The Institute for Domestic and International Affairs, Inc.
League of Arab States
Greater Arab Free Trade Agreement
Director: Janelle Gendrano
© 2007 Institute for Domestic & International Affairs, Inc. (IDIA)
This document is solely for use in preparation for Rutgers Model
United Nations 2007. Use for other purposes is not permitted
without the express written consent of IDIA. For more
information, please write us at [email protected]
Key Terms___________________________________________________________________ 1
Introduction _________________________________________________________________ 3
Background _________________________________________________________________ 4
Free Trade _______________________________________________________________________ 4
Trade in the Middle East and North Africa (MENA) Region _____________________________ 7
Greater Arab Free Trade Area (GAFTA) ____________________________________________ 10
Current Status ______________________________________________________________ 12
Concerns About GAFTA __________________________________________________________ 13
Works Cited ________________________________________________________________ 20
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Key Terms1
1. Free Trade – The ability of people to undertake economic transactions with
people in other countries free from any restraints imposed by governments or other
regulators. Trade is measured by the volume of imports and exports.
2. Comparative Advantage – Theory relating to free trade in which all states should
produce and export items that the state is more efficient at producing in
comparison to other states. Is impossible for a state to not have any good or
resource that they cannot trade at a competitive advantage due to the diversity of
all states. If every state specializes in comparatively advantageous products, trade
will be mutually beneficial.
3. Liberalization – A policy of promoting liberal economics (laissez-faire
capitalism) by limiting the role of government to only what the government can do
to help the market economy work efficiently. Examples include deregulation and
privatization.
4. Trade Diversion – Directing trade in inefficient ways. Certain economic policies
that defy the concept of comparative advantage, such as preferential tariffs and
most-favored nation status, will cause trade to flow in inefficient ways.
5. Protectionist - Policies that restrain trade between nations through methods such
as high tariffs on imported goods, restrictive quotas, a variety of restrictive
government regulations designed to discourage imports, and laws made in an
attempt to protect domestic industries in a particular nation from foreign take-over
or competition.
6. Tariffs – Often used to describe a tax on goods produced abroad imposed by the
government of the country to which they are exported. Many countries have
reduced such tariffs as part of the process of freeing up world trade.
7. Non - Tariff Barriers (NTBs) – Non-tax obstacles to free trade. Examples of this
include inefficient customs and administrative procedures associated with
importing.
1
All definitions are taken from Economist.com and other sources cited in this paper.
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8. Free Trade Agreement – agreements made by two or more states in an attempt to
eliminate trade barriers, like tariffs and NTBs. In these agreements governments
can adopt similar trade policies, including open and transparent rulemaking
procedures as well as non-discriminatory laws and regulations. Free Trade
agreements can be made bi-laterally (between two states), regionally, or
multilaterally.
9. Free Trade Area – An area in which members remove trade barriers among
themselves but keep their separate national barriers against trade with the outside
world.
10. Customs Union – A free trade area that shares common external tariffs. The states
in the customs union share a common external trade policy. At the same time,
customs unions can set restrictions on how much each state in the free trade area
can import.
11. Arab – A term describing those whose ancestry is from the nations of the Middle
East or North Africa where Arabic is the primary language.
12. Middle East and North Africa Region (MENA) – Region comprising the
following state: Algeria, Libya, Mauritania, Morocco, Tunisia, Egypt, Jordan,
Lebanon, Syria, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab
Emirates, Djibouti, Somalia, Sudan, and Yemen.
13. World Trade Organization (WTO) - An international organization that regulates
trade and tariffs between nations in order to ensure that trade flows smoothly,
predictable and as freely as possible. Based in Geneva, the WTO functions by
negotiating multilateral agreements, which are then ratified by the member nations
in order to protect their trading rights.
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Introduction
Free trade is the most commonly used system of trade in the world, however it is
rare that free trade is truly practiced by participating governments. Impediments that
restrict trade, such as government-imposed tariffs, taxes, and the most-favored nation
status, still exist in virtually every state. Despite this, governments have made their trade
policies increasingly more liberalized since the conclusion of the Second World War with
a series of agreements reducing trade impediments, culminating in the creation of the
World Trade Organization. More than 150 trade free trade agreements have been made
since the end of the Second World War, and a majority of those agreements have been
made within the last fifteen years.
