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7 Intra-Arab Trade: Determinants and Prospects for Expansion

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Saíd El-Naggar
Published Date:
December 1992
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Jamal Eddine Zarrouk1

Introduction

The promotion of trade among Arab countries has long been considered the basis for cooperation and economic integration within the League of Arab States. Though this vision had its origins in a political perspective, the development of Arab economies, especially in the fields of industrialization and foreign trade, contributed to the economic rationale for the promotion of intra-Arab trade. In fact, since the early fifties, joint Arab trade efforts have attempted to liberalize intra-Arab trade through various channels. Such channels include both multilateral and bilateral trade agreements and the recently established Arab Trade Financing Program. These vehicles were expected to allow Arab countries to achieve gains from increased trade, to take advantage of economies of scale that would enable them to produce for a regional market, and to promote competition.

However, historical evidence suggests that intra-Arab trade has expanded little during the last two decades and its share in total Arab trade has remained small. The shortcomings of intra-Arab trade performance have raised questions about its future direction. Will Arab countries pursue the promotion of intra-Arab trade by relying on multilateral liberalization while several of them are at different levels of development and have different trade regimes, or will they devote their efforts to pursuing smaller-scale regional groupings that may be used as building blocks for an Arab economic community at a later stage? Should and can they do both simultaneously?

The purpose of this paper is to address some of these crucial issues. It attempts to identify the determinants of intra-Arab trade expansion during the 1970s and 1980s and to evaluate the likely trade effects of across-the-board preferential tariff reductions of Arab manufactures. It has three sections. Section I describes the main channels used by the Arab countries to promote intratrade.

Section II provides an empirical analysis of the determinants and characteristics of intra-Arab trade flows compared with total Arab trade flows and their changes as a result of trade preferential arrangements.

Section III sheds light on the extent to which inward-looking trade regimes and/or restrictive commercial practices in Arab countries have affected trading patterns among Arab countries. Then the likely intra-Arab trade gains from substantial tariff reductions and the elimination of nontariff barriers are simulated. The projected intra-Arab trade expansion is an exercise that aims at assisting Arab countries to assess the effects of across-the-board trade liberalization of manufactures of Arab origin.

The paper concludes with a summary of main findings and sets out policy recommendations for an intra-Arab trade liberalization scheme.

I. Principal Channels Available for Promoting Intra-Arab Trade

Arab countries have been able to utilize several channels to facilitate and expand their multilateral trade relations. The extent of these efforts can be observed from the number of both bilateral and multilateral trade agreements, which exceed those concluded in other related economic areas.

Arab multilateral trade agreements aim at establishing an institutional framework to remove in stages barriers to intra-Arab trade by providing preferential trade treatment, including mechanisms to finance and guarantee such trade. The Inter-Arab Investment Guarantee Corporation has expanded its work to intra-Arab export credit guarantees, and the Arab Trade Financing Program was created as a specialized financial institution in intra-Arab trade. The following subsections present the main channels undertaken by Arab countries to expand intra-Arab trade, emphasizing their advantages and limitations to achievement of economic integration among Arab countries.

Arab Multilateral Trade Agreements

Trade agreements constitute the basis for preferential treatment among Arab countries. That several such agreements have been in effect since the early fifties reflects the desire of Arab Governments to provide a means to bring about an increase in intra-Arab trade.

The 1953 Transit Trade Agreement

Several Arab countries2 concluded this agreement in 1953 to facilitate trade and organize its transit as a preparatory phase to establishing a common market later. In the same year, an agreement on the settlement of current payments and the movement of capital was concluded to complement this agreement, which granted full exemption of customs duties on farm products, livestock and their products, raw materials, and other selected primary products. However, the Transit Trade Agreement accorded less preferential treatment to manufacutured goods and retained quantitative restrictions on specific commodities.

Creation of an Arab Common Market

In 1964, a group of Arab countries3 agreed to create a common market in stages to provide an advanced framework for intra-Arab trade promotion. The first phase was to establish a free trade area among the signatories of the agreement. The principal measure envisaged in the Arab common market was the elimination of tariffs and nontariffs for agricultural products as well as manufactures, according to a specific timetable. However, the decision to allow exceptions has led all the member countries to take advantage of this loophole, thus reducing the ability of the common market to realize a total liberalization of trade between its signatories.

The 1981 Agreement for Facilitation and Promotion of Intra-Arab Trade

The Agreement for the Facilitation and Promotion of Trade among member states of the Arab League4 was signed in 1981, and entered into force in 1982. This agreement is a declaration of intent on the part of the signatories to negotiate the full elimination of tariff, nontariff, and taxes of similar effect for manufactured and semimanufactured goods. It thus complements the tariff exemptions for agricultural products that Arab countries exchanged under the 1953 agreement. Moreover, the 1981 agreement urges member countries to provide for the necessary financing of intra-Arab trade on a preferential basis. The 1981 agreement ushered in a product-by-product approach to trade liberalization, which involves negotiating agreements between a few Arab countries on individual products and then seeking to extend such agreements to all the members through the Arab League’s Economic and Social Council. However, this process has turned out to be slow and cumbersome. In fact, negotiators were allowed to liberalize some manufactured products but not others. In addition, the negotiations did not lay out a time schedule for the stages to complete liberalization. Because many of the Arab manufactured products are similar, and countries are allowed to pick and choose among products, only a very few Arab manufactured products remain candidates for tariff exemptions.

Furthermore, the exchange of tariff exemptions between member countries involves losses at the start of the liberalization, including tariff revenue losses and the cost of restructuring inefficient industries in order to compete in a regional market. Because the 1981 agreement did not lay the grounds for a compensation scheme to balance the likely gains and losses resulting from liberalization, many signatories may have been discouraged from speeding up the trade liberalization process.

Although the above multilateral trade agreements have not in general led to the expected liberalization of intra-Arab trade, they have constituted a positive attitude toward Arab economic integration. Section II will shed further light on the effects of Arab multilateral trade agreements by looking at changes in trade patterns at both regional and subregional levels.

Mechanism for Intra-Arab Export Financing

In addition to the promotion of intra-Arab trade through the institutional framework of multilateral trade agreements, Arab countries also established an intratrade financing and guarantee mechanism. This subsection discusses the role and advantages of the Arab Trade Financing Program (ATFP) in promoting intra-Arab trade. Since the program has only recently started its activities, and data pertaining to intra-Arab trade financing are not available, the following discussion is not an attempt to evaluate the performance of such a program.

Objectives of the Arab Trade Financing Program

The Arab Trade Financing Program is the latest achievement in joint Arab economic endeavor. It was established in 1990, following a realization that financing intra-Arab trade is an essential factor in encouraging Arab exporters and importers to trade with each other on a continuous and regular basis. Thus it aims at enhancing the competitiveness of Arab exporters by providing the required export financing.

Its role is first to refinance intra-Arab trade in goods and accompanying services whenever they are of Arab origin. In most cases, a good is considered of Arab origin if it is produced or manufactured in an Arab country from raw materials or other components originating in any Arab country or if the Arab added value was 40 percent or more. Petroleum, used goods, and re-exported goods are excepted from this financing scheme.

Moreover, it provides financing through credit lines made available to the national financial agencies designated by Arab Governments. The necessary exporter/importer’s guarantee should be acceptable to the program.

Finally, the program provides financing for preshipment and postshipment credits to Arab exporters and importers through the national agencies.

Advantages of Arab Trade Financing Program

The program is unique in its specialization in intra-Arab trade financing. It seeks to mobilize resources to finance intra-Arab trade and to enable the Arab banking system to carry out its desired role in financing Arab trade.

ATFP credit coverage available for trade financing is about 85 percent of the credit provided by relevant national trade financing agencies. This coverage is the highest provided by an Arab trade financing institution, as shown in Appendix 1. In addition, the program provides financing to both Arab exporters and importers, while local commercial banks in Arab countries give loans only to exporters and at costly guarantees.

There is no doubt that financing intra-Arab trade through a regional program with its own independent resources will allow individual Arab countries to release part of their savings from financing intra-Arab trade to financing trade-related development projects instead. Thus the financing of intra-Arab exports by the program may relieve the balance of payments difficulties of some Arab countries.

Another advantage of this program is related to the inherent difficulty of risk assessment and the uncertainty surrounding future export performance. As a specialized institution directly involved in financing Arab trade, the ATFP might be able to collect information and practical experience that will allow it to assess the creditworthiness of the various trade partners. In the final analysis, this specialization can help small- or medium-scale Arab exporters and new Arab exporters in obtaining trade financing.

As mentioned previously, the program also has the advantage of refinancing pre-export credit, which the exporter can rarely obtain from a local trade financing scheme.

Because the program is a regional institution, it can group together trading risks and prorate them among several Arab countries. In addition, as it acquires a good financial position in the international market, it will be able to augment its resources by borrowing from foreign sources.

Arab Trade Financing Program and Export Credit Guarantees

Providing guarantees for financing intra-Arab trade is an activity that complements the work of the ATFP. Credit guarantees make it possible to refinance and ensure a continuity in the program. Since the program itself does not provide guarantees, it signed an agreement with the Inter-Arab Investment Guarantee Corporation to provide guarantees for the credit operations that are carried out by the program and its national agencies. In practice, the Corporation provides guarantees to national agencies to cover all their operations that are refinanced by the program.

Finally, it is worth recalling that a major characteristic of the recent trends in world trade flows is the increasing role of trade information technology and especially world trade information networks. Trade information technology has increased competition among businesses. The ATFP has taken the initiative in preparing for the establishment of a trade information network for Arab users. This system will be able to collect data and information on trade laws and regulations, preferential arrangements, and available export market opportunities in the Arab countries. These services will help Arab exporters to better reach Arab markets and to gain new comparative advantage.

II. Development Trends and Determinants of Intra-Arab Trade

This section starts with an analysis of trends in the evolution of intra-Arab trade during the 1970s and the 1980s. Subsequently, an applied study of two basic relationships is carried out: First, the effect of growth in per capita GDP on intra-Arab trade expansion, and second, the extent to which Arab trade preference agreements have increased intra-Arab trade. The section concludes with features of successful regional trade groupings among countries.

Development Trends of Intra-Arab Trade

Value and Share

The historical evidence (Table 1) indicates that the value of intra-Arab trade (exports and imports) increased about eleven times between 1972 and 1980, reaching $22.5 billion in 1980, compared with $2 billion in 1972. Then it started declining with the fall in world oil prices, averaging $20 billion between 1981 and 1985, and $15 billion between 1985 and 1990. During the decade of the 1980s, the average value of intra-Arab trade leveled out at about $15 billion, of which intra-Arab exports alone accounted for $9 billion.

Table 1.Developments in Value and Share of Intra-Arab Trade in Arab Total Trade,1 Selected Years, 1972–90
1972198019811985Average

1981–85
198619891990Average

1986–90
Average

1980–89
(Millions of U.S. dollars)
Intra-Arab trade1,996.022,508.327,663.215,895.419,867.413,027.417,606.916,833.615,467.918,235.1
Intra-Arab exports874.611,446.013,993.47,183.79,779.36,341.78,853.08,450.37,713.39,045.8
Intra-Arab imports1,121.411,062.313,669.88,711.710,088.16,685.78,753.98,383.47,754.69,189.3
Total Arab trade27,332.5345,194.6350,921.6206,911.4269,784.7168,373.4212,759.0251,944.2200,719.2244,577.4
Total exports16,704.2234,321.9216,850.9107,959.4147,991.779,769.7116,181.3141,246.5104,154.3135,380.6
Total imports10,628.3110,872.7134,070.798,952.0121,793.088,603.696,577.7110,697.796,565.6109,196.8
Intra-Arab trade as percentage of total trade7.36.57.97.77.37.78.36.77.87.5
Intra-Arab exports as percentage of total exports5.24.96.56.66.67.97.66.07.66.7
Intra-Arab imports as percentage of total imports10.610.010.28.88.37.69.07.68.08.4
Source: International Monetary Fund, Direction of Trade Statistics, 1991.

