US economic and trade policy in the Middle East

The DISAM Journal, Spring 2004

United States Economic and Trade Policy in the Middle East

By Alan P. Larson

Under Secretary of State for Economic, Business, and Agricultural Affairs

[The following are excerpts of the testimony presented to the Senate Finance Committee,
Washington, D.C., March 10, 2004.]

The Middle East Challenges and Opportunities

I can think of no other region in the world today that is as vital to U.S. interests, yet poses as
many challenges for us, as the Middle East. As President Bush declared in his speech last May,
“What happens in the Middle East greatly matters to America.” Among those challenges, and the
focus of my remarks today, is the growing thirst for opportunity that characterizes the Middle
East, and the substantial efforts the United States is undertaking to respond to that demand. U.S.
policies to stimulate economic reform and trade liberalization have much to offer, both in terms
of generating growth and employment, and in solidifying our broad ties with this diverse and
culturally rich region. At the same time, they promote U.S. economic and commercial interests.

During the last week of February, I had the opportunity to visit several Middle Eastern cities,
including Ramallah, Jerusalem, Amman, Riyadh, and Cairo. Last week, my colleague Under
Secretary Marc Grossman visited Rabat, Cairo, Manama, and Amman. In our meetings with a
broad spectrum of individuals - from students to business and civic leaders to government
officials - several consistent themes emerged:

- The people of the Middle East, and especially the young people, are yearning for
greater economic opportunities;
- Governments in the region increasingly understand the imperative for economic
reform;
- The many regional leaders — and we ourselves — believe that change and economic
reform come from within, and that the region’s cultural and historical legacy will be an important
factor in shaping those reforms.

The widely quoted United Nations Development Program (UNDP) Arab Human
Development Reports for 2002 and 2003 examine in considerable detail the challenges and
opportunities for building a better Middle East. As the 2003 report concludes, a strategic vision
for establishing a “knowledge society” in the Arab world requires diversifying economic
structures and markets. This also requires upgrading the Arab presence in the “new economy,”
and in opening up to other cultures.

Grounded in home-grown ideas and a realization that change is necessary to generate jobs,
there is growing support in the Middle East for the catalytic role of economic opportunity, a light
that shines brightly, dispelling negativism and despair. I am encouraged by concrete
demonstrations that the Middle East is taking ownership of this process; last September’s U.S.
Arab Economic Forum in Detroit the first ever provided ample evidence of this energy and
enthusiasm.

Of course, I do not want to downplay the formidable challenges and obstacles that lie ahead
before a new, more open, and economically vibrant Middle East can be realized. The Middle East
remains woefully un-integrated in the global trading system. The region’s share of total world
exports accounted for only 5 percent in 2001, and less than 1 percent of global foreign direct
investment.

Middle Eastern economies are characterized by structural rigidities, red tape, high
unemployment, and a lack of export diversity, which have led to sub-optimal economic
performance over many decades. Despite its abundant energy resources and oil wealth, the
Middle East has not been successful in creating opportunities that engender a sense of a better
tomorrow. This is turn has fostered a loss of hope, particularly among young people, which has
increased their susceptibility to those who use terrorism as a means to channel their desperation.

Nonetheless, there is a growing awareness in the Middle East of the nature of the problem,
and of the need to change. U.S. economic and trade policy is calibrated to support these nascent
developments by promoting economic reforms, and by fostering economic ties and trade
linkages. This in turn can help build the prosperity and stability needed to anchor lasting peace
in the region. Recent examples of developments that reflect positive movement in this direction
include:

- Our trading relationship with Jordan has already borne considerable fruit; the U.S.-
Jordan Free Trade Agreement has contributed to regulatory reforms, a dramatically improved
investment climate, and increased investment in human capital. Indeed, Jordan and the United
States have experienced an increase in bilateral trade of 205 percent from 2001 to 2003 alone.
Jordan’s economic reforms have also resulted in the establishment of eleven Qualifying Industrial
Zones, wherein products manufactured in cooperation between Jordanian, Palestinian, and Israeli
entities can be exported to the United States tariff free;
- The U.S.-Morocco Free Trade Agreement, which was just concluded on March 2 of
this year;
- Substantial progress is being made in negotiating the U.S.-Bahrain Free Trade
Agreement;
- Trade and Investment Framework Agreements were signed on February 6 with
Kuwait and Yemen; agreements are also pending with Oman, Qatar, and the United Arab
Emirates, and;
- We are partnering with Saudi Arabia to facilitate its accession to the World Trade
Organization (WTO), a process that is gaining momentum through technical cooperation.

