20322 February 2000 t_ja -rce vo, ICy ~~~ets1 \ lJ eve o,,-%nents in the Middle East and North Africa s I~~~~I= S s * L BANKBernard Hoekman g y x | ~~~~~~Hanaa Kheir-EI-Din M E D I T E R R AN EAN D EVE LO 0 PME N T F 0 R U M , ' WORLD \ 121 ~~~~~~~~~~INSTITUTE I \ d Ts EC~~~~~~~~~~IONOMIC Z * \ i ti > X 11 ~~~~~~RESE-ARCH ;1~~~~~~~~~~~~~~~~ -0 R U M feM i= n\1 L1 4L]I\1s11s s 1 Trade Policy Developments in the Middle East and North Africa Bernard Hoekman Hanaa Kheir-EI-Din Editors THE WORLD BANK WASHINGTON, D.C. ( 2000 The International Bank for Reconstruction and DevelopmentlTHE WORLD BANK 1818 H Street, N.W. 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ISBN 0-8213-4614-8 Library of Congress Cataloging-in-Publication Data Trade policy developments in the Middle East and North Africa / edited by Bernard Hoekman, Hanaa Kheir-EI-Din. p. cm. ISBN 0-8213-4614-8 1. Middle East-Commercial policy. 2. Africa, North-Commercial policy. 3. Free trade-Middle East. 4. Free trade-Africa, North. 5. Middle East- Economic integration. 6. Africa, North-Economic integration. I. Hoekman, Bernard M., 1959- . II. Kheir-EI-Din, Hanaa, 19- HF1583.3 .T7 2000 382'.3'0956-dc2l 99-058630 Contents CONTRIBUTORS viii FOREWORD x ABOUT MDF xi Introduction I Bernard Hoekman and Hanaa Kheir-El-Din I Managing Global Integration in the Middle East and North Africa 7 Mustapha K. Nabli and Annette L De Kleine 2 Incentives for Economic Integration in the Middle East 51 Ahmed Galal 3 Turkey, Tunisia, and Israel: A Comparison of Agreements with the European Union 69 Siibidey Togan 4 Agricultural Trade Around the Mediterranean 101 A. Halis Akder 5 Egypt: An Assessment of Recent Trade Policy Developments 113 Amal Refaat 6 Trade Policies in Jordan, Lebanon, and Saudi Arabia 141 Riad al Khouri 7 Para-Tariff Measures in Arab Countries 165 Jamel Zarrouk iii iv TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA 8 Trade Liberalization and Tax Reform in the Southern Mediterranean Region 181 George T Abed 9 Enforcement of Product Standards as Barriers to Trade: The Case of Egypt 213 Hanaa Kheir-EI-Din 10 Electronic Data Interchange, Trade Facilitation, and Customs Reform 229 Benita Cox and Sherine Ghoneim 11 Free Zones in the Middle East: Development Patterns and Future Potential 245 Kishore Rao INDEX 265 TABLES 1.1. Overview of Integration with the Global Economy: MENA, Central Eastern European, Southern Mediterranean, and East Asian Countries 9 1.2. Speed of Total Trade Integration 11 1.3. Speed of Export Integration, as a Share of GDP 12 1.4. Share in World Exports and Imports, 1970-97 13 1.5. Per Capita Exports and Population 15 1.6. Fuel and Nonfuel Exports 16 1.7. International Tourism Receipts 18 1.8. Comparison of Trade Policy Indicators for Selected Countries 20 1.9. Trade Taxes in MENA Countries 21 1.10. Net FDI Flows to Three Groups of Countries 27 1.11. Share of Foreign Banks in Domestic Banking Systems 33 1.12. Net Non-FDI Capital Flows to Selected MENA Countries, 1993-97 35 1.13. Non-FDI Net Private-to-Private Capital Flows to Three Groups of Countries, 1993-97 36 l.A.1. Goods and Services Trade Integration Ratios 45 I.A.2. Goods and Nonfactor Services Exports as a Share of GDP 46 I.A.3. Volatility of FDI and Non-FDI Private-to-Private Capital Inflows, 1993-97 47 I.A.4. Net FDI Flows to MENA and Other Regions 48 l.A.5. Net Non-FDI Private Flows to MENA and Other Regions 49 CONTENTS v 2.1. Intraregional Exports in Percent of Total Exports 53 2.2. Egypt's Trade Pattern: Exports in Percentage of Total Exports 53 2.3. Inflows of Foreign Direct Investment 54 2.4. Workers' Remittances 55 2.5. Regionalism: Old and New 56 2.6. Average Nominal Tariff Protection and Effective Rate of Protection for Selected Sectors 58 3.1. Basic Data on Israeli, Tunisian, and Turkish Economies 70 3.2. Geographic Distribution of Exports and Imports, 1996 71 3.3. Commodity Composition of Israeli, Tunisian, Turkish, and World Exports, 1996 71 3.4. Commodity Composition of Israeli, Tunisian, and Turkish Exports to and Imports From the EU, 1997 73 3.5a. Dynamic Exports, Turkey 74 3.5b. Dynamic Exports, Tunisia 75 3.5c. Dynamic Exports, Israel 75 3.6. Trade in Selected Agricultural Commodities 81 3.7. Tariff Quotas on and Trade Arrangements for Selected Agricultural Commodities 83 3.8. Unit Export Prices of Selected Agricultural Commodities 85 3.9. Major International Conventions on Intellectual Property 92 4.1. Trade Between the EU and the Mediterranean Basin (1995) 102 4.2. Market Similarity Coefficients Among the Mediterranean and Eastern European Countries 104 4.3. Product Similarity Coefficients Among the Mediterranean and Eastern European Countries 107 5.1. Distribution of Egypt's Exports, Imports, and Trade Deficit by Trading Partner 1986/87 and 1996/97 116 5.2. Nominal and Effective Protection 119 5.3. Changes in Tariff-Induced Bias Against Exports 120 5.4. Production Coverage of NTBS on Egyptian Imports 121 5.5. Development of Trade Openness in Egypt and Selected Fast-Growing Economies 123 5.6. Tariff Reductions in Mexico and the United States due to NAFTA 130 6.1. Goods Requiring Permission to Enter Jordan 147 6.2. Types of Control Measures Applied 151 6.3. Control Measures by Government Entity 152 7.1. Major Specific Duties and Taxes Applied in Jordan 170 7.2. "Special" Import Taxes Complementing Tariffs as Known in Some Arab Countries 175 7.3. Internal Taxes or Charges on Imports in Selected Arab Countries 176 vi TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA 7.4. Egypt: Main Taxes and Charges Levied on Imports of Selected Products 177 8.1. Southern Mediterranean Region Countries: Tariff Revenue from Trade with the EU 184 8.2. SMR Countries: Status of Tax and Tariff Reforms, 1997 189 8.3. Effective Tariffs by World Regions, 1975-95 194 8.4. Effective Tariffs in Selected Countries of the Middle East and the SMR, 1975-95 195 8.5. Taxes on International Trade in Selected Countries of the Middle East and the Southern Mediterranean Region, 1975-95 197 8.6. Taxes on International Trade in Selected Countries of the Middle East and the SMR, 1975-95 198 8.7. Revenue Structure in World Regions, 1994-95 199 8.8. SMR Countries: Central Government Revenue Structure, 1994-96 200 8.A.1. Tunisia: Revenue Losses from Reductions in Import Duties on EU Trade 203 8.A.2. Tunisia: Revenue Losses from Reductions in Import Duties and the Elimination of Compensatory Duties on EU Trade 203 8.A.3. Morocco: Revenue Losses from Reductions in Import Duties- No Trade Diversion 204 8.A.4. Morocco: Revenue Losses from Reductions in Import Duties- Total Trade Diversion 204 8.A.5. Lebanon: Customs Revenue Losses Implied by Tariff Dismantlement, 1996 205 8.A.6. Taxes on International Trade in World Regions, 1975-95 206 8.A.7. Taxes on International Trade in World Regions, 1975-95 207 11.1. Growth in Free Zone Activity Worldwide 246 11.2. Profile of Operational MENA Zones 247 11.3. Free Zone Successes and Failures 249 11.4. Employment and Export Impact of Zones 250 11.5. Economic Impact of MENA Zones-Selected Countries 250 11.6. Changing Free Zone Concepts-Selected Countries 253 11.7. Free Zone Incentives-Selected Countries 257 11.8. Free Zone Access Under Regional Trade Agreements 258 11.9. Free Zone Regulatory Bodies 259 FIGURES 1.1. Total Trade Integration: Volume of Goods and Nonfactor Service Trade Ratio to GDP 10 1.2. Ratio of GNFS Export Volumes to GDP 14 1.3. MENA's Intraregional Trade: Share of Exports 19 CONTENTS vii 1.4. Effect on Per Capita GDP Growth of One Standard Deviation Increase in Trade Policy Openness Index 23 1.5. Volatility of Purchasing Power of Exports, 1970-93: Ratio of Region Standard Error to All LMICs 25 1.6. Volatility of Purchasing Power of Exports, 1970-93: Standard Error in Percentage Points 25 1.7. Net Private Capital Flows to Developing Countries: All Developing Countries 29 1.8. Net Private Capital Flows to Developing Countries: Argentina 29 1.9. Net Private Capital Flows to Developing Countries: Mexico 30 1.10. Net Private Capital Flows to Developing Countries: Hungary 30 1.11. Coefficient of Variation for FDI and Non-FDI Private Inflows 31 1.12. Net FDI Flows to MENA and Other Regions 31 1.13. Net Non-FDI Private Flows to MENA and Other Regions 34 1.14. Ratio of Short-Term Debt to Total Debt 39 1.15. Foreign Exchange Exposure: Ratio of Foreign Liabilities to Foreign Assets of Banks 39 1.16. Ratio of Short-Term Debt to Reserves 40 1.17. M2/Reserves, 1996 40 4.1. Market Similarities: Mediterranean Countries and East Europe 105 4.2. Product Similarities: Mediterranean Countries and East Europe 108 5.1. Exports and Imports' Quantity Indices and Terms of Trade, 1980-96 115 5.2. Exchange Rate Premium, 1981-96 122 5.3. Overall Ranking of Institutional Constraints in Egypt 124 5.4. Outcome-Based Measures of Trade Liberalization 124 5.5. Openness Indicators, Excluding Trade in Fuel 125 10.1. EDI Contextual Pressures 232 BOXES 11.1. Free Zones in MENA Are Multiplying 248 11.2. Some Drawbacks of Tax Holidays 256 11.3. Advantages of Using a U.S. Foreign Trade Zone 261 Contributors George T Abed Senior Advisor, Fiscal Affairs Dept., The International Monetary Fund, Washington, D.C. A. Halis Akder Professor of Economics, Middle East Technical University, Turkey Benita Cox Senior Lecturer, The Management School, Imperial College for Science, Technology and Medicine, London Annette L De Kleine Economist, The World Bank, Washington, D.C. Ahmed Galal Executive Director, The Egyptian Center for Economic Studies (ECES), Cairo, Egypt Sherine Ghoneim Economist, Economic Research Forum for the Arab Countries, Turkey and Iran, Cairo, Egypt Bernard Hoekman Principal Trade Economist, The World Bank, Washington, D.C. and Fellow, Center for Economic Policy Research (CEPR) viii CONTRIBUTORS ix Hanaa Kheir-EI-Din Professor of Economics, Cairo University, Egypt Mustapha K. Nabli Chief Economist and Sector Director, Middle East and North Africa Region, The World Bank, Washington, D.C. Kishore Rao President and CEO, The Services Group, Inc., Arlington, Virginia, USA Amal Refaat Economist, The Egyptian Center for Economic Studies (ECES), Cairo, Egypt Subidey Togan Professor of International Economics, Bilkent University, Turkey Jamel Zarrouk Senior Economist, Arab Monetary Fund, United Arab Emirates Foreword This is the second book published by the World Bank on behalf of the Mediterra- nean Development Forum (MDF) partnership of 10 Middle East and North Africa region (MENA) think tanks and the World Bank Institute. The volume is a joint publication with the Economic Research Forum for the Arab Countries, Iran and Turkey (ERF). Most of the contributors are researchers from the region, many of whom are active ERF Fellows. We hope that the studies presented here will contrib- ute to the ongoing debate on the trade opportunities and challenges facing the coun- tries in the Middle East and North Africa. The MDF publication series is based on conferences that the MDF partnership holds every 18 months. This particular volume on trade policy developments in the Middle East and North Africa includes papers discussed at the second Mediterra- nean Development Forum, which took place in Marrakech, Morocco, in September 1998. We would like to express our thanks to those who contributed to the sessions on trade and global integration challenges facing the region at both MDF1 and MDF2. Hana' Al Sagban of the ERF played a major role in organizing the workshops and ensuring that they went smoothly. In addition to the ERF, other think tank represen- tatives who contributed to the trade sessions were Faycal Lakhoua (Institut Arabe des Chefs d'Entreprise, Tunisia), Nabil Sukkar (Syrian Consulting Bureau), and Imed Limam (Arab Planning Institute, Kuwait). Heba Handoussa, Director Vinod Thomas, Director Economic Research Forum for the World Bank Institute Arab Countries, Iran, and Turkey x About MDF The MDF partnership, launched in 1997, is composed of 10 Middle East and North Africa region (MENA) think tanks and the World Bank Institute. The part- nership is dedicated to providing policy support among development actors, re- search and capacity building of think tanks, and creating networks in the MENA region. The partnership's work culminates in a forum held every 18 months. The MDF represents a vital opportunity for some of the region's most influen- tial thinkers and practitioners to affect regional policy. The forum is a crucial component of the MDF partnership because it pro- vides a rare opportunity for MENA experts, high-level government officials, and civil society representatives to meet and engage in a dialogue to set the region's development agenda. The MDF already has a unique impact on the region. Its first