Enhancing economic prosperity: The case for a chemical industry Free Trade Agreement (FTA) between GCC and key partners
By Dr. Sana Ben Kebaier, Head of Economic Research Department (A), GPCA
In today’s interconnected global economy, Free Trade Agreements (FTAs) are pivotal instruments shaping international trade dynamics. The Gulf Cooperation Council (GCC) has been engaged in negotiations with major economic players, such as China, India, and Turkey, to bolster economic ties in the chemical industry. These negotiations aim to eliminate trade barriers and promote mutually beneficial trade dynamics. While these talks have been ongoing for some time, the delay in finalizing these agreements raises concerns about their impact on economic growth, not only in the GCC but also in their partner countries.
This article explores the potential benefits and challenges of establishing an FTA in the chemical sector and the recommendations that can expedite its realization.
The article provides a preview of a broader and more in-depth analysis to come as a white paper titled “Unlocking Growth Opportunities: Measuring the Economic Implications of FTA in the GCC Chemical Industry“, which will be released soon on the GPCA website. This forthcoming white paper delves even deeper into the intricacies of the FTA, providing a more extensive exploration of the potential benefits and challenges. It will offer policymakers and stakeholders a thorough understanding of the economic implications of this transformative agreement.
Chemical trade performance between GCC and key partners
The GCC’s negotiations with China, India, and Turkey represent a strategic move to foster deeper economic ties with key trading partners. The GCC’s geographic location and significant resources make it a valuable partner in the global chemical industry. China, India, and Turkey are burgeoning economies with a growing appetite for chemicals, making them ideal partners for trade in this sector.
Over the past decade, the GCC region has established significant chemical trade relations with China, India, and Turkey. It has consistently maintained a favorable chemical trade balance, reflecting the region’s competitive edge and comparative advantage in producing and exporting chemical products. The persistence of a trade surplus in chemicals indicates the economic strength and profitability of the chemical trade relationship between the GCC region and its counterparts in China, India, and Turkey.
Within this consortium of trade partners, China emerged as the most pivotal counterpart for the GCC in the chemical sector during 2022, constituting 25.3% of the total GCC chemical exports, as depicted in Figure 1. Subsequently, India stood as the second most significant trading partner, accounting for 21.1% of the GCC’s chemical exports during the same period.
Figure 1: The GCC chemical exports in 2022, share in GCC exports
Source: UN-Comtrade and GPCA research, 2023.
Figure 2: GCC chemical trade balance value (USD billion) with China, India, and Turkey
Source: UN-Comtrade, 2023
As economies regained momentum, the demand for chemicals across various sectors rebounded, driving the increased trade value. In 2022, the chemical exports from GCC to India and Turkey reached an unprecedented level, setting a new record, which can be attributed to several factors: 1) the recovery from the pandemic, resulting in the resumption of economic activity and increased consumer demand; 2) the strengthening of commercial relations through bilateral agreements and diplomatic efforts, such as the UAE-India Comprehensive Economic Partnership Agreement (CEPA); 3) the expansion of industrial sectors in all regions, driving demand for chemicals; 4) the market diversification strategies of the GCC, India, and Turkey; and 5) the positive impact of regional integration initiatives. Taken together, these factors have created favorable conditions for enhanced cooperation, market access, and an increase in the volume of trade in the chemical sector between the GCC region, India, and Turkey.
The significance of determining trade effects, consumer surplus, and welfare effects
Understanding trade effects, consumer surplus, and welfare effects is crucial when assessing the potential impact of an FTA in the chemical industry between the GCC and its main partner countries: China, India, and Turkey. These elements play a key role in assessing the overall impact of the FTA and the potential benefits it can offer to all stakeholders involved.
Trade effects: Trade creation and trade diversion
Trade creation and trade diversion are key concepts in evaluating the impact of FTAs on international trade. They provide insight into whether an FTA is likely to boost trade volume and foster economic integration or lead to trade redirection from previous partners. Understanding these trade effects helps policymakers and stakeholders make informed decisions regarding the potential benefits of the FTA.