The benefits of free trade are many, provided that the basic principles of the
system are carried out. Comparative advantage is the idea that a state must specialize in
exporting a good or resource that is produced or manufactured more efficiently than other
states. If states trade with other states and import and export the most comparatively
advantageous goods and resources, trade will without exception be beneficial to both
parties. States will spend less on manufacturing goods and will also spend less on
importing goods.
Unfortunately, free trade purely based off of the concept of comparative advantage
is difficult to achieve and therefore rarely implemented. Other factors, such as political
alliances, embargoes, and the wealth disparity between developing and industrialized
nations, lead to protectionist trade barriers in an effort to protect domestic industry. In the
case of the Middle East and North Africa region (MENA), the average tariff for the
region as a whole is higher than any other region, except Africa.2 Also, for many states in
MENA, such as the Gulf Area states of United Arab Emirates, Oman, Kuwait, Saudi
Arabia, Bahrain, and Qatar, are too similar economically because of their oil-based
2
Rania S. Miniesy, Jeffrey B. Nugent, and Tarik M. Yousef, “Intra-regional Trade Integration in the Middle East,”
Trade Policy and Economic Integration in the Middle East and North Africa: Economic Boundaries in Flux, (New
York City, New York: RoutledgeCurzon, 2004), p 59.
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economies. Because of the importance of this natural resource to all six economies, there
is no significant comparative advantage over one another, making it difficult to have
unrestricted trade between them.
Even so, in 1997, fourteen Arab nations began talks concerning the formation of a
Greater Arab Free Trade Area (GAFTA), and in 2005, their plan was finally
implemented. Currently, the effectiveness and benefits of GAFTA are up for debate.
There is still less trade across the region than sub-regionally, though strengthening and
integrating these regional trade blocs may be the key to a successful GAFTA. The
League of Arab States must work together to discern whether the current regional free
trade system, GAFTA, is working to its full potential, and if not, how it can be
ameliorated to do so.
Background
In the past, intra-regional trade in the Middle East and North Africa region
(MENA) was severely lacking due to high tariffs and non-tariff trade impediments in the
region. The implementation of the Greater Arab Free Trade Agreement and the region’s
ability to adapt to a region-centric free trade system will strengthen individual state
economies, provided that the agreement is being implemented properly. To recognize
why regional and sub-regional trade in the Middle East and North Africa (MENA) region
is important and the consequence of a free trade agreement in the MENA region, one
must first understand the concept of free trade and trade systems in MENA as a whole.
Free Trade
There are different types of international trade systems that operate in the world
today. Free trade3, one of the most commonly used systems, is often talked about yet not
always fully understood. Usually, free trade agreements are not one-hundred per cent
free, but instead have some protectionist restrictions in place. In theory, if two states were
to engage in free trade, goods and services between or within the two states would flow
3
See Key Words section.
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without any government-imposed restrictions, such as taxes and tariff and non-tariff trade
barriers. Free trade operates under the idea that trade should only be conducted if it
benefits both parties.4 The theory of comparative advantage5 is a major component of this
idea. According to the concept of comparative advantage, every state should produce and
export items that the state is more efficient at producing in comparison to other states.
