A DETAILED ANATOMY OF EU-GCC TRADE RELATIONS: PAST, PRESENT, AND FUTURE

This paper describes in detail the current status of trade relations between the EU and GCC and then discusses the future prospects of the trade relationship. The paper is organised as follows. Section 2 explains the principles that govern the foreign economic strategies of the EU and GCC countries, as well as briefly describing the formal results of diplomatic efforts aimed at deepening economic ties between the two blocs. Section 3 presents an anatomy of EU-GCC economic relations in the period following the 2008 global financial crisis and prior to the Covid-19 crisis. Section 4 analyses the prospects for the future of relations post-Covid-19 and Section 5 concludes by synthesising the arguments made about the likely trajectory of EU-GCC economic relations.

A DETAILED ANATOMY OF EU-GCC TRADE RELATIONS: PAST, PRESENT, AND FUTURE

Author

Dr. Omar Al-Ubaydli

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Date

December 15, 2020

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A DETAILED ANATOMY OF EU-GCC TRADE RELATIONS: PAST, PRESENT, AND FUTURE

INTRODUCTION

Economists have been extolling the virtues of economic integration, including free trade, for over two centuries, and their arguments have played an important role in advancing globalisation and in the consequent increases in global economic prosperity. The cornerstone of the arguments made by economists is the theory of comparative advantage: countries should specialise in producing the goods and services in which they possess a relative competence and they should export the surpluses in exchange for the remaining goods and services which they produce inefficiently. Removing barriers to trade allows for higher levels of specialisation and higher levels of total consumption for the trading parties.

However, in the domain of international relations, commercial considerations are rarely separated from political and diplomatic ones and they are often used as bargaining chips in negotiations over holistic relationships between nation-states. As a result, global trade patterns do not necessarily reflect the distribution of production capabilities among different countries. For example, many European countries are wary of purchasing Russian gas due to strategic and ideological differences, despite the considerable efficiency advantages that can be secured from stable imports.

In the context of EU-GCC trade relations, this broader concept of the returns to trade that includes political and diplomatic considerations holds the key to deepening the economic relationship between the two blocs. More than 30 years of efforts to establish a free trade agreement have failed, and consequently, the GCC is only the EU’s fifth largest trading partner, with EU-GCC trade amounting to less than 2% of the EU’s GDP. The EU’s status as the GCC’s largest trading partner has not been enough to overcome the protectionist obstacles posed by the petrochemical lobby in the EU. If the GCC wishes to make a much-needed breakthrough in realising a free trade agreement, it needs to emphasise the non-economic advantages that evolving the relationship can confer upon the EU.

This need is exacerbated by Brexit, as the UK plays a disproportionately large role in trade, both merchandise (18%) and services (30%), between the EU and the GCC. Moreover, gross trade between the two blocs is threatened by the Covid-19 pandemic, as passenger transport and civil aviation are central components of EU-GCC trade. In principle, in the year 2021, the EU’s nominal economic interest in evolving its relationship with the GCC could be significantly diminished.

A variety of geo-political developments during the last decade, however, offer the GCC an excellent opportunity to secure a Free Trade Agreement (FTA) with the EU. The EU has always treated its trade negotiations as a tool in its efforts to realise its broader strategic goals, namely the protection of human rights and the environment, and the growth of multilateralism. With the relative decline in the economic and political power of the US and the re-emergence of the US’s isolationist propensities, the need for global multilateralism has become more acute. Moreover, the problem of climate change has reached near-crisis levels. These developments should make the EU more willing to make concessions in trade negotiations if the outcome would be greater GCC support for the EU’s strategic goals.

Recent developments should also soften the GCC’s negotiating stance, as the GCC perceives its relationship with the EU as an opportunity to strengthen its own security. The US has been the bloc’s de facto security guarantor since the 1990s, but the US has signalled a significantly diminished desire to provide such services, creating a security vacuum that the GCC countries will be keen to fill with major global players such as the EU, be it in the form of military or diplomatic support. From the GCC’s perspective, access to the EU market is more important than ever: the future of oil prices is very uncertain, accentuating the GCC countries’ need to secure a market for their non-hydrocarbon exports, and for the development of the knowledge partnerships that will help their economies transit from a state of natural resource dependence.

This paper describes in detail the current status of trade relations between the EU and GCC and then discusses the future prospects of the trade relationship. The paper is organised as follows. Section 2 explains the principles that govern the foreign economic strategies of the EU and GCC countries, as well as briefly describing the formal results of diplomatic efforts aimed at deepening economic ties between the two blocs. Section 3 presents an anatomy of EU-GCC economic relations in the period following the 2008 global financial crisis and prior to the Covid-19 crisis. Section 4 analyses the prospects for the future of relations post-Covid-19 and Section 5 concludes by synthesising the arguments made about the likely trajectory of EU-GCC economic relations.  This paper is distinct from—but highly complementary to—another paper written by the same author. 

THE PRINCIPLES OF FOREIGN ECONOMIC STRATEGIES

To provide a context for the efforts made by the EU and GCC to forge deeper economic ties, this section explains the strategies that each bloc uses when deciding its foreign economic relations and how these strategies have affected the diplomatic efforts made by the two sides to bring their economies closer together.

THE EU STRATEGY HISTORICALLY

The overall EU economy has evolved considerably since the bloc’s inception as the European Economic Community in 1957, with the growth in the number of members playing an important role. However, during the period 1980-2020, several broad characteristics have been quite stable and have assisted in understanding the EU’s foreign economic strategy.

Firstly, the EU is a large economy, accounting for about one-fifth of global GDP. One reason for this is its population, which is equal to approximately one-twentieth of the world’s population (ranked third highest after China and India).

