Arab States Embrace Free Trade Pacts

VOL. XLV

No 13

1 April 2002

GENERAL

Arab States Embrace Free Trade Pacts….

The recent eagerness of many Arab countries to sign free trade agreements (FTAs) has manifested itself not only in various proposals for bilateral cooperation, but also – and more importantly – in efforts to join other larger trading blocs both within the region and outside it. One of the region’s key FTAs is the Euro-Mediterranean Partnership, the pact between the 15-member EU and Morocco, Algeria, Tunisia Egypt, Israel, Jordan, the Palestinian Authority (PA), Lebanon, Syria, Turkey, Cyprus and Malta which, under objectives defined at the 1995 Barcelona Conference, is intended to set up a free trade area by 2010 and create what will be the world’s biggest marketplace. While the 2010 date is not legally binding, an official at the European Commission (EC) said that by that date “a major part of the enterprise should have been done.” After agreements with Euro-Mediterranean partners are ratified, there is a transitional period of some 10-12 years for the dismantling of tariffs on EU products entering each country, although this occurs at different rates depending on the partner and the product. The Euro-Med agreement will enable the signatory countries to compete globally and “fit more easily into the World Trade Organization,” notes the EC official. Financial aid from the EU will obviously help the members, and the recently proposed start-up of a reinforced Euro-Mediterranean Investment Facility within the European Investment Bank should give the EU’s Mediterranean partner countries more say on how such money is spent, according to economists (see article below). One obvious obstacle to the attempt to establish a trading bloc across the Mediterranean is Israel’s continued conflict with the Arab countries, and while the EU already has an FTA with Israel, it recognizes that until the problem is solved Arab states will not want to trade with Israel. Nonetheless, the EU is moving ahead with its free trade plans.

The process for each country’s agreement with the EU has multiple stages. Once an agreement is signed it must be ratified by each of the EU member states’ parliaments and then by the European parliament – a process which can take about four years. Agreements with Morocco, Tunisia, Israel and the PA are all in force, while the ratification process has just finished for Jordan and its agreement with the EU will go into effect on 1 May (see Table 1). Egypt signed the Euro-Mediterranean agreement in June 2001, while Algeria and Lebanon have just concluded negotiations and their agreements are expected to be signed 22-23 April at the Euro-Mediterranean foreign ministers’ meeting.

However, due to the lengthy nature of the ratification processes, an interim trade agreement can come into force more quickly if both sides agree, and according to the EC official this is a possibility for both Lebanon and Algeria. Negotiations between the EC and Lebanon have been continuing since 1998, but Lebanon’s dependence on high customs duties has been a major obstacle to progress. Talks resumed in September 2000 and accelerated in 2001, as Lebanon started implementing new economic measures aiming at liberalizing the economy and removing barriers to trade

Libya currently has observer status at certain meetings of the Euro-Med Partnership, while Syria is actively being courted by the EU. In early February, EU trade commissioner Pascal Lamy visited Damascus to establish a framework for an FTA between the EU and Syria. Such an agreement would appear to be beneficial for both parties ― while the EU regards Mediterranean countries as strategically desirable trading partners, Syria needs the foreign investment an FTA would bring. However, analysts suggest that Syria is expected to move with caution, given that its economy remains tightly controlled by the government. The EC official agrees, noting that Syria will be “lucky to sign before the end of next year.” The official believes that Syria’s emergence from a centrally controlled political and economic system will take time, since “the president wants to move forward but he has to be careful because he is surrounded by powerful conservatives.” However, joining the Euro-Med Partnership would appear to be a natural step for Syria, since it is already in talks with Lebanon to establish a free trade zone, with the two planning to unify customs tariffs in three-to-five years.

MAFTA

Four other countries in the Euro-Med Partnership, Jordan, Egypt, Morocco and Tunisia, have also set up the Mediterranean Arab Free Trade Area (MAFTA) and plan to launch an economic bloc formally this year. In a meeting last year they said that other Arab states can join the agreement if they are party to FTAs with the EU and signatories of the Pan-Arab FTA. The four MAFTA members will introduce and apply rules on trade competition and the prevention of monopolies and have agreed on the formation of a ministerial committee to ensure implementation of the MAFTA agreement. The EC official notes that MAFTA’s moves towards establishing a free trade bloc are a side benefit of the Barcelona process and will further reinforce the Euro-Mediterranean FTA.

