How can free trade agreements benefit the GCC chemical industry?
By: Dr. Sana Ben Kebaier
GCC chemical industry trade performance
Chemicals are essential to our modern life. The chemical industry is interlinked with a vast and complex network of manufacturing value chains which contribute to all kinds of goods across industrial sectors, making it a cornerstone of the regional economy. In the GCC, the chemical industry has witnessed strong recovery since the beginning of 2021, responding to growing chemical demand from major end markets. This translated into a regional economic rebound, with the industry contributing 5.6% to GDP in 2021. The GCC chemical sector serves as a significant driver of growth, posting a 7.1% CAGR between 2018-2021. Accordingly, growth leads to job creation (e.g., in 2021, the industry accounted for 53,900 direct jobs, 107,800 indirect jobs, and 48,500 induced jobs – 210,200 jobs in total), making it an important contributor to society.
The chemical industry in the GCC is predominantly export-driven. Despite the international economic uncertainty, its export value reached USD 72 billion, and volume reached 68.6 million tons in 2021, delivering a GCC chemical trade surplus of USD 53.7 billion (almost double compared to 2020). Global chemical trade accounted for 6.1% of all trade in goods in 2021, and is becoming increasingly competitive. Chemical and international trade policies can play a significant role in helping GCC governments reach their social, environmental, and economic ambitions.
Figure 1: The GCC chemical industry trade facts in 2021
Source: GPCA Facts and Figures, 2021
Figure 2:Top 10 destinations for the GCC chemical exports and imports in 2021, share in GCC trade.
Source: GPCA Facts and Figures, 2021
As of 2021, the GCC chemical industry has traded with approximately 170 countries, with the top 10 export destinations accounting for 66% of all GCC chemical exports. China represents the GCC’s biggest trading partner in chemicals. Chinese exports from the GCC reached USD 18.5 billion, and imports stood at USD 4.4 billion, followed by India and Europe. Reducing trade barriers will raise GCC chemical industry exports, lifting the chemical trade balance and further enhancing the industry’s economic contribution.
Free trade agreements in the GCC
Up until recently, the GCC region has operated under the strategy of unilateral trade agreements2. Adopting Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs) is now increasingly being seen as beneficial to GCC economic growth as well as the sustainability of the regional chemical industry. FTAs can raise living standards, promote economic growth, connect people and businesses, help bring in foreign investments, and foster innovation in manufacturing, thus enabling governments and companies to make the industry more sustainable with improved revenues, higher job creation, and better technologies.
FTAs and PTAs encourage smooth and fast-moving trade between GCC countries and their partners as they reduce, or even remove, import/export duties and other tariffs, as well as non-tariff barriers. The benefits across economic, political, and industrial performance are numerous, as summarized in Figure 2. This, in turn, leads to preferential access to key markets (including for chemicals), which is mutually beneficial for the countries signing the trade agreement.
2 Unilateral trade agreements are one-sided, non-reciprocal trade preferences granted by developed countries to developing ones, with the goal of helping them to increase exports and spur economic development.
Figure 3:Benefits of free trade agreements
Given a supportive local and international trade policy, the GCC chemical industry has strong potential to benefit from the global increase in chemical demand, estimated to double by 2050, and continue to provide life-enhancing, safer, cheaper, and more durable goods to over 9 billion people by 2050. Such goods not only contribute to food security, and the health and wellbeing of people and animals, they are also crucial in the light-weighting of various plastic applications. Given the significant importance of the chemical industry to the global economy and the GCC, it is prudent that governments, industry players, and regulators cooperate on trade policies such as FTAs.
Enhancing trade is one of the most important goals of any economy. According to economic theory, FTAs, PTAs, customs unions, and monetary unions are the leading practices to reach this objective. Following the success of the European Customs Union, where trade increased by 600% during the first 12 years following its establishment, the member countries of the newly formed Gulf Cooperation Council signed an agreement to become a Free Trade area in November 1981.
