Prospects and Challenges of Free Trade Agreements
DOI: 10.1057/9781137479884.0001
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Prospects and Challenges of Free Trade Agreements: Unlocking Business Opportunities in Gulf Cooperation Council (GCC) Markets Doren Chadee Deakin University, Australia
Banjo Roxas Deakin University, Australia and
Tim Rogmans Zayed University, UAE
DOI: 10.1057/9781137479884.0001
© Doren Chadee, Banjo Roxas and Tim Rogmans 2015 Softcover reprint of the hardcover 1st edition 2015 978-1-137-47986-0 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2015 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–1–137–47988–4 PDF ISBN: 978-1-349-50257-8 A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. www.palgrave.com/pivot doi: 10.1057/9781137479884
Contents List of Figures
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List of Tables
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Preface
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Acknowledgements
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Countries of the Gulf Cooperation Council
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1 Background and Context of the Study 1.1 Background of study 1.2 Context of the study 1.3 Objectives and structure of the study
1 2 6 7
2 The Political Economy of Free Trade 2.1 The economics of free trade 2.2 Instruments of trade policy 2.3 Assessing the benefits of free trade: an economic framework 2.4 Effects of tariffs and quotas 2.4.1 Effects of an import tariff 2.4.2 Effects of an import quota 2.5 Recent trends in tariff barriers 2.6 Why do governments intervene in trade and investment? 2.7 An institutional perspective of FTAS 2.7.1 Institutions and FTAs 2.8 Summary and conclusion
9 10 13
3 GCC Market Scope and Competitiveness 3.1 GCC market profile
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17 19 20 22 24 28 29 30 32 34 35
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3.2 International competitiveness of GCC states 3.3 Most common problems encountered when doing business in GCC states 3.4 Ease of doing business in GCC states: institutional factors 3.5 Ease of doing business in GCC states: cultural considerations 3.6 Summary 4 GCC–Australian Trade and Investment Trends and Patterns 4.1 Australian–GCC merchandise trade 4.2 Australian merchandise exports to GCC 4.3 Australian merchandise imports from GCC 4.4 Composition of Australian merchandise trade with GCC 4.5 Trade in services 4.6 Australian–GCC investment patterns 4.7 Summary 5 Challenges and Opportunities for Australian Businesses in GCC 5.1 Identifying trade barriers: a framework 5.2 The business survey 5.3 Sample characteristics 5.3.1 Ownership and location 5.3.2 International business scope of sample firms 5.3.3 Australian business activities in the GCC region 5.3.4 Revenues derived from GCC markets 5.4 Main barriers faced by Australian businesses in GCC states 5.5 Awareness and support for the proposed Australia–GCC FTA 5.6 Assessing the potential impacts of an Australia–GCC FTA 5.7 Organisational capability and preparedness to take advantage of FTA 5.8 Australian business expansion and growth under FTA
40 44 45 49 53 55 56 57 58 59 61 65 66 68 69 70 71 73 74 75 76 77 80 82 83 85
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5.8.1
5.9
Proclivity to expand business in GCC following an FTA 85 5.8.2 Growth in export revenues and employment 88 Summary 91
6 Australia–GCC FTA: International Business Prospects and Limitations 6.1 Challenges facing the GCC 6.2 FTA as an internationalisation Strategy 6.3 Main challenges facing Australian businesses in GCC 6.4 Business expansion, revenue and employment effects 6.5 Emerging business opportunities in GCC: growth sectors 6.5.1 Travel and tourism 6.5.2 Industry, trade and logistics 6.5.3 Education and health 6.5.4 Construction and infrastructure 6.6 Unlocking business opportunities in growth sectors 6.6.1 Managerial recommendations 6.6.2 Policy recommendations 6.7 Doing business in GCC – some practical advice 6.8 The importance of developing strong institutional intelligence 6.9 Contributions of the study 6.10 Summary
93 94 95 97 100 102 103 104 105 106 107 107 109 110 112 118 120
Appendix: Additional Resources on Australia’s FTAs
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Bibliography
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Index
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List of Figures 2.1 Production possibility frontiers 11 2.2 Welfare effects of a price change on consumers and producers 19 2.3 Effects of import tariffs 21 2.4 Effects of an import quota 23 2.5 Average import tariff rates in 2012: Australia and GCC 25 3.1 Main pillars of international competitiveness 41 3.2 Main dimensions of cultural distance, Australia–GCC 51 4.1 Two-way trade between Australia and GCC, 2000–2012 57 4.2 Australia–GCC two-way trade by country, 2000–2012 57 5.1 Firm size: number of employees and annual revenues 72 5.2 International business scope and export revenue 75 5.3 Country-specific barriers faced by Australian businesses in GCC countries 81 6.1 A framework for developing institutional intelligence 113
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List of Tables 1.1 2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5.1
Australia’s top ten two-way trading partners 2011 Comparative advantage and the gains from trade Trade policy instruments Salient features of the population in GCC Selected economic indicators of GCC economies Energy reserves in GCC International competitiveness of GCC countries, 2013–2014 Main factors affecting the competitiveness of the GCC states Five most common problems encountered by businesses in GCC countries Ease of doing business in GCC countries and Australia, 2014 Australian merchandise exports to GCC countries, 2004–2012 Australian merchandise imports from GCC countries, 2004–2012 Composition of trade: Top 5 Australia-GCC trade categories Australian-GCC services trade, 2004–2012 GCC students enrolled in Australian educational institutions, 2004–2012 Value of Australian education exports to GCC countries Australian investments in GCC countries, 2004–2012 Industry composition of sample