EU-GCC Links

Aside from the Euro-Med Partnership, the EU is trying to set up an FTA with the six-member Gulf Cooperation Council (GCC), which comprises Saudi Arabia, Kuwait, UAE, Qatar, Bahrain and Oman. GCC officials hope the FTA will be signed sometime this year, and EC officials predict it will be signed this year or next. The GCC removed one of the major obstacles to free trade when it decided in December 2001 to bring forward the customs union of its members to 2003 from the originally proposed date of 2005 (although recent press reports suggest that there are still some concerns about the details of the deal which need ironing out). The EU is the GCC’s largest market and its second largest supplier following Japan. The EC official notes that the GCC is being treated separately from the Arab states of the Euro-Med Partnership. “The Barcelona process with our neighbors requires a major shake-up in their political and economic systems, given that the EC is providing the Euro-Med partners with financial aid,” he said, noting that the agreement with the Gulf countries only encompasses free trade and not wider forms of cooperation. The Euro-Med Partnership’s rules on free trade are compatible with the WTO, and many believe that they will prepare some of the partners for membership in the WTO. Some Arab states are already WTO members, including Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar, Tunisia and UAE (see Table 2). Saudi Arabia, Lebanon, and Yemen have observer status, as does Algeria, which is in the final round of accession talks. While Algeria has been a candidate for accession since 1996, the WTO discussions appear to be gathering momentum as it steps up reforms and attempts to form new trading relationship. The PA signed an aid agreement with the British Government on 11 February for £1mn to finance a project for the development of Palestinian foreign trade so that it can match the requirements of the WTO. Part of the goal of the project is also to plan a strategy for economic relations with Israel after independence.

Jordan, which joined the WTO in 2001 and has had a particularly close political relationship with the US, became the first Arab state and fourth country in the world to sign a free trade agreement with the US on 23 December 2001 (MEES, 25 February). The signing of the agreement was timely for Jordan, which is attempting far-reaching economic restructuring and reform. The agreement provides for the gradual elimination of tariffs between the two countries by January 2010. Jordan’s exports to the US reached $185mn during the first 10 months of 2001, a 340% increase over the previous year’s total. Meanwhile, Morocco is also being considered for a free trade agreement with the US, although no decision has been made and discussions are at an early stage.

GAFTA

Aside from the EU and WTO free trade pacts, FTAs within the Arab region are also gathering momentum in an attempt to counterbalance economic dominance by the US and EU and due to fears that liberalization through the WTO is proceeding too slowly and unevenly. To that end the Greater Arab Free Trade Area (GAFTA) is a new Arab League initiative that aims to revive previously unsuccessful attempts at regional integration. The Economic and Social Council decided at its 69th meeting in Cairo in February to accelerate the establishment of GAFTA, setting 2005 instead of 2007 as deadline for its launch. This year, the 14 Arab countries which have joined GAFTA reduced customs on trade among them by 50%, and the reductions will reach 60% next year and 80% in 2004, with zero tariffs by 2005. Algerian Minister of Trade ′Abd al-Hamid Tamar said on 13 February that his country has decided to join the GAFTA, raising the membership to 15. Of the 22-member Arab league, those not taking part in GAFTA are the PA, the Comoros, Somalia, Djibouti, Mauritania, Sudan and Yemen. GAFTA is managed by the Council of Ministers of member countries and its secretariat is managed under the auspices of the economics department of the Arab League Secretariat.

AEUC

In early September, at the 73rd session of the Arab Economic Unity Council (AEUC – an institution that has for several years to pursue trade integration, but with little success) initialed an agreement setting up a four-way free trade area between members Egypt, Iraq, Syria and Libya. They also approved an executive program for a greater Arab Free Trade Zone as well as a long-term strategy for joint economic Arab action over the coming 10 years. Participants in the session agreed to establish a compensation fund to help the least developed Arab states integrate with the overall Arab economy as well as to provide technical assistance to those Arab states willing to join the WTO. At the end of the session, the AEUC members called for the lifting of the “unjust” embargo imposed on Iraq. Iraq has been subject to sanctions since its invasion of Kuwait and has had to finance much of its needs through the UN administered oil-for-food program, which has been operating since 10 December 1996 (MEES, 28 January). The sanctions have prevented Iraq from joining the larger FTAs, and it has instead focused on developing bilateral trade agreements, mostly with Arab neighbors. It has signed FTAs with Algeria, Tunisia, UAE, Egypt and Syria and Yemen and is also in discussions with Jordan and Lebanon. Iraq is the second largest market for Egyptian goods after the US. Egypt supplies about $1bn worth of goods to Iraq per year, and for the last 12 months contractual trade between Egypt and Iraq was $3.7bn, according to Hasan Khatub, Iraq’s Minister of Planning. At the end of December the two countries signed an accord to work together on trade, technical and industrial issues, bolstering a six-month old agreement. Iraq is also in talks to develop FTAs with a number of other countries, including Qatar, Tunisia, Sudan and India.

