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CHAPTER 10 The Greater Arab Free Trade Area: Limits and Possibilities Jamel Zarrouk The Greater Arab Free Trade Area (GAFTA), launched by the member states of the Arab League on January 1, 1998, is a recent example of renewed attempts at regional integration in the MENA region.1 The objective of the GAFTA is the elimination of import duties and other barriers to trade on goods of Arab origin over a ten-year period. As a result, by 2008 intra-Arab imports will enter each country of the region-spanning Morocco in the west to Oman in the East-without encountering tariffs or tariff-like barriers. Two factors have been advanced for the recent interest in creating a region-wide FTA. First, many of the countries in the region have implemented reforms to reduce the economic role of the public sector and shift away from import substitution. As a result, there is greater scope for the region to expand intratrade and to exploit investment opportunities. Second, the post-Uruguay Round tariff and nontariff reductions and the strengthening of the multilateral trading system (the advent of the WTO) have raised fears of marginalization of MENA economies that have relied on preferences for their exports to industrial markets. Responses to this challenge have included increased interest in WTO membership and the conclusion of a series of "Association Agreements" between the EU and the Southern Mediterranean countries. Such agreements involve the complete liberalization of trade with the EU over a twelve-year period. The agreements are expected to foster trade and development and to attract FDI in the Southern Mediterranean region. However, there is a danger that the association agreements will give rise to trade diversion and discourage intraregional economic ties. If all the Arab Mediterranean countries do not 286 CatchingUpwiththeCompetition have comparable FTAs with each other-that is, if they do not conclude a single free trade area-then the common denominator of the association agreements will be the EU. This may lead to a situation in which foreign investors choose to invest in the EU "hub" in order to service all the Arab "spokes." Minimizing this so-called "hub and spoke" effect (Wonnacott, 1996) by lowering intraregional trade barriers is a major incentive for creating a single free trade area among Arab countries in the MENA region. The Past Legacy of Regional Integration Efforts The history of RIAs in the MENA region is not encouraging for prospective intraregional trading blocs. Examples of unsuccessful regional initiatives include the 1953 treaty to organize transit trade among the states of the Arab League, the 1964 Agreement establishing an Arab Common Market (ACM), 2 and more recently, the 1981 Agreement for Facilitation and Promotion of Intra-Arab Trade, signed by eighteen member states of the Arab League. Broadly speaking, the impact of these agreements on regional trade has been extremely limited. Intraregional trade among Arab countries expanded little during the last two decades, and its share in total regional trade has remained small. The relative importance of intratrade in total Arab trade rose moderately during the ten-year period of 1986-97, reaching 9 percent of total trade as measured by imports and exports. This compares unfavorably with more successful trading blocs such as the EU, NAFTA, and the recent Customs Union (MERCOSUR) between four Latin American Countries, each of which enjoy much higher intraregional trade (table I0.1).3 An important shortcoming of regional integration efforts in the MENA region has been that virtually all RTAs have been declarations of intent on the part of the country signatories. They were not binding or comprehensive; coverage was determined through negotiations following a product-by-product approach. Countries could pick and choose manufactured products for tariff exemptions. None of the agreements laid out time schedules for the elimination of tariffs and trade barriers. The failure of the first wave of Arab regionalism led some countries to devote their efforts to pursuing smaller-scale regional groupings in the l980s. Three regional groupings were founded. The GCC, established in 1981 by Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE, emerged as the only TABLE 10.1 Intraregional Trade (Percent of Total Trade) 1980 1984 1989 1994 1997 Intra-Arab 6.2 73 10.2 8.8 9.0 INTRA-FU 61.0 58.8 65.2 61.9 57.1 Intra-MERCOSUR 10.7 6.7 11.5 19.5 21.0 Source: Direction o,[Trade Statistics, IMF: Yeats (1997) for MERCOSUR data. [18.118.7.85] Project...

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