Removing the GCC from the EU’s Generalised System of Preferences (GSP) list, a list of developing economies that are levied lower export taxes in order to promote their economic growth, may not have the impact that was originally feared.
On 1 January 2014, Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates, and Oman were removed from the EU’s GSP-list which was designed to help developing countries by making it easier for them to export to EU markets.
In the short-term, the move appears to be a step away from reaching a free trade agreement between the two regions, and damaging to the GCC’s refiners who rely on continued access to European markets.
“The EU decision to increase duties on certain imports of chemicals […] is surprising as the global trend is towards a reduction of tariffs,” said Dr. Abdulwahab Al-Sadoun, secretary general of the GPCA, the region’s largest trade council.
Europe is the GCC’s second largest export destination, accounting for 12.9% of the region’s total chemicals exports in 2012, approximately 7.8 million tons, valued at $8.4 billion, according to the Gulf Petrochemicals and Chemicals Association’s (GPCA) 2012 Facts & Figures report.
That year, the European Union member states imported about 70% of the GCC chemicals exports bound to Western, Central and Eastern Europe.
“The EU decision to end GSP benefits for imports from GCC states is a protectionist measure that will not even benefit the European industry. The resulting increase in costs for the GCC’s customers will further affect their competitiveness, both locally and on export markets,” warned Dr. Al-Sadoun.
But for the EU, the removal of the GCC from the GSP list is actually quite the opposite from protectionist. Instead, the move shows that the GCC countries are now actually better positioned to become members in a free trade agreement.
“The EU decision to take Oman off the list of developing countries is, in effect, an acknowledgement of the Sultanate’s huge economic progress,” said EU Ambassador Adam Kulach to Omani industry representatives in Muscat.
According to the EU’s trade department, the GCC countries were lifted from the scheme because they have been classified as high income economies by the World Bank. Qatar, for example, has a per-capita income which is higher than all EU member states. So the region will now face normal customs duties that will apply to all products from GCC countries.
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“The best solution for Omani exporters would be the conclusion of the EU-GCC Free Trade Agreement,” said Kulach. “Through such an agreement, Omani businesses could benefit from even lower EU duties than those applied during the last 40 years. That would further facilitate Oman’s exports, give the development of the economy an additional boost and create many jobs for young Omanis.”
At the same time, it is highly unlikely that GCC refiners are going to suffer too much from the increased taxes in the first place. For example, European markets continue to lead the world in terms of low sulphur content requirements in transport fuels and environmental regulations.
“But Europe doesn’t have refineries to meet its diesel demand and its stringent fuel environmental quality standards,” says Saji Sam, principal at A.T. Kearney Middle East’s global energy practice.
“The GCC and other new refineries are configured for higher middle distillate yields and comply with these standards; they have less than 10 ppm of sulphur in their product,” he said. Clearly there are some very strong competitive advantages for the GCC’s refiners.
Most important of these are of course: the access to cheap feedstock; geographic proximity to European markets; and world-class refineries that are expected to come online in the next few years.
So it is very likely that even when faced with higher taxes, European demand is here to stay. At least until other regions are able to match the GCC’s competitive prices or Europe sees a new wave of refinery upgrades. That being said, the WTO’s recent signing of the Bali Agreement, is likely to offset the immediate impact of the EU’s latest move for the GCC.
The WTO’s first comprehensive agreement in 18 years, aims to simplify the procedures for trading across border.
“The deal will usher in a new era of faster, cheaper exporting, by simplifying, modernising and harmonising trade procedures and customs requirements,” said the European Chemical Industry Council in a statement.
It is expected to lower the cost of trade by 10-15%, adding $1 trillion to global output, according to the International Chamber of Commerce. So even if local producers do face higher taxes in Europe, then at least it can count on having easier access to East Asian markets.
“Much of the demand growth in recent years has been driven by China. Since 2009, the lending stimulus has helped to drive demand, which has absorbed much of the new capacity coming on line,” says Andy Gibbins, VP MENA at Euro Petroleum Consultants.
For the GCC’s producers, this latest development from the WTO will likely offset the region’s removal from the EU’s GSP list.
“Trade facilitation will certainly help to reduce the amount of red tape, bureaucracy and frustration for business,” said Gibbins. “The GCC states are excluded [from the EU’s GSP list] because they are categorised as high income countries.”
Ultimately. this may benefit European petrochemical producers who have suffered in recent
years, at the expense of those in the GCC, but in the longer term, the effect should be counteracted by the outcomes of Bali and free trade discussions, which are likely to be accelerated now.
Factbox:
– 12.9% Europe accounts for this much of the GCC’s total chemicals exports.
– 7.8 mln Europe imported this many tons of chemicals from the GCC in 2012.
– 15% The Bali free trade agreement could decrease trade costs by this much.
