The trouble with trade

The next decade will see a significant strengthening of two seemingly mutually exclusive trends in global trade.

Trade will become, simultaneously, more global and more local. And the Arab world, pulled in those opposite directions, will open up its markets in a swathe of trade deals - multilateral, regional and bilateral.

Integrating the 300 million-plus people from the Arab world into the global economy will hurt regional economies much more than it will benefit them. Developed economies will use all the tricks of the trade to get the best possible deals for their own businesses, through multilateral and regional deals. The Middle East will get the short end of the stick.

In the multilateral arena, the World Trade Organization (WTO), which acts as a referee for global trade, will become more and more powerful, encompassing new sectors and getting new powers to police offenders. With over 140 current members, the WTO will within a decade rival the UN as the world's largest - and most powerful - international organization.

With increased power for the WTO, global trade, which has increased three times as fast as the world's merchandise output in the last 50 years, will continue to outpace other sectors of the economy. Even in 2001, while world farm output increased by less than three percent, trade in farm products increased by 12 percent.

Similar trends are becoming increasingly visible in other sectors, too, notably services and manufacturing.

While the WTO will bring in a wave of trade globalization, at the same time, the world will also be divided into regional blocs that are set to increase in power. This will happen since the big countries, especially in the developed world, will not be willing to make the sacrifices necessary to really empower the WTO in areas that are of strategic interest to them. While seeking access to developing markets, the West will continue to repel any attempts to open their own markets in any meaningful way.

This will lead to a new divide, and more disastrous WTO ministerial conferences, like Seattle in 1999. Repeated failures in breaking new ground and providing equitable trading terms will lead the big blocs, notably the European Union (EU) and the United States, to sign up regional and bilateral deals with other countries, especially with big markets in Asia and Africa.

The European Union recently signed agreements with a wide variety of countries - including Morocco, Sri Lanka and Lebanon - at terms that are tough for the small countries. In the future, with 30 member countries and nearly 500 million people, this will be one of the largest such groupings and will increase its negotiating power much more. The EU is currently negotiating a EuroMed treaty with all the Mediterranean countries.

The United States is also busy building up its trade muscles. It already dominates the North America Free Trade Area (NAFTA) and is now negotiating the Free Trade Area of Americas, which will encompass all the countries of the North and South American continents, and which will be the most influential and single largest such group, accounting for over a third of the world's total economic output.

The EU trade commissioner, Pascal Lamy, admits that such a threat exists, but blames it on the 'lack of flexibility' among the developing countries and also on politicians seeking voters' approval at home. 'Of course, there are temptations and tendencies to move more towards bilateral free trade simply for political reasons: domestically speaking, selling a free trade negotiation is easier than selling a multilateral trade agreement,'' he says.

But while regional trade is set to boom in many parts of the world, it remains abysmally low in the Middle East. Trading within the Arab world remains extremely complicated. It is easier for a farmer in Egypt to export his wheat to the United States than to neighboring Saudi Arabia.

'I think that's probably one area in which we have not done very well,'' says Saeed al Muntafiq of Dubai Investments. 'I could sit here and give you 1,000 reasons as to why that is so, but our habit is to focus on the positive rather than on the negative. It's extremely weak; not just intra-Gulf trade, but inter-Arab trade, intra-regional trade, it's in the single digits. The GCC [Gulf Cooperation Council] only recently unified tariffs, 20 years after its inception.''

Taking the EU as its model, the GCC will work towards a single currency and unified fiscal policies for the six member countries. The GCC will also perhaps establish special trade relations with large neighboring markets, including India, Pakistan, Iran, Iraq and Turkey.
Most Arab countries have small domestic economies, and individually they have limited negotiating muscle - and thus end up with bad deals. If the GCC were a vibrant body, it could negotiate far better deals for its member states at various levels.

EuroMed, too, has been making slow progress towards bringing in all the Mediterranean countries. And the Middle East Free Trade Area (MEFTA) deal may throw a spanner into the works for EuroMed since they will both be targeting several overlapping countries. Meanwhile, the United States may use its clout in the region to make sure that MEFTA becomes the primary link between the Arab world and the global economy - and also the framework for regional trading.

One of the principal arguments used by the proponents of globalization is that it benefits poor countries and smaller economies since the game is played according to rules that are equitable. Logically, as an economy develops, it moves away from labor-intensive sectors, like mining, manufacturing and agriculture, to tertiary sectors like services and value additions.
For the developing countries to benefit from trade, developed economies must open their markets to imports from the developing world, while exporting services or high technology products.

But the reality is starkly different. As the ongoing negotiations since the Doha meeting of the WTO show, Western countries are unwilling to make even the smallest gestures to show that they practice the open-market policies that they preach.

The EU, for instance, has refused to lower the gigantic $90 billion that it spends each year on subsidizing its 9 million farmers. The US, too, is reticent to reduce subsidies for its own farmers and has announced new measures to protect its steel industry. Those trends are unlikely to change in the future.

According to a study by the International Food Policy Research Institute (IFPRI), full global trade liberalization of major agriculture commodities would provide global benefits of $36 billion in 2020, nearly two-thirds of which could be seen in developing countries. But it adds that for this to happen, European nations need to remove farm subsidies.

'Though most developing countries have opened their market to agricultural products, many industrialized nations still practice protectionism,'' says IFPRI. It predicts that the United States will gain most from free trade in agricultural goods, a gain of over $4.1 billion by 2020.

Agriculture is not an exception, but the rule. The developing world, simply put, has little to gain from free trade. Even the WTO itself admits it. Despite these drawbacks, Saudi Arabia will continue to advance towards WTO membership. Before the end of the decade, Saudi Arabia will finally join the WTO, thus ensuring that all the Arab economies are finally integrated into the global trade arena.

The Saudis are pressing for special concessions based on two factors - that it holds the world's largest oil reserves and that it is the seat of the two holiest cities of Islam. However, the WTO has so far refused to offer the Saudis special treatment, on the grounds that other members will reject any any concessions.

This is crucial since even after an agreement is reached between the Saudis and the WTO, it will need to be ratified by each existing member of the organization. And if China's entry was an indication, the Saudis will have to go through a similar, if not more rigorous exercise.

In the end, a decade from now, local businesses in the kingdom may be left wondering whether all that pain was worth the measly rewards that globalization will prove to offer.