conference, MDFI-held in May 1997-focused on the inter- play of civil society, business, and government in boosting the region's com- petitiveness. The discussions at MDF2 in September 1998 revolved around the theme of enhancing public participation in the development process. More than 100 speakers debated innovative and cutting-edge development issues with an audience of over 500 of the region's most influential thinkers and practitioners, including high-level government officials, think tank representatives, private sector leaders, academics, and civil society. As a direct result of the MDF partnership, a number of projects have emerged, including programs on decentralization and governance in the West Bank and Gaza; programs on quality education, emphasizing gender; the Network of Women Evaluators; the Network of Lawyers Reforming NGO Laws; the "Meet the Civil Society Initiative"; the MENA Data Initiative; and the MDF publica- tion series. xi xii NEW ROLES FOR GOVERNMENT AND THE PRIVATE SECTOR The next Forum, MDF3, will take place in Cairo, Egypt, on March 5-8, 2000. Based on the theme "Voices for Change, Partners for Prosperity," MDF3 will emphasize an inclusive approach toward development and the impor- tance of partnerships in the new millennium. For more information on the conference, please contact the partner in your region listed on the back cover of this publication. Introduction Bernard Hoekman and Hanaa Kheir-El-Din The extent to which countries in different parts of the world have increased their integration into the world economy varies substantially. Some countries, such as China or the former centrally planned economies of Europe, have greatly increased their participation in the international economy in the last decade. Others, including many countries in the Middle East and North Africa (MENA), have been less dy- namic. Although almost all MENA countries have pursued economic reforms, in- cluding trade liberalization, the pace of integration into the world economy achieved by the region has been slow. As pointed out by Mustapha Nabli and Annette De Kleine in chapter 1 of this volume, the trade integration ratio for MENA economies (that is, trade in goods and nonfactor services trade as a share of GDP) was stagnant over the 1990-97 period, whereas it increased in all other regions of the world. The factors that constrain the ability of Arab businesses to confront import competition and compete in world markets are numerous. Some are exogenous- for example, political and foreign policy related-and give rise to significant disin- centives for investment in the region. Others reflect the large role of the state in the economy, which crowds out the private sector, generates excessive transactions costs, and raises the costs of intermediate inputs (both goods and services) that are a deter- minant of the competitiveness of enterprises. The focus of the contributions in this book is on trade and trade policy-related factors. Contributors-almost all econo- mists from the region-review recent trends in trade performance, assess current trade and investment regimes, and discuss some of the emerging microeconomic policy challenges that confront governments and firms seeking to expand trade. 1 2 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Topics addressed include the need for and scope of using regional integration and economic free zones as a tool of development, mobilization of nontrade tax bases to offset revenue losses as tariffs are lowered, establishment of more efficient mecha- nisms to enforce product standards to ensure health and safety of citizens, and imple- mentation of modern information technologies to expedite customs clearance. A number of chapters reveal that, although tariffs have fallen and quotas have largely been abolished, transactions costs associated with international trade fre- quently are high in MENA countries. Inefficiencies in customs clearance proce- dures, in port and ancillary services, and in transportation and telecommunications services impose excess costs on economic actors. Administrative red tape and re- dundant procedures imposed at the border are a major problem in some economies in the region. Relatively high import duties and inadequate duty drawback mecha- nisms-in part because para-tariffs in many countries are significant-add an addi- tional burden by raising the costs of imported inputs and technology. There are three major policy options for governments seeking to liberalize trade-unilateral (autonomous) reform, opening of markets in the context of (recip- rocal) bilateral or regional trade agreements, and multilateral liberalization in the World Trade Organization (WTO) forum. Many countries all over the world are complementing autonomous economic reform programs with reciprocal trade agree- ments and WTO commitments. Arab countries are no exception, although unilateral and regional approaches have tended to dominate. Starting in the mid-1990s, many MENA countries began trade liberalization programs in the context of broader eco- nomic reform efforts. A number of Mediterranean Arab countries complemented such unilateral reforms with reciprocal free trade agreements (FTAs) with the Euro- pean Union (EU) covering all manufactures. These imply that by the end of the next decade EU goods will enter the relevant MENA markets duty free. A primary motivation for the FTAs with the EU was the collapse of commu- nism in Central and Eastern European countries (CEECs) and the conclusion of FTAs between these countries and the EU. The advent of EU-CEEC free trade raised concerns that the Mediterranean Arab countries might be "marginalized" in EU markets, as the competitive advantage that they used to enjoy in those markets (through geographic proximity and preferential access) would be eroded. So far, Tunisia, Morocco, and Jordan have concluded so-called Euro-Mediterranean (Euro- Med) Partnership Agreements, while Israel and Turkey have somewhat different arrangements that also imply virtual free trade with the EU (the notable exception being agriculture). Lebanon and Egypt are actively negotiating with the EU to con- clude similar agreements, and the intention of the EU is that agreements will be concluded with all countries around the Mediterranean (and beyond-for example, with the Gulf Cooperation Council). The impact of such FTAs with the EU has been the subject of a substantial amount of work.' To some extent, the Euro-Med FTAs led to a revival in interest in intra-MENA integration, as exemplified in the 1998 Greater Arab Free Trade Area agreement. In chapter 2 of this volume, Ahmed Galal assesses the prospects and INTRODUCTION 3 preconditions for greater economic integration within the MENA region (including Israel as well as Arab countries). To a significant extent, the prospects and payoffs of intraregional integration are determined by the interaction of noneconomic (es- pecially political) and economic factors. Galal argues that preconditions for regional integration are implementation of the FTAs with the EU, more far-reaching domes- tic economic reforms, and a clear perception on the part of all countries' leaderships that there are political gains from integrating. In his view, these conditions have yet to be satisfied. One reflection of the differences in preparedness of economies in the region is the variation that is observed in the content and depth of the agreements with the EU. These differences are assessed in chapter 3 by Sibidey Togan, who compares in some detail three of the trade agreements involving the EU. Although there are important gaps in all of the EU agreements, both in terms of sectoral coverage and the extent to which the agreements ensure effective market access, some Mediterra- nean countries have concluded more comprehensive deals than others. A recent report by the World Bank (2000) notes among other things that: * Realization of economic gains from regional integration depends on se- curing an effective increase in competition in the regional market. Increas- ing openness to trade with the outside world is a key ingredient in maximizing the gains from regional trade agreements. i Although there are clear advantages associated with selecting high-in- come countries (such as those in the EU) as partners in terms of the po- tential for income convergence over time, attaining the desired increase in growth depends importantly on the coverage of the agreement. In par- ticular, realization of competition and scale effects may require abolition of antidumping, cooperation on customs practices and product standards, and liberalization of investment regimes and service sectors ("deeper in- tegration"). A problem affecting both the autonomous trade reforms and the trade agree- ments that have been concluded among countries in the region is that their coverage is relatively narrow. As a result, the potential gains from reforms are reduced. A major hole in the EU agreements-and in unilateral reform efforts as well2-is ag- riculture. In chapter 4, A. Halis Akder assesses the extent to which southern Medi- terranean countries produce and export similar agricultural commodities, or compete in the same EU countries. He concludes that a number of MENA countries have a great interest in improving their access to EU markets. The issues here are relatively well-known-what is of interest in this chapter is the use of statistical techniques to assess the similarity of countries' export agricultural bundles and identify which countries are, and which are not, competitors. Improving agricultural market access conditions in EU markets should be a priority for many Mediterranean countries. 4 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA More generally, the focus in many MENA countries is arguably too much on the "traditional" trade agenda-elimination of quotas, reduction in tariffs-and not enough on the complementary regulatory and institutional reforms that are needed to ensure that antitrade biases are removed and a strong supply response emerges. Many of the chapters in this volume discuss the outstanding reform agenda. How- ever, even on the traditional front there is still a significant amount of work to be done. Chapters 5, 6, and 7 by Amal Refaat, Riad al Khouri, and Jamel Zarrouk, respectively, document both the progress that has been made to liberalize trade in a number of MENA countries and the challenges that remain. Average tariffs remain relatively high, and nontariff barriers, including para-tariffs, can be a significant burden. In general, the conclusion of these chapters is that trade regimes could be made more transparent, in the process lowering transactions costs. The trade policy agenda extends well beyond traditional tariff and para-tariff issues. Priority areas that are discussed in a number of chapters are domestic regu- latory regimes and administrative procedures related to trade. Administrative proce- dures and requirements associated with importing into MENA countries are often burdensome, increasing the cost of imports substantially and thereby lowering the competitiveness of MENA firms on world markets. Many government bodies are involved in the import process, either collecting taxes or import duties, or authoriz- ing the release of imports. The many administrative controls can delay customs clearance by anything from a few days to several weeks. Customs officials in many MENA countries appear to be generally suspicious of invoice values, relying on price lists and declared values of "bona fide" importers of particular goods to deter- mine the value of goods. To some extent, burdensome customs procedures and rela- tively high tariffs are motivated by government revenue objectives. In chapter 8, George Abed provides a comprehensive survey of the dependence of MENA gov- ernments on trade taxes; assesses the fiscal impact of trade liberalization, especially the Euro-Med agreements with the EU; and discusses the options for mobilizing alternative tax bases. Two specific issue areas that are attracting a lot of attention-both inside and outside the region-are discussed in some detail in this book. In chapter 9, Hanaa Kheir-El-Din discusses the enforcement of mandatory product standards in Egypt, which is regarded as a serious nontariff barrier by many exporters to Egypt. In chap- ter 10, Benita Cox and Sherine Ghoneim focus on the scope for using modern informatics techniques-in particular electronic data interchange-to reduce trans- actions costs related to customs procedures. In both cases, progress is not easy to achieve-in contrast to tariff reforms, which can be implemented at the stroke of a minister's pen-reduction in transactions costs and