Arab economies of US national interest

US seeks to increase trade to spur Arab economic growth but daunting challenges need to be overcome

    The United States is seeking to broaden its trade ties with the Arab world, including the possibility of an ambitious Middle East trade initiative aimed at linking several Arab countries into free trade agreements with the United States.

    The idea, touched on by US Trade Representative Robert Zoellick at a recent Washington conference, could potentially emulate a recently launched US programme aimed at boosting US trade ties with southeast Asian nations. Under that model, the US seeks to create a network of free trade agreements through a gradual strengthening of trade legislation.

    US Trade Representative
    Robert Zoellick supports
    increasing US free trade
    agreements around the world

    US trade officials note that the attempt to forge closer trade ties between the US and the Arab world is nothing new. Washington has already signed a free trade agreement with Jordan and is in talks with Morocco for a similar agreement, expected to conclude by the end of 2003. Bahrain and Egypt are in talks with the US on key trade issues and Washington has played a significant advocacy role for World Trade Organisation membership for several of its Arab allies. Still, one US official noted that he “cannot remember a climate of such high-level urgency toward finding ways to increase our trade ties.”

    One of the reasons for that “urgency”, say US officials, is the need to boost weak, sluggish Arab economies, which US officials view as a national security threat. They argue that the Arab world’s heavily youthful populations (nearly 60 percent under the age of 24, according to the World Bank) coupled with sluggish economies that provide few employment opportunities and authoritarian governments unresponsive to populations’ needs provide breeding grounds for extremism and, potentially, foot soldiers for terrorist groups. These terrorist groups, they note, threaten local Arab governments, Israel, the United States, and global economic stability.

    Though many regional specialists point out that US policies deemed unjust to the Arab world serve as the primary motivation for anti-American attitudes in the Arab world and, separately, a host of non-economic reasons spur the small minority of young men – both Arab and non-Arab – who join "terrorist" organisations, they concede that economic frustration can play a contributing role in extremism.

    The Arab world’s economies are, for the most part, under-performing dramatically, and could use any boost they can get. According to the Arab Human Development Report published last year by the United Nations, one in five Arabs survives on less than two dollars a day, annual growth in income per capita over the past two decades has been a paltry 0.5 percent (exceedingly only sub-Saharan Africa), and one in six Arabs are unemployed. World Bank Middle East North Africa Vice-President Jean Louis Sarbib said recently that the region “has certainly lived below its potential.”

    Most troublingly, the Middle East is out of the global trade loop. Eight of the eleven largest economies have yet to join the World Trade Organisation and, today, the Middle East’s share of international trade and foreign direct investment is less than 1.5 percent of the world total. This “poor integration,” Sarbib points out, has had negative effects on Arab economic growth and development.

    Free trade agreements with the United States could help boost Arab economies, but they won’t be able to transform their mostly heavily distorted economies weighed down by, according to the UN report, “discredited, statist, inward-looking economic models… that serve neither governments which need rapid economic growth nor people who seek more good jobs with decent wages.”

    Greater openness to trade has helped several Arab countries achieve higher levels of growth, including Tunisia, Jordan, Morocco, and the United Arab Emirates. Free trade agreements with the United States – the world’s largest market for goods – is certain to be an economic boon to any country that signs one. Israel has benefited from its free trade agreement with the US for several years (Israel was the first country in the world to broker such an agreement with the US, dating back to 1985), Mexico and Canada have seen demonstrable benefits from their North American Free Trade Agreement with the US, and Jordan attributes 15,000 new jobs to opportunities that arose with its free trade agreement with the US. So far, most of the Jordanian jobs created have been labour-intensive manufacturing jobs, but Jordanian officials note that those jobs serve a significant goal in serving the poor.

    Jordan provides an interesting example of the challenges facing Washington’s Middle East trade initiative. Jordan has felt a significant economic fallout from the war in Iraq, since an estimated 20% of Jordan’s GDP emanates from Iraqi business. Jordan also received an estimated 90,000 barrels of Iraqi oil a day at low cost in grants or trade deals. The US has stepped in to fill the void, offering Jordan more than $1 billion in military and economic assistance and persuading Saudi Arabia and Kuwait to fill the low-cost oil gap.

    These US-activated and funded subsidies, however, defy market principles, and highlight the big question mark facing many Arab economies: will the war on Iraq help transform them or, as one UN report estimated, lead to $400 billion in losses and two million lost jobs over the next 10 years?

    Take Egypt, for example. Egypt’s key foreign currency earner, tourism, has dropped dramatically since the conflict and has shown little signs of picking up. Egyptians who work in tourism say that political uncertainty from the war on Iraq and ongoing Israel-Palestinian violence slows the tourist crowds, not the lack of trade deals.

    One American business executive with long experience in the Arab world, speaking on condition of anonymity, also said he worries about the personal anger toward the United States in the Arab world. “I’ve never seen such a chill in US-Arab commercial relations. While the big players on both sides continue to do business and high oil prices will ensure fairly steady trade numbers, there is a big slowdown in new business ventures on both sides, especially among mid-sized firms.”

    “When it takes a respectable Saudi businessman three months to get a US visa, you better believe he won’t be too interested in trading with the US,” the business executive said. “Trade deals are good,” he said, “but political stability emanating from an Israeli-Palestinian peace deal, an orderly Iraq, and reduced political tensions will be far better.”

    In the year 2002, US trade with the Arab world amounted to $43.5 billion in two-way trade, down only four percent from the year 2001, according to US Department of Commerce figures. Of that amount, nearly $18 billion comes from US-Saudi trade, some $13 billion of which is Saudi oil exports to the US. During the same period, US trade with Israel amounted to $19.5 billion, with the US importing nearly $13 billion in goods from Israel.

    The year-end 2002 figures for US-Arab trade were better than expected, but a significant chunk of that is attributed to high oil prices.



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