Chronicle of the Middle East and North Africa

Gulf-European Trade Liberalization: Motives and Obstacles

The success of Gulf-European Trade Liberalization while Gulf states maintain distinguished trade relations with India and China may position them as a linking economy between East and West.

Gulf-European Trade Liberalization
Saudi Arabia’s Crown Prince Mohammed bin Salman. Evelyn Hockstein / POOL / AFP

Ali Noureddine

This article was translated from Arabic to English

In May 2024, on the sidelines of the opening activities of the European Chamber of Commerce in Saudi Arabia, the European Union decided to advance its trade negotiations with the Gulf Cooperation Council.

The ultimate goal is to reach a free trade agreement between the Arab Gulf states and the European Union following previous repeatedly unsuccessful attempts to liberalize trade since 1988.

Reasons for the Failure of Previous Negotiations

This was not the first time that the two parties had sought such an agreement. The initial attempt dates back to 1988 when the GCC countries signed a framework agreement with the European Economic Community. The goal was to initiate negotiations on trade liberalization between the two blocs. Negotiations began on this basis in 1991 but saw no significant progress in the following years.

From that time until 2008, over a period of 17 years, the negotiations remained stalled due to mutual conditions and concerns. Despite numerous initiatives, summits and specialized subcommittees, the obstacles persisted and evolved at each stage. Consequently, at the Muscat Summit in 2008, the GCC decided to completely suspend negotiations with the European Union regarding the free trade agreement.

Since 1988, one of the most prominent obstacles was the European Union’s request for the Arab Gulf states to form a customs union. This required the integration of these countries into a cohesive economic bloc with unified customs duties and procedures, both internally and externally. The EU deemed this harmonization essential for entering into a free trade agreement with the GCC as a single entity, rather than with individual countries, each having their own customs policies.

This obstacle was finally overcome in January 2003, when the GCC countries established a customs union with a unified policy on goods imported from abroad. This development enabled the GCC countries to negotiate trade and customs agreements with other economic blocs, such as the European Union, potentially leading to the liberalization of import and export operations.

Additional European Conditions and Arguments

After overcoming this issue in 2003, the European Union added a new condition requiring all GCC countries to join the World Trade Organization. This condition specifically targeted Saudi Arabia, which at that time was the only GCC member not part of the WTO.

The pressure on Riyadh to join the WTO aimed to curb some of its economic policies, particularly those involving direct financial support for certain petrochemical industries and restrictions on foreign capital movement in the Saudi private sector.

Riyadh was frustrated by this condition, especially since the European Union had signed free trade agreements with non-WTO countries like Algeria and Lebanon. However, this obstacle was resolved when Saudi Arabia joined the WTO in 2005 and committed to complying with all organizational standards and rules within a three-year transitional period.

Subsequently, the European Union introduced new conditions and demands. These included liberalizing and privatizing certain Gulf economic sectors, opening them to European investment, canceling price support for certain goods and raw materials, and addressing political and social issues such as human rights, and women’s economic participation and democracy.

These demands led to sensitivities among the GCC countries, causing negotiations to be suspended in 2008.

Beyond the stated reasons, it was evident that the European petrochemical industry lobby was concerned about competition from Arab Gulf states due to lower prices of oil derivatives in those countries. This concern significantly influenced the EU’s stringent conditions for the free trade agreement.

Conversely, the GCC countries consistently demanded that their petrochemical products be exempt from customs duties under the proposed agreement, like other goods, without any transitional periods or additional conditions.

Reasons for Moving the File in 2024

The most important question today revolves around the reasons behind European enthusiasm to advance negotiations with the GCC regarding the free trade agreement. This issue arises amid the trend of major economic blocs engaging in mutual trade wars, including those among liberal Western economies themselves.

Economic globalization and ideologies embracing market liberalization are now facing major setbacks after previously dominating decision-makers’ minds. So, why is the European Union betting on the success of liberalizing trade with the Arab Gulf states now, especially when this project failed to boost globalization and liberalize global markets in the past?

A look at the figures for 2022, the year the Ukrainian war began, reveals that the value of Arab Gulf countries’ exports to Europe rose to over $92 billion, compared to $43 billion the previous year. Europe’s exports to the Arab Gulf states increased to $93.5 billion in 2022, up from $77 billion the previous year.

In 2023, European exports jumped to more than $101 billion, while Europe imported over $82 billion in Gulf goods. The slight decline in Gulf imports to Europe in 2023 was due to the decrease in average energy prices compared to the previous year.

These numbers highlight the interests pushing the free trade agreement forward. The Ukrainian war significantly increased the European Union’s dependence on Gulf petroleum derivatives, which was reflected in the volume of Gulf exports to Europe.

Meanwhile, Gulf demand for European technological products has increased within the framework of strategic projects undertaken by the GCC, especially in health services, electricity, water distillation, clean energy generation and the development of academic institutions.

At the same time, European Union countries are watching with concern the progress in negotiations between China and the GCC, which could lead to a trade liberalization agreement between the two regions. This prompts the European Union to anticipate this possibility and attempt to sign a similar free trade agreement with the GCC, fearing that European goods might lose their competitiveness in the Arab Gulf states’ market.

Additionally, Russia announced in May 2024 that it seeks to prepare similar free trade agreements with countries in the Middle East, Africa and Asia, adding to the urgency.

Recent developments in the European market have addressed the obstacle associated with the fear of Gulf petrochemical industries.

European companies have started importing basic materials for making plastic from abroad due to rising energy prices and production costs. This makes influential lobbies within the Union more receptive to openness to Gulf markets, rather than fearing the liberalization of trade with them. Here, a free trade agreement could benefit the Arab Gulf states.

This file is expected to undergo a long negotiation process before all details of the agreement mature, if both parties reach an understanding.

However, the success of the Arab Gulf states in liberalizing and developing their trade with Europe, while maintaining distinguished trade relations with India and China, may position them as a linking economy between East and West. This is especially true if they continue investing in infrastructure related to commercial shipping, which is a goal for the UAE, Saudi Arabia, and Oman in particular.

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