GCC Insights: Bahrain's economy poised to gain from FTA with US

Bahrain's economy stands to gain substantially from the proposed Free Trade Agreement (FTA) with the US.

The pact would require the authorities in Manama to streamline certain laws and practices, which in turn could pave the way for the inflow of investments from the US and other places into Bahrain.

Formal negotiations on the FTA are expected to begin early next year. But the Bush Administration has largely signalled its readiness to endorse the deal. The FTA with Bahrain may serve as a stepping-stone to a free trade pact with other countries in the region.

President George Bush has called for the setting up of a US-Middle East free trade area by 2010. The US has an FTA with Jordan and it has recently signed FTAs with Chile and Singapore.

Once adopted and implemented, the FTA will further strengthen trade ties between the two countries. Already, the US is Bahrain's main trading partner, constituting around 8 per cent of Bahrain's external trade.

Last year, Bahrain's exports to the US amounted to $395 million comprising mainly clothing, aluminium, fertilisers, organic chemicals, mineral fuels and oils. Imports from the US stood at $419 million consisting of aircraft, machinery, toys and pharmaceutical products.

Accordingly, the US enjoys a limited trade surplus with Bahrain.

The proposed FTA will remove all tariffs on goods and services including finance, information technology, financial services, health care and tourism. Additionally, the US hopes that the FTA will open up government procurement besides ensuring high standards for intellectual property rights and transparency rules in Bahrain.

Amongst others, the FTA is likely to include a clause in Bahrain's laws requiring granting members of the public the opportunity to make comments on proposed laws prior to reaching the legislative body. This, in turn, will provide the lawmakers the opportunity to appreciate public feelings about proposed legislative pieces.

This is already a practice in the US. Specifically, the Office of the US Trade Representative, through the Trade Policy Staff Committee, invited the public to make comments and testimony at a public hearing held on November 5 to provide advice as to how matters should be treated under the proposed FTA.

Certainly the deal is not done until it is done. Robert Zoellick, the US Trade Representative, at one point indicated that the Bush Administration would have a "difficult sell" with the Congress.

This is attributed to the small size of Bahrain's economy, hence its insignificance to the US. Bahrain's GDP stands at around $8 billion, representing less than one per cent compared with America's economy.

The fact is the profit of some of the US Fortune 500 companies exceeds the size of Bahrain's GDP.

Certain parties are bound to suffer from the FTA. For instance, as part of the pact, Bahrain will be required to grant unrestricted access to American dairy products. This step will bring American goods in direct competition with Saudi dairy exports, which currently enjoy a virtual monopoly of Bahrain's market.

Aware of the potential effects of the FTA on Bahrain's laws, the mainstream political group has written to the US Congress to ensure that the deal addresses certain concerns.

In its correspondence, the Al Wefaq National Islamic Society has highlighted numerous shortcomings in Bahrain, including the absence of legislation for protecting employees against discrimination on the basis of race, ethnic background, disabilities, religion, sex, or age.

Also, the group called for mandating a law requiring buildings to provide convenient access to people with mobility problems.

The FTA amounts to an American recognition that Bahrain is fit for American investments and should add to the country's advantages. The Heritage Foundation/Wall Street Journal Index of Economic Freedom regards Bahrain as the most open economy in the Middle East.

Undoubtedly, it is up to Bahraini authorities and enterprises, notably firms selling services, to decide how much they want to gain from a pact that provides them access to the largest market in the world.

The author is assistant professor, College of Business Administration, University of Bahrain