Responding and Supporting Regional Reforms

The Greater Middle East (GME) proposal reflects President Bush’s “Forward Strategy for
Freedom.” This strategy seeks to support peace and security in the Middle East through the
pursuit of freedom and promotion of democracy and human rights, through both words and deeds.
In consultation with various European, G-8, and Middle Eastern partners, we are seeking ways to
encourage and support those individuals, organizations, and governments in the region willing to
embark on the path of reform and positive change. Our efforts should leverage U.S. resources
and those of our partners for the maximum benefit of the region.

This approach has provoked a constructive discussion, launching open debate on the
directions reforms should take, and on the means to achieve those ends. Countries of the Middle
East are contemplating how better to define and organize their approaches to the reform process,
and are engaging a broad cast of interlocutors. In short, the interest and energy of Middle Eastern
countries provide impetus for change and the development of a social climate that increasingly
accepts change.

As recently as last week’s troika meeting with Irish Foreign Minister Brian Cowen, European
Union (E.U.) High representative Javier Solana, and E.U. External Affairs Commissioner
Christopher Patten, Secretary of State Powell held productive discussions on how the E.U. and
the United States can best work together to support indigenous voices for reform in the Greater Middle East. After the meeting between Secretary Powell and his European Union counterparts,
the Secretary declared that the United States and the E.U. “see great opportunity and scope for
cooperation on a Greater Middle East Initiative in the run-up to the G-8, U.S.-E.U., and NATO
summits” to be held this coming June.

The Greater Middle East proposal signals a readiness to undertake projects to address
indigenous calls for change in areas defined by Arab reformers themselves. This self-diagnosis,
outlined in the UNDP Arab Human Development reports, has produced the following priorities
for the region:

- Promoting good governance;
- Building a knowledge-based society, and;
- Expanding economic opportunities.

The last of these, expanding economic opportunities, is essential for a variety of reasons. The
UNDP Arab Human Development Report for 2002 notes that all Arab countries had a combined
1999 GDP of $531 billion, less than that of Spain alone. GDP growth, investment, and
productivity have all declined in Arab countries over the past two to three decades. The World
Bank also estimates that the Middle East will need to create 100 million new jobs by 2020 to keep
pace with the growth in the labor force-age population. The region’s persistent economic
problems demand action in terms of increased economic growth and development, regional
economic integration, and foreign direct investment.

As we prepare for the G-8 Sea Island Summit on June 8-10, 2003, we are considering a
number of ideas that could expand economic opportunities in the Greater Middle East. Among
them are:

- Information technology for business development. With the world’s lowest per capita
Internet access, the Middle East suffers from critical information deficits. Training and technical
assistance can address this vital need.
- Financial reform and the development of capital markets and increased capital access
to small and medium-sized enterprises (SMEs). Increasing economic growth and job creation in
the Middle East requires more efficient allocation of capital and a more vibrant private sector.
Partners should cooperate to improve financial institutions and capital markets to improve the
business environment for small and medium-sized enterprises, which comprise the vast majority
of private businesses in the region.
- Promotion of good business practices and improving the investment climate. Efforts
in this area should include expanding modern business education, promoting best practices for
businesses, and encouraging a level playing field to stimulate investment.
- Promoting regional dialogue on economic and social reform. Partners should address
the need for serious dialogue on economic and social reform by supporting regional fora,
fostering discussion by government officials, regional and international financial and
development institutions, private business leaders, and academics.
- Improving trade opportunities. Intra-regional trade in the Middle East is among the
lowest in the world; furthermore, the area also suffers from low levels of integration with the
global trading system. Partners should provide training and technical assistance to address this
situation, and support regional trade initiatives to facilitate intra-regional trade.

Trade Policy: Export Opportunities and Promoting Reform

The United States has several objectives in its economic and trade engagement with the
Middle East, including:

- Ensuring a level playing field for exports, so that our goods and services are not
disadvantaged in comparison to those of others, such as the European Union, in terms of their
ease of market entry;
- Encouraging greater market access generally, so that the Middle East becomes more fully
integrated into the world trade system, with minimal barriers to entry, and commercial
transactions with a broader range of partners involving a greater scope of goods and services;
- Accelerating economic reforms and trade liberalization essential to the development
of sound fiscal and monetary policies that provide the foundation for long-term, sustainable
growth and employment creation, and;
- Engendering alternatives to the often stagnant economic situation many countries
face, which is all too often accompanied by rising unemployment, minimal technology transfer
and skills development, and a lack of export diversification.
Supporting innovative efforts to
transform economies from sluggish to dynamic will pay social dividends, as countries become
increasingly able to provide opportunities commensurate with rising expectations. This will offer
alternatives to despair and acts of desperation, as societies afford a broader range of prospects for
prosperity. Economic reforms will also provide opportunities for those, particularly the young,
who might otherwise become disillusioned and hence vulnerable to exploitation by those who
advance terrorism as a means to express their grievances.