Arab total trade of member countries of the Arab Monetary Fund.

Source: International Monetary Fund, Direction of Trade Statistics, 1991.

Arab total trade of member countries of the Arab Monetary Fund.

As regards the share of intra-Arab trade in total trade, it did not increase significantly during the 1970s and 1980s, averaging around 7.5 percent during the decade of the 1980s. Intra-Arab exports as a percentage of total exports accounted for about 7 percent and intra-Arab imports for more than 8 percent of the total imports during the same period.

These trends show that the importance of intra-Arab trade in total trade, either viewed from the export or the import side, has been largely insignificant.

Share of Intra-Arab Trade in Total Arab Trade with Major Regional Groupings

A summary of the shares of Arab trade distributed by selected regional trading blocs that are main Arab trading partners is presented in Table 2. In addition, detailed membership of the regional trading blocs grouped into associations between industrial and developing countries is shown in Appendix 2.

Table 2.Developments in Direction of Arab Trade by Major Regional Trading Blocs
Exports (as Percentage of Total Arab Exports)Imports (as Percentage of Total Arab Imports)
Trading Blocs19801985198919901980–8919801985198919901980–89
A. Developed Countries’ Regional Trading Blocs
European Community (EC)33.536.229.031.834.237.440.242.045.941.5
North American Free Trade Area (FTA)15.67.612.313.511.311.510.512.912.912.1
European Free Trade Association (EFTA)2.20.91.21.61.43.24.34.84.74.2
New Zealand-Australian Free Trade Area (NAFTA)1.01.01.01.21.11.01.61.51.71.5
Total (A)52.345.743.548.148.053.156.661.265.259.3
B. Developing Countries’ Regional Trading Blocs
Arab Countries (Intra-Arab)4.96.67.66.06.710.08.89.07.68.4
Association of South East Asian Nations (ASEAN)2.11.92.22.32.20.61.02.32.61.0
Latin American Integration Association (LAIA)2.03.52.72.43.20.71.81.61.51.4
Total (B)9.012.012.510.712.111.311.612.911.710.8
Total(A)+(B)61.357.756.058.860.164.468.274.176.970.1
C. Rest of the World38.742.344.041.239.935.631.825.923.129.9
Source: International Monetary Fund, Direction of Trade Statistics, 1991.
Source: International Monetary Fund, Direction of Trade Statistics, 1991.

Table 2 indicates that Arab exports to the major regional trading associations have accounted for about 60 percent of total exports during the 1980s. Arab imports from these trading associations constituted about 70 percent of total imports during the same decade. This sizable share of Arab trade with the world’s major trading associations reflects the increasing importance of the regional trend in Arab trade with its principal trading partners. It also suggests the likely benefits that regional trading associations stand to gain from strengthening the bargaining power of their members to assure greater market access.

As regards Arab trade with the world’s major regional trading blocs whose members are industrial countries, the Arab countries exported about 48 percent of total exports and imported about 59 percent of the total imports during 1980–89. These figures suggest that Arab countries are a large export market for the industrial member countries of these trading associations. The capital and engineering goods that predominate in Arab imports from the industrial countries incorporate higher value added than the primary and semimanufactured goods that predominate in Arab countries’ exports to them.

As to Arab trade with the regional trading associations whose members are developing countries, Arab countries exported about 12 percent of total Arab exports and imported around 11 percent of the total imports during 1980–89, indicating that the regional trading associations in developing countries are export as well import markets for Arab countries.

Intra-Arab trade was the largest among the regional trading associations whose members are developing countries during 1980–89. In addition, the 8 percent intra-Arab import share and the 7 percent intra-Arab export share in total imports and exports, respectively, suggest that Arab countries are import markets for each other more than for other developing countries.

Trends in Non-Oil Intra-Arab Trade

The Arab countries as a group are oil exporting countries in the first place. But changes in the commodity structure of Arab exports took place during the 1980s. The data in Table 3 show that non-oil Arab exports as a percentage of total oil and non-oil exports have steadily increased from about 11 percent in 1980 to 14 percent in 1985, and then to 42 percent in 1989. This growing share of non-oil Arab exports can be explained by Arab countries’ efforts toward industrialization and diversification of their exports away from oil.5

Table 3.Developments in Shares of Non-Oil Intra-Arab Trade(In percent)
1972197919801985198719881989
Non-oil Arab exports as percentage of total exports16.315.210.914.422.327.842.1
Non-oil Arab imports as percentage of total imports97.997.296.395.795.797.797.3
Non-oil intra-Arab exports as share of non-oil Arab total exports24.520.039.325.820.721.514.1
Non-oil intra-Arab imports as share of non-oil Arab total imports8.65.87.05.65.96.16.8
Non-oil intra-Arab trade as share of non-oil Arab total trade11.99.312.28.69.09.59.2
Source: Intra-Arab data are constructed from various statistical publications of the Arab Monetary Fund and from other national sources.
Source: Intra-Arab data are constructed from various statistical publications of the Arab Monetary Fund and from other national sources.

Regarding trends in non-oil intra-Arab trade in the 1980s, the data in Table 3 indicate that non-oil intra-Arab exports as a percentage of non-oil Arab total exports have fluctuated sharply. While the share of non-oil Arab exports increased steadily during the period 1980–89, the share of non-oil intra-Arab exports did not follow the same upward trend during the same period. After peaking at about 39 percent in 1980, the share of non-oil intra-Arab exports fell to about 26 percent in 1985 and then 14 percent in 1989. The declining share of non-oil intra-Arab exports underlies the impact of changes in the economic activity of Arab countries, which may have been severe on non-oil intra-Arab exports. To shed light on this impact, a comparative study of trends in the growth rates of non-oil intra-Arab export volume and Arab real output follows.

Comparative Trends in Growth of Non-Oil Intra-Arab Export Volume and Arab Real Output

To study comparative trends in Arab real output and non-oil intra-Arab export growth rates, four indicators were used: the annual average growth rates of non-oil intra-Arab volume of exports, and of both non-oil Arab real GDP6 and per capita real GDP. The latter are both proxies for real output growth. Moreover, the study covered three periods: 1974–81; 1982–89; and 1986–89, which is considered a recession period for the Arab economies. Table 4 shows the results for the average of the three periods.

Table 4.Comparison of Annual Average Growth Rates of Non-Oil Arab Trade Volume, GDP, and Per Capita Real GDP(In percent)
1974–811982–891986–89
Non-oil intra-Arab exports14.10.514.8
Non-oil total Arab exports14.913.024.2
Arab per capita real GDP15.8−4.0−0.7
Non-oil Arab real GDP11.3−3.9−0.07
Sources: International Monetary Fund, International financial Statistics; and Arab Monetary Fund data base.
Sources: International Monetary Fund, International financial Statistics; and Arab Monetary Fund data base.

For 1974–81, similar upward trends were observed in all four growth rates. However, growth in the volume of both non-oil intra-Arab and non-oil Arab exports exceeded non-oil Arab real GDP and per capita Arab GDP growth.

For 1982–89, Arab real GDP fell dramatically, as did per capita real GDP, as a result of the worldwide recession of 1980–83. Thus both non-oil Arab real GDP growth and per capita real GDP growth became negative. Likewise, growth in the volume of non-oil intra-Arab exports fell to almost zero. However, the volume of non-oil Arab exports continued to grow at an annual average rate of 13 percent, similar to that during the first period.

Finally, during 1986–89, growth in both non-oil Arab real GDP and per capita real GDP improved slightly but remained negative. While growth in the volume of non-oil intra-Arab exports was much stronger, reaching an annual average rate of 14.8 percent, growth in the volume of non-oil Arab exports was at a record annual average rate of 24 percent.

Whereas this analysis of trends highlights the strong association during the 1980s between growth in Arab real GDP and growth in the volume of non-oil intra-Arab exports, the association between Arab real GDP and the volume of non-oil Arab exports was weak. This finding seems natural and predictable, given that Arab countries, which are exporters as well as importers among each other, have experienced a decline in income and an impact from the international recession that lasted well after 1982, when many other countries started economic recovery.

Changes in Commodity Structure of Non-Oil Intra-Arab Trade

This section discusses the evolution of the commodity composition of non-oil intra-Arab exports and imports contrasted with that of non-oil total Arab exports and imports. The basic data used for the analysis are from the UNCTAD data base. Commodities are grouped into 10 categories of goods and 4 main product groups. The 10 categories of goods are adapted from the GATT classification by broad factor-intensity groupings. For instance, food, agricultural products, minerals, and ores are considered to be primary goods. Consumer goods comprising textiles, clothing, and household equipment are in general labor intensive. Capital and engineering goods that include machinery, transport equipment, and office machinery are more capital-intensive and skill-intensive goods. The data analysis focuses on two years: 1981 is the earliest year for which Arab trade data in the Standard International Trade Classification (SITC) are available, and the most recent yearly data are available for 1988.

Table 5 shows the percentage composition of non-oil intra-Arab and total Arab exports, and Table 6, the percentage composition of non-oil imports, for 1981 and 1988.

Table 5.Developments in Product Composition of Arab Non-Oil Exports(In percent)
Product Composition of Non-Oil Exports
Intra-ArabTotal Arab
1981198819811988
Primary Products41.333.551.342.2
Food34.323.919.217.4
Nonfood agriculture5.61.513.818.4
Metals, minerals1.38.118.318.4
Industrial Goods20.735.422.823.5
Chemicals11.021.618.918.1
Iron, steel0.82.31.21.3
Semimanufactures8.911.52.84.2
Capital Goods17.711.25.53.6
Machinery and transport equipment17.711.25.53.6
Consumer Goods20.220.019.530.5
Textiles6.911.78.515.4
Clothing7.64.09.012.4
Other consumer goods5.74.32.02.7
Other Commodities Not Classified Elsewhere0.20.00.90.1
Total100.0100.0100.0100.0
Note. The product shares in Tables 5 and 6 are compiled from the COMTRADE data base. The commodity trade data were available only for Algeria, Egypt, Jordan, Morocco, Oman, Saudi Arabia, Syria, and Tunisia.Source: UNCTAD, COMTRADE data base, 1990.
Note. The product shares in Tables 5 and 6 are compiled from the COMTRADE data base. The commodity trade data were available only for Algeria, Egypt, Jordan, Morocco, Oman, Saudi Arabia, Syria, and Tunisia.Source: UNCTAD, COMTRADE data base, 1990.
Table 6.Developments in Product Composition of Arab Non-Oil Imports(In percent)
Product Composition of Non-Oil Imports
Intra-ArabTotal Arab
1981198819811988
Primary Products40.135.423.934.4
Food29.125.919.625.0
Nonfood agriculture3.72.42.56.0
Metals, minerals7.37.21.83.4
Industrial Goods27.340.126.330.1
Chemicals10.122.16.713.1
Iron, steel4.15.45.76.6
Semimanufactures13.112.613.910.3
Capital Goods13.711.134.827.2
Machinery and transport equipment13.711.134.827.6
Consumer Goods18.013.413.77.8
Textiles2.22.83.93.7
Clothing2.62.41.81.9
Other consumer goods13.28.28.02.2
Other Commodities Not
Classified Elsewhere0.90.01.30.4
Total100.0100.0100.0100.0
Note. By definition, intra-Arab imports equal intra-Arab exports plus transport and insurance. However, intra-Arab import figures turned out to be widely different from intra-Arab export figures, after approximated costs of transport and insurance were added. It appears that many of the discrepancies can be explained also by the different recording dates for imports and exports, and different product classifications between Arab countries. Hence, the product shares of Table 6 are compiled for illustration of overall trends in intra-Arab commodity trade patterns only; they are not intended for data cross checking.Source: UNCTAD, COMTRADE data base, 1990.
Note. By definition, intra-Arab imports equal intra-Arab exports plus transport and insurance. However, intra-Arab import figures turned out to be widely different from intra-Arab export figures, after approximated costs of transport and insurance were added. It appears that many of the discrepancies can be explained also by the different recording dates for imports and exports, and different product classifications between Arab countries. Hence, the product shares of Table 6 are compiled for illustration of overall trends in intra-Arab commodity trade patterns only; they are not intended for data cross checking.Source: UNCTAD, COMTRADE data base, 1990.

