The importance of Arab regional integration

Perspectives for developmentGlobal CGE Analysis

Economic Development and Globalisation Division

The GAFTA

• In 1981, the members of the Arab-League adopted an Agreement to Facilitate and Develop Inter-Arab Trade (AFDIAT).

• The AFDIAT aimed at liberalization, perhaps even the establishment of a regional FTA, it was vague in its language and left open the selection of covered products to a set of malleable “principales”.

• It could well have been seen as yet another part of the Arab League’s facade dissimination. Nevertheless, 16 years later was to become the basis for what might be seen as a the Arab trade integration scheme.

2

The GAFTA (Cont.)• On February 19, 1997, the Social and Economic Council of the Arab League

adopted a declaration on a Pan-Arab FTA establishing an “executive program” for the AFDIAT, which is in fact the text of the GAFTA.

• The GAFTA required that “all Arab goods traded among the party-states shall be liberalized in accordance with the gradual liberalization principle which shall be applied as of January 1, 1998”, allowing for “full liberalization” by July 21, 2007.

• It established a principle of national treatment among states parties, and a general prohibition on non-tariff barriers”, GAFTA members include 17 of the 22 Arab League countries of which Yemen and Sudan, as LDCs, have a longer period of liberalization (until 2010) and the Palestinaian Authority has been exempted from tariff reductions.

• In 2002, the Arab League’s Economic and Social Council resolved to accelerate the gradual liberalization process, abolishing tariffs by January 1, 2005 3

Compared to other regions…

The Arab region is less integrated,

even compared to African countries

Fig1: Intraregional exports as % of total exports (2010)

Source: ITC

Arab league

GCC Maghreb UE 27 NAFTA Asean Africa0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

5.22.6 2.5

64.5

48.7

24.8

12.4

Intra-Arab trade volume has on average grown by 24.1% between 2005 and 2009, but recent data shows a change in trend

  Value of intra Arab trade in Billion USD

2005 2006 2007 2008 20090

10

20

30

40

50

60

70

80

90

100

46.2

56.1

67.6

88.4

71.1

Compared to Arab exports to the world, intra-Arab exports are more diversified and less concentrated on chemical products

 Structure of Arab exports

Agriculture Agrofood Products

chemical products

other manuf

11.8 14.3

31.9

42.0

1.6 2.1

82.7

13.6

Arab league's exports to Arab leagueArab league's exports to world

Why the impacts are too small?

• The main GAFTA’s weakness is in the realm of non-tariff barriers, reflecting the general problem.

• Moreover, trade in services and investment liberalization are not included in GAFTA and will require further efforts.

• None well determined rules of origins

• NTMs are not homogeneous across countries

• Non convergence in terms of indirect fiscal instruments on imports. Other taxes have similar impacts as tariffs are not removed (consumption, excess...)

• Licenses, negative lists and many other barriers still active

• Very heterogeneous system of implicit and explicit subsidies on production that affect relative competitiveness harms the development of intra-trade.

7

Scenarios definition

8

Sim 1 (FTA): A full implementation of intra-Arab FTA

Sim2 (TR) =Sim1+ a 50% reduction of intra-Arab transport costs

Sim3 (CU) : Sim2+ a customs union for non agricultural products. The Common external tariffs is supposed to be equal to the minimum tariff applied by non oil producing countries. Countries that have a lower tariff are supposed to maintain their current tariffs.

Sim4 (Migration): Sim3+the replacement of 20% of non Arab migrant stock by Arab migrants

sim4:sim3+ An Arab preference

for migration quotas in OPC

sim3: sim3+a common external

tariffs (for non agriculture

products

sim2: sim1+ 50% reduction in

transport cost

sim1: A complete Free trade Area

Simulations results: Impacts on trade

Share of the intra-Arab trade in total trade

9sim1 sim2 sim3 sim40.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

10.1

38.5

32.6 33.0

ref sim1 sim2 sim3 sim40.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

8.59.3

11.510.6 10.7

• A full implementation of the FTA increases intra-Arab trade increase by around 10 per cent. If 50 per cent transport cost is reduced intra-Arab trade could increase by 38.5%.