Trade effects dynamics
Source: GPCA analysis, 2023
Consumer surplus and welfare effect
Determining the consumer surplus and welfare effect is equally significant, as these elements provide a holistic view of the FTA’s impact on consumer well-being, economic growth, and overall prosperity. These concepts take into account various dimensions of economic and social benefits:
The role of WITS-SMART simulation
The research paper utilizes the WITS-SMART simulation model to quantify these effects, offering a data-driven basis for negotiators and policymakers to make informed decisions regarding the FTA. This simulation model leverages empirical data, trade policies, and tariff changes to estimate the potential impact on trade dynamics, consumer welfare, and overall economic well-being.
By employing this simulation model, the research paper achieves several critical objectives:
- It provides a robust and empirically grounded framework for assessing the FTA’s potential impact, enhancing the reliability of the results.
- It offers policymakers and stakeholders a clear understanding of the expected outcomes, allowing them to make informed decisions.
- It quantifies the positive trade creation, trade diversion, consumer surplus, and welfare effects, providing specific figures that demonstrate the potential benefits of the FTA.
In summary, the WITS-SMART simulation model is an invaluable tool in evaluating the trade effects, consumer surplus, and welfare effect of the proposed FTA between the GCC and its partner countries. It allows for a comprehensive analysis, providing a deeper understanding of the potential economic benefits and challenges, ultimately guiding policymakers and stakeholders toward well-informed decisions that can promote sustainable growth in the chemical industry and strengthen economic ties between nations.
The study reveals that establishing an FTA in the chemical sector between the GCC and its partners offers a promising outlook. The simulation results indicate a substantial increase in trade volume and economic integration. Trade creation effects are expected to reach USD 408.3 million with China, USD 215.8 million with India, and USD 42.3 million with Turkey. This paints a picture of stronger diplomatic relations, expanding market opportunities, and aligned strategic objectives. On the flip side, the trade diversion effect suggests that the GCC countries can expect trade to shift from previous partners to these FTA countries due to the removal of trade barriers.
Revenue, welfare, and consumer surplus
While the elimination of tariffs might initially result in negative revenue effects for GCC countries, it is crucial to consider this within a broader context. The research points to significant positive welfare effects, indicating substantial gains in economic welfare due to increased market integration, competition, and technological progress. Furthermore, the considerable consumer surplus reflects improved living standards, product variety, and access to advanced technologies, ultimately enhancing consumer welfare.
Trade effects from the perspective of partner countries
The positive trade, welfare, and consumer surplus effects aren’t limited to GCC countries. Partner countries, including China, India, and Turkey, also stand to benefit. The FTA is poised to have a positive impact on their revenues, welfare, and consumer surplus, fostering higher economic growth, industry competitiveness, and consumer welfare.
The research paper provides several policy recommendations derived from the comprehensive analysis of the potential FTA’s impact. These recommendations include:
- Strategic FTA negotiations: The GCC should actively pursue negotiations for an FTA with China, India, and Turkey in the chemical industry. The study indicates substantial potential for mutual benefits, such as trade creation and market diversification.
- Tariff elimination phasing: Recognizing the short-term negative revenue effects of tariff elimination, GCC policymakers should consider a phased approach. This gradual reduction of tariffs allows domestic industries to adjust while benefiting from long-term market integration, competition, and innovation.
- Skill and workforce development: The GCC countries should focus on workforce development and education in the chemical sector. This ensures that the labor force is equipped with the necessary skills to thrive in the evolving market conditions resulting from the FTA.
- Continuous evaluation: Policymakers should commit to regular evaluations of the FTA’s impact, taking into account the evolving economic landscape. These evaluations should guide policy adjustments as necessary, ensuring that the FTA continues to serve the best interests of the GCC countries.
In conclusion, the research paper: “Unlocking Growth Opportunities: Measuring the Economic Implications of FTA in the GCC Chemical Industry” sheds light on the potential for economic prosperity through the establishment of a Chemical Industry FTA between the GCC and key partner countries – China, India, and Turkey. While it highlights both positive and negative effects, the positive welfare and consumer surplus effects suggest that the FTA’s benefits can outweigh its short-term fiscal challenges. This points to the broader economic gains and potential for industry growth.
The insights from this research are invaluable for policymakers, industry stakeholders, and researchers seeking to foster sustainable growth and development in the GCC countries and their partner nations. Ultimately, the proposed FTA promises to be a win-win situation, creating economic prosperity and strengthening diplomatic ties between all FTA members. As the world’s economy continues to evolve, these types of agreements become increasingly crucial for mutual prosperity and cooperation. The paper will be released soon on the GPCA website.