Free Trade Area quietly draws Arab countries closer

By Alazar K.

The Arab world is fragmented, its 22 "sister" countries regularly bickering in one endless political soap opera. The state structures within each country are also fragile, with soldiers and policemen propping up corrupt regimes, or misdirected coercive power causing mayhem as in the different but equally sad examples of contemporary Iraq, Lebanon, Palestine and Somalia.
The special case of the Palestinians aside, decades after the last Arab country gained independence the internal and external disarray of Arab states is mutually re-enforcing to make a complex vicious circle. But putting aside the political weakness and fragmentation of Arab countries, what about economic structures?
Not surprisingly, the same is true of Arab economic structures as it is of politics: Arab economies have historically been un integrated with each other, while internally they still have a long way to go to become sustainablly prosperous.
Could that now be changing? Though political reform is still a distant mirage for many in the region, some positive economic developments are becoming apparent. Among these are internal business liberalization processes in several Arab countries, while external trade developments also look promising.
It used to be the case that Arab states did little business with each other, but that is starting to change, thanks in part to the Arab Free Trade Area (AFTA). AFTA was launched in 1997, and 17 countries are now part of it (Mauritania, Djibouti, Somalia, the Comoros, and Algeria are still outside) accounting for 96 percent of total intra-Arab trade.
The AFTA aims to abolish tariffs and other barriers to intra-Arab commerce, and the goal of duty-free merchandise trade among members is now close to being achieved. Services had initially been excluded, but 11 countries have now started the process of integrating their non-merchandise trade into AFTA.
Partly thanks to AFTA, trade among Arab states has risen: in 2001, 7.2 percent of Arab merchandise exports went to other Arab states; by 2005, the figure was 8.1 percent; with the comparable numbers for imports moving from 10.2 percent to 12.4 percent over the same period. This is not a spectacular jump, and is still far from the percentages for intra- EU or North American commerce but the trend is clear, with partial figures for 2006 indicating a further rise and the outlook for 2007 even better. The same is true for non-merchandise trade, as business in sectors such as banking, transport, and tourism is booming among Arab countries.
Finally, and related to this trend, intra-Arab investment is also rising strongly. Parallel to but going beyond AFTA, Egypt, Morocco, Tunisia, and Jordan in 2004 entered into the Agadir Agreement, which seeks to establish an Arab-Mediterranean free trade zone by 2010. Lebanon and Syria have also expressed interest in joining Agadir, and other serious potential members are Algeria, Libya, Mauritania, and Palestine.

Encouraged by the highly successful Israeli-Jordanian-American Qualifying Industrial Zone (QIZ) model, which has seen Jordan selling billions of dollars worth of goods to America in the past decade, Agadir seeks to boost exports to Europe through accumulation of value added among Arab and European producers.
To do this first requires unifying "rules of origin" i.e., the way that countries determine where and how goods are transformed into finished products to allow member exports to benefit from duty-free entry into the EU market.
The principle is simple: for the manufacturers of one country to enter another at a low or no tariff charge under a free trade agreement, a certain amount of local value added has to occur. In the case of the QIZs, a product with 11.7 percent added value that is Jordanian, 7-8 percent Israeli and the balance of 35 percent from either the US or Palestine, can enjoy duty free entry into the American market.
For example, if a skirt costing $1 is imported into Jordan from India and dyed in Amman to raise its value to $1.12, it cannot by that transformation alone enter the US market free of duty under current Jordanian-American trade rules.
However, if that same skirt also gets Israeli trim worth $0.08 and an American zipper costing $0.16, then the finished product has added the necessary amount of value (in this case stipulated at 35 percent or more) to qualify for duty free entry into the American market.
Agadir aims to do something similar vis-a-vis Europe, adding value from European countries and Arab signatories to enter the EU duty-free. While not a panacea for economic fragmentation, AFTA and the more ambitious Agadir accord are quietly drawing Arab countries closer. As the rest of the world integrates economically, the Arabs will have little choice but to do the same.