Also, this concept states that it is impossible for a state to not have any good or resource
that they cannot trade at a competitive advantage due to the diversity of all states. If every
state specializes in comparatively advantageous products, trade will be mutually
beneficial. 6 Since the end of the Second World War, trade has become increasingly freer
because of two agreements: The General Agreement on Tariffs and Trade (GATT) and
the resulting establishment of the World Trade Organization. Despite the popularity of
free trade systems, free trade is rarely fully free of restrictions imposed by state
governments.7
In many areas of the world, states often work together to make what is called a
free trade agreement (FTA)8. These agreements are made in an attempt to eliminate trade
barriers, like tariffs and taxes. In principle, trade agreements help level the international
playing field by encouraging governments to adopt similar trade policies, including open
and transparent rulemaking procedures as well as non-discriminatory laws and
regulations. FTAs typically aim to reduce or eliminate tariffs, quotas, and preferences on
all traded goods and improve intellectual property regulations.9
States in close proximity with one another can decide to make multilateral free
trade agreements and create a Free Trade Area. Supporters of this concept see regional
free trade areas as a stepping stone to even more liberalized global trade. Free trade areas
4
“Free Trade,” Economics A-Z, The Economist,
http://www.economist.com/research/Economics/alphabetic.cfm?term=freetrade#freetrade (accessed 22 August
2007).
5
See Key Words section.
6
“Comparative Advantage,” Economics A-Z, The Economist,
http://www.economist.com/research/Economics/alphabetic.cfm?term=comparativeadvantage#comparativeadvantage
(accessed 22 August 2007).
7
“Free Trade.”
8
See Key Words section.
9
“Free Trade Agreements ,” Export.gov, http://www.export.gov/fta (accessed 22 August 2007).
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also take into account the increasing cost of transportation for goods. By trading
regionally, transportation time and costs are cut, and both parties benefit. Free trade areas
illustrate the power in numbers idea; one state with a weak economy cannot make
significant positive change to its own economy without the help of other states, but when
a number of similar states in a region work together, the region as a whole improves. In
the past fifty years, more than 150 regional trade agreements have made, and most of
these agreements are still in force. Half of these agreements were made after 1990.
Prominent examples of these agreements are the European Union, the North American
Free-Trade Agreement (NAFTA), Association of South East Asian Nations (ASEAN),
and Mercosur in South America.10
Another regional trade alliance made by regional blocs is a customs union.
Customs unions are free trade areas that share common external tariffs. All of the states
in the customs union share a common external trade policy. At the same time, customs
unions can also set restrictions on how much each state in the free trade area can import.
Customs unions are an appropriate choice for states that are economically competitive
with one another, such as states that share a common export or common trade partners.
Customs unions are usually established to increase economic efficiency while also
forging closer political and cultural ties with other states in the same customs union.
Not all economists are in support of free trade areas. Instead of a stepping stone,
many feel regional trade agreements are an obstacle towards true global free trade. To
some, having regional trade agreements violates the principles of free trade. For example,
if it were cheaper and more efficient to buy goods from a state outside of the regional
trade agreement, goods should be bought from the outside state. Trade agreements negate
this logic, and the regional trade relationship becomes more costly to the importing state.
However, regional trade agreements are still encouraged by policy makers because of the
many benefits associated with such agreements. So long as regional FTAs are still open
to world trade, these agreements are still beneficial to many parties.
10
“Trade Area,” Economics A-Z, The Economist,
http://www.economist.com/research/Economics/alphabetic.cfm?letter=T#tradearea (accessed 22 August 2007).
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Trade in the Middle East and North Africa (MENA) Region
Arab states in the Middle East and North Africa region (MENA) are often divided
by policy makers and scholars into four categorical sub-groups based largely on
geographical location and trade policy. These categories are as follows: the Maghreb
states (Algeria, Libya, Mauritania, Morocco, and Tunisia), the Mashreq states (Egypt,
Jordan, Lebanon, and Syria), the Gulf states (Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia, and the United Arab Emirates) and the “other” states (Djibouti, Somalia, Sudan,
and Yemen).11 In the Middle East and North Africa region (MENA), trade within the four
subgroups is significantly higher than in overall intra-MENA trade. Approximately sixtyfive per cent of the Magrhreb states’ exports to other Arab states are with other Maghreb
countries. Seventy-five per cent of Gulf states’ exports to other Arab states are with other
states from the same region. Thirty per cent of the Mashreq’s trade with other Arab states
is with other Mashreq states. One can easily discern from these figures that trade
impediments are lower within the subgroups than for the region as a whole, with the Gulf
states having the least amount of restrictions in place.12
These figures, though accurate, are somewhat confusing to experts. The MENA
region has a wide array of manufactured goods and considerable variety in resource
endowments; these regional characteristics should be-trade promoting. At the same time,
studies show that lack of product and resource diversity is most prominent within subregions, and yet somehow trade is more frequent within these very same sub-regions. The
similarity of resources at a sub-regional level, in the case of Gulf states, oil and
petroleum, has made them competitors in the same global product markets. Because the
sub-regions lack a diversified export base, especially in manufactured wares,
opportunities for trade are even further limited. Despite this, nearly seventy-five per cent
of the Gulf states’ trade takes place within the sub-region. Experts can only conclude that
the trade conducted between the Gulf states and within other MENA sub-regions must
11
12
Miniesy, Nugent, and Yousef, p 57
Miniesy, Nugent, and Yousef, p 47.