facilitation of trade require insti- tutional changes and strengthening. Greater reliance on information technologies, international norms and good practices, and market forces can help trade, but progress requires that all stakeholders be consulted and involved in the process of reform. Regional integration initiatives of the type discussed in chapters 2 and 3 can play an important role in advancing regulatory reform by acting as focal points and INTRODUCTION 5 commitment mechanisms, but they are simply tools, not panaceas. Many of the actions that are required will have to be pursued by governments and stakeholders autonomously. In the transition toward a more open economy, one instrument that could be used is the economic free zone or free trade zone. Such zones have been used to good effect by a number of countries-both developing and developed-but have not been very prominent in the MENA region. In chapter 11, Kishore Rao discusses the global experience with free zones and reviews the status quo in the MENA region. He concludes that MENA countries could benefit greatly from more widespread use and more effective implementation of such zones. In conclusion, the contributions to this volume illustrate that a lot has been achieved in the last decade, but that a lot also remains to be done on the trade policy- related front. This is an issue area that is receiving substantial attention from both policymakers and the research community in the region. The contributions to this volume illustrate that the policy challenges extend beyond traditional trade policies, and include domestic regulatory regimes, administrative procedures, and the per- formance of public institutions. Complementary reforms that center on reduction of transactions costs and improving the performance of infrastructure service provid- ers-for example, transport, port services, telecoms, and finance-are as important, if not more important, than trade policy reforms narrowly defined. Notes: 1. See Galal and Hoekman (1997), Safadi (1998), Joffe (1999), and Hoekman and Zarrouk (2000). 2. See, for example, De Rosa (2000) and Chaherli and El Said (1999). References Chaherli, Nabil, and Moataz El Said. 1999. "Impact of the WTO Agreement on MENA Agriculture," Economic Research Forum, Cairo. Mimeo. De Rosa, Dean. 2000. "Agricultural Trade and Rural Development in the Middle East and North Africa." In B. Hoekman and J. Zarrouk, eds., Catching Up with the Competition: Trade Opportunities and Challenges forArab Countries. Ann Arbor: University of Michigan Press. Galal, Ahmed, and Bernard Hoekman, eds. 1997. Regional Partners in Global Mar- kets: Limits and Possibilities of the Euro-Med Agreements. London: Centre for Economic Policy Research. 6 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Hoekman, Bernard, and Jamel Zarrouk, eds. 2000. Catching Up with the Competi- tion: Trade Opportunities and Challenges for Arab Countries. Ann Arbor: Uni- versity of Michigan Press. Joff6, George, ed. 1999. Perspectives on Development: The Euro-Mediterranean Partnership. London: Frank Cass Publishers. Safadi, Raed, ed. 1998. Opening Doors to the World: A New Trade Agenda for the Middle East. Cairo: American University of Cairo Press for the Economic Re- search Forum. World Bank. 2000. Trade Blocs and Beyond: Political Dreams and Practical Deci- sions. Policy Research Report. Washington D.C. CHAPTER 1 Managing Global Integration in the Middle East and North Africa1 Mustapha K. Nabli Annette l. De Kleine The World Bank In the aftermath of the Asian crisis, questions regarding the role and implications of increased integration into the world economy for developing countries are again at center stage. A renewed debate and assessment of the issues involved is taking place. While little has changed in the terms of the debate and policy implications for trade and trade policy, it has been heated about financial integration. The role of capital inflows and the pertinence of prescriptions for capital account liberalization are being reassessed in view of their potential contribution to financial crisis. While very diverse in many respects, the Middle East and North Africa (MENA) countries nevertheless also share some common characteristics, including a number of important shared challenges for policymakers. On the domestic front, low labor productivity and high unemployment are critical issues to be dealt with to secure improved future growth prospects. These generally reflect the need throughout MENA to redefine the role of the state, linked to the pursuit of increased private sector par- ticipation and financial sector reform. The public sector still plays a dominant role, especially compared with other developing regions. For example, MENA govern- ments spend 9.8 percent of GDP on wages, in contrast to less than 5.0 percent in the OECD countries, Asia, and Latin America (World Bank, 1999). This is intricately linked to the region's high unemployment rate, which makes govemment downsizing especially difficult. MENA governments on the whole have also been under pressure to introduce fiscal reforms and cut public spending programs-including even the Gulf petroleum exporters, which have faced generally weak oil markets since the mid-1980s and made huge outlays tied to the Gulf War. 7 8 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA The policies with regard to integration into the world economy are central to the MENA countries' response to deal with these challenges. The debate about glo- balization is, therefore, of particular interest for the MENA region, especially be- cause it has lagged behind other regions, in part reflecting skepticism about the benefits of integration in both academic and policymakers' circles. Goods trade has expanded as a percentage of national output in real terms (pur- chasing power parity, or PPP) for all regions except MENA between 1986 and 1996 (Table 1.1). However, during this period, MENA's integration declined on the whole: while its level of trade integration ratios were highest or among the highest in 1986, it lost this position by 1996. The same observation applies to capital inflow ratios. In sum, the worldwide trend of increased cross-border trade in goods and capital has bypassed the MENA countries as a group. Examination of individual MENA countries, where data are available, reveals that only a few of the North African countries diverged from the regionwide trends: Tunisia shows an across-the-board improvement in the four integration measures presented in Table 1.1, below. And, while Egypt and Morocco both exhibit deterioration in the private capital flow indi- cators, they were the only other MENA region countries to show improvement in the two merchandise trade integration indicators (Table 1.1). Given these regional and international developments in trade and finance, this chapter aims to (a) present an update and overview of the extent and main character- istics and trends of integration of MENA countries into the world economy; (b) review the terms of the debate about globalization and development and, more spe- cifically, the issues of risks and benefits of financial integration; and (c) present a brief discussion of the implications and lessons for managing MENA's integration into the world economy in the future in light of the experience of other countries.2 Given the terms of the debate, highlighted most recently by the East Asian crisis and its spread, the chapter discusses the issues of trade integration, globalization of pro- duction, and financial integration. MENA and Trade Integration in Global Markets Trends in Trade Integration in MENA A variety of measures of trade integration can be used, and they all lead to the same conclusion: The MENA region as a whole has lagged behind other regions, despite a far stronger level of integration achieved by a limited number of the individual countries. VOLUME OF EXPORTS AND IMPORTS Using a broader measure of trade integration-including nonfactor services trade as a share of GDP, in contrast to using only merchandise trade in Table 1.1-Figure 1.1 shows an increase in openness for all regions since the late 1980s or early 1990s, MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 9 TABLE 1.1. OVERVIEW OF INTEGRATION WITH THE GLOBAL ECONOMY: MENA, CENTRAL EASTERN EUROPEAN, SOUTHERN MEDITERRANEAN, AND EAST ASIAN COUNTRIES Merchandise Merchandise Gross private trade, trade, capitalflows, Gross FDI. %of %ofgoods %of %of GDP PPP GDP PPP GDP PPP GDP PPP 1986 1996 1986 1996 1986 1996 1986 1996 MENA Algeria 17.3 15.0 41.1 66.7 0.8 - 0.0 - Egypt 13.6 14.8 60.9 70.6 4.6 2.5 1.5 0.4 Iran 9.7 9.6 17.1 - 2.0 1.5 0.0 0.0 Jordan 36.8 36.6 123.8 172.4 3.3 4.7 0.4 0.4 Kuwait 54.3 45.8 158.2 132.4 41.1 16.8 1.0 1.7 Libya - - 91.9 - - - - - Morocco 12.6 14.0 66.8 69.3 2.8 1.7 0.0 0.4 Oman 52.9 45.4 136.7 - 10.2 2.5 1.4 0.2 Saudi Arabia 36.2 41.2 110.2 - 14.2 5.5 0.9 1.0 Syria 20.0 19.6 64.5 - 6.1 5.0 0.0 0.2 Tunisia 20.6 30.2 84.6 - 3.8 5.8 0.3 0.6 UAE 83.6 135.7 160.8 - - - - - Central Europe Czech Republic - 46.3 - 187.2 - 10.9 - 1.3 Estonia - 77.4 - 280.4 - 13.7 - 3.2 Hungary 34,5 41.4 126.9 137.1 5.4 14.0 0.0 2.8 Poland 15.9 26.5 50.6 107.2 3.8 9.3 0.0 2.0 Slovenia - 74.0 - 184.5 - 9.5 - 0.8 Southern Mediterranean Greece 21.2 27.9 58.6 50.4 4.3 10.9 0.6 0.8 Portugal 23.2 43.1 106.1 - 4.5 19.0 0.4 1.0 Spain 18.4 36.8 64.8 - 4.6 10.3 1.1 1.9 East Asia Indonesia 10.7 13.6 55.0 69.7 2.0 2.1 0.1 0.8 Korea, Rep. of 33.6 46.7 115.0 118.0 3.5 11.1 0.8 1.1 Malaysia 33,6 70.2 163.5 269.0 2.8 4.6 0.7 2.0 Philippines 8.0 21.3 57.4 98.8 2.3 4.8 0.1 0.8 Thailand 14.7 31.3 85.8 138.2 1.6 5.0 0.2 0.8 By income group Low 7.1 7.9 33.8 56.9 2.0 2.1 0.2 1.0 Middle 12.5 21.8 53.3 81.1 4.0 5.8 0.3 0.9 High 26.5 38.9 70.4 178.8 11.4 19.3 1.6 2.7 Low- and middle-income group by region East Asia and Pacific 9.1 13.0 48.1 127.3 1.7 1.9 0.2 1.0 Europe and Central Asia - 25.5 57.2 79.7 - 9.2 - 0.8 Latin America and Caribbean 7.9 17.3 40.6 61.7 4.6 6.6 0.3 1.1 MENA 19.4 18.9 52.1 78.4 5.0 3.2 0.4 0.4 South Asia 4.9 5.8 22.1 39.2 1.2 0.9 0.0 0.2 Sub-Saharan Africa 15.8 18.9 70.3 102.5 4.8 5.7 0.3 0.4 - Not available. Note: Trade comprises the sum of exports and imports. Source: World Bank, World Development Indicators, 1998c. 1 0 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA except for MENA. In other words, both goods and services trade integration in MENA has deteriorated. After a period of continuous declines in the early 1980s, the MENA region did witness an increase in integration in the mid-1980s, much of which it lost after the Gulf War. The performance by country within the MENA region varies (see Table 1 .A. 1 in the Annex). Largely reflecting the impact of civil strife and/or regional conflict, trade volume ratios for Algeria, Syria, Kuwait, Iran, and Iraq show stark downward trends. Bahrain and Egypt's ratios have also deteriorated markedly. Morocco, Tuni- sia, Saudi Arabia, the UAE, and Jordan have, in contrast, expanded real goods and services trade as a share of national output. Morocco, Tunisia, and Jordan have reaped these gains in large part as a result of market reforms introduced in the 1980s and early 1990s. In the case of Saudi Arabia, expansion of trade integration stems in part from significantly increased petroleum export volumes following the sanctions imposed on Iraq in 1990. The UAE's growth in integration are due to its greatly expanded port and free trade zone activity. FIGURE 1.1. TOTAL TRADE INTEGRATION: VOLUME OF GOODS AND NONFACTOR SERVICE TRADE RATIO TO GDP 65 60 55 50 45 40 35 30 25 20 oo, 15 70 72 74 76 78 80 82 84 86 88 90 92 94 96 East Asia & Pacific South Asia - - - - Sub-Saharan Africa Europe and Central Asia Latin America Middle East & North Africa* *Excludes Libya, Lebanon, and Qatar. Source: World Bank. