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GCC: Full customs union ready by early 2015

Article - November 20, 2014

The six robust economies of the Gulf Cooperation Council, apart from venturing away from oil into new business sectors, are cementing plans for a customs union to commence next year, which will enable the creation of a full economic union in the future.

At the upcoming 2014 GCC Summit, the leaders of one of the world’s most economically and politically newsworthy regions will focus primarily on formalizing the Gulf Customs Union. The new trading bloc has been more than a decade in the making and will enable the free movement of goods and services within the region. First agreed in 2003, full implantation of the union has been delayed because of disagreements between GCC member states – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – on the distribution of customs revenues, among other issues, yet the concept has never lost its staunch support from certain corners.

At the 2011 GCC Summit, Saudi King Abdullah Bin Abdul Aziz Al Saud had strongly expressed his desire for this six-way alliance to “transition from the stage of cooperation to the stage of the union.” Two years later, Saudi State Minister for Foreign Affairs Nizar Bin Obaid Madani reiterated the importance of expediting the process, saying: “Moving to the union has become a necessity imposed by the great importance of the Gulf region and the strategic political and economic aspects that have also brought numerous risks and problems.”

At the regular meeting of GCC finance ministers in May this year, a consensus was finally reached to remove all obstacles to the full implementation of the customs union. Barring any last-minute disputes, the December GCC Summit will see that the union goes into effect early next year.

Already, the partial application of the customs union contributed to tripling inter-GCC trade between 2005 and 2012 – from $32 billion to $100 billion. This represents a low proportion of the GCC’s total foreign trade (it stands at some 10% while intra-EU and intra-Asean trade account for 60% and 25%, respectively), due in large part to the similar nature of its export commodities. However, a fully-fledged customs union will, perhaps more importantly, facilitate more joint ventures and in turn, contribute to greater economic diversification.

This is one of the top priorities among member countries, whose economies (with the exception of UAE) depend largely on hydrocarbons. Indeed, together the GCC countries produced 24% of global total crude oil production last year and control 30% of the world’s crude oil reserves, according to a 2014 British Petroleum report.

In fostering new industries and sectors, GCC member states are creating ever-growing demands for power. So as to not diminish revenues from hydrocarbon exports, alternative sources – including coal and nuclear, wind, hydro and solar power – are being increasingly harnessed. Meanwhile, the countries are also looking at ways to increase generation efficiency. Saudi Arabia, for example, is converting single-cycle plants to combined-cycle, which will increase thermal efficiency from 30-35% to a forecast 40-45%.

In its 2014 report on the region, engineering and consulting firm Black & Veatch identified the GCC’s power segment as a potential area for foreign entrepreneurs to get involved. Meeting and managing the region’s expanding needs, the report said, “will increasingly require companies that have expertise in delivering both water and energy projects, and successfully combining insights from both”.

“GCC states have made major investments in energy infrastructure during the last decade, and high levels of spending are forecast in order to meet growing demand. Asset creation, however, is only half the story,” the report continues.

“To deliver the levels of customer service and environmental performance that end-users and governments seek, GCC states’ infrastructure asset base needs to be managed effectively. We see this as a growth area.”

This coincides with the substantial business reforms the GCC members have been passing over the past several years. As a region, the GCC boasts one of the most favorable tax regimes in the world, while the reforms have made it easier to start a business, obtain credit, and conduct cross-border trade. Saudi Arabia, for example, is embarking on one of the world’s most ambitious infrastructure programs now, and to help attract foreign direct investment (FDI), its Council of Ministers has recently removed many barriers to bidding for government projects.

Yet in spite of these virtues, last year marked the fifth consecutive year that FDI inflows to the GCC dropped – from more than $60 billion in 2008 to $24 billion in 2013, according to a National Bank of Kuwait report. The report attributes this partly to the completion of major projects, such as Qatar’s liquefied natural gas expansion program and several petrochemical and construction projects in Saudi Arabia.

Kicking the negative group trend, however, Bahrain and the UAE have recorded four consecutive years of growing FDI inflows, “as investors return to the property, manufacturing and services sectors”, which augurs well for the region’s economic diversification ambitions.
The drop in FDI to the GCC has done little to harm the region’s economic growth so far. “The growth outlook for the GCC is positive, but will be affected by global and regional developments. While growth has slowed from the exceptionally strong rates in 2010-2011, it remains robust,” the International Monetary Fund reported last year.

At a recent conference of the International Institute for Strategic Studies, Kamal bin Ahmed, Bahrain’s Minister of Transport and Acting Chief Executive of the country’s Economic Development Board, argued that the GCC has the strongest economic fundamentals of any region in the world. These include, he said, robust and resilient economic growth, sustainable public finances and household balance sheets, current account surpluses and great prospects for continued growth through investment and the diversification of member economies.

The rest of the world has certainly taken note of the GCC, and not just for its economic might. Member countries such as Saudi Arabia, Kuwait and Qatar wield significant influence in diplomacy, and Oman has acted as a go-between for sometimes confidential negotiations involving the West and Iran.

Qatar and other members have hosted major international sporting events, including the 2006 Asian Games, and Qatar has signed on to host the 2022 FIFA World Cup, creating air-conditioned stadiums and all. Dubai is a byword for luxury, Oman is becoming a tourism magnet, and regional carriers like Emirates Airlines, Etihad Airways, Gulf Air and Qatar Airways are expanding their routes worldwide with their home airports as major hubs.

At the same time, prestigious Western universities, museums and other institutions are setting up branches in several of the Gulf countries, bringing the finest minds and best art to a new, appreciative population.

At a time when the world seems to be in perpetual crisis involving unrest across parts of the Middle East, a frightening health epidemic with its economic impact still unclear, uncertainty on the U.S. political horizon and so much more, the GCC leaders are making an extra effort to ensure that their countries continue on the current path of peace and prosperity.