Is Protectionism Obsolete?

Domestic trade among the Arab states has not made much progress yet. Many politicians and independent businesspeople hope that the ratification of the Agadir Agreement with the EU will improve the situation. By Frederik Richter

Domestic trade among the Arab states has not made much progress yet, hampered by the persistence of customs barriers and bureaucratic procedures. Many politicians and independent businesspeople hope that the ratification of the Agadir Agreement with the European Union will improve the situation. By Frederik Richter

A grocery store vendor shows bottles of Mecca-Cola in the West Bank town of Nablus (photo: AP)
For most Arab nations exchanges with other countries in their own region account for no more than 10 percent of their foreign trade

​​Free trade agreements are the wave of the future in the Middle East. Every few months, trade ministers from the various Arab states shake hands and hold up freshly signed treaties to be photographed by the press.

This is quite surprising in view of the fact that 17 member states in the Arab League formed the GAFTA free trade zone as far back as 1997, with all customs duties abolished as of the beginning of 2005.

Despite this initiative, however, there is still no sign today of flourishing trade between the Arab nations. For most of them, exchanges with other countries in their own region account for no more than 10 percent of their foreign trade.

During the World Economic Forum in Sharm El-Sheikh last May, the Egyptian Minister of Foreign Trade and Industry, Rashid Mohamed Rashid, soberly confirmed that, "We've dreamt for the past 50 years of an Arab common market, but the problem is that we were merely dreaming – and did nothing else."

Bureaucratic barriers

Customs duties have largely been abolished in the region, but other barriers remain. "The true obstacle is the bureaucracy," says Gamal Bayoumi, General Secretary of the United Arab Investors, "not because it is against an agreement per se, but because it tends to defend the particular interests of the countries involved."

For example, the existing bilateral agreements contain blacklists of products that are categorically excluded. The stipulated import licenses, prescribed product standards and bureaucratic customs procedures all help further to hinder trade between companies in the region.

What's more, the logistics and transport infrastructure between the Arab states is poorly developed: roads are often of low quality, railways play hardly any role at all in the region, and airports and harbors have limited capacities.

Identical export products reduce trade opportunities

Said Abdallah, State Secretary of the Egyptian Ministry of Foreign Trade and Industry, expects an agreement to be reached by the end of this year. The states involved are working feverishly on simplifying the regulations governing product origin. This should counteract what is often cited as the main reason behind weak inland trade in the Arab world.

"The major problem is the overlapping export profiles of the Arab economies," Abdallah explains. Since – apart from the high proportion of raw materials amongst their exports – the Arab states often manufacture the same products, trade between them is difficult to encourage.

In the coming years, help may well be on the way from outside the region. In response to terrorism and migration pressure, the EU made a goal of promoting stronger economic cooperation with the states along the southern coast of the Mediterranean as long as 11 years ago in the so-called Barcelona Process.

At the time, association agreements were concluded with some countries that lifted customs barriers and simplified bureaucratic procedure and economic policies. De facto, however, the Barcelona Process has borne little fruit. One reason for this can be found in the lack of regional trade.

Hopes placed in the Agadir Agreement

The Arabs therefore had high hopes for the success of the Agadir Agreement, introduced in February 2004 to create a free trade zone between the EU and Morocco, Egypt, Jordan and Tunisia.

This agreement stipulated, however, that companies in one of these countries could import products that contain preliminary products from one of the other Arab nations customs-free into the EU. This is designed to provide a greater incentive for countries to import preliminary products from their own region, thus fostering regional trade.

The Agadir Agreement has not yet gone into effect since the signature of Moroccan King Mohammed VI is still pending. One can't help but suspect that this delay can be traced to pressure exerted by certain influential sectors of Moroccan business that fear foreign competition.

Nevertheless, the European Union has not yet given up hope that in four years the Agadir Agreement and the bilateral agreements in the region will make possible the development of a large-scale free trade zone between the EU and the states of the southern Mediterranean.

Regional trade is viewed as one of the key factors for economic growth. Moreover, functioning trade agreements also attract important foreign direct investments.

For example, Siemens produces computer parts and telephone systems in Egypt that are then exported to Arab and African markets because the Egyptian market is too small.

"But Egypt is not in competition with Saudi Arabia and Saudi Arabia is not competing with Jordan. Instead, our rivals are China, India, Brazil," says Mohammed El Mehdy, Siemens CEO in Egypt. "No matter what we do here, it won't stop the others from doing business in our region." Inexpensive Chinese products in particular have become ubiquitous in the countries of the Middle East in the past several years.

Ultimately, it is only the businesses themselves that can drive improvements in the conditions for regional trade. "The days of protectionism are numbered," Egyptian Trade Minister Rashid is convinced.

In his view, businesses have already begun to think along regional lines and to appeal to their governments to help boost regional trade. "It used to be that every minister in the region was under pressure to protect his national market. Today, it is the businesses that are pressing for a more open market."

Frederik Richter

© 2006

Translated from the German by Jennifer Taylor-Gaida

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