Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
An International Political Economy Analysis of the Potential EU
GCC Free Trade Area Agreement
Noura Abd El Maksoud Abdallah Eissa*
This study examines the nature behind member states in deciding whether to
cooperate with one another in a regional bloc or with other regional blocs through free
trade agreements. A qualitative comparison between the two blocs using the
international political economy was outlined and analyzed in a SWOT analysis
framework; this was done in a sequential order of steps.
The formulation of an
international free trade agreement for both the EU and the GCC means that strong
regional bloc integration is a must and necessary step however it is not a sufficient
condition to ensure whether the potential outcome of the EU GCC Free Trade
agreement would be successful or not.
In other words, a positive relationship
between strong regional bloc integration and international economic partnerships
exists. The potential outcomes of the EU GCC Free Trade Agreement prove that for
the GCC, the outcomes will lead to an increase in trade creation, economic welfare,
and a fulfillment of both political and economic desires. For the EU, the potential EU
GCC Free Trade Agreement will lead to trade diversion and very little increase in
economic welfare; however, it will allow the EU to fulfill its self-interest and desires in
maintaining its global position in the world market. In other words, both political and
economic factors work together to give out prerequisites as well as results for
international trade agreements, on top of that lies state self-interest.
JEL Codes: O, E, F
1. Introduction
This research paper through several integrative yet necessary steps highlights a different
approach in explaining the cooperative interests of states within the context of regional and
international discourse, putting its hands on the main problems that are causing delays in
the signing of the EU GCC FTA and at the same time understanding the importance of
having strong regional bloc integration. With such an understanding, this research
theorizes that member states decide whether to cooperate with one another or with other
regional blocs after conducting a cost-benefit analysis of the conditions that may warrant
coordination and whether the pursuit of the cooperation will truly facilitate or complement
their political, defensive, and economic motives.
The main research problem that exists in this paper is the globalization factor; globalization
is a dynamic octopus-like process involving many processes amongst them is regional
and/or international trade liberalization. A subsequent problem that exists under
globalization is state self-interest and the motives behind such interests. To what extent
should nation-states integrate with globalization? Should they move towards regional blocs
or international economic partnerships in order to maintain a global position in the world
nowadays?
*
Dr. Noura Abd El Maksoud Abdallah Eissa, Faculty of Economics and Political Science (FEPS), Future University
in Egypt (FUE), Egypt. Email: nouraeissa@yahoo.com; noura.eissa@fue.edu.eg
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Proceedings of 26th International Business Research Conference
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2. Literature Review
Historically, there was interchangeably low involvement in foreign policies from both the EU
and the GCC usually explained by the dual perception that the United States was the main
sphere of influence. Most of the European states except for the United Kingdom do not
have a history in the region which they disregarded until the first oil crisis of 1973 which
outstandingly revealed Europe’s vulnerability and dependency on oil and its geopolitical
exposure to the negative spill-over of the Middle East conflict. Furthermore, the EU did not
have the capacity and/or capability to affect social, economic, or political change in the
Gulf. The GCC member states were prune to engage in stronger relationships with the
United States since it was one of the main countries interfering and aiding Kuwait during
the Gulf war. In other words, the nature of the EU-GCC relations was conducted on a
bilateral basis by individual European countries involved in military sales, infrastructure
projects and trade. Collective EU relations has emerged only more recently.
According to Roberto Aliboni, a low degree of Europeanization towards the GCC exists with
more dominance of policies of countries having close security ties with the region, like the
UK and France, and divergent economic interests across Member States and EU actors
(Aliboni 2010). According to the EU, GCC countries come from different backgrounds with
countries like Kuwait and Qatar being far more liberal than its counterparts, making it
difficult the transition towards a common external tariff and hence FTA negotiations with the
EU. In a similar way, GCC states economic interests also differ, with Saudi Arabia more
concerned with the petrochemical dispute while Dubai and Bahrain concentrates on the
aluminum issue. Baabood argues that the GCC does not match the EU as a regional
organization given its lower degree of institutionalization (Baabood 2003); the GCC states
have failed to organize properly, due to their little experience in collective diplomacy and
the weak mandate GCC have on external relations. The EU lacks a well-defined strategy
towards the Gulf region. Clear-cut models of relations are or have been offered to regions
like Eastern Europe (enlargement/neighborhood), the Mediterranean region (association
and/or neighborhood), Sub-Saharan Africa (trade preferences or even association) and
Latin America (association). But the GCC status still remains undefined somewhere
between mere cooperation and association.