Changes in Commodity Structure of Non-Oil Intra-Arab Exports

The percentage composition shown in Table 5 indicates that shifts in the structure of non-oil intra-Arab exports occurred during the period 1981—88. First, the relative importance of intra-Arab exports of primary goods decreased in 1988. The share of primary goods in non-oil intra-Arab exports fell from 41 percent in 1981 to 33 percent in 1988. Looking at the export basket of this product group, the share of food, accounting for 34 percent of non-oil intra-Arab exports in 1981, fell to 24 percent in 1988.

Second, the share of manufactured goods ranked highest in non-oil intra-Arab exports, reaching 35 percent in 1988 from 21 percent in 1981. In this product group, the share of chemical exports was highest in 1988 and double the 11 percent share of 1981. Subsequently, the share of consumer goods exports, ranking third in the percentage composition of non-oil intra-Arab exports, remained constant in 1988, at about the same 20 percent share as in 1981. Among consumer goods, textile exports increased from 7 percent in 1981 to 12 percent in 1988. Finally, the share of exports of capital and engineering goods fell from 18 percent in 1981 to 11 percent in 1988.

This historical evidence suggests that structural changes in the composition of intra-Arab exports took place during the 1981–88 period. These changes may have resulted from industrialization and diversification efforts by the Arab countries and materialized in the development of new industries such as petrochemicals, which made up more than one third of non-oil intra-Arab exports in 1988.

The general model for changes in the commodity structure of developing countries’ exports hypothesizes that the evolution of comparative advantage rests on the introduction of new technology and know-how or skills. Developing countries that acquire technology through imports will first move to export semimanufactured and labor-intensive products such as consumer goods, comprising textiles and clothing. Then, at a later stage, developing countries’ exports will shift to more capital-intensive and skill-intensive goods.

As far as Arab countries as a group are concerned, by acquiring textile and clothing technologies, countries like Egypt, Morocco, Syria, and Tunisia gained a comparative advantage in exporting such labor-intensive consumer goods. In addition, the resource-rich and capital-rich countries of the Gulf Cooperation Council (GCC) succeeded in developing petrochemical industries to the extent that they acquired new comparative advantage in exporting petrochemicals. As a result, the share of petrochemicals in total Arab exports expanded.

Table 5 indicates that the commodity structure of non-oil Arab exports has evolved differently from the commodity structure of non-oil intra-Arab exports. Thus, while the share of consumer goods in non-oil total Arab exports increased sharply, from 19.5 percent in 1981 to 30.5 percent in 1988, the share of consumer goods in non-oil intra-Arab exports remained constant. One explanation for this difference is that many Arab countries have had protected import-competing industries producing similar consumer goods. This protection may have prevented an increase in the share of consumer goods in intra-Arab exports.

Another difference in the evolution of the commodity structure of non-oil intra-Arab exports and non-oil total Arab exports concerns changes in the share of petrochemicals. While this share in the former increased sharply between 1981 and 1988, the share in the latter fell slightly over the same period. Protection policies in developed countries may have prevented GCC countries, in particular, from increasing petrochemical exports. But these trade barriers in developed countries coincided with the increase in Arab demand for petrochemicals for agricultural uses and as inputs in manufacturing, inducing an increase in the share of petrochemical products in intra-Arab exports.

Commodity Composition of Non-Oil Intra-Arab Imports

Intra-Arab imports equal by definition intra-Arab exports after adjustment for transportation and insurance. However, in practice, discrepancies may occur between these figures. Different recording dates and product classifications account for many of these discrepancies. Thus, the difference between the two sets of intra-Arab trade data is reflected in the compiled percentage commodity composition of intra-Arab imports. It can be shown from Table 6 that although the product shares in intra-Arab imports are different from those in intra-Arab exports, they still follow similar overall trends.

According to the general model, shifts in the commodity composition of developing countries’ imports rest on factors such as import substitution policies, industrial capacity expansion, and the stage of development. Regarding Arab countries, the results in Table 6 highlight some similarities with, but also differences from the developing countries’ model. Also, there are similarities and differences in the changing commodity structure of non-oil intra-Arab and Arab imports.

First, the share of primary goods, comprising food in intra-Arab imports declined, while the share in total Arab imports increased over the period. This result confirms other international findings on the increasing reliance of Arab countries as a group on foreign sources of food supplies. In addition, the share of industrial goods rose owing to the sharp increase in intra-Arab imports of petrochemicals between 1981 and 1988. Moreover, the share of consumer goods in both intra-Arab and total Arab imports declined over the period. This decline may have been triggered by import substitution policies and infant industry protection in many Arab countries.

Finally, the share of capital goods in both intra-Arab and Arab imports also fell. This may have resulted on the one hand from the completion of large-scale development projects in a number of Arab countries, especially the GCC countries, and on the other from the revised development policies and reforms in heavy industries in a number of Maghreb and Mashreq countries.

Determinants of Non-Oil Intra-Arab Trade

The previous analysis of intra-Arab trade trends highlights historical evidence that the non-oil intra-Arab trade volume has been influenced by Arab real output. Also, as indicated in the data compiled on the commodity structure of non-oil intra-Arab trade, evidence suggests that Arab countries acquired new comparative advantage in manufactured goods, comprising petrochemicals, and consumer goods, including textiles and clothing. This section presents an applied study to test two basic relationships: first, between changes in non-oil intra-Arab trade and per capita GDP growth, and, second, comparing the increases in internal trade as a share of GDP before the application of preferential trade agreements with the increases after the application of such agreements. The section concludes by noting the features of successful regional trade associations in world trade.

Effects of Per Capita GDP Growth on Non-Oil Intra-Arab Trade

To test the effect of growth on changes in non-oil internal trade (imports and exports), per capita real GDP growth was used as a proxy to take into account the impacts of output and population growth. Also, the effect of per capita GDP growth was separately tested on two other variables: changes in non-oil external trade, excluding intratrade, and changes in non-oil overall trade. Thus, three types of elasticities7 were measured to explain the impact of per capita GDP growth on changes in trade shares: first, the internal elasticity, which measures the percentage change in intratrade in response to per capita real GDP growth; second, the external elasticity, which measures the percentage change in external (excluding intratrade) trade in response to per capita real GDP growth; and finally, the overall elasticity, which measures the percentage change in total trade in response to per capita real GDP growth. These elasticities were estimated for three selected Arab regional trade groupings, namely, the members of the League of Arab States, the Arab Common Market (ACM), and the Arab countries of the GCC (see Appendix 2). Tables 79 present the estimated elasticities for the three selected regional trade groupings, covering two selected average periods.

Table 7.Changes in Income Elasticities for Non-Oil Trade of Arab Countries(In percent)
Period IPeriod II
Per Capita Income Elasticity/1972–811982–89
Internal1.151.15
Intra-Arab non-oil trade(7.39)
External1.131.17
Arab non-oil trade (excluding intra-Arab)(8.56)(4.73)
Overall1.131.17
Total Arab non-oil trade(8.89)(4.02)
Note. For Tables 79, the figures in parentheses for Period I are t-statistics, which measure the statistical significance of the estimated elasticities. The t-values in parentheses for Period II measure the statistical significance of the estimated dummies. If the coefficient of a dummy variable differs significantly from zero, it is added to the respective income elasticity. The regression estimation is in log-linear form.
Note. For Tables 79, the figures in parentheses for Period I are t-statistics, which measure the statistical significance of the estimated elasticities. The t-values in parentheses for Period II measure the statistical significance of the estimated dummies. If the coefficient of a dummy variable differs significantly from zero, it is added to the respective income elasticity. The regression estimation is in log-linear form.
Table 8.Changes in Income Elasticities for Non-Oil Trade of GCC Countries(In percent)
Period IPeriod II
Per Capita Income Elasticity/1974–811982–89
Internal0.980.93
Intra-GCC non-oil trade(4.36)(3.61)
External1.141.22
GCC non-oil trade (excluding intra-GCC)(5.82)(6.39)
Overall1.121.20
Total GCC non-oil trade(6.31)(5.83)
Table 9.Changes in Income Elasticities for Non-Oil Trade of Arab Common Market (ACM)(In percent)
Period IPeriod II
Per Capita Income Elasticity/1961–651966–72
Internal0.570.51
Intra-ACM non-oil trade(1.41)(1.77)
External1.411.11
ACM non-oil trade (excluding intra-ACM)(4.41)(1.29)
Overall1.121.09
Total ACM non-oil trade(4.47)(1.41)

Table 7 summarizes the results of the relative effect of Arab per capita GDP growth on changes in trade shares of Arab countries as a group during two selected periods. The estimated internal intra-Arab elasticity shows that, on average, a 1 percent growth of per capita GDP was accompanied by a 1.15 percent increase in the volume of intra-Arab trade during the period preceding the conclusion of the 1981 Agreement for the Facilitation and Promotion of Intra-Arab Trade. Moreover, this intratrade elasticity also did not change during 1982–89, after the application of the agreement. The dummy variable accounting for the changes in internal elasticity was not statistically significant.

The estimated external elasticity, which equaled the overall elasticity for the Arab countries, was close in magnitude to the internal intra-Arab elasticity during both periods.

Table 8 summarizes the results of the effects of GCC per capita GDP growth on changes in GCC trade shares. These results suggest that the percentage increase of intra-GCC trade volume in response to a 1 percent growth in per capita real GDP was 0.93 percent. At the same time, both percentage changes of the external and the overall trade volumes in response to a 1 percent growth in per capita GDP were greater than 1 during the two selected periods of 1974–81, preceding the creation of the GCC free trade area, and 1982–89, after its creation.

Table 9 presents the results of the effect of ACM per capita GDP growth on changes in ACM trade shares. They show that the percentage increase of intra-ACM trade volume to a 1 percent growth of per capita GDP was 0.51 percent. However, both percentage changes of the ACM external and overall trade volumes were greater than 1 during the two selected periods: the 1961—65 period, before ACM creation, and the 1966—72 period, after it.

Thus these summary data suggest that increases in the intra-Arab trade volume were more sensitive to growth in per capita real GDP than the increases in both the intra-GCC and the intra-ACM trade volumes, before as well as after the application of trade preference agreements. The low internal elasticities within the GCC and the ACM groupings can be explained by several factors, one of which is the existence of limited and undiversified production bases in each of these regional groupings, which fail to make the members of the grouping one another’s best customers.

In contrast, the production base in the Arab countries as a group is relatively larger and more diversified, thus allowing for economies of scale. Therefore, changes in intra-Arab trade seem to relate better and respond more strongly to growth in combined Arab output than do changes in both intra-GCC trade and intra-ACM trade to their respective real output growth.

Multilateral Trade Agreements and Patterns of Non-Oil Intra-Arab Trade

To shed further light on how Arab trading patterns have changed with the establishment of regional associations, data on the increase in non-oil internal trade (exports and imports as a share of GDP) were compiled for the League of Arab States, the GCC, and the ACM. Moreover, as noted above, the study of internal trade increases was related to two selected periods, as indicated in the tables.

Tables 1012 show the calculated increases in intratrade as a percentage of GDP. Also, increases in two other trade shares were measured: increases in external trade as a share of GDP, and increases in total trade as a share of GDP. Table 10 presents increases in non-oil Arab trade shares as a percentage of GDP. Intra-Arab trade as a share of the Arab countries’ combined GDP increased by 0.15 percent between 1974 and 1981, and then fell to 0.05 percent between 1982 and 1989, showing no net increase after the conclusion of the 1981 Arab trade preference agreement. In contrast, external trade (trade with outside Arab countries) as a ratio of Arab combined GDP declined even more than internal trade.