Secondly, it has a high standard of living, with EU GDP per capita being over three times the global average of USD 11,000. This is primarily the result of high cumulative levels of economic growth in the period following the industrial revolution, which is in turn the result of persistently high levels of innovation and technological progress.

Thirdly, as a result of the bloc’s size, it has a high dependence on internal trade and limited dependence on extra-EU trade. In fact, extra-EU trade in goods equals 25% of the EU’s GDP, which is just over half of the global average of 46%. A similar pattern is present in its inward and outward Foreign Direct Investment (FDI) figures, both of which are considerably below the respective global averages.

Fourthly, its primary macroeconomic policy indicators are generally sound: the economy grows consistently at around 2.5% annually, which is below the global average but normal for an economy that has high living standards. Its unemployment rate is usually in the range 5%-10%, above the world average, but with high levels of social support. It has budgets that are close to being balanced and manageable levels of gross national debt, although individual members such as Greece and Italy face greater problems in managing their finances and the EU’s current account is consistently positive.

The EU’s primary extra-EU exports are machinery and equipment, motor vehicles, pharmaceuticals, chemical products and computers and electronic products. Its primary imports are computer and electronic products, crude petroleum and natural gas, chemical products, machinery and equipment and motor vehicles. The EU’s primary trading partners are the USA, China, Switzerland, Russia and Turkey, of which both Switzerland and Turkey have free trade agreements.

The overall strength of the EU economy has played a central role in determining its foreign economic strategy. In the first half of the twentieth century, much of Europe’s global influence came via colonial and military power, extending from its strong economy, and there was a high level of intra-European competition. In contrast, in the latter half of the twentieth century, the intra-European rivalry has been replaced by high levels of cooperation, as the structure of the EU and its progenitors has transformed the member states’ thinking from zero-sum to positive-sum. Consequently, the bloc has pursued its external policy objectives primarily through its economic strength. 

Moreover, the organic growth in the role played by the EU’s (and its progenitors’) economic relations has been reinforced by the fact that internal trade and economic integration are the glue that binds together former archenemies such as Germany and France. Consequently, when seeking to understand the EU’s trade strategy, it is important to appreciate that the strategy’s goals generally extend beyond a narrow, economic frame. Instead, they are often integrated with the EU’s broader foreign policy goals.  

Before describing those goals, it is worth clarifying the sources of the EU’s power in the sphere of trade. We have already discussed the most salient point, which is the massive size of the EU economy. Yet also significant is the long negotiating experience that the EU and its institutions have accumulated gradually since the signing of the Treaty of Rome in 1957. Initially, the European Commission embodied that expertise, as it was afforded unusually large levels of latitude in negotiating the EU’s trade policy  and because the EU was itself grounded in the European Coal and Steel Community. More recently, after reforms to the system, authority has been more widely dispersed and a more active role has been played by the governments of the member countries. Nevertheless, the EU remains virtually peerless in the world when it comes to negotiating trade deals and it is keen to wield that power to further both its trade and non-trade interests. 

The goals of the EU’s trade policy are varied and ever-changing, but there exist consistent, core themes. The first is securing market access for European exporters and simultaneously securing lower prices for European consumers; these are the traditional and universal goals of trade policy. Also, in the same vein, in an attempt to override what Young referred to as “behind the border barriers” to trade,  the EU also seeks the adoption of its social, environmental and safety standards. These goals also reflect the EU’s less than total commitment to pure capitalism and its belief that non-market measures are required to ensure the protection of workers and the environment. This is commonly described as ‘ordoliberalism,’ a German tradition that has had significant influence on EU economic policy. 

Beyond this, at the bilateral level, the EU seeks to promote democratic reforms, adherence to global multilateralism and the adoption of wider notions of EU standards. At the regional level, the EU wants to export its rules to other regions and at the global level, the EU wants to shape the multilateral system according to its pluralistic worldview. 

Understandably, in light of its sheer size and its regular expansion, the EU’s agenda for trade has evolved. In a famous 1999 speech by former Trade Commissioner Pascal Lamy, the EU’s stance was “managed globalisation”, meaning the use of standards and safety nets to mitigate the ills of globalisation, while still reaping its efficiency rewards. This doctrine also affirmed the EU’s desire to be a model for other countries, and the Scandinavian members of the EU, in particular, pushed for the promotion of human rights and environmental protection.  Operationally, a key component of the EU’s policy was getting as many countries as possible to join the multilateral system, for example via accession to the World Trade Organization (WTO). This also meant widening the WTO’s mandate and exporting the EU’s governance model as a result of its success in managing intra-European disputes. 

In this regard, the exemplar was the EU’s economic relations with Eastern Europe following the collapse of the Soviet Union: accession to the union brought significant economic benefits to all parties, but it was also conditional on extensive democratic reforms in Eastern Europe, respect for the rule of law and a broader embrace of the post-1990 multilateral system of international relations.

The EU also used its trade relations to promote EU-style integration among the countries and regional blocs it negotiated with. For example, the recently concluded Mercosur deal stipulated significant integration within the South American bloc, while a series of bilateral deals with countries in the West Balkans also required integration within the bloc and with EU laws and regulations.

However, Lamy was replaced by the British Peter Mandelson in 2004 and by 2006, the tone of the EU’s trade policy had changed distinctly, moving from “managed globalisation” to “global Europe: competing in the world.” This represented a shift to more mercantilist foundations for its trade policy, with a greater emphasis on narrow economic goals, at the expense of broader normative goals. Improving the competitiveness of EU industries by securing access to foreign markets was firmly the priority.  

