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Trade integration key to economic transformation.

Trade has not historically been a principal driver of growth in non-oil Middle Eastern and North African countries. Yet global integration would go a long way in raising productivity growth through economies of scale and enhanced country specialisation. The forgone cost of low external trade is large. According to many studies, limited global and regional integration in terms of trade, investment and capital flows means 1-2% lower economic growth. For most Arab countries however, intra-regional trade accounts for only a tenth of aggregate trade.

The ratio of exports to gross domestic product (GDP) is significantly below the average for emerging markets and developing economies (EMDEs), and this gap has widened in the past two decades. According to the International Monetary Fund (IMF), the average figure for merchandise exports relative to GDP over the period 2010-12 for the MENA oil-importing countries was 17%, compared with 28% for the EMDEs as a group. By contrast, exports-to-GDP ratios have risen among oil-exporting nations since the early 2000s--reflecting rising production and prices.


For the oil-importers, the net effect of oil price changes on their economies is double-edged. Higher fuel bills, for example, tend to weaken the balance of payments, reduce disposable incomes, and hike business costs. While swelling oil revenues lead to higher external demand from oil-exporting neighbours, including tourism and manufactured goods, as well as larger workers' remittances.

These offsetting effects are particularly crucial for the Mashreq countries: Jordan, Lebanon, Syria and the Palestinian Territories (West Bank and Gaza) as well as oil importers in the Maghreb, including Egypt, Tunisia and Morocco.

The Gulf Cooperation Council (GCC) area remains the dominant source of remittances, foreign investment and bilateral aid to non-oil MENA. The role of remittance flows has increased over years, as with the GCC through both trade and remittances. Looking at the wider MENA region, the share of exports (including oil and gas) to China and India has increased noticeably in recent years, thanks to the Asian giants insatiable thirst for energy.

Trade obstacles

While there has been some tariff liberalisations under the Pan-Arab Free Trade Area (PAFTA), the region's average tariffs, at 12%, remain high by global standards (compared to 8% for the EMDEs) based on IMF data. Some countries have excess tariffs--chiefly Egypt and Tunisia at 18% and 16%, respectively, but Lebanon imposes low tariffs (only 6%) and Morocco has taken steps to lower its own. Meanwhile, non-tariff barriers (NTBs) continue to impede regional integration.

NTBs are trade barriers that resricts foreign imports but not in the usual form of carrying a tariff. Typical examples of NTB's are anti-dumping measures and countervailing duties, which have the same effect as tariffs once they are enacted. NTBs to international trade include import quotas, special licenses, unreasonable standards for the quality of goods, bureaucratic delays at customs, export restrictions, limiting the activities of state trading, export subsidies, technical barriers to trade, sanitary and phyto-sanitary measures, rules of origin, etc.

Increased regional integration, eliminating unnecessary NTBs and harmonising policies, would help MENA countries to successfully integrate into global production chains. The removal of import barriers, however, should be phased-in gradually in order to minimise the risk of negative short-term impacts upon specific industries and employment. Losses in state budgetary receipts from lower tariffs would need to be compensated for, at least temporarily, by hikes in other revenues or by cutting recurrent spending on non-essential items.

Global production chains

Deeper trade integration can provide substantial tangible benefits to regional economies--in terms of job creation in the export sector, productivity growth via increased foreign direct investment (FDI) inflows and access to better and cheaper intermediate inputs. Experience gleaned from developments in Central Eastern Europe, for example, show that integration into international supply chains generates significant Greenfield FDI. Raising the MENA region's openness to emerging Asian markets could boost GDP growth by as much as a full percentage point according to empirical evidence.

The transition towards higher value-added manufactured exports that South East and East Asia has achieved in a range of economic sectors over the last 20-30 years has been slower in the MENA region, partly due to low FDI, which for its seven non-oil countries totalled $13bn in 2012, according to the United Nations Conference On Trade and Development (UNCTAD) World Investment Report 2013.


Three countries (Lebanon, Morocco and Egypt) received 72% of the total FDI regional inflows during that year, accounting for some $9.3bn.


The region needs diversified investments in high value-added manufacturing and knowledge-intensive sectors. This will be the great challenge of development over the next decade. UNCTAD has advised its host countries to "adopt policies that help improve their local capacities, and in particular their labour skills and technological capabilities". Such moves are aimed at creating jobs for the rising youth population.

Larger markets attracts more FDI into labour-intensive manufacturing and services sectors such as transport, telecoms, and finance, all of which help build and increase the wider benefits of regional integration. The drive towards deeper trade integration can also encourage micro-reforms in other areas (such as business regulation and labour markets), which should help further strengthen competitiveness and output potential of respective MENA countries. The efficient movement of goods and services to markets alongside reliable electricity supplies and functioning communication networks are prerequisites for a free and thriving production environment.

MENA oil importers should strike now to reap the benefits of globalisation, but they will also need to reduce further tariff and NTBs. These countries are advised to diversify trade toward the dynamic Asian markets and higher-value-added goods. To better exploit the opportunities presented by global value chains, they also stand to benefit from removing import barriers for their exporting industries.