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not be as beneficial as they could be, and diversification of the states’ export base must
occur in order for trade to be optimally beneficial.13
Differences in per capita income also contribute to constrained intra-Arab trade.
Wealthier countries prefer to import high-quality goods, and these goods are more likely
to be produced by industrial nations. While per capita income is not necessarily a barrier
to trade, as many developed and developing nations have established trade agreements,
the homogeneity of the export base among many Arab countries combined with income
disparities have generally been cited as impediments to intra-regional trade. An example
of this can be found with Egypt and Saudi Arabia. While Egypt is an important producer
of consumer goods manufactured within the region and Saudi Arabia is an important
importer of such goods, Saudi Arabia’s per capita high income induces it to consume
higher quality goods from European countries instead of those from Egypt.14
High trade costs, including transport and communications, are another obstacle to
establishing efficient and beneficial free trade in the MENA region. The distance and
difficult geographic terrain between some Arab countries make trade links difficult. The
Maghreb states, for example, are geographically closer to Europe than to other Arab
countries, making trade links easier with Europe. Even where geography does not work
against regional trade, the lack of transportation networks, minimally paved roads, and
rail links across countries, combined with border closures and customs bureaucracy, have
all created disincentives for the movement of goods and services. Often, the lack of
adequate transport is a reflection of the political instability within a particular state, along
with state controls on the development of commercial networks in the region.15
Attempts at trade integration among Arab states have been made for over sixty
years. Beginning with the creation of the Arab League in 1945, several attempts have
been made to promote regional political and economic integration. The Agreement on
13
O. Havrylysyn and P. Kunzel, “Intra-industry trade of Arab countries: an indicator of potential competitiveness,”
Catching Up with the Competition: Trade Opportunities and Challenges for Arab Countries, (Ann Arbor, MI:
University of Michigan Press, 2000), pp 81-99.
14
Miniesy, Nugent, and Yousef, pp 59-60.
15
Ibid., pp 60-61.
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Trade Flow and Transit Rules (1953), signed by Egypt, Iraq, Jordan, Lebanon, Saudi
Arabia and Syria, was adjusted four times in order to establish a well-functioning trade
system by setting transit rules. It aimed at eliminating tariffs on many agricultural
commodities; reducing tariff on some industrial and agricultural products by 25%;
ensuring a nondiscriminatory treatment to
local and Arab products; and simplifying administrative procedures.16 Also discussed was
the Agreement on Current Transaction Payment and Capital Movement, which was
conceived as an integration of the Transit Rules agreement with a particular focus on the
liberalization of capital movement among Arab States. Unfortunately, many Arab States
did not offer suitable conditions to invest, and therefore a significant portion of capital
flew outside the Arab region.17
In 1964, Arab States attempted to establish an Arab Common Market (ACM),
whose primary goal was to have full exemption from tariff and non-tariff barriers. The
agreement resulted from the willingness to create a Pan-Arab market under the auspices
of the Arab League. Its intent was to foster free trade among Arab States by eliminating
restrictions to all goods with the exception of agricultural and animal products. The
potential benefits of this agreement were limited as many Arab States did not sign it.
