Inter Arab Trade

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Arab political unity, from being a mantra in the 1950s,has turned into a joke, and today the Arab world’s 22"sister" countries regularly bicker in an endless politicaltragic-comedy. Politically, fragmentation of the Arab worldis clear, but what about economics? The same lack ofintegration had been true in the late 20th century of Arabeconomies as it was of states themselves, but couldintra-Arab business now be reversing that? It used to be thecase that Arab states traded little with each other, butthat is starting to change, thanks in part to the Arab FreeTrade Area (AFTA). AFTA was launched in 1997, and seventeencountries are now part of it (with Mauritania, Djibouti,Somalia, the Comoros, and Algeria still outside) accountingfor 96% of the total intra-Arab trade. The agreement aims toabolish tariffs and other barriers to intra-Arab commerce,and the goal of duty-free merchandise trade among members isnow close.

Partly thanks to AFTA, trade among Arab states has risen:in 2001, 7.2% of Arab merchandise exports went to other Arabstates; by 2005, the figure was 8.1%; with the comparablenumbers for imports moving from 10.2% to 12.4% over the sameperiod. This is not a spectacular jump, and is still farfrom the percentages for intra- EU or North Americancommerce; but the trend is clear, with partial figures for2006 indicating a further rise and the outlook for 2007 evenbetter. The same is true for non-merchandise trade, asbusiness in sectors such as banking, transport, and tourismbooms among Arab countries.

Going beyond AFTA, Egypt, Morocco, Tunisia, and Jordanentered in 2004 into the Agadir Agreement, which seeks toestablish an Arab-Mediterranean free trade zone by 2010.(Lebanon and Syria have also expressed interest in joiningAgadir, and other serious potential adherents are Algeria,Libya, Mauritania, and Palestine.) Encouraged by the highlysuccessful Israeli-Jordanian-American Qualifying IndustrialZone (QIZ) model, which has seen Jordan selling billions ofdollars worth of goods to America in the past decade, Agadirseeks to boost exports to Europe through accumulation ofvalue added among Arab and European producers. To do thisfirst requires unifying "rules of origin" (i.e. the way thatcountries determine where and how goods are transformed intofinished products) to allow member exports to benefit from duty-free entry into the EU market. The principle is simple: forthe manufactures of one country to enter another at a low orno tariff charge under a free trade agreement, a certainamount of local value added has to occur. Agadir aims to dosomething similar to QIZ, but vis-à-vis Europe, adding valuefrom there and from Arab signatories to export to theEuropeans duty-free.

While not a panacea for economic fragmentation, AFTA andthe more ambitious Agadir accord are quietly drawing Arabcountries closer. As the rest of the world integrateseconomically, the Arabs will have little choice but to dothe same. To help thing along, the likes of the Arab TradeFinancing Program (ATFP) is bankrolling intra-Arab tradedeals. One of several schemes of this type, the ATFP, aspecialized Arab financial institution with a mission tocontribute to development of regional trade, was started in1989 by Arab shareholders including regional funds, centralbanks, and a number of private financial institutions. Oneof its latest deals came this year when four Lebanese bankssigned agreement for USD82 m in lines of credit from theprogram. The money is part of a pledge made by the ATFP atthe January Paris III donor conference to give Lebanesebanks USD90 m in soft loans, and the program has nowprovided more than USD930 m to Lebanon since the ATFPstarted operations.

Finally, and related to this trend, intra-Arab investment isalso rising strongly, partly as a result of capitalrepatriation from the West after 911. Jordan is a case inpoint: investments recorded during the first quarter of thisyear by the state Jordan Investment Board (JIB) totaledUSD1.357 b, 212% higher than the USD435 m made during thefirst three months of 2006, with most of the non-Jordanianinflow from the Gulf region. (Actual investments are evenhigher, but these numbers are for projects benefiting fromJIB exemptions.) To spur this process, JIB investmentpromotion offices will open in Kuwait, Qatar and Abu Dhabithis year. You have only to remember the early 90s, whensuch a move would have been unthinkable, to realize how farArab economies have moved together in the past decade and ahalf. Driven increasingly by the private sector, this trendshould continue no.

Riad al Khouri is Director of MEBA wll, Amman andSenior Associate of BNI Inc, New York

Riad Al-Khouri is Middle East director of GeoEconomica GmbH