Bilateral Trade Flows in the Gulf Cooperation Council Countries : What happend to the Middle East Integration after 2003?

It is well known that the GCC countries are heavily dependent on oil and hydrocarbon industries, but during the 2003-2008 period, economic diversification is proceeded; enhancing the role of the private sector, encouraging FDI, and laying the ground for competitive integration in the globalization process. The year 2003 is special for the economic integration within the GCC due to the introduction of the custom union and high growth. This paper analzes the trade flows of the GCC countries before and after the signature of the Custom Union agreement in 2003. Fixed effects panel models have been estimated using the LS and GMM methods. It has been found that the year 2003 is special for the GCC countries. The year 2003 indicates the turning points in the intra-GCC trade and also in the GCC trade with the rest of the world. The results show that the 2003 Custom Union agreement has not fostered the intra-GCC trade, except for the United Arab Emirates, and also that the order of top fifteen trade partners has changed significantly from the EU countries and the US to the Asian countries after 2003. Additionally, the exports and imports of the GCC countries are related to the wealth of partner countries, but not distance. These results have important implications for the economic, cultural and political issues in trade negotiations to provide any trade incentive for the GCC countries.