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Recent confirmation from the United Arab Emirates that it will begin negotiations in March for a Free Trade Agreement (FTA) with the United States will be welcomed in most quarters - yet not everyone will be happy if the negotiations prove successful.

The two countries signed a Trade and Investment Framework Agreement (TIFA) in March last year, aimed at increasing bilateral trade and investment, and first announced their intention to begin FTA negotiations in November.

An agreement along similar lines to Bahrain's FTA, concluded with the US in September, is what is envisaged. The abolition of tariffs will greatly reduce the price of US imports, chiefly machinery, aircraft, vehicles and electrical equipment, whilst further opening the lucrative US market to the UAE's energy sector and growing manufacturing sector. The UAE will be carefully monitoring the success of the Bahrain deal, and those with Jordan and Morocco that were also signed with the US in 2004.

Washington has been actively seeking FTAs with a number of countries in the Middle East as part of President Bush's broader vision of reform in the region. FTAs form a central pillar of the Middle East Free Trade Initiative (MEFTA), which aims to foster economic growth, reform and openness in the Middle East and the Arabian Gulf.

In November, informing Congress of his intention to begin negotiations with the UAE and Oman, US Trade Representative Robert Zoellick said FTAs "will encourage the six members of the Gulf Cooperation Council [GCC] to adopt standards that will promote trade and investment, encouraging development, more open societies and opportunities for people to improve the lives of their families". This objective is in line with recommendations made by the 9/11 Commission that a US strategy to counter terrorism should include economic policies to encourage development in the Middle East.

But not everyone is happy about all this. Saudi Arabia has been deeply troubled by the spread of FTAs throughout the region, arguing that they violate GCC agreements and undermine attempts at regional economic integration. The Saudis have a point. The GCC formed a customs union in January 2003, abolishing tariffs on trade between the six member states, whilst imposing a uniform 5% duty on goods imported from outside the region. With Bahrain now allowing US goods into the GCC duty-free, Riyadh believes the protective wall has been breached. Although Bahrain denies that US goods will be re-exported into Saudi Arabia duty-free, tensions between the two neighbours culminated this week in a Saudi plan to re-impose a 5% tariff on US goods coming through Bahrain.

Moreover, the Saudis rightly argue that bilateral agreements weaken a country's negotiating power when dealing with powerful trading blocs like the US or EU. The terms of an agreement are unlikely to be as favourable as they would be if negotiated from within a broader trading bloc such as the GCC. As Saudi Foreign Minister Prince Saud al-Faisal noted in a recent speech in Bahrain, "It is alarming to see some members of the GCC enter into separate bilateral agreements with international powers... taking precedence over the need to act collectively... They diminish the collective bargaining power and weaken not only the solidarity of the GCC as a whole, but also of each of its members."

For the Gulf countries, however, trade agreements with the US appear to have far greater allure than neighbourly economic co-operation. Other GCC members - Oman, Qatar and Kuwait - are also queuing to sign deals with the US, leaving the Saudis looking isolated. Indeed, the Saudis' position begins to look increasingly like sour grapes when one considers that trade between GCC states makes up less than 8% of the region's total trade, a paltry sum that suggests bilateral FTAs with the US will bring far more economic benefit to individual member states than GCC integration.

Some analysts believe the Saudis are in fact more concerned that the proliferation of US trade agreements threatens their own dominance over the GCC. Indeed, undermining Saudi Arabia's regional and international importance could be the tacit political objective of a White House determined to reshape the Middle East.

Whatever the intrigue, both the US and Saudi Arabia's GCC partners appear to have concluded that it is better to press on with bilateral trade negotiations, bringing swift economic benefits for their own countries whilst forcing the Saudis to play catch up with domestic reforms that could benefit the whole region. An attempt by the EU to set up an FTA with the GCC as a whole has been frustratingly sluggish, primarily because of the inability of Saudi Arabia, the only member of the GCC that has not obtained membership of the World Trade Organisation (WTO), to adopt international economic standards. Such experiences undermine the Saudi argument that GCC members are better off negotiating collectively.

Many see the successful conclusion of talks between the US and UAE as a given. But the UAE still has some way to go to reach the required economic standards. In particular, the US has highlighted labour laws as a cause for concern, stating that the UAE and its neighbours will have to implement International Labour Organisation-consistent laws before any agreement can be reached. In response, the UAE announced plans this week to allow its mainly expatriate workforce to set up trade unions, a key condition of any US free trade pact and one which could have far-reaching consequences in a country that depends so much on cheap foreign labour from south Asia and the Indian sub-continent.