Chapter

2 Foreign and Intratrade Policies of the Arab Countries: The Basic Issues1

Editor(s):
Saíd El-Naggar
Published Date:
December 1992
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Said El-Naggar

Trade and Change in the World Economy

This is the fourth in a series of seminars dealing with economic policies of particular importance to the Arab countries. The first seminar, held in 1987, dealt with adjustment policies and development strategies; the second was concerned with privatization; and the third was on investment policies. The present seminar comes at a time when trade policy reform constitutes one of the major themes in adjustment programs. This is not difficult to explain. Foreign trade policies have a direct bearing on the allocation of resources and hence on economic growth and development. No less important is the fact that they are one of the major factors underlying international competitiveness and external equilibrium. The subject of this seminar has acquired an added significance in the light of recent developments in the world economy. These developments might be summed up as globalization, regionalization, and a rising tide of protectionism. Globalization has come about as a result of four decades of remarkable growth in world trade. Between 1950 and 1980, world exports of goods and services increased at an annual rate of 7 percent compared with a 4 percent average annual growth of GDP. The growth of world trade was matched by no less far-reaching developments in international finance. One of the most distinctive features of the last two decades has been the enormous growth of international capital movements. A study by the Organization for Economic Cooperation and Development (OECD) estimates international financial transactions—transactions involving a movement across national borders—at some $200 billion daily, or forty times the volume of world trade. As a result of these developments, the world economy has become characterized by a high degree of interdependence. Countries are intertwined in an extensive network of commercial and financial ties. The growing interdependence of the world economy gives rise to both positive and negative effects. On the positive side, there are now vast possibilities for a fruitful international division of labor. At the same time, all trading countries where the foreign trade sector accounts for a high proportion of total economic activity have become increasingly vulnerable to external economic shocks. This aspect was driven home to the Arab countries following the economic turbulence of the 1980s.

Alongside the trend toward globalization, the world economy seems to be going in the direction of regionalization. The completion of Europe 1992 will result in the creation of a giant trading bloc with far-reaching implications for the world economy. The same can be said about the North American free trade area comprising the United States, Canada, and Mexico. There are also indications that Southeast Asia and the Pacific Basin will see the birth of yet another giant trading bloc.

The third characteristic of the world economy is the upsurge of protectionism in the industrial countries. Underlying this development is the marked slowdown in the growth of the major industrial countries, notably the United States, coupled with relatively high unemployment and substantial external imbalances. The problem was compounded by the remarkable rise in the economic power of Japan relative to that of the major industrial countries. No less important in explaining neo-protectionism is the changing pattern of comparative advantage. The newly industrialized countries were able to acquire distinct comparative advantage, not only in the traditional labor-intensive types of products, but in a wide range of capital- and technology-intensive industries that hitherto have been the exclusive reserve of the old-established industrial countries. Protectionism was resorted to in order to stem the tide of highly competitive imports from Japan and the newly industrialized countries.

The changing face of the world economy has important implications for the trade policies of developing countries, including the Arab countries. It was against this background that the seminar on foreign trade was convened by the Arab Monetary Fund and the Arab Fund for Economic and Social Development in cooperation with the International Monetary Fund and the World Bank. A number of issues were examined in six papers presented to the seminar. Special attention was paid to trade policies of import substitution versus export orientation, the impact of protectionism in the industrial countries on the trade of the Arab countries, the significance and implications of the Uruguay Round of Trade Negotiations, and prospects and problems of intra-Arab trade. In addition, two case studies were presented to the seminar; one on the foreign trade policy of Egypt, the other on regional economic integration among the Maghreb countries.

Import Substitution: Meaning and Implications

While developing countries have benefited in a variety of ways from the growing interdependence of the world economy, they have also suffered from the major economic disturbances of the last two decades. The decade of the 1980s, in particular, was aptly described as the lost decade. Developing countries experienced a significant setback in growth rates. In some cases, per capita incomes have actually declined. They have been adversely affected by instability of exchange rates, high nominal and real interest rates, and, above all, unprecedented deterioration in their terms of trade. At the same time, the crushing burden of external indebtedness is posing a serious threat to their growth and development prospects.

