GCC: Lasting Regional Trade Bloc - Report Example

GCC: A Lasting Regional Trade Bloc Introduction The May 1981 meeting in Abu Dhabi of the six member s that comprise the Gulf Cooperation Council(GCC) marked the beginning of a new era of cooperation and integration and continued the evolution of the historical, cultural, and religious unity that had prevailed in this region for centuries. The states of Bahrain, Kuwait, Oman, Saudi Arabia, and the United Arab Emirates are some of the wealthiest nations in the region and share several socio-political commonalities, as well as a contiguous geographic region. Originally organized to promote their economic integration, they have furthered this agenda by forming a customs union in 2003, and are currently working towards establishing a common market. In addition, the GCC cooperates in many other fields such as auditing, agriculture, the media, and the military. They have additional objectives of a common currency, establishment of a central bank, and creating similar regulations in regards to tourism, trade, mining, and industrial technology. However, talks have often been contentious and have stalled due to political infighting. The GCC has been criticized for allowing dormant political disputes to create fresh tensions, which have rendered the GCC ineffective in achieving even modest economic integrationist policies, let alone its "often grandiose political and security declarations" (Abdulla 1999, p.151). The GCCs ability to remain intact and continue to cooperate makes it a relevant and effective organization able to confront the growing economic and political problems of the 21st century. Historical Background When the GCC was conceived and formed, there were some specific differences among the member states as to the purpose of the organization, and those conceptions have continued to play a part in the role that the GCC plays. Overall, the main purpose of the GCC was for economic integration, as well as for establishing some level of political cooperation that could translate into a "recognized regional organization in international politics" (Abdulla 1999, p.152). Originally, the GCCs individual members had three objectives in three distinct areas of cooperation. Their objectives included economic and social integration, regional military security, and the establishment of a Gulf Common Market. Oman was outspoken about its desire to create a regional military alliance that would be similar to NATO or the Warsaw Pact (Abdulla 1999, p.154). Saudi Arabia had less interest in economic and military integration, and was more interested in preserving the political structure of the status quo in the region. The Saudis wished to use the GCC to boost its own political power and its ability to pursue its own foreign policy (Abdulla 1999, p.155). The smaller states of Bahrain, Qatar, and the United Arab Emirates did not have specific self-oriented objectives, but saw the GCC as an additional security layer against radical groups and uprisings, as well as a long-term asset for their relatively new monarchies in terms of security, military, and economic cooperation (Abdulla 1999, p.155). These divergent interests, and various individual objectives, have made progress more difficult in the attainment of any one goal. In fact, the GCC has tended to remain indecisive in regards to their objectives and as a result have not fulfilled any of them with any degree of effectiveness. Economic Integration The success of a regional trading bloc, or regional political alliance, can be measured by the degree to which they accomplish their objectives and by the extent to which the objectives produce the desired outcome. According to economic theory, "market integration creates more trade and subsequently economic growth" (Rettab & Istaitieh, 2005, p.23). Though the GCC is generally referred to as a regional trading bloc, its objectives have often gone beyond the principles of free trade, the elimination of tariffs, and the preferential treatment of favoured trading partners. However, economics is an area that all the member states can agree upon and the GCC was formed on this basis. However, as a regional trade bloc the GCC has only experienced a moderate amount of success, and numerous setbacks and delays. This experience has been demonstrated in the GCCs desire to move towards a common currency. The smaller countries of Oman and Bahrain have oil dependent economies with limited reserves, and would benefit from a weaker currency, while the UAE, Qatar, and Kuwait would prefer a stronger currency as a protection against imported inflation (de Milliano 2007, pp.11-2). This has led to significant differences in the currency requirements of the members. In addition, the need for diversification recently prompted Oman to sign bilateral trade agreements with the US, which for all practical purposes dedicated them to the US dollar and have, for the time, opted out of the move towards a common currency (de Milliano 2007, p.1). This created considerable tension between Oman and the Saudis for Omans decision to act independently without discussion or consultation (Harders & Legrenzi 2008, p.122). The economies, which are heavily dependent on the single product of petroleum, the modest level of intra-GCC trade, and the slow pace