The flux in the EU’s trade policy goals can be partially attributed to the existence of contradictions in its fundamental tenets. On the one hand, the EU promotes multilateralism, but on the other hand, it has an overt preference for regionalism in its trade deals (rather than working via the WTO for example), which undermines multilateralism to some degree. Moreover, while it has historically had a preference for a pro-capitalist agenda with the addition of standards and safety nets, by the mid-1980s, protectionist forces within the EU began to challenge the European Commission’s worldview, as certain member states preferred the use of tariffs to protect domestic jobs in sensitive sectors such as aviation.  And as the Brexit experience has demonstrated, there are elements within the EU that no longer believe in the benefits of a harmonised trade policy. In its 2016 Global Strategy, the EU reverted to a more integrated and broad-based selection of strategic goals. The primary emphasis is on directing resources to the strengthening of rules-based, global governance, which should imply lower levels of protectionism.

From the perspective of EU suitors, including the GCC, these factors render negotiations with the EU more complex and less predictable, a point that we will return to below.

THE GCC STRATEGY HISTORICALLY

The overall GCC economy has, like the EU’s, evolved considerably during the period 1980-2020, but unlike the EU, its membership has been fixed, meaning that its evolution reflects changes in the member’s economies. Its broad characteristics are as follows.

Firstly, its economy is approximately 10% of the size of the EU’s, meaning that it still makes a sizeable contribution (2%, 10th highest in the world) to the global economy. Its total population of 56 million is small, however, and this figure is misleadingly large since over 50% of the GCC’s residents are migrant workers rather than citizens.

Secondly, like the EU, the GCC has high per capita income levels, also equal to around three times the global average of USD 11,000. However, the sources of the high living standards are very different to those of the EU. The GCC’s economy is a recent phenomenon, as prior to the discovery of oil in the 1930s, the GCC countries were desert economies, operating barely above subsistence levels, with widespread nomadic life. Moreover, the high levels of living standards reflect rents from exporting hydrocarbons, with low levels of innovation and technological advancement in the wider economies.

Thirdly, due to the bloc’s small absolute size, and the economy’s chronic lack of diversity (resulting from the desert climate), the GCC has a high dependence on global trade, with extra-GCC trade in goods equalling 59% of GDP, compared to a global average of 46%. Similarly, inward and outward FDI are larger as a percentage of GDP than the respective world averages.

The GCC’s primary extra-GCC exports are crude oil, natural gas, petrochemicals, and aluminium. The GCC is extremely dependent on global trade for its imports, which include everything from basic foodstuffs to advanced electronics. Its primary trading partners are the EU, followed by China, Japan, and India.

Fourthly, in terms of the major macroeconomic policy indicators, the GCC has generally been in good health, but with larger swings due to the sensitivity of the economy’s performance, as it is linked to the global price of oil. Like the EU, annual economic growth is usually in the range 2-3%, with very low levels of unemployment due to the high levels of public sector hiring and to the need for unemployed migrant workers to return home if they are unable to secure employment. In general, public finances are in a good state, with low levels of gross public debt (around 20% of GDP). Moreover, due to the historically high levels of oil prices during the new millennium and the existence of a fixed exchange rate regime with the US Dollar, the current account usually has a high surplus.

Unlike the EU, the GCC countries are too small to have been significant colonial or military powers historically. Moreover, most of the member states only secured independence in the 1960s and 1970s and during the Cold War, they relied on foreign powers for external security, while maintaining a low profile diplomatically. Therefore, since the discovery of oil, the bloc’s global influence has been primarily exercised through its economic power, which is a point of similarity with the EU; moreover, the EU’s successful economic integration has been a model that the GCC, since its establishment in 1981 as an institution, has tried to emulate.

Consequently, following in the footsteps of the EU, the GCC has gone from a free trade agreement (1982) to a customs union (2003) and then to a single market (2008). However, the single market has faced significant implementation challenges.  More importantly and despite the high levels of economic integration, the GCC is better described as an intergovernmental forum, rather than as an economic and political union that the EU describes itself as.  The six member states possess a large degree of latitude in choosing which GCC initiatives to adopt and the supranational institutions that exist, such as the Secretariat General and the Supreme Council, do not wield the authority of their nominally equivalent entities in the EU, such as the European Commission and the European Council.

Accordingly, GCC trade policy does not rest on a mature and clearly articulated doctrine and it is essentially an amalgam of the trade policies of the six member states. Fortunately, the isomorphic nature of the GCC economy means that there is a high degree of uniformity in the foreign economic goals of the GCC member states and this is a key reason why some of the GCC’s most impressive achievements in establishing a regional order lie in the economic domain.

However, compared to the member states of the EU, there are considerably lower levels of transparency in the foreign policy goals of the GCC states, which translates to considerably lower levels of transparency in the GCC’s collective trade policy goals. For example, the website of the GCC’s Secretariat General does not have any white papers relating to trade policy, meaning that scholars and analysts are forced to infer policy goals from a combination of official press releases, communiques, and from the observed actions of the Member States.

With this in mind, understanding the trade policies of the GCC member states is an appropriate departure point for understanding the trade policies of the GCC itself. In the case of the economically dominant member of the GCC, Saudi Arabia, the economy has historically been closed, a luxury it could afford due to its sizeable oil wealth. However, the decline in oil prices during the late 1990s, when oil prices declined from USD 40 to 20 per barrel created an impetus for economic reforms. These included opening the economy up to foreign investors and gaining access to foreign markets to develop industries beyond the export of crude oil. Consequently, during the last twenty years, Saudi Arabia’s foreign economic policy has revolved around it being seen as a serious, credible and accountable international economic player. 