• The application of common external tariff increases trade with non-Arab partners as the market access will increase in both directions.

• The business as usual (BaU) scenario will lead to 8.5 per cent share of intra-Arab trade. If scenario 2 is implemented, the share of intra-regional trade will increase by 3 points

Share of the intra-Arab trade in total trade

Simulations results: Impacts on GDP

10

Saudi Arabia

UAE

Bahrain

Kuwait

Oman

Qatar

Algeria+Libya

Egypt

Tunisia

Morocco

Rest of Mashrek

-1 0 1 2 3 4 5 6 7

0.12

0.22

0.31

0.06

0.11

0.02

-0.14

0.55

0.03

0.12

0.42

1.23

0.92

3.22

0.68

1.21

0.44

0.15

1.58

1.04

0.42

2.24

2.9

4.63

6.5

4.3

1.88

1.57

1.94

3.22

2.09

0.54

3.37

4.02

6.02

6.34

4.65

0.82

1.18

1.95

5.48

3.07

2.39

4.44

Migration CU

tranport cost reduction FTA

Arab

Count

ries

Oil Pro

ducin

g Cou

ntrie

s (O

PC)

Non- O

il Pro

ducin

g Cou

ntrie

s

0.2 0.10.4

1.10.8

1.6

3 3.12.8

3.93.7

4.5

FTA tranport cost reduction

CU Migration

Simulations results: Impacts on Households Revenue

11

Saudi Arabia

UAE

Bahrain

Kuwait

Oman

Qatar

Algeria+Libya

Egypt

Tunisia

Morocco

Rest of Mashrek

-2 0 2 4 6 8 10

0.23

0.21

0.44

0.12

0.15

0.03

-0.44

0.71

0.27

0.18

0.57

1.99

0.76

3.74

0.89

1.19

0.17

-0.16

1.94

1.1

0.41

2.22

4.77

4.72

8.52

8.32

2.24

1.71

3.23

0.52

2.66

0.52

3.76

6.59

5.92

8.33

8.92

0.94

1.23

3.26

2.86

3.89

2.25

4.99

Migration CU

tranport cost reduction FTA

0

1

2

3

4

5

6

0.30.1

0.5

1.3

1

1.7

3.4

4.4

1.8

4.6

5.2

3.6

FTA tranport cost reduction

CU Migration

Simulations results: Impacts on unemployment

12

• both skilled and unskilled unemployment rate can be reduced significantly, by around 4 basis points in the Arab region as a whole.

• As expected, the impact is most important in the non-oil producing countries that will experience a reduction in both unskilled and skilled unemployment by around 5 basis points.

• scenario 4 will contribute greatly reduce unemployment in most Arab countries. At the country level, Egypt, Tunisia and Morocco could register around a 5 basis points reduction of unskilled and skilled unemployment. This would reduce both their unskilled and skilled unemployment rate reduced by around 40 per cent.

Absolute variation of unskilled unemployment

Arab Countri

es

Oil Pro

ducing C

ountries

(OPC)

Non-Oil P

roducin

g Countri

es

-6.0

-4.0

-2.0

0.0-0.3

0.1

-0.5-1.4

-0.5-1.8-1.8 -2.0 -1.7

-3.93

-2.27

-4.8

Sim1 Sim2 Sim3 Sim4

Absolute variation of skilled unemployment

-6.0-4.0-2.00.0

-0.1

0.2

-0.2-0.7 -0.1 -1.0-1.0 -1.1 -0.9

-3.8-1.3

-5.1

Sim1 Sim2 Sim3 Sim4

Thank you!

For additional information, please contact: UNITED NATIONS – ESCWA

P.O. Box 11-8575, Riad el-Solh,Beirut – Lebanon

Web: http://www.escwa.un.org/