As the border crisis between Lebanon and Syria unfolded over the last two months, the bars of Beirut and the family restaurants of the Old City of Damascus were host to boisterous and often heated conversations on how it was time for each country to “go it alone.” The fallout from the late prime minister Rafik Hariri’s assassination continues and nationalist sentiments are slowly eroding into the economic bedrock that has linked these two countries for centuries. As tensions are likely to continue for the foreseeable future, especially given the impending release of the findings of the UN investigation into Hariri’s death this month, taking a closer look at what each side needs economically from the other is an important first step in understanding the options each country has at its disposal in weathering whatever crises might lie ahead.
In the first half of 2005, Lebanese exports to Syria totaled $105.7 million, representing 12% of all its exports. Imports of Syrian goods over the same period totaled $90.6 million, representing a mere 2% of all Lebanese imports and 2.6% of overall Syrian exports. Overall, Lebanon relies on Syria for oil products (43%), Mutton (15%), phosphates (8%), fruit and vegetables (6.4%), legumes (3.2%), milk and dairy (3%) and iron products (2.9%). Syria, in turn, relies on Lebanon for paper products (14%), cement (13%), aluminum (6%), marble (5%), sugar (3.2%), juice and water (3%), and alcohol (1.2%).
If economic relations were severed tomorrow, each side could go it alone in terms of import sourcing. However, this would lead to an increase in prices on both sides. Syrian oil and liquefied petroleum gas (LPG) exports to Lebanon are extremely competitive, due to low transport costs and Lebanon’s ability to tap into Syria’s subsidized prices on some products. Lebanon’s paper industry, for example, is one of the region’s best, and sourcing paper products elsewhere from Turkey and Egypt would likely lead to high prices on the Syrian market.
The economic fallout of severing ties would impact not only Syria’s state-owned energy sector, as many Lebanese have speculated, but also Syria’s rapidly growing private sector, which accounts for around 65% of Syrian exports to Lebanon. To offset the losses of a Lebanese boycott, Syrian producers could find larger alternative markets in Turkey, with which Syria has just concluded a free-trade agreement. But as this agreement is phased in over a number of years, while customs on most products between Lebanon and Syria have been abolished, the reorientation of Syrian exports currently going to Lebanon would not be an easy process.
For Lebanon, the impact would be substantial, as Syria was its third largest export market in 2004 (after Iraq and Switzerland), totaling, according to Lebanese customs, some $145 million. Reorienting Lebanese exports would likely be problematic, due to the country’s higher relative production prices that are the result of the Lebanese lira’s current peg to the US dollar and the higher overall skill levels of Lebanese. Currently, Lebanese products are competitive on the Syrian market by virtue of the customs free environment between the two countries, as well as low transport costs. Just how fast exports to Syria could be made up for in the Arab Gulf in the face of stiffer competition from global producers is hard to determine.
Getting to market: Transit
In many ways, the fact that Damascus chose to heighten its “security” restrictions on the Lebanese frontier at the same time that the new “anti-Syrian” government in Beirut was taking shape should not have come as a surprise. It is in the transit of goods that the Lebanese-Syrian economic relationship takes on a much different and largely geographic dimension. With a border to the north and east with Syria, and a southern border with Israel that has been closed since 1948 (except during periods of Israeli occupation), and western coastline facing the Mediterranean, Lebanon is completely dependent on Syria for getting its goods to market overland. Coming to grips with Lebanon’s overland transit issue involves a good deal of crunching of numbers from both Lebanese and Syrian sources. According to the Lebanese Ministry of Economy, overall Lebanese exports (including services) totaled $2.5 billion in 2004. In terms of general trade (i.e. material goods excluding services and tourism) exports, Lebanese customs figures total some $1.747 billion. Of Lebanon’s top 16 export markets, 10 are in the Middle East ($1.339 billion), including Iraq ($255.5 million), Syria ($145.2 million), UAE ($135.3 million), Turkey ($127.3 million), Saudi Arabia ($112.8 million), Kuwait ($67.4 million), Jordan ($62.8 million), Egypt ($39.5 million), Qatar ($30.3 million) and Iran ($21 million).
Just how much of those goods traverse Syria? According to the Syrian Central Bureau of Statistics (which breaks down transit trade by country of origin and country of destination), Lebanese transit trade through Syria in 2004 totaled around $702 million, with $347 million going to the UAE, Qatar, Kuwait, Bahrain, Saudi Arabia, Turkey and Jordan, and $355 million going to “other countries,” including Iraq and Iran. Combining Lebanese figures on exports to Syria ($145.2 million) with Syrian figures on transit trade of Lebanese origin ($702 million) means that around $847 million (around 49%) of all Lebanese general trade (and 33% of overall trade) in 2004 involved goods crossing the Syrian frontier. Another interesting development has come in the area of transit of goods through Lebanon. According to Lebanese customs figures (which are not broken down by country of origin or country of destination, making it difficult to determine directions in the flow of trade), transit of goods totaled a record $355 million in 2004, up from a mere $69 million in 2001 and $185 million in 2003. The reason? Given that transit trade quadrupled starting in July 2003, it seems safe to assume that Lebanese shippers have tapped securely into supplying US-occupied Iraq. In the first six months of 2005, transit totaled around $113 million.
Sanctions busting and smuggling
Figures on “informal” trade between Lebanon and Syria are difficult to come by, with estimates ranging from hundreds of thousands to millions of dollars per year. According to Syrian law, its importers are required to directly import goods from their country of origin using Syrian air and sea ports. The only exception to this rule exercised by Damascus concerns the current US export ban (all goods with 10% US content other than food and medicine) on Syria. Syrian companies seeking US components are then allowed to purchase these goods in other markets. According to Syrian businessmen, Lebanon and Dubai rank as the top two sources for the “re-export” of US goods to Syria, given each country’s higher standards of living and sophisticated markets. While the range of re-exported goods to Syria is as wide as whatever is on offer in the re-export market, Syrian businessmen say they rely on Lebanon largely for high-tech components vital to computers and networking.
