Bahrain: Best Yet To Come

Zawya, United Arab Emirates

Bahrain: Best Yet To Come

8 August 2008

Oxford Business Group/Two years down the track, Bahrain’s free trade agreement (FTA) with the US has garnered mixed reviews, with some hailing it as an overwhelming success while others say it has yet to reach its full potential.

The FTA came into force on August 1, 2006, and was the first such agreement between a member state of the Gulf Co-operation Council (GCC) and the US. Under the agreement, all bilateral trade in consumer and industrial products became duty-free, with Bahrain lifting 98% of all tariff barriers on US agricultural exports as soon as the FTA was implemented, with the remainder to be phased out within 10 years.

The agreement required the US to provide immediate duty-free access for all of Bahrain’s current exports of consumer, industrial and agricultural products, along with a series of other measures. These included opening up its service, telecommunications and finance sectors to US investors and strengthening copyright, patent and anti-piracy regulations.

On the agreement’s second anniversary, Hassan Fakhro, Bahrain’s industry and commerce minister, hailed the FTA as a landmark for his country but said it was too early to be talking about results.

"The early signs are very encouraging, but I would expect a lot more two-way trade and investment over the coming years as the private sector impetus grows on the back of increased understanding of the opportunities on offer," he told local media on August 1.

While the FTA offered great opportunities, Fakhro said, businesses and investors have to be proactive and take advantage of its potential, though he acknowledged that larger scale enterprises with greater resources were better positioned to reap benefits from the deal.

"Small companies are at a disadvantage as they tend not to have the depth of knowledge, access to advice and expertise to understand what opportunities are on offer," he said.

According to the minister, the two greatest advantages stemming from the FTA to date have been the elevation of Bahrain’s profile in the US business community and the affect the agreement has had in terms of prompting the government to accelerate economic reform.

"In particular, we made enormous progress on the development of our intellectual property laws, which are a major source of interest for foreign investors and one of the principle foreign direct investment determinants," Fakhro added.

The US is also pleased with the progress made in the past two years, with Christopher Henzel, Washington’s deputy chief of mission in Manama, saying there was no limit to the positive effects that the FTA could have on the US trade relationship with Bahrain.

"The continuing rise in trade volumes is the early fruits of the agreement," Henzel said in a statement issued on July 30. "We are just starting to see long-term potential."

There is no question that benefits have accrued to Bahrain since the deal was struck, with bilateral trade with the US rising from $782.4m in 2005 to $1.1bn last year. This figure is set to climb even further this year, with trade between the two countries for the first five months of 2008 totalling $540m, according to data issued on July 30 by the US embassy.

Despite the increase in trade volume, there have been critics of the FTA. They point out that the balance is tipping in favour of the US. Last year, Bahrain recorded a surplus in its bilateral trade with the US of $91m, down from the $158m of 2006. In the first 12 months of the FTA, US exports to Bahrain increased by 28%, valued at $529m, while the kingdom’s exports fell to $638m, a drop of 10%, according to Jasim Husain, a member of Bahrain’s council of representatives finance and economic committee. He believes the first year results support the argument that developed countries have most to gain from such agreements.

At the time, the signing of the FTA was not received too warmly by some of Bahrain’s neighbours, who argued the deal undercut the GCC’s standing as a trade and political bloc. Saudi Arabia was particularly vocal in its opposition, with officials saying the deal threatened the future of GCC economic integration.

Two years on, these objections have faded away. Oman signed a similar agreement with the US, and the United Arab Emirates is in the process of negotiating its own FTA with Washington. The GCC is also involved in drawn-out talks with the EU on implementing a FTA between the two regional groupings.

Apart from directly improving trade ties with the US through the FTA, Bahrain has sought to use its agreement with Washington to promote itself as a gateway for regional investors eager to enter the US market.

On August 3, ahead of a visit to Turkey, Bahrain’s King Hamad bin Isa Al Khalifa, said Turkish investors, and those from other Gulf countries could benefit from the FTA by setting up operations in Bahrain and directing their exports to the US.

While Bahrain has yet to make the most of its FTA with Washington, Fakhro said it was now up to the private sector to grasp the opportunities it presented.

"The FTA is an agreement between governments, but it takes the private sector to turn the written agreement into positive trade and investment opportunity," he said.

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