INDUSTRY INSIGHTThought Leadership

Towards a strategic partnership – strengthening trade relations between the GCC and EU

By Arnoud Willems and Maryanne Kamau of Sidley Austin LLP

The European Union (EU) is looking to strengthen its cooperation with the Gulf Cooperation Council (GCC) countries, beyond the framework laid down in the 1988 EU-GCC Cooperation Agreement. To that end, on 18 May 2022, the EU unveiled a Joint Communication on a “Strategic Partnership with the Gulf” which identifies key policy areas where concrete actions could be taken to enhance cooperation such as energy, the green transition, trade, economic diversification, digitalization, and global security.

As concerns trade, the Communication indicates a willingness by the EU to explore possibilities of reviving negotiations for a trade agreement with the GCC. Faced with a fast- changing geo-political landscape and global economic slowdown, establishing stronger trade relations between the EU and the GCC should be the next frontier in the EU-GCC strategic partnership. The EU and the GCC collectively account for approximately 17.5% of global trade and more than half of global foreign direct investments. The GCC is a crucial supplier of chemicals and fuel products, as well as an important export market for the EU. In 2020, the EU was the GCC’s largest import partner (accounting for 17.8% of imports) and the fourth-largest export partner (accounting for 6.9% of exports), and thus ranked as the GCC’s second largest trade partner.

A comprehensive trade agreement that goes beyond the traditional tariff cuts and that addresses issues of mutual interest would help enhance the trade environment in both regions. Such an agreement would also be a significant element in the EU’s sustainable energy security policy in as far as it facilitates access to renewable energy and promotes sustainable investments in the sector. Against this background, this commentary briefly explores how a trade agreement would enhance EU-GCC trade relations and the associated benefits of an EU-GCC trade agreement, in particular, for the chemical industry.

Enhancing the EU- GCC trade relations: prospects for a trade agreement

The EU and the GCC launched negotiations for a free trade agreement (FTA) in 1990 which were prolonged until 2008, when the talks were eventually suspended. The EU’s announcement of its intention to explore possibilities of reopening the trade talks comes at an opportune time when the global marketplace is increasingly competitive and more countries are working towards economic recovery from the effects of COVID. In such economic times, a trade agreement presents an opportunity to lower the cost of international trade and gain preferential access to new markets.

For the GCC, this opportunity is even more relevant given it has only two FTAs with the European Free Trade Association (EFTA) States (i.e., Iceland, Lichtenstein, Norway and Switzerland) and Singapore. As a result, GCC industries are likely more disadvantaged compared to competing industries in countries that enjoy wider preferential market access due to their large network of FTAs. For the EU, a trade agreement with the GCC would be a step closer in guaranteeing that its industries remain competitive in export markets. The GCC is holding trade negotiations with key trading partners such the United Kingdom, South Korea and Australia, who also compete for the same market as the EU. Thus, securing the EU-GCC trade relations would help keep industries in both markets competitive.

Further, looking at the global environment where liberalization of trade in goods and services at the multilateral level has made little headway, a bilateral trade agreement offers an alternative track to trade liberalization.

Since the last EU-GCC trade negotiations, the social and economic realities in both regions have changed which, naturally, would also affect the interests that parties have in concluding a trade agreement. For example, the GCC countries have set out long term plans to diversify their economies away from dependence on oil and gas revenues and develop new economic sectors. Access to the EU’s single market for alternative exports presents a significant opportunity in the GCC’s path to economic diversification. In addition, the GCC countries’ diversification plans increase their incentives for a comprehensive trade agreement that covers a broad range of sectors and addresses a new generation of trade concerns, such as digital trade, sustainability and investment facilitation.