Inconsistencies between the EU and US in terms of Middle East policies also hamper a
better-defined EU approach to the Gulf and a better GCC approach to the EU. According
to Escribano, a transatlantic dialogue is an essential input of EU-GCC dialogue itself. The
lack of such a transatlantic dialogue may turn the perception of EU and US-GCC FTA’s as
non-compatible rather than mutually reinforcing, opening a kind of agreement competition
that could be harmful at a collective level (Escribano 2000). In this framework, the main
objective of the EU-GCC Agreement is the deepening of existing relations both political
and economic. In fact, the fourteenth Joint Council Meeting in Brussels May 2004 has
proved to be extremely fruitful in terms of launching a political dialogue. The EU-GCC
Joint Council agreed to “incorporate in the FTA agreement clauses on human rights” (point
4), as has become the usual pattern in EU agreements, and “noted progress in the steps
towards political reforms undertaken by several GCC countries” (point 5). The dual
challenge of the EU-GCC Agreement is thus to move from fragmented economic
cooperation to comprehensive partnership and free trade, and upgrade the instruments
devoted to political dialogues.
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3. Methodology
Through an international political economy approach, the dissertation was able to merge
between politics and economics to understand and analyze whether the potential FTA
between the EU and the GCC will be compatible to both sides or not. The study focused
on the period from 1995 to 2007 and from 2008-2010 (after world financial crisis of 2008).
A qualitative comparative analysis mainly dealt with how variations in state self-interests,
institutional structure, legal framework, levels of macroeconomic indicators, and the level of
economic regional integration provide a path of understanding of why the EU and the GCC
have not yet signed the FTA agreement.
4. Findings
4.1 SWOT Analysis of Legal Framework
4.1.1 EU SWOT Analysis of Legal Framework
Strengths
First and foremost, there is evidence of similar patterns of interregional activities following
both flexibility and soft balancing. This helps the EU member states follow strong patterns
based on sustainable development, the promotion of democracy, and good governance
leading to a continuous modification of institutional balance between the EU parliament,
council, and commission. Strength lies in the strong and firm nature of EU policies; to put it
simply, there are strong mechanisms to get members harmonizing policy outcomes in
specific domains and to put pressure on Member States that do not comply with such
policies. Third, Because of the strong internal structure, EU puts more focus on external
issues rather than internal ones and at the same time enjoys a strong common foreign
policy. Soft balancing has made interregionalism a priority on the EU agenda through
EPAs, forming a global economic balancing arena, due to the increasing absolute and
relative powers in some world economies. EU’s foreign policies are summarized in the
form of strengthening international security, the development of international trade, and
consolidating democracy through regional integration and political dialogues.
The EU model of regionalism stands as an offered model of what countries could achieve if
they were to cooperate. The EU itself is a powerful economic entity. From its mere
existence, it was meant to be an economic rather than a political or militaristic body, with
the main purpose of allowing the less restricted movement of capital and goods across the
borders of the European countries.
Weaknesses
There are internal variations between EU body members and member states in the
decision making process forcing member states to face a dilemma: choosing between
European harmonization against their own national self-interests, problems, and solutions.
Another weakness is further evident in the internal variations between EU member
delegations themselves in the decision making process with the presence of North-South
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EU delegations primarily due to self-interest. When the Member States are faced with
choices between market-based versus regulatory solutions to policy questions, northern
delegations usually support market-based solutions while Southern ones usually support
regulatory solutions.
There are already many channels for European citizens to exercise their voice: national
elections for the leaders who represent them in the European Council, European elections
for representatives in the European Parliament, and even referendums in some countries to
ratify new treaties. But most attempts to engage voters have been over procedural issues
such as treaty change rather than political choices facing the EU. Ironically, there is always
the debate on EU democratic deficit and lack of legitimacy.