Later, in 1981, member states of the Economic and Social Council of the Arab League
signed the Agreement on Trade Flow Facilitation and Development (1981), which was a
declaration of intent by the signatories to negotiate the full exemption of tariffs and nontariff measures for manufactured and semi-manufactured goods.18 The establishment of
the Gulf Cooperation Council in 1981, the Arab Cooperation Council and the Arab
Maghreb Union in 1989 has shown that the Arab world is cognizant of the importance of
sub-regional trade to the region as a whole. However, these agreements have generally
16
“The Great Arab Free Trade Area: Impact on Arab Economies,” National Agriculture Policy Center, 22 October
2003, http://www.napcsyr.org/dwnld-files/proceedings/en/10_gafta_impact_en.pdf (accessed 5 September 2007)
17
Ibid.
18
Ibid.
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not been implemented with respect to free trade. As a result, trade barriers remained high
within the Arab region. 19
Greater Arab Free Trade Area (GAFTA)
In 1997, representatives from fourteen Arab states met with the intention of
planning a framework for a future Greater Arab Free Trade Area (GAFTA). By the end
of the series talks, the representatives set a target implementation date of 1 January 2007
GAFTA’s Main Points
1. Gradual reduction in tariff rates, fees, and taxes with
similar implications at an annual rate of 10%
2. Products that are forbidden to be traded for religious,
environmental, security and health reasons are exempted
from the Execution Program of GAFTA.
3. Removal of all non-tariff barriers
4. Application of the “Agricultural Calendar” and
agricultural exemptions.
5. The possibility of exempting a number of industrial
products from the Execution Program of GAFTA, subject
to certain rules and conditions and based upon a decision
of the Social and Economic Council of the Arab League.
Source: Ministry of Economics and Trade,
Republic of Lebanon
for the future trade area. Eighteen of
the twenty-two members of the League
of
Arab
States
signed
onto
the
agreement. The primary provisions
concerned the progressive removal of
tariff and non-tariff barriers on intraGAFTA trade in manufactured goods.
Because of the strong agricultural
sector of the region, agriculture and
agricultural products were subject to an “agricultural calendar” – each state was allowed
to use protectionist measures for at most ten agricultural products from the agreement
during the harvest season, at most seven months per year with a maximum of 45 months
in total for all listed products. After a series of delays in implementation, on 1 January
2005, two years ahead of schedule, the tariff removal was fully completed. Non-tariff
barriers were only partially removed.20
19
“GAFTA,” Bilaterals, http://www.bilaterals.org/rubrique.php3?id_rubrique=169 (accessed 4 September 2007).
Javad Abedini et Nicolas Péridy, “The Greater Arab Free Trade Area (GAFTA): An Estimation of the Trade
Effects (Preliminary version),” Canadian Economics Association, http://economics.ca/2007/papers/0300.pdf
(accessed 4 September 2007)
20
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The states currently participating in the GAFTA agreement are Bahrain, Egypt,
Iraq, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Sudan,
Syria, Tunisia, United Arab Emirates and
Yemen. All of these states are members of
the League of Arab states. Five states,
Algeria, Mauritania, Somalia, Djibouti,
and Comoros, are not members of
GAFTA, though all but Algeria are
considered
to
be
potential
future
members.21 GAFTA is managed by the
Council of Ministers of member countries
and by a permanent executive body.
GAFTA has a functioning Secretariat that
comes under the Economics Department of
the Arab League Secretariat. The program
also calls for the chambers of industry and
commerce in Arab countries to monitor
implementation.22
To an extent, GAFTA was created out of concern that Arab states would make
bilateral trade agreements with European and Mediterranean states and ignore more
regionally beneficial trade agreements between Arab states. Additionally, at the time of
GAFTA’s establishment, other free trade agreements made between European and
Mediterranean states with other developing areas threatened the preferential trading
arrangements that many Arab states had enjoyed in the past. Because of these reasons,
shifting trade flows into other markets, notably intra-regional markets, became more
21
Ibid.