of diversification among the member states have made agreement in regards to a common currency difficult. However, the GCC has made some progress in other areas of economic integration. One of the major accomplishments of the GCC that has benefited the members economically, and moved them closer to a common market, has been the establishment of the Customs Union in 2003. The Customs Union is an area where "customs duties as well as the regulations and procedures restricting trade among the GCC members are abolished, and tariffs, trade restrictions, and regulations for non-members are uniformly established" (Rettab & Istaitieh, 2005, p.7). These actions are designed to stimulate intra-member trade by allowing the free flow of trade, as well as mandating that all products receive the same preferential treatment as domestic products (Rettab & Istaitieh, 2005, p.7). Hypothetically the Customs Union increases the available market, stimulates intra-bloc competition, and lowers the production and transportation costs (Rettab & Istaitieh, 2005, p.27-28). However, the GDPs of the member states of the GCC are highly dependent upon the single product of oil, and much of the benefit that would usually be derived from a Customs Union is not realized in the GCC. For example, countries with a low level of diversification do not benefit from an increased market size or intra-bloc competition. In addition, transportation costs that come as a result of cross border simplicity have little impact on a country such as Oman, where oil accounts for "about 75 percent of the country’s export earnings and 40 percent of its gross domestic product" (Country analysis briefs: Oman, 2007, p.1). However, the Customs Union has been an overall plus for the GCC, even though it does have some areas of weakness. Though the GCC intra-bloc trade is hampered by a lack of diversification and oil dependent GDPs, there has been a considerable increase in regional trade since the implementation of the Customs Union. Overall, intra-bloc trade for both imports and exports rose by nearly 300 percent since its 2003 inception (de Milliano 2007, p.3). There is sufficient evidence to support the contention that the Customs Union had a significant impact on this figure. After rising significantly in the early 1980s after the formation of the GCC and the implementation of the GCC Free Trade Area in 1983, intra-bloc trading remained sporadic and flat during the remainder of the 1980s and the 1990s. After a slow start in the early 2000s, the figure for exports within the bloc went from approximately $7 billion in 2002 to over $20 billion in 2007. This spike in trading coincided with the implementation of the Customs Union in 2003. However, not all countries have benefited equally. Oman has been unable to take full advantage of the Customs Union due to its dependence on oil fields that are small, geographically isolated, and have a lower production capacity than its neighbours. This has kept the fixed costs of its main export at a high level. Dubai, though it has shown some growth, has lost some of the advantages that it had before the implementation of the 5 percent fixed tariff. Prior to 2003, Dubai had a low 4 percent tariff as compared to Saudi Arabias 12 percent. During the first year after the Customs Union, Dubai experienced a rapid rise in imports and a significant negative trade balance (Rettab & Istaitieh, 2005, p.12). Diversification would be a big advantage for the GCC in the future, especially for the smaller nations, such as Oman, where the fixed costs of oil production is high. With a more diversified economic base the effects of tariff standardization could continue to stimulate intra-bloc trading, and its benefits could begin to be realized on a more equal basis. The successful outcome of an economic policy is often measured in terms of growth as expressed by GDP. The aggregate growth rate in the GCC since 2003 has been a high of 11.6 percent in Qatar to a low of 5 percent in Oman (Strum, Strasky, Adolf, & Peschel 2008, p.19). These figures reflect the high oil prices during this period, and Omans challenge with a dwindling oil supply that is costly to produce. On its entirety, the GCC GDP growth rate between 2001 and 2006 was over 100 percent, over doubling from $332 billion to $712 billion (Strum, Strasky, Adolf, & Peschel 2008, p.11). However, eliminating the effects of oil and gas, and their price fluctuations, the growth rate for this period was a more modest 30 percent (Strum, Strasky, Adolf, & Peschel 2008, p.11). This illustrates the dominance of oil and gas and the need to diversify. Foreign Direct Investment (FDI) can directly impact diversification, and the modest rate of FDI in the GCC has been responsible for the low rate of non-oil GDP growth in recent years (Mina 2007, p.3). FDI stimulates diversification by improving "access to technology, adoption of innovation in the production process, and therefore productivity. FDI can also bring new expertise and managerial know-how and expand production, marketing, transport, and communication networks" (Mina 2007, p.3). Market openness, education level of the labour pool, and labour policies all contribute to the attractiveness of FDI (Mina 2007, p.13-14). While the GCC has provided ample market openness, the human