Vying for position

Al-Ahram Weekly (Cairo) | 27 December 2007

Vying for position

In the second and final instalment of articles on Arab economies and globalisation, Riad Al-Khouri* looks ahead to more competition and trade liberalisation in the region in 2008

In the context of globalisation, the European Union and the United States are increasingly involved in a widening medley of trade and other agreements in the Middle East and North Africa region (MENA). As the EU and US push for more and varied free trade agreements, rivalries between these global economic giants also spur competition among Arab countries.

Arab commercial relations with both America and Europe became more complex after 9/11. Direct connections between trade and diplomacy strengthened, with the US arguing for trade liberalisation as central to anti-terrorism. This new US focus resulted by the middle of this decade in several Free Trade Agreements (FTAs) with regional states (as well as a grand design for a Middle East Free Trade Area linking the region with America). This included FTAs in parts of MENA where Euro-Med agreements already existed, (e.g. Jordan and Morocco) as well as in areas outside the Barcelona sphere, such as some Gulf Cooperation Council (GCC) states.

While such accords at first glance appear to be mainly economic, the first FTA with an Arab country, Jordan (then the second such US pact outside North America and the first with an Arab country) only gelled a few weeks after 9/11. Meeting a strategic need to support an anti-terrorism ally, the Jordan- US FTA breezed through the American legislature in the wake of the September 2001 attacks, having previously languished unchampioned.

Other FTAs with Arab states followed after 9/11, and Egypt signed a Qualifying Industrial Zone (QIZ) pact at the end of 2004. This was again — in the context of Middle East diplomacy — a "gift" to Egypt, but the accord also threatened the US trade with Jordan, which had a QIZ. It is interesting to note the pre-9/11 strategic motivation of the QIZ accord with Jordan, described by the US as an "incubator" for the FTA. On the other hand, the Jordan-US FTA could eventually make the Jordanian QIZ irrelevant, though this is still unclear. Additionally, QIZ with Egypt and American FTAs with individual neighbouring Arab countries are part of the US trade policy of "competitive liberalisation", promoting competition among states engaging in free trade with America. Further, there have been suggestions within the region and the US for yet more free trade accords with various other MENA countries. This includes, for example, a QIZ with Turkey and an FTA with Egypt, among others, which would intensify competitive liberalisation.

Like accords between Arab countries and the US, the EU is pushing free trade with MENA through the Euro-Med Partnership (and now a Neighbourhood Policy) that also covers non- trade issues, including immigration. While migration benefits both the EU and MENA, making the link between illegal immigrants in Europe and crime or terrorism has intensified. This complicates arguments for free trade in goods and services across the Mediterranean. In any case, Morocco, one of the two Euro-Med agreement signatories with which the US has an FTA, concluded the latter as a counterweight to the EU’s dominant commercial and diplomatic position, though this was not obviously the case in Jordan, the only other FTA/ Euro-Med adherent.

Along with most other Arab Mediterranean states, Egypt has a Euro-Med Partnership agreement, under which all Egyptian manufactured goods enter the European Union free of tariffs (though non-tariff barriers remain). As of January 2004, the EU also abolished customs duties on agricultural imports from Egypt. Though duties on EU agricultural products entering Egypt still exist, most fell by at least 25 per cent or disappeared in certain cases, although some of these reductions are subject to quotas. Gradual tariff cuts will come for EU processed agricultural products entering Egypt; and duties on imports of their industrial goods are being phased out, as agreed during two rounds of trade liberalisation over the past few years. As a result, Egyptian exports to the EU have accelerated since 2004, while trade in the opposite direction has also risen, but more slowly.

