We all know the story about how we pissed off that big brother of ours, just to keep a stronger, more glitzy, more enticing friend happy. Now brothers get into fights, particularly one when brother perceives the other to have sold out just for money. It is even more painful, when the big brother realizes his younger one might overtake him in terms of prestige and opportunities. So Bahrain decided to sign a Free Trade Agreement with the US. Saudi Arabia sulked, considering this a breach of GCC agreements, and warned that it might impose tariffs on Bahraini goods. Bahrain retorts back that it is not a breach, and that other countries such as Qatar are getting ready to sign anyway.

Is this good or bad? I say it's bad, very bad. Who's right or wrong? Well, I say both are wrong (ever the non-cynic I am).

Why is it bad? Well it's bad on two fronts: Bad for Bahrain, but more importantly, it's even worse for the GCC as a whole.



First, to our dear homeland Bahrain. So far we have only heard the constant positive spin about how great this agreement will be for Bahraini trade and consumers. Our trade with the United States will boom. Our industries will benefit from lower taxes the U.S. will impose on them, which in turn will increase our demand and sales. Similarly, goods from the United States will flow the other way, and with no taxes on them this will be reflected in lower prices for consumers in Bahrain. Also, we will get in the good books of the mightiest (and only) military and economic superpower in the world. Look how lucky we are to be one of the few chosen ones so far to be included in this world trade agreement. Right? WRONG.

Let's decompose these arguments one by one. First, to our goods having lower prices in the United States, thus demand being increased. I don't think anyone can really argue against that one, but one has to think about how much we are going to benefit from this. i.e. How much goods do we export to the states that would benefit from these taxes? Well, not that much. Let's admit it, we are no manufacturing economy. We do not have that many locally produced products that are going to benefit from these tax breaks. The example that people keep bringing on and on again is our clothes industry. Aha. And how much exactly does that count for our GDP? How many productive Bahrainis (and those that are employed just to fill the Bahranization quota but are completely unproductive do not count) are employed in this sector? Not that many.

How about our other sectors? The oil industry? You bet your tight wallet that the U.S. is not going to reduce its 100%+ tax on fuel any time soon, especially just for the sake of a globally economically insignificant country like Bahrain. Aluminium maybe? Well, I have another rant coming on about the disgraceful inefficiency and corruption that resides in Alba, but let's leave that aside for the moment. Other than that, Aluminium is not a commodity whose demand fluctuates all over the place, so that tiny tax reduction is not going to affect our demand that much. Our sales will probably stay the same.

Also, we have to take into account that the U.S. accounts for only 3.5% of our exports (2003). Let us be very generous and say our exports with the United States will grow by 10, in fact 20%. Our overall increase in exports will be 0.035 multiplied by 0.2. I'll let you do the Maths. Anyhow, the benefits to our exports from the world trade agreement are going to be most probably (minutely) positive, so it's not the main problem.

How about us lifting taxes and tariffs from American goods? Isn't that going to lower our prices significantly, reflecting well on the consumers? First let us point out that, unlike our exports, the United States constitutes a big share of our imports (11.4% to be exact, the second largest import partner). To answer the above question: Yes, theoretically the deal would lead to lower prices. However, one has to ask by how much? Bahrain's taxes on imports are set at a whopping and ridiculously high 5% (as are all other gulf countries). Thank god that 5% price ceiling will be lowered.

Again, to the thick headed, I am being sarcastic here. If you really want to lower prices, I have a more effective and closer to home, sure-winning advice: break up those goddamn monopolies we have at home. Go to those five big hamours (fish) on the island who own every single goddamn agency for every single product on the island, and tell them, "oi, that's wrong." It is pretty ridiculous for a handful of people to own everything on the Island, to reap 30% or higher profit margins in a supposedly free market, making billions of dollars of profit on a country as small as ours. You want to lower prices? Set up a proper anti-monopoly agency to monitor how fat these guys' wallets are. There's one useful thing we can learn from the U.S.

Added to this, I'm also a bit worried about the revenue the state is losing out. Remember, the U.S. is our second largest import-partner, and we are going to lose out on the already small sum of 5% the government makes on these imports.

The first moment I sensed trouble with this deal is when I witnessed the delegations each countries sent to the negotiations. The United States had plane-loads of lawyers, economists, politicians, analysts, economic lawyers and technicians to monitor every single paragraph, sentence, and word of the agreement. The Bahraini delegation comprised of a grand total of four (including the minister), where three of those sent considered it a prestigious holiday trip, and one person was working his socks off to look at all parts of the agreement. Who do you think got the better deal?

How about that special relation we are going to foster with the United States? How about us being able to have an edge over other GCC countries, and being able to export cheap American goods to other GCC countries? Well, keeping the issue of Saudi tariffs on us aside, this takes me to the next part of this blog: the effect on the whole GCC.

The one aspect that seems in this euphoria to have zoomed over everyone's head is that WE ARE NOT ALONE. We are not somehow special in getting this agreement. We might be one of the firsts, but we definitely won't be one of the lasts. Jordan has already signed an agreement with the U.S., and there are countless other countries in the process of doing so too. As the proponents of this agreement always point out, Qatar is also in the process of signing one. What happens then? Where does our advantage over GCC countries go to?