According to some economists, most of the problems faced by developing countries are inherent in the nature of their relationship with the industrial countries as long as their exports to developed countries consist essentially of primary commodities while their imports are made up of manufactured products. We know the extent to which this pattern of trade has raised serious doubts in the minds of many economists regarding its impact on growth and development. The views of such economists as Prebisch, Myrdal, Singer, and Nurkse are too well known to warrant elaboration. Suffice it to mention that according to them this pattern of international division of labor fails to meet the development needs of developing countries. During the nineteenth century, they point out, foreign trade was truly an engine of growth. This is no longer the case in today’s world. Long-term changes in the production structure of developed countries have adversely affected their demand for raw materials and primary products. Reference was made to the growing proportion of services, the decline in raw-material-intensive industries, and advances in technology in the form of synthetics competing with natural products. Moreover, it was pointed out that this pattern of international exchange between developing and developed countries has been responsible for the long-term deterioration in the former’s terms of trade.

The logical consequences of those views, typical of the development doctrines of the 1960s, was a call to change the structure of trade between developed and developing countries. Through a policy of import substitution, it was argued, developing countries could embark on large-scale industrialization and do away with a colonial type of international exchange.

However, recent empirical research by Bela Balassa and others has served to show the limitations and shortcomings of development strategies based on import substitution. More often than not, import substitution policies have been associated with extremely high protective tariff and nontariff barriers, which all but eliminated foreign competition. A case in point is provided by Ahmed El-Dersh and Hanaa Kheir El-Din in their paper, “Foreign Trade Policy of Egypt.” Prior to the 1986 tariff reform, import duties on finished manufactured products were extremely high. At the same time, nontariff barriers, including an outright ban on certain imports, were widely used as a means of protecting local industries. Because of pronounced tariff escalation, the rate of effective protection afforded to finished products was substantially higher than may be gauged from nominal tariffs. The situation in other developing countries was not materially different from that in Egypt. In all cases, import substitution policies have been largely responsible for serious misallocation of resources, distortion of domestic prices, overvaluation of currency, and erosion of international competitiveness.

In contrast to the poor performance of countries that have adopted a strategy of import substitution, available evidence suggests that countries that have pursued export-oriented strategies were able to attain an advanced stage of industrialization, maintain a high level of competitiveness in export markets, and achieve robust rates of growth. This conclusion is amply documented in the paper by Thalwitz and Havrylyshyn. They refer to the agreement among a large number of economists that the higher growth of exports is, in general, associated with higher economic growth, and that countries that have relied on outward-oriented polices have done better over the medium and long run than those countries that have adopted inward-looking strategies.

As a result of these findings, greater emphasis is now being placed on export-oriented strategies. It is important, however, to understand the meaning and implications of a shift from import substitution to export orientation. Import substitution policies have often been associated with a strong bias against export industries. This is due to the fact that import substitution industries have been made artificially more profitable than export industries through the imposition of high tariff and nontariff barriers on competing imports. At the same time, export industries were in many cases compelled to use locally produced inputs at prices significantly higher than world prices. This is tantamount to a tax on export sectors that, not infrequently, offset or more than offset whatever subsidies were accorded to these sectors. Stated differently, it is submitted that high protection in the import-competing sectors spells high negative effective protection in the export sectors. This point is clearly illustrated in El-Dersh and Kheir El-Din’s paper. It highlights the serious handicaps under which the export industries have been operating, and goes a long way toward explaining the poor export performance of countries that opted for import substitution strategies. It follows that a shift from import substitution to export orientation means simply doing away with the anti-export bias. Under a neutral policy stance, economic resources would flow to various sectors according to their market profitability and not according to an artificially created one. Such a policy does not rule out import substitution. It distinguishes between efficient and inefficient import substitution. The former may thrive and constitute the basis for a potential export industry. The latter is inimical to growth and development and should therefore not be encouraged.

This argument may be construed to imply a shift from a policy of high protection to one of free trade. This is not necessarily so. A certain measure of protection is unavoidable and even desirable. As pointed out by Thalwitz and Havrylyshyn, what is at issue is not the principle of protection but its degree and method. A policy of export orientation is perfectly consistent with a moderate degree of protection. Moreover, it is important to keep the domestic market fully integrated in the mainstream of the world economy and subject to the discipline of foreign competition. This can only be achieved by dismantling most quantitative restrictions and nontariff barriers and relying more on price instruments of protection such as tariffs and subsidies. Unlike quantitative restrictions, tariffs do not destroy linkages with the world economy, are quantifiable, and have the advantage of transparency.

