GCC Insights: Customs union pushed by economic necessity

The most notable achievement of the recently held GCC summit in Qatar was confirmation that the long-awaited customs union will be launched as scheduled on January 1.

Under the union, the six-nation grouping stands to turn into a single customs zone in which duties, fees, taxes and other charges as well as measures hindering trade will be removed between Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

The agreement states that commodities and goods produced in any GCC member state will be treated as national products, not subjected to customs tariffs when moved among member states.

The customs union agreement is a giant step forward, being born 23 years after the establishment of the GCC. An ambitious plan calls for launching a monetary union by 2005, leading to a common currency among member states by 2010. But talk of a single currency like the euro in the case of the EU is premature.

Customers stand to benefit as unified duties bring more transparency. The six GCC states have a population of 32 million. The agreement stands to improve the quality of products, cut production costs and prices and promote trade and investment between member states.

The agreement is expected to increase trading between member states. Currently, inter-GCC trade is minor, accounting for less than seven per cent of total exports to the world.

This compares unfavourably with the EU, where exports to member states account to nearly half of total exports. Sadly, the GCC economies are competing rather than complementary ones. Most exports are similar in nature, notably petroleum and petrochemical products.

However, it is hoped that the customs union will spur more specialisation within the union. The GCC is a sizable economic bloc in the world and the agreement paves the way for capitalising on their advantages. Between them, the GCC states account for half of the world's known crude oil reserves.

The combined gross domestic product of the GCC member states amounted to nearly $330 billion. In 2001, GCC exports amounted to $155 billion, of which Saudi Arabia and the UAE accounted for $73 billion and $38.5 billion, respectively.

Also, imports stood at nearly $82 billion, but here the UAE stands out by accounting for $33.5 billion versus $29 billion for Saudi Arabia. Combined imports are forecast to reach $89 billion by 2002.

A key aspect of the customs union is maintaining a common external policy. As such, all states will implement a five per cent duty on foreign imports. The EU has stipulated the presence of a unified external policy in order to sign a free trade agreement with the GCC.

For the GCC, trade with the EU is vital, notably in non-oil products. Currently, the EU applies restrictive measures on imports of petrochemicals and aluminium goods. The EU has indicated a willingness to cancel tariffs on aluminium and petrochemical imports once the trade pact is signed, which is expected by 2005.

The customs union enhan-ces the GCC's strength as an economic entity in trade negotiations with other blocs. Ultimately, challenges of globalisation have forced the GCC to form a unified economic agreement.

The customs union is based on the principle of a single entry point, upon which customs duty on imported goods would be collected. But the GCC states have yet to agree on a satisfactory formula for sharing customs revenue.

Several options are being discussed, including proportional distribution based on the size of imports of each country. In June, GCC finance ministers decided to distribute customs revenues on the basis of the final destination of imports for a period of three years on a trial basis.

However, it is feared that technical problems, domestic interests and political uncertainty will hinder implementation of an effective union until a later date. One such problem facing the customs union is the entry of alcohol and other 'sin' goods, which are allowed by some states but banned by others. Also, states that traditionally maintained higher customs duties may lose revenue and may like to delay the implementation of the agreement.