By any global metric, the remaining GCC countries are small (only the UAE is ranked in the world’s top 50 for GDP), ensuring that their foreign economic policies have generally favoured multilateralism and free trade. In the case of Bahrain and the UAE in particular, attracting FDI has been a central plank of their economic strategies since the 1980s and they are not novel features of Bahrain Economic Vision 2030 or Abu Dhabi Vision 2030.  Following the oil price crash of 2014, the economic strategies of all six member states clearly viewed integration with the global economy as a priority, both as a means of securing markets for non-oil export and also as a way of attracting inward FDI, which can create jobs and foster knowledge transfer. 

For these reasons, the GCC successfully negotiated a free trade agreement with Singapore in 2008 and with the EFTA states (Iceland, Liechtenstein, Norway and Switzerland) in 2009.  According to the official summary: “The coverage of the FTA includes trade in goods (industrial and processed agricultural goods, fish and other marine products), trade in services, government procurement and competition. For investment and intellectual property rights, the Parties agreed to conduct negotiations on those topics after the entry into force of the Agreement. Basic agricultural products are covered by the bilateral agricultural agreements, which are part of the instruments establishing the free trade area between the Parties.” 

The GCC has also been in active negotiations with several other blocs. However, like the EU, the GCC has internal discord, stemming from disparities in foreign policy goals, especially the non-trade aspects of foreign policy. In particular, because of the diplomatic crisis with Qatar, forging GCC-level agreements has become difficult (though not impossible), due to the limited opportunities to negotiate. Moreover, unlike the EU, the absence of a coercive, supranational institution in the GCC has allowed the member states to negotiate bilateral FTAs outside the scope of the GCC, most notably Bahrain’s FTA with the US, which was implemented in 2006 and Oman’s FTA with the US, which was instigated in 2009. 

A final remark is that the GCC was established in 1981 at the beginning of the Iraq-Iran war, underscoring the collective security and defence goals of the bloc.  Given their small populations and large resources of wealth, the GCC countries are perennially at risk of armed conflict with their larger neighbours.  Consequently, a consistent theme in the GCC countries’ external dealings has been gaining international recognition and legitimacy, as a way of reinforcing their sovereignties and maintaining their territorial integrities.  In this respect, regionally engaging large international players is a basic goal, separate from any direct economic benefits that such relationships might confer upon the GCC member states. The Iraqi invasion of Kuwait in 1990 elevated the importance of this line of thinking from the perspective of GCC policymakers. 

DIPLOMATIC EFFORTS AT DEEPENING EU-GCC ECONOMIC RELATIONS

The general principles governing EU and GCC foreign relations’ strategies suggest a high degree of compatibility between the goals of each bloc. The EU would like access to a new market and it would like a new locale to export its global worldview, including its support for human rights, multilateralism and the protection of the environment. Moreover, these benefits are amplified in the case of the Middle East, due to the area’s geostrategic importance and geographic proximity, as the EU has always expressed an interest in the Israel-Palestinian conflict and the proliferation of nuclear weapons, as well as being keen to avoid the economic disruption caused by the oil price shocks of the 1970s.

Meanwhile, the GCC would like to enhance its sovereignty and global legitimacy by gaining the recognition of the EU, a bloc that features two of the five permanent members of the UN Security Council. It would like to do so in tandem with expanding the market that its exporters have access to and by creating better opportunities for mutual investments, especially inward FDI that could promote knowledge transfers.

In light of the compatibility, both sides have exerted considerable diplomatic efforts at deepening their economic relations.  As of 2019, the key developments were as follows.

The two sides started formal talks in 1988, with the ultimate goal of establishing an EU-GCC FTA. However, in 2008, the two sides had still failed to secure an FTA and the GCC unilaterally suspended negotiations, due to a perception that the gap between the two sides was no longer shrinking and that for the time being mutually acceptable terms were not possible. The EU remains willing to resume negotiations at any time. Thus, beyond the decentralised economic relations that we will discuss in the next section, over 30 years of negotiations have resulted in formal expressions of a desire to deepen relations and in joint councils that meet regularly to discuss issues of mutual interest, but limited progress has been made in the form of an institutionalised economic relationship between the EU and GCC.

The reasons for this relative lack of progress have evolved. Initially, a key barrier was the lack of formal economic integration within the GCC—specifically the absence of a customs union. As mentioned above, the GCC overcame this hurdle in 2003 and went on to establish a single market, though it is worth noting that the single market is currently not functioning due to the boycotting of Qatar by three GCC states (Bahrain, Saudi Arabia and the UAE). While the EU welcomed the development of the Customs Union and the Common Market, there have been two subsequent chronic barriers to the development of EU-GCC relations.

Firstly, there is the lobbying by European petrochemicals producers, who perceive their GCC competitors to have unfair access to subsidised raw materials, a charge rejected by GCC petrochemicals producers. As explained above, historically the EU trade negotiations team should have neutralised such lobbying threats, but by the 1990s, the European Commission had a diminished capacity to prevent narrow lobbying interests from impeding economic integration, as the member states began to recover some of the centralised authority that the Commission used to command, especially in matters relating to international trade.

Secondly, there are the EU’s concerns regarding human rights and the environment, and its insistence on relevant clauses being part of any agreement, which is consistent with the EU’s approach to FTAs historically. As explained above, the EU does not see human rights as an ancillary element of trade negotiations, as it regards them as a central foreign policy goal that it pursues via its trade policy. The GCC countries, on the other hand, regard such issues as irrelevant to what is essentially an economic agreement. Moreover, they consider detailed stipulations on human rights matters by foreign countries to be violations of the norm of non-interference in internal affairs. 

In addition to these persistent problems, the EU has also recently insisted on the GCC countries liberalising services and government procurement, to which the GCC has refused to comply. Yet, while formal negotiations have halted, informal negotiations continue, facilitated by the recent establishment of an EU mission in Kuwait, to add to the ones that already operate in Riyadh and Abu Dhabi. Moreover, EU and GCC representatives are often seen mingling on the side lines of academic and policy events relating to EU-GCC relations, such as the 2019 German-Arab Dialogue held in Berlin.