Export Orientation: Scope and Limits

It is sometimes argued that an export-oriented strategy is feasible if it is pursued by a limited number of developing countries, but is bound to encounter great difficulties if it is followed simultaneously by a large number of these countries. There is already some resentment, it is pointed out, against imports from the four countries of the Asian rim (Hong Kong, Singapore, the Republic of Korea, and Taiwan Province of China), which have been an important factor in the rising tide of protectionism. The problem would be much more difficult if the industrial countries were to contend with cheap imports from a vastly expanded number of exporters. In other words, the call for an export-oriented strategy is based on a fallacy of composition; namely, the assumption that what is true for a small number of countries is also true if it is applied on a much larger scale.

On the face of it, the argument sounds plausible. On scrutiny, however, it is highly questionable. In the first place, this is a static argument in the sense that it assumes other things to remain equal. But a considerable increase in the exports of manufactured products from developing countries will not leave other things unchanged. This is evident with respect to the import capacity of these countries, which will expand pari passu with the increase in exports. Looked at from the vantage point of the industrial countries, rising imports from developing countries will be matched by a parallel increase in exports to them. Thus, the capacity of the industrial countries to absorb a larger volume of imports will be significantly greater at a higher level of exports. Moreover, it should be realized that, at the present levels of trade, imports of manufactures from developing countries are still a tiny proportion of apparent consumption in the industrial countries. In 1987–88, the proportion was 3.5 percent in the United States and Canada; 3 percent in the European Community; and about 1.6 percent in Japan. These figures suggest that there is still ample room in the markets of the industrial countries before the critical threshold is crossed. Furthermore, there is no reason to assume that competition with developing countries would result in the disappearance of certain branches of manufactures. What is more likely to happen is a more sophisticated division of labor under which the same product, or parts thereof, would be produced in different countries. The experience of the European Community provides a case in point. Following the dismantling of intratrade barriers, competition among member countries has not led to the concentration of the automobile industry in one country to the exclusion of others. The automobile industry is still thriving in all producing countries, although there has been a change in the pattern of specialization so that different types, parts, and qualities are produced in different countries. This kind of intra-industry and intra-firm specialization is likely to be characteristic of the future international division of labor.

The upshot of this analysis is that there is no fallacy of composition in the case of the export-oriented strategy of development. It is valid for the four countries of the Asian rim as it is for all developing countries. Compared with import substitution strategy, it provides an appropriate framework for the optimum allocation of resources, and is more consistent with a dynamic interpretation of comparative advantage. The real problem facing the successful implementation of a thorough going export-oriented strategy on the part of developing countries is protectionism in the industrial countries.

Protectionism in the Industrial Countries

The establishment of the General Agreement on Tariffs and Trade (GATT) in the late 1940s marked the beginning of a systematic process aimed at the liberalization of world trade within a multilateral framework. Between 1947 and 1960, seven rounds of trade negotiations were completed under the aegis of GATT. The Kennedy Round, which took place in the first half of the 1960s, and the Tokyo Round, which covered the second half of the 1970s, were the most important rounds in terms of reducing the barriers to trade. As a result of this process, international trade became significantly less subject to restrictions than it was before the establishment of GATT. This is particularly true with respect to tariffs. It was estimated that the average rate of tariffs in the industrial countries was reduced from about 40 percent in 1947 to less than 10 percent following the Tokyo Round. There can be little doubt that the phenomenal growth of world trade during this period is partly ascribable to the liberalization process.