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 11 Aside from the 1970s, the MENA region's rate of integration has lagged behind that of most other low- and middle-income country regions (Table 1.2). The largest gap in MENA's relative performance is evident in the 1990s, when most other de- veloping regions witnessed a surge in trade integration. The only countries mark- edly boosting the regional rate of trade integration over 1990-95 are Morocco, Jordan, Saudi Arabia, the UAE, and Yemen. A similar pattern is evident when the speed of export integration as a share of national output is considered (Table 1.3). Algeria, Morocco, and Yemen also show robust export integration growth in the early 1990s. However, in 1996 and/or 1997 the trend reversed and became negative in Morocco, Tunisia, Egypt, Jordan, and Yemen. EXPORTS In real terms, MENA's goods and services exports as a percentage of total world exports have declined since the oil boom period in the 1970s, from 10.5 percent in 1980 to 2.1 percent in 1997 (Table 1.4). The level of MENA exports volumes as a share of total international exports used to place it behind that for Europe and Cen- TABLE 1.2. SPEED OF TOTAL TRADE INTEGRATION, (Percentage change over previous period, negative values underlined) 1975 1980 1985 1990 1995 1996 1997 Volumes Low- and middle-income regions East Asia and Pacific 12.7 28.7 -4.4 10.5 24.0 -1.3 2.1 SouthAsia -11.7 32.1 -7.4 1.0 28.2 0.4 1.8 Sub-Saharan Africa 0.5 2.2 -14.4 -4.7 8.1 5.1 4.3 Europe and Central Asia 8.9 8.6 -7.8 5.4 24.2 7.4 5.1 Latin America -9.4 9.4 -14.2 23.5 41.3 6.1 7.2 MENA' 10.7 4.8 -16.9 3.5 3.6 -1.2 3.1 Algeria 13.6 -17.7 0.3 -18.5 -5.3 -2.2 6.9 Morocco 8.9 -12.8 -6.3 25.6 25.8 -9.7 6.9 Tunisia 14.3 21.3 -16.4 27.7 0.0 -7.6 0.6 Egypt 30.4 -16.5 -21.5 -19.3 -4.3 2.2 -0.4 Jordan 78.2 33.6 23.4 39.6 3.7 8.7 0 9 Syria 48.2 -15.8 -7.9 -17.5 -35.0 4.9 -0.4 Bahrain 55.7 -10.8 7.6 10.5 -15.5 -3.6 -7.1 Saudi Arabia 11.3 -3.1 2.4 48 38.1 0.0 0.0 Kuwait 3.4 28.9 -1.3 -38.7 -11.7 5.9 5.2 UAE 7.2 -5.5 -16.2 34.4 9.6 3.1 10.2 Oman 16.8 9.4 -22.2 4.2 -13.1 1.0 4.1 Iran 13.8 -56.1 -4.8 26.1 -35.9 -2.3 -0.2 Iraq 1.9 -5.9 -10.8 4.2 -78.3 8.8 169.4 Yemen 56.7 37.7 -52.7 23.9 32.5 -2.3 -1.7 a. (Exports + Imports of GNFS)/GDP. b. Excluding Lebanon, Libya. and Qatar. Source: World Bank. 12 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 1.3. SPEED OF EXPORT INTEGRATION, AS A SHARE OF GDP (Percentages, negative values underlined) 1975 1980 1985 1990 1995 1996 1997 Real Low- and middle-income regions EastAsia & Pacific 16.0 16.9 -12.5 26.3 19.9 -1.1 6.8 South Asia 6.5 9.0 -9.0 17.3 44.6 -0.3 3.7 Sub-Saharan Africa -11.0 3.6 -6.9 2.4 5.9 5.4 4.4 Europe and Central Asia 1.1 11.5 9.3 -3.7 24.5 5.6 5.2 Latin America -26.9 2.0 15.7 20.7 28.8 6.7 4.2 MENA total -8.5 -8.9 -35.8 20.9 5.0 -1.4 2.6 Algeria -20.6 -24.6 -1.8 17.2 2.4 5.6 9.8 Morocco -14.0 -5.7 7.1 23.4 25.5 -4.7 5.0 Tunisia 11.4 19.8 -16.1 37.3 4.8 -6.0 -1.0 Egypt 0.7 -3.2 -22.2 21.1 2.5 3.2 -4.2 Jordan 163.5 28.5 33.2 45.4 5.9 6.6 -0.7 Syria -19.1 -36.2 1.5 6.3 -24.0 -0.5 -3.3 Bahrain 13.6 -8.9 13.3 7.1 -13.5 -6.7 -8.5 Saudi Arabia 5.8 -19.1 -34.7 1.0 43.1 0.0 0.0 Kuwait -6.8 -11.9 -19.6 -23.1 -21.3 -5.5 2.0 UAE -17.0 -3.8 -19.3 56.6 1.6 -0.8 8.8 Oman -16.1 19.8 -24.9 10.9 -9.3 -1.0 3.9 Iran -18.3 -77.6 21.8 66.9 -20.6 -5.0 0.1 Iraq -20.6 -14.6 -31.7 18.0 -80.3 7.9 168.1 Yemen 161.9 30.1 -36.6 368.5 63.6 -4.9 -4.0 Source: World Bank. tral Asia in the 1970s, but by the mid- 1980s, it came to be outranked by Latin America and East Asia and the Pacific as well. MENA's goods and services imports as a share of total world imports have also fallen, dropping to 1.9 percent in 1997, less than a third of the 6.9 percent share in 1980. Import volumes as a share of total world imports from East Asia and the Pacific have grown to outstrip those of MENA, and those of Latin America, Europe and Central Asia have remained above the MENA region's level, in both real and nominal terms. Despite the Maghreb countries' dependence on EU export markets, the region's exports to the EU as a share of total world merchandise exports to the EU have dropped markedly since the early 1980s, from 10.6 percent in 1980 to 2.3 percent in 1995 (Table 1.4). Over the same period, MENA has come to represent a smaller export market for the EU, although the decline has not been as sharp. The decline in importance of MENA's exports compared with other regions is strikingly evident when comparing real GNFS exports as a share of GDP (Figure 1.2). The MENA countries had the highest export volumes as a share of GDP through- out the 1970s, despite a consistent decline in the ratio during the period. In the 1980s, due to an acceleration of the drop in the ratio, MENA's share fell below that of Sub-Saharan Africa. Despite a resumption of export growth in the mid-1980s, MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 13 TABLE 1.4. SHARE IN WORLD EXPORTS AND IMPORTS, 1970-97 (Percentages, nominal unless otherwise noted) 1970 1975 1980 1985 1990 1995 1996 1997 MENA 's share of intraregional goods trade 5.6 4.2 4.0 6.0 9.2 8.1 7.3 7.2 Share in total world exports, GNFS Current prices East Asia and Pacific 2.1 2.4 3.1 3.8 3.8 6.4 6.6 7.0 SouthAsia 1.0 0.8 0.7 0.9 0.8 1.0 1.0 1.1 Sub-Saharan Africa 3.2 2.7 3.5 2.3 1.8 1.3 1.4 1.4 MENA' 2.8 7.0 8.5 4.3 3.3 2.3 2.2 2.2 Europe and Central Asia 13.1 14.9 6.4 6.4 4.3 3.6 3.8 3.8 Latin America 4.5 4.0 4.6 5.2 4.0 4.3 4.6 5.0 Constant prices East Asia and Pacific 2.3 3.2 3.8 4.1 4.0 5.9 6.3 6.6 South Asia 1.1 1.0 0.9 0.9 0.8 0.9 1.0 1.0 Sub-Saharan Africa 3.6 3.6 4.3 2.4 1.9 1.2 1.3 1.3 MENA' 3.1 9.2 10.5 4.7 3.4 2.1 2.1 2.1 Europe and Central Asia 14.7 19.4 8.0 6.9 4.5 3.3 3.6 3.6 Latin America 5.0 5.2 5.7 5.7 4.1 4.0 4.4 4.7 Share in total world imports, GNFS Current prices East Asia and Pacific 2.2 2.5 2.8 4.3 3.7 6.7 6.7 6.5 South Asia 1.4 1.0 1.2 1.4 1.1 1.3 1.3 1.4 Sub-Saharan Africa 3.5 3.2 3.1 2.1 1.7 1.5 1.4 1.4 MENAa 2.2 5.0 5.6 5.0 3.2 2.1 2.0 2.0 Europe and Central Asia 13.8 17.6 6.6 6.1 4.7 4.3 4.7 4.8 Latin America 4.7 4.7 5.0 3.7 3.4 4.4 4.7 5.3 Constant prices East Asia and Pacific 2.4 3.2 3.5 4.7 3.8 6.1 6.4 6.2 South Asia 1.5 1.3 1.5 1.6 1.2 1.2 1.3 1.4 Sub-Saharan Africa 3.7 4.2 3.8 2.3 1.8 1.3 1.4 1.4 MENA' 2.4 6.6 6.9 5.5 3.3 1.9 1.9 1.9 Europe and Central Asia 14.9 23.1 8.1 6.8 4.9 4.0 4.5 4.6 Latin America 5.1 6.2 6.1 4.1 3.5 4.1 4.5 5.0 Memo items MENA's share in total world goodsXto the EU 4.5 7.9 10.6 6.3 3.5 2.3 2.5 2.7 MENA's share in total world goods M from the EU 2.7 6.6 6.7 6.2 3.5 3.2 3.3 3.8 a. Excludes Kuwait, the UAE, Lebanon, Libya, and Qatar. Source: IMF, Direction of Trade; World Bank. MENA was overtaken in 1990 by East Asia and the Pacific. While the ratio in- creased during the late 1980s, the rate of increase leveled off and remained flat throughout the 1990s, in contrast to other regions, with the exception of South Asia. (Table 1.A.2 in the Annex presents a breakdown by country.) 14 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA FIGURE 1.2. RATIO OF GNFS EXPORT VOLUMES TO GDP (Percentage shares, real) 40 35 30 25 20 15 10 5 0 1970 1975 1980 1985 1990 1995 1997 MENA - - - - East Asia & Pacific + South Asia ----- Sub-Saharan Africa Europe and Central Asia --- Latin America Source: World Bank. Per capita exports for the region (in real terms) also reveal a pattern of declin- ing integration, indicating a progressive tightening of the external constraint on growth. This translates into a falling standard of living. Decreasing real exports per capita also imply falling import-purchasing power. Declines are sharpest from the early 1970s through the mid-1980s, when real per capita exports declined from $5,238 in 1970 to less than half, at $2,192, in 1985 (Table 1.5). In the decade since 1985, exports per capita have, however, remained fairly stable. Among the countries for which data are available, Jordan is the only one that has expanded strongly and consistently over the last 25-years, increasing more than 10-fold, albeit from an extremely low base of $74 per capita to $1,027 in 1997. Morocco, Tunisia, and Egypt also witnessed a fairly steady increase over the period from 1970 to 1997. However, they reaped more modest gains: Morocco's exports doubled to $300 per capita, and Tunisia and Egypt's tripled to $646 and $150 per capita, respectively. Sharp declines in exports per capita were experienced by Kuwait, the UAE, and Iraq, pulling down the region's aggregate performance. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 15 FUELS AND NONFUELS EXPORTS Clearly, the large geographical grouping of MENA countries masks great variabil- ity among the individual countries due to factors such as size (both geographical and population), role of fuels, and trade policies. It is therefore useful to use the following sub-groupings: Gulf Cooperation Council (GCC) (and Libya)-that is, oil exporters with low population density, Saudi Arabia, the UAE, Kuwait, Bahrain, Oman, and Qatar; oil exporters with large populations-Algeria, Iraq, and Iran; and diversified exporters-Egypt, Jordan, Lebanon, Morocco, Tunisia, Syria, andYemen. With respect to trade profiles, the percentage share of fuel exports as share in total goods and services exports provides one indication of regional diversity (Table 1.6). Not surprisingly, for the GCC, Syria, and Algeria, the bulk of foreign export earnings is composed of fuel exports (Table 1.6). Only a limited number of MENA economies have a significant ratio of nonfuels exports to GDP: Morocco, Tunisia, Egypt, Jordan, Bahrain, and, more recently, Oman.3 Morocco has not increased its ratio of nonfuels to exports significantly since the mid- 1980s, while Egypt made some gains up to the early 1990s, which it lost over the last few years. Oman has experienced a surge in nonfuels exports since the early 1990s, as has Bahrain. Tuni- sia achieved a very rapid increase in nonfuels since the structural adjustment pro- gram in the mid-1980s, but the rate of increase has stagnated since 1994. TABLE 1.5. PER CAPITA EXPORTS AND POPULATION 1970 1975 1980 1985 1990 1995 1996 1997" Per capita exports (Real 1987 US$) MENA, average' 5.238 3.988 3,795 2,192 2,344 2,339 2,299 2,256 Algeria 470 411 376 409 423 391 421 452 Morocco 142 136 151 175 238 286 298 301 Tunisia 196 299 430 390 551 635 629 646 Egypt 66 75 105 102 134 144 153 150 Jordan 74 196 487 641 794 945 1,034 1,027 Syria 164 209 156 155 150 138 140 136 Bahrain 4,570 5,349 8,307 7,269 7,447 7,108 6,605 6,070 Saudi Arabia 4,691 7,254 6,691 2,401 2.491 3,247 3.217 3.197 Kuwait 27,711 17,388 11,674 5,776 4,622 5,142 4,921 4,996 UAE 24,825 15,640 16,039 8,372 10,637 9,546 9,757 9,325 Oman 2,176 2,055 2,367 1,768 2,251 2,564 2,433 2,659 Iran 532 538 82 109 153 121 136 143 Iraq 2,477 2,294 2,475 919 499 49 53 151 Yemen - - - 12 77 89 85 81 - Not available. a. Underlined values are based on estimates for population figures for 1997. b. Excludes Yemen. Sources: IMF, International Financial Statistics; World Bank. 1 6 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 1.6. FUEL AND NONFUEL EXPORTS (Percentage shares of GDP, nominal) 1985 1990 1991 1992 1993 1994 1995 1996 Fuel exports/GDP Algeria 17.1 17.2 24.7 21.7 19.3 19.7 19.6 - Morocco 0.7 0.6 0.4 0.4 0.4 0.3 0.3 0.2 Tunisia 8.2 4.9 4.1 3.9 3.0 2.8 2.6 3.0 Egypt 3.6 1.8 5.4 3.2 3.3 2.6 2.2 2.5 Jordan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Syria 7.4 15.5 - 16.2 - - - - Bahrain 66.7 73.3 64.7 59.8 52.4 42.3 - - Saudi Arabia 29.9 38.3 37.0 37.8 32.6 - - - Kuwait - 34.7 7.9 31.3 41.8 45.4 46.0 - UAE - - - - - - - - Oman - 48.0 41.8 40.3 37.4 36.6 38.4 - Iran Iraq Yemen - - 0.0 - - - 20.8 Nonfuel GNFS exports Algeria 6.5 6.1 4.2 3.1 2.5 4.0 7.8 - Morocco 24.8 25.9 23.7 24.7 26.2 25.1 26.6 24.9 Tunisia 23.9 38.6 36.3 35.6 37.5 42.1 42.1 39.3 Egypt 16.3 18.3 22.4 25.8 24.4 20.3 22.1 18.1 Jordan 38.7 61.9 59.5 52.1 51.6 49.8 52.4 - Syria 4.9 12.3 - 2.9 - - - - Bahrain 35.0 48.6 50.0 51.8 52.2 62.8 - - Saudi Arabia 6.1 7.9 7.6 7.3 7.8 - - - Kuwait - 10.2 9.0 9.1 6.0 5.7 8.8 - UAE - - - - - - - - Oman - 4.7 6.5 9.3 11.0 12.8 14.2 - Iran - - - - - - - - Iraq - - - - - - - - Yemen - - 14.2 - - - 4.1 - Total GNFS exports East Asia and Pacific 17.0 23.7 25.2 25.7 25.0 28.9 28.7 27.1 South Asia 7.1 9.0 10.8 11.6 12.5 12.4 13.6 13.8 Sub-Saharan Africa 26.2 27.7 26.3 26.7 26.4 28.0 28.2 28.8 MENA' 20.7 30.2 30.0 29.6 29.2 30.7 29.5 29.3 Europe and Central Asia 17.8 14.4 13.0 28.9 20.0 17.8 17.2 16.1 LatinAmerica 16.6 15.0 14.8 14.5 13.9 13.8 15.5 16.3 - Not available. a. Excludes Kuwait, the UAE, Libya, and Qatar. Source: World Bank. SERVICES: THE CASE OF TOURISM Tourism revenues represent a large component of foreign exchange receipts for a number of MENA countries, especially the North African countries of Egypt, Mo- rocco, and Tunisia, as well as Jordan and Syria. As a share of total exports, there has MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 17 been a striking expansion of tourism exports share in total exports in Egypt, from 12.9 percent in 1980 to 21.0 percent in 1996, and in Syria, from 6.3 percent in 1980 to 24.1 percent in 1996 (Table 1.7). Compared with other low- and middle-income regions, MENA tourism revenues as a percentage of total GNFS are comparable or high at 8.2 percent in 1996. However, as a percentage of total world tourism, the region only captures a marginal share of 2.6 percent in 1996, down significantly from 4.2 percent in 1980. In contrast, as a group, low- and middle-income countries were able to increase their share of total world tourism receipts from 22.2 percent to 26.8 percent, at the