Benefits of an EU-GCC trade agreement – Implications for the chemical industry

The benefits of a trade agreement are rather apparent given their potential to eliminate tariffs and address non-tariff barriers that behind-the-border would otherwise hinder trade in goods and services as well as investment. An EU-GCC trade agreement stands to bring similar benefits, particularly for industries, such as the chemical industry, that are largely export-driven. Some benefits include:

1. Tariff cuts: While customs duties on imports in both the EU and GCC customs union remain relatively low, a trade agreement that liberalizes tariffs would still be useful. First, it would ensure EU-GCC imports benefit from similar treatment as other countries that have existing FTAs with either region. Second, the binding nature of trade agreements offers greater certainty on the expected treatment of imports when compared to unilateral preferential arrangements. For the GCC chemical industry, this would level the competition faced from other exporting countries with more favorable terms in the EU (e.g. South Korea).According to GPCA, changes in the Generalised Scheme of Preferences (GSP) have impacted GCC countries significantly by raising import tariffs into the EU. For example, the GCC region is subject to 5.5-6.5% import duty for key agri-nutrients such as urea, ammonia and DAP/MAP, whereas North African countries benefit from the GSP and pay 0% duty. With chemical and fertilizer supplies from a major producer like Russia being further constrained and gas shortages affecting shutdowns of some EU fertilizer plants, it is even more important to establish an agreement between the EU and the GCC, says GPCA. It adds that GCC products are also considerably more sustainable compared to their North African counterparts due to its chemical plants being more modern and better integrated.

Negotiations for a trade agreement would also provide an opportunity to design simple and flexible rules of origin to ensure that tariff benefits are maximized.

2. Removal of non-tariff barriers and regulatory convergence: An EU-GCC trade agreement would also address regulatory hurdles that present themselves beyond the border as a result of both regions applying different regulatory requirements to the same products. This can be achieved by aligning regulatory requirements such as technical regulations, standards and technical assessment procedures through the adoption of joint standards, mutual recognition and establishment of cooperation mechanisms.

One example is the successful publication of the first regional Global Harmonized System standard developed by GPCA and adopted by the GCC Standardization Organization (GSO) on the territories of all six GCC states. GHS was developed by the United Nations as a single worldwide system for classifying and communicating the hazardous properties of industrial and consumer chemicals.

The agreement could focus on sector-specific provisions addressing non-tariff barriers for sensitive export-driven sectors. For example, the EU has included sector-specific annexes on non-tariff barriers addressing trade in chemicals in the UK-EU Trade and Cooperation Agreement (Annex TBT-3) and EU-Korea FTA (Annex 2-E). These provisions seek to facilitate trade in chemicals, ensure high protection standards and provides for cooperation between authorities.

3. Trade remedies: As observed in the EU, trade remedy measures such as anti-dumping duties and countervailing measures are increasingly in use to protect industries from economic practices in exporting countries that allegedly distort the EU market. Negotiations for an EU-GCC trade agreement would offer an opportunity to obtain favorable conditions either for the substantive rules applied or cooperation in trade remedy proceedings. The GCC may want to aim to obtain a comparable exemption from safeguard measures through a trade agreement in the same way as European Economic Area (EEA) countries (Norway, Iceland, and Liechtenstein) and countries that have an Economic Partnership Agreement with the EU (Botswana, Cameroon, Fiji, Ghana, Ivory Coast, Lesotho, Mozambique, Namibia, South Africa and Eswatini).

4. Sustainable trade: Bearing in mind the commitments made by both the EU and GCC on climate action, a trade agreement would address concerns about the environmental impact of trade, through sustainability-related provisions. Alignment on sustainability standards would ensure that neither party is locked out of the other’s market for the foreseeable future. Perhaps the GCC countries should also aim to get its climate change actions recognized as equivalent to those in the EU.

5. Intellectual property protection: Robust provisions on intellectual property rights protection that potentially go beyond the standard of protection in the WTO TRIPS Agreement would reduce costs of trading in IP-sensitive goods and promote innovation in R&D-heavy sectors. GPCA would welcome this move, particularly as the GCC industry increases its focus on innovation and takes its first steps in the journey from being a technology licensee to a technology licensor in the future.

6. Investment: Investment protection rules in an EU-GCC trade agreement would address regulatory barriers to investment and provide sufficient incentives to attract large-scale foreign direct investments in both regions.

Final thoughts

Renewed engagement in the EU-GCC trade negotiations is the right step towards forging a deeper and strategic partnership between both regions. A comprehensive EU-GCC trade agreement would provide a competitive edge for EU and GCC companies thus creating an enhanced trade and investment environment. The benefits and security that such a trade agreement offers, far outweigh those to be gained from unilateral tariff reductions. Both parties should therefore seize the momentum ignited by the EU’s publication of its Communication on building a strategic partnership.

Disclaimer: All views expressed in this article belong to the author and do not reflect the position of GPCA.