Table 10.Changes in Non-Oil Trade Patterns of Arab Countries(As percent of combined Arab GDP)
Total Increases
Period IPeriod IIChange in

Period II

from Period I
1974–811982–89
Total increases in intra-Arab trade0.150.05−0.1
Total increases in Arab external trade7.58−1.19−6.39
Total increases in Arab overall trade7.73−1.14− 6.59
Note. For Tables 1012, the above measures of trade increases have been used as a crude test for the effect of trade policy on a country’s trade patterns. (World Bank, World Development Report, 1991; and Schott (1989).)Sources: International Monetary Fund, Direction of Trade Statistics; Arab Monetary Fund, statistical data base.
Note. For Tables 1012, the above measures of trade increases have been used as a crude test for the effect of trade policy on a country’s trade patterns. (World Bank, World Development Report, 1991; and Schott (1989).)Sources: International Monetary Fund, Direction of Trade Statistics; Arab Monetary Fund, statistical data base.
Table 11.Changes in Non-Oil Trade Patterns of GCC Countries(As percent of combined CCC GDP)
Total Increases
Period IPeriod IIChange in

Period II

from Period I
1974–811982–89
Total increases in intra-GCC trade0.360.930.57
Total increases in GCC external trade (excluding intra-GCC)4.658.243.59
Total increases in GCC overall trade5.009.174.17
Table 12.Changes in Non-Oil Trade Patterns of Arab Common Market (ACM)(As percent of combined ACM GDP)
Total Increases
Period IPeriod IIChange in

Period II

from Period I
1956–611966–72
Total increases in intra-ACM trade−0.730.070.8
Total increases in ACM external trade−2.143.335.47
Total increases in ACM overall trade−2.873.266.13

Table 11 presents the estimates for the GCC, which show that internal trade as a share of the combined GDP of the GCC members rose by 0.57 percent, from 0.36 percent between 1974 and 1981 to 0.93 percent between 1982 and 1989. Thus, it appears that growth of internal trade,8 although slow, did occur after the GCC free trade agreement was signed. The increase in the GCC’s external trade as a share of the combined GDP was higher, however, than the increase in internal trade. It seems plausible that the increase in external trade was due to the low trade barriers of the GCC countries against nonmembers and to the limited GCC industrial production base. Also the implementation of the GCC free trade agreement needed more time to evolve as a framework for allocation of production and increased trade. In addition, the new GCC industries, especially petrochemicals, produce more than the domestic markets can absorb. However, in the future, the GCC producers may benefit from their larger markets through orienting their production to the needs of the GCC high per capita income market. Finally, Table 12 indicates that increases in internal trade as a share of the ACM members’ GDP were insignificant after the ACM was created. However, the increase in external trade as a share of the combined ACM’s GDP was higher than the increase in internal trade, following the similar trading pattern with the GCC.

The results discussed above suggest that in general the implementation of trade preference agreements was not conducive to a rapid increase in internal trade of the selected three Arab regional groupings. They frequently produced similar products, thwarting the opportunity to gain from trade based on economies of scale and product differentiation. In addition, import substitution and infant industry policies pursued by members of the associations made it difficult to free intraregional trade.

Another insight to be gained from the results is the expansion of external trade of the GCC and the ACM, which was much more rapid than the increase in internal trade. It is possible that this increase was due in part to the low trade barriers imposed by the member countries of the GCC, especially against nonmembers. Moreover, foreign producers may have benefited from increased trade opportunities in larger regional GCC and ACM markets on the basis of economies of scale.

Finally, the summary data for the increase of intra-Arab trade confirm the discussion in the first section that the product-byproduct scheme intended in the 1981 agreement failed to contribute to a rapid increase in Arab internal trade. In practice, the list approach to liberalize intra-Arab trade has so far succeeded in identifying a handful of candidates for liberalization. The apparent reluctance of Arab countries to come forward with a complete preferential scheme covering all industrial products of Arab origin has limited the scope for potential gains from intra-Arab trade liberalization.

Intraregional Trade Performance in Selected Regional Trade Groupings

The historical evidence suggested in Table 13 shows that in general regional trade groupings did not increase intraregional trade significantly during the last two decades.9 However, some features of the regional trade groupings that expanded their intratrade more successfully than the others are worth mentioning.

Table 13.Comparative Intraunion Export Shares in Total Exports, 1980–89(In percent)
198019851989
A. Developed Countries’ Regional Trading Groups1
European Community (EC)55.754.459.8
North American Free Trade Area (FTA)26.538.033.8
European Free Trade Association (EFTA)14.813.613.9
New Zealand-Australian Free Trade Area (NAFTA)6.47.07.8
B. Developing Countries’ Regional Trading Groups1
Arab Countries (Intra-Arab)4.86.38.0
Arab Common Market (ACM)1.80.90.7
Gulf Cooperation Council (GCC)3.04.65.8
Maghreb Arab Union (MAU)0.31.023
Association of South East Asian Nations (ASEAN)16.918.417.8
Latin American Integration Association (LAIA)13.78.410.8
Source: International Monetary Fund, Direction of Trade Statistics, 1991.

The member countries of each are listed in Appendix 2.

Source: International Monetary Fund, Direction of Trade Statistics, 1991.

The member countries of each are listed in Appendix 2.

Outward-oriented economic groupings have been more successful than inward-oriented ones in promoting intratrade. Among the regional groupings of industrial countries, the EC, which has a strong outward orientation, enjoyed the greatest internal trade share as a percentage of total exports, with 55 percent in 1980 and 60 percent in 1989 (Table 13). Among the regional groupings of developing countries, ASEAN, which is an outward-oriented regional association, had the highest internal trade shares, with 17 percent in 1980 and 18 percent in 1989. Intra-ASEAN trade is likely to increase as a result of the new free trade agreement concluded between its members in July 1991, which is expected to replace the current trade preference agreement that has been in place since 1960.

The regional trade groupings formed through across-the-board liberalization hold the largest share in internal trade. This is true of most regional trading associations among industrial countries that were grouped into either free trade areas or customs unions. However, most of the regional trade groupings among developing countries were formed through trade preferential agreements using a list of liberalized products to promote intratrade.

Finally, among the most important factors limiting the promotion of internal trade among developing countries are the members’ small industrial production bases, their similar factor endowments (which have often led to producing similar products), inadequate infrastructure, restrictions on intraregional factor mobility, and intraregional conflicts.

III. Extent of Restrictive Trade Practices and Potential Gains from Liberalization of Intra-Arab Trade

The conclusions in Section II indicate that Arab countries acquired comparative advantage in manufactured goods at the expense of primary goods, whose share in intra-Arab exports declined. In general, the development efforts toward industrialization and export diversification in many Arab countries have been among the main factors leading to these gains in comparative advantage.

However, the evolving difference in the commodity structures of intra-Arab exports and total Arab exports can be explained by the existence of high tariff and nontariff barriers that can lead to significant distortions in the commodity structure of Arab imports. Such high levels of protection in Arab markets may have prompted Arab exporters to look for trade opportunities for their products in less protected, non-Arab markets. To test this hypothesis, the first part of this section analyzes the extent of the restrictive trade practices in Arab countries. Then an attempt is made to measure the likely increases in intra-Arab trade as a result of across-the-board liberalization of tariff and nontariff barriers.

Tariff and Nontariff Barriers in Arab Countries

Restrictive trade practices, whether in the form of tariff or nontariff barriers, influence efficiency of resource allocation in the Arab countries. Extensive use of these practices distorts production and consumption, pushes up inflation, and weakens the international competitiveness of domestic industries. Because Arab production is less diversified than, say, the industrial or newly industrializing countries (NICs), restrictive trade practices in the Arab countries reduce trade opportunities more dramatically for Arab exporters than for the exporters of industrial countries or NICs. Even trade preferences for Arab products are still applied selectively on a few manufactured products.

Features of Tariff Barriers in Arab Countries

Disparities in level of tariffs. Levels of tariffs in the Arab countries are relatively high. In addition, extreme disparities exist, with some countries having high and others very low duties. Table 14 summarizes the levels of weighted and unweighted average tariffs in the individual Arab countries. These can be classified into low-tariff countries, namely, the countries of the GCC, and high-tariff countries, the remainder. For instance, the highest official unweighted average tariff imposed in Sudan is 250 percent; in Syria, 150 percent; in Egypt, 120 percent; and in Mauritania, 175 percent. Also, among the high-tariff countries, there are disparities in the levels of high and low tariffs. These differences are due to the various objectives of tariffs pursued in the Arab countries, which can be one or a mix of the following: to generate government revenues, protect national and infant industries, minimize distortion in consumption by reducing tariffs or granting exemption of certain basic commodities, and impose high tariffs on luxury goods. Table 14 also shows the level of weighted average tariffs in the individual Arab countries, which are used as indicators of changes in the structure of tariffs. The summary data show that a sharp reduction in the weighted tariffs of Jordan, Tunisia, and Egypt took place in 1990 as a result of their tariff and trade policy reforms.

Table 14.Weighted1 and Unweighted Average Tariff in Arab Countries(In percent)
WeightedUnweighted
Country198119881990LowHighTariff

Year
Jordan12.414.88.60.0130.0
United Arab Emirates1.20.60.40.04.0
Bahrain1.73.43.05.010.0
Tunisia20.021.014.00.075.0(1986)
Algeria19.126.023.07.0100.0
Saudi Arabia2.58.011.015.030.0(1988)
Sudan42.037.043.00.0250.0
Syria12.415.111.010.0150.0
Somalia35.023.210.90.0100.0
Iraq5.0150.0
Oman1.53.52.54.020.0
Qatar1.82.65.04.020.0
Kuwait3.57.018.025.0
Lebanon17.50.090.0
Libya15.416.527.00.7100.0
Egypt35.329.018.02.5120.0(1990)
Morocco31.219.016.05.045.0(1987)
Mauritania17.017.033.00.0175.0
Yemen26.027.0100.0
Average (all Arab countries)11.012.011.0
Average (developing countries)34.0281.03(1987)4
Sources: Weighted tariff averages: Arab Monetary Fund, statistical data base; unweighted tariff averages: UNCTAD, Trade Control Measures in Developing Countries, 1988; International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

Weighted tariff average is obtained by dividing the values of import duties by the total import values.

Tariff average is based on 82 individual countries.

The highest tariff average is found in South Asian region.

Unweighted tariff average in developing countries was obtained from World Bank, World Development Report, 1991.

Sources: Weighted tariff averages: Arab Monetary Fund, statistical data base; unweighted tariff averages: UNCTAD, Trade Control Measures in Developing Countries, 1988; International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

Weighted tariff average is obtained by dividing the values of import duties by the total import values.

Tariff average is based on 82 individual countries.

The highest tariff average is found in South Asian region.

Unweighted tariff average in developing countries was obtained from World Bank, World Development Report, 1991.

Tariff escalation. As in many developed and developing countries, Arab countries impose higher tariffs on products at a higher stage of processing. This tariff escalation is illustrated by the data in Table 15, which reports both low and high levels of tariffs on each product category. The tariff rates on primary goods range between zero and a low rate in most Arab countries. Then the tariff rates are higher on intermediate and finished goods. They are highest on consumer products, comprising textiles and clothing and processed food. In addition, there is a wide dispersion in the level of tariffs on consumer goods across Arab countries. For example, tariff rates on processed food range from 5 percent in Bahrain to 100 percent in Yemen, and to 200 percent in Sudan. The tariff rates on textiles and clothing range from 4 percent in the United Arab Emirates to 100 percent in Yemen, Syria, and Algeria, and to 175 percent in Mauritania.

