America's vision for the Arab world

Could George W. Bush's free trade initiative change the face of the Middle East?

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By  Massoud Derhally Published  August 10, 2003

|~||~||~|There is a new carrot and stick approach to solving the problems of the Arab world and securing the elusive peaceful settlement to the Arab Israeli conflict. It comes in the form of President George W. Bush’s proposed Middle East Free Trade Area (MEFTA) and a Middle East Partnership Initiative. America is promising those that choose to work with it economically and politically, a better future, one where trade can act as the catalyst for growth, opportunity and political stability. “Across the globe, free markets and trade have helped defeat poverty and taught men and women the habits of liberty,” said Bush.

“So I propose the establishment of a US-Middle East free trade area within a decade, to bring the Middle East into an expanding circle of opportunity, to provide hope for the people who live in that region.” This was the message of Bush’s speech on May 9, a month after Baghdad fell, and this was the message that every US official attending the World Economic Forum in Jordan (June 21-23) brought with them.

The Americans are desperate to do anything. That’s how one of the Arab world’s most influential bankers sees things. “After 9-11, the US realised the Arab world was a powder keg, full of problems and now they think they can fix it,” says the banker. To a large extent, that is what many reform pundits in the region would like to see. By and large, the assessment that things need to change is on the mark. The MEFTA proposal is a facet of a new US regional strategy that is being formulated to spur change in the Arab world while integrating its economies into the global economy.

For those countries that choose to be a part of America’s vision of a new Middle East, the benefits from a regional free trade area and individual FTAs with the US in ten years time, mean, according to US officials, that they will no longer be disconnected from the global economy. Such an eventuality of course will not come about merely because of trade, despite what one participant at WEF said, that when you are building an empire you start with trade. At the Dead Sea in Jordan, every US official that Arabian Business spoke to indicated there was indeed a paradigm shift in what many say was as a timid and uneven American foreign policy in the Arab world.

Today, US officials say, America comes to the Arab world not only with the MEFTA proposal, but a step-by-step approach that will help revive the economic fortunes of the region. “We have to prove ourselves, the Americans have to prove themselves,” Elizabeth Cheney, the US deputy assistant secretary for Near East affairs, said on the sidelines of the forum. “It’s true that these are not issues that we have cared about for very long and people I think, rightly, are saying prove it; show us that you really are going to walk the walk.”

Some in the Arab world may be apathetic and inclined to dismiss America’s efforts as bogus, but it would be difficult not to acknowledge there is always something good in what is being offered. Yes, the US $2.4 billion that the US has put aside for the reconstruction of Iraq is less than the $3 billion in annual aid to Israel, but it is also the biggest undertaking by the US since the Marshall Plan. And while Iraq may be the yardstick by which many in the world want to measure America’s ability to succeed on other fronts in the region, there are undeniably successes that can be derived from the free trade initiative.

“The approach we try to outline is different steps, oriented towards different stages of reform,” says Robert Zoellick, the US trade representative who unveiled details of MEFTA at the forum. “For some [countries] it means getting them into the World Trade Organisation, for some it means building on it with a trade investment agreement and ultimately moving to free trade agreements.”
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Zoellick went to pains to emphasize that unlike the EU, the US, as part of its commitment to increasing trade links with the region, would expand its Generalised System of Preferences program (GSP) that enables goods to enter the US market free of duty. “It means no tariffs, no quotas [on consumer goods] and the same for agriculture and that’s definitely not what the EU policy is,” Zoellick said.

The US will also offer to negotiate or deepen its existing Trade and Investment Framework Agreements (TIFAs), which it says will help Arab countries expand trade and facilitate their integration into the global economy. Bilateral investment treaties (BITs) with the US, says Zoellick, will help Arab countries attract much needed foreign direct investment and cultivate new businesses.

But there are definitely political dimensions to the American overture. The US, for instance, is “not supporting Iran’s admission to the WTO at present,” according to Zoellick. To secure an FTA with the US, countries have to be members of the WTO and none of Saudi Arabia, Algeria, Yemen, Sudan, Libya, Syria or Lebanon is a member. Jordan, which is a WTO member, points to the increase of its exports to the US from Qualified Industrial Zones (QIZs), or industrial parks, as testimony to the benefits it has reaped from working closely with the US.

For Ennis Rimawi, chief executive of Estarta Solutions, a software manufacturer, the QIZs and the FTA meant not only no duties on the software his company exports to the US, but also easier access to the American market and a $1 million investment from Microsoft. “Certainly, perception is a key benefit for any country that concludes an FTA. That country enters an elite group of countries that are ‘close’ to the US, such as Canada, Mexico, and Israel,” says Rimawi.

