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REVIVING ANCIENT TRADE ROUTES
BY FREDERIK RICHTER
ADDITIONAL REPORTING BY KARIM EL-SENUSI
The dream of an Arab common market is pushing 50 htis
year, yet there's still much to do. Business Monthly investigates
the steps that have been taken and the obstacles that remain as
Arab nations reinvent age-old trade routes.
Arab economic integration has been an elusive goal since it was
first envisioned over 50 years ago. The Arab League established
the Council of Arab Economic Unity in 1957 with the aim of creating
an Arab common market, but economic integration has been a tortuous
road.
“We have lived a 50-year dream of having an Arab common market,
but the problem was that we were just dreaming – we weren’t
doing anything else,” Minister of Trade and Industry Rachid
Mohamed Rachid said during the World Economic Forum (WEF) meeting
in Sharm Al Sheikh last May. He noted that despite the geographical
proximity, historical ties, and cultural and linguistic affinities
of 300 million people in 22 Arab states, intra-regional trade has
remained disappointingly low.
While trade between Arab states grew by 22 percent last year, it
still accounts for less than 10 percent of total trade. By comparison,
the European Union’s inter-trade accounts for about 65 percent
of its total trade.
“The Arab world is one of the few remaining regions to have
failed to capitalize on its full potential in terms of regional
cooperation and trade,” Rachid said. “While inter-Arab
trade is now accelerating after decades of single-digit growth,
it has the potential to represent a far greater proportion of the
region’s overall trade with the world.”
Although the short-term goal is shallow integration, which involves
the elimination of tariff and non-tariff barriers to trade, the
long-term goal is deep integration, which requires governments to
unify the trade regulations and practices on both goods and services.
“Arab countries are perfectly economically integrated when
their residents face no official obstacles to negotiating and executing
economic and financial transactions anywhere and with anyone within
the integrated area; and when they face the same transaction costs
independently of where they reside,” explains Nasser Saidi
in a 2003 Economic Research Forum (ERF) study entitled “Arab
Economic Integration: An Awakening to Remove Barriers to Prosperity.”
Enter GAFTA
A major initiative to create an Arab economic bloc was the signing
of the Greater Arab Free Trade Area (GAFTA) agreement in 1997. The
agreement’s main thrust – to eliminate all tariff and
non-tariff barriers to inter-Arab trade – is proving easier
said than done. While GAFTA – theoretically at least –
abolished tariffs on trade between 17 Arab states as of January
1, 2005, numerous problems remain.
Ambassador Gamal Bayoumi, secretary-general of the Arab Investors
Union, says non-tariff barriers are the biggest hurdle to Arab economic
unity. “The real obstacle is bureaucracy, not because it is
against the agreement, but because it is defending the interest
groups of the countries [involved].”
He explains that industrial lobbyists in Arab countries continue
to pressure their governments to protect domestic and export markets.
Too often trade agreements reflect the interests of individual sectors,
or even single exporters.
Governments, meanwhile, see customs as an important source of revenue
and authorities continue to employ creative measures to get the
most from traders. In fact, Arab governments are able to impose
bureaucratic obstacles that in essence make it appear as if they
are complying with GAFTA’s regulations, while violating its
spirit. This can be done in a number of ways, including: applying
alternative rules of origin, instituting negative lists, re-categorizing
products or subjecting imports to lengthy and often arbitrary “security”
examinations.
Rules of origin have been a major sticking point for all the MENA
region’s trade agreements. GAFTA requires that value-added
content account for no less than 40 percent of a product’s
total cost in order for it to qualify for zero tariffs. But Arab
countries have divergent views over how total cost should be calculated.
Some countries argue that this should be based on the selling price,
while more industrialized countries argue it should be according
to manufacturing cost.
The difference between the two methods can be huge. Samir Radwan,
managing director of the Economic Research Forum (ERF), explains
that Arab countries that play with rules of origin prefer calculations
based on sales, as it is easier to manipulate the sale price of
goods, which the country controls, rather than the price of manufacture,
which is set at the country of origin.
“Rules of origin is a mechanism to prevent a country from
[abusing] a free trade agreement,” Radwan explains. For instance,
Gulf countries import goods from Europe or Asia, make cosmetic changes
to the products or their packaging, then claim these goods were
made in Dubai. “This happens all the time. But this is not
trade augmentation, it is simply trade diversion.” Rules of
origin – which track the origin of every component of a product
– prevent such manipulation.