Over the past four decades, the GCC region has prospered into an ambitious, integrated economic group with common and harmonized objectives regarding trade policies and relations. The GCC Free Trade area was initiated in March 1983 by eliminating the customs duties and lowering trade barriers on the movement of natural resources and industrial and agricultural goods. This agreement proved to be a success for 20 years, where GCC intra-regional trade increased from USD 6 billion in 1983 to USD 11.6 billion in 1993 and USD 20 billion in 2002. Following the formation of the GCC Customs Union on 1 January 2003, the volume of Intra-GCC trade has increased by an annual growth average exceeding 20%.
Retail and wholesale trade were completely opened up to all GCC citizens in 1990. However, most of the domestic trade registered slow progress. Consequently, the GCC multiplied its effort to enhance trade, and on 1 January 2003, the Customs Union of the GCC officially started after the Financial and Economic Cooperation Committee approved the rules and the condition of the implementation of the GCC Customs Union.
The GCC Customs Union significantly increased chemical trade flow between GCC states, translating the Union’s positive influence on bilateral trade across the GCC countries (Figure 4). Imports and exports registered massive growth.
In 2008, the GCC declared standard market status to create a mutual environment for GCC nationals to benefit from equal rights and opportunities across the region, as can be seen in Figure 4. Thanks to these agreements, intra-GCC trade in chemicals expanded substantially.
The GCC member countries are highly engaged in trade as they are a major supplier of petrochemicals and chemicals. Consequently, it is crucial to develop international trade agreements to boost diversification and growth.
Figure 4: Chemicals intra-GCC trade (2003-2021)
Source: UN Comtrade, GPCA analysis, 2023
Note: Top traded products are selected (Organic chemicals, plastics, fertilizers, and inorganic chemicals)
Figure 5:Estimated benefits of FTAs with key partners if imports tariffs are removed, 2021
Source: The data of the imports of the top 10 chemical products is extracted from UN Comtrade. The imports duties are extracted from the World Bank, and they correspond to the average import duties on all goods.
Note: The top 10 chemical products are methanol, ethylene glycol, HDPE, LDPE, PP, methyl tert-butyl ether, ammonia, p-xylene, UREA, and Terephthalic Acid (TPA).
Global trade has been undergoing important changes in recent decades, responding to the growing globalization and a shift of the economic development polarization towards growing and emerging economies, including the GCC region.
Historically, the GCC has maintained low external tariff barriers and has made a collective effort to negotiate trade policies, mainly FTAs and PTAs, with international partners. This could increase bargaining power, improve trade flows, and contribute to collective economic growth.
During the last three decades, the GCC has established trade agreements with key partners, including the integration with the Arab world (PAFTA), the relationship with northern Europe under EFTA, and the FTA with Singapore. Negotiations are underway with other countries and trade groups, including China, the United Kingdom, Turkey, and India.
As an example of the immediate benefit of removing tariffs on chemical products with key trade partners, eliminating tariffs on the top 10 exported chemical products would yield a significant estimated benefit, as presented in figure 5, and provide improved access and competitiveness for GCC chemical products exported to these markets.
The GCC chemical industry is primarily export driven, has an important economic impact, and is a significant driver of social growth and industrialization. Historically, it is undeniable that FTA negotiations and the progress of trade policies have been challenging. However, these policy challenges must be overcome, given the potential gains that can result from trade liberalization. With the ever-growing number of FTAs concluded by competing, exporting countries, the GCC industry is in danger of losing ground and would hope for the balance to be restored with the conclusion of critical GCC FTAs.
This article is based on an upcoming GPCA white paper entitled ‘Importance and Benefits of Trade Agreements for the GCC Chemicals Industry’. The white paper, due to be released soon, will provide a complete an assessment of potential economic benefits for the GCC chemical industry resulting from the conclusion of FTAs with top trading partners.