Opportunities
The EU should practically make use of its flexibility. The flexibility at hand within the EU
actually forces the EU to become a closed regional power bloc rather than a flexible one
seeking to secure peace and security across the continent in the context of complex
interdependence. Flexibility should (1) enable reluctant states to opt out rather than
oppose, veto, block (2) allow coexistence of different degrees of national commitment to
the integration process and (3) increase the general momentum of the integration process
Threats
One of the most vigorous and ongoing threats to the EU is its fear of competing and
emerging regional blocs especially its fear from the United States which follows more direct
commercial and military model that is usually propagated is a faster and easier manner
than that of the EU. In addition to that, the EU also has fears from weaker partner regions.
In many cases, potential partner regions are usually weaker than the EU as strong regional
blocs, and hence more work, more absorptive capacity, as well as financial capabilities are
required from the EU.
4.1.2 GCC SWOT Analysis of Legal Framework
Strengths
GCC countries are known for their strong GCC governments and strong relationships
between state and society: The non-existence of taxes of the Gulf people and the ability of
the GCC governments to create and sustain bureaucratic institutions that distribute wealth
to the society makes the citizens benefit and at the same time become loyal to the GCC
governments and in return the GCC itself. The minimum number of members makes GCC
institutional framework is easier to handle.
Weaknesses
One of the main weaknesses is the dilemma faced by GCC member states whether to
abide by their national interests or the GCC interest. The GCC’s creation affects the
identity and affinities of Gulf state nationals and provides the potential at least for the
development of an identifiable security community at both the intergovernmental and nongovernmental level. There are little efforts to formalize GCC security cooperation among
member states: In contrast to the relative progress in economic affairs, and ironically the
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undeclared components of the original rationale behind the GCC’s formation, security
cooperation, did not seem to see any serious efforts to formalize cooperation with collective
efforts.
There is evidence of institutional and practical handicaps in GCC foreign policy making
such as self-interest jealousy and political sovereignty.
GCC political systems
characterized with a largely hierarchical nature prevents them from having a horizontal
assessment of national policy options, involving meaningful autonomy for policy specialists
and at the same time forces them to lack the basis to conduct this process at the interstate
level. Also, there are deficiencies in the GCC institutional framework. This is summarized
in the GCC's (1) consensus-based decision making process, risking the pace of integration
(2) passive role of the GCC Secretariat and the non-existence of a role such as the
European Commission to push for new integration policies (3) lack of a follow-up
mechanism for the implementation of decisions and treaties made and the lack of the
dispute resolution process.
GCC focuses on external rather than internal issues mainly due to their fear of insecurity
from external forces and at the same time due to the lack of attention towards their internal
legal affairs.
Opportunities
The GCC desires to become globally competitive and known as a successive regional bloc.
GCC has the opportunity to learn from the EU model and its mistakes and avoid them to
become globally competitive.
Threats
The GCC has a fear of adopting western-dominated regional models such as the EU.
Simply, seeking a stronger Gulf position in the international economic affairs suggests that
the GCC states are regionally and proactively resisting globalization at least in the form of
western dominated models.
4.2 SWOT Analysis of Macroeconomic Indicators
4.2.1 EU SWOT Analysis of Macroeconomic Indicators
Strengths
Because of its large members, the EU’s economic output is the largest in the world in terms
of purchasing power parity making it the largest GDP and economy in the world. Therefore,
the EU has a comparative advantage in its strong pooled resources in the global market.
The EU's significant FDI inflows and outflows is one of its major economic strengths. Sheer
economic development of EU has allowed EU companies significant FDI inflows and
outflows especially in the Middle Eat an Asia, previously having closer ties with the U.S.
FDI outflow is actually higher than the inflow. EU policies towards FDI are inward-oriented
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meaning to strengthen internal FDI flows and attracting new members to EU FDI
investments.