“Intra-regional Trade and Greater Arab Free Trade,” Economics Research Forum,
http://www.erf.org.eg/economic_00/html/body_intra-regional.html (accessed 5 September 2007)
22
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desirable to Arab states instead of attempting the bilateral trade arrangements of the
past.23
Current Status
Implemented on 1 January 2007, GAFTA is still in a nascent stage. States
participating in GAFTA have begun to streamline their trade policies by enacting the
primary provisions of GAFTA, particularly reducing tariffs. Many of these measures
have had positive results in the global community. At this point in its implementation,
however, it is critical to evaluate the efficiency and purpose of GAFTA to prevent any
policy errors from causing an increased detrimental effect.
There are a number of anticipated long-term benefits for GAFTA states, as
several gains could be derived from the trade agreement. First, GAFTA may very well
facilitate a smooth and gradual integration into a liberalized global trading system. The
economic union among GAFTA states also creates a collective approach to negotiations
with the World Trade Organization (WTO) and other regional blocs, such as the EuroMed bloc. Also, with proper implementation, GAFTA could increase the volume of intraArab trade and promote industrial development, especially in those industries that are
likely to face challenges abroad under other WTO Agreements.24 GAFTA also generates
confidence among domestic and foreign investors and should therefore attract foreign
direct investment (FDI) and the transfer of technology. In addition, the adopted acrossthe-board approach for tariff reductions under GAFTA offers the advantage of being
transparent to each other and corporations seeking to invest in the area, and ensures that
high tariffs will be reduced faster than lower tariffs in absolute terms. 25
23
Jamel Zarrouk and Franco Zallio, “Integrating Trade Agreements,” World Bank,
http://www.worldbank.org/mdf/mdf3/papers/global/Zarrouk.pdf (accessed 4 September 2007).
24
“Macroeconomic Policy Analysis for Regional Cooperation in the ESCWA Region: The Effect of Real Exchange
Rate Variability of Intra-regional Trade,” United Nations, 31 March 2003,
http://www.escwa.org.lb/information/publications/edit/upload/ead-03-1.pdf (accessed 6 September 2007).
25
Ibid.
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Concerns About GAFTA
Even with the many anticipated benefits that experts expect GAFTA to bring to
Arab states, there are still many concerns with the current agreement as well as the
overall principle of regional trade blocs. Empirical evidence showed that the impact of
formal settlements on Arab regional trade liberalization has been extremely limited.26
There are many technical barriers to intra-Arab trade that have not been addressed by the
GAFTA agreement, such as taxes and charges, the lists of exemptions and rules of origin,
and non-tariff barriers. To critics of GAFTA, all of the aforementioned issues provide for
loopholes that can be exploited, hindering the regional integration process, though
because the loopholes exist, it is clear to some that the political will to integrate
regionally is lacking.27
One of the most cited reservations that economists have about GAFTA are the
number of commodity tariff exemptions the agreement provides and how GAFTA leaves
the door open for more to be instated. These exemptions are generally with regard to
agricultural commodities, though talks of including manufactured goods are also in the
works. With the “agricultural calendar” provision, each GAFTA state was allowed to use
protectionist measures for at most ten agricultural products for seven months out of
twelve months a year, with a maximum of 45 months in total for a specific commodity.
