Regional Integration through Trade in Goods

Trade volumes usually increase when competitiveness improves and thus demands for exports to go up.

This has been well illustrated for MENA as the total exports in the region has been quadrupled from the late 1990s to the late 2000s thus rising from US$ 194 billion per year to US$ 825 billion per year.

Accordingly, total imports have also increased from US$ 165 billion per year to US$ 607 billion per year.

Nearly 80 percent of the growth in exports is associated with petroleum, and the petroleum exporting countries of the region have accounted for two-thirds of the growth in import demand.⁵⁶¹

The above numbers confirm the important role that petroleum plays as the most competitive product, in the region. Nonetheless, if we consider nonoil export of the region, trade integration in the global economy would be quite slow. As mentioned, the share of non-oil world trade was only 1.8 percent despite the fact that MENA inhabits 5.5 percent of the world population (2008-10) plus 3.9 percent of the world’s GDP. Therefore, outside of petroleum, most countries represent a narrow trade base being 2-3 percent of the total trade as merchandise trade of the region (Hoekman and Zarrouk 2009).⁵⁶²

Nevertheless, the Gulf Cooperation Council (GCC) nations took a relatively different path during the past decade by a rapid expansion of trade and investment in particular with China and India, two emerging economic powers, as such basing a strong complementarity with these countries (Habibi 2011).⁵⁶³ These

558 Rouis, Mustapha. “Economic Integration in the Mashreq.” Middle East and North Africa Region. Washington, DC: World Bank, 2010.

559 Rouis, Mustapha; and Ali Al-Abdulrazzaq. “Economic Integration in the GCC.” Middle East and North Africa Region. Washington, DC: The World Bank, 2010.

560 Rouis, Mustapha; and Komlan Kounetsron. “Economic Integration in the Maghreb.” MENA Region, Washington, DC: The World Bank. 2010.

561 Rouis and Tabor (The World Bank, 2013), p. 11-12.

562 Ibid, p. 12; With reference to:

Hoekman, Bernard; and Jemal Zarrouk. “Changes in Cross-Border Trade Costs in Pan Arab Free Trade Area.” Policy Research Working Paper No. 5031, Washington, DC: The World bank, 2009.

563 Habibi, Nader. “Growth in Economic Relations of China and India with the GCC Countries.” Asian Pacific Economic Literature, 2011; 25 (2): pp. 52-67.

two powers are considered the fastest-growing oil consumers of the world, while the GCC countries are considered having the largest deposits of oil and gas. The bilateral trade is being led mainly by Saudi Arabia and the United Arab Emirates. Moreover, fossil fuels are the main exports from the GCC to India and China. In return, the main imports from India into the GCC are food and refined products while manufactured consumer goods and capital goods are those from China to the GCC. This rapid growth in merchandise trade has also triggered growth in other sectors including bilateral investments in the energy, finance sectors and real estate.⁵⁶⁴

The lowest share of intraregional nonoil merchandise trade belongs to the Maghreb countries so far⁵⁶⁵ as being less than 5 percent, which has somewhat increased a bit since 2000. Intraregional trade in the Mashreq and GCC, have been relatively larger. In the Syrian Arab Republic and the Republic of Yemen (both currently engulfed with conflicts), regional markets account for more than half of all nonoil exports.

In Oman, Bahrain, the United Arab Emirates, and Lebanon, they account for 35–40 percent while they comprise of more than 25 percent of nonoil exports in case of the Arab Republic of Egypt, Jordan, Kuwait, and Saudi Arabia. For Jordan and Syria, the ratio of intraregional trade to GDP exceeds 15 percent while it is in the low single digits in the other countries of the MENA region. Such ratio is in fact low in resource-rich, labor-importing countries in which the ratio of total exports to GDP is considered high (Hoekman and Zarrouk 2009).⁵⁶⁶

With the rise of India and China a competition has emerged in the new markets for nonoil products making it difficult for MENA countries to retain market share. For example the EU market has been affected by this competition. China’s share drastically rose in particular for textiles, apparel, and electronics. Between 1995 and 2006, the EU market has been gradually replaced from Maghreb countries nonoil products to the Chinese ones. The dominant market for Maghreb countries’ exports in 1995 was the European Union accounting for half of exports from Egypt, Syria, and Islamic Republic of Iran.⁵⁶⁷ This is while, by 2006 with the exception of the Republic of Yemen, the above share in the EU market fell in all Maghreb countries. Also, on the home front, the rapid increase in imports from China and India affected the consumer prices in the MENA region, and as the result of the competition, domestic producers faced difficulty particularly in the electronics, textiles, leather, and furniture industries (Pigato

564 Rouis, Mustapha and Tabor, Steven R. “Regional Economic Integration in the Middle East and North Africa:

Beyond Trade Reform.” The World Bank, Washington DC, 2013, p. 12.