Notwithstanding progress made within the framework of the GATT, some important restrictions continued to impede the flow of world trade. This is clearly shown in the paper by Margaret R. Kelly and Bernhard Fritz-Krockow. Developing countries still encounter a wide range of protectionist measures that in some instances severely limit their access to the markets of the industrial countries. The restrictive impact of these measures is particularly felt in those sectors in which developing countries enjoy a clear comparative advantage. Such is the case as regards textiles and clothes, agricultural products, and a large number of labor-intensive manufactures. Protectionist measures in the industrial countries fall under two broad categories. The first consists of conventional measures of protection in the form of tariff and nontariff barriers. It is true that tariffs are no longer a major instrument of protection in the industrial countries. Following successive rounds of trade negotiations, most tariffs have been reduced to levels that render them insignificant as obstacles to access. Nevertheless, there are certain tariff peaks that are well out of line with the average level within any product category. Moreover, tariff escalation, typical of the tariff structure in the industrial countries, has a negative impact on the development of processing industries in the developing countries. In most cases, raw materials are admitted duty free to markets of the industrial countries. However, when raw materials are processed, they are treated differently. Tariff rates rise with the degree of processing so that they are lowest at the early stages of processing and highest on the finished product. This type of tariff structure discourages industrialization based on locally produced raw materials. Faced with tariff escalation, developing countries are often better off exporting unprocessed raw materials rather than finished products. Furthermore, certain types of tariffs have an extremely restrictive effect. The variable levies imposed by the European Community to protect certain types of agricultural products are an example. Variable levies have the attribute of rising when the world market price falls and falling when it rises. They are used as an instrument to defend domestic prices fixed at artificially high levels. It is not difficult to see that they are far more restrictive than a regular fixed tariff as they serve to shut out the effect of a fall in world market prices.

In addition to tariff peaks, tariff escalation, and variable levies, industrial countries resort to a wide variety of nontariff barriers (NTBs), including quantitative restrictions (QRs). This is illustrated by the regime regulating international trade in textiles and clothes within the framework of the Multifibre Arrangement (MFA). It is hardly necessary to point out that textiles and clothes constitute the backbone of industrialization in developing countries. However, as early as 1962, they were excluded from the GATT rules. Contrary to these rules, international trade in textiles and clothes was made subject to an international agreement comprising practically all exporters and importers and assigning an annual quota for each participant. The agreement was supposed to be a temporary arrangement pending the incorporation of textiles and clothes into the GATT system on the same footing as other manufactured products. But the agreement has been renewed, with extended coverage, once every five years up to the present time.

The decade of the 1980s saw the emergence of a new breed of trade-restricting measures that came to take the label of neoprotectionism. Typical of such measures is the so-called voluntary export restraint (VER). Under this arrangement an exporting country “voluntarily” accepts to limit the volume or value of the exports of a certain product to a predesignated level. VERs were widely resorted to by the United States to stem the tide of Japanese exports of automobiles, television sets, and other electronic products. They were similarly used by the European Community for the same purpose. The same treatment was administered against certain exports from the Republic of Korea, Taiwan Province of China, Hong Kong, and Singapore. Evidently, VERs belong to the category of quantitative restrictions, but they differ in that they are not part of a formal agreement of the traditional type. They have precisely the same effect as QRs but they are supposed to be entered into voluntarily by the exporting country. Because of this dual character, they were aptly described as “gray area” measures. As a quantitative restriction of international trade, they contravene the provisions of GATT. Since, however, they are presented as a voluntary arrangement, the importing country can claim to be acting within the confines of its GATT obligations. Another gray area measure is that of voluntary import expansion (VIE). This arrangement is the opposite of a VER. While a VER is designed to limit the exports of a certain product, a VIE is a device to expand the imports of another product that would otherwise not have been imported to the predesignated level. VIEs were again used by the United States as a device to expand Japanese imports of rice, beef, and telecommunication equipment. As with VERs, they do not constitute a formal contravention of the GATT rules. In essence, however, they are trade-diverting measures that violate the spirit, if not the letter, of the GATT.

A third gray area measure is the so-called orderly marketing arrangement (OMA). According to the GATT, any contracting party has the right to limit the imports of a certain product if they increase to a point deemed to be causing or threatening to cause a serious injury to home producers. This provision is known as the safeguard clause, which serves the purpose of protecting members of GATT against market disruption arising from a sudden and substantial increase in imports. During the decade of the 1980s, there was widespread use of the safeguard clause, which was not warranted by the serious injury caveat. In fact, it was often invoked to stifle legitimate competition of more efficient foreign suppliers. These are the main forms of neo-protectionism: VERs, VIEs, and OMAs, which were widely used to limit access to the markets of the major industrial countries. True, the main brunt of these measures fell on Japan and some of the newly industrialized countries. This cannot be said, however, of the traditional forms of protection that adversely affected all developing countries. Equally important is the fact that neo-protectionism has been responsible for engendering a sense of uncertainty as regards prospects of access to the markets of the industrial countries.

The upsurge of protectionism in the industrial countries happened at a time when developing countries were urged to open up their markets and shift from the inward-looking strategies of the 1960s to a more outward-looking posture. The irony of this asymmetry was not lost on developing countries, which are obviously far less able than the industrial countries to shoulder the burden of adjustment to a more liberalized trade regime.

