EC-Arab Talks on Free Trade Cause `Chemical Reaction'

THE day may be nearing when Europe's doors are wide open to Arab petrochemicals, much to the chagrin of its domestic chemical producers. Talks begin May 15 in Brussels on establishment of a free trade pact between the European Community (EC) and the Gulf Cooperation Council. The GCC groups six Arab nations that border the Persian Gulf.

A broader Euro-Arab dialogue has been underway for some time, with the aim of enhancing political relations between the EC and the strategically important Arab countries that supply Europe with most of its oil. A recent example is the EC meeting with the Arab League in Paris in December. A meeting is planned for June in Fez, Morocco, between the EC and the Organization of Arab Petroleum Exporting Countries.

Prior to last month's first-ever EC-GCC foreign ministers meeting in Muscat, Oman, GCC secretary-general Abdullah Bishara said EC industrialists, particularly petrochemical manufacturers, have too much power over politicians and are blocking Gulf exports to Europe.

The issue of Arab petrochemical exports to Europe is a decade old. By 1980 many oil-producing nations had started to diversify their economies by building plants that Europe's mature industry regards as a threat. Today, one-third of Gulf petrochemical exports go to Europe. A free-trade pact could twist the valve wide open.

Chemical reaction

``We don't like it and we don't want a free trade pact,'' says Mike Coburn, secretary of the Brussels-based Association of Petrochemical Producers in Europe. APPE charges that a free-trade agreement would flood its domestic market with cheap Gulf-produced petrochemicals, which are the GCC's principal - and growing - value-added exports. APPE members account for a total of $200 billion in annual sales, $20 billion in annual foreign currency earnings, and 2 million jobs.

The EC has offered a compromise. Import tariffs of up to 13.5 percent on some petrochemicals would be removed after an eight- to 16-year transition period. The GCC wants open access to the market, however. EC officials have also pointed out that a free-trade pact promoting lower prices would be in the consumer's interest.

The APPE says it favors trade liberalization, but that it must be negotiated multilaterally under the General Agreement on Trade and Tariffs (GATT). Of the six GCC members - Saudi Arabia, Kuwait, United Arab Emirates, Bahrain, Qatar, and Oman - only Kuwait is a GATT member.

EC officials in Brussels say that in any case the GCC countries must first form a customs union among themselves before there could be any real progress in a trade agreement.

The principal GCC petrochemical producer is the Saudi Arabia Basic Industries Corporation (SABIC). The government-owned entity is the partner of foreign companies in several petrochemical projects. SABIC companies have started work on two 500,000 tons/year ethylene crackers at a time when the work market is facing a glut of this basic petrochemical.

Worldwide industry restructuring

SABIC officials point out that the Gulf region holds massive and cheaply available resources of feedstock (i.e. natural gas). They say that the world petrochemical industry could restructure so that the Gulf region would manufacture basic products such as ethylene, while the industrialized countries would diversify into specialty chemicals.

The availability of cheap Gulf feedstock makes companies such as SABIC an ideal joint venture partner for European companies, the company says. But the SABIC offer of joint ventures has got nowhere in Europe and is not even fully believed.

The Gulf petrochemical producers ``say they have cheap feedstock and then they say they charge it to themselves at international prices,'' says Mr. Coburn. ``It's very difficult to see what we gain from that.'' Oil industry executives point out that the Gulf oil producers charge their international marketing outlets at international prices.

SABIC has targeted West Germany as its main European market. West German foreign minister Hans Dieterich Genscher is said to favor of an EC-GCC trade pact. West Germany's BASF, the world's largest chemical company, does not. ``BASF totally supports the position of the APPE,'' said a company spokesman at its Ludwigshaven head office.

SABIC sees expansion into Eastern Europe as a medium-term prospect, although some initial contacts with Eastern European companies have been made. However, Eastern European companies have been approaching APPE to talk about prospective membership and closer European integration.