On 31 May 2018, the world woke up to the news of the United States’ imposition of tariffs on steel and aluminium from the EU, Mexico and Canada in a move that dealt a major blow to free markets and signalled the beginning of a new era in global trade relations.
Few weeks ago, Washington announced additional duties of about $50bn on imports from China after splashing 25% tariffs on Chinese steel and 10% on aluminium imports earlier this year. This recent rise in protectionism, as history teaches us, has the potential to drastically alter trade routes, supply chains, relations and practices.
Free trade agreements
For decades, market liberalisation has dominated economic policy throughout the world. Free Trade Agreements (FTAs) between two, or more countries increase the flow of services and goods, bring about greater economic integration and ensure preferential access to key markets.
The GCC is currently signatory to just two FTAs – one with Singapore and another with the European Free Trade Area (EFTA), comprising Iceland, Lichtenstein, Norway and Switzerland. With a small but growing internal market, the region is still highly dependent on exports. According to GPCA figures, in 2017, the GCC exported around 80% of its chemicals and petrochemicals worth $52bn. Thus, having free access to global markets is a lifeline for the regional industry.
The GCC chemical industry
As the voice of the chemical industry in the Arabian Gulf, GPCA has consistently advocated for free trade with global economic blocks. The benefit of a GCC FTA covering trade in chemicals with key trading partners would not be reaped by the chemical industry alone but would, in fact, be shared widely. The removal of trade barriers, both tariff and non-tariff, and establishing free trade agreements with key export markets would also be an important enabler for future export-led growth.
China is the largest export market for the GCC chemicals, accounting for 23% of all exports, while Europe is the second largest export market. With recent moves by the US to impose import duties on the EU and China, this is an opportune time for the GCC leaders to establish free market alliances and negotiate mutually favourable terms with those countries. The EU also stands to benefit significantly by reaching favourable trade agreement with the region as this would not only result in closer economic ties but also afford the EU consumers’ access to more competitively priced products.
While the GCC is still in negotiation phase to establish FTAs with its top trading partners, chemical producers are required to pay a minimum import duty of 5.5%. This represents a significant loss in revenue that could otherwise be invested in projects and human capital development.
An FTA with the EU was first tabled in 1990 but after exhaustive and unproductive rounds of negotiations, the GCC pulled out, unilaterally, in 2008. In recent years, the GCC chemical producers have focused on the emerging markets in Asia, but as these countries seek to gain more self-sufficiency in the long run, especially China and India, the GCC producers may lose important market share.
Impact of a global trade war
Nobody wins from closed market policies. On the contrary, more often than not countries will find themselves on the losing side. According to the UN, in the event of a global trade war, tariffs applied on the developing countries’ could rise to a staggering 37%. If we take such worst case scenario, by 2023, the GCC chemical industry would accrue a combined loss of $9.6bn from exports to the US, China and the EU.
To put things in perspective, this represents around 23% of export revenue from these markets, and 8% of the GCC chemical industry’s total export revenue. This would be a significant loss for the GCC producers, and have a knock-on impact on the economy as a whole.
Since its inception in 2006, GPCA has advocated for open market policies as we believe that market liberalisation helps individual producers from the Arabian Gulf to gain access to key markets, and the wider industry to earn greater returns. As a result of our relentless efforts over the years, total business interest upheld in the region has exceeded $210mn, and we continue to call on regional regulators to develop policies that ensure the regional industry’s interests are protected and upheld.
No to protectionism
As the famous quote goes by Benjamin Franklin, “No nation was ever ruined by trade”. If we look at virtually everything that surrounds us, from our electronic gadgets, to our homes, roads and cars, tens of thousands of materials go into the production of items that make our lives more comfortable and enable us to do our jobs easier and faster. These materials are sourced from destinations across the globe ensuring higher quality, lower cost and affordability for the consumer. The truth is, none of this would have been possible without trade between nations.
If protectionism becomes the norm, we all lose as duties will be passed on the consumer. As some of the most powerful nations remain embroiled in lingering trade tensions that threaten to derail growth for global and domestic economies, today, more than ever, the world is looking towards its leaders for wisdom and guidance.