Economics International Trade Term Paper

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International Trade Between Bahrain and Saudi Arabia

This is a paper on Trade between Bahrain and Saudi Arabia, focusing on how it affects their international trade relations with special attention to OPEC, GCC and the Qatar dispute. It uses 22 sources in MLA format.

Both Saudi Arabia and Bahrain are members of the Gulf Cooperation Council along with Qatar, UAE, Kuwait and Oman. Under the GCC Agreement, preferential tariffs apply among the member states. Since independence in 1971, Bahrain has essentially pursued a liberal trade and investment policy, and has integrated its economy closely with those of other countries in the region, through the Unified Economic Agreement of the Gulf Cooperation Council (GCC).

Trade and economic growth in Bahrain is strongly affected by variations in international energy prices. Real GDP growth, as a result, was slower during the 1990s compared with the previous decade, averaging around 3.6% annually since 1994.

Bahrain: General Policy Framework

Although the Government of Bahrain has controlling interests in many of the island's major industrial establishments, its overall approach to economic policy can best be described as laissez faire. Except for a few basic foodstuffs, the price of goods in Bahrain is determined by market forces, and the import and distribution of foreign commodities and manufactured products is carried out by the private sector. Owing to its historical position as a regional trading center, Bahrain has a well-developed and highly competitive mercantile sector in which products from the entire world are represented. Import duties are primarily a revenue device for the government and are assessed at a ten-percent rate on most products. (U.S. Department Of State, 1994)

Over the last two decades, the Government of Bahrain has encouraged economic diversification by investing in such basic industries as aluminum smelting, petrochemicals and ship repair; and by creating a regulatory framework that has fostered the development of Bahrain as a regional financial and commercial center. Despite this, the oil and gas revenues are still very important. In 1994, they constituted over 60% of governmental revenues and about 80% of the island's exports. (U.S. Department Of State, 1994) Petroleum's share in GDP has been declining, however, and stands at present at about 14% of GDP and 64% of merchandise exports.

As a member of the Gulf Cooperation Council (GCC), Bahrain is striving to achieve greater economic integration among its member states. In addition to accepting imports from other GCC states duty-free, Bahrain has adopted GCC food product labeling and automobile standards. In recent years, the GCC has negotiated a trade agreement with the [European Community European Report, 04-25-2001].

Because Bahrain imports most manufactured products it needs, prices are basically dependent upon the source of supply and shipping and handling costs. The opening up of the causeway between Bahrain and the Saudi mainland in 1985 has resulted in a fall in prices to the levels prevailing in other GCC countries and an increase in tourist traffic.

Trade among states increases as they industrialize. And their patterns of production become more specialized and more diversified. The region has been slow to industrialize and therefore, between 1990 and 1997, while world exports grew by an annual average rate of 6.8%, Middle East exports as a whole increased by only 2.9%, largely because of declining oil prices. (Rivlin, P., 2000) Efforts are underway within the GCC to enlarge the scope of cooperation in industrial investment coordination as well. Prominent among new industry initiatives in Bahrain are aluminum smelting and the manufacture of paper products, clothing, and consumer goods. Agriculture also is important in the irrigated northern coast of Bahrain Island where dates, fruits, and vegetables are grown. A modern harbor at Mina' Salman near Manama has strengthened the position of Bahrain as a transshipment port of the southern part of the Persian Gulf for transit trade.

Bahrain's trade liberalization has a strong regional focus. The tariff was amended recently in the context of the GCC's Unified Economic Agreement that seeks to complete a customs union by 2005. On 1 January 2000, customs duties were removed on essential goods and fruit, previously imposed at rates of 5% and 7%, respectively. Members of the GCC have also signed an agreement with 12 other countries in the region in 1997 to form the Greater Arab Free-trade area (GAFTA), to be completed by 2008. Aimed at reducing tariffs on products included in the agreement, it seeks to reduce tariff by 10% per year until end 2007.