AN ANATOMY OF POST-2010, PRE-COVID-19 EU-GCC ECONOMIC RELATIONS

Economic interactions between the EU and the GCC are primarily decentralised in nature and businesses and individuals are largely free to buy goods and services from anywhere in the world. Consequently, there is a large scope for their development, despite the stuttering progress of the formal aspects of EU-GCC economic relations. In this section, we explore the trade in goods and services in detail. 

TRADE IN GOODS

The following data are taken from the World Bank and the Observatory of Economic Complexity (OEC). “Products” are defined as six-digit classes of goods under the UN’s harmonised system (HS) of goods classification.

Figure 3.1.1 (see PDF file) shows EU-GCC merchandise trade during the period 2010-2017. The data confirm the existence of a large trade surplus from the EU’s perspective, starting at approximately USD 50 billion in 2010 and rising to approximately 70 billion in 2017. However, the data also show the comparatively small contribution that trade with the GCC makes both to extra-EU trade (around 4%) and to EU GDP (around 1%), befitting the GCC’s status as the EU’s fifth-largest trading partner. In contrast, as the GCC’s primary trade partner and in light of the importance of extra-GCC trade to the GCC economy, trade with the EU equals around 11% of GCC GDP. As with many of the data series to be examined in this paper, the data are hump-shaped (single-peaked) in the period 2010-2017, due to the fact that oil prices peaked in 2014 and due to the importance of hydrocarbons to aggregate economic activity in the GCC.

Figure 3.1.2 (see PDF file) shows the path of total merchandise trade for the two largest contributors to EU-GCC trade from the GCC side: Saudi Arabia and the UAE, which together account for approximately 75% of total EU-GCC trade. Note that there is a large degree of variation and that by the end of the period (2017) the two series have converged, indicating an oversized (relative to its economy) contribution to merchandise trade by the UAE’s economy. This is driven by the large growth in EU-UAE exports, much of it relating to aviation (see below). Qatar, which is omitted in the interests of visual parsimony, also makes a significant contribution due to its high volume of LNG exports to the EU. For the period 2011-2013, Doha managed to operate a merchandise trade surplus with the EU, the only GCC country to do so, due to the rapid growth of its LNG exports.

Figure 3.1.3 (see PDF file) offers a breakdown of the EU’s primary contributors to EU-GCC trade. The EU’s four largest economies, Germany, the UK, France and Italy, together account for around 62% of total EU-GCC merchandise trade. Notably, despite representing around 16% of the EU economy, the UK contributes almost 20% of EU-GCC merchandise trade, making it disproportionately important. This is partially the result of the UK’s imperial ties to the GCC region, dating back to the start of the 19th century. These data also indicate that, in general, the four EU members with the largest political weight (owing to the sizes of their economies and populations) are also the four members with the biggest stakes in EU-GCC economic relations.

Figure 3.1.4 offers a breakdown of the top EU-GCC exports for the years 2010 to 2017. The distribution is quite stable, indicating the maturity of the supply chains linking the two regions. The largest contribution by far comes from aircraft, which includes the civilian aircraft sold to the leading GCC airlines (Emirates, Etihad and Qatar Airways) as well as the military aircraft procured by the GCC’s armed forces from the UK and France in particular. The aircraft industry is unusual on the EU side because of its political proximity to the EU’s leadership: Airbus is partially government-owned (with German, French and Spanish government holding companies) and is also considered to be a company with strategic importance, both due to its large employment levels and its military role. This gives the EU-GCC trade relationship extra weight from the EU’s perspective. The aviation industry is also represented by exports of turbo-jet engines and aircraft parts, both of which are in the top 11 EU exports to the GCC. 

Other important EU-GCC exports include vehicles, pharmaceuticals, electrical and plumbing equipment, largely mimicking the EU’s global trade. In terms of the breakdown by EU country, Germany contributes aircraft, motor vehicles and plumbing equipment; the UK contributes aircraft and their parts and motor vehicles, France contributes aircraft and pharmaceuticals, as well as perfumes and beauty products, while Italy contributes electrical and plumbing equipment, plus a large volume of furniture. Thus, the top 11 exports at the EU level are representative of the top exports from the top four EU economies.

Figure 3.1.5  (see PDF file) shows the GCC’s top 11 merchandise exports to the EU for the years 2010 and 2017. Similar to the EU’s exports, the distribution is quite stable, with the exception of a sharp increase in the contribution of diamond exports, rising from zero in 2010 to almost USD 2 billion in 2017. This reflects an active (and successful) effort by Dubai to become a global diamond hub during the period 2010-2018. Unsurprisingly, the GCC’s exports are dominated by hydrocarbons, crude oil and its various cousins in all countries and LNG in the case of Qatar. Like aircraft exports, energy imports have amplified importance due to their role as strategic commodities. The EU wisely tries to maintain a diverse range of energy suppliers, but its primary source of crude oil, coal and natural gas is Russia—a country which is engaged in geopolitical conflicts with the EU in several areas, most notably Ukraine. The absence of significant geopolitical conflicts with the GCC enhances its attractiveness in the EU’s energy imports portfolio.

There are significant petrochemicals exports for all GCC countries too, which partially explains the aforementioned opposition to an FTA by European petrochemicals producers. Finally, aluminium also makes a significant and growing contribution as Saudi Arabia, the UAE, and Bahrain all export aluminium. This reflects efforts at leveraging the region’s low energy and gas costs to secure a competitive advantage in transforming bauxite into aluminium.

