Regional integration

Regional integration and cooperation foster trade flows, growth, and development among participating countries. Such integration provides other benefits, including dynamic features, ranging from open borders to the free exchange of ideas that would mature over the long-term and benefit all (Frankel 1997). In 1981, members of the Gulf Cooperation Council (GCC), Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE), concluded that forming a regional bloc would help each of them reach various collective goals in promoting security, growth, diversification, and overall economic development through integration (GCC 2009).

This desired integration was successfully articulated through the GCC. The most important, founding instruments of the GCC were its charter, signed in May, 1981, and the Unified Economic Agreement (UEA), ratified in November, 1982. The two documents spelled out the type of integration and cooperation desired by GCC founders (Sassanpour 1996). Trade in GCC The founders of the GCC included trade-related aspects in its main objectives as stated in its Charter and explained in detail in the Unified Economic Agreement.

The UEA consists of seven chapters and 28 articles covering almost all aspects of integration. The trade-related articles of the UEA are covered in the first seven articles of the agreement. Articles 1-7 covered all trade-related aspects of integration starting with the establishment of an FTA and going on to the establishment of a customs union with a Common External Tariff (CET) to the coordination of policies vis-a-vis foreign entities (GCC 2009). However, more than 20 years after the signing of the UEA, there has been little progress in increasing intra-GCC trade.

Due to this slow progress between 1982 and 2001 the share of intra-GCC trade merely increased by 2%. Consequently, GCC has the lowest intraregional trade share among other regional blocs. Therefore, when it comes to the evaluation of GCC trade, there are many who cast doubts on the benefits of integration and claim that this slow growth in intraregional trade could have happened without the integration, given that GCC members are natural trading partners and close neighbors (Badr 2007).

There should be some consideration of the economic structures of the GCC when evaluating the above arguments. Therefore, the dominance of oil as a single commodity and as the main source of income made these countries more inclined to trade with outsiders than among themselves. Trade theory suggests that factor endowments influence production and trade, in trade literature this is proved by the Ricardian theory of “comparative advantage” and by the Heckscher-Ohlin model.

However, it seems that the GCC countries are not following the law of comparative advantage which states that “in a world of competitive markets, trade will occur and will be beneficial whenever there are international differences in relative costs of production” (Kenen 2000, pg20). Patterns of GCC Trade Looking at simple trade statistics, total intra-GCC trade increased from below 5 billion US dollars in the year 1977 to more than 17. 6 billion dollars by the year 2001 (IMF Direction of Trade Statistics 2009).

However, the rise in the monetary value of intraregional trade cannot be entirely attributed to the trade integration of the GCC region since the share of intraregional trade to overall total GCC trade stayed below seven percent in 2001. There are many factors affecting the growth of trade of any country, among those is its overall economic growth. So as the GCC economies grew over the years, their trade with others grew as well. GCC total exports increased from below 70 billion US dollars in 1977 to more than 161 billion dollars in 2001 (IMF DOTS 2009).

This big growth of total exports was not a steady growth for the period under study due to the fluctuation of oil prices which can cause wide fluctuations in these nations’ balance of trade. However, the fluctuation of oil prices tends to have less effect on the intra-GCC trade due to the fact that intraregional trade, with the exception of Saudi Arabia which exports crude oil to Bahrain, does not include oil (Badr 2007). The composition of intra-GCC trade in terms of commodities traded is very similar due to the similarities in the structure of production.

Beside re-exports, which are distributed through different GCC members but in particular through the UAE, GCC members trade mainly in, locally processed foodstuffs and beverages, live animals and some seasonal agricultural products, fisheries products (mainly from Oman), dairy and poultry products (mainly from Saudi Arabia and UAE), basic manufacturing, petrochemicals as an input for basic plastic and other industries (the bulk of this comes from Saudi Arabia), building materials, cement, and processed aluminum as an input for related industries (originated from Bahrain).

During the 1980s, like most developing countries, “import substitution” was the focus of GCC governments’ industrial policies. These policies produced some surpluses in these basic industries which tend to be circulated among other neighbors/partners (Badr 2007).