For Jordan, a country that continuously suffers from the turmoil in the West Bank and Gaza and, until recently, uncertainty in Iraq, the picture has improved. “We went up from exports of less than $10 million in 1999 to exports of over $400 million today,” says Marwan Muasher, Jordan’s foreign minister. “It [the FTA] has created 30,000 new jobs and has made the US our number one export destination.”

But that may be a harder sell for other Arab countries. Those that get on with Israel will gain higher marks with the US than those that do not. Citing the Jordanian example, products from QIZs must have at least 35% of the value added from Israel, a Jordanian QIZ or the West Bank/Gaza. Of that 35%, a minimum of 11.7% must be added in a Jordanian QIZ, 8% in Israel, and the remaining 15.3% can come from a Jordanian QIZ, Israel or the West Bank/Gaza. “Egypt is eligible for those QIZs as is Turkey [but] the requirement is working with Israel and Israeli content,” says Cheney.
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Next on the list of steps is building on the existing free trade agreement with Jordan, which the US holds as a model of success. An FTA eliminates tariffs on all trade in goods between the US and the other country, according to a mutual time schedule, and this is something the US wants to pursue with other countries in the hope that a particular FTA embraces other Arab states. In North Africa, the US is negotiating an FTA with Morocco and this, according to Zoellick and Cheney, can incorporate Algeria and Tunisia.

In the Gulf, the US is ironing out a similar agreement with Bahrain, which can act as a starting point that others in the Gulf can follow. “The benefit to that is the ability to accumulate the requirements in terms of composition of goods that are exported,” says Cheney. “So if you have a certain percentage requirement it could be cumulative across the countries that are part of a single FTA.”

Jordan’s foreign minister, Marwan Muasher is optimistic. A regional FTA is going to bring further benefits to this region, he says. “This is not a zero sum game and if we are able to sign a regional FTA with the US we can use the comparative advantages of each economy in order to have cumulative rules of origin and have a qualitative edge in exporting to the US,” says Muasher.

The final element of the US’s trade strategy is the provision of financial and technical aid. This, according to Zoellick, will help countries “develop the capacity to take part in negotiations, implement trade agreements and build the legal and entrepreneurial infrastructure to partake in the benefits of open markets.” He added that the Middle East Partnership Initiative would help target more than one billion dollars of annual funding from various US government agencies to spur partnerships with private organisations and businesses that support trade and development.

There is also the idea of establishing the Middle East Finance Corporation, an initiative modelled on the Enterprise Fund the US set up in Eastern Europe in the 1980s. This corporation, say US officials, would be managed by a private board of directors and engage the private sector to play a critical role in every aspect of America’s undertakings in the Arab world.

Although the US agenda is not a mission impossible, America certainly has its work cut out for it. The US’s trade relations with the Arab world have been declining. According to the Institute for Research and Middle Eastern Policy (IRMEP), an independent think tank, the U.S. share of world merchandise exports to the Arab Middle East fell from 18% in 1997 to 13% in 2001. Like Arabian Business, IRMEP attributes the decline to political developments in the Arab world. IRMEP estimates America has lost $31 billion in exports between 1998 and 2002 and it says if the decline persists, that figure could be $63 billion by 2007, and a total ten-year export loss of $94 billion.

That said, Iraq and the need for a comprehensive settlement to the Arab-Israeli conflict remain vital to the success of any undertaking in the Arab world. Economic growth depends on foreign direct investment (FDI), which very much hinges on political stability and security. Arab states attracted less than one percent, 0.7% to be exact, of the world’s FDI in the 1990s, and in 2002 FDI inflows to the region were only $4.9 billion.

At a small luncheon with dignitaries and participants attending the forum, William Rhodes, vice chairman of Citigroup said, “Foreign investment is a coward, because it often goes where it feels absolutely safe.”

America’s litmus test is Iraq. If the US succeeds in reviving Iraq’s economy, if the reconstruction process picks up, if the infrastructure is adequate, if there is political transparency and democracy then the region’s credibility will be restored and perceptions will change. Those very fundamentals should also serve as building blocks for the rest of the Arab world. These are a lot of ifs, but as Elizabeth Cheney says, “No amount of money will help change the fundamental economic and political structures of countries, if the leaders of those countries are not willing to make the hard choices that have to be made.”

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