Supply and demand

By Fiona Mackenzie-Bell in Jeddah

With Oman's recent accession to the World Trade Organization (WTO), the Gulf Cooperation Council (GCC) has moved yet one step further down the road towards global integration. Saudi Arabia is - officially at least - set to join the organization by the end of this year. Tunisia, Morocco, Egypt and Jordan are already members and even Palestine is thinking about joining. However, the nature of trade flows in the GCC - and to some extent in the rest of the Arab world - is monolithic and worryingly non-regional. The region still sits uneasily within the world trade system and the free-trade concept.

The Middle East and North Africa has a lower level of intra-regional trade than any other region in the world - something particularly disturbing given the homogenous nature of its markets in terms of language, culture and traditions. According to Palestinian economist Yousif Sayegh, interregional trade has remained stagnant at around seven percent of the total volume of trade for the past three decades.

The region has failed to wholeheartedly adopt the free-trade refrain either globally or internationally. Many of the GCC states that have joined the WTO have negotiated a "waiver" - which allows for delays in full-scale liberalization, notably in the financial sector - and thus have yet to face the true reality of entering a liberalized global system. Kuwait and Qatar are cases in point. Although they both became WTO members in the mid-1990s, they have yet to liberalize their financial sectors fully and allow equal treatment for foreign entities operating in the sector.

At a regional level, the GCC has been equally averse to free trade. At the last GCC summit, during negotiations on the establishment of a free-trade region, the only significant success was an agreement not to agree. Analysts had expected a timely schedule for the establishment of a regional customs union when in fact the six member states simply agreed to reconvene and discuss the issue in 2005.

Trading partners. And there seems to be growing disillusionment with the region's trading partners. Speaking at a recent conference on GCC-European Union (EU) cooperation, Abdullah al-Kuwaiz, the general manager of Bahrain-based Gulf International Bank, said the EU was "not serious" about forging a long-stalled free-trade pact with the GCC. "They want to keep restrictions on our exports, tax our products and be nice to European producers of petrochemicals," he said. He also claimed that progress is being hampered by the lack of a common GCC customs tariff structure - although the EU had not placed pressure on trading blocs to unify tariffs in eastern Europe and the Mediterranean before signing trade pacts.

Al-Kuwaiz also said that EU reluctance to move forward was reflected by the lack of an EU permanent commission in Saudi Arabia as a counterpart to the GCC's liaison office in Brussels. And this, despite the fact that the EU is the GCC's main trading partner and the volume of trade between the two blocs stood at $36 billion in 1999 (albeit with a $14 billion deficit in favor of the EU).

Similar reservations exist elsewhere in the Arab world where officials have voiced their reservations about EU efforts to forge free-trade agreements with their regional partners. Moroccan diplomat Hassan Abouyoub, currently posted to France, recently complained that a European agenda dominated by EU expansion and the euro problem meant that there is "little room in this internal agenda for [trade discussions with] other countries." He also said that agricultural free trade remains a taboo issue in negotiations: "I cannot see any positive prospects for integrating agriculture in our free-trade agreement. It would create a lot of problems including with the WTO."

Captive market. Georges Corm, Lebanon's finance minister, argued that Europe may be reluctant to push for the liberalization of a region, which is effectively a captive market, but was ultimately concerned about regional trade agreements. "Now that we are beginning to have active implementation of Arab free-trade agreements, it's becoming a problem. In Lebanon, we find ourselves suffering from the present opening of the Arab free- trade zone and even with Syria in terms of competition between agricultural products.

It is much more a provocation than other legislation with the EU." Corm said that the level of imports of agricultural products from the Gulf is growing. "We are importing flowers from Saudi Arabia," he said. "This is where we are feeling the pinch more than from our traditional relations with Europe, as Europe is our largest trading partner. We are now feeling that we need to advance faster."

Corm cautioned, however, that Lebanon's industrial base is fragile, with no competitive capacity (despite "good potential to develop agribusiness"), and that negotiations with the EU cannot afford to go too far too fast. The country is still dependent on customs tariffs receipts, explained Corm. "We are introducing VAT [value-added tax] to reduce this dependence and we hope it will be implemented by the next government. It is now ready."

Corm said that he was concerned that free-tree agreements threatened the still vulner-able industries of Lebanon, which had yet to fully recover from years of political conflict. He complained that Lebanon's industrial base is already threatened by regional competition, not to mention potential global inflows of commodities.

And yet, despite Corm's allusion to GCC goods - notably agricultural produce - invading the domestic market, even Gulf industries have cause for concern. Many analysts question the ability of GCC industries to maintain a competitive edge in a world of global free trade, most notably in the industries that have received heavy subsidies over the years. The GCC exports six commodities to Europe, while Europe exports over 1,000 different types of commodities - what formula, if any, could bring about an agreement?

Some analysts argue that the immediate decline of domestic industries in the region - as it swamped with cheaper produce - is just the sort of doom-mongering that local lobby groups thrive on, as are the apocalyptic predictions of excessive unemployment levels. And some Western analysts might agree with them - at least to some extent. Kevin Watkins, Oxfam's senior policy advisor, argues that the issue of free trade is too often seen in terms of the absolute value of trade flows and their impact on gross domestic product rather than as something which can have a direct - and often very negative - impact on millions of people.

Ultimately, the impact of the WTO on the region's economies will vary according to sector. Import substitution based industries, which have failed to adopt a more competitive advantage in production and marketing, are likely to face huge challenges when they are faced with unrestricted international access to their markets. Indeed, anti-WTO activists would argue that opening markets without having developed full capacity to provide for the domestic market gives industries in developing countries an unfair disadvantage. In GCC countries, for example, industries are still generally well protected with import tariffs often as high as 20 percent.

These tariffs are not likely to disappear quickly. But with this protection comes a dangerous potential for local industries - especially those that have developed regional markets and a certain level of regional competitiveness - to develop a false sense of security. "It is in the long term that these countries will feel the impact," one Saudi analyst told Arabies TRENDS. "Cement production, for example in Saudi Arabia, benefits from a tariff of 20 percent - even if that is reduced to seven percent, it is still well protected. But when they finally face international competition in the local and regional markets, they will be forced to realize that if they don't shape up they will simply have to phase out. Some may still be able to survive due to cheap access to certain raw materials such as cheap energy. Energy intensive industries could pull through but still most do not have unit production costs that can compete at an international level."

Some Arab states may argue that to date, WTO membership has had a limited impact on their industrial sectors. Oil has allowed some GCC states to produce highly competitive petrochemical and aluminum sectors, but such advantages do little to offset the volatility induced by oil-dependent industries. Pharmaceuticals manufacturing is relatively successful in the domestic GCC markets, but it produces generic products and is unlikely to survive the onslaught of highly organized, cost-effective multinationals with well-developed research and development operations.

Some take comfort from the fact that although the WTO will ultimately wipe out the widespread "distributor agents" that have monopoly rights to certain import goods (automobiles in particular), the strength of the established relationship with the supplier will mean that such arrangements will continue. But as one distributor pointed out to Arabies TRENDS, "if the supplier decides to sell to more than two or three guys you cannot force them to deal with only one local company."

Logically the process is one of do or die and Arab nations will be hard pressed to avoid the impending reality of full liberalization and integration into the global economy. They may be able to postpone the issue for some time to come but in doing so risk a path of enforced opening up, rather than a systematic one that is guided by domestic policy and a strategic economic development plan.