Introduction

The aim of this paper is to estimate the potential impact of a free trade agreement (FTA) between the European Union (EU) and the Gulf Cooperation Council (GCC) on the EU's market access to the region. The EU-GCC FTA negotiations, which started in 1990, are among the EU's longest-running bilateral negotiations. Since the start of the negotiations, the mandate has changed several times. In 2002, the negotiations were re-launched with a more ambitious agenda, which includes trade in services and investment. Currently, trade relations are significant for both parties: the GCC is the fifth-largest export market for the EU, and the EU is the top trading partner for the GCC countries.

The current levels of tariffs on both sides are low. While all six members of the GCC benefit from tariff-free access to the EU market under the EU's Generalized System of Preferences (GSP), all GCC countries have a low tariff structure, in which tariff lines range between 0-5 percent. Despite low tariff barriers, the GCC's market access to the EU has been poor, but it is improving with increasing GSP utilization rates. Conversely, the EU has been enjoying increased market access in the Gulf region since the establishment of the GCC customs union in 2003. This paper is motivated by a general lack of interest in empirical literature on EU-GCC trade relations. So far only a few studies have examined the impact of an EU-GCC FTA (Baier and Bergstrand, 2004; PriceWaterhouseCoopers, 2003).

There are also other studies that include the GCC as part of a larger sample (Nugent, 2000; Peridy, 2005). The latter studies fail to find a significant relationship, as they do not adjust for the dominance of oil in GCC exports (Insel and Tekce, 2008). Hence, one of the contributions of this paper is to extend the debate on the potential impact of a EU-GCC FTA by concentrating on non-oil exports only. Another contribution of this paper is that we use a novel method to estimate the economic impact of this FTA. In the literature, it is common to use Computable General Equilibrium or partial equilibrium analysis to estimate the impact of an FTA. However, both of these methods have significant shortcomings. Instead of CGE or partial equilibrium models, which offer ex ante impact of a trade agreement, we use an ex post benchmarking exercise using the effects of an FTA.