Expert Group Meeting on Preferential Trade Agreements and Regional Integration in the Arab World

1. Expert Group Meeting on Preferential Trade Agreements and Regional Integration in the Arab World Ramada Hotel, Tunis, 5-6 December 2012

2. A preliminary ex-post assessment of trade liberalization schemes in the Arab world

3. Why Trade Liberalization and Regional Integration have been implemented in the Arab World Trade is believed to be a channel for enhancing economic growth, create jobs and reduce poverty. However, the achievements of these gains depend on four main determinants: • Higher market access on foreign markets through trade agreements (tariff and NTBs should be phased out and not only tariffs) • Reducing technical Barriers to Trade (logistics, custom clearance, human capital, institutions…) to be able to trade with new partners and reduce the cost of trade operations • Reforms macroeconomic and sectoral policies to be more pro-trade and competitiveness enhancement • Develop productive capacities through better investment climate to response to additional foreign demands

4. The focus of this presentation is to assess the impacts of Arab regional and global trade integration on the Arab economies

5. Arab Regional and Global Integration: the trade agreements

6. Trade Liberalization in the Arab Region • The last two decades have seen an unprecedented surge in free trade agreements (FTAs). • South-North (N–S) agreements driven by an economic giant—the European Union —are dominating Arab FTAs. • Many Arab countries signed bilateral trade agreements with key developed regions around the world while others still negotiating additional agreements • Furthermore, various sub-regional and regional agreements have been implemented in the Arab world with the aim to foster intra-Arab trade

7. Inter-Arab Bilateral Agreements The last decade has witnesses the development of a web of bilateral trade agreements between the Arab states. This is a trend that has expanded in parallel to the sub-regional and regional initiatives presented in the following slides. Among them we cite: • Jordan has FTAs with Tunisia, Syria, Lebanon, Egypt, the UAE, Bahrain and Kuwait signed since 1998. It has also cooperation agreements with Libya, Algeria, and Yemen. • Egypt has agreements, some designated as FTAs, with Lebanon, Syria, Morocco, Tunisia, Libya, Jordan and Iraq. • Tunisia has agreements with Algeria, Egypt, Libya, Jordan, Morocco and Syria

8. Sub-regional Arab Economic IntegrationThe Cooperation Council for the Arab States of the Gulf • The GCC has proven to be the most successful sub-region in terms of economic integration in the Arab world. • One of the first steps taken by GCC members was to approve the Unified Economic Agreement (UEA) which was ratified in late 1981. • The UEA set out to establish both a FTA and a Custom Union (CU). • The FTA, which broadly applies to all intra-GCC trade, was successfully established in 1983. • The CU has been launched on January 1, 2003, creating a common external tariff of 5% for all products from non-GCC countries (with some exceptions as tobacco products subject to 100%). • It appears that the GCC CU has been successfully implemented, despite complications related to differential foreign trade obligations due to Bahrain’s and Oman’s FTAs with the USA.

9. Sub-regional Arab Economic Integration The GAFTA • In 1981, the members of the Arab-League adopted an Agreement to Facilitate and Develop Inter-Arab Trade (AFDIAT). • Taken on its own, the was vague in its language and left open the selection of covered products to a set of malleable “principals”. • Nevertheless, 16 years after (on February 19, 1997, the Social and Economic Council of the Arab League adopted a declaration on a Pan-Arab FTA establishing an “executive program” for the AFDIAT, which is in fact the text of the GAFTA. • The GAFTA required that “all Arab goods traded among the party-states shall be liberalized in accordance with the gradual liberalization principle which shall be applied as of January 1, 1998”, allowing for “full liberalization” by July 21, 2007.

10. Sub-regional Arab Economic Integration The GAFTA (Con’t) • GAFTA members include 17 of the 22 Arab League countries of which Yemen and Sudan, as LDCs, have a longer period of liberalization (until 2010) and the Palestinian Authority has been exempted from tariff reductions. • In 2002, the Arab League’s Economic and Social Council resolved to accelerate the gradual liberalization process, abolishing tariffs by January 1, 2005. • The weakness of the GAFTA is in the realm of non-tariff barriers, reflecting the general problem. • Moreover, trade in services and investment liberalization are not included in GAFTA and will require further efforts, especially given the strong role of services and oil-based capital in many Arab economies. • As far as regional economic integration is concerned, the GAFTA constitutes a few steps in the right direction, but many more will be needed.