Table 15.Tariff Escalation on Imports of Arab Countries
Foodstuff

and Agricultural

Materials
ChemicalsProcessed FoodTextiles

and

Clothing
Machinery

and

Equipment
CountryLowHighLowHighLowHighLowHighLowHigh
Jordan0.023.00.028.020.085.020.085.00.025.0
United Arab Emirates0.04.04.04.04.04.0
Bahrain0.05.00.05.05.010.05.010.05.010.0
Tunisia0.025.06.525.010.075.010.075.06.525.0
Algeria0.040.00.025.05.0100.05.0100.040.050.0
Saudi Arabia0.012.012.020.012.020.012.012.012.020.0
Sudan15.0125.010.080.020.0200.010.080.075.0175.0
Syria1.030.01.040.050.0100.050.0100.01.040.0
Somalia2.010.020.030.020.030.0
Iraq
Oman0.05.05.05.05.05.0
Qatar0.04.04.020.04.04.04.0
Kuwait0.04.04.020.015.025.00.015.00.020.0
Lebanon0.050.00.028.018.090.018.090.07.090.0
Libya
Egypt0.030.00.030.010.0100.07.080.07.030.0
Morocco0.025.90.017.434.945.92.545.012.523.6
Mauritania0.05.05.0175.0175.0175.0
Yemen0.040.00.025.050.0100.050.0100.050.0
Average developing countries0.075.00.0100.05.0150.08.7150.00.034.0
Average developed countries0.89.40.14.94.420.01.775.60.411.5
Average (EC)0.012.40.017.524.00.017.00.415.0
Sources: UNCTAD, Trade Control Measures in Developing Countries, 1988; International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, various IMF-World Bank Study, The Impact of Industrial Countries’ Trade, Agricultural and Industrial Policies on Developing Countries, 1990; and World Bank, World Development Report, 1991.
Sources: UNCTAD, Trade Control Measures in Developing Countries, 1988; International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, various IMF-World Bank Study, The Impact of Industrial Countries’ Trade, Agricultural and Industrial Policies on Developing Countries, 1990; and World Bank, World Development Report, 1991.

Effects of Tariff Barriers on Intra-Arab Trade

Although intra-Arab trade preference agreements cover raw materials and agricultural products, most of the manufactured goods of Arab origin are excluded from the preference scheme. Thus they are subject to the escalating tariffs mentioned above.

The high levels of tariffs on manufactures in most Arab countries have often resulted in high levels of protection for manufacturing sectors. Such protection discourages Arab exports of manufactures from flowing to Arab markets. Instead, trade in manufactures may continue to rely on the traditional markets of developed countries, where trading opportunities still exist despite the prevailing protection. To support this view, a comparison of protection levels in industrial countries with those in Arab countries (Table 15) shows that average levels of protection in industrial countries are much lower than the levels of protection presently found in most Arab countries, both on primary goods as well as on manufactures. The lower average levels of protection in industrial countries, coupled with the national industry protection in Arab countries, may be an important factor in boosting the export share of such goods in total Arab exports and in causing its share in intra-Arab exports to stagnate.

However, the low overall level of tariffs on manufactures does not necessarily mean that trading opportunities in manufactures, including consumer goods, are more accessible in the developed than in the Arab countries. One reason is the relatively inelastic demand for imports of manufactures in Arab countries, in contrast with the highly elastic demand for such goods in developed countries. Another is the heavy reliance of developed countries on nontariff measures to restrict trade in manufactures with the developing countries. Nevertheless, both industrial and developing countries have at present recourse to nontariff measures. The extent of nontariff barriers in the Arab countries is presented below.

Nontariff Barriers in Arab Countries

Nontariff barriers are different from tariffs. While tariffs have a direct effect on import costs, nontariff barriers are measures aimed at restricting imports (or exports) through administrative decisions. Nontariff barriers are in general highly restrictive measures imposed on quantities. They are extensively used by most Arab countries to restrict foreign trade. Nontariff barriers frequently used in Arab countries are presented in Appendix 3. They range from prohibition of import of certain commodities to government monopoly over imports, monetary and financial measures, import licensing, quotas, and additional fiscal charges on imports (paratariffs).

Import licensing and quotas. Import licensing, and, in some cases, quotas are used in Arab countries to restrict imports. Appendix 3 indicates that import licenses are required for almost all imports in 10 Arab countries,10 although in some of these countries annual import certificates and licenses may be granted to manufacturers to import intermediate products and raw materials. Also, import licenses may be granted only for commodity lists determined by the competent authorities in 8 Arab countries.11 In Saudi Arabia, Qatar, and Kuwait, import licenses are required only for statistical purposes and for notification to customs officials. An import license is not required in the United Arab Emirates. Overall import licensing in Arab countries is a restrictive measure often used by Arab Governments to allocate foreign exchange to correct balance of payments difficulties, and to protect national production from foreign competition.

Government monopoly over imports. Government agencies often have a monopoly over imports of primary commodities, including oil products, raw materials, minerals, cereals, and other agricultural products. The extent of government agencies’ monopoly over imports ranges from 75 percent to 95 percent of the total imports in Algeria, Syria, Iraq, and Libya, and between 25 and 70 percent of the total imports in Jordan, Tunisia, Sudan, Somalia, Egypt, Mauritania, and Yemen.

Government monopoly over imports in general, and imports of manufactured goods in particular, is a restrictive trade practice, because it reduces competition between Arab exporters, which is necessary to create viable, internationally competitive industries and to take advantage of economies of scale by producing for regional markets. In addition, government monopoly over imports of manufactured goods distorts relative prices in favor of production for domestic markets. This monopoly also helps impose high economic costs, because it encourages rent-seeking from informal activities in parallel markets.

Monetary restrictions on imports. The required advance import deposit of certain amounts of money is another important restrictive measure imposed by many Arab countries to limit imports. Appendix 3 indicates that 12 Arab countries require advance deposits for imports. These deposits range from 10 percent to 100 percent of the c.i.f. value. A few Arab countries require that this percentage be deposited in foreign currencies. Likewise, such monetary restrictions influence foreign trade in general and intratrade in particular, because they tend to freeze intra-Arab patterns.

Paratariff in Arab countries. Paratariff restrictions are generally additional fiscal charges levied on imports (or exports) with an effect similar to tariffs, because they are used to restrict demand for imports and to discriminate in favor of domestic production. Appendix 3 presents the additional charges levied on imports in individual Arab countries. They are usually imposed as a percentage of the customs duties or as a percentage of the c.i.f. value.

Paratariffs may reach double the tariffs levied on imported goods. Overall paratariffs are relatively high and replicate in Arab countries. Also, the methods of their calculation are not transparent and confusion often surrounds their administration.

Potential Gains from Liberalization of Intra-Arab Trade

In an attempt to quantify the likely trade gains from substantial tariff reductions and the elimination of nontariff barriers on manufactured goods of Arab origin, two types of gains from trade liberalization are estimated. First, there are static gains, which may be realized in the short term, namely, those that will result from a change in relative prices immediately after the removal of the trade barriers. Second, there are dynamic gains, which are long-term gains as a result of increases in production, services, investment, and growth.

Static Gains

Concept of trade creation and diversion. Measuring the likely expansion of intra-Arab trade depends on quantifying two familiar effects of a multilateral across-the-board trade liberalization. Trade creation, which takes place following tariff cuts, is somewhat similar to increases in the quantity of imported goods because they are cheaper. However, trade creation usually depends also on both the supply and the demand conditions. For example, high tariff reductions on products with low import-demand elasticities may lead to a smaller trade expansion than low reductions on products with high import-demand elasticities.

Trade diversion results from a shift of imports from relatively low-cost foreign producers’ nonbeneficiaries to higher-cost producers who are beneficiaries of tariff exemptions. It is considered a discriminatory measure against nonbeneficiary countries, which may lead to a reduced economic welfare that outweighs the gains from trade creation, if the exchange of tariff exemptions was accompanied by the imposition of new, high tariff barriers against relatively low-cost nonbeneficiaries. Where trade diversion is high, and even higher than trade creation, there will be a loss of efficiency that increases the likelihood that losses from the trade preference will exceed gains.

Assumptions for measuring static gains. The methodology of measuring static trade gains from across-the-board liberalization is based on the familiar concept of trade creation and trade diversion.12 Moreover, to quantify these two concepts, a number of assumptions have to be taken into account. First, measuring trade creation and trade diversion assumes the elimination of nontariff barriers and other administrative measures to allow for direct effects of tariff cuts. Second, it is assumed that world prices are constant. Third, because of the extreme disparities in the levels of tariffs on manufactures in Arab countries, an unweighted average tariff rate calculated by the World Bank13 for the Middle East and North African countries was used as a basic rate for tariff concessions. In addition, across-the-board tariff cuts were proposed as a liberalization formula. Fourth, demand elasticity of intra-Arab imports of manufactures was estimated, applying a general model for estimating price elasticity.14

Finally, it is suggested that Arab countries would reach an agreement on the division of gains as a result of trade liberalization between them. Such agreement would encourage the members to apply tariff exemptions on intra-Arab manufactures in full.

Estimating results of trade gains. The results of the empirical evidence on the trade expansion effects of tariff cuts are summarized in Table 16. They are shown under two tariff margin cuts: 50 percent and 100 percent. An agreement that incorporated full (100 percent) concessional tariffs on intra-Arab imports of manufactures could expand intra-Arab trade by $400—500 million annually. These likely increases make up 1 percent of non-oil total Arab exports or 9 percent of non-oil intra-Arab exports annually. In the case of 50 percent concessional tariffs on intra-Arab imports, the likely intra-Arab trade expansion could reach about $200 million, that is, ½ of 1 percent of non-oil total Arab exports or 4.5 percent of non-oil intra-Arab exports annually.

Table 16.Projected Increases in Intra-Arab Trade from Across-the-Board Tariff Reductions on Manufactures of Arab Origin1
Tariff Reductions
100 percent50 percent
Unweighted tariff average22626
Value of actual intra-Arab imports of manufactures, 1989 (million U.S. dollars)4,4204,420
Elasticity of demand for intra-Arab imports of manufactures (percent)3−0.521−0.521
(million U.S. dollars)
Projected trade creation495247
Projected trade diversion8849
Net trade creation407198
Net trade creation as percentage of intra-Arab non-oil exports9 percent4.5 percent
percent Net trade creation as percentage of Arab non-oil exports1 percent0.5 percent

These projections were estimated using the SMART system and other restrictive assumptions discussed in the text of this paper. (The SMART system was developed by the staff of the World Bank and UNCTAD.)

Estimated for the Middle East and North Africa by the World Bank (World Development Report, 1991).

Intra-Arab import elasticity of demand was estimated by running a log-linear model of the effect of relative prices and real income on import volume during 1972–89. All data are annual and drawn from Arab Monetary Fund statistical data base.

These projections were estimated using the SMART system and other restrictive assumptions discussed in the text of this paper. (The SMART system was developed by the staff of the World Bank and UNCTAD.)

Estimated for the Middle East and North Africa by the World Bank (World Development Report, 1991).

Intra-Arab import elasticity of demand was estimated by running a log-linear model of the effect of relative prices and real income on import volume during 1972–89. All data are annual and drawn from Arab Monetary Fund statistical data base.

These results show that the likely intra-Arab trade expansion is relatively insignificant. Two major statistical factors explain this modest potential trade expansion: the estimated price-inelastic demand for intra-Arab imports of manufactures, and the influence of tariff-cutting rates. Regarding the weak demand for imports as a result of the tariff reduction, previous studies15 showed that demand conditions usually change at different stages of processing. Therefore, import demand elasticities normally increase with processing, and the potential trade expansion will be higher for goods at a higher stage of fabrication. Potential intra-Arab trade expansion will be relatively larger for fabricated, as opposed to primary commodities and semifinished goods. Thus, in assessing the influence of tariffs, consideration must be given to demand conditions to draw meaningful results about their effects on intra-Arab structure.

With regard to the level of tariff-cutting rates, the extent of their depth also affects potential trade expansion. As shown in Table 16, full cuts of 100 percent lead to higher potential intra-Arab trade increases than do 50 percent cuts. This result confirms the benefits drawn from full liberalization of intra-Arab trade in manufactures as opposed to partial tariff concessions. Although it is practically difficult to reach a full tariff exemption agreement on manufactures, an overall tariff-cutting formula based on tariffs and nontariff barrier reductions, and coupled with provisions such as duty-free reentry of domestically produced commodities that have undergone processing in another Arab location, will usher in further intra-Arab trade expansion. In this respect, the garment industry can be a significant example.

