The signing of the trade agreement between Lebanon and
the UAE in May poses serious questions about the
prospects of the industrial sector, the objective of the government’s
trade policy and the challenges of globalization.
These matters will become more acute as other agreements are
signed with Arab countries, Europeans through the Euro-Med agreement
and the world via the WTO.
The agreement with the UAE, which calls for tariff reductions
(50% before the end of the year, 25% in 2001 and zero tariffs in
2002) is part of the Arab Free Trade accord. When the agreement
was signed, some industrialists threatened to relocate their factories
to Dubai. Although hardly any industrialists call for an import substitution strategy, most, if not
all, ask for protection in the form of higher customs duties.
Some industrialists have been more
pragmatic, requesting tariff protection until
they can deal with high production costs.
Otherwise, they rightly state, they will become
vulnerable to overwhelming competition.
On the opposite end of the spectrum, free
market zealots believe that it’s high time to liberalize
and open borders. This will essentially
boost growth, increase efficiency and productivity,
enlarge the market for our products,
decrease prices, improve quality and so on.
These free trade proponents believe that the
industrial sector is not a significant player in the economy since it contributes 17% to GDP and employs 14% of the
labor force, while Lebanon is a country of services. I confess that
I have purposely polarized these two opinions to better show the
fallacies of both.
The first argument, put forth by industrialists for tariff protection,
is actually less fanatic than it sounds. They basically want more time.
Industrialists advocate higher tariffs on imported goods in order to
allow them to restructure their firms so they can become more competitive
and export. This, at first, sounds convincing. After all, the
industrial sector is facing innumerable problems from uncertain government
policies and bureaucratic obstacles, as well as paying the
price of outdated equipment, lack of financing, low productivity and
the high cost of energy, labor and land. Removing tariffs, particularly
on finished goods, no doubt, will make things even harder.
But to believe that trade protection will make the industrial sector
more competitive is hardly convincing. It will save the industrial
sector from the unforgiving forces of competition and the market
but only for a while. This is because Lebanon will eventually and inevitably reduce all tariffs. The point is that lifting customs
might break the back of the industrial sector, but keeping tariffs
in place will hardly make industries more efficient.
Hence, the key to sustainability and eventually competitiveness lies
elsewhere. Industry will not emerge from the mess it’s in without a
clear and conducive government policy so that investment and
modernization can take place. In other words, the problem is in the
process of policy making. What’s needed is a transparent, serious and
pragmatic mechanism to set an objective and strategy for the industrial
sector given the regional and international changes. Customs
duties could then be used as a tool to achieve this objective.
The second argument has to do with the benefits of trade liberalization. Few people dare to say otherwise,
fearing to be labeled old-fashioned,
communist-fanatic or closed-minded. In any
case, conventional wisdom is that openness to the
region and ultimately the world will boost
growth from lower trade barriers. This goes
through various channels which include an
increase in exports and foreign direct investment,
more job creation and the spillover effect
that raises productivity.
An empirical analysis on several countries by
Dani Rodrik, a professor of economics at
Harvard University, shows otherwise. In fact, he
argues that though countries that have grown faster had also witnessed an increase in
exports, the reverse is not true. One could thus argue that exports
are a source of “learning and technological externalities” for
Lebanon, allowing firms to learn from sophisticated markets
abroad. Rodrik shows that this is true. Exporting firms are indeed
technologically more dynamic, they “tend to have larger plants
that better utilize scale economies, employ a mix of better skilled
workers, and generally outperform non-exporting firms.”
But these firms are in fact dynamic and successful for other reasons.
It is actually because they are dynamic that they export. So
again Rodrik shows that there’s little proof that efficiency benefits
accrue from exporting activities.
To recapitulate, industry cannot develop simply by advocating
protectionism. But it’s equally true that opening up the borders
will not reap the list of benefits advocated by many. The solution
lies somewhere in between: open up the borders selectively to
meet your industrial investment strategy.
Sami Atallah is an economist with the Lebanese Center for Policy Studies. The views
expressed here are those of the author and not necessarily those of the LCPS.
