Quicker outcomes are what free trade agreements offer Gulf states when they seek new markets to open up - or raise their profile in. Image Credit: Shutterstock

The global economic landscape has long since become one shaped by contradictory trade dynamics.

The creation of World Trade Organization in 1995, along with the signing up of countries as its members and into trade-facilitating agreements, led to unprecedented growth in trade and of millions of new jobs.

The benefits of these developments vary significantly from one country – or trade bloc - to another due to disparities in production costs, often referred to as comparative advantages. These differentials have played a pivotal role in shifting the balance of interest, sometimes to the detriment of certain parties.

Severe trade disputes have arisen, leading to deep internal tensions. A prime example is the ongoing trade dispute between the US and China, which have had a profound impact on their trade volumes, as well as their economic and investment interests.

This has led to a surge in voices advocating renewed trade protectionism, grounded in the notion of national self-interest and often intertwined with concerns about competitiveness. This trend is particularly conspicuous in France and Hungary, both EU member-states with their own distinct laws. Some of the member states appear to be diverging from EU policies in favour of pursuing their self-interest.

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In France, there is a push towards developing high-tech products domestically rather than rely on imports, even if this results in higher prices for its consumers and diminished competitiveness in the global market. Similarly, Hungary's move to sign an agreement with China for setting up an electric car manufacturing facility, including battery production, marks a departure from the broader EU policies.

The EU typically advocates for reliance in EV manufacturing as opposed to more price-friendly Chinese alternatives.

Another notable trend in trade relations involves the policies of certain countries, with a prominent example being the GCC countries. These nations are actively seeking to bolster trade exchanges to harness the benefits from signing up to the World Trade Organization. Despite certain challenges that hinder the full implementation of these provisions…

Going direct with key trade partners

To overcome these challenges, the GCC countries are exploring alternative approaches, such as entering into free trade agreements with key nations engaged in significant commercial activities. These include China, India and the UK, with ongoing efforts in this direction, as well as recent agreements with Singapore and South Korea signed just last week.

These hold the promise of eliminating customs duties between the involved parties, resulting in reduced prices for Korean goods in Gulf markets, making them more accessible to consumers. In return, this enhances the competitive edge of Gulf-made goods in Korea, a market that takes in a substantial portion of their overall exports.

This Gulf-centric orientation raises an important question, which warrants further exploration. The GCC holds a strategically advantageous position at the crossroads of the world, with a well-developed commercial and logistical infrastructure capable of handling a substantial share of the transit trade between East and West.

This offers them a significant opportunity to reap substantial benefits. It's worth noting these infrastructure facilities required substantial investments, and to justify the costs, they must be fully utilized to achieve returns commensurate with the expenditure.

Mitigating the flip side of FTAs

The industrial sectors in the GCC - particularly those related to oil, petrochemicals, and aluminium products - are experiencing consistent growth. To support this expansion, they require access to extensive markets and the development of competitive capabilities, both of which can be facilitated through free trade agreements.

A question rises here: Are there negative aspects to these agreements? It is well known that no phenomenon exists in an absolute state, and certainly, there are repercussions that can be addressed and mitigated.

One such is the competition posed by goods from countries with which the Gulf has signed free trade agreements. It is important to note that this competition is expected to be relatively limited due to disparities in product quality between these imports and most Gulf products. The adverse effects are thus likely to be restricted when compared to the gains expected from the gains.

Another potential drawback is the reduction in customs revenues for Gulf budgets. To offset this loss, it is necessary to implement reforms within the customs system to enhance its efficiency.

These can encompass various aspects, including export policies. The Gulf nations can maximize the benefits derived from free trade agreements, ultimately benefiting the local economy and consumers at large.