Said Abdallah, undersecretary for trade agreements at the Ministry
of Trade & Industry (MTI), says officials are working hard to
simplify rules of origin, a process that should be finished by the
end of the year. One of the biggest hurdles is unifying customs
procedures. While GAFTA regulations are supposed to precede other
bilateral agreements, authorities can be capricious, applying the
rules of origin of various trade agreements according to their whim.
Similarly, they can also manipulate the so-called “negative
list” – a provision in bilateral and multilateral agreements
that allows countries to protect their vital industries by excluding
certain products from tariff elimination.
Over the years, GAFTA’s negative lists grew to include thousands
of items. While these lists were abolished in January 2005, customs
authorities in some countries continue to apply the negative lists
of other bilateral and multilateral agreements. “Legally,
we have zero tariffs,” says Bayoumi, “but in practice,
we [still] have all these negative lists.”
Such discrepancies allow customs officials to re-categorize products
into production categories or higher tariff bands, as Peter Youssef,
logistics and export manager at Al Ahram Beverages Company (ABC),
can attest. He says product categorization is keeping ABC’s
popular non-alcoholic malt beverage, Fayrouz, from reaching its
full market potential. “The number of containers of Fayrouz
[we export] could be at least three times higher,” he complains.
But as long as every customs official across the region comes up
with a different answer to the question, whether Fayrouz is a malt
drink or a soft drink, thus falling under different customs categorizations,
this potential cannot be exploited.
Despite the legal maze of regulations that have been adopted by
different authorities in Arab countries, tariffs are clearly on
the way out. But as they fall, governments are finding other ways
to protect their domestic industries. Common practices include subsidizing
domestic producers, demanding special import licenses or blocking
imports on the pretext they pose a social or health threat. Radwan
admits that no comprehensive study has ever been done to identify
how much is lost to these non-tariff barriers, but says it is widely
agreed that “non-tariff barriers remain the biggest obstacle
to regional trade.”
Comparative advantages
Analysts are divided over the reason for the low-level of inter-Arab
trade. Some argue it is due to the inadequacies within the GAFTA
agreement itself, others argue it is about non-competitive export
policies, while still others attribute it to excessive bureaucracy
and the Machiavellian policies of various interest groups.
Abdallah has his own theory. “The main reason for the low
level of inter-Arab trade is the overlapping profiles of Arab countries,”
he states assuredly. He argues that as tariffs and negative lists
have been abolished, they cannot be the culprits. Thus it is because
Arab countries are manufacturing the same broad product line instead
of investing in industries where they have a comparative advantage.
He suggests that for inter-Arab to really take off, these countries
would have to find ways of complementing, not competing, with one
another.
After all, says Mohammed El Mahdy, president and CEO of electronics
manufacturer Siemens Egypt, the real competition is coming from
outside the region, especially the Far East. A functioning economic
bloc could help Arab states synergize their industries and produce
globally competitive products. “Egypt is not competing against
Saudi Arabia and Saudi Arabia is not competing against Jordan. We
are competing against China, India, Brazil, Thailand, and trying
to block something is not going to prohibit the other countries
from doing the business here.” Cheap Chinese products in particular
have become ubiquitous in the Middle East in the past several years.
Bayoumi acknowledges that the trade profiles of Arab countries often
overlap, but denies that this is major factor in the low level of
regional trade. He points to Europe, where export profiles often
overlap yet inter-regional trade is flourishing. “Are you
telling me that there is no competition between the car industries
of France and Germany?” he asks rhetorically.
And if one examines the trade profiles of Arab countries, Bayoumi
continues, the low level of inter-Arab trade is not as bad as it
might seem at first. He points out that oil accounts for 70 percent
of Arab exports. Since many Arab states are oil self-sufficient,
that leaves just 30 percent of exports to ship between neighboring
Arab states. Of this, nearly a third of these goods are traded between
Arab countries.
Yet Bayoumi regrets that regional trade agreements have completely
failed to achieve their most important task, to increase trade in
food and agricultural products. He points out that Arab countries
are bending over backwards to trade with Europe and the rest of
the world while protecting their markets from Arab competitors.
“We’re exporting food to Europe while we’re importing
food from everywhere else,” he says. “Why don’t
we encourage transactions among Arabs?”
Building blocs
“The days of protectionism are over,” Rachid has asserted.
He noted that businesses have begun thinking regionally, and are
lobbying their governments to facilitate inter-regional trade. “This
is making our job as Arab ministers of trade much easier. Before,
every minister in the region was under pressure to protect the market.
