
The Economic Agreement of 2001 set goals and targets for achieving a common market and monetary union. Coordination in agriculture, industry, environmental sustainability and scientific research were included for the first time. By 2003, a customs union was announced, but discord in revenue-sharing schemes emerged on whether the member state of first entry or the product’s final destination of consumption should retain tax revenue. Bahrain and Oman signed bilateral free-trade agreements with the US in 2004 and 2006, respectively, which complicated efforts for intra-regional trade.
To the region’s credit, in 2008 an important step was taken by launching the GCC common market. This granted economic equality for companies and citizens across the region’s borders. Barriers to goods as well as capital and labour were essentially removed. In 2010, the single currency adoption was announced, but the euro zone crisis as well as Oman’s unwillingness to join and differences over the location of the central bank obscured the path ahead.
One of the main criticisms about intra-regional efforts to increase trade is that there isn’t enough trade, as most produce the same oil-based products. Intra-GCC trade in goods and services stands at US$85 billion, growing by 23 per cent annually on average since 2003, yet this remains less than 10 per cent of total GCC trade volumes. In comparison, intra-EU trade represents 57 per cent, intra-Nafta 41 per cent and intra-Asean 23 per cent of their respective total trade volumes.
Although tariffs on regional trade have been removed, non-tariff barriers (NTBs) are a hindrance to further free market integration. Energy prices vary even as subsidies are gradually being lifted; this has consequences for business costs. Business openness, red tape, competition laws and the regulatory environment need to be harmonised across the region. Coordination on industrial policy that allows for complementary roles in the global or regional supply chain rather than competition is essential.
Despite the recent concerns about the viability of the euro, there are obvious benefits a single currency brings to its member states, such as facilitating trade, investment and job creation. A fiscal union is a necessity, which Saudi Arabia proposed in 2011 and the EU has learnt the hard way.
The region is moving in the right direction with the expected implementation of a value-added tax on goods and services across the GCC in 2018. This could act as a prelude for cooperation and complementary efforts. For instance, Saudi Arabia could fill in its labour shortages.
Both the UAE and Saudi Arabia need the scale and scope only achieved through larger markets and economies of scale. There is much that can be done between them as they think about their post-oil future.
John Sfakianakis is the director of economic research at the Gulf Research Centre in Riyadh.
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