11. Sub-regional Arab Economic Integration The Agadir • This agreement was signed in 2004 and entered into force on January 2006. • It establish a free trade area between Tunisia, Jordan, Morocco and Egypt and it is open to accession for other Arab states that are parties to FTAs with the EU. • It calls for full liberalization in trade in industrial goods (departs from the GAFTA), with trade in agricultural goods to be liberalized according the plan set in the GAFTA while trade in services is governed by the GATS. • This agreement would not, therefore, seem to contribute much substance to regional integration as such, in relation to the GAFTA and WTO. • However, in contrast with the GAFTA, the Agadir agreement speaks the language of the WTO. • Its main unheralded purpose is to promote the adherence to Pan-Euro-Mediterranean Rules of Origins, to facilitate regional trade with the EU.

12. South-North Integration: the case of EU-Arab countries • The Euro-Mediterranean Partnership Agreement (EMAA) signed in 1995 involves the largest number of Arab countries (9 countries). • Its consists of creating a framework for political, economic, cultural and social ties between the partners. • The EMAA replace the Cooperation Agreements of the 1970s, which were characterized by non-reciprocal preferences accorded by the EU to developing countries. • The EMAAs provide for the establishment of FTAs over a transitional period lasting a maximum of 12 years from the date of the entry into force of the agreements • Syria is still in the process of ratification while the Palestinian Authority has entered into an interim agreement for early implementation of trade measures. • GCC countries still negotiating FTA with the EU while others are not yet involved (Sudan, Iraq, Yemen…) • The aims of the EMFTA has been to improve competitiveness of the AMCs and boost their economic growth through higher inflows of FDI and better export performance

13. South-North Integration: The Bilateral FTAs of Arab Countries with the US • The U.S. Middle East FTA initiative started in 2003 with the purpose of creating a U.S. Middle East Free Trade Area by 2013. • The U.S. objective with this initiative has been to gradually increase trade and investment in the Middle East, and to assist these countries in implementing domestic reforms, instituting the rule of law, protecting private property rights, and creating a foundation for openness, economic growth, and prosperity. • Four Arab countries are already associated with the USA in bilateral FTAs: Jordan, Bahrain, Oman, and Morocco while many others still negotiating similar agreements.

14. The impacts on Trade Flows by Origin and Destination

15. Trends in the structure of Arab trade with the main economic blocs • In 2010, intra Arab trade represented around 11% of total Arab’s trade much lower than the EU or the North American Countries where intra-regional trade represent a larger share in their total trade, respectively 71% and 50%. • During the period 200-2010, Arab exports increased by 27% compared to 11% for its imports. However, intra-Arab trade did not experienced a similar improvement. • In 2010, trade with the EU represent 24% of total Arab trade both inter and intra regional. However, Asian countries are far the main partner for the Arab region with approximately 63% of total Arab trade. • Arab exports to emerging economies in Africa and Latin America, currently too small, could represent a source for additional economic growth in the coming years. • The high contribution of intra-regional trade to total trade of the EU, Asian countries or North American countries confirm once again the increasing importance of intra-regional trade.

16. Impacts on Destination of Arab’s Exports by major partners 1990 – 2010 (in %)- An increasing role of China in the Arab’s foreign trade- A declining role of the EU in the Arab’s foreign China- Exports to Arab countries is significantly increasing for Syria, Sudan, Yemen, Lebanon, Jordan, Egypt and Bahrain

17. Impacts on the origin of Arab’s Imports by major partners 1990 – 2010 (in %)- similarly to exports, Arab imports from the EU is losing its leading partner to the profit of China- Imports from Arab countries experienced significant increase for Yemen, Syria, Sudan, Libya, Lebanon- Even the average is below 10% of intra-Arab trade, disparities are significant among countries.

