CAIRO: Increased economic integration of Arab countries is one of the priorities of Minister of Trade and Industry Rachid Mohamed Rachid, who discussed the measures being taken to address some of the shortcomings of the Greater Arab Free Trade Area in an interview with The Daily Star Egypt. Regional trade is also one of the topics that will be discussed during the World Economic Forum on the Middle East, which begins today in Sharm El-Sheikh.
The minister explains that he is working together with a number of like-minded counterparts in other Arab countries to increase compliance with the trade agreement and expand its scope. There is a specific circle now that is working together very aggressively to really enforce this liberalization of trade, says Rachid.
The agreement, to which all members of the Arab League are signatories except Algeria, Djibouti, Comoros, Mauritania and Somalia, eliminated tariffs on products on Jan. 1, 2005.
Nevertheless, trade has continued to be hampered by several factors, including non-tariff barriers such as administrative hassles and safety standards that are costly or even impossible to observe.
We are all aware that there are non-tariff barriers, and therefore in our last two meetings [of Arab trade ministers] we have been focusing on those, says Rachid. We have been focusing on making sure that all areas dealing with certificates, rules of origin, sanitary rules and rules for different controls are more harmonized across the region.
The absence of a mechanism to handle trade disputes has also encouraged non-compliance. Rachid explains that Arab countries are currently negotiating the implementation of such a mechanism.
This is one of the weaknesses; we don t have a mechanism that deals [with] all kinds of violations of the agreement, says Rachid.
Additionally, while the agreement contains a provision allowing manufactured goods to include foreign inputs of up to 40 percent, there are divergent views about how to implement this provision.
There is still a lack of clarity in the rules of origin, says Rachid. There are still two major views about them, and we are trying to cross that gap in the next few months. The dispute relates to the method of calculation for the proportion of domestic content, with some countries insisting that it should be based on selling price rather than manufacturing cost.
That s a huge difference, says Rachid. Some countries that are less industrialized want to have a lower percentage, which would allow them to trade in goods which are not necessarily produced in that country by the definition of other countries.
Despite these obstacles, Egypt s trade with other Arab countries increased by 60 percent last year. A number of macroeconomic factors contributed to this increase, including the floatation of the currency in 2003, but the elimination of tariffs under GAFTA also encouraged some businesses to enter the regional market.
We have a totally different environment for our exports, says Hussam Mestekawy, chief financial officer of the Olympic Group, whose Cairo-based company manufactures household appliances and exports its products primarily to Libya, the Gulf, Jordan, Syria and Sudan.
Mestekawy explains that his company witnessed an increase in exports of 65 percent to 70 percent last year and he expects the level of exports to double to $40 million this year. He adds that the existence of local suppliers in Egypt diminishes the relevance of disputes over rules of origin.
One of the advantages we have in Egypt is the local supply; we have a very good base of component suppliers, says Mestekawy.
Notwithstanding the success or failure of GAFTA in effectively eliminating tariffs on products, there are a number of other areas relating to economic integration that have not yet been addressed, including investment, labor mobility and services. We have actually started talking about liberalization of trade in services, says Rachid.
The benefits from a more comprehensive framework for economic integration may be substantial. A study by economist Denise Konan in 2002 found that Egypt stands to gain twice as much from the liberalization of trade in both goods and services than from the liberalization of trade in goods alone.
Reforming the service sector affects the economy as a whole, not just the external sector, adds a report from the Egyptian Center for Economic Studies published in 2002. It entails removing high barriers to both domestic and foreign entry, and it eliminates policies that create social waste (needless transaction costs). This differs from trade liberalization, which gives rise to efficiency gains only.
There is also a clear link between trade and investment. People are more likely to invest in Egypt if they feel that their presence in Egypt would allow them to trade their goods into the rest of region, says Rachid.
Progress on all fronts will ultimately involve a struggle between two opposing interests: protectionism on the part of long-established industries partial to the domestic market and liberalization on the part of the growing number of pan-Arab companies such as Olympic.
It takes a lot of persistence from the government and from the business community to move into this new environment, but we are confident that the rest will follow, says Rachid.