The U.S. experienced a $17.9 billion dollar merchandise trade deficit with the Middle East in
2003. U.S. imports of crude oil and petroleum products represent over 55 percent of Middle
Eastern exports to the United States. Without trade in crude oil and petroleum products, the U.S.
would have run a $3 billion/year trade surplus with the Middle East.

In 2002, U.S. exports to the region reached a level of $23.6 billion, principally from sales of
machinery, equipment, vehicles, manufactured goods, and foodstuffs. This, however, is dwarfed
by the volume of exports from the European Union to the Middle East, which attained a value of
$97.7 billion in 2002. In terms of total bilateral business activity, the U.S. traded $62.1 billion
with the region in 2002, in comparison to $176.2 billion for the European Union.

Market access is therefore an area that needs to be addressed. Tariffs and quotas in the region
remain too high and limit the opportunities for U.S. products in Middle Eastern markets.
Moreover, U.S. goods and services have also been handicapped by the advantages European
traders have enjoyed in the region.

Building on its favored position, the European Union has an ambitious trade agenda for
the Middle East. It has already entered into an Association Agreement with Egypt. It is essential
that the United States strive to counter these trends in the Middle East to ensure that we gain equal
market access and enjoy a level playing field. While that market is currently small, the potential
for growth is large.

The United States is addressing this situation with abroad strategy of economic engagement
activities. On May 9, 2003, President Bush reaffirmed the U.S. government’s commitment to
promoting and supporting economic reform in the region. This broad policy initiative includes
the proposed Middle East Free Trade Area (MEFTA).

The President’s vision for MEFTAis to build, over a decade, on current free trade agreements
with Israel and Jordan. MEFTAoffers a framework for openness, trade integration, and economic
development for the Middle East. Applying technical assistance, it seeks to promote trade
expansion and policy reforms, re-igniting economic growth and expanding opportunities
throughout the region.

The U.S. government is working with countries of the Middle East through a series of
graduated steps tailored to their individual level of development.

Trade and Investment Framework Agreements (TIFAs) - are typically the initial fora for
ongoing dialogue with the U.S. government on economic reform and trade liberalization. TIFAs
promote the establishment of legal protections for investors, improvements in intellectual
property protection, more transparent and efficient customs procedures, and greater transparency
in government and commercial regulations.

As of mid-2003, the United States had signed TIFA agreements with Algeria, Bahrain, Egypt,
Tunisia, and Saudi Arabia. In February 2004, we signed with both Kuwait and Yemen.
Furthermore, TIFAs are currently under negotiation with Oman, Qatar, and the United Arab
Emirates. Through this process, and the joint development of robust action plans, the U.S.
government can identify potential partners for further trade cooperation, such as free trade
agreements.

In consultation with Congress, the U.S. government is pursuing a series of Free Trade
Agreements (FTA) with Middle Eastern countries to build on those already concluded with Israel
and Jordan. These agreements are designed to expand bilateral trade through commitments to
high standards and comprehensive trade liberalization.

On March 2, following a year of intense negotiations, we concluded Free Trade Agreements
negotiations with Morocco; which will immediately provide duty-free market access to 95
percent of traded goods, providing significant incentives for both countries to identify and target
opportunities in each other’s markets. This agreement covers all agricultural products, and
provides substantial market access to the services sector, such as banks and insurance companies. Furthermore, the FTA affords legal protections for U.S. investors, as well as covering trademarks,
copyrights, and patents. The Morocco FTA is a high-quality agreement that will set the standard
for FTAs with other Middle East partners.

Building on the Morocco agreement, the U.S. government hosted Round II of the U.S.-Bahrain Free Trade Agreement negotiations here in Washington last week. The round went well;
based on progress attained so far, we look forward to concluding the agreement by mid-year.