As is evident from Figure 3.1.4 and Figure 3.1.5, EU merchandise exports to the GCC exhibit a significantly higher degree of diversity than do the EU’s merchandise imports from the GCC. Figure 3.1.6 shows this more clearly: in 2017, the top 5 products exported by the GCC to the EU accounted for 74% of total merchandise exports, while the top 10 accounted for 82%. In contrast, the top 5 products exported by the EU to the GCC accounted for a mere 20% of total merchandise exports and the top 10 accounted for only 30%. This reflects the much larger levels of economic diversity in the EU. The lack of diversity in the GCC economy remains the region’s Achilles heel, a point we return to in our synthesis below. 

Based on this examination of the EU-GCC’s merchandise trade, the key points are as follows. Firstly, EU-GCC merchandise trade is consistent with basic theories of trade: each side exports the goods in which it has a comparative advantage and imports the goods in which it has a comparative disadvantage. Moreover, the composition of EU exports to the GCC is similar to the rest of its extra-EU exports, and the same applies to the GCC’s exports to the EU. 

Secondly, EU-GCC merchandise trade is very important to the GCC economy, whereas it is of limited importance to the EU economy. Therefore nominally, this should limit the EU’s economic incentives to deepen its relationship with the GCC.

Thirdly, despite the small contribution that EU-GCC merchandise trade makes to the EU economy, the effective importance of the trade is amplified by the political and strategic importance of the EU’s largest export to the GCC, which is civilian and military aircraft, and of the GCC’s largest export to the EU, which is energy (crude oil and natural gas). This counters the nominally small incentive to deepen economic ties.

Fourthly, the UK makes a disproportionately large contribution to EU-GCC trade. Consequently, the completion of Brexit will undermine the absolute strength of the EU-GCC economic relationship, without altering the strategic importance of the key products that define the relationship.

Fifthly, the civilian aircraft industry is threatened by the potential long-term implications of Covid-19, further weakening the direct economic relationship between the EU and the GCC. According to the International Air Transport Association’s forecasts, 2021 passenger departures are expected to be over 25% lower than their 2019 levels, with revenues per kilometre expected to contract by 30% compared to 2019.  Most worryingly for companies such as Airbus, the world’s aircraft fleet of 30,000 is forecast to be down to 20,000 by the end of 2020. However, the GCC’s demand for EU pharmaceuticals could rise to offset partially the decreasing demand for civilian aircraft.

Data on FDI are sparse, meaning that there are no freely available data sources more recent than 2012. In that year, the GCC had USD 283 billion of inward FDI stocks, of which the EU accounted for 78 billion or 27%. The overwhelming majority was concentrated in Saudi Arabia and the UAE. In contrast, outward FDI stocks for the GCC countries equalled USD 80 billion, with 22 billion (27%) being in the EU. These figures do not include the sizeable investments made by GCC sovereign wealth funds in the EU, which are incredibly diverse, an example being Qatar’s ownership of Paris St. Germain Football Club. In fact, Ayadi and Gadi  point out that at one stage leaders within the EU became so concerned with increasing GCC ownership of strategic assets in the EU, such as aviation, that it passed legislation that limits foreign ownership.

TRADE IN SERVICES

Unfortunately, the availability and quality of data on international trade in services are considerably lower than that of merchandise trade, due in part to the fact that merchandise trade is funnelled via customs checkpoints that collect duties, creating built-in data-collection mechanisms, whereas there is no analogous process for services. Nevertheless, the data provided by the European Commission yield numerous insights. (Unfortunately, mirror data on the GCC side are not available).

Figure 3.2.1 (see PDF) shows aggregate EU-GCC trade in services for the period 2010-2018. It distinguishes between GCC trade with the EU28, which includes the UK, and the EU27, which excludes it. The figure also shows the share of total extra-EU28 exports and imports accounted for by the GCC. It has several notable features.

Firstly, the value of total trade in services is large, exceeding 60 billion Euros in 2016, which is equal to around a third of merchandise trade. However, this remains a small percentage (approximately 5%) of extra-EU services trade. Notably, the EU operates a significant services surplus in its trade with the GCC.

The UK makes a disproportionate contribution (30%) to total EU-GCC services trade. Looking at the last 10 years, EU-GCC services trade has been growing, both in absolute terms and also as a percentage of total extra-EU services trade. On the GCC side, the two most important services trade partners for the EU are Saudi Arabia and the UAE, as they account for approximately 70% of GCC services trade with the EU. Figure 3.2.2 shows GCC services trade with the EU for the period 2010-2018. These data indicate robust growth in EU services exports to Saudi Arabia, EU services exports to the UAE and UAE services exports to the EU.


Figure 3.2.3a shows the composition of EU28 exports to the GCC in 2010 and in 2018, while Figure 3.2.3b shows the composition of imports. These figures indicate that the breakdown of trade between the two blocs has been relatively stable during the eight year span, with the exception of “other business services”, which have grown considerably (we return to this below). Starting with EU exports to the GCC, one can see that the largest contributions come from transport, especially sea freight and passenger air transport; travel, especially conventional (i.e., not health- or education-related) tourism, which one expands upon below; financial services, which is also a key reason for the UK’s large contribution; and telecommunications and IT services. Also, the other business services category includes all forms of professional consulting (management, legal, accounting and public relations), which again accounts for part of the UK’s large contribution; technical and trade-related business services; and architectural, engineering and scientific services, which partially reflects the representation of European universities in the GCC, such as London Business School and INSEAD in the UAE, HEC Paris in Qatar and Salford University in Bahrain.

