Bridging Regions? EU-GCC Relations on Trade and Infrastructure

• CommentaryGeoeconomics · Middle East and North Africa
  by Katarzyna W. Sidło

Talks on a Free Trade Agreement (FTA) between the European Union (EU) and Gulf Cooperation Council (GCC), which unites Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman and Bahrain, have been ongoing since 1990, beginning soon after the signing of an EU-GCC cooperation agreement that still today governs cooperation on political and economic matters between the two blocks. The talks were subsequently put on hold to allow GCC states to implement their own customs union, which was accomplished in 2003. One year later, the EU released the results of a Sustainable Impact Assessment (SIA) of the prospective FTA and commenced work on a draft text for the agreement, which was shared among Member States in late 2007. It appeared that the two blocks were close to signing the FTA in 2008, but what happened instead was the suspension of negotiations.

Even in the absence of the FTA, trade between the EU and the GCC has remained robust, although the landscape has changed since the late 2000s. Notably, with trade exchange worth EUR 170 mln as of 2023, the EU is a key trade partner for the GCC but no longer the most important one, as it has been overtaken by China (accounting for 11.1% and 15.9% of all GCC trade, respectively). Moreover, these days, Asian countries are the most important clients for the Gulf, purchasing the majority (over 70%) of oil and gas produced in the GCC. At the same time, for the EU, fuels and mining products remain the key imports from the Gulf (82.3% in 2023), with exports being more diverse: food amounts to 10.5%, machinery and transport equipment 41.4%, and chemicals 16.3% of EU exports to the GCC. In other words, nearly 100% (99.6% to be precise) of EU imports are industrial products while exports are more diverse, agricultural products (AMA/NAMA Product Groups) accounting for 10.9%.

This focus on energy imports from the GCC meant that strengthening the relationship became ever more important for the EU following Russia's invasion of Ukraine in February 2022, as the EU felt a new sense of urgency to diversify its energy imports. (In 2022, 21% of the EU's oil and petroleum, and 23% of its natural gas was sourced from Russia.) As such, the publication of the Joint Communication on Strategic Partnership with the Gulf in May that year could not have been timelier (though it is important to stress that the document was in the making long before Russia's attack and was not its direct outcome). Disappointingly, though, the document is even more vague than texts of this kind released by the EC typically are. Indeed, the action point on strengthening trade and investment cooperation amounts only to "exploring possibilities of reaching a common understanding on possible negotiations for a trade agreement, which would address issues of mutual interest, including an enhanced trade and investment environment".

The obstacles that prevented the EU and the GCC from signing an FTA back in 2008 are still in place: the GCC partners have been reportedly annoyed about the EU's lack of flexibility when it comes to the inclusion of clauses on human rights, while the EU has been dissatisfied with the GCC's insistence on maintaining the right to impose export tariffs (i.e. tariffs or duties imposed on goods of strategic importance levied on domestic producers wishing to sell the said goods abroad).

Given the lack of progress in negotiations, the UAE has apparently signalled it is open to signing an individual trade agreement with the EU. Arguably, this may be a way forward.

A similar solution was, in fact, implemented by the EU when trade negotiations with another block, the Association of Southeast Asian Nations (ASEAN), were halted in 2009 after only two years of talks. The EU commenced bilateral negotiations with several members of the ASEAN group, and two FTAs, with Singapore and Vietnam, have already entered into force. At the same time, the EU continues to stress that a region-to-region FTA remains the "ultimate ambition". Another valuable example is the approach adopted by New Zealand and Australia, who also hope to sign a trade agreement with the GCC, but have just (in September 2024) concluded negotiations for a Comprehensive Economic Partnership Agreement (CEPA) with the UAE. On the UAE's side, this is part of a broader strategy of signing individual agreements with strategically selected partners; thus far, CEPAs have been signed with India, Israel, Indonesia, Türkiye, Cambodia, and Georgia (in order of completion).

Concluding a CEPA with the UAE could pave the way for the EU to find an alternative solution to coordinate its economic relationship with the GCC; an investment-focused agreement could suit the needs of both blocks. In fact, it might be argued that given the characteristics of EU-GCC trade, there is little to gain from an FTA. Focusing on improving market access for investment would instead benefit both regions, given the shared interests in transitioning towards sustainable energy. Indeed, while the investment dynamics have been improving (between 2018 and 2020 the EU27's inward stock from the GCC increased from EUR 87 billion to EUR 185 billion while outward stock to the GCC went up from EUR 77 billion to EUR 177 billion [80% of which was to the UAE]), there is still room for improvement and much to be gained by both sides in this area.