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Analysis
Lowering barriers to UK-GCC trade

Lowering barriers to UK-GCC trade

Bilateral deals between UK and Gulf states may arise

by Bhavin Patel in London

Thu 19 Apr 2018

The potential cost to the UK's economic performance and influence from leaving the European Union has made Britain's relations with Gulf countries more important. Prospects for a free trade agreement, a rise in defence spending in Gulf Co-operation Council states and reaffirmed bilateral ties with many GCC countries all underscore the UK's renewed interest in the region.

The UK's total trade volume with the GCC in 2016 was $44.5bn, a marked jump from the $19.1bn in 2010 and $13.2bn in 2005. Improving diversity of industry in the GCC is likely to strengthen further these trade opportunities for the UK.

Machinery and mechanical appliances, as well as aerospace products, dominate UK exports to the GCC. Only 32% of GCC imports from the UK are in services, largely dominated by the health and education sectors. In the longer term, the burgeoning consumer market in the region will provide worthwhile investment opportunities. The GCC has a young and growing population with high income per capita.

However, enhancing trade will require the GCC to lower the barriers that British firms face. The UK-GCC joint working group on trade, which held its inaugural meeting in October 2017, intends to address these restrictions. However, since its inception, no explicit trade strategy has been discussed. This is because the group is bound by the UK-EU common commercial policy, meaning the parties are unable to action any deals until Britain formally leaves the union, though they continue to develop strategies to enhance UK firms' access to GCC markets.

Despite the removal of some larger barriers to entry, the group argues that the plethora of byzantine barriers are of greater concern for British firms. These include a lack of clarity and transparency in the legal environment in Gulf states, GCC-wide labelling requirements and stipulations that a segment of the workforce comes from the local population. There is the risk, too, of not receiving payments, as there is no explicit framework in place that protects against delayed payment or non-payment of contracts.

The GCC made 103 reforms – one-third of all reforms made in the Middle East and North Africa, according to research from the World Bank – between 2016-17 in an effort to improve the business environment in the region. Saudi Arabia has been the most active, implementing a significant reform plan to improve the ease of doing business in the country, with the underlying principle of involving the private sector in its decision-making. Last month's Saudi delegation to the UK included the Saudi Arabian General Investment Authority, whose representatives led educational briefings and discussions with British firms affected by these reforms.

Under the terms of the Brexit negotiations, the UK has the opportunity to establish new free trade agreements with countries not presently involved in any with the EU. Moreover, the UK's trade links to the Gulf are not subject to any current agreement between the GCC and the EU and will not lapse when Britain leaves the union.

The GCC tends to negotiate collectively, as it did when finalising agreements with Singapore in 2008 and the European Free Trade Association – namely Iceland, Liechtenstein, Norway and Switzerland – in 2009. The UK would probably have to follow the same path. However, establishing any such multilateral agreement may prove problematic, given the collapse of diplomatic relations between Qatar and other Middle Eastern and North African countries last year. This began in June 2017, following allegations that Qatar was financing terrorist activities.

The case for the conclusion of a free trade agreement is strong, and may encourage the UK and individual GCC states to pursue bilateral agreements if the political troubles with Qatar are unresolved.

Such agreements are expected to reduce tariffs and duties, extend existing trade frameworks, and lead to more intensive economic engagement between the UK and the Gulf.

Bhavin Patel is Economist at OMFIF. This article first appeared in the April Bulletin.

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