Like merchandise exports, GCC services exports to the EU are significantly more concentrated than the GCC’s imports, with three categories dominating. The first is transport, especially sea freight and other non-passenger sea transport, and both passenger and freight air transport. This latter category reflects the UAE’s status as a global logistics and civilian air transport hub that is used by Europeans heading to Asia and Australia. The second is travel, which is primarily personal and business tourism, especially to the UAE and to Saudi Arabia (see below for more details). The third is ‘other business services,’ which is also a blend of all of the different classes of consulting.

These data indicate a certain degree of complementarity between the EU-GCC merchandise and services relationships. For example, civilian aircraft play a dominant role in EU merchandise exports to the GCC, thereby enabling high levels of passenger transport and tourism. Much of the consulting trade is related to trade in advanced manufactured goods, such as petrochemicals, electronics and armaments, with large contributions from France, Germany and the UK.

Tourism merits elucidation in the case of EU-GCC economic relations due to its large contribution to EU-GCC services trade and also in light of the threats posed by Covid-19. Moreover, it is a class of internationally-traded service for which unusually high quality data are freely available.

Tourism accounts for approximately 3.9% of pre-Covid-19 EU GDP and 9% of pre-Covid-19 GCC GDP. In the case of the GCC, the high contribution is driven by the large volume of inbound religious tourism to Saudi Arabia, which hosts the two most holy sites for Muslims, including Mecca, where all physically and financially-able Muslims must conduct a pilgrimage at least once in their lives. Tourism also makes a large contribution to the economy of Dubai. Global forecasts on the future of the tourism industry are grim: a May 2020 brief by the World Tourism Organization projected a 60-80% decline in international tourism during 2020, with tourism spending levels remaining below pre-crisis levels until 2024, threatening 120 million tourism jobs across the world.  Given the importance of tourism to the GCC economy, both as a means of creating jobs and of diversifying the economy, their tourism strategies will surely need to adapt to the new circumstances.

In terms of inter-regional tourism, Figure 3.2.4 shows the total number of tourists from each of the two regions travelling to the other and an estimate of the total expenditure of those tourists using an imputation procedure detailed in the Appendix. The data contain several notable features.

Firstly, despite the massive population imbalance (the EU has approximately 10 times the GCC’s population), the total number of EU-bound GCC tourists is approximately equal to the total number of GCC-bound EU tourists, with the exception of 2018, when there was a sharp rise in GCC-bound EU tourists. In general, the total for both regions is approximately equal to 1.5 million.

Secondly, despite having roughly comparable numbers of tourists visiting one another’s regions, GCC tourists spend a lot more in total: approximately USD 3 billion, compared to approximately USD 1 billion by GCC-bound EU tourists. This is due to the fact that GCC tourists have globally high expenditure levels, owing to their high per capita incomes. However, neither of these figures is large compared to the size of each region’s economy.

To shed further light on these data, Figure 3.2.5 shows what share of GCC outbound tourists go to the EU and vice versa, where “outbound” includes GCC tourists visiting other countries in the GCC and EU tourists visiting other countries in the EU. These data confirm the extremely low (around 0.3%) representation of the GCC in EU tourist destinations. In contrast, the EU is a moderately popular destination for GCC tourists (around 4% of total outbound tourists).

Put together, these data suggest that tourism is not a critical component of the EU-GCC economic relationship, despite its contribution to the services trade between the two blocs. Both sets of tourists prefer other destinations in general. Moreover, the limited size of the GCC’s population places a low ceiling on the contribution that GCC tourists can make to the EU economy, despite their high levels of spending; and for a variety of reasons, among them the convenience of intra-EU tourism, the total number of incoming EU tourists in the GCC is quite low, limiting the contribution that they can make to the GCC economy. Thus, while the threats to the EU and GCC economies posed by Covid-19 are considerable, the impact on the EU-GCC relationship via the tourism channel is likely to be limited. A final point is that the UK makes a large contribution to the EU-GCC tourism relationship, due in part to the deeper historic ties that the UK has with the GCC.

Based on this examination of the EU-GCC services trade, the key points are as follows. Firstly, the EU-GCC services trade is again consistent with the principle of comparative advantage: as a legacy of its imperial heritage, the EU exports a large volume of transport and financial services and its deep cultural heritage makes it a popular tourist destination. Moreover, its advanced knowledge production makes it an effective exporter of consulting services. The GCC, on the other hand, has leveraged its geographical position and its favourable governance structure to transform itself into a regional and global transport and logistics hub and as a bridge for consulting and financial services that tie East to West.

Secondly, like the merchandise trade, the EU-GCC services trade is more important to the GCC than it is to the EU, again limiting the EU’s nominal motivation to deepen its economic relations with the GCC. However, unlike the EU-GCC merchandise trade, the EU-GCC services trade does not have a compelling strategic component that can offset its weak nominal importance. One possible exception involves Islam: Muslims represent a small but growing percentage of the EU’s population and they are projected to be around 11% of the total by 2050.  In that case, religious tourism—and with it the services trade generally—could gain supra-nominal importance from the perspective of EU policymakers.

Fourthly, the UK makes a disproportionately large contribution to the EU-GCC services trade—one that is even more disproportionate than the contribution to the merchandise trade. Therefore, more so than in the case of goods, Brexit will strike a blow to efforts at deepening EU-GCC services trade.

Fifthly, in light of the dominant role that passenger transport and tourism plays in the EU-GCC services relationship, Covid-19 again poses a threat to the strength of the two bloc’s economic ties. However, as in the case of the goods trade, there may be offsetting growth in the knowledge domain, in the form of university-mediated research partnerships. As the GCC countries continue to allocate resources to transform their economies into knowledge forms, the EU could develop into a critical partner in the capacity-building and joint ventures in the scientific domain.