expense of high-income countries. This reflects the strong growth of tourism in East Asia and the Pacific and Europe and Central Asia, which offsets declines in world market shares in Latin America and the Caribbean, MENA, South Asia, and Sub-Saharan Africa. INTRAREGIONAL TRADE Another important feature of the MENA region's global trade integration is the fact that export and import product profiles are similar-that is, intraregional demand for MENA goods and services is generally weak. The predominance of primary goods in the product mix also constrains the intraregional market potential. As a result, there is little opportunity for intraindustry trade growth, which is more gen- erally associated with trade in manufactured goods. Intraregional trade as a share of the region's total trade first declined and then expanded during the 1970s and 1980s. The pattern was repeated in the late 1980s, peaking in the early 1990s, and then deteriorating again through 1997 (Figure 1.3). MENA's low level of intraregional integration (even within subre- gions such as the Maghreb and the Gulf) makes the countries more dependent on extraregional trading partners and correspondingly constrains their export mar- ket diversity. For example, the Maghreb's export dependence on EU markets is immense: In 1997, exports to the EU as a percentage of total merchandise ex- ports were close to 60 percent for Algeria, 70 percent for Morocco, and as much as 80 percent for Tunisia. In contrast, exports to one another are marginal and came to less than 5 percent. Trade Policy and Liberalization in MENA PAST AND PRESENT Over the period from the mid-1960s through the mid-to-late 1980s, MENA coun- tries as a group implemented some of the most restrictive trade regimes in the devel- oping world. Import substitution industrialization was pursued throughout the region. While varying in degree and form from country to country, these policies include(d) an extensive and complex system of import controls, tariff rates, and exchange con- trols. Additionally, MENA governments also put in place comprehensive systems to support domestic import-substituting industries, including investment, credit, prices, and trade support programs. 18 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 1.7. INTERNATIONAL TOURISM RECEIPTS $ (millions) Export, % World receipts, % 1980 1996 1980 1996 1980 1996 MENA Algeria 115 16 0.8 0.1 0.1 0.0 Egypt 808 3,200 12.9 21.0 0.8 0.8 Iran 54 165 0.4 0.8 0.1 0.0 Iraq 170 13 - - 0.2 0.0 Jordan 431 744 36.5 20.3 0.4 0.2 Kuwait 377 109 1.7 0.7 0.4 0.0 Libya 10 6 0.0 - 0.0 0.0 Morocco 397 1,381 12.3 14.9 0.4 0.3 Oman - 99 - 1.3 - 0.0 Qatar - - - - - - Saudi Arabia 1,344 1,308 1.3 2.2 1.3 0.3 Syria 156 1,478 6.3 24.1 0.2 0.4 Tunisia 601 1,436 18.4 17.6 0.6 0.3 UAE - - - - - Yemen 24 42 - 1.7 0.0 0.0 World 101,016 421,783 4.6 6.4 100.0 100.0 Low-income 3,055 16.722 3.5 5.4 3.0 4.0 Middle-income 19,388 96,400 4.7 8.8 19.2 22.9 Low- and middle- income 22,443 113,122 4.5 8.0 22.2 26.8 East Asia and Pacific 2,480 32,450 5.1 7.3 2.5 7.7 Europe and Central Asia 1,358 32,820 4.0 10.2 1.3 7.8 Latin America and Caribbean 11,262 27,993 9.2 8.1 11.1 6.6 MENA 4,260 10,903 2.3 8.2 4.2 2.6 South Asia 1,485 3,774 8.5 5.8 1.5 0.9 Sub-Saharan Africa 1,598 5,182 1.9 5.4 1.6 1.2 High-income 78,573 308,661 4.6 5.9 77.8 73.2 - Not available. Source: World Bank, World Developtnent Indicators. 1998. Beginning in the mid-1980s, a few countries (Jordan, Algeria, Morocco, Tuni- sia, and Egypt) began to pursue extensive economic reform programs. Trade reform measures, including a general dismantling of quantitative import controls, cuts in tariff levels, streamlining of tariff systems, and current account convertibility, were introduced. Policies to promote nonoil and nonmineral exports were also imple- mented. In most of these countries where reforms were introduced, the impetus for change came in response to major balance-of-payments difficulties. Overall, greater progress was made in liberalizing quantitative restrictions than in reducing tariffs, due largely to the continued reliance on international trade taxes as a source of budgetary revenue. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 19 FIGURE 1.3. MENA'S INTRAREGIONAL TRADE: SHARE OF EXPORTS (Percentages) 10 9 8 7 6 5 4 3 2 1~ ~ ~ ~~i 0 1970 1975 1980 1985 1990 1995 1996 1997 Source: IMF, Direction of Trade. Despite these advances in trade liberalization in some countries, MENA econo- mies remain relatively closed on the whole, with high average tariffs compared with the other developing countries (Table 1.8). If average tariff and paratariff levels are compared with other countries', only a few MENA countries-Bahrain, Oman, and Saudi Arabia (all GCC members)-have levels below 15 percent, for example, while most are close to or above 30 percent. Quantitative restriction (QR) ratios are also very high compared with those in other regions. Again, only in the three GCC states are QR ratios comparably low, less than 5 percent. Despite the fact that some GCC countries have more open trade regimes than other countries in MENA, they have heavy protection of import-substituting activities. Moreover, trade institutions, such as customs, financial services, and export promotion, function far less well in MENA than in more integrated economies (for example, East Asia), creating further deter- rents to trade expansion. Where data are available, weighted average tariffs rates in all MENA countries are more than double the international average, and are either higher or just below 20 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 1.8. COMPARISON OF TRADE POLICY INDICATORS FOR SELECTED COUN- TRIES Average Average tariff + QR tariff' paratariffa coverage ratios' Country MENA Algeria 22.9 24.9 9.5 Bahrain 7.1 7.1 1.5 Egypt 33.5 33.5 45.2 Iran 20.7 100.9 99.3 Jordan 13.8 28.0 12.9 Kuwait - - - Libya 18.3 34.7 10.3 Morocco' 23.5 36.1 27.6 Oman 2.9 2.9 3.6 Qatar Saudi Arabia 12.1 12.1 3.9 Syria 14.8 27.5 36.6 Tunisia 27.5 30.6 32.7 UAE n.a. n.a. n.a. Other selected countries Colombia 11.8 11.8 1.7 Costa Rica 21.1 61.7 0.8 Korea, Rep. of 11.1 12.3 2.6 Singapore 0.4 0.4 0.3 Sri Lanka 26.1 29.2 3.8 - Not available. a. Data are unweighted averages for most recent year available in the early 1990s. b. Unweighted averages for number of items covered by quantitative restrictions (QR) for most recent year in the 1990s. c. For the late 1980s. Source: World Bank. the average for developing countries (Table 1.9). Effective import duties tend to be lower in the GCC countries, ranging from less than 0.1 percent in the UAE to 5.8 percent in Bahrain, with the exception of Saudi Arabia, where they are estimated at 10 percent. Aside from rates of 8 percent in Yemen and Jordan, among the MENA countries, diversified exporters' effective import duty rates range from 11.3 percent in Lebanon to 20 percent in Syria. Trade taxes in the region represent from 2.8-8.1 percent of GDP in more diversified MENA exporters, and from 0.4-4.2 percent of GDP for MENA oil exporters. PROSPECTS: FREE TRADE AGREEMENTS WITH THE EU AND WORLD TRADE ORGANIZATION MEMBERSHIP Jordan, Tunisia, and Morocco recently signed Euro-Mediterranean Free Trade Agreements (FTAs). Egypt, Lebanon, and Algeria are in the process of negotia- MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 21 TABLE 1.9. TRADE TAXES IN MENA COUNTRIES Weighted average tariff Effective import Trade taxes as % Country/region (as of March 1996) (%) duties' (%) of GDP (1994) GCC Bahrain - 5.8 2.8 Kuwait - 3.8 0.9 Oman - 2.7 1.0 Qatar - - 0.8 Saudi Arabia - 10.0 0.4 Other oil exporters Algeria 21.6' 15.1 3.2 Iran - 4.0 1.0 Libya - 8.9 4.2 Diversified exporters Egypt 28.0 17.3 4.2 Jordan 19.8 8.2 8.1 Lebanon 24.2 11.3 5.2 Morocco 20.3 16.2 4.4 Syria 17.2 20.1 3.0 Tunisia 31.7 17.4 7.6 Yemen 8.0 2.8 Developing countries All developing countries 21.4 - East Asia and Pacific 21.3 - Latin America 14.1 - South Asia 47.1 - Central Europe 9.1 - Sub-Saharan Africa 14.8 - Memo World 8.2 - - Not available. Note: East Asia: Indonesia, Korea, Macao, Malaysia, Philippines, Thailand. Latin America: Argentina, Brazil. Chile, Colombia, Jamaica, Mexico, Peru, El Salvador, Uruguay, Venezuela. South Asia: India, Sri Lanka. Central Europe: Czech and Slovak Republics. Hungary, Poland, Romania. Sub-Saharan Africa: Senegal. Zimbabwe. a. Import taxes as a percentage of value of total imports. b. 1992. Source: Alonso-Gamo, Fennell, and Sakr 1997. Tables 6, 8. tions. These bilateral FTAs with the EU will serve as one of the main forces driv- ing trade liberalization in the MENA region in the coming 15 to 20 years, as well as influence economic performance. Additionally, they have stimulated regional integration, evidenced by the recent Arab Free Trade Area Agreement negotiated within the Arab League. While the EU FTAs entail significant opening, the pace of liberalization is slow. EU FTAs with the MENA countries do not envisage even- tual accession to the EU. The most significant feature of the EU FTA agreements is the implied unilat- eral liberalization and opening to imports of manufactured products. The Euro-Med 22 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA agreements include the following shared objectives: (a) progressive elimination of all tariffs on industrial goods, over 12 years; (b) gradual and limited trade liberaliza- tion for agricultural products; (c) measures to liberalize services and rights of estab- lishment; and (d) adoption of a wide range of trade-related EU regulationsthat is, harmonization of rules and regulations to facilitate trade, especially in the areas of competition policy and intellectual property rights. Additionally, the agreements open further liberalization prospects with planned negotiations on agriculture and services.4 This is important in that, while these EU-FTAs are expected to improve growth prospects as they are implemented, competition to export to the EU is in- creasing, especially by the Central and Eastern European EU applicant countries (or CEECs), but also by now more price-competitive East Asian exporters. Another factor advancing trade liberalization in a number of MENA countries is GATT/WTO membership. As of the end of 1997, Bahrain, Egypt, Kuwait, Mo- rocco, Qatar, Tunisia, and the UAE were members of the WTO. Algeria, Jordan, Oman, and Saudi Arabia have all applied to join, and currently have observer status. Jordan's accession negotiations were completed at the end of 1999. Benefits, Costs, Risks, and Challenges While the path to greater trade integration may be paved with a number of hurdles in the MENA countries, benefits are potentially as large as the scope for liberaliza- tion, in part because of the high initial level of protection. Prospects are promising, given the EU agreements and forthcoming WTO negotiations. In the wake of the recent financial crisis in East Asia, the challenge may have become greater, but- given the associated drop in import demand from East Asia and consequent decline in world trade-introduction of reforms has become more of an imperative. BENEFITS Evidence indicates that implementation of more rapid trade liberalization paves the way for better economic performance. This has been the experience of the MENA reformers, Jordan, Morocco, and Tunisia, which were able to not only increase their integration with the rest of the world, but also to achieve higher rates of GDP growth compared with other MENA countries. The extent and speed of liberalization that other countries in the region will implement, however, may vary because of coun- try-specific circumstances. Strength and resistance by protected industries, other policy objectives (for example, raising fiscal revenue through trade taxes), and ad- ministrative and institutional inefficiencies are some factors that could hinder the pace of reforms. Conflicts between policy reform and stabilization goals, including social adjustment costs, could slow the process of liberalization. Low or negative economic growth could also reduce popular support for reforms. Estimates of static benefits from greater trade openness due to improved re- source allocation generally show only modest gains in welfare. Empirical evidence has, however, shown significant GDP growth gains, which indicate the presence of significant dynamic effects.5 In a recent study of these dynamic gains, Wacziarg MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 23 (1998) calculates that a one standard deviation increase in an index of trade policy openness is associated with a 0.9 percentage point higher per capita GDP growth. This effect of trade policy openness on growth can be separated into a number of different channels, one of