Brunei Darussalam (hereafter Brunei) is a small, rich sultanate located on the northern coast of the island of Borneo, with a population of 344,500 in 2001 (Government of Brunei Darussalam 2002). Brunei has been one of the major producers of oil and gas within Southeast Asia, and exports of oil and gas currently account for about 40 per cent of Brunei's gross domestic product (GDP) (Government of Brunei Darussalam 2002). Based on per capita GDP, Brunei is the most advanced country of the fifty-six-member Organization of Islamic Countries (OIC). The country also has the fourth highest GDP per capita in Asia, after Japan, Singapore, and Hong Kong (UNDP 2002). Brunei, like other countries that depend substantially on earnings from oil and gas exports, has features of what is known as a "rentier economy", in which the state is a recipient of substantial foreign revenues and relies far less on taxes as a source of income. The dominant oil and gas sector has limited linkages with other economic sectors in Brunei (Gunn 1993).
While the economy of Brunei boomed in the 1970s and 1980s because of relatively high world oil prices, the economy slowed down considerably throughout the 1990s. Based on revised data issued by the Department of Economic Planning and Development, the 1997-98 Asian financial crisis hit Brunei hard; real GDP declined by about 14 per cent from 1997 to 1998, from B$7,684.2 million to B$6,610.0 million (expressed in constant 2000 values). The government has begun to accelerate the drive towards a more broad-based diversification of the economy. With the new Five-Year Development Plan (2001-05) launched in 2001, expansion of non-oil exports, setting up an international financial centre, modest import substitution manufacturing, and tourism promotion have been targeted as the main areas to be pursued by the country in its economic diversification programme. The development of non-oil trade with traditional and non-traditional partners is considered to be important. Hence the government has begun a programme of attaching economic trade officers in its diplomatic missions overseas (Government of Brunei Darussalam 2001).
The need to expand international trade as a practical means of economic diversification in an era of globalization has meant that Brunei has chosen to become a member of many international organizations and trading blocs since its independence in February 1984. For example, Brunei is a member of the Asia-Pacific Economic Co-operation (APEC), and hosted the 2000 APEC summit. The country's main trade consideration in recent years has been to focus on the production and export of non-oil products, and a search for new trading partners. The main trading partners of Brunei are: Singapore, Malaysia, Japan, the United States, the United Kingdom, and Germany. Together, these six countries account for about 90 per cent of total merchandise trade (both imports and exports) for Brunei (Mahmod and Anaman 2001; Buffong and Anaman 1999). Table 1 profiles Brunei's exports and imports to and from four major trading blocs, as percentages of Brunei's total exports and imports worldwide respectively, over the period 1966-2000. It can be ascertained that the European Union (EU) is a major source of imports into Brunei, accounting for more than 21 per cent of total imports over the period. However the EU is a relatively small destination for Brunei's exports, compared with APEC, (1) ASEAN, (2) and North America. (3) This study attempts to identify the factors influencing trade between Brunei and the EU--the largest political-economic union in the world, with annual economic output (GDP)of over US$9,000 billion and a population of about 375 million in 2000. (4)
One justification for this study is the virtual neglect of Brunei from most published regional economic studies on the Asia-Pacific region. For example, the study undertaken on the determinants of bilateral trade among Asia-Pacific countries by Chwo-Ming and Zietlow (1995) neglected Brunei, due to apparent data unavailability. …