To illustrate this, in 2013, the President of the King Abdulla University for Science in Technology in Saudi Arabia was the Frenchman Jean-Lou Chameau, the former President of Caltech. In 2006, the French Sorbonne University opened a branch in Abu Dhabi and by 2020, it had over 2,000 graduates from over 90 countries. The partnerships are sometimes located in Europe, as in the case of the King Hamad Chair for inter-religious dialogue and peaceful co-existence, a Bahraini-Italian partnership in the Italian public university Università di Roma La Sapienza, inaugurated in 2018.

PROSPECTS FOR POST-COVID-19 EU-GCC ECONOMIC RELATIONS

Protectionist lobbying on both sides is one of the reasons why the EU and GCC are yet to establish an FTA. Nevertheless, as is evident from the data presented above, the merchandise and services trade between the two blocs has developed organically in accordance with the principle of comparative advantage. The EU’s massive size compared to the GCC and the diversity of its own internal market, have combined to render the GCC a secondary trading partner for the EU, ranking fifth in the world; but the EU is the GCC’s largest trading partner, creating a strong appetite among the Gulf states for deeper economic engagement. How likely is an EU-GCC FTA in the coming years?

On purely economic grounds, the prospects look quite dim, especially in light of the two shocks of Brexit and Covid-19. The UK has consistently played a large role in the EU-GCC merchandise and services trade, meaning that its departure from the EU will significantly weaken the economic ties between the two regional blocs. The Covid-19 pandemic is threatening to cause a large and permanent contraction in the demand for civil aviation and tourism and its adverse impact on oil prices is likely to diminish further the GCC’s demand for EU exports, including military aircraft.

However, an examination of the historic tenets of the EU’s external economic relations and a macroscopic assessment of recent geo-political developments together give cause for optimism.

Firstly, the EU has consistently treated its external economic relations as a means for realising its broader strategic goals. The three most salient goals are improving human rights, protecting the environment and strengthening global multilateralism. In fact, disagreements regarding human rights and environmental protection have previously disrupted efforts at securing an EU-GCC FTA. Today, these goals are arguably more important to the EU than ever, both due to the realities of the post-COVID world and to the newly-stated, geopolitical ambitions of the EU. As a result, if the GCC countries are sympathetic to them, this could lead to a softening of the EU’s stance on the remaining impediments to an FTA, such as those relating to protectionist lobbying.

In particular, the unipolar, American-led world order that emerged after the dissolution of the Soviet Union has run its course, with direct consequences for the EU and GCC’s appetites for multilateralism. The US’ economic and political supremacy has been undermined by the economic rise of several Asian countries, most notably China, and this—along with several disastrous foreign military interventions by the US—has contributed to the US rediscovering its affinity for an isolationist foreign policy.

Consequently, the EU’s persistent pursuit of a multilateral world order can no longer be dismissed as a quaint dream that is crushed by the might of American unilateralism; it now arguably offers the world its greatest chance of a peaceful transition through the current era of economic uncertainty. The US’ withdrawal from the Paris Agreement was a great disappointment to the EU, but it should also make the bloc redouble its efforts to strengthen global multilateralism.

The GCC countries have always been supporters of multilateralism and are therefore partners in the global struggle against those who favour anti-multilateralism. However, the GCC countries’ subscription to the EU’s model has been limited by the closeness of their security relationships with the US. Yet, the US has explicitly and implicitly conveyed to its primary strategic partners across the world—including the GCC—that its desire to intervene militarily has decreased substantially. The confidence in their de facto security guarantee that the liberation of Kuwait instilled in the GCC countries has been replaced by a realisation that they need to diversify their diplomatic partnerships, making the EU’s offer of a multilateral world order significantly more attractive.

Notably this development is not necessarily threatened by the intra-GCC split that is the Qatar crisis. Any negotiations between the GCC and EU are surely rendered more complicated by the existence of political disputes between the GCC countries, but there is still the hope that all sides can agree that strengthening ties with the EU is desirable—which is likely in light of the emerging security vacuum.

The coincidental decline in global oil prices that started in 2014 and restarted in 2020 should also contribute to the softening of the GCC’s negotiating stance. Knowledge transfer via foreign direct investments is a central pillar of the economic visions of all six GCC countries and securing a deeper economic relationship with the EU can play an important enabling role. Moreover, in the highly competitive domain of global merchandise markets and supply chains, the GCC’s single market—while sizeable—remains too small to permit the production scale required for GCC manufacturers to compete effectively in global markets. Access to the EU’s single market is a potentially critical step in the diversification of the GCC economy and the lower the price of oil, the higher the price that the GCC countries should be willing to pay to gain access to the lucrative European common market.

CONCLUSION

Trade negotiations with the EU are complex by design, as the EU uses them to pursue a wide range of strategic goals. This explains why it has FTAs with small economies such as Albania and Lebanon. From the GCC’s perspective, the EU’s holistic approach to FTAs is ultimately an advantage, as it offers the GCC additional ways of convincing the EU of the value of an FTA.

The adverse geopolitical developments of the last decade give the GCC countries an opportunity to explore this hypothetical advantage. Whereas the EU’s calls for environmental protection and the strengthening of multilateralism may have fallen on deaf ears globally during the era of post-Soviet/American supremacy and before the recent tangible evidence of rising global temperatures, today the EU’s message is much more compelling. In principle, the EU’s desire for partners should be stronger than ever, as should the prospective partners’ interest in the EU.

When the GCC unilaterally suspended FTA negotiations in 2008, the EU expressed its disappointment but affirmed its continuing openness to the resumption of negotiations.  The circumstances and calculi of all parties have changed considerably since 2008, and the EU recently signalled its interest in deepening its relationship with the GCC by establishing a regional mission in Kuwait. The two sides should strongly consider reopening negotiations at the conclusion of the Covid-19 pandemic, for the benefits of all parties including the entire international community.


Footnotes and References

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