October, 2003

Economic and Political Implications of the MEFTA Initiative

Maghawri Shalabi Ali

In a speech at South Carolina University on 9 May 2003, US president George W Bush declared his intention to establish a free trade zone with the Middle East, which he said would help secure peace, stability and prosperity for the peoples of the region.

The Middle East Free Trade Agreement -MEFTA- initiative underscores the significance of the economic dimension of the Arab-Israeli peace process, which has become almost inseparable from the political one and is increasing in importance as the result of an Arab economic boycott of Israel. Although this boycott began on the official level, it has been widely taken up by the Arab and Muslim masses.

Within the Middle East, the US already has free trade agreements with Jordan and Israel, and is currently negotiating another with Morocco.

Although Bush's announcement of the region-wide free trade initiative was devoid of details, a State Department statement soon followed. The content, conditions and tools of implementation contained within show that, in addition to the economic considerations, the criteria for the free trade zone include significant political aspects.

The US plan aims at establishing a free trade zone encompassing the US and the Middle Eastern states within 10 years by means of bilateral free trade agreements between Washington and the countries of the region. These individual agreements would eventually be grouped together in a comprehensive regional agreement. Washington seeks to cooperate with the governments and peoples of the Middle East to enhance political, economic and educational opportunities for all and to establish projects to strengthen the role of women in economic and political life and to provide greater opportunities for youth in terms of education and training.

Washington also has a number of definite targets, or rather conditions, that would need to be fulfilled if the free trade zone is to see the light of day. These conditions include, as explained by various US officials:

- Substantial economic reform: Some US bodies consider the countries of the Middle East to be suffering from low levels of local and foreign direct investment, low productivity, an inefficient labour market and increasing unemployment, all of which keep their economies weak. The US wants to improve the investment environment, protect intellectual property rights, enhance the private sector and develop the judiciary system.

- Political reform related to the enhancement of democracy and free expression, the expansion of the role of civil society, the combating of corruption and terrorism, and the protection of human rights.

- Ending the Arab economic boycott of Israel, which the US sees as a violation of World Trade Organisation -WTO- regulations. This would promote inter-regional trade, which accounted for 8% of the region's total trade in 2001, and enhance the contribution of the countries of the region to global exports. The region provided 12% of global exports in 1981 though this had receded to 5% by 2001.

- Developing education in Arab countries, the use of modern technology, the English language and teacher training, and enhancing the educational opportunities of women.
In order to achieve these aims, the US has devised various tools for the implementation of its initiative, including:

- Allocation of financial aid of $1bn - in fact to be taken from the aid previously promised to the region - to help the countries of the Middle East introduce the required reforms. The US has allocated $29m for the current year for this purpose. Certain amounts are designated for the establishment of programmes in areas of concern, such as the empowerment of women, youth and teacher training, and for providing scholarships in US universities.

- Provision of technical and financial aid to the Arab members of the WTO to enable them to meet their commitments to the organisation, as well as technical aid for Arab countries seeking to join the WTO in order that they can meet the membership requirements.

- Providing funds for the private sector and technical aid for promising businesspeople.

- Provision of trade training in US enterprises with a focus on training businesswomen.

- Assistance for Arab governments to reform the financial sector, promote transparency and combat corruption by means of establishing what the US calls a 'Middle East financial agency.' This would encourage the creation of jobs and trade by means of providing investment for small and medium-sized enterprises -SMEs- in the private sector. Companies with capital of around $100m would qualify for $50m from a US fund with the remaining $50m to come from regional investors after the establishment of the company.

- Providing aid for the establishment of more non-governmental organisations, independent media companies, opinion poll agencies, intellectual forums and trade associations, and assisting them to effect political reform through the Fund for Middle East Democracy.

- Design of programmes to enhance the transparency of legal and regulatory systems, improve management of the judiciary process, and train candidates for political posts and parliamentary and other elected members, as well as training programmes in the field of traditional and electronic journalism.

On the economic level, the Middle East free trade zone initiative comes within the context of US desires to liberate world trade, especially as many of the region's countries have high customs duties and protectionist tariffs. Many have yet to join the WTO and those that have do not always abide by their commitments. The initiative thus seeks to encourage the countries of the region to promote free trade, which, in the US view, they have failed to do. The US also believes that the countries of the Middle East are reluctant to introduce reform and have yet to take the necessary measures to attract investment.

It is telling that the volume of trade between the US and the Arab countries is not, in reality, so large as to command the effort that Washington is making for a free trade agreement. This highlights that other, political concerns, are the target behind the agreement. The reforms required of the Arab countries are comprehensive and deep, and stretch far beyond the scope of the economic reform included in most free trade agreements. It seems that the US considers the agreement a means of rewarding those Arab countries that support its policy, and encouragement for others to follow suit.

The initiative also seeks to involve Israel in the region, and to bring the Arab economic boycott to an end, whether or not peace is attained. This aim is clear in the US-Jordanian free trade agreement, which stipulates that common industrial zones be established between Jordan and Israel. This runs counter to the rules of origin common to trade agreements worldwide, which prohibit any third party from benefiting from the privileges of the agreement.

Jordan signed its free trade agreement with Washington on 24 October 2000, increasing its exports to the US from $13m the previous year to $412m in 2000. The agreement also led to the creation of 30,000 new jobs and attracted more than $200m of new investment from around a dozen countries. But, despite this clear progress, it remains to be seen whether Jordan's gains will be permanent, how much the Jordanian economy will really benefit from the agreement in the longer term, and what the real economic value is for Jordan when the Israeli quota is factored out.

It is interesting that while Israel is a party to both the European and US initiatives in the Middle East, Tel Aviv's participation in the latter has been much greater. And while both initiatives aim to merge Israel into the region, the US has been much more forceful in this regard. The rules of origin specifications in US agreements, designed to serve Israeli interests, clearly demonstrate this.

Both initiatives also include the provision of technical and financial support to the countries of the region to encourage them to introduce certain reforms. The aid from the US, however, unlike that from Europe, is allocated from money already destined to the region, and is channelled to introduce political, social and cultural reforms. The aid from Europe is incremental and is earmarked mainly for reform of the industrial sector.

The US initiative is considerably more linked to progress in the peace process than the European one, reflecting the greater role of Washington in the peace process than the EU. The major impediment to the success of the US free trade plan is Washington's bias towards Israel, and whether it can arrive at a regional solution acceptable to the Arabs. The EU initiative, on the other hand, seeks, among other targets, to enhance the European role in the peace process.

The Arab countries tend to favour the European initiative, for economic as well as political reasons. The Arabs are also wary that the proposed free trade zone with the US comes within the context of US plans to assert its domination in the region.