Weaknesses
The EU has a very small centralized budget with limitations in its financial budget and
liquidity about 1.27% of aggregate EU output, roughly half of which is expenditure
connected with the Common Agricultural policies. There are no indications that this budget
will increase in the near future. Although there is a high degree of built in fiscal stabilization
for individual countries and for the system as a whole, so long as counterpart swings in
budgetary positions are allowed to happen, there are minimal fiscal transfers between EU
countries and member states.
Another major weakness is the high unemployment rates in the labor market with a huge
influx of labor from not so wealthy EU countries like Poland etc. with many eastern
European laborers moving over the UK and other EU countries. Many citizens feel
betrayed by their own government and feel isolated and forgotten. Further macroeconomic
weaknesses include very high inflation and CPI rates.
Opportunities
EU opportunities lies in the ongoing enlargement process, counter parting and competing
with the US, as well as creating more compatible and sustainable Economic Partnership
Agreements EPAs with other successful regional blocs such as the GCC.
Threats
The EU has not yet recovered from 2008 financial crisis and might even enter into a new
euro zone crisis. Other threats include threats of having politics affect macroeconomic
indicators, threats of having limitations in budgets while engaging in the enlargement
process, increased EU US dichotomy and increased competition especially in trade from
China, Japan, and India.
4.2.2 GCC SWOT Analysis of Macroeconomic Indicators
Strengths
GCC is known for its strong macroeconomic indicators in terms of GDP, budget surpluses,
and labor employment levels. Four of the GCC countries are major players in the OPEC.
Economic diversification is increasing and moving towards the service sector. FDI in terms
of exporting oil and gas remains very high, with outward FDI more than inward FDI
although progress is moving towards inward FDI. There is an increase in infrastructure
investments especially telecommunications and maritime transport services.
Weaknesses
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Because of their small populations, there is a redundancy in the goods and services
provided by GCC markets, with little competition among member states causing intra-trade
to be quite low. GCC countries need to stampede themselves from their small domestic.
Another major bottleneck faced by GCC countries is the nature of both oil and gas as nonrenewable sources that will eventually be replaced.
Opportunities
The service sector provided by GCC markets is a great opportunity for boosting their
economies, and making them somehow not so dependent on oil and gas. This is found in
the banking sector, telecommunications, and transportation sectors. The tourism sector is
also another opportunity that the GCC markets can use
Threats
Global, Arab, and even neighboring political security issues and threats can affect the
economic outcome of the GCC countries. There is also an inflation risk due to asset price
boom. As capital projects grow in the region, constraints on contracting capacity may
become an issue.
4.3 SWOT Analysis of Economic Regionalism
4.3.1 EU SWOT Analysis of Economic Regionalism
Strengths
The EU is a global economic power entity. From its mere existence, the EU was meant to
be an economic bloc as it creates a common, largely unrestricted market resulting in more
efficient allocation of production and resources. The EU’s economic power benefits its
foreign policy; the EU can use its position as an economic powerhouse to its advantage in
matters of foreign policy.
Weaknesses
The limited financial capacity of the EU enlargement process in absorbing new candidates
especially when it comes to labor market and government budget is a major weakness.
Limited and slow pace steps in trying to integrate in world politics to reach the political
union phase are major drawbacks. The EU central bank is actually one of the main
weaknesses of EU economic regionalism due to its limited financial capabilities and also
due to the Euro-zone crisis of 2011. The sudden collapse of the economic indicators
particularly of industrial activity and services and the financial instability in Europe in the
last quarter of 2011 induced the European Central bank to inject an unprecedented amount
of liquidity in to the financial system in December 2011.
Opportunities
The EU has the opportunity and space to attract as many candidates as it can and be able
to eventually become the strongest regional bloc in the world. The EU can use its high
levels of economic regionalism in attracting more political integration themes with countries
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all over the world. The EU can use its model to attract new regional blocs to cooperate with
it through EPAs.
The EU enlargement process presents a significant economic opportunity in the form of a
larger market. Any addition of new member states means that the EU has become the
largest economic area in the world. Consumers benefit from wider choice and lower prices.
Across the EU, businesses share a regulated market and benefit from increased trade,
greater efficiency and more competition boosting investment and job creation that raise
levels of prosperity throughout Europe.
