Thursday, June 25, 2009

GCC states advised to sign free trade pact with China

Emirates Business 24/7 | Monday, June 15, 2009 - Mohammed Elsidafy

Urgent talks should be held to help reach a free trade agreement (FTA) between GCC member states and China, said a new study.

Such a move would enable the Gulf countries to benefit from the rapid growth of the Asian giant’s economy, which has become the second largest in the world.

There is a particular need for a GCC-China FTA because of the suspension of talks about setting up such a deal with the European Union, said the study. The negotiations with Europe had lasted 20 years and while they were going on, GCC members had missed out on economic opportunities in number of developing countries, including India and other Arab states. Talks on reaching an FTA with China began in 2005 but stalled because of China’s refusal to lift import restrictions on a number of GCC commodities.

The study, entitled Economic Relations Between GCC Member States and the People’s Republic of China, was compiled by Najib Abdullah Al Shamsi, Director of the Studies and Research Department at the General Secretariat of the GCC.

He said the GCC members wish to overcome obstacles and integrate themselves in the world economy.

"Almost complete reliance on Western European countries and the US has made GCC countries endeavour to consolidate economic relations with partners that bring economic and financial stability," it said. "Such partners are available in China, India and other Asian countries, which enjoy economic stability and are scoring high growth levels."

The desirability of reaching an FTA is not based solely on China’s strategic need for the GCC oil and gas and the existence of a large market for Chinese goods in the Gulf.

Chinese companies are hoping to benefit from the $500 billion-plus (Dh1.84 trillion) of funds allocated by GCC members for the development of their infrastructure, education, health and IT needs.

The study said the future of economic and trade relations looks promising and stresses the importance of recent visits made by GCC leaders and businessmen to China.

"Globalisation and free market requirements impose on GCC member states and China a host of challenges they have to face to with more economic and trade cooperation," said Al Shamsi. "These challenges represent investment opportunities that could help both sides to achieve their strategic goals."

He called on China to help GCC members to achieve their strategic development goals by sharing its experience of reform, as Japan did with China and China did with India.

He said: "Although the trade exchange between the GCC and China has grown quality and quantity-wise over the past few years, the growth has been modest in comparison with the two economies’ potential."

The study identifies a number of obstacles to achieving a higher volume of trade:

- The absence of a database on the volume and types of investment and trade opportunities available to Chinese companies and the GCC private sector.
- Disparity between economic ideologies as the Chinese economy was a closed one for a long time, while GCC members pursued an open-door policy and adopted free economies.
- Failure by Chinese companies which export products to the GCC to abide by standard specifications and quality levels.
- A rise in the cost of Chinese commodities in recent years which prompted Gulf consumers to obtain commodities and goods from Southeast Asia.
- The absence or limited availability of airlines and shipping firms to carry goods from China on a regular basis.
- The closure of Chinese markets to Gulf commodities and goods, especially petrochemicals.
- The failure of Chinese firms to expand their investment activities into GCC.

And the study said the following measures must be taken to ensure the development of trade and economic relations between the GCC and China:
- Customs obstacles must be overcome to open up the Chinese market to exports and investment from GCC members. The quality of Chinese commodities and goods should be improved, customs tariffs imposed on GCC exports should be reduced and better transport, shipping and storage companies facilities should be developed.
- Specialised companies should be set up to study and market opportunities to businessmen and investors.
- The private sector should assume an active role in boosting the economic and trade partnership through chambers of trade and industry to develop. In addition, businessmen and women from both sides should intensify visits, and specialised marketing exhibitions should be held. Also trade forums and conferences should be held and a joint Gulf-Chinese chamber be set up.
- Both sides should benefit from investment opportunities where Chinese expertise and technology and Gulf capital are combined to establish major companies in China. The potential of Chinese companies potential could be useful in various Gulf projects involving infrastructure, power generation, transport, railways and electricity generation.

China’s relations with the countries that now make up the GCC date back to ancient times when the sea route known as the "second silk road", which links China with the Arabian peninsula, was opened.

Recommendations for talks with economic groups

The GCC Ministerial Council in March 1996 set out the following recommendations that negotiation teams should take into account during talks with countries and international economic groups:
- Negotiations between GCC states and international economic groups should be restricted to economic frameworks.
- Priority should be given to talks with the US, European Union, Japan, Asean countries, China, Singapore, Australia, India and Pakistan.
- There should be a concentration on the encouragement and protection of foreign investment.
- Agreement should be reached to prevent dual taxation. Priority should be given to increasing GCC exports.

The recommendations confirmed that where commercial agreements were reached between GCC states and any international economic group there should be a focus on the following points:
- Allowing the GCC states to impose charges to protect their emerging industries.
- The protection of emerging industries should continue for a fixed period of time.

China’s economic situation

China has recorded the world’s highest growth rates over recent years and has attracted a huge influx of international investment into the country.

Since 1978, the economy’s rate of growth has increased from six per cent to 13 per cent.

The Chinese cabinet’s development and research centre expects the economy to grow by eight per cent over the next five years.

It expects that China’s gross domestic product will reach $2.6 trillion (Dh9.54trn) by 2010, equal to $1,900 per head of population compared with $1,400 in 2005.

China is the world’s third-largest commercial state and comes second in the world after Japan in terms of monetary reserves.

Trade between GCC and China

Commercial exchange between the GCC states and China was weak in the 1950s because of the difference over economic ideologies.

However, the 1980s and 1990s witnessed development in economic relations and accelerating trade growth. The trade exchange rose from $1.5 billion (Dh5.5bn) in 1991 to $11.6bn in 2002, $15.4bn in 2003, $24.1bn in 2004 and $33.8 billion in 2005.

The trade balance registered a deficit in the interest of China in the 1990s, but the new millennium saw a qualitative development in the trade balance in the interest of GCC states. Oil, gas and petrochemicals are the GCC’s most important exports to China, while the GCC states imports clothes, textiles, leathers, computers, telecom equipment and toys from China.