A third round of trade talks between Egypt and the EU was to have begun on 5 December, but there has been a postponement due to the two sides’ differing approaches: the Egyptians wanted bilateral talks, while the Europeans wished to negotiate simultaneously with all Agadir partners. In any case, talks will be in the framework of the European Neighbourhood Policy (ENP). Under the EU-Egypt ENP Action Plan of March 2007, negotiations will identify and adopt supporting measures to ease access to export markets by, among other things, approximating technical legislation and increasing cooperation in international marketing standards for all raw and processed agricultural goods. Under the plan, this will come with aid of 558 million euros in 2007-10, which in turn should also help attract lending for investment of 250-300 million euros, for a total of over 800 million euros.

Another element of the ENP Action Plan calls for adoption and implementation of the protocol on Pan-Euro- Mediterranean cumulation of origin, which Egypt has now entered into, through the Agadir Accord. This allows for diagonal cumulation among Mediterranean Partners that have identical rules harmonised with those of Europe, and have negotiated among each other to set up a free trade area. This is, in fact, a geographically expanded multilateral kind of QIZ, which itself has so far stuck to Israel and bordering Arab countries.

To maximise the benefits of this sub-regional QIZ-like possibility, in 2001, Egypt, Jordan, Morocco, and Tunisia signed the Agadir Agreement, which will harmonise rules of origin among the four states and with the EU to achieve diagonal cumulation and thus export to the European market free of restrictions. Finally activated in March 2007, this agreement opens important possibilities for Arab economies that have so far failed to export substantially to Europe, as under the QIZ model. However, the practical impact of Agadir has yet to come in Egypt.

QIZ, on the other hand, has started in Egypt. As of December 2004, this free trade accord with the United States and Israel allows Egypt to export duty- and quota-free to the US, provided a certain amount of Israeli value added goes into the Egyptian output. Egyptian QIZ production started two years ago with an approximate $60 million in exports to the US in the second quarter of that year. That figure had tripled by mid- 2007 and looks set to climb much higher.

By contrast, QIZs in Jordan are now producing at a slower pace. However, unlike Jordan, Egypt has no FTA with the US, so Egyptians will now have to depend solely on QIZ for exports to America. On the other hand, indications so far are that QIZ in Egypt will turn out to be much more effective than it has been for Jordan, and the 2008 prospects for the former are excellent. On the other hand, Jordanian QIZ production next year may stagnate. Jordanian QIZ problems are yet another example of the volatile mixture of rapid but superficial expansion on a still shaky economic base. QIZ seems to have been good for many non-Jordanians, but the people of Jordan have not been major beneficiaries.

So how can the benefits of trade and globalisation accruing to the rich and well-connected also be good for average people? The answer is that larger doses of democracy and liberalisation may help the region cope with the forces of globalisation. Well-thought-out democratic practices and properly introduced liberalisation help make the best of globalisation. Regarding recent and continuing entry of Arab countries into trade agreements, experiences of various regions, including Latin America and South and East Asia, suggest that negotiation capacity of states seeking to join trade pacts actually increases as pressure groups play active roles in this process. By contrast, in many cases, Arab negotiators themselves monopolise, and so weaken, their own countries’ negotiation position; and contribute to narrowing policy space by avoiding difficult negotiations with various local pressure groups. In negotiating trade pacts, Arab governments also fall short in the broadening of the debate about different economic policies to choose, given concentration of political decision-making. The weakness of Arab dissent and its lack of organisation also work against the proper ventilation of socio-economic issues, including, of course, globalisation.

In the context of this top-down approach to economic policy, it will be interesting to see how MENA states play off America against the EU as more countries of the region enter into free trade pacts with both powers in 2008. Individual Arab states, as well as sub-regional groupings such as the GCC, must learn to be better negotiators, keeping in mind globalisation’s inevitability. That does not mean, however, that just because something is inevitable, it must be either fought against insanely (as happened in 9/11) or accepted almost without question by Arab countries that are diplomatically too close to the West and not well connected to their own people.

* The writer is a visiting scholar at the Carnegie Middle East Centre, Beirut, and senior fellow of the William Davidson Institute of the University of Michigan.

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source: Al-Ahram