Dynamic Gains

Dynamic gains need longer to materialize. They occur as a result of liberalization of production factors and reallocation of resources in the context of a regional industrialization, allowing the competitive process to determine the allocation of production.

Measuring dynamic gains is very difficult, since it requires estimating a complex model that extends to the structural characteristics of Arab economies. Such a work is not within the scope of this paper. However, in order to convey some indications of potential dynamic gains from intra-Arab trade liberalization, an attempt has been made to measure them under highly simplified assumptions, as follows:

  • Real growth would rise between 2–5 percent annually during the first five years immediately after the liberalization (the average annual growth rate would be 3 percent during this period);
  • Annual average real growth rate would reach 5 percent during the second five years after the liberalization;
  • Import-demand elasticity would increase from its currently estimated rate of 1.15 percent to 1.3 percent for the first five years following the liberalization, to reach 1.5 percent during the second five-year period. Finally, the initial value of non-oil intra-Arab imports would be $7 billion, which is close to their level in 1989.

Under these assumptions, intra-Arab exports of manufactures would grow at an annual average rate of 3.9 percent of non-oil total intra-Arab exports during the first five years following the liberalization, and at a rate of 7.5 percent during the second five years thereafter.

Therefore, intra-Arab trade could increase by as much as $1.5 billion at the end of the first five years of liberalization, and by $5.2 billion at the end of ten years. These estimates are based on low growth assumption, contrasted with the higher potential growth that would result from intra-Arab trade liberalization itself. Also, the estimates of potential gains from liberalization of intra-Arab trade, whether static or dynamic, are only examples to assist policymakers in the Arab countries in evaluating the results of a full intra-Arab liberalization of manufactures. Of course, this is not the final word in this field and the assumptions used here are greatly simplified.

Conclusions

This paper studied the main features and the determinants of non-oil intra-Arab trade trends, using historical and statistical evidence. Its main focus was to assess the effectiveness of trade promotion by studying three major Arab regional groupings: the members of the League of Arab States, the Gulf Cooperation Council, and the Arab Common Market.

The main findings can be summarized as follows:

First, the annual average value of non-oil intra-Arab trade reached about $18 billion, that is, 7.5 percent of non-oil total Arab trade during the 1980s. The annual average value of intra-Arab exports accounted for about $9 billion, while the annual average value of non-oil intra-Arab exports was $5.7 billion, or 64 percent of intra- Arab exports during the last decade. These historical trends show that intra-Arab trade’s contribution to total Arab trade was insignificant.

Second, a comparison of the share of intra-Arab trade in total Arab trade by major regional trade associations shows that Arab export and import markets are the largest destination of Arab trade with developing countries.

Third, as far as non-oil intra-Arab trade is concerned, there has been a strong relationship between growth in the volume of intra- Arab trade viewed from the export side, and growth in Arab combined real GDP and per capita real GDP, compared with a much weaker relationship of growth in the volume of total Arab trade with growth of Arab output.

Fourth, regarding the commodity structure of intra-Arab exports and imports, the composition for 10 categories of goods excluding oil for the longest available period—1981—88—shows that the composition of intra-Arab exports has changed. There has been quite a strong surge in the share of industrial goods, comprising chemicals and semimanufactures, and a decline in the relative importance of primary goods. Moreover, a comparison of changes in the commodity structure of intra-Arab exports with those of total Arab exports indicates that although the share of consumer goods in total Arab exports increased sharply, the share of such goods in intra-Arab exports remained constant in 1981–88. One main explanation for this is that many Arab countries have applied high levels of protection for emerging infant industries and national production. This protection may have prevented an increase in the share of consumer goods in intra-Arab exports.

To the extent that import substitution policies to encourage national production have often resulted in high levels of protection for domestic industries—leading to a detachment of production decisions from market signals—Arab countries that followed inward-oriented import substitution policies have failed to expand intra-Arab trade.

Fifth, a study of the effect of GDP growth on intra-Arab and external trade shows that intra-Arab trade volume was more sensitive to growth in per capita real GDP than were the intra-GCC and intra-ACM trade volumes. This result was in part due to the limited and undiversified production base in each of the GCC and ACM groupings as opposed to a larger and more diversified industrial production base in Arab countries as a group. Moreover, the Arab countries that are principal trading partners to the members of the GCC and the ACM are often nonmembers of these associations. Thus, intra-Arab trade provides better trading opportunities to Arab countries as a whole than do intra-GCC and intra-ACM trade to their members.

Sixth, the results of the study on how Arab trading patterns have changed with the 1981 Agreement for the Facilitation and Promotion of Intra-Arab Trade and the establishment of the GCC and the ACM groups show clear evidence that neither the Arab trade preference agreement nor the two associations were conducive to a rapid increase in internal trade. For the Arab countries, the product-by-product scheme adopted for intra-Arab trade liberalization failed to contribute to a rapid increase in Arab internal trade.

The apparent reluctance of Arab countries to come forward with a complete preferential scheme covering all products of Arab origin has limited the scope for potential gains from intra-Arab trade liberalization.

Seventh, restrictive trade practices in individual Arab countries are also impediments to intra-Arab trade expansion. The summary data on tariff and nontariff measures indicate that many Arab countries impose high levels of tariffs. In addition, Arab countries apply tariff escalation, that is, higher tariffs on products at a higher stage of processing. The range of tariff rates is highest on consumer goods, in which Arab countries acquired new comparative advantage in world markets. Furthermore, there are divergences in the level of trade liberalization in individual Arab countries. For instance, the GCC countries impose relatively low levels of protection on foreign trade, while the remaining Arab countries still have high levels. These disparities could cause difficulties in motivating low-tariff and nontariff countries to exchange concessions with high-tariff and nontariff countries that are commensurate with the likely gains.

Eighth, an attempt was made to measure potential static and dynamic gains from across-the-board liberalization of tariff and nontariff barriers. For static gains, an agreement that leads to full (100 percent) concessional tariff cuts on intra-Arab imports on manufactures could expand intra-Arab trade by between $400—500 million in the first year after the agreement. These likely increases represent 1 percent of non-oil total Arab exports or 9 percent of non-oil intra-Arab exports.

Dynamic gains usually need longer to materialize. They would result from the liberalization of production factors within a larger regional market and the reallocation of resources in the context of a regional industrialization. Measuring such dynamic gains is very difficult, since it requires estimating a complex model of structural changes in Arab production, investment, and services. However, an attempt was made to provide “hypothetical” dynamic gains based on highly simplified assumptions.

Finally, the study presents strong reasons for the Arab countries to take effective measures for a multilateral trade liberalization scheme, covering all products of Arab origin and allowing for tariff and nontariff barriers to be phased out in stages. Such a trade liberalization scheme provides a significant contribution to the implementation of the 1981 Agreement for the Facilitation and Promotion of Intra-Arab Trade.

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Appendix 1
Comparative Terms and Structure of Trade Financing: ATFP Versus Trade Financing Schemes in Selected Arab Countries
Country

or Scheme
Financing

Scheme
Interest

Rate
Maturity

Period
(Maximum)

Credit Coverage
Required

Guarantees
JordanPostshipment loans10–11.5

percent
(Longest period) short-term loans up to 80 daysUp to 80 percentInsurance and guarantees required
AlgeriaPreshipment5 percent180 days and up to three years forUp to 80 percentInsurance and guarantees required
Postshipment8 percentnontraditional exports
IraqPreshipment5 percent netUp to 90 daysUp to 80 percentInsurance and guarantees required
EgyptPreshipment

Postshipment
11–14

percent
180 days-1 year70 percentInsurance and guarantees required
MoroccoPreshipment

Postshipment
9 percent

LIBOR+margin
Up to one year traditional exports and up to five years for capital and equipment70–85

percent
Insurance and guarantees required
Arab Trade Financing Program (ATFP)Financing through line of credit contract with national agencies—rediscounting of trade financing instruments from national agencies preshipment and postshipmentLIBOR+0.25 percentShort-term: 180 days and up to 365 daysUp to 85 percent of the eligible credit extended by the national agenciesATFP Board of Directors shall decide nature of necessary guarantees
Source: Arab Trade Financing Program, 1991 (Abu Dhabi, United Arab Emirates).
Source: Arab Trade Financing Program, 1991 (Abu Dhabi, United Arab Emirates).
Appendix 2
Membership of Selected Regional Trading Blocs
Trading BlocsType of AssociationYear FormedMember Nations
1) Arab countriesPreferential trade agreement1981Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, United Arab Emirates, Yemen
Arab Common MarketFree trade area1964Egypt, Iraq, Jordan, Libya, Mauritania, Syria, Yemen
Gulf Cooperation CouncilFree trade area1981Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates
Maghreb Arab UnionCooperation for a future customs union1989Algeria, Libya, Mauritania, Morocco, Tunisia
2) European Community (EC)Economic association1972Belgium-Luxembourg, Denmark, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, United Kingdom
Unified market1992
3) U.S.-Canada (FTA)Free trade area1989United States, Canada
4) European Free Trade Association (EFTA)Free trade area1960Austria, Finland, Iceland, Norway, Sweden, Switzerland
5) New Zealand-Australia Free Trade Area (NAFTA)Free trade area1965Australia, New Zealand
6) Latin American Free Trade Area (LAIA)Preferential trade agreement1980Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela
7) ASEANPreferential trade agreement1967Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand
Free trade area1991

