Bahrain and Oman FTAs with US dent customs union

Bilateral FTAs can jeopardize multilateral efforts at trade liberalization, as they are about establishing national spheres of influence and shielding them from competition.

Dr Eckart Woertz
Program Manager, Economics

The Free Trade Agreement (FTA) between Bahrain and the US has been operational since August 1, and on September 19, the US Congress approved the FTA with Oman, which will come into effect soon. The media coverage of the two deals in the region have been limited to official announcements without pointing out the serious dangers these FTAs pose to the GCC customs union.

The customs union plan has been under negotiation since 1985, and at the 2001 GCC summit in Muscat, a major breakthrough was achieved after the member states agreed on a common tariff barrier of five percent with outside trading partners by January 2003. This move complemented the already existing free intra-GCC trade and marked the start of the GCC customs union. Individual FTAs of GCC member states with outside countries put this achieved consensus and the young GCC customs union into jeopardy. For example, it is hardly conceivable that Saudi Arabia can accept the influx of American goods from Bahrain, where they face a zero percent tariff, while the same goods would face a five percent tariff if imported via Saudi Arabia or by other GCC countries that still stick to the spirit and letter of the GCC customs union. At the same time, the GCC has lost credibility as a partner in the ongoing FTA negotiations with the EU, China, and Japan as it cannot ensure a proper implementation of possible negotiation outcomes.

The FTA negotiations with the US have come to a standstill in Qatar, and in the UAE, they have been slowed down after the DPW debacle. Should they come to fruition, it would further question the efforts of many years at GCC unification. Given the serious consequences, one must wonder why Bahrain and Oman took this step with such ease; why Saudi Arabia did not oppose them more decisively; and finally what are the motives on the part of the US in deliberately driving a wedge between the GCC countries.

The policy of establishing bilateral FTAs is relatively new in the US. The first FTA of this kind was signed in 1985 with Israel, followed by the one with Canada in 1989, and the NAFTA (US, Canada and Mexico) in 1994. Before that the stress had been on multilateral trade liberalization within the GATT agreement, later followed by the WTO, which was established in 1995. Critics have pointed out that bilateral FTAs may actually not facilitate trade on a worldwide scale but rather lead to an increasing economic bloc building, with the US, the EU and Asian giants such as China and Japan being major competitors. Seen from this angle, bilateral FTAs can jeopardize multilateral efforts at trade liberalization, as they are about establishing national spheres of influence and shielding them from competition.

The quest for establishing bilateral FTAs has intensified in the US in recent years. In 2003, President George W Bush announced an initiative to establish a US-Middle East Free Trade Agreement by 2013, comprising approximately 20 countries. The goal is to gradually establish single FTAs and finally merge with MEFTA. Important first steps that can later lead to full-blown FTAs are Trade and Investments Framework Agreements signed already with Egypt (1999), Algeria (2001), Tunisia (2002), Bahrain (2002), Saudi Arabia (2003), Yemen, the UAE, Qatar and Kuwait (2004). Besides Bahrain and now Oman, FTAs were signed with Jordan in 2001 and with Morocco in 2004.

Similar approaches have been undertaken in Latin America and Asia. Besides, after 9/11, the notion has gained currency in some neoconservative circles in Washington that Saudi Arabia should be isolated and that a functioning GCC could be an unwelcome counterweight to US policies in the region. Signing bilateral FTAs with smaller GCC states fits well with this strategy.

The motives of the US may be mixed with its political agenda in the region, but the motivation for the GCC countries in entering FTAs with the US may be political as well. After all, they have to rely on the US, not the EU or China, for security in an unstable region -- not surprisingly, Bahrain is home to the US Fifth Fleet and Qatar hosts the US Central Command in the region. But no doubt, besides risks for local industries, agriculture, and sponsorship schemes, there are also economic benefits. Oman and Bahrain may develop into refining and re-export hubs for cheap Asian goods to the US, which would otherwise face considerable tariffs in the US. Or they may serve as a gateway of US products to other GCC countries, barring of course, retaliatory tariffs and non tariff barriers from their partners in what is now erroneously termed "GCC customs union". But it is questionable whether it is wise to reap these individual economic benefits at the expense of a vision of sharing such benefits in the framework of a wider GCC FTA with the US or other countries and economic blocs. This assumes significance especially since Europe and Asia are much more important trading partners, with each roughly contributing one-third of imports to the GCC, while the share of the US is only 10 percent.

Thus, if all other GCC countries, including Saudi Arabia, don't follow suit and reach FTAs with the US themselves, the Bahrain and Oman FTAs would render the GCC customs union mere ink on paper. Such lack of unity and cooperation is not likely to inspire confidence in the planned GCC currency union in 2010 either. In the end, the GCC countries have to decide if they want to get bogged down in petty fights and rivalries or seriously try to put their act together. It is their choice to either be a nascent economic bloc to reckon with, that also develops some political muscle to stand its ground in an often unstable region, or remain a loose cooperation of dependent satellite states with little room to maneuver in the midst of the world's power games.

Contact details of Dr Eckart Woertz is available to registered journalists

Published: 11 Oct 2006

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