Significance of the Uruguay Round

The rising tide of protectionism threatened to wipe out the gains made during seven rounds of trade negotiations within the framework of GATT. Not only has it distorted the flows of international trade, but more significantly, it has reflected less than a firm commitment to the basic tenets underlying the GATT system. Multilateralism, the hallmark of the system, was gradually giving way to bilateralism and regional arrangements. The United States, which was for the better part of the postwar period the standard-bearer for a free and open international trading system, became more susceptible to protectionist pressures at home. The change in U.S. posture was reflected in the Trade and Tariff Act of 1984, which empowered the President to take retaliatory measures against countries deemed guilty of “unfair competition.” The Trade Representative, who is responsible for trade negotiations on behalf of the Administration, was required to initiate investigation upon complaint from interested parties into allegations of unfair competition and make recommendations to the President. The powers of the Trade Representative were further strengthened in the Trade and Competitiveness Act of 1988. Henceforth, there was no need to wait for a complaint from interested parties. An investigation could be conducted on the initiative of the Trade Representative. Given the vital importance of the U.S. market for many trading countries, particularly Japan, China, and the four countries of the Asian rim, it was not necessary to use these powers. The fact that the President is so empowered was enough to bring reluctant trade partners to the negotiating table. Protectionist tendencies were of course not limited to the United States. The same trend was observable in the European Community, Japan, and most of the other industrial countries.

As a result of these developments, there was a rapid erosion in the international trading system. The rules of the game that guided international action throughout the postwar period were scarcely respected, much less enforced. It was clear, however, that such a course of action was hardly sustainable. Protectionism was a costly proposition, not only for the countries against which it was administered, but also for those practicing it. Several studies have been made to estimate the cost of protectionism to countries of the OECD. Although there is a large variation in the results because of differing structures, parameter estimates, and base years, it is generally agreed that the cost is relatively high. According to a report presented to the Development Committee at its spring session in 1991, the cost of agricultural support policies alone amounts to about 2 percent of GDP, and the distortions from financing the transfers associated with these policies were quite significant. The report goes on to state that one study, for example, has estimated that the industrial countries suffer a direct welfare loss of $50 billion a year (at 1985 prices). Another study, which extends this kind of analysis to the impact of these policies on the whole economy, concludes that they cost industrial countries some $70 billion a year (at 1988 prices). The economic costs suggested by studies such as these are quite high in comparison with the relatively small contribution of agriculture to GDP in industrial countries. If account is taken of the cost related to protectionism in other sectors of the economy, the results would be far more striking.

Apart from the high cost of protectionism it also became apparent that recurrent trade disputes could easily degenerate into a full-scale trade war not only between the United States and Japan, but also between the two of them and the European Community. The damaging impact of such a development on the world economy could hardly be exaggerated.

Against this background the Uruguay Round of Multilateral Trade Negotiations was launched at the ministerial meeting held at Punta del Este on September 15–20, 1986. The Uruguay Round was to be far more comprehensive in its coverage than previous rounds of trade negotiations. In addition to the traditional topics such as the reduction or elimination of tariff and nontariff barriers, the new round proposed dealing with issues that had never been the subject of multilateral negotiations. These include agriculture, services, trade-related intellectual property rights (TRIPs), and trade-related investment measures (TRIMs). Moreover, the new round proposed looking into ways and means of strengthening the GATT system itself. The negotiating plan envisaged a review of provisions relating to the safeguard clause, settlement of disputes, GATT surveillance of trade, and trade-related measures applied by member countries.

Although developing countries expressed reservations with respect to certain aspects of the new issues, there can be little doubt that they stand to reap substantial benefits from the successful conclusion of the Uruguay Round. The same goes, of course, for the Arab countries. In his paper on the subject, A. H. Mamdouh states that the strengthening of the system resulting from a successful conclusion of the round would secure future opportunities under a framework of equitable principles and rules and preserve the balance of rights and obligations between all developed and developing countries. More specifically, the Arab countries would benefit in their capacity as exporters of a wide range of agricultural and manufactured products. These include textiles and clothes from Morocco, Egypt, Jordan, Syria, Tunisia, and the United Arab Emirates; steel products from Algeria, Egypt, Morocco, Qatar, and Saudi Arabia; petrochemicals from a number of the Arab oil exporting countries; and processed agricultural products from Lebanon, Egypt, and the Maghreb countries. Kelly and Fritz-Krockow cite a number of specific examples showing the kind of tariff and nontariff barriers encountered by Arab exporters in the markets of the industrial countries. With respect to agricultural products (particularly citrus fruit, potatoes, dates, olive oil, onions, and wine), practically all diversified Arab exporters face significant trade restrictions in their export markets.