Most of Bahrain's petroleum (almost 79%) comes from the offshore Abu Saafa oilfield in Saudi Arabia, which it has a right to share on a fifty basis, but since 996, Saudi Arabia has allowed it to obtain 100% of the production from this field.

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This crude is exported, and a significant amount of petroleum is imported by Bahrain, mainly from Saudi Arabia, and refined locally in Bahrain before being exported abroad. In 1998, petroleum and mining accounted for around 14% of GDP. (WTO Report, http://www.wto.org / english/tratop_e/tpr_e/tp139_e.htm). Despite this Saudi Arabia is not expected to depend on the quota compliance. Instead, Saudi Arabia is very keen on the Abu Saafa field issue. Discovered in 1963, the maritime border between Bahrain and Saudi Arabia formed the basis for bilateral trade of the two countries through the 1972 treaty which made Saudi Aramco the operator and provider for an equal division of revenue. However, in 1992, the treaty changed its clause to give Bahrain more revenue including 100 million bpd of the 145 bpd of produced oil from Abu Saafa. The main concern here was that how Abu Saafa could be developed into a regionally strategic point for oil extraction. In 1996, the treaty was amended yet in favor of Bahrain still further allowing its National Oil Company to have all output access of oil production. This bilateral relation has been seen to have a great impact on Bahrain's international trade scenario. With this treaty Abu Saafa has become the domain of Bahrain and Saudi Arabia became a bystander in the production of oil for OPEC.

While Bahrain is committed to the WTO, its special trade and investment ties with other member countries of the Gulf Cooperation Council allow the investors from these countries preferential investment access in Bahrain, besides customs duties exemptions. Equity ownership of up to 100% in certain sectors [compared with 49% for other foreign investors], is permitted to the GCC nationals.

However, in keeping with its policy of actively promoting foreign investment, it has promulgated regulations permitting 100% foreign ownership of new industrial Establishments and the establishment of representative offices or branches of foreign companies without local sponsors. Most other commercial investments are subject to government approval and generally must be made in partnership with a Bahraini national controlling 51% of the equity.

The ownership of land however is allowed only to nationals of Kuwait, Saudi Arabia and the U.A.E.

Export Subsidies Policies of Bahrain

The Government of Bahrain provides indirect export subsidies in the form of preferential rates for electricity, water and natural gas to selected industrial establishments. The duty-free importation of raw material inputs for incorporation into products for export and the duty-free import of equipment and machinery for newly established export industries are also permitted by the government. Bahrain is not a signatory to the GATT nor is it a signatory to any major intellectual property convention, and its new copyright law, adopted in 1993, excludes from protection nearly all foreign works which are first introduced outside Bahrain. Patents and trademarks are, however, protected by Bahraini law, though the sale of unauthorized cheap video and audio tapes and computer software is widespread.

Liberal trade and investment policies have helped Bahrain to maintain stable economic growth since the 1980s and allowed some diversification into non-energy related economic activities. Continued dependence on petroleum for resources, however, resulted in a slowdown, particularly during 1994-1999 as a result of lower energy prices. Lower oil income had resulted in lower public revenue, since it is derived mainly from taxes on petroleum, gas and derivative products. (Press/TPRB/139, 13 October 2000) Bahrain has accelerated implementation of economic reforms aimed at further diversifying the economy and raising economic growth. The liberalization programme has to some extent helped address the problem of private investment. However, foreign investment has been sluggish, especially in the key sectors. A WTO report on the trade policies and practices of Bahrain. Served as the basis for the trade policy review of Bahrain in October in the Trade Policy Review Body of the WTO. Higher oil prices in 2000 led to 4.5% economic growth. Also responsible for this development was the demarcation of maritime borders with Qatar that provided much need relief. Bahrain and Qatar on the other hand have long been engaged in territorial dispute. The main argument lies in the fact that Bahrain accused Qatar may exploit the fact that Qatar have always been in favor of the Middle East summit. But Qatar's and Bahrain's border have been among issues of dispute due to the historical background and segregation….....

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