Many Middle Eastern trading partners are in close and active consultations with us through
the TIFA process, and have a strong interest in concluding an FTA with us, including the United
Arab Emirates, Tunisia, and Egypt. More open markets in these and other countries will offer not
only significant opportunities for U.S. exporters, it will also reinforce their economic reform
efforts. We are actively engaged with these countries on a range of pending bilateral trade and
economic reform issues through the TIFA Council process and other bilateral discussions.
Continued progress in these areas will help pave the way toward eventual FTAs.

The U.S. government has been working with countries of the region so that they can take
advantage of the Generalized System of Preferences program. On March 1, 2004, President Bush
announced that Algeria had qualified for GSP; on the same day, he also announced that Bahrain
would graduate from GSP eligibility on January 1, 2006, as its per capita income had moved it
above the World Bank’s developing country threshold a Middle East success story.

The U.S. government is also actively engaged with several Middle Eastern countries - Saudi
Arabia, Algeria, Yemen, and Lebanon - to expedite their accession to the WTO. The accession
process involves countries voluntarily opting for economic reform and trade liberalization in
order to join the rules-based world trade system. We see WTO accession as a key step forward,
as it involves making commercially meaningful market access commitments for goods, services,
and agricultural products. So powerful is the interest to participate in the global marketplace that
Iraq has already sought and gained WTO status as an observer. This will help accelerate its
reintegration into the global trading system.

The United States would like to see countries of the region play a stronger role in advancing
the World Trade Organization’s Doha Development Round. Leadership, particularly by key
countries such as Egypt, Morocco, Tunisia, and Jordan, as well as Pakistan and Turkey, would go
far to reinvigorate this essential global dialogue about the future of the world’s commercial
transactions. Their concerted efforts could result in the preparation of a framework agreement by
mid-2004 by leveraging participation by a broader spectrum of countries.

A major weakness the Middle East shares with other regions of the world is a lack of expertise
and skills needed to promote greater trade. In recognition of this, the United States has
committed, as a part of the Doha Development Round agenda, to a major effort to help these
countries to develop these skills. There are a variety of means that the U.S. government is
undertaking to build trade capacity, so that countries of the Middle East can take full advantage
of increased trade opportunities with the United States. In addition to promoting trade-related
policies that enhance the business environment, the Middle East Partnership Initiative (MEPI)
plans to establish regional offices in Tunis and Abu Dhabi to coordinate trade capacity building
efforts.

In 2003, the U.S. government expended over $174 million in the Middle East in trade capacity
building. Most of this assistance involved trade facilitation, financial sector development,
support for governmental transparency, export promotion, and business services and training.

A key funding mechanism for trade capacity building and trade-related technical assistance
derives from the MEPI. MEPI-provided assistance, carried out in cooperation with the United
States Trade Representatives and U.S. Agency for International Development, includes a broad
spectrum of economic reform and trade liberalization elements. It involves facilitating WTO
accession, assisting in TIFA-driven policy restructuring, and supporting regulatory measures for
ensuring compliance with FTA provisions. Broadening the base of trade between the United
States and the countries of the Middle East is necessary but not sufficient. It is essential that the
U.S. government also work to promote trade between Middle Eastern countries. Economic
interdependence is key to forging strong linkages between countries of the region, which will
promote mutual prosperity and increase the collective stake in regional peace and stability. This
presents a complex issue, as many Middle Eastern countries have relied for too long on
petroleum-based exports to drive their economies, versus building a more diverse export base.

Trade within the Middle East accounted for only 8 percent of the region’s total trade in 2001.
This is far below the intra-regional level of nearly 75 percent for Europe and 50 percent for Asia.
Increased intra-regional trade not only promotes economic growth and development, it also
enhances the political stability of the region through fostering interdependence.

The United States can foster greater intra-regional trade through several means, including
supporting the efforts of the Gulf Cooperation Council (GCC) to generate a greater volume of
trade between its six member states through the customs union it launched in January 2003; the
Agadir Initiative, wherein Morocco, Tunisia, Jordan, and Egypt are forming a free trade area; and
the promotion of an economic policy dialogue within the region.

Conclusion

To summarize, the countries of the Middle East have taken stock of their economic situation,
and have decided to participate more fully in the world trade system. Recognizing that the future
of their youthful societies lies in the creation of meaningful economic opportunities, the countries
of the Middle East are increasingly open to making the sometimes-difficult choices required to
effect economic reform and trade liberalization. The United States is responding to this thirst for
economic opportunity. Through MEFTA, MEPI, and other components of our economic and
trade policy, we are supporting efforts of Middle Eastern countries to reform and liberalize, while
simultaneously increasing market access opportunities for U.S. goods and services - a “win-win”
situation.

source: DISAM