It was pointed out, however, that for the net food importers such as Egypt and the oil exporting countries, the liberalization of agricultural trade may prove to be a costly proposition owing to higher world prices. Evidently, the significance of this consideration varies according to the specific circumstances of each country and the extent to which the increase in the cost of food imports is offset by a rise in the price of agricultural exports. Moreover, this kind of cost may not be that important if account is taken of the beneficial effects of higher growth rates arising from a better allocation of resources in the industrial countries.

On balance, the Arab countries, like other developing countries, have a significant stake in the success of the Uruguay Round. It should be noted, however, that only 4 Arab countries—Egypt, Kuwait, Morocco, and Tunisia—are members of GATT. That leaves 17 Arab countries—including all the oil exporting countries with the exception of Kuwait—outside GATT and the ongoing negotiations. The explanation for this state of affairs is not hard to find. At one stage developing countries as a whole were skeptical about the advantages of GATT membership. The principles of free trade, nondiscrimination, and reciprocity, to which GATT was dedicated, were seen to be inconsistent with their development requirements. While this view was arguable in the 1950s and 1960s, it is no longer so, given the fact that most Arab countries are already committed to a policy of liberalization within the framework of an adjustment program supported by the IMF and the World Bank. As to the oil exporting countries, the case for GATT membership is even stronger. Their trade regimes, as well as development strategies, have been largely outward oriented. No less important is that they have recently become significant exporters of petrochemical products, which are subject to various trade restrictions in the markets of the industrial countries. The chances of improving market access for these products as well as other products in which they are interested will be vastly improved once they become active participants in the process of multilateral negotiations.

Economic Integration and Intratrade

Economic integration among the Arab countries has been one of the principal goals of economic and political cooperation ever since the establishment of the Arab League toward the end of War World II. Reference might be made to the Economic Unity Council that included some Arab countries as far back as the late 1950s. This was followed by the establishment of the Arab Common Market, whose purpose was to eliminate intra-Arab trade barriers and eventually to realize complete economic union with the free movement of goods, capital, and labor among member countries. While these schemes were able to make some modest contributions in terms of economic cooperation, they were far from successful in their basic objectives of economic integration. Their impact was very limited indeed, if not nonexistent. This result is hardly surprising given the vast expanse of the Arab world, the inadequacy of regional infrastructure and institutions, the different economic and social systems prevailing, the inward-looking strategy characteristic of most of them, and, last but not least, the virtual absence of complementarity between production structures. The experience of the Arab countries in this respect is not different from that of Latin America and Africa, where several integration schemes were implemented with no significant results.

The failure of economic integration at the Pan-Arab level prompted a search for alternative strategies. One approach was to seek integration through the establishment of joint projects. The decade of the 1970s witnessed a plethora of such projects in various sectors ranging from agriculture and cattle farming to shipping and mining. Some of these projects were more successful than others, but it soon became clear that whatever their benefits such projects cannot by themselves constitute a valid approach to economic integration. The limited nature of this approach gave rise to the present strategy of economic integration at the subregional level. The decade of the 1980s saw the rise of three subregional integration schemes led by the Gulf Cooperation Council (GCC), comprising the six Arab countries of the region, followed later in the decade, by the Arab Cooperation Council between Egypt, Iraq, Jordan, and Yemen; and the Maghreb Economic Union between Algeria, Libya, Mauritania, Morocco, and Tunisia. Of the three subregional schemes, the Gulf Cooperation Council and the Maghreb Union are proceeding as planned in the founding agreements. The Arab Cooperation Council on the other hand is in a state of suspension as a result of the Gulf crisis that divided its members into two warring camps.