565 Ibid, p. 13.

566 Ibid.

567 Ibid, p. 14.

2009).⁵⁶⁸

Even though Barriers to Trade in Goods have been lowered, compared with other regions, the level of tariff protection in MENA is still high by international standards particularly in agriculture that is considered a sector heavily protected by high tariffs within the MENA region. Nontariff measures (NTMs) have also become the most important barriers to trade in case of the MENA region. Accordingly NTMs continue to impede regional integration in spite of tariff liberalization that took place under PAFTA. Beside the border closures, such NTMs cause excessive delays as the result of lengthy clearance and inspection processes as well as the bureaucracy involved in the customs. Taking into account such NTMs when calculating the OTRI (Overall Trade Restrictiveness Index), the MENA region would be considered the most restrictive region in the world in particular because of such high NTMs on agriculture goods (Figure 7.2.). The only exception in Agriculture would be South Asia. Overall, such high NTMs continue to impede regional integration in spite of the tariff liberalization under PAFTA.⁵⁶⁹

Beside the NTMs impediment, the poor regional trade logistics performance is also an issue. The current logistic services imposed some internal costs on the way of shipping goods from the factory gate to the port, and from ports to retail outlets, that all create significant hurdles in the region with the exception of the United Arab Emirates (UAE) that is among the world’s better performers in this regard. More into details; for example, the Doing Business “cost of trading” data confirms the high costs related to the procedures involved in export or import of a 20-foot container within MENA. Such costs include document and administrative fees for customs clearance as well as technical control, inland transport and terminal handling charges.⁵⁷⁰ As exceptions, in 2012 however, the United Arab Emirates, Qatar, and Saudi Arabia were among the top 40 logistics performers. This whole picture suggests the necessity to implement the institutional reforms as such in order to facilitate trade within the MENA region.

In parallel with such institutional reforms, MENA has significant opportunities to reform trade regimes in the region to achieve deeper economic integration. MENA countries should first unilaterally reduce their MFN tariffs to the level of the most competitive regions such as East Asia. In addition, the existing NTMs ought to be reviewed and streamlined by learning from other countries experiences.

568 Ibid, with reference to: Pigato, Miria. “Strengthening China’s and India’s Trade and Investment Ties to the Middle East and North Africa.” Orientations in Development Series. Washington, DC: The World Bank, 2009.

569 Rouis and Tabor (The World Bank, 2013), p. 19.

570 The cost measure does not include tariffs or trade taxes. Only official costs are recorded. Inland transport costs are based on distance to the shipping port. The methodology, surveys, and data are available at:

http://www.doingbusiness.org.

Figure 7.2. Overall Trade Restrictiveness Index (OTRI) by Region, 2009

New regulatory impact should be established so as to improve the process through which new NTMs are created.⁵⁷¹ Furthermore, some mechanisms need to be strengthened for the purpose of tracking and enforcing commitments in order to liberalize trade within the MENA region. In case of some Arab nations, an independent PAFTA Secretariat should contain skilled staff like those in the Common Market for Eastern and Southern Africa (COMESA) Secretariat.⁵⁷²

Moreover, the implementation of PAFTA should be monitored that includes inter alia PAFTA members’

liberalization commitments, i.e. for dismantling the NTMs, and for the liberalization of services. As such, an instrumental role may be bestowed upon the organization to devise a service negotiation strategy that is comprehensive for the regional bloc and yet designed to be appropriate to the PAFTA members’ goals and needs. Such monitoring is important for the policy-makers to receive the feedback and to assess the effects of the agreement. The rules and disciplines should be strengthened applicable to PAFTA as well as other regional institutions by which Arab Customs Union or Common Market (2020) can be created.

Prohibition of NTMs would be a necessary step to help PAFTA while establishing effective national

571 Rouis and Tabor (The World Bank, 2013), p. 21.

572 Ibid.

treatment in the services trade, as well as reaching an effective framework that can guarantee the free movement of labor within the MENA region. And above all, this should include a dispute settlement mechanism along with proper enforcement to ensure compliance.⁵⁷³

Overall, in view of a recent assessment concerning MENA’s trade agreement, we may conclude that trade within the region is relatively below its potential and that the level of diversification is low. Even the performance of PTAs has not been effectively stimulating trade within the region. Nonetheless, Algadir Agreement, as well as US-Jordan Agreement contained some positive impact on trade similar to the effect of a standard PTA. In order for the regional preferential agreements to have a significant effect upon trade and economic growth, they need to be designed much deeper so as to involve improved governance, regulatory harmonization, services trade as well as labor mobility. Except for the GCC, the majority of MENA economies are facing challenges in their regional schemes due to their inadequate infrastructure, political frictions among the members, as well as policy distortions in domestic economies. According to Fardoust, Economic Cooperation Organization might have the capacity to address the challenges of trade facilitation and act like a bridge between East Asia and the MENA region.⁵⁷⁴

Beyond the formation of the PTAs, deeper integration such as the customs union (CUs) in which countries set up common external tariffs (CETs) in accordance with the GATT’s Article XXIV exception to the principle of non-discrimination, could also bring more conformity between regionalism (regional integration) and that of the global integration. In other words, creating the complementarity between the two levels of regional and global integration could properly inhabit the integration processes.⁵⁷⁵

The significance of infrastructure are also revealed in the OECD report which states that apart from the GCC and despite some recent achievements, the quality and quantity of infrastructure in the MENA still lags behind.⁵⁷⁶ In fact, infrastructure investment can facilitate trade while having a positive impact on growth and productivity, and the quality of life. Therefore, it is incumbent upon the governments in MENA to improve their institutional framework so as to better manage the infrastructure investment with a view to increase trade and productivity.

573 Rouis, Mustapha and Tabor, Steven R. “Regional Economic Integration in the Middle East and North Africa:

Beyond Trade Reform.” The World Bank, Washington DC, 2013, pp. 21-22.

574 Fardoust, p. 20.

575 See Baldwin, Richard; Cohen, Daniel; Sapir, Andre; and Venables, Anthony. “Market Integration, Regionalism and the Global Economy.” Cambridge University Press, 1999, pp. 53-76.

576 OECD: “Better Policies for Inclusive Growth and Economic Integration in the MENA Region.” Better Policy Series, October 2016, p. 22.