which is the impact on investment (Figure 1.4). Indeed, about half of the positive effect of trade policy openness on growth is due to its effect on the investment rate. Other channels include improvements in macroeco- nomic policies induced by greater openness and increased technology transfer. Spe- cifically, gross domestic investment (GDI) accounts for 0.42 percentage point of the overall effect, followed by a 0.23 percentage point-induced improvement in macro- economic policy quality, with FDI accounting for a 0.12 percentage point increase in per capita GDP growth. Other benefits associated with trade liberalization include the reduction of risks and vulnerabilities of export revenues, which the region experiences as a result of the high concentration of exports in hydrocarbons and other primary goods. Strikingly, over the extended period from 1970 through 1993, the purchasing power of MENA's exports6 has been twice as volatile as that for other developing regions, and nearly four times that of industrial countries (Figure 1.5). Of course, the vola- tility in export earnings among the region's countries varies widely. Instability for FIGURE 1.4. EFFECT ON PER CAPITA GDP GROWTH OF ONE STANDARD DEVIATION INCREASE IN TRADE POLICY OPENNESS INDEX (Percentage points) Tech transfer- manufactured Tech transfer-FDI Government size Black market premium Macro policy improvements Factor accumulation-GDI 0 0.1 0.2 0.3 0.4 0.5 Source: World Bank 1997a. 24 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA the oil exporters exceeds that of the non-oil-exporting group by a factor of three, and, in general, the closer a country's links are to the fuel exporters, the higher the variability in revenues tends to be. In contrast, more diversified economies (for example, Morocco) tend to display a more stable pattern in export earnings (Fig- ure 1.6). It should also be noted that, in general, trade liberalization can yield important net social gains. It can play a significant role in poverty reduction by raising returns to unskilled labor (where it is the relatively abundant factor of production) and, as already noted, by contributing to faster overall growth. ADJUSTMENT COSTS Although over the medium and long term, trade liberalization is beneficial, it in- volves short- and medium-term adjustment costs. The benefits are a large multiple of the costs. These costs are associated with losses incurred by resources idled as a consequence of the introduction of trade reforms. Sectors protected by tariffs, quo- tas, and other governmental interventions are the most vulnerable, as firms will likely face lower production and downsizing, including employee layoffs. The un- employed workers may not be readily absorbed in other expanding sectors of the economy, in turn also reducing aggregate demand. Correspondingly, other workers and entrepreneurs (especially those employed in the tradables sectors) will benefit. Until other sectors benefit enough from the introduced trade reforms and associated efficiency gains, such that their expansion outweighs the decline in the formerly protected sectors, output will fall. Various studies have shown that the implementation of the Uruguay Round agreements would imply net losses to the MENA region in the medium term. They result from higher food prices and the dismantling of the multifiber agreement (and the resulting loss of preferences). The implementation of the EU FTA agreements will also result in adjustment costs, in terms of temporary unemployment, due to intersectoral shifts of resources.' There may also be a temporary negative effect on investment because of increased uncertainty, particularly in view of the length and timing of the lifting of trade restrictions. CHALLENGES Greater trade integration is key to overcoming the MENA countries' many chal- lenges to achieving better growth performance and improved standards of living and poverty reduction, and to achieving a significantly faster rate of employment growth. It should also help improve performance in terms of productivity growth, faster capital accumulation, and greater diversification of output and exports, in all of which MENA has lagged behind other regions. But the challenges of greater trade integration alone are significant. Given its characteristics and endowments, the MENA region occupies an in- termediate place on the ladder of comparative advantage and is being squeezed from above and below. On the one hand, the more advanced developing countries MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 25 FIGURE 1.5. VOLATILITY OF PURCHASING POWER OF EXPORTS, 1970-93: RATIO OF REGION STANDARD ERROR TO ALL LMICs Ratio All LMICs= 1.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0 MENA E. Europe/ Africa All Latin East OECD South FSU LMICs America Asia Asia FIGURE 1.6. VOLATILITY OF PURCHASING POWER OF EXPORTS, 1970-93: STANDARD ERROR IN PERCENTAGE POINTS Nonoil exporters Morocco Oman Tunisia Egypt Syria Jordan Bahrain Yemen Algeria Iran Oil exporters Kuwait Saudi Arabia 0 10 20 30 40 50 60 70 80 Note: The measure of volatility used is the standard error (in percent) of a time trend regression of the purchasing power of exports covering the period 1970-93. Source: Development Economic Prospects Group. 26 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA (such as in East Asia) have gone upscale in their production structure toward more skilled and capital-intensive activities. On the other hand, large and unskilled, la- bor-abundant countries (China, India, Bangladesh) are integrating fast into the world economy, putting strong pressure on countries (such as Egypt, Tunisia, and Mo- rocco), which have specialized in low-skills intensive manufactures. The Central European countries, which are closer to MENA in terms of endowments and geo- graphically closer to its main trading partner (the EU), are on track for accession to the EU and to gain a competitive edge. The MENA countries have to quickly posi- tion themselves in this context, so as not to be squeezed out of international mar- kets, particularly the EU. The management of increased and faster trade integration in the MENA region calls for * Recognizing and dealing with the adjustment costs of the transition to a more liberalized trading system: retraining programs, measures to facili- tate restructuring of companies (labor severance, financial restructuring), government support of technology acquisition, and improved quality con- trol processes. * Addressing the trade diversion effects that may result from the EU FTA agreements. This requires trade liberalization with the rest of the world, and particularly within the region, in step with that of the EU. - For countries already advanced on the path of reform, deepening of re- forms that help reduce the adjustment costs and maximize the long-term benefits: public administration, legal infrastructure, labor markets, state- owned enterprises, domestic competition, and financial markets. - For countries still at the beginning of their reform programs, implementa- tion of aggressive liberalization and opening. - Improved and more efficient educational and vocational training systems to enhance labor market responsiveness, that is, to create a labor force with more appropriate skills, improved ability to innovate, and increased capac- ity to adjust to change. * Significant improvements in infrastructure (transport and communications networks) and liberalization of services related to international trade (trans- port, insurance, cross-border services), to reduce transaction costs. * Institutional development and policies for acquisition, adaptation, and dis- semination of technology. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 27 MENA and the Globalization of Production Globalization of production has expanded rapidly over the last two to three decades, driven by a number of factors: the liberalization of trade and investment policies, privatization, the rapid fall in transport and comrnmunications costs, and the growing importance of knowledge and other intangible assets in world production. An increasing share of world output is generated by cross-border production by multinational affili- ates. It is estimated that, in 1990, about 22.0 percent of world GDP was produced by multinationals at home and abroad. The share of value added by multinationals abroad was 6.4 percent of world GDP in 1990 (up from 4.5 percent in 1970), which increased to 7.5 percent in 1995. This share is much higher when only manufacturing industry is considered: it increased from 11.5 percent in 1977 to 17.5 percent in 1992. This trend of expanding global production networks has contributed to increased integration of the developing economies and expands opportunities for developing countries to partici- pate in international specialization. The share of production of affiliates of multinationals in developing country GDP increased from 4.4 percent in 1982 to 6.3 percent in 1995, close to the international average.' FDI flows accounted for about 5-6 percent of aggregate investment in devel- oping countries in the 1990s, significantly above the 1-2 percent share of the previous 15 years (World Bank 1997a) (Table 1.10). TABLE 1.10. NET FDI FLOWS TO THREE GROUPS OF COUNTRIES (Percentage of GDP) Standard Country 1993 1994 1995 1996 1997(e) Mean deviation MENA Egypt 1.05 2.35 0.84 0.94 1.21 1.28 0.61 Jordan 0.36 0.43 0.61 0.81 1.12 0.67 0.31 Morocco 1.75 1.74 0.84 0.77 3.51 1.72 1.10 Tunisia 3.85 2.73 1.50 1.30 1.35 2.14 1.12 Central Europe Czech Rep. 1.80 2.10 5.70 2.50 2.30 2.90 1.60 Estonia 4.00 5.50 4.50 2.50 6.10 4.50 1.40 Hungary 6.10 2.60 10.00 4.40 6.60 5.90 2.80 Poland 0.70 0.60 1.00 2.00 2.10 1.30 0.70 Slovenia 0.90 0.90 0.90 1.00 1.60 1.10 0.30 East Asia Indonesia 1.00 0.90 1.90 3.00 1.50 1.70 0.90 Korea, Rep. of -0.20 -0.50 -0.40 -0.40 -0.60 -0.40 0.10 Malaysia 8.00 6.10 4.90 5.40 5.90 6.10 1.20 Philippines 1.60 2.00 1.50 1.70 1.40 1.60 0.20 Thailand 1.30 0.60 0.70 0.80 1.50 1.00 0.40 Note: 1997(e): estimate. Sources: World Bank staff, from IMF, Balance of Payments; World Bank, Global Development Finance. 28 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA FDI Benefits and Risks The benefits from FDI and participation in global production networks are large. They are partly related to the complementarity between trade and FDI. The overseas produc- tion of multinationals is increasingly oriented toward exports rather than domestic mar- kets in the host countries.9 Intrafirm trade as a percentage share of total trade has been increasing. Open trade economies tend to attract more FDI, and the benefits from FDI tend also to be larger with a more open trade regime.'° Unlike other forms of financial flows, the risks associated with FDI are low, since they are less volatile and not subject to quick reversals. Developing countries, therefore, stand to gain from FDI, and policies should be geared to promote this type of financial integration. BENEFITS Access to FDI flows allows countries to benefit more quickly and effectively from improved investment opportunities, such as new natural resource discoveries or major structural policy reforms. The evidence suggests that FDI tends to "crowd in" more domestic investment: a dollar of FDI in developing countries is associated with a $0.50-$1.30 of additional domestic investment, that is, faster capital accumulation and aggregate growth. Additional indirect benefits accrue from spillover effects, such as labor market spillovers (through improved skills), market access and dem- onstration effects, and supplier spillovers, among others. While it is difficult to es- tablish causality, increased FDI flows are generally associated with faster aggregate long-run growth (and total factor productivity growth), with each percentage in- crease in the FDI to GDP ratio associated with a 0.3-0.4 percentage point faster per capita GDP growth." However, the increase in GNP would be smaller when repa- triation of profits is taken into account. RISKS AND VOLATILITY FDI inflows to developing countries are relatively stable and have been rising on the whole, during periods of both crisis and noncrisis in the developing world. This contrasts with non-FDI private net inflows, which show far greater volatility with sudden reversals (Figure 1.7). This general characteristic of persistence is even more strongly and clearly evident in specific country episodes (Figures 1.8, 1.9, and 1.10). For Argentina, Mexico, and Hungary, FDI flows have proven to be much less vola- tile than non-FDI flows (portfolio or other flows). Among non-FDI flows, the be- havior of portfolio equity flows most closely resembles that of FDI, but is more volatile. Debt portfolio flows have been far more volatile compared to FDI and magnify the amplitude of boom-bust cycles. The low volatility and associated lower risks of reversal of FDI capital inflows is also seen in Figure 1.11 (see Table 1 .A.3 in the Annex), which presents data on a number of MENA countries, as well as selected Central European and East Asian countries for the 1993-97 period. The standard deviation for FDI flows (as percent of GDP) and (the absolute value of the) coefficient of variation over this period is much lower (by a large multiple) for FDI flows. