Gulf oil producers and the European Union (EU) will hold a fresh round of negotiations in Bahrain next month amid optimism the two sides could finally sign a landmark free trade agreement (FTA).

In a study issued yesterday, the government-controlled Emirates Industrial Bank (EIB) said the foreign ministers of the six-nation Gulf Co-operation Council (GCC) and the EU would meet in the Bahraini capital Manama to resume talks on the FTA that has eluded them for more than 20 years.

It gave no precise date of the talks but said there are expectations the Europeans would drop their political demands that have blocked the deal despite scores of meetings between the two sides since mid-1980s.

"Nearly 20 years after tough negotiations on the free trade deal, trade relations between the two parties are not put to real test with the upcoming round of negotiations in Manama next month… it is expected that all non-economic demands by the EU would be overcome and abandoned," it said.

"In the absence of that deal, commercial exchange, mainly EU exports to the GCC, are facing serious challenges because of the sharp rise in the euro against the Gulf currencies, which have hurt the competitiveness of those exports in the Gulf markets… for this reason, finalising the FTA in Bahrain next month will constitute an historic development in the trade ties between the two sides."

The next meeting in Manama followed statements by the GCC countries that they are willing to resume negotiations with the EU after they decided to suspend them early this year in protest at EU political demands.

In previous remarks, the Riyadh-based GCC Secretariat blamed the Europeans for the failure to reach a free trade deal despite two decades of negotiations, saying the EU has presented unacceptable demands. The study said the GCC countries had sought an agreement to support their economic diversification programmes and bridge a widening deficit in their trade balance with the EU due to a steady rise in European exports to the region and customs barriers imposed by the EU on Gulf exports.

"One of the main obstacles that faced the FTA negotiations is that the EU has not been interested in tackling this massive trade imbalance with the GCC because it is shifting its interest to East Europe," the GCC said.

"Another key obstacle is that the Europeans are not focussed on the development of the GCC economies and their diversification programmes… this is illustrated in the limited EU investments in GCC productive sectors and their concentration in the oil sector because they need it. They also do not appear to be making any effort to facilitate the transfer of technology to the GCC countries and have been dealing with the region as a key consumer market."

Figures showed the EU has remained the GCC's largest economic partner, with their two-way trade peaking at nearly $132.5 billion (Dh486bn) in 2007 compared with more than $110bn in 2006 and $107bn in 2005.

But the surplus has been largely in favour of the EU due to a sharp growth in its exports to the Gulf and the fact that the GCC's exports to the European markets are confined to oil, gas, petrochemicals and aluminium.

According to the study, the trade surplus for the EU hit an all-time high of around $54.9bn in 2007 compared with only $17bn in 2006.

"The GCC countries have sought to remove all previous obstacles and met demands by the EU to set up a customs union before finalising the FTA… but it seems these efforts have not been sufficient for the EU, which has started to make political demands, which it has not include in its free trade talks with other countries. It should not be noted that the EU signed a free trade accord with South Korea last month only two years after they started negotiating," the EIB report said.

"The tough position by the EU governments has even angered their own private sector, which seeks to maintain the flow of EU exports to the Gulf. We hope the Europeans will realise the importance of the GCC markets to their products and sign the FTA next month. The deal will remove a five-per cent customs tax on their exports to the region and this will open up an enormous market for them given the fact that the GCC is already the fifth largest market for the United States."

GCC states – the UAE, Saudi Arabia, Bahrain, Kuwait, Qatar and Oman – hope an FTA deal with the EU would allow them to acquire technology through joint investments and support their ongoing diversification programmes. In return, they have pledged to open up their markets to EU products and ensure stable crude and gas supplies for Europe in the long run.

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