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5 11 13 36 38 40 42 43 45 46 58 59 60 62 63 64 65 71
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List of Tables
5.2 Distribution of firms by number of employees and annual sales revenue 5.3 Ownership structure of sample firms 5.4 International business experience 5.5 Business activities of Australian firms in GCC countries 5.6 Number of years of doing business in the GCC region 5.7 Annual revenue from the GCC countries 5.8 Main barriers faced by Australian businesses in GCC countries 5.9 Five most common barriers faced by Australian businesses in GCC countries 5.10 Main sources of information and support for the proposed FTA 5.11 Potential impact of a successful Australia–GCC FTA 5.12 Likelihood of business expansion under an Australia–GCC FTA 5.13 Organisational capability of firms to do business in the GCC region 5.14 Variables and their corresponding measures 5.15 Results for proclivity for business expansion in GCC 5.16 Logistic regression results for revenue and employment change 6.1 Five most common problems encountered when doing business in GCC
72 73 74 76 76 77 78 79 82 83 83 84 86 87 90 99
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Preface A free trade agreement (FTA) is a legally binding agreement between two or more countries to liberalise trade and investment and bring about closer economic integration. A bilateral FTA achieves this by removing barriers to trade in goods, services and investment through preferential market access to its members. Bilateral and regional FTAs have grown in popularity since the formation of the World Trade Organisation (WTO) in 1995. For example, between 1996 and 2010, there were 179 bilateral and plurilateral FTAs in force compared to only 44 during the 1980–1995 period (WTO 2013). As of 2013 the WTO had been notified of more than 160 FTA negotiations in progress. The increasing popularity of bilateral and regional FTAs is due to the fact that they are easier and less time consuming to achieve compared to multilateral trade agreements under the WTO. This research assesses the effectiveness of FTA’s in unlocking international business opportunities for member states. The research starts with an overview of the political economy of FTAs by focusing on the instruments of trade policies most commonly used for restricting the free flow of goods, services and capital. The study highlights the potential economic benefits which are likely to arise from the elimination of tariff and quotas, two traditional instruments of trade policies. However, it is also noted that during the last two decades tariff and quotas have declined to negligible levels in most countries. By contrast, during the same period, countries around the world continue DOI: 10.1057/9781137479884.0004
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to use non-tariff barriers such as stringent health standards, customs procedures and overly complex administrative processes as weapons to inhibit the free flow of goods and services. Non-tariff barriers continue to persist even in countries which have FTAs in place. The research takes an institutional perspective in explaining the existence of non-tariff barriers and their debilitating effects due to the fact that they are difficult to monitor and eradicate. The second part of the research focuses on the proposed Australia– Gulf Cooperation Council (GCC) FTA to show that given that tariff and quotas are at negligible levels, it is important for FTAs to comprehensively address non-tariff barriers. Australia and the six member states of the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates [UAE]) have been negotiating a potential FTA between the two regions since 2007. In view of the likelihood of a successful FTA between the two regions, this study presents the findings of a large scale survey of exporters, importers and investors in relation to the most common constraints faced by Australian firms currently doing business with GCC countries and the potential benefits which are likely to arise from an Australia–GCC FTA. The key findings include the following: The GCC has signed FTAs with a number of countries, such as Singapore, Pakistan, New Zealand and India, among others. The GCC is also currently engaged in a number of bilateral FTA negotiations with Australia, European Union, Korea, Malaysia, China and Japan. Australia-GCC two-way merchandise trade (exports + imports) has grown steadily over the last decade, from less than A$ 6.7 billion in 2004 to more than A$10.1 billion in 2012. Australian merchandise exports to the GCC countries grew from A$ 4.2 billion in 2004 to A$5.4 billion in 2012. During the same period, Australian imports from the GCC grew from A$ 2.4 billion to A$4.7 billion in 2012. In recent years the GCC has accounted for 4% to 4.5% of Australia’s total merchandise exports and all of the GCC states were among Australia’s top 40 trade partners. Agricultural products (grains, meat, live animals and dairy) are among Australia’s top five exports to the GCC in recent years. Among the GCC states, Saudi Arabia and the UAE are the two most important export destinations for Australia. In 2012, the UAE