18. Average yearly increase of intra-Arab imports compared to other key partners

19. Average yearly increase of intra-Arab exports compared to other key partners

20. Extend of intra-regional trade flows Understandingwhy intra-regionaltradeislow in Arab countries?

21. 1. Limited scope for beneficialtrade. • Potential scope for benficialbilateraltrade • RegionalIntegration • Trade complimentarity index • Hecksher-Ohlin and Linder Hypothesis • Complimentarity of tradeflows • Export composition of a country X matching import composition of Y

22. Low complementarity among Western Asian economies • Lowcomplementarity of trade in the region. • Couldregionalintegrationbebeneficial?

23. What determines divergent trade performance? Export concentration index by region index (1995,2011) Export concentration index by county and export performance (2000-2011) • Arab countries has high export concentration • Does high export concentration hindering export growth? • Empirical Studies .. Yes • Western Asia .. Yes (oil sector), but there are windows for diversification and improvements !

24. 2. High Non-Tariff Measures (NTM) among Arab countries Share of burdensome NTMs and exports in LAS • Trade agreementsgrantingprefrencialmarketaccess DOES NOT eliminateproblemscreated by NTMs. • NTMs are particularychallanging in manufacturingsector. • NTMs in Agriculture: Sanitary and Photosanitaymeasures (SPS), technicalbarriers to trade (TBT), and rules of origin. • NTMs in Manufacture: Rules of originis the main callengefollowed by SPS and TBT measures.

25. 3. High Cost of Logistics • The most performing Arab countries is the UAE • The second Arab country appears only at the 33 rank • Most of the remaining countries still poor in terms of facility of trade. • Poor logistics performance index means high cost of trade. • In many Arab countries, the expected impacts from tariff removal have been offset by the high logistic costs • To ensure gains from trade, Arab countries must make significant efforts in reducing technical barreirs to trade through the modernization of its infrastructure and logistics related to trade.

26. High disparities in terms of macroeconomic and sectoral policies • Macroeconomic policies are too heterogeneous in the Arab word: Monetary policies are an example, where Arab countries did not achieved the minimum level of convergence. Some of them pegged their currencies to the US Dollar while others are more flexible. • The objective of monetary policies itself is not homogeneous among countries: targeting inflation, increasing domestic investment, or mobilizing savings... • Sectoral policies in terms of subsidies and public support harm competition and accordingly many countries excluded a significant lists of products from their inter-Arab agreements, mainly in Agriculture and related industries

27. Impacts on export diversification

28. Changes in Diversification Index

29. The Product Space Map to assess changes in export diversification and performance

31. UAE 1990 – WithPetrol

32. UAE 2010 – WithPetrol

33. Kuwait 1990 – WithPetrol

34. Kuwait 2010 – WithPetrol

35. Why trade with the EU is decreasing? • The EMPA did not delivered its promises in terms of increasing trade between both parties • The agreements has been limited to manufacturing products where a restrictive rules of origins represented the main barrier for extending Arab exports to the EU • Even the preferential access of agricultural products from the Arab region to the EU has been restricted by entry prices system and calendar of imports • Agriculture products are excluded and the EMPA could not be extended to these products under the current support and subsidies provided by the EU’s Common Agricultural Policy. • EU exports are loosing competitiveness on the Arab markets to the benefits of the South Asian Countries even in the absence of preferential trade agreements with these partners • If no EMPA European exports to the Arab region may declined much more than what is currently observed

36. Conclusions • Oiloccupies a major share in manyArab countries • High product concentration coupledwithNTBs and TBTsconstraints intra-regionaltrade • Countries need to reduceburdenNTBs • Negativelistsshouldberemoved • Macroeconomic and sectoralpoliciesneed to converge • Counties in the region havent taken full advantage of theirpotential in trade in services and agriculture. • Agreementswith the EU limited to manufacturingproductswithvery restrictive rules of origins. • Evenpreferences to Arab agriculture exports to the EU are subject to entry prices system and calendar of imports. • Liberalization of agricultural tradewith USA and the EU shouldbeconsideredproduct by productgiven the support provided by the Common Agricultural Policy in the EU and the farmbill in the USA to a large panel of products.