Appendix 3

The Extent of Nontariff Barriers in Arab Countries
CountryProhibited

Imports
Government Monopoly

Over Imports
Advance Import

Deposit
Import Quota

Licenses
Additional Fiscal

Charges on Imports
JordanCertain agricultural products during crop year, alcoholic beverages, second-hand cars and buses, and certain consumer goods and luxury consumablesPetroleum products, ores, and metals30 and up to 70 percent of c.i.f. valueImport license requirement on all imports if their c.i.f. value exceeds JD 10013 percent of c.i.f. value
United Arab EmiratesFew commodities for health and security reasonsGovernment procurements1NoNoNo
BahrainCultured pearls and few other commodities for health and security reasonsRice, sugar, government procurements1NoImport licenses are required for arms and ammunition and alcoholic beverages2 percent of c.i.f. value on fats and fresh fruits
TunisiaList of commodities issued by Ministry of EconomyCereals, petroleum products, foodstuffs, tobacco products (25 percent of total imports)NoImport regime; annual import certificates, traders’ quotas (industrial imports may be imported freely)Imports are subject to 14 percent and up to 70 percent VAT and in some cases to consumption tax of the c.i.f. value
AlgeriaList of commodities issued by Ministry of National EconomyGovernment grants concessions to public enterprises and specific groupsImports valued at less than $2 million must be paid for in cash or with credit of up to 90 daysNo25 percent and up to 100 percent
Saudi Arabia45 prohibited products for health and security reasonsGovernment procurements1NoNo10.3 percent on the customs value of imported product2
SudanList of commodities issued by Ministry of Trade and CooperationPetroleum products, cereals, Pharmaceuticals, agricultural produce10 percent and up to 100 percent of the c.i.f. value in foreign currencyImport licenses are required for all private importsVarious additional charges on imports; 10 percent defense tax on all imports except for selected products
SyriaList of commodities issued by Ministry of Economy and Foreign Tradeagricultural goods, iron, steel, tobacco, paper, agricultural machinery, industrial goods (80 percent of all imports)100 percent of c.i.f. value based on official exchange rateAll imports except those valued at less than LS 2,000; certain imports from ACM3 are exempt from license2 percent “license fee” on al l imports except those by Government; 20 percent unified import surcharge
SomaliaList of commodities including those prohibited for safety and social policyPetroleum products, Pharmaceuticals, explosives, jewelry, minerals, and other products of necessity100 percent of c.i.f. value in foreign currencyImport license for all imports except prohibited items80 percent surcharge on alcoholic beverages, 12 percent on consumer goods, 25 percent on livestock
IraqList of commodities, including food preparations, alcoholic and nonalcoholic beverages, chemicals, and textile fabricsImports are normally handled by socialized sector100 percent of c.i.f. value in foreign currencyLicenses for all private imports0.5 percent and up to 0.75 percent on imports of capital goods
OmanFew commodities for reasons of health, security, or public policyGovernment procurements1For nonauthorized importsLicenses are required for all importsNo
QatarPork and its derivatives, other commodities for reasons of health or securityGovernment procurements1NoAlcoholic beverages, firearms, ammunition, and certain drugsNo
KuwaitCertain steel and asbestos pipes, pork or foodstuffs containing pork, alcoholic beverages, and used vehicles, gas cylinders, and portable phonesGovernment procurements1NoLicenses are required for all commercial imports other tha n fresh fruits and vegetables; licenses are issued freely to registered Kuwaiti merchants and companiesNo
LebanonNarcotics, arms, ammunitions, and similar products are either prohibited or reserved for GovernmentWheat, citrus fruits, apples, olive oil, peanutsForeign exchange may be obtained freely for licensed importsImports of certain other agricultural products and all seeds, certain finished goods, sanitary ceramic wares, insulated electric and telephone wires, cables made of copper7 percent and up to 90 percent of surcharges on all imports
LibyaConsumer goods and luxury consumablesImports included in annual commodity budget are undertaken exclusively by state-owned exterprises (90 percent of all imports)All imports require central bank approvalAll imports require exchange permits10 percent on customs duty
Egypt210 prohibited products, the majority of which are consumer and luxury goodsFoodstuffs, agricultural raw material, ores and metals (38 percent of all imports)35 percent prior import deposit in domestic or foreign currency to be financed from importer’s own resourcesLicenses on all non-prohibited imports12.5 percent on the c.i.f. value
MoroccoCategory of imports in List “C”Agricultural produce, petroleum products, ores and metals, and chemicals (15 percent of all imports)Minimum import pricesLicenses are required for products in List “B” (11 percent of all imports)12.5 percent VAT of the c.i.f. value
MauritaniaFew goods for reasons of health or public policyTea, sugar, rice, otherAll imports must receive foreign exchange approval from central bank; advance payments for all private importsLicenses are required for all private importsAdditional charges of up to 10 percent on the c.i.f. value
YemenUsed machinery and equipment for resale, other commodities for health or public policy reasonsPetroleum products, medical imports, foodstuffsForeign exchange is provided to priority categoriesLicenses are required on all private imports1 percent tax for reconstruction; 100 percent surcharge on imports transported over land routes without licenses
Sources: International Monetary Fund, Exchange Arrangements and Exchange Restrictions, 1987–91; UNCTAD, Control Measures of Developing Countries, 1988; GATT, Trade Policy Review: Morocco, 1991.

Government procurements are required to give preference to goods of national origin and those produced within the Gulf Cooperation Council (GCC), provided that the prices of these goods are within specified margins of the prices of imported substitutes; the margins are 10 percent for goods locally produced and 5 percent for goods produced within the member countries of the GCC.

Harbor and service charges: 10 percent of customs value of goods. Tax on conformity certificate: 0.3 percent of customs value of goods.

Annual Report on Arab Common Market.

Sources: International Monetary Fund, Exchange Arrangements and Exchange Restrictions, 1987–91; UNCTAD, Control Measures of Developing Countries, 1988; GATT, Trade Policy Review: Morocco, 1991.

Government procurements are required to give preference to goods of national origin and those produced within the Gulf Cooperation Council (GCC), provided that the prices of these goods are within specified margins of the prices of imported substitutes; the margins are 10 percent for goods locally produced and 5 percent for goods produced within the member countries of the GCC.

Harbor and service charges: 10 percent of customs value of goods. Tax on conformity certificate: 0.3 percent of customs value of goods.

Annual Report on Arab Common Market.

Comment

Tayseer Abdel Jaber

Studying the various forms and mechanisms of Arab cooperation aimed at achieving economic integration is not a new endeavor, but a continuation of awareness of the concerns and problems of the Arab nation, and an attempt to find means conducive to its growth and integration. The first physical expression of this awareness was the establishment in 1945 of the League of Arab States. Later, it was reflected in a number of bilateral and multilateral agreements and arrangements, notably—on the economic side—the ratification in 1953 of the agreement to facilitate exchange of trade and organize transit trade among some Arab countries, the Agreement for Arab Economic Unity of 1957, the decision to establish the Arab Common Market in 1964, the ratification in 1981 of an agreement to facilitate and develop trade exchanges among Arab countries, and the establishment of three Arab economic cooperation councils during 1981–89.

Of all the different modalities of Arab economic cooperation, the development of intra-Arab trade and the identification of the related problems has consumed the major part of the literature and seized the attention of Arab Governments as well as regional specialized organizations. The paper prepared for this seminar by the Arab Monetary Fund, “Intra-Arab Trade: Determinants and Prospects for Expansion,” complements the study papers and research work previously conducted in this field. It is a comprehensive paper that discusses the issue from various perspectives, and, on the whole, is a commendable scientific effort. However, I have some remarks on its contents.

In discussing the rationale behind liberalizing Arab trade, the paper states that the economies of Arab countries are similar. This description, in my view, is highly simplistic. With the exception of the economies of the GCC countries, which can be said to be similar, those of the Arab countries are more complementary than similar. There is a remarkable disparity among them as regards the distribution of natural resources, population, wealth, and environment, factors that are on the whole considered to justify complementarity and that assist in achieving such complementarity among their economies.

I also have some remarks on the outcome of the assessment of the aggregate, foreign, and intra-Arab trade of the Arab countries. The paper does not show whether the figures on aggregate, foreign, and intra-Arab trade are reported in real or nominal terms. If they are in nominal terms and per capita income is in real terms, the results of the regression are inaccurate and can only be used if a variable is introduced to represent the impact of prices on the value of trade, and thus act as another independent variable in addition to real per capita income.

Neutralizing the population effect on income by using per capita income in the sample assessed by the paper should have been accomplished on the trade variable by using the per capita trade ratio rather than aggregate trade. Alternatively, the size of the population should have been used as another variable in addition to per capita income, so long as the size of the population affects the total volume of trade. Disregarding this factor influences the significance of the results, since it overestimates income elasticity for demand on trade.

The paper acknowledges the use of dummy variables in running the regression for trade and per capita income during the two periods under review, to assess the impact of the Agreement for the Facilitation and Promotion of Intra-Arab Trade after its ratification. In this regard, I have two remarks:

First, it is necessary to use the dummy variable only in the second period (1982–89), since the agreement was not in effect during the first. Second, the paper does not indicate the coefficient of the dummy variable, so the impact of ratifying the agreement is not known.

The second period (1982–89) is not a normal period for measuring the relationship between the volume of intra-Arab trade and per capita income because the two variables tended to move downward. This is another cause for reservations about the paper’s assessments of the impact of internal elasticity on the demand for internal trade during that period. The same applies to the rest of the elasticity results in Tables 7 and 9. More research is thus needed in this area.

The paper made an assessment of the prospective static and dynamic gains from the liberalization of intra-Arab trade. The results are considered by the author of the paper as indicators to assist trade policymakers in the Arab countries. The paper, however, does not adequately preserve the theoretical background of the method used, so that it is not possible to refer to the information, thus making it difficult to accept the results. I therefore suggest greater coverage of the method of calculation.

The paper suggests that Arab and regional cooperation agreements have not led to the promotion of intra-Arab trade agreements. With the exception of intra-Arab trade, Arab foreign trade benefited from the regional trade liberalization agreements within the framework of the GCC and Arab Common Market countries more than intra-Arab trade benefited from those groupings. This conclusion has no theoretical or practical basis. The theory of complementarity does not speak about the benefits gained by countries outside the trade groupings as a result of intratrade liberalization of such groupings. From a practical point of view, there is no evidence that foreign Arab trade, except intra-Arab trade, gained from Arab cooperation agreements.

The paper concludes:

  • The contribution of intra-Arab trade to overall Arab trade is marginal.
  • Economic activity in the Arab countries has a greater impact on intra-Arab non-oil trade than on the growth of total Arab exports.
  • The share of non-oil Arab manufactured exports during the 1980s has increased to more than one third of the value of intra-Arab exports at the expense of a diminishing share of basic commodities. The share of consumption commodities has also not increased in total intra-Arab exports owing to the adoption of import substitution and the protection given to infant industries in most Arab countries.
  • With the exception of oil, intra-Arab trade for all Arab countries is more important than it is within the regional groupings selected, namely the GCC and the Arab Common Market.
  • Neither the Arab nor the regional cooperation agreements could promote intra-Arab trade, but they were useful to foreign Arab trade.
  • The paper discusses the reasons behind the weak intra-Arab trade from two standpoints: the first is that the 1981 Agreement on the Facilitation and Promotion of Intra-Arab Trade depends on commodity lists on which agreement is difficult to reach. Furthermore, the agreement does not provide for a compensation mechanism or for equity in the share of gains, opportunities, and costs as a result of liberalizing intra-Arab trade. This has led a number of Arab countries to refrain from the immediate liberalizing of their trade. Second, there are restrictive trade policies in the Arab countries.
  • Arab countries are able to achieve trade gains through expanding their intra-Arab trade by eliminating or reducing tariffs.

In light of these results, the paper finds that there are strong motives for the Arab countries to take effective measures to liberalize completely their intra-Arab trade away from tariff and nontariff restrictions. This can make a positive contribution toward achieving the broad objectives of the Agreement on the Facilitation and Promotion of Intra-Arab Trade and to reforming the international trade system.

Despite the important conclusions of the paper on the current situation and the problems of intra-Arab trade, requiring a comprehensive liberalization of such trade from tariff and nontariff restrictions in order to increase the volume of Arab trade, I believe that the issue has other dimensions that call for more than just the liberalization of tariff and other trade restrictions.

Looking at the basic characteristics of joint Arab action, it seems that, prior to the 1970s, the efforts made to liberalize and smooth the flow of intra-Arab trade were too ambitious and too comprehensive. Cooperation projects lacked the flexibility necessary to accommodate the disparities among the countries concerned, on the one hand, and changing circumstances on the other. Such projects were put forward on the basis of either full acceptance or full rejection. In other words, countries that were potential parties to such arrangements were not given the option to accept the terms and conditions of only those projects they were prepared to accept. This was one of the main factors that hampered the efficacy of the Arab Common Market and the growth of its membership despite the efforts of the Council of Arab Economic Unity to develop the market over 25 years. Elasticity is a basic element in joint action, as evidenced by the successful economic integration experience all over the world, such as the European Economic Community (EEC) and its accommodation of the individual circumstances of each member country. Furthermore, the decisions issued by the technical bodies emanating from the different organizations of joint Arab action were not binding on the member countries; such decisions depended on the political considerations involved. The experience of regional economic cooperation over the period largely depended on the relationship between governments, and hence reflected the economic and social philosophy of the more influential countries in the region without attempting to seek participation by the beneficiary grass roots (farmers, craftsmen, and traders) in strengthening and developing Arab cooperation, whether in determining the objectives of such organizations or in selecting the means to achieve those objectives.

Experience gained from the period indicates that when the industrial and agricultural sectors are underdeveloped in Arab countries, production structures are limited, and coordination of development policies is lacking, adopting trade liberalization as a method of joint Arab action will fall short of its objectives even with the best of intentions to achieve such liberalization.