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accounted for approximately 38% of Australia’s exports to the GCC, while Saudi Arabia’s share was 32%. Australian imports from the GCC increased from A$ 2.8 billion in 2004 to A$4.8 billion in 2012, that is, at an average annual increase of approximately 10% over the last decade. Australian imports from the GCC countries comprise mostly of crude oil and petroleum products. The UAE is the single most important source of Australian imports from the GCC countries; accounting for a 64% share in 2012. Findings from the business survey suggest that a FTA between Australia and the GCC is likely to result in significant export revenue growth for Australian businesses, but the effects on Australian imports from the GCC and employment in Australia are likely to be negligible. The overall economic benefits of an FTA for Australian businesses remains limited because of a number of structural impediments in relation to Australian trade and investment in the GCC. Australian exports to the GCC are narrowly concentrated around a few categories and a few big players in commodity markets. Similarly services export is dominated by a single sector, education, and it is concentrated in a single market, Saudi Arabia. As such Australian exporters are highly vulnerable to the vagaries of government policy in the region; particularly in relation to the administration of non-tariff type barriers. Institutional barriers in the trade sector are significant in impeding trade and in doing business in the GCC. Some of the most common non-tariff barriers include bureaucratic rules and regulations in relation to the preparation of business documentations, the enforcement of contracts for payments, labelling standards and the lack of transparency in administrative processes in relation to government procurement rules, inspection and intellectual property protection. Increased competition from other countries with which the GCC already has preferential trade agreements were also identified as being problematic. Difficulties with the issuing of travel documentation, visas and work permits, particularly for females seeking to do business in some parts of the GCC, have also been highlighted as constituting major impediments. An Australia–GCC FTA should provide an institutional framework for both FTA partners to address non-tariff type barriers and
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smooth the conduct of business for both partners. The FTA can serve as an effective mechanism for resolving trade disputes and addressing institutional and structural constraints such as excessive red tape, approval of permits and work visas, honouring of contracts and payments and so on which are often difficult and time consuming to resolved at government-to-government level or within the WTO. The FTA can serve as a more efficient platform to address trade issues regularly as they arise in a speedy fashion. In order to benefit the most from an eventual FTA, Australian businesses should develop their institutional intelligence further. A general lack of understanding of the intricacies of the differences in the institutional environment in the GCC and the ability for businesses to spot business opportunities have so far held Australian businesses from taking advantage of business opportunities to a greater extent in the GCC. In order to unlock potential business opportunities in the GCC which may arise as a result of the FTA, it is critical for Australian business to strengthen their cultural and relational intelligence as well as their psychological and intellectual capability. By strengthening their institutional intelligence, Australian businesses can potentially gain first-mover advantage in the GCC states and help overcome the liability of foreignness at a time when the GCC is actively pursuing FTAs with a number of other countries and providing preferential treatment to businesses from those countries. In order for Australian businesses to capitalise on growth in the region and to be part of the more diversified GCC economy, it is important that the FTA is comprehensive and includes the harmonisation of a wider range of cross-border trade and investment related issues generally considered to be trade enablers, such as services, customs cooperation, intellectual property, foreign investment and finance. The overall benefits of an Australia–GCC FTA will depend on how comprehensively the FTA covers the treatment of non-tariff barriers affecting import, export and investment, the extent to which the FTA leads to institutional reforms which eradicate non-tariff barriers in the region and the extent to which Australian businesses are prepared to exploit business opportunities in the GCC in a post FTA era.
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Acknowledgements The completion of this book would not have been possible without the contribution of a number of people who donated their time generously to share their views and provide feedback. We gratefully acknowledge valuable input from the following people:
The participants in the survey conducted for the study who provided valuable information for the study. Ms Cynthia Dearin, past CEO, Australia Arab Chamber of Commerce and Industry Inc. for her valuable assistance with the survey for the study and for providing access to a number of its members. Mike Anderson, Deputy National Chairman and Chairman Victoria Chapter of the Australia Arab Chamber of Commerce and Industry Inc.; Nicole Andrews, Manager–Export and Investment, Middle East, of the State Department of Business and Innovation, Victoria; and Ashley Chaleyer of the State Department of Innovation, Industry and Regional Development, Victoria, for their valuable insights on Australian–GCC trade relations. Mr Meshaal Alshammary, Counsellor, Saudi Economic Association, Riyadh, Saudi Arabia for providing constructive comments and suggestions on an earlier draft of this research. The World Economic Forum (Switzerland) for permission to use data from various issues of the Global Competitiveness Report.
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We are also grateful for the financial support from the Council for Australian-Arab Relations and the Australian Department of Foreign Affairs and Trade towards the business survey. The views expressed in this report are those of the authors solely who assume full responsibility for any errors or omissions.
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Countries of the Gulf Cooperation Council
Source: Adapted from http://commons.wikimedia.org/wiki/File:MiddleEast.png (retrieved 18 September 2014)
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