The breakthrough came after the intervention of Qatar's Emir Sheikh Hamad bin Khalifa al-Thani, who urged free-trading UAE and oil giant Saudi Arabia, which has some of the

highest tariffs in the Gulf, to settle their differences.

"It was a major coup to bring both sides together, the UAE, being far ahead of the rest of the GCC in terms of trade savvy, was naturally reluctant to raise its own 0-4 per cent tariff," a Gulf source said.

Oil price rally lightens atmosphere
The atmosphere at the summit, which begins on Saturday,will be in marked contrast to the gloomy 1998 summit when oil prices were at their lowest levels in real terms in 25 years.

The six conservative Arab monarchies, which sit on half the world's oil reserves and depend on sales of crude for up to three-quarters of government income, are enjoying a prolonged oil price rally which has sent prices to nine-year highs.

But diplomats in the region noted that Saudi Arabia and the other GCC members, still suffering from large budget deficits, are pushing ahead with economic reforms in a bid to woo foreign investment and create jobs for a growing young population.

"The Gulf is getting to grips with a new reality that includes a shift to the private sector to drive the economy. We have seen that in the UAE and now in Saudi Arabia and the others," the Abu Dhabi-based diplomat said.Saudi Arabia's Crown Prince Abdullah on Thursday called for energising the GCC's decision-making process to keep pace with economic and political reforms throughout the region.

"Thecouncil (GCC) has had many accomplishments since it was set up but we should not be embarrassed to admit that what has been achieved, although important, does not meet our aspirations and the ambitions of the peoples of council members," the Saudi Press Agency quoted Prince Abdullah as saying."I think it is time for a qualitative step (to improve) the way the council operates," he said without elaborating.

A tariffs accord good for both Saudi and UAE
Diplomats noted that it was advantageous for both Saudi Arabia, under pressure to lower tariffs to gain entry to the World Trade Organisation, and the UAE to participate in a regional common market with Bahrain, Kuwait, Oman, and Qatar.

"It would hurt us not to be included in a common GCC market. We are quite optimistic that there will be a fair agreement for all," a United Arabs Emirates official said.

Diplomats and economists hailed the tariff pact as a step toward the GCC goal to establish a customs Union by March 2001.

The GCC also needs thecommon tariff to strike a deal with the European Union over its petrochemical exports to EU states and push forward talks on a free trade accord with the EU.

"It is a necessary step and the first towards true regional market integration. It makes their relationship tighter and has a very positive political spillover," a Western diplomat said.

A GCC bloc would also attract foreign investors keen to tap into the larger regional market, diplomats said.

GCC leaders are also expected to discuss regional political issues including a territorial dispute between the UAE and non-Arab Iran over three small but strategic Gulf islands.

Gulf officials said they did not expect much to be done at the summit about the dispute. A committee of Saudi Arabia, Qatar and Oman -- set up to try to persuade Iran and the UAE to begin direct negotiations -- had not made much progress, they said.

"We do not expect much to come of this issue this time. Neither side is willing to budge," one Gulf official said.

Both the UAEand Iran claim Abu Musa, the Greater and Lesser Tunbs, located near key shipping channels.