It remains to be seen how successful is the subregional approach to economic integration compared with the Pan-Arab approach. Certain features of the Maghreb Union are enunciated in the paper by Minister Hassan Abouyoub. In contrast to the Gulf Cooperation Council, which includes a group of more or less homogeneous countries, the Maghreb Union covers six countries that differ among themselves with respect to level of per capita income, stage of development, degree of diversification of production base, economic systems, and the inward- or outward-looking character of their strategies. These are formidable hurdles in the way of economic integration. Aware of these differences, the Maghreb countries have adopted a strategy of integration by stages, starting with selective liberalization of trade barriers, leading to a free trade area, followed by a customs union. Economic union, involving the free movement of goods as well as labor and capital, is envisaged as the final stage that is not likely to materialize before the end of the 1990s.

It is recognized that intratrade plays an important role in the process of economic integration. In the paper on intra-Arab trade, Jamal Zarrouk and others of the Arab Monetary Fund give a detailed statistical and economic analysis of the various aspects of this flow, including its value and volume, relative importance, commodity composition, tariff and nontariff barriers, and a host of other questions. The paper underscores the fact that intra-Arab trade accounts for a small proportion—some 7–8 percent—of total trade. If oil is excluded from both the intra and extra flows, the proportion is still in the 10 percent range. It is important, however, to keep these figures in proper perspective. The relative importance of intratrade of the Arab countries taken as a whole conceals the wide variations at the individual country level. For countries such as Lebanon and Jordan, trade with the rest of the Arab countries is significantly more important than these figures suggest. The export structure of both countries includes a large proportion of fresh fruits and vegetables whose primary outlet is in the markets of the GCC countries and Iraq. Similarly, the overall average fails to reflect the variations between different commodity groups. Apart from fresh fruits and vegetables, intra-Arab trade is fairly important in many categories of processed and semiprocessed products as well as a wide range of manufactures.

The situation is different with respect to oil and raw materials, including phosphates, iron ore, and cotton. In such cases, the markets of the industrial countries account for an overwhelming proportion of Arab exports. Given the great importance of oil and raw materials in the overall export structure, the share of intratrade is understandably modest. It was also pointed out that official statistics do not take account of a good deal of trade that goes on unofficially across borders. Reference might be made to the across-the-border trade between Syria and Lebanon; Jordan and Iraq; Egypt and Sudan; Saudi Arabia and Yemen; to mention but a few examples.

With respect to the official trade between Egypt and the rest of the Arab world, the period between 1980 and 1989 might have been distorted by the Arab boycott in the wake of the Camp David accords. Most important in explaining the low level of intra-Arab trade is the fact that it continues to be subject to more or less severe restrictions in the form of tariff and nontariff barriers.

The study by Zarrouk refers to a number of agreements that have been concluded between Arab Governments with the avowed purpose of promoting intratrade. These include the 1953 agreement on transit trade, the 1964 agreement on the establishment of a free trade area, and the 1981 agreement on the promotion and development of intratrade. Those agreements were supposed to do away with the tariff and nontariff barriers impeding the flow of trade. But liberalization was carried out on the basis of agreed lists of commodities. As to be expected, and as the experience of other developing regions shows, the case-by-case approach to liberalization has failed to make a dent in the high wall of protection. It should be mentioned, however, that the level of protection varies considerably from one country to another. It is highest in Algeria, Sudan, Syria, Jordan, Iraq, Egypt, and Morocco, where the level of effective protection ranges from 75 percent to 250 percent. It is moderate or low in most of the Arab oil countries. The high level of protection in some of the Arab countries was aggravated by certain distortions in macroeconomic policies coupled with strict foreign exchange control.

There are reasons to believe that the prospects for intra-Arab trade may well be significantly better than has been the case so far. In the first place, most of the highly protected Arab countries have embarked on a comprehensive process of trade liberalization in the context of an adjustment program agreed upon with the IMF and the World Bank. In the case of the oil countries where the level of protection is generally moderate, the most important factor is the implementation of a thorough-going program of diversification. This is likely to open up significant opportunities for intratrade that do not exist when the economy is heavily dependent on oil. Last, but not least, reference should be made to the Arab Trade Financing Program that was put into effect in 1989 under the direction of the Arab Monetary Fund. The Program marks an important shift in the strategy for the promotion of intratrade from the conclusion of ineffective liberalization agreements to the provision of badly needed financing and credit guarantees. It is hoped that the new approach, together with the other factors, will have a positive impact on the growth and development of intra-Arab trade.

1

The views expressed in this paper are the author’s and do not necessarily represent those of the seminar.

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