Until very recently, goods carried by Lebanese and Syrians across the frontier for “personal” use were substantial. Syria’s military and security presence in Lebanon had one very powerful ancillary benefit: customs procedures on both sides of the border were extremely lax. Furthermore, after Syrian President Bashar al-Assad came to power, historically tight customs procedures were relaxed, leading at first to the construction of several “superstores” in Chtaura where Syrians heading home could stop and purchase anything from food to high tech goods. Business was so brisk over the last few years that Assad’s cousin, Rami Makhlouf, constructed a massive Duty Free in the neutral zone going into Syria, complete with a supermarket, electronic shop, pharmacy, and even a Dunkin Donuts. The Duty Free facility was constructed on the inbound side of the road to Damascus, flying in the face of Duty Free procedures throughout the world that aim at passengers exiting the country.
Exactly how much this trade was worth is unknown, but it was systematic enough that shopkeepers in Damascus openly admitted being supplied with various goods that officially fall under Syria’s import restriction list. This process has become more difficult, however, as shortly after security procedures tightened on the Syrian frontier, Syrian customs reverted back to its old, pre-Bashar self. Today, passengers crossing to Syria are having difficulty even bringing in bottles of Lebanese wine or in some cases water. And many consumer goods previously available in Syrian shops have disappeared.
So in terms of overall informal trade, Syria is much more dependent on Lebanon’s free market for sourcing the goods that are fueling Syria’s growing appetite for globalized products. Import regulations have changed, however, and now products such as Coca Cola, Pepsi and even KFC are available in Damascus via Syrian suppliers and the recent restrictions on the Lebanese border could be the first step towards cutting off Lebanon’s traditional role as Syria’s consumer window to the outside world.
The issue of Syrian labor in Lebanon has been discussed so many times in the Lebanese press that to go into it in depth here would not add anything new. Suffice to say, Lebanon needs cheap, low to medium skilled labor both to carry out the government’s ongoing reconstruction plans, as well as to service private sector businesses and individual homes. As Syrians live right next door, and often have Lebanese family, their availability on the Lebanese market is something that long predates Syria’s 29-year sojourn in Lebanon. Estimates of Syrian laborers in Lebanon vary between 400,000 to 1 million.
The Lebanese state has not made it easy to introduce other foreign laborers to the country, due largely to Lebanon’s lengthy and expensive residency and work permit procedures, which inclusive of insurance total some $1800 per head per year. Such fees have increased in tandem with the Lebanese state’s desperate attempt to deal with its debt problem.
Much less attention has been paid to the role of Lebanese labor in Syria. According to the Syrian-Lebanese Higher Council, some 100,000 Lebanese currently work in Syria. However, this figure is widely believed to be inflated, even by some Syrian government officials. Getting a handle on Lebanese labor in Syria faces the same difficulties in forming good estimates on Syrian labor in Lebanon, as many Lebanese and Syrian families and households overlap. This being said, the utilization of Lebanese expertise was highlighted during a recent crackdown on “illegal” Lebanese labor in Syria. Beginning in July, Syrian police showed up at the door of Syria’s new private sector banks, as well as the country’s two mobile phone companies. All non-Syrians without work papers were duly taken to the Lebanese border and “dropped off.”
According to sources in Syria’s private sector banks, Lebanese play a vital role in the training of Syrians staffing the new banks. Syrians have little experience in banking, following 40 years of a state monopoly over finance. Implementing international bank risk procedures has been a major challenge to the new banks, and deposits are piling up. Private bankers say that Lebanese are vital to training credit managers in several respects. First and foremost, risk procedures vary from bank to bank (or what is called “credit culture”), and Syrian private banks with Lebanese involvement have to learn first hand from their more experienced Lebanese counterparts just what to lend and under what circumstances. Second, of course, Lebanese have the language skills necessary to best explain the institution’s procedures.
Millions of dollars have been flowing into Syria’s private sector banks following their opening in 2003. Nevertheless, Lebanon remains Syria’s piggy bank, with estimates varying widely from the hundreds of millions into the billions of dollars in deposits. And as Lebanese institutions are involved in the vast majority of Syria’s private banking ventures, the link between Lebanese and Syrian finance seems set to remain enmeshed for the foreseeable future.
Bankers say going it alone would be disastrous to both economies. For example, Lebanese institutions known to have substantial Syrian deposits, including BLOM, BEMO, Audi, and Byblos, are heavily invested in Lebanese Treasury Bills. On the Syrian side, the regulatory environment for private banks is still restrictive, as the Syrian state tries to deal with substantial issues concerning interest rates, exchange rates, and the introduction of liquidity facilities. A majority of Syrian traders still use L/Cs from Lebanese banks to import goods. In the end, bankers says that separating the two systems – something that did not even happen during Lebanon’s civil war – would be virtually impossible.
So which neighbor needs the other more? A run down through the issues above shows that Lebanon and Syria enjoy (or suffer from) a complex, symbiotic economic relationship. In many ways, each side thrives off the weaknesses of the other – perhaps the main conceptual pillar of trade throughout the world. But unlike other countries in the region, Lebanon and Syria’s economies have substantial overlap – especially in the areas of labor and finance – which serve as the mortar keeping this complex system alive. Reform in Syria will help allow the country to stop depending on Lebanon to service basic needs – a fact that Lebanese should take to heart as they consider the implications of their country’s long-term economic future. And it is only in looking to that long-term future, and implementing reform plans to achieve set targets, that Lebanese will be able to carve out an economic independence to match their new political reality.