As for the financial crisis and the resultant Eurozone crisis, there is an evident opportunity
with new rules to reinforce the fiscal and monetary system. The current economic crisis
has made the EU work to progress its status by improving two of the most important pillars
the stability pact and the banking system.
Threats
There are major threats that come from Asia and the USA in terms of trade. Another major
threat to the EU is actually the price of oil which can be an advantage to the GCC
countries. An increase in the price of oil could negatively affect the economic recovery in
Europe. The reason is that the barrel of oil is priced in US dollars. Since the euro is losing
ground against the American currency and the price of oil is increasing, Euro zone nation
states are facing a difficult situation.
4.3.2 GCC SWOT Analysis of Economic Regionalism
Strengths
The GCC has moved at a rather fast pace from signing a customs union agreement to
signing the common market among its member states. With the increase in GCC economic
diversification, they have been able to also avoid the convergence criterion. The limited
number of members makes the GCC have easier progress and consensus in their trade
agreements.
Weaknesses
GCC trade agreements with other countries are usually on a unilateral basis. The signing
of the unified monetary union is still taking slow progress.
Although the GCC countries have the financial capacity to attract new candidates, they do
not have the programs or the laws or the process for such. The pace of advance in
collective trade agreements reflects limited progress on broader institutional arrangements.
GCC negotiations are currently led by senior bureaucrats from GCC member countries,
which can make it difficult to bundle common interests and positions. This weakness is
reflected in the limited enforcement of collective decisions on external trade relations, due
either to a lack of political will or to weak administrative capacity.
Opportunities
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GCC countries have the financial capacity to attract new candidates if they do want to; they
should re-consider adding new member states into the GCC especially with the potential
candidates already applying. GCC countries have the privilege of learning from the
experience of the EU in terms of having a unified monetary union. A GCC Unified currency
would reduce the GCC exchange rate risk and would enhance European capital
movements within GCC countries leading to increased European investment in those
states. The benefits of the GUCA will be more than the costs in terms of allow price
standardization, transparency, the shrinkage of the foreign exchange market, the
elimination of the exchange rate risk, the facilitation of cheap transfer of funds, the widening
scope of GCC collective bargaining power, and the increase of intra-regional trade
Threats
Oil can be substituted by solar and/or other type of renewable resource and at the same
time is highly vulnerable to asymmetric shocks. Political unrests in the Middle East and
Gulf countries can greatly affect the economic regional levels of such countries. There are
some threats associated with the unified GCC currency including the relinquishing of the
ability of member states to conduct a monetary policy, the institutional changes associated
with the GUCA, and the costs of adopting a unified single currency.
4.4 SWOT Analysis of Potential EU GCC FTA
In order to avoid redundancy, the SWOT analysis below was conducted for the EU.
However it is important to note that the opportunities of the EU are actually the strengths of
the GCC and the threats of the EU are actually the opportunities of the GCC.
Strengths
The EU GCC FTA will provide the EU with better market access for its manufactured
exports and services and at the same time the EU’s oil imports will be provided by the
GCC. Strong economic as well as political relationships will exist between the two blocs.
In sequence, the EU can modelize and apply its EU model to that of the GCC through the
political conditions and the calls for democracy that it has been using to dictate the nature
of the relationship between the two blocs.
Weaknesses
According to the trade gravity models, for the EU countries, trade creation is mutually
dependent upon the distance between the countries, and on the nature of their exported
and imported goods. In that sense, the EU GCC FTA will most probably lead to trade
diversion with little impact on economic welfare of the EU.
Another weakness is the
vulnerability of the EU to fluctuations in oil prices and their dependency on GCC Countries
for such a natural resource.
The Eurozone crisis, and the bankruptcy of Greece, as well as the recession in Ireland,
Italy, and Spain, makes the EU become limited in its financial capacity and is in need for
some economic flourishing.