Penetrating OECD markets

Energising trade also depends on enhanced access to advanced economy markets. For many decades, the EU's high tariffs, quota restrictions and farm subsidies have remained a major hurdle to agricultural exports from the MENA region. The EU could boost and consolidate its trade relationships with non-oil MENA countries through effective implementation of the proposed Deep and Comprehensive Free Trade Areas (DCFTAs). This process will take time, but immediate steps could include improved access for agricultural products.

In December 2011, the European Commission adopted negotiating directives for DCFTAs with Egypt, Jordan, Morocco and Tunisia. These four (grouped in a regional free trade zone within the Agadir Agreement), fall under the Deauville partnership, launched by the G-8 in 2011 to support Arab Countries in Transition towards becoming "free, democratic and tolerant societies".

The DCFTA offers a framework for modernising trade relations and for promoting socio-economic development by the opening of markets via the progressive removal of customs tariffs and quotas, and by an extensive harmonisation of laws, norms and regulations in various trade-related sectors.

The first round of negotiation between the EU and Morocco started a year ago, in April 2013. This DCFTA with Rabat extends significantly beyond the scope of the original Association Agreement to include trade in services, government procurement, competition, intellectual property rights, investment protection and technical regulations. The main goals of DCFTA are to facilitate progressive integration of developing economies into the EU single market by bringing Southern Mediterranean partners closer to EU legislation in trade-related areas. The EU has also pledged support for economic reforms in those four countries.


Some experts insist that providing MENA oil-importers with better access to US and EU markets is important before the implementation of the planned United States-European Union (TTIP), which could have negative effects on regional exports and jobs because of trade diversion from MENA to developed countries within the TTIP zone.

Independent research shows that TTIP could boost the EU and US economies by 120bn [euro] and 90bn [euro], respectively, and the rest of the world by 90bn [euro]. However, the MENA countries stand to gain little given difficulties in increasing market share for their manufactured goods in highly competitive global markets.

The TTIP treaty aims to make it easier to buy and sell goods and services between the EU's 28 members and America, by removing trade barriers in a wide range of sectors, as well as tackling barriers behind the customs border--such as differences in technical regulations, standards and approval procedures. These issues often cost unnecessary time and money for companies hoping to sell their products to both markets. The TTIP negotiators are also look at opening both markets for services, inward and outward investments, and public procurement. Once in force, the treaty could shape global rules on trading across borders.

The capacity for integration

Better logistics, particularly transport networks can have positive effects on export promotion. Some estimates anticipate Egypt's merchandise exports could increase 12% by upgrading logistics quality to a similar level to that of Tunisia. In recent years, Morocco has invested in port infrastructure (including the expansion of Tanger-Med to become Africa's largest port), coupled with simplification of customs rules and abolishing obstructive procedures. In the new world shaped by global production chains, the World Bank notes: "Being competitive requires not just been able to produce at low cost but also to establish a competitive supply and logistics chain, including transport, customs, communications and financial services."

Trade facilitation systems across MENA need improvements, including training for small exporters to help them understand trade rules, and certification procedures. More technical assistance from state overseas marketing agencies would be helpful for smaller firms. Other forms of promotion policies include export credits, insurance/guarantee schemes, and tax concessions on earnings and duty drawback provisions on imported inputs

In sum, the non-oil MENA states can build stronger, dynamic economies by pursuing closer trading ties with each other and with other emerging and developing regions. Integration and reform delivered rapid growth in post-second world war western Europe. The Arab region can also harness the power of integration to achieve sustainable growth and job creation. However, the path to genuine integration needs to operate against a background of strong political unity which, at the present time, is clearly lacking in the region.

On a more positive note, during the past decade, intra-regional tourism has grown, transport connectivity has improved and, thanks to a number of ongoing regional projects, the prospect for regional energy trade appears good.

By international economist and analyst Moin Siddiqi
Trading across borders

               GLOBAL    DOCUMENTS    TIME TO      COST TO
               RANK *    TO EXPORT     EXPORT    EXPORT $/
                          (NUMBER)     (DAYS)    CONTAINER

Egypt              70            8         12          625
Jordan             52            5         13          825
Lebanon            95            5         22        1,080
Morocco            47            6         11          577
Syria             125            8         15        1,190
Tunisia            30            4         13          773

Bahrain            54            6         11          955
Kuwait            113            7         16        1,085
Oman               49            8         10          745
Qatar              58            5         17          885
Saudi Arabia       36            5         13          935
UAE                 5            4          7          630

               DOCUMENTS    TIME TO        COST TO
               TO IMPORT     IMPORT         IMPORT
                (NUMBER)     (DAYS)    $/CONTAINER

Egypt                  9         13            755
Jordan                 7         15          1,335
Lebanon                7         30          1,365
Morocco                8         16            950
Syria                  9         21          1,625
Tunisia                7         17            858

Bahrain                7         15            995
Kuwait                10         19          1,242
Oman                   8          9            680
Qatar                  7         17          1,033
Saudi Arabia           5         17          1,054
UAE                    5          7            590
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Title Annotation:Business/TRADE
Author:Siddiqi, Moin
Publication:The Middle East
Geographic Code:70MID
Date:Apr 1, 2014
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