At the danger of sounding like a hippie leftie anti-globalist, I am going to put forward two political-economic reasons for the U.S.'s sudden eagerness to sign free trade agreements all over the world. The first is pretty obvious and not that controversial. It is a way for the U.S. to bypass all the hassle of the World Trade Organization. Every time the U.S. (and EU for that matter) try to propose some new rules for the WTO, a handful of developing countries (such as Brazil, India, South Africa) stick their noses up and protest that the developed countries are not offering enough for the developing countries in exchange (particularly on agricultural issues). Hence, there is a deadlock, and no agreement is reached. Well, the U.S. and (the E.U. is playing this game as well) has decided to call their bluff and engage in bilateral trade agreements (in simple words: sod negotiating with the whole world, we’ll just negotiate wich each country on its own). Hence, these negotiations are mushrooming all over the world.

The other is more Arabic countries specific. Why do you think the U.S. picked Morocco, Jordan, and Bahrain as the first countries to sign world trade agreements with? Is it because of our vibrant and world influencing economies? Hmmm..... More probably it is part of the U.S. greater push for Democracy and Free Trade in the Middle East (which they make no effort to hide). Bahrain is probably a smaller fish to fry just to get squeeze on the bigger fish, Saudi Arabia and the gulf as a whole. Whether this push is a good or bad thing, I’ll leave it for the reader to decide. One could also conceivably argue that this is part of a more idealistic and philanthropy oriented push by the U.S. to make the world more market competitive. I have my doubts about that one, especially since you would think the U.S. would extend it's friendship hand first to bigger economic powers, such as the EU, in such a scenario.

Still with me? Good, because we are only halfway through with the story. Before I go on, there is a key point I have to point out:
THE US HAS INSISTED THAT IT WILL ONLY CONDUCT NEGOTIATIONS WITH EACH COUNTRY SEPARATELY, AND NOT IN A WIDER CONTEXT, SUCH AS BARGAINING WITH THE WHOLE GCC.

Now that that's said, here's my analysis at the game the U.S. is playing in the Gulf:

What is happening at the moment is what economists and game theorists term "the prisoner's dilemma." Don't worry, this is not very technical, and actually could be quite fun to learn. This is how the story goes:

Two prisoners have been arrested on the charge of robbing a place. Each prisoner is being interrogated on his own. The officer tries to lure each prisoner into confessing about the other prisoner. If prisoner A confesses about the crime, then he is let go and prisoner B gets nine months in jail (and vice versa). If they both confess about the crime, then they each get five months in jail. If both of them hold out, then the police have minimal evidence, and can only put them away for three month.

Which do you think the prisoner's would go for? Obviously it's denying the crimes and going away with three months? Think again. Look at the above diagram.


Let us analyze what is the best thing, or what is the best strategy for each player to do. It can be noticed that no matter what player A does, it's best for player B to confess (and vice versa). If player A confesses, then player B might as well confess and get off with -5 months instead of -9. If player A denies the crime, then it's better off for player B to confess and get off with no time. The same applies to player A's thinking. Hence, what ends up happening is both confess and both end up with 5 months in jail.

As we said before, this is not the optimum solution. The optimum solution would be fore each to deny, as each only get 3 months but unfortunately this result is not achieved.

This is exactly what's happening with these world trade agreements. As noted before, the United States has laid it down as a precondition that it will only talk to each country on its own. Hence, each country is approached and is enticed by the goodies of signing the agreement (confessing). Each country has an overwhelming motive to join (confess) thinking it is outplaying the other countries and that this is the optimum result. What they don't realize is that if they stuck together (both deny), and acted as one whole GCC they probably would get a better deal.

Why? Because on our own Bahrain on a global scale, let's be honest, is quite insignificant. Hence, its bargaining power is minimal as well. The same applies to all the GCC countries, maybe with the exception of Saudi Arabia. As a whole, the GCC, although not quite so powerful, at least will have enough say to weave out something for its own benefit from the deal; it will at least have some bargaining power. By being able to chip at one country at a time, the United States is able to destroy this bargaining power, and ultimately put its final goal, Saudi Arabia, in a vulnerable position.

Ultimately, however, there is no one to blame more than the Saudis. Leaving aside the issue that this deal has been negotiated for a few years, and they didn't decide to speak until now, the main reason the GCC is so weak is because of Saudi Arabia itself. It has been the main stumbling block for us to integrate our tariffs, currencies, economies, and even some sort of political federation. In a continent as diverse as Europe, with many languages, currencies, cultures, as we all as the conflicting wars, the European Union was achieved. In an area as the GCC, where they have basically the same currency (effectively the U.S. dollar), the same language, similar culture, similar governing system, and even similar dialect, all that has been achieved is flag waving and fighting over borders and small islands. No wonder the U.S. is able to slowly chip away at us and cause conflict between countries that in theory should be united.

If the GCC has utilized the past 25 years effectively and has been able to establish a single currency and single economic area, then the U.S. would have found it much harder to play the game it is playing right now. Look how now the EU always bargains and negotiates as a single market. The actual steps that would've been needed to achieve a GCC union would've been extremely simple compared to that of the European Union, but unfortunately we lacked the political capital. We will slowly see the effects of that over the coming years.

¶ 3:26 AM