The protectionist measures counter the liberalization process and in turn hinder intraregional trade. The reasoning behind the exemptions was to protect certain commodities
from facing competition from other states in the region, particularly states participating in
GAFTA. Exemptions protect the agricultural sector, and in certain cases, the
manufacturing sector, of the state. States are abusing the exemption list by adding
products potentially subject to non-Arab competition on their exception list, fearing
strong competition from outside the region. Additional and unnecessary protectionist
measures such as this hinder the effectiveness of GAFTA. A possible way to ameliorate
26
“The Great Arab Free Trade Area: Impact on Arab Economies,” (accessed 5 September 2007)
“Macroeconomic Policy Analysis for Regional Cooperation in the ESCWA Region: The Effect of Real Exchange
Rate Variability of Intra-regional Trade,” (accessed 7 September 2007)
27
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this challenge is by clearing the ambiguity regarding what products and commodities are
allowed to be on the exemptions list.28
While GAFTA itself is not at fault for individual states having widely varying
economic practices, many experts believe that there are certain policies that are crucial to
the success of GAFTA, and these policies must be uniform for most states. In particular,
scholars encourage changes in the currency systems in Arab states, particularly in
reforming the nature of pegged currency in Arab states. Many currencies in the Greater
Arab region are pegged to what are called “stable currencies,” such as the United States
Dollar or the European Union Euro. When a currency is pegged, the value of the currency
depends on the value of the stable currency as well as how much of the stable currency
the state has in its possession. Most states that are parties to the GAFTA agreement are
currently pegged to the United States Dollar, for the main reason that oil prices are
quoted in Dollars. Some see this peg as disadvantageous to the area due to the falling
value of the Dollar and the gaining importance of other currencies, such as the Euro. The
increasing international importance of the Euro, and the fact that Europe is a much more
important trading partner than the United States for Arab countries justify some
consideration to change it. In addition, some scholars cite future trade agreements with
the Euro-Med bloc or the European Union in general as an impetus for changing the
peg.29 An alternate proposal is a universal currency for all states participating in the
GAFTA agreement, but most policy makers agree that it is too early in the
implementation of GAFTA to institute an agreement of that nature. Some sub-regional
blocs, such as the Gulf Area states have already made a commitment to a unified
currency in the near future.
A major concern for critics of the GAFTA agreement is the lack of transportation
infrastructure to support increased intra-regional trade. The greater Arab region spans a
great distance as well as difficult terrain. Minimally paved roads and few rail links across
countries, combined with border closures and customs bureaucracy, have all been
28
29
Ibid.
Ibid.
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impediments to the movement of goods and services throughout the region. Often, the
lack of adequate transport is a reflection of the political instability within a particular
state, along with state controls on the development of commercial networks in the region,
and GAFTA currently has no provisions to counter these factors.30 A prior agreement
made in the 1960s, the Agreement on Current Transaction Payment and Capital
Movement, was designed to ameliorate this problem and encourage a liberalization of
capital movement among Arab States. Unfortunately, many Arab States did not offer
suitable conditions for foreign companies to invest in, so the agreement was never carried
out and no transportation improvements were made in the region.31 In the area of freight
transport by road, which plays a very important role in intra-regional trade exchanges,
there are periodic reports citing barriers to cross-border trade as described by the road
transport professions. These range from closure of roads and motorways for political
reasons and delays to cumbersome cross-border regulations, such as no driving on
weekends and public holidays or the refusal of visa issuance for professional drivers of
certain nationalities.32
Even though most tariffs, with the exception of exempted commodities’ tariffs,
were removed, intra-regional trade has not increased significantly. A major reason for
this is the non-tariff barriers (NTBs) still in place. There are few provisions in GAFTA
concerning NTBs specifically, though GAFTA does attempt to streamline intra-regional
trade by making certain trade policies uniform. Some of the domestic policies ignored by
GAFTA are import licensing for safety and health standards, customs, subsidies,
countervailing measures, safeguards, most favored nation status, and intellectual property
rights. Even the GCC countries, where NTBs are comparatively low to the rest of the
region, still have many NTBs hindering their trade, as illustrated in the table below,
where dashes represent no trade obstacle and asterisks signify that the country has that
particular NTB.
30
Miniesy, Nugent, and Yousef, pp 60-61
“The Great Arab Free Trade Area: Impact on Arab Economies,” (accessed 5 September 2007)
32
Zarrouk and Zallio
31
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33
Critics also site the incompatibility of GAFTA with already existing sub-regional
free trade agreements as well as bilateral free trade agreements and World Trade
Organization (WTO)34 regulations. While GAFTA and the WTO are not directly
incompatible because neither violates each other, not all parties participating in GAFTA
are members of the WTO. GAFTA was actually crafted to be in line with WTO
regulations; however, because not all GAFTA states are in the WTO, they do not have
any binding obligation to adhere to these standards.35 Many of the MENA sub-regions
have already created their own free trade agreements that can be viewed as superceding
the authority of GAFTA. The strongest of these agreements is between the Gulf
Cooperation Council states. Because trade on a sub-regional level has historically been
much more frequent than intra-regional trade, it is likely that sub-regional trade
agreements will be successful and counter the intent of GAFTA to increase intra-regional
trade throughout the entire region. In addition, bilateral trade agreements are very
common for states to pursue, establishing preferential trade agreements with other states
that aim to liberalize trade between the two participants. However, this practice does not
appear to work to enhance GAFTA for a number of reasons. First, preferential trading
agreements work against liberalizing trade throughout the region by disrupting the
33
Masoud Kavoossi, The Globalization of Business and the Middle East, (Westport, CT: Quorum Books, 2000), p
89.