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 29 FIGURES 1.7 -1.10. NET PRIVATE CAPITAL FLOWS TO DEVELOPING COUNTRIES Figure 1.7. All Developing Countries (1975-96, Percentage share of GDP) 4.0 3.5 Total 3.0 2.5 2.0 / 1.5 1.0 0.5 ,- FDIl Non-FDI 0.0 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 Note: Weighted average. Source: WDI. Figure 1.8. Argentina (US$ millions) 30000 25000 Pbrtfolio debt 20000 15000 \ 10000 \ 5000 7 ...,- .... . .O.....4 P Portfolio equity 0 -5000 0 0 Non-FDI -10,000 1990 1991 1992 1993 1994 1995 1996 Source: IMF, World Bank. 30 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Figure 1.9. Mexico (US$ millions) 25,000 20,000 15,000 FDI 10,000 a- 5,000 - - Portiolio O ,7b / \ , equity 0 -5,000 /Portfolio debt -10,000 -15,000 -20,000 Non-FDI -25,000 1990 1991 1992 1993 1994 1995 1996 Source: IMF, World Bank. Figure 1.10. Hungary (US$ millions) 5,000 4,000 Portfolio debt 3,000 N FDI 2,000 1,000 .- t / ~~~~~~Portfolioeut \ -1,000/\ -2,000 Non-FDI -3,000 -4,000 1990 1991 1992 1993 1994 1995 1996 Source: IMF, World Bank. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 31 FIGURE 1.11. COEFFICIENT OF VARIATION FOR FDI AND NON-FDI PRIVATE INFLOWS (Percentage of GDP, 1993-97) 18 16 C FDI * Non-FDI 14 12 10 8 6 4 2 ]1 El A Cl Source: Development Economic Prospects Group, World Bank. FIGURE 1.12. NET FDI FLOWS TO MENA AND OTHER REGIONS (Percentage share of GDP) 2.4 C MENA 1.9 * Total to Developing Countries 1.4 0.9 0.4 -0.1 -0.6 1970-74 1975-79 1980-84 198S-89 1990-94 1995-97 Source: Development Economic Prospects Group, World Bank. 32 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA FDI in MENA Net FDI inflows in the MENA region have been consistently lower than the average for developing countries (as a percentage of GDP) (Figure 1,12; see Table 1.A.4 in the Annex). There was a temporary surge during the second half of the 1980s and first half of the 1990s, but the region lagged behind considerably during 1995-97. The total net inflow was 0.1 percent of GDP, compared with an average of 2.0 per- cent for all developing countries, and was the lowest among all regions. The region has not been a full participant by any measure in the globalization of production trends, and has been missing important opportunities to bolster growth. In terms of attracting FDI, the best-performing countries of the region (Egypt, Jordan, Morocco, and Tunisia) show a mixed experience with respect to the level, variability, and trend of FDI inflows. Their experience is comparable to that of some well-performing countries in East Asia and Central Europe, but much less success- ful than the most "attractive" countries in these regions. FDI has been especially strong in low-skill-intensive activities. Attracting FDI In order to both attract more FDI and reap the potentially very large gains from it, countries of the MENA region need to follow the same policies that have been found to be successful in other countries and regions. These are a openness to trade, which as discussed above has been found conducive to attracting FDI, and also is associated with greater gains from FDI * improved infrastructure in terms of availability and quality * more active privatization * public administration and legal structures, which enhance the rule of law and improve the predictability and enforceability of contracts * improved transparency of corporate activities and corporate governance, and greater development of capital markets. Entry of Foreign Financial Institutions in Domestic Markets A specific type of FDI involves foreign financial institutions that are allowed to enter domestic markets.)2 For this type of FDI, the level of capital inflow is much less important than the introduction of greater competition in domestic banking markets and the associated reduction in domestic bank costs."3 At the same time, entry by internationally active foreign banks-which are also more diversified in terms of their activities-can help strengthen the domestic financial system. Table 1.11 shows that MENA countries vary significantly in terms of extent of foreign bank participation. Gulf oil-producing countries are generally closed to for- MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 33 eign banks, while the more open and diversified economies have a significant for- eign bank presence. The average level of openness, as measured by the share of foreign banks in the total number of banks and in bank assets, is comparable to the average for industrial countries. It is lower, however, than for other developing regions, particularly transition economies. The indicators of performance for MENA banks compare favorably with other developing regions with respect to overhead costs and net margins (which are relatively low), but tend to have lower profits and lower provisioning (in total assets).14 Non-FDI Flows and Financial Integration in MENA Non-FDI Flows in MENA On average, the MENA region has also tended to attract less net non-FDI capital than all developing countries as a group (Figure 1.13; see Table 1 .A.5 in the Annex). In the early 1990s (1990-94), net non-FDI inflows were, on average, negligible. Although they increased sharply in 1995-97 to reach 0.9 percent of GDP, this was still below the 2.0 percent average for developing countries. Non-FDI capital flows involve a variety of financial instruments, and their com- position differs considerably among countries. Portfolio inflows to MENA have TABLE 1.11. SHARE OF FOREIGN BANKS IN DOMESTIC BANKING SYSTEMS (Average period 1988-95) Share in number Share in Total number of banks bank assets of banks' Country/region (%) (%) (1995) Egypt 10 1 9 Jordan 43 95 7 Lebanon 49 57 5 Morocco 33 21 8 Oman 0 0 6 Qatar 0 0 3 Saudi Arabia 34 43 4 Tunisia 39 35 7 Yemen 0 0 3 MENA 26 19 ... Africa 31 27 ... Asia 28 30 ... Latin America 25 28 ... Transitional economies 54 52 ... Industrial economies 25 15 ... ... = Not available. Note: A foreign bank is defined as having at least 50 percent foreign ownership. a. Banks included in the BankScope database of IBCA. Source: Claessens, Demirgurc-Kunt, and Huizinga 1997. 34 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA FIGURE 1.13. NET NON-FDI PRIVATE FLOWS TO MENA AND OTHER REGIONS (Percentage share of GDP) 2.2 El MENA * Total to developing countries 1.7 1.2 0.7 0.2 0 1970-74 1975-79 1980-84 1985-89 1990-94 1995-97 -0.3 Source: Development Economic Prospects Group, World Bank, based on Global Develop- ment Finance. been close to zero until the 1995-97 period, when they reached around $1 billion per year. Commercial bank loans and bonds have been the main instruments used. The diversity of experience across the region in terms of non-FDI (particularly private-to-private) inflows is great (Table 1. 12). Egypt and Jordan had negative net private-to-private non-FDI inflows during 1993-97. Tunisia and Morocco experi- enced significant inflows on average, but at declining levels, and then negative flows in 1997. Portfolio flows were very low for the region as a whole. A comparison with a number of East Asian and Central European countries reveals the limited extent of non-FDI private-to-private inflows in the MENA coun- tries (Table 1.13). Many countries in the other regions experienced large surges in such flows, which have been associated with subsequent financial problems in some cases (including Thailand, Korea, and the Czech Republic). While the MENA region has not attracted large amounts of capital flows, it has been a large exporter of capital looking for higher retums, lower risks, and greater diversification of portfolios. In the future, the reversal of such outflows could help increase net inflows into the region. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 35 TABLE 1.12. NET NON-FDI CAPITAL FLOWSTO SELECTED MENA COUNTRIES, 1993-97 (Percentage of GDP) Standard Indicator Country 1993 1994 1995 1996 1997(e) Mean deviation Total non-FDI Egypt -1.40 -0.10 0.26 -0.05 0.86 -0.09 0.83 flows Jordan 3.77 9.79 5.90 3.94 5.67 5.82 2.43 Morocco 1.25 1.85 1.18 1.41 -2.01 0.74 1.56 Tunisia 5.66 4.11 3.09 3.54 2.32 3.74 1.25 Portfolio Egypt 0.01 0.01 0.03 0.81 1.93 0.56 0.84 investment Jordan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Morocco 0.09 0.78 0.06 0.39 0.00 0.26 0.33 Tunisia 0.12 0.10 0.14 0.74 0.00 0.22 0.29 Other investment Egypt 1.82 -0.60 -0.22 -0.75 -0.46 -0.04 1.06 Jordan -1.66 10.72 11.02 8.87 0.11 5.81 6.10 Morocco 1.18 1.19 -0.75 -0.52 -2.01 -0.18 1.37 Tunisia 4.70 4.50 3.60 2.10 2.27 3.43 1.22 Other investment Egypt 0.68 -1.72 0.37 0.98 0.59 0.18 1.09 (of which by Jordan -4.69 5.73 6.63 2.40 0.00 2.01 4.59 banks) Morocco 0.00 -0.06 -0.36 -0.14 0.00 -0.11 0.15 Tunisia 0.43 1.50 1.08 -1.02 0.68 0.53 0.96 Net errors Egypt -3.24 0.49 0.45 -0.11 -0.61 -0.60 1.54 & omissions Jordan 5.43 -0.93 -5.11 -4.93 5.56 0.00 5.29 Morocco -0.02 -0.13 1.87 1.54 0.00 0.65 0.97 Tunisia 0.84 -0.49 -0.65 0.71 0.05 0.09 0.67 Total Egypt -1.83 1.47 1.38 1.03 2.21 0.85 1.56 private Jordan 3.73 7.46 -2.65 -2.75 1.25 1.41 4.35 flows Morocco 3.10 5.54 3.43 2.78 2.43 3.46 1.22 Tunisia 7.61 5.11 4.10 4.55 2.93 4.86 1.74 Private to Egypt -2.48 1.16 0.97 0.66 1.89 0.44 1.69 private Jordan 1.77 4.46 -5.61 -4.88 -0.77 -1.01 4.30 Morocco 2.70 5.11 3.27 2.22 2.06 3.07 1.23 Tunisia 7.00 4.34 1.33 2.59 1.17 3.28 2.43 Non-FDI Egypt -3.53 -1.19 0.13 -0.27 0.69 -0.84 1.66 private to Jordan 1.41 4.03 -6.22 -5.69 -1.89 -1.67 4.44 private Morocco 0.95 3.37 2.42 1.45 -1.44 1.35 1.82 Tunisia 3.15 1.61 -0.17 1.29 -0.19 1.14 1.39 Note: 1997(e): estimate. The calculations to obtain the data are as follows: Total private-to-private capital flows = total private capital flows - public and publicly guaranteed private creditors. Total private capital flows = total flows - official flows - net use of IMF credit. Total flows = FDI + portfolio investment + other investment + net errors and omissions. Total non-FDI private-to-private capital flows = total private-to-private capital flows - FDI. Sources: World Bank staff, from IMF, Balance of Payments; World Bank, Global Development Finance. 36 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 1.13. NON-FDI NET PRIVATE-TO-PRIVATE CAPITAL FLOWS TO THREE GROUPS OF COUNTRIES, 1993-97 (Percentage of GDP) Standard Country 1993 1994 1995 1996 1997(e) Mean deviation MENA Egypt -3.53 -1.19 0.13 -0.27 0.69 -0.84 1.66 Jordan 1.41 4.03 -6.22 -5.69 -1.89 -1.67 4.44 Morocco 0.95 3.37 2.42 1.45 -1.44 1.35 1.82 Tunisia 3.15 1.61 -0.17 1.29 -0.19 1.14 1.39 Central Europe Czech Rep. 3.9 8.3 9.8 -1.0 1.9 4.6 4.5 Estonia -1.7 -1.7 0.1 8.2 11.6 3.3 6.2 Hungary 6.7 4.7 5.3 -7.3 -2.8 1.3 6.1 Poland -0.2 -1.5 1.2 0.4 0.9 0.2 1.1 Slovenia -1.6 -0.3 0.1 1.4 4.6 0.8 2.4 EastAsia Indonesia -1.5 0.0 1.8 3.43 0.5 0.8 1.9 Korea, Rep. of 1.3 2.5 3.7 5.4 -1.6 2.3 2.6 Malaysia 14.3 -4.5 -1.0 2.1 -8.4 0.5 8.7 Philippines 2.3 4.5 3.4 8.5 0.1 3.8 3.1 Thailand 6.4 7.6 11.2 7.6 -9.1 4.7 7.9 Sources: World Bank staff, from IMF, Balance of Payments; World Bank, Global Developmenr Finance. Benefits, Risks, and Vulnerability15 Theory suggests that there are several potential benefits for developing countries that pursue capital account liberalization.'6 These include increased access to (and lower costs of) capital, faster productivity growth, risk diversification, consumption smoothing, and improved domestic financial intermediation."7 Non-FDI flows are associated with increased domestic investment, but at a lower rate than FDI flows. There is little evidence of a significant positive association between non-FDI inflows, particularly shorter-term and more volatile flows, and productivity growth. The benefits associated with this type of flow are much less certain than for FDI. There is no evidence that countries with fewer capital controls have grown faster. As many developing economies have relatively concentrated exports and economic activity, opening capital accounts allows risk sharing and asset diversification. Here again, there is limited empirical evidence about the significance of these effects. In the face of high income volatility in developing countries, another potential source of welfare improvement from greater capital flows is increased opportuni- ties for consumption smoothing."' If isolated financially, a country that experiences an external shock must accommodate it through changes in consumption and in- vestment. In contrast, if it is well integrated into world financial markets, it can lend MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 37 and borrow and thus maintain consumption and investment closer to desirable lev- els. Potential gains may be larger for developing countries with more income vola- tility. 