UAE-Japan to benefit from FTA

Emirates Business 24/7 | June 24, 2008

UAE-Japan to benefit from FTA

By Nadim Kawach

The UAE needs to offer concessions to Japan to sign a free trade agreement (FTA) and ensure that both countries would benefit from the deal, according to a prominent UAE think-tank centre.

The FTA should focus on bridging the gap in trade between the two sides and encourage Japan to pump more investment into the UAE to enable it to acquire technology, which is needed for its economic diversification programme, said the Emirates Centre for Strategic Studies and Research (ECSSR).

In a new book released this week, the Abu Dhabi-based think-tank highlighted the efforts by the UAE and its partners in the six-nation Gulf Co-operation Council (GCC) to sign FTAs with the United States and other countries to attract industrial capital and open up new markets for their petrochemicals and other products.

The targeted countries include the EU members, as well as the United States, China, India, Pakistan, Singapore, Malaysia, Australia, and Turkey.

"The proposed Japan-UAE FTA is expected to enhance bilateral trade in services in some sectors more than others. In the case of investment there are no deep economic links between the UAE and Japan in terms of foreign direct investment (FDI). Therefore, promoting joint investment is necessary," ECSSR said.

"If limited access concessions are bilaterally accorded to the services sectors, then one might doubt the extent to which the proposed FTA would be beneficial - except for trade in goods. In this case, Japan would be the one to gain more from the FTA given the present trade surplus that it has with the UAE. International experience shows that a FTA between a developed country (eg. Japan) and a developing/emerging country (eg. UAE) usually results in encouraging more exports from the former to the latter than vice-versa."

But the study proposed what it called mechanisms to lessen the likely gap between the expected benefits for both parties, such as duality of the liberalisation pace and incorporation of revisions or transition clauses.

It said signing a FTA between the UAE and Japan would result in economic benefits and costs for both parties, as is the case for FTAs in general.

"However, in order to decide whether to proceed with a FTA, gains must outweigh losses for the involved countries," it said.

"In general, the UAE must give Japan concessions similar to those proposed to other FTA countries [especially in sectors where Japan possesses a competitive advantage] in order to create competition and increase economic welfare, which would result in reaping maximum benefits."

The study did not elaborate on those concessions but Japan has sought more interests in the UAE’s massive oil sector to ensure stable crude supplies in the long term. Currently Japan has relatively small interests in the UAE hydrocarbon industry through its Japanese Oil Development Company (Jodco) and the Abu Dhabi Development Company (Adoc).

Japan is the world’s largest market for UAE crude oil, importing more than one million barrels per day from Abu Dhabi, almost 40 per cent of the emirate’s total crude exports. Japan’s Tokyo Electric Power Company is also the main buyer of liquefied natural gas from Abu Dhabi’s Adgas company.

Japan has suffered from a heavy deficit in its overall trade with the UAE but it enjoys a big surplus if crude oil and gas are excluded.

Despite its strong commercial relationship with the Emirates, Japan’s foreign direct investments in the UAE have remained relatively low, standing at around $1.09bn (Dh4bn) at the end of 2006.

In other regional states, Japan’s FDIs were estimated at around $2.038bn in Saudi Arabia and nearly $2.187bn in the Neutral Zone, an oil-rich border strip shared by the Kingdom and Kuwait. Investments stood at $419m in Qatar, $238m in Bahrain and only $21m in Oman.

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