capital and labour policies have not made the GCC favourable to FDI, and diversification has been minimal (Mina 2007, p.14). GCC policies that would serve to increase the value of their human capital, such as educational programs, could increase the level of FDI and improve the ratio of the non-oil component of the GDP. Defence and Security Integration One of the ongoing and pervasive needs of the GCC is regional and global security. The fact that they have remained a cohesive organization in the face of the Islamic Revolution and the Iran-Iraq War is an indication that they have been able to provide some level of internal and regional security. However, the monarchies have traditionally been suspicious of the role that armies play in their society, the potential for a military coup, and they are opposed to any armed organization on their soil that is comprised of soldiers from other Arab countries (Harders & Legrenzi 2008, p.109). When the GCC was challenged during the 1990 invasion of Kuwait, it was "damning evidence of the GCCs failure in security matters that its states unilaterally opted for foreign protection" and are now dependent upon foreign security forces, primarily American (Abdullah 1999, p.164). GCC rulers would rather depend on a temporary American or British presence than a neighbouring army that may become a permanent fixture (Harders & Legrenzi 2008, p.109-110). In addition, the objective of military integration may have less importance than it did when the GCC was first formed. According to Hertog (2007, p.68), "As a full clash with Israel has become increasingly unthinkable, and no Arab regime has mounted a military challenge to any of its neighbours since Saddams Gulf War, military power is of declining utility in todays Arab world. In the absence of a full-scale clash with Iran, economic power will increasingly come to the fore in defining intra-Arab relations". The objective of security and military integration may not be realistic in the near future. However, it does give the GCC additional cohesiveness and presents and projects an image of security cooperation, even if it is only in principle. Recommendations and Conclusion The ability of the GCC to withstand the last 30 years of revolution, war, terrorism, and economic turmoil is a testament to their endurance and demonstrates their potential for longevity. As an economic coalition, the GCC has been able to maintain some economic stability, even amidst the general disagreements on a common currency. One of the biggest obstacles that face the GCC is the lack of diversification within the member states. While the Customs Union in 2003 has promoted greater intra-bloc trading, real GDP growth is still heavily tied to the price of oil. The best solution to this problem would be to attract a greater amount of foreign direct investment. Oman has had some limited success in this area, as a nation that is faced with a dwindling supply of oil, which is becoming more costly to produce. However, all the nations need to improve their human capital resource by providing a workforce that is better educated and able to attract modern technology. This would attract more FDI and create a more stable economic future. The GCC has remained a secure area since its inception, mainly as a result of their reliance on the US and Britain. The monarchies have provided a politically stable environment, but there is little trust for a general security agreement or mechanism for military integration among the member states. It has, however, provided its allies with a format for agreement and general security. Though the GCC has been hampered by occasional disagreements and setbacks, it continues to be a relevant organization. Though it has generally been slow to react to the problems of the area, they have provided a platform for political stability. A common currency and full military integration may be years away from reality. It is the spirit of cooperation, and their long history that makes the GCC a workable organization in the face of the problems of the 21st century. References Abdullah, AK 1999, The Gulf Cooperation Council: nature, origin, and process in Middle East dilemma: the politics and economics of Arab integration, ed M Hudson, Columbia University Press, New York. Country analysis briefs: Oman 2007, United States Department of Energy, Energy Information Administration, Washington DC, viewed 4 May 2009, de Milliano, R 2007, Special report 07/03: Gulf Cooperation Council, Rabobank Economic Research Department, Amsterdam NE. Harders, C & Legrenzi, M 2008, Beyond regionalism?: regional cooperation, regionalism and regionalization in the Middle East, Ashgate Publishing, Hampshire UK. Hertog, S 2007, The GCC and Arab economic integration: a new paradigm, Middle East Policy, vol.14, no.1, pp.52-68. Mina, W 2007, Discussion paper 2007-23: Are the GCC FDI location determinants favorable?, UAE University, United Arab Emirates. Rettab, B & Istaitieh, A 2005, The effect of Customs Union formation between GCC countries on Dubais trade, Dubai Chamber of Commerce and Industry, Dubai UAE. Sturm, M, Strasky, J, Adolf, P, & Peschel, D 2008, The Gulf Cooperation Council countries: economic structures, recent developments and role in the global economy, European Central Bank, Frankfurt GDR. Read More