34
See Key Terms section for definition.
35
“GAFTA,” Bilaterals.Org, http://www.bilaterals.org/rubrique.php3?id_rubrique=169 (accessed 8 September
2007).
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concept of comparative advantage and instead causing a trade diversion.36 While the
trade relationship may be beneficial in the short and medium term, in reality it disrupts
free trade throughout the region. Second, the number of bilateral trade agreements made
between MENA states is staggering, and there is concern as to whether all of the trade
agreements will be compatible with each other and with GAFTA. There is currently no
mechanism in the GAFTA agreement that regulates bilateral agreements.37
The most obvious criticism of GAFTA made by economic scholars is the fact that
it is a regional trading bloc, and regional trade blocs are viewed as impediments to global
free trade. Similar to how bilateral agreements are likely to hinder overall intra-regional
trade, GAFTA is viewed to work the same way on a global scale. GAFTA supporters
make the valid argument that the goal of the GAFTA agreement is not to increase global
trade but rather to improve trade intra-regionally and to bolster the economies of states
throughout the region. Furthermore, GAFTA may facilitate trade among GAFTA
participants and other regional bloc participants, such as the South East Asian states
participating in ASEAN in comparison to an individual nation attempting to set up a trade
relationship with the bloc. Still, some economists are doubtful as to the benefits of
GAFTA on a global scale.
36
37
For definitions for Comparative Advantage and Trade Diversion, see Key Terms section.
Zarrouk and Zallio (accessed 8 September 2008)
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Summary
Intra-regional trade is a crucial component to the success of the Middle East and
North African region. High volumes of trade with states outside of the MENA region,
particularly between the Maghreb states and their Mediterranean neighbors, have caused
a significant amount of capital to leave the region. Intra-regional trade success is a clear
sign of economic development in the region, causing foreign businesses to invest in the
region and bring even more economic benefits to MENA states.
The Greater Arab Free Trade Agreement is a major step towards enhanced intraregional trade. The uniform elimination of tariffs has occurred across the board, though
due to the great differences in prior tariff levels for different countries, not all states have
benefited as much from the tariff elimination as others. Because the agreement is still in
its beginning stages, it is unclear as to what the effects of the agreement currently are.
Projected estimates range from little to no change in intra-regional trade to significant
increases in intra-regional trade.
While there is little empirical evidence available to suggest either great success or
failure, many concerns have been raised with the provisions and implementation of
GAFTA, along with GAFTA participant states’ side trade agreements with other states.
Some of these concerns include the lack of regulation of non-tariff barriers, weak
transportation infrastructure, and lack of government commitment to the principles of
GAFTA, and varied economies and currencies. These concerns must be addressed in
order to ensure the success of GAFTA and the increase of intra-regional trade.
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Discussion Questions
• Why are regional trade blocs formed? How does this reasoning apply to the
Middle East and North African Region?
• How does the success of sub-regional trade groups factor into the implementation
and success of the Greater Arab Free Trade Agreement?
• How can the Arab League work to assuage political issues in order to better
facilitate intra-regional trade?
• How do regional trade blocs increase intra-regional trade? How do they hinder it?
What is their purpose on a global scale?
• How can GAFTA avoid becoming yet another unenforced trade agreement in the
MENA region? What should penalties be for refusing to properly comply with the
agreement?
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Works Cited
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