The Empty Promise of the Arab Free Trade Area
A version of this article was published in The Cairo Times, Vol 2, Iss 5.
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It has become fashionable of late to talk up an Arab free trade area as the local counterweight to the European Union (EU) and the North American Free Trade Agreement (NAFTA) that links the US, Canada and Mexico. Optimists see an Arab free trade area (which we’ll call AFTA, for lack of an official name) as a no-lose proposition, allowing Arab states to fulfill several long-standing goals at once. It liberalizes trade, which is all the rage these days, while at the same time excluding Israel, which for a certain caste of Arab leader makes it more palatable than the Middle East and North Africa (MENA) conferences pushed by the US. It taps into the age-old sentimental desire for Arab unity, which has long been seen as the essential precondition for the region regaining its stature in the world. And it is supposed to make the Arab states more attractive to foreign investors by giving them one large common market to sell to. Cynics take a slightly different view, of course, but even they usually concede that an Arab free trade area can’t do much harm.
In fact, AFTA is likely to be an economic disaster, even if it is a political success. Why? Put aside, for the moment, the fact that the Arab states’ track record on unity is so poor that it makes it improbable they will ever agree on trade rules. The point of a free trade zone – any free trade zone – is that it is supposed to reduce the tariffs on trade, thereby promoting growth. But this only works if there is significant intra-regional trade among the trade zone members. For example, America’s two largest trading partners are Canada and Mexico, which means NAFTA frees a large share of America’s overall trade with the world. The Arab states, by contrast, all export more or less the same thing: oil. They don’t sell it to each other, obviously, but to the oil-poor nations of the developed world in return for the various consumer and capital goods that the Arab states do not produce for themselves. As a result, their intra-regional trade is negligible, around 3-5%, and so only a few things like Egyptian oranges or locally-made toothpaste will really be freed.
Thus an Arab free trade area will only lower tariffs on a tiny sliver of the region’s total trade. Worse, because there are no dedicated free-market economies in the Arab world to push for greater reform from within, there is the risk that the free trade area will become a fortress. Every Arab state has an industry or two it will want to continue to protect from the rest of the world through high tariffs, and in the horse-trading that surrounds trade negotiations it is possible that AFTA, in a kind of highest common denominator approach to policy-making, will agree to adopt everyone’s pet projects. Thus AFTA could lower tariffs on trade among Arab states but end up raising them, on average, on trade with the rest of the world. This would make the Arab world even more isolated after the free trade area than it was before it and, in turn, would therefore generate less foreign investment rather than more.
But in that, paradoxically, lies AFTA’s political appeal. The Arab states are under intense pressure to reform their economies and reform, as everyone knows, can be painful. But an Arab free trade area, precisely because it would have little actual effect on trade, offers governments the chance to look like they’re reforming without actually having to do anything painful. This sounds convenient, but it is dangerous in two ways. First, the reason the Arab states need to reform in the first place is not to please the US or the IMF but because their economies are stagnating, failing to create jobs or opportunities for their citizens and bleeding the budget dry with subsidies and loss-making public-sector companies. These problems will survive an Arab free trade area.
Second, and more significant in the long run, is that governments have a limited amount of political capital they can expend in selling their citizens on the idea of free trade. If they waste it building a free trade area that makes things worse rather than better, they will have nothing left to push through the wrenching changes that are needed to actually improve things. Looking back on Sadat’s infitah (or Open Door) policy in the 1970s, which was billed at the time as economic liberalization, it is fairly clear that it enabled his friends to get rich but discredited the idea of free trade for almost a generation. Egypt didn’t attempt serious reforms again until the mid-1990s, by which time other parts of the world, like Asia, had been through two decades of strong growth and rising incomes. This ‘lost’ twenty years could be repeated if the government uses the creation of an Arab free trade area as a substitute for useful policy.
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