In the wake of world oil price adjustments during 1973–74 and the accumulation of financial resources by some Arab countries, the interests of Arab joint action expanded from the mere liberalization of trade to other new spheres. Interest in joint Arab projects appeared the most promising means of promoting Arab integration. Capital transfers from surplus oil Arab countries to non-oil Arab countries were encouraged as was the transfer of Arab labor in the opposite direction. A number of important institutions to enhance Arab cooperation were established during the period, such as the Saudi Arabian Monetary Agency (SAMA), the Arab Fund for Economic and Social Development (AFESD), and the Inter-Arab Investment Guarantee Corporation (IAIGC). This interest in trade liberalization was maintained, and in 1981 the member countries of the League of Arab States signed the Agreement on the Facilitation and Promotion of Trade among its members.

The results of Arab joint action in the 1960s were not encouraging; there was a lack of flexibility in dealing with the individual Arab member countries, and the growing disparities in wealth between the Arab oil countries and the rest of the Arab countries in the 1970s created different standards of living, consumption patterns, and development patterns between the two groups. These compelling factors led to the emergence of the need for subregional cooperation, which took shape through the establishment of the Gulf Cooperation Council (GCC) in 1981.

The establishment of the GCC was a novel and unique experience in the area of Arab cooperation, as it was the first multilateral arrangement outside the framework of the League of Arab States and the Council of Arab Economic Unity. Eight years later in 1989 the Arab Cooperation Council was established encompassing Iraq, Jordan, Yemen, and Egypt, followed by the establishment of the Union of Maghreb Countries comprising Tunisia, Algeria, Morocco, Libya, and Mauritania. The same period witnessed the resurgence of interest in bilateral trade agreements, and a number of such agreements were signed between the People’s Democratic Republic of Yemen and Oman in November 1989, Iraq and Egypt in 1988, Egypt and the United Arab Emirates in July 1988, a Trade and Cooperation Agreement between Egypt and Sudan in February 1987, Iraq and Morocco in November 1987, and Tunis and Jordan in December 1986. The interest in bilateral agreements was behind the success achieved by such agreements in promoting intra-Arab trade more than through regional groupings such as the Arab Common Market. Bilateral agreements focus directly on the interests of the two contracting countries, and the liabilities ensuing from such agreements are limited compared with those from regional groupings with broad objectives that often exceed the ability and desires of member countries.

This significance of bilateral over multilateral agreements in shaping intra-Arab trade can be illustrated by the figures provided by the United Nations Economic and Social Commission for Western Asia (ESCWA) in 1987 on the geographical share of the intra-Arab trade of its member countries as a whole and of each individual country. The ESCWA found that the bulk of trade was confined to the first three trading partners. At the level of the whole region, 58 percent of the export trade share involved the first trading partner, 72 percent the first and second partners combined, and 81 percent the first three partners. On the import side, the shares were 58 percent for the first partner, and 75 percent and 83 percent for the first two and the first three, respectively. At the level of the member countries, the share of intra-Arab exports of the first three partners exceeded 80 percent in six countries, namely, Bahrain, Egypt, Oman, Saudi Arabia, Syria, and the United Arab Emirates, 90 percent in the case of Iraq, and 100 percent in two countries (at that time), the Yemen Arab Republic and the People’s Democratic Republic of Yemen. On the import side, the share of the first three partners was over 80 percent in five countries, namely, Egypt, Iraq, Jordan, Syria, and the United Arab Emirates and over 90 percent in Bahrain and Oman.

In light of the failure of regional organizations to promote intra-Arab trade, attributable in part to their indifference to the various aspirations and potential of individual Arab member countries, there is a need to adopt a new method of looking for ways and means by which intra-Arab trade can be developed and its problems solved. Such ways and means begin with a study of intra-Arab potential and constraints in the member countries of each organization, and later on among the different organizations.

Similarities among the GCC economies, for example, make them competitive rather than complementary. They are all largely out-ward- oriented economies, depending on exports of one basic commodity—oil—and importing almost all their needs for goods and services. They are characterized by small populations, an abundance of financial resources, and high income levels, and hence high standards of living leading to advanced patterns of consumption that cannot easily be met by domestic products from within the GCC or other Arab countries. Their financial potential has made it possible to apply sophisticated development methods in those economies, making them significant markets for manufacturing industries, equipment, heavy machinery, and advanced electronic goods, which are produced on a limited basis in Arab countries and therefore are imported from the industrial countries. Except for petrochemical industries, where most GCC countries enjoy a comparative advantage, expansion in the areas of agriculture and industry at a reasonable cost is hampered by the nature of the desert land, the scarcity of raw materials needed for industry, and the shortage of labor.

The GCC’s efforts in promoting means of cooperation among its member countries by liberalizing factors of production, eliminating tariffs, unifying tariffs for transactions with other countries, establishing joint projects, and facilitating the movement of commodities cannot lead to a meaningful increase in the volume of intra-GCC trade because the economic nature of its member countries does not make it possible for economic integration measures or the elimination of trade and tariff controls to increase intra-Arab trade significantly. If oil exports and re-exports are excluded, there is little to be imported from one country to the other. The figures for 1987 demonstrate that even when re-export figures, which represented a high degree of GCC intra-trade, are taken into account, the ratio of individual country imports from these countries as a whole were as follows: Bahrain, 1.2 percent; Kuwait, 2.1 percent; Qatar, 3.4 percent; Saudi Arabia, 1.6 percent; and the United Arab Emirates, 4.5 percent.

However, despite the low prospects of intra-GCC trade development on the one hand, and the limited potential of these states to export to the rest of the Arab countries on the other (except for oil, petrochemicals, and re-exported goods), the importance of the region for intra-Arab trade should not be underestimated. On the contrary, the GCC countries represent a sizable economic and financial power in the Arab world, as a source of financial flows and an important market for goods and services. Such a market provides a great opportunity to absorb products from the Arab countries that have the potential to develop their agricultural and industrial production and have a comparative advantage over the rest of the GCC countries’ trading partners from outside the Arab region. This is due to geographic proximity, the low cost of production resulting from cheap labor, and the availability of raw materials at low cost. They enjoy that comparative advantage particularly for bulky commodities that are commercially not suited for long-distance transportation, such as cement, mineral water, rubber, plastic materials, and iron structures. Nevertheless, the small volume of GCC imports from the rest of the Arab countries (at 3.3 percent of total GCC imports during 1984–87) clearly reflects the prevalence of constraints against access of other Arab countries’ commodities to GCC markets, due largely to the nature of demand in GCC markets or to the trade practices therein. In part, those constraints have their sources in the other Arab countries.

Most of the Arab countries outside the framework of the GCC belong to the Arab Cooperation Council or the Arab Maghreb Union. It is difficult to assess their position on the basis of their membership in those organizations because of the short period of time since their founding and the repercussions of the Middle East crisis on their effectiveness, particularly in the case of the ACC. Assessment of the impact of Arab joint action on those countries as a whole leads to the conclusion that the opportunities for integration among those countries have not been exploited in a manner conducive to increasing their intra-Arab trade, for the following reasons.

The objectives of trade promotion and liberalization were not accompanied by measures to coordinate their development policies. Instead of making the full use of comparative advantage in certain factors of production to establish an integrated export-oriented industry, each country sought industrialization for the sake of import substitution. This resulted in the emergence of a small number of similar industries, leading to high protectionist measures taken by other Arab countries to protect their domestic industry.

Except for fruit and vegetable growing, which required special care and effort in the export process, the agricultural policies in the non-GCC countries failed to produce the basic food commodities and animal products in sufficient quantities to be included in their intra-Arab trade. In fact, they rely more heavily on imports of such commodities from outside the Arab region.

As the oil price surge receded and balance of payments pressures increased, the diminishing financial resources of these countries in general affected their ability to provide direct financing for their imports. Because of the unavailability of export financing programs in the Arab countries, these countries had to increase their imports from non-Arab countries that could afford procurement with delayed payment.

The expansionary expenditure policies that continued for many years in these countries led to significant economic distortions, reflected in higher prices and a drop in the value of their local currencies. This boosted the costs of production, thereby negatively affecting demand for their products.

Disparities in the level of economic development in the Arab countries posed a risk that one country, or a limited number of countries, might get the lion’s share of gains at the expense of the less developed ones. This concern, and the absence of a compensatory mechanism to help the disadvantaged countries adjust for the results of integration, made most of the Arab countries reluctant to commit themselves to the decisions on intra-Arab trade liberalization.

The political rather than economic orientation of the decisions on Arab economic cooperation and trade liberalization is another factor. Relations among Arab Governments are fragile and unstable. Therefore, a deterioration in those relations would jeopardize decisions on cooperation and be detrimental to gains already made. The importance of this factor is such that it is necessary to separate Arab trade and economic cooperation efforts, on the one hand, and the impact of political relations on the other. This can be achieved by two measures. First, countries should avoid rash commitments that are made in response to temporary conditions or motivated by self-interest. Second, popular participation must be emphasized in identifying the objectives and means of achieving Arab trade and economic cooperation, to prevent noncompliance with or blocking of cooperation decisions. Solving the problems relating to the liberalization and promotion of intra-Arab trade requires, therefore, that efforts be made on many fronts. It is also clear that easing tariff and other trade constraints represent only one aspect of that endeavor.

In conclusion, two points must be stressed: First, the importance of intra-Arab trade becomes clearer when petroleum and its byproducts are excluded. The Arab markets are the natural and basic outlets of the exports of a number of countries in the region, such as Lebanon and Jordan, for manufactured and agricultural commodities. Their exports to Arab countries, particularly to those in Western Asia, constitute a high percentage of their total exports.

Second, Arab countries have attempted all approaches to promoting cooperation and integration among themselves and to increasing trade flows, but have failed where other groups achieved success. This indicates that the cause of failure lies not in the methods adopted, but in the lack of real commitment, for reasons that are entirely economic. The establishment of the Single European Market at the end of this year may be an incentive to the Arab countries to enhance cooperation among themselves to deal with the repercussions, which will inevitably appear if the current Arab economic situation continues to prevail.

1The author wishes to acknowledge the valuable contribution made to this paper by Mohamed Hamed Alhaj and Fares Ben Jradi.
2Egypt, Iraq, Jordan, Lebanon, Saudi Arabia, and Syria. Kuwait ratified the agreement following its independence in 1962.
3Egypt, Iraq, Jordan, and Syria. Libya, Mauritania, and the People’s Democratic Republic of Yemen joined later.
4Members of the Arab League are given in Appendix 2.
5The growing non-oil Arab exports may result from falling oil export shares caused by the decline in oil prices during the 1980s. However, as will be elaborated later in this section, the predominant push for change in the commodity structure of non-oil Arab exports was industrialization, which shifted Arab production progressively from primary goods to manufactures.
6The basic data for non-oil Arab GDP are estimated by subtracting the mining contribution from GDP.
7The elasticities were separately measured by regressing change in the intra-Arab trade volume, change in the external (non-Arab) trade volume, and change in the overall trade volume on per capita real GDP growth. A set of dummy variables was introduced in each of the three regression equations to explain the changes in elasticities after the application of the preferential trade agreements.
8The improvement in the process of collecting and classifying foreign trade data of GCC members in the 1980s, especially the revised classification into exports and re-exports, may have influenced the small increases in intratrade in the 1980s, compared with the increases in the 1970s, which, in most cases, were not based on data classified into exports and re-exports.
9This evidence corroborates the one reached in the World Bank’s World Development Report, 1991.
10Jordan, Algeria, Sudan, Syria, Somalia, Iraq, Oman, Libya, Mauritania, and Yemen.
11Bahrain, Tunisia, Saudi Arabia, Qatar, Kuwait, Lebanon, Egypt, and Morocco.
12This method is used in calculating trade gains resulting from reduced tariffs by several international organizations in the field of trade negotiations such as UNCTAD, which has used this method to help developing countries project net increases in trade when they exchange tariff exemptions during the Uruguay Round negotiations (Laird and Yeats (1986)).
13World Bank, World Development Report, 1991.
14Relation of demand on intraimports of manufactured goods to the relative prices and real income during 1972–89 was estimated in a log-linear form so that the coefficient can be directly interpreted as elasticity.
15Finger and Olechowski (1987).

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