….But Still Have A Long Way To Go In Free Trade Arena

Free trade agreements are seen by many observers as the way forward for economic and political reform in the Arab region. Nevertheless, there is also considerable skepticism about free trade agreements in general and the Arab free-trade initiatives in particular. “GAFTA has some great objectives,” one economist says, “but given that Arab countries have made many failed attempts to achieve economic integration and develop trade pacts, many are waiting to see results before they become too enthusiastic.”

A 2001 report by the United Nations’ Economic and Social Commission for Western Asia (ESCWA) entitled Free Trade Areas In the Arab Region; Where Do We Go From Here? forecasts that a number of gains could be derived from GAFTA such as a smooth and gradual integration into the world’s trading system and a collective approach to negotiations with the WTO and other regional blocs. GAFTA could also promote industrial development, generate confidence among domestic and foreign investors, encourage investment flows between ESCWA member countries and attract foreign direct investment and technology transfer. However, GAFTA has problems which threaten to undermine its effectiveness, particularly a list of exceptions for tariff removal that is too large and rules of origin for goods that are too loosely defined. Taxes and charges with similar effects as tariffs remain largely untouched and non-tariff barriers (which can be administrative, quantitative and financial) need to be identified and dealt with appropriately, according to ESCWA. Finally there is a discrepancy in GAFTA (which is ultimately designed to be compliant with WTO rules) because some members of GAFTA are not members of WTO and are therefore not currently subject to the same rules.

ESCWA sees the potential for far greater inter-Arab integration, especially as far as trade and investment flows are concerned. “Despite favorable geographic and cultural elements the Arab region remains remarkably unintegrated economically. Intra-regional trade is small, labor flows are large but skewed, and private capital transactions remain limited,” notes ESCWA, pointing out that over the past two decades the share of intra-Arab trade in the total trade of the Arab region remained below 10%. By comparison, the share of intra-Asian trade was about 40% and intra-Latin American trade 20%. However, one ESCWA source notes that the results are heavily skewed by oil and that if this is removed intra-Arab trade accounts for a more healthy 22% of the region’s total trade.

Although most countries in the region will continue to trade mainly outside the region, primarily with Europe, the US and Asia, the volume and the share of regional trade can rise significantly as a result of greater regional integration, said ESCWA. Increased regional interaction among Arab countries could also stimulate growth and employment, which are a major challenge facing the region. ESCWA notes that there is potential for far greater integration, especially in trade and investment flows. Relatively high initial trade barriers suggest that substantial gains could be made from regional integration, while with an average per capita income well above that of developing countries and about 3% of the world’s population the region offers a large market with considerable purchasing power. According to ESCWA, closer integration is unlikely to have much impact on commodities already traded in the region, particularly oil exports from the GCC, but should promote increased trade in other areas. Beyond the effects on trade, regional integration would boost service flows and intra-regional investments. Arab residents hold some $350bn-600bn of their investment portfolios outside the region, and given the right economic policies in recipient countries even a small relocation in favor of regional activities would make a large difference in the region’s resource base. Moreover a common language and cultural affinity should also facilitate labor and tourist flows within the region.

Table 1

Arab Euro-Med Partners

	Signed	In Force (After Ratification)
Algeria	Initialed 12/2001; Formal signing set for 23/4/2002
Egypt	6/2001
Jordan	11/1997	Expected 1 May
Lebanon	Initialed 10/1/2002; Formal signing set for 23/04/2002
GCC	Under Discussion; Signing expected 2002-03
Morocco	2/1996	3/2000
Syria	Still in discussions; Signing possible in 2003
Tunisia	7/1995	3/1998
West Bank/Gaza Strip	Interim agreement 2/1997	7/1997

Table 2

Arab Members of WTO and Accession Dates

Bahrain	1/1/1995
Egypt	30/6/1995
Jordan	11/4/2000
Kuwait	1/1/1995
Morocco	1/1/1995
Oman	9/11/2000
Qatar	13/1/1996
Tunisia	29/3/1995
UAE	10/4/1996

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Notes:

Algeria – In final round of accession talks (candidate for accession since 1996).

West Bank/Gaza – Pact signed to get £1mn from UK to finance trade development project to match WTO requirements.

Saudi Arabia, Lebanon, Algeria and Yemen have observer status.

Source: World Trade Organization