Today, the companies are themselves pushing us to open up the market,”
he said.
But not all Arab governments are responsive. Thus Rachid believes
the way forward is to create a council of “willing”
counterparts, focusing efforts on those Arab countries that desire
greater economic integration. Once these countries succeed, the
more resistant Arab states will be more inclined to follow.
Bayoumi agrees, stressing that not all Arab states carry the same
weight. “Don’t concentrate on establishing something
with all 22 countries, because you cannot compare Somalia with Egypt
or Saudi Arabia,” he says, adding that an inner circle of
six to eight main countries would be easy enough to manage yet strong
enough to move regional trade along.
The EU, for comparison, began as an economic bloc of six countries
in 1958. It has since grown to include 25 member countries and is
considering further expansion. Having sorted out its own business,
the EU has sought to improve the flow of goods to and from its neighboring
trading partners.
Under the 10-year-old Barcelona Process, the EU has created a net
of association agreements with its southern Mediterranean neighbors,
including Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Tunisia
and Turkey. In addition to fostering political and cultural ties,
these agreements seek to unify economic legislation and customs
procedures. The ultimate goal is the gradual dismantling of tariffs
to create a regional FTA spanning Europe and the Middle East North
Africa (MENA) region by 2010.
Many consider the Agadir Agreement, signed in 2004 though still
awaiting ratification, an important initial step towards realizing
this vision. The agreement creates a free trade area encompassing
the EU and four MENA states, namely Egypt, Morocco, Tunisia and
Jordan. As each of these four have already concluded EU Association
agreements, they have already agreed to unify economic laws and
customs procedures in line with EU requirements. This, say economists,
should help the Agadir agreement to create deeper integration than
GAFTA, which has no restrictions on dumping and subsidies.
Yet discrepencies between EU and Arab free trade initiatives could
potentially cause a rift in GAFTA as Mediterranean Arab states find
themselves drawn towards the EU’s gravity. Abdallah, however,
insists these initiatives share common goals, namely the liberalization
of trade. “The door is open for the GAFTA states to join us
under Agadir,” he says, upon the condition that the new entrants
first enter into an association agreement with the EU.
Across the Atlantic, the US is also planning to unite the MENA region
under a pan-Arab free trade agreement. The Middle East Free Trade
Agreement (MEFTA) initiative began in 2003, but has made little
headway, at least in terms of FTA agreements. So far Washington
has concluded free trade deals with only four Arab states: Jordan,
Morocco, Oman and Bahrain.
The delay may be attributed in part to Washington’s approach.
The US enters into FTA negotiations only after a number of conditions
are fulfilled, while the EU prefers to enter negotiations unconditionally,
signing somewhat vague agreements in order to get the process started
while the details are worked out.
Despite the different regulatory frameworks of the dozens of bilateral
and multilateral trade agreements into which Egypt has entered,
Radwan argues that there should be little problem unifying the various
agreements into a single multilateral trade protocol. He explains
that existing agreements have been relatively shallow. “This
is why the multiplicity is not harmful,” he says. “If
these were FTAs of deep economic integration then it would be much
more difficult.”
AT YOUR SERVICE
To date, the focus of Arab economic integration has been
on trade in products, but economists suggest that much greater
gains can be attained from a more comprehensive framework.
GAFTA only outlines trade in goods; it does not include the
service sector – which could significantly increase
the benefits. “Theory and empirical simulations suggest
that the benefits from liberalizing trade in services are
likely to be many times [those of] free trade in goods,”
economist Nasser Saidi has noted.
According to the World Bank, the market potential of liberalizing
trade services in developing countries is up to four times
higher than that of trade in goods. In Egypt, for instance,
where the service sector accounts for over 50 percent of GDP
and employs half the country’s workforce, the service
sector accounted for $14 billion in exports in 2004, while
exported goods barely topped $8 billion.
“If there’s one thing that has potential, it’s
services,” says Samir Radwan, managing director of the
Economic Research Forum. “The potential is tremendous,
[especially if you factor in] intra-regional tourism, which
has increased because of the treatment that Arabs receive
elsewhere since 9/11.”
But services are more difficult to liberalize than goods as
they are both intangible and face government protectionist
measures that are less visible than tariffs. While GAFTA does
not cover services, a separate framework agreement, the General
Agreement on Trade in Services (GATS), outlines the liberalization
of services among all World Trade Organization (WTO) member
states.
To date, Egypt has agreed to liberalize just five sectors:
financial services, construction, tourism, transportation/maritime
and telecommunications. |
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