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Opportunities
The EU should consider the EU GCC FTA more seriously even though little trade creation
will be present and this is due to the opportunities that can later turn into threats that the EU
should take hold of (before the GCC becomes a competing bloc rather than a cooperating
one): (1) GCC’s increasing macroeconomic competitive role in the world especially after the
2008 world financial crisis (2) GCC leading membership in OPEC, (3) GCC and its interest
in joining the IAEA (4) Qatar and its changing role in the global world
and (5) GCC millennium goals leading to more economic development, sustainability and
stability.
When comparing the case of Turkey with the case of the GCC it becomes rather clear that
having an EU GCC partnership is an opportunity for the EU who will not need the financial
obligations usually granted to EU partners. Rather real cooperation will be considered and
actually in real terms, GCC countries with their budget surpluses can provide the EU with a
strong, supportive backbone.
Another opportunity which the EU can benefit from is EU labor migration to the GCC
countries therefore decreasing their high levels of unemployment rates especially with the
current recessions.
Threats
The first major threat of the EU-GCC FTA is the fact that it would lead to trade creation and
more economic welfare for the GCC in relation to the EU simply because the GCC
countries’ trade line does not depend on the distance of the trading partner but rather on
the wealth and what it has to offer. The EU is faced with the GCC service liberalization
dilemma which it claims is the main obstacle for the conclusion of the EU GCC FTA
package deal. The EU is the world’s largest exporter and importer of services and enjoys
comparative advantages vis a vis GCC countries and has the fear of having GCC compete
their services worldwide as what is the case in the Gulf area. Another threat that the EU
should bear in mind is Asia which has recently become a major trading partner with the
GCC.
5. Summary and Conclusions
.
Regional integration is a very significant prerequisite for any successful free trade area
agreement. Strong regional integration among a regional bloc ensures a strong and
successful international economic partnership. Despite such a fact, regional integration
does not guarantee the success of a free trade area agreement. There are more significant
factors related to such a success. These factors include strong institutional structure and
legal framework of the regional bloc, strong macroeconomic indicators that are not
vulnerable to external financial shocks, strong and high level in terms of individual bloc
economic regionalism and strong position in political external relations.
Does regionalism divert trade and undermine trade liberalization, forming defensive trade
blocks or does regionalism create trade thereby further institutionalizing and supporting
multilateralism? This question is a bit tricky; regionalism can divert trade and can
simultaneously create trade in the same situation for different regional blocks depending on
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the factors that do not have to be economic, they can be political, economic, and/ or
cultural. It has been stated that in the case of the potential EU GCC FTA, the strong
regional ties within the EU will actually lead to trade diversion and low value added in terms
of economic welfare while for the GCC, the FTA along with the GCC regional ties will lead
to an increase in trade creation and in economic welfare.
Given the current political and economic circumstances in the global era, who will be the
big winner from the eventual signing of the EU-GCC FTA agreement? Is it the EU? Is it the
GCC? Or both? The win-win situation in this case is for the EU is not economic but rather
fulfilling to its self-interest and motivations and for the GCC it is both economic and a
fulfillment of its self-interest and motivations.
What is the role of self-interest for both the EU and the GCC when it comes to the signing
of the EU GCC FTA? In the EU Case as a global power and actor, the EU as an observer
of the GCC regionalism case has played the role of the neo-Marxist, supporting their
regionalism and the role of the neo-realist when dealing with EU GCC international
relations, halting their approach to international cooperation(by halting the EU GCC FTA for
almost 20 years). In other words, GCC regionalism ties are coordinated interests that will
be successful. Its international economic ties, international agreements and partnerships,
will somehow struggle in the bottleneck of corrupted interests (not because of the EU) but
actually because of the EU not wanting the GCC to become a strong, global, and equal
power. EU self-interests are opportunist. In practice, the EU does not follow one theory or
one school of thought but rather a variety of theories and schools of thoughts depending on
the situation they are put it. But in overall, it can be concluded that EU self-interests are
towards imperialism and strong global power.
The EU still continues to negotiate an FTA with the GCC, to fulfill its self-interest desires
and positions in the world market. So, why is the EU continuing to negotiate an FTA with
the GCC? It could be due to a variety of reasons, maybe interregionalism, maybe
bureaucratic interest, maybe EU's negotiating strategy, or geopolitical motives.
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