9 However, the general observation that capital flows tend to be pro-cyclical in developing countries is an indication that actual consumption smoothing may not be significant. More detailed evidence suggests, also, that while capital inflows may have sometimes provided for some consumption smoothing and reduction of vola- tility of consumption relative to that of income, on average they are associated with increased volatility. Increased capital flows can help the development of capital markets and allow more banking system intermediation, both of which have been shown to affect growth positively.20 Additionally, increased international competition en- hances the quality of the financial system. Allowing domestic banks to diversify their portfolios helps reduce their vulnerability to external (terms of trade) and internal output shocks. The Risks Associated with Capital Account Openness Capital account liberalization and capital flows are also associated with increased risks, which are a function of both the risk absorption capacity (or robustness) of the domestic economy and the volatility and changed perceptions it may be subject to. Different classes of internationally traded financial assets vary in their volatility and implications for increased vulnerability to crisis. There are four channels that link financial integration to increased risks of fi- nancial crises: 1. Exogenous factors, such as international interest rates, are an important determinant of capital flows. Independently of their actions and policies, developing countries may witness surges and reversals of capital flows (and crises). Under such conditions, openness to capital flows may be said to increase the risks of currency crises. When there is an upturn in interest rates, international investors are unwilling to continue, and are more likely to decrease, their financing to developing countries. At the same time, the capacity of developing country banks, firms, and governments to service their debt is reduced. 2. The presence of potentially serious international capital market failures can aggravate domestic financial weaknesses and produce contagion ef- fects on others. Models of self-fulfilling expectations of currency crisis imply that the intrinsic instability of the international financial system is a major contributor to currency crises, and, therefore, complete openness of the capital account implies greater risks for developing countries. 3. Capital flows may make macroeconomic management much more diffi- cult and lead to excessive borrowing and macroeconomic instability. 38 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA 4. Capital flows may amplify preexisting weaknesses of the domestic finan- cial system. Domestic financial liberalization may interact with external capital account liberalization and increase the risks of crisis because of the "overborrowing syndrome." With inadequate supervision and the presence of moral hazard, possibly due to government guaranties, unrestricted ac- cess to external finance may result in excessive borrowing and risk taking. There is little direct empirical evidence about the role of either capital account liberalization or capital inflows in financial crises. There is only some indirect evi- dence, such as the association between surges in capital inflows and subsequent occurrence of crises.21 Vulnerability The risks associated with large and rapid increases in capital flows include possible increased vulnerability to sudden shifts in market sentiment and reversals in these flows. Loss of confidence, which may be triggered by any major domestic change or shock, and external shocks in international capital markets or the terms of trade may bring about a sudden reversal of flows and an attack on the currency. A cur- rency crisis could result. If the domestic financial system is fragile, a currency crisis could also be accompanied by a banking crisis, which is the most damaging and costly "twin-type" of crisis. The MENA region has attracted limited volumes of non-FDI flows and has been less exposed to vulnerabilities of the type experienced in East Asia, for ex- ample. Figures 1.14 to 1.17 show a number of the indicators of vulnerability that have been extensively used to assess the risks of crisis in East Asia. The ratio of foreign liabilities to foreign assets, as a proxy for foreign currency exposure, re- mained low for the MENA countries (Figure 1. 15), except for Tunisia, as compared to the very large values observed in Thailand, Malaysia, the Philippines, the Repub- lic of Korea, and Indonesia, as well as the Czech Republic, before the onset of crisis. Also, the ratio of short-term debt to total debt (Figure 1.14), and that of short- term debt to reserves (Figure 1.16), remained low (except for Lebanon, with a very high ratio of short-term to total debt). On the other hand, M2/reserves ratios are high in many MENA countries (Figure 1. 17). Implications for MENA The previous brief discussion and lessons from the East Asia crisis suggest that there are benefits, the size of which is uncertain, from financial integration involving the more volatile type of capital flows; but attendant risks are significant, especially when the domestic financial system is weak. Hence, the particular conditions of de- veloping countries need to be taken into account. The implications are not that devel- oping countries should close their capital account and systematically impose controls on capital flows. Rather, the process and pace of capital account liberalization has to take account of the potential risks. Policies toward capital account openness should MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 39 FIGURE 1.14. RATIO OF SHORT-TERM DEBT TO TOTAL DEBT (1996, e.o.p.) 50 45 40 35 30 25 20 15 510 K C'regtg~~~~S'9 o ˘ s &HRr Source: GDF 1998. FIGURE 1.15. FOREIGN EXCHANGE EXPOSURE: RATIO OF FOREIGN LIABILITIES TO FOREIGN ASSETS OF BANKS (Percentages) 8 7 6 .1993 5 1996 5 4 3 2 C 01 2 -J-]- - | } 1-46 -b- - l - + ' Source: IFS. aim at determining the origin of the distortions that are the source of vulnerability of a given country to a financial crisis and try to address them directly.22 As the empirical evidence shows, the main problem in MENA is its relative unattractiveness to capital flows. Overall, there is no problem of managing capital inflows as experienced by other regions. This suggests that the benefits of financial 40 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA FIGURE 1.16. RATIO OF SHORT-TERM DEBT TO RESERVES (Percentages, 1996, e.o.p.) 200 180 160 140 120 100 80 60 40 200\IIIU 111 Source: GDF 1998, IFS. FIGURE 1.17. M2/RESERVES, 1996 12 10 8- 6 4 Source: IFS. integration may be even higher for MENA countries than for other regions, given the larger volatility the region faces. But the risks are also significant because of the weaknesses of their financial systems and the presence of other traditional vulner- abilities. Despite significant improvements over the last decade, many MENA coun- MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 41 tries still have high debt ratios, relatively large budget deficits (possibly larger than the official numbers show because of contingent liabilities), and a prevalence of implicit and explicit guarantees. MENA countries need to develop policies that allow increased financial inte- gration, but in such a way as to avoid financial crises in the event they face incipient surges in capital inflows (possibly as a reversal of previous outflows). MENA coun- tries need to aim at maximizing the benefits while minimizing the risks of crisis. To this end, recommended steps include: * The crucial issues of domestic financial sector reform need to be addressed. Weaknesses in these systems are prevalent, given low capital adequacy ratios, large nonperforming loans, large role and weight of government, and low capacity for risk management. This implies improving capitaliza- tion, dealing with the nonperforming loan overhang, privatizing banks, and enhancing the human capital capacity in banks. * Resolute domestic financial liberalization programs need to be implemented, but carefully managed with improved and adequate supervision and regu- latory framework. This should include introducing and forcefully enforc- ing prudential regulations on foreign currency exposure by banks, in addition to those on other high-risk activities. * Regulation must be complemented with improved incentives for owners and managers of banks for prudent risk taking. * Corporate governance, transparency, and the capacity for enforcement of contracts need to be improved. This helps to support the domestic financial system and improve the efficiency of resource allocation. * Promotion of capital markets development would help reduce the high debt- to-equity ratios and reduce the vulnerability of the corporate sector. * The process of opening the capital account has to take into consideration the state of development of the domestic financial system. In addition to FDI, trade-related credit should be facilitated and controls phased out. Long- term borrowing, particularly bonds, with improved information and trans- parency of borrowing corporations and banks should be encouraged. However, the process has to be more careful with short-term debt for both banks and firms. * Macropolicy should continue to aim, as is the case generally in MENA, to preserve stability. The appearance of large distortions (such as large foreign-domestic interest differentials and perceptions that underesti- 42 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA mate currency risk), which may encourage excessive borrowing, needs to be avoided. For that purpose, flexibility of exchange rate policy is desirable, especially in a region where inflation has been mostly mod- erate, and the benefits from the exchange rate as an anchor for expecta- tions are low. Notes 1. This chapter was presented at the workshop, Benefiting from Globalization, at the Medi- terranean Development Forum, September 3-5, 1998, Marrakesh, Morocco. We are grateful for research assistance from Carol Gabyzon and Eung Ju Kim. Special thanks to E. Mick Riordan and Himmat Kalsi. The findings, interpretations, and conclusions are the authors' own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its member countries. 2. The chapter draws heavily on work of the World Bank Development Economic Pros- pects Group on these issues, particularly Riordan et al. (1998), World Bank (1998a), and World Bank (1998b). 3. Countries for which data are available. 4. The agreements also cover human rights and social, cultural, and environmental issues. 5. Sachs and Warner 1995; Edwards 1998. 6. Defined as exports of goods and all factor and nonfactor services, adjusted for inflation by the U.S. private consumption deflator. 7. See Nabli (1997) and Galal and Hoekman (1997). 8. World Bank 1997a, chapter 2. 9. The share of exports in sales of U.S. majority-owned foreign affiliates has increased from 20 percent in 1966 to 40 percent in 1993 (World Bank 1997a). 10. World Bank 1997a, chapter 2. 11. World Bank 1997a, chapter 2. 12. This may be part of external financial liberalization, but is not formally part of capital account liberalization. 13. Claessens, Demirgurc-Kunt, and Huizinga 1997. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 43 14. Claessens, Demirgurc-Kunt, and Huizinga 1997. 15. These issues are discussed in detail in World Bank 1998b. 16. World Bank (1997b) discusses these benefits at length. 17. Another benefit that is sometimes cited is that financial openness submits governments to the hard scrutiny of international markets and would restrain any tendencies for misman- agement. 18. Low-income developing countries may also benefit from long-term consumption smooth- ing. They may borrow and increase their consumption now in view of increased future in- come. 19. The precise welfare improvement associated with increased consumption smoothing depends on a number of factors, such as the time preference and the shape of the utility function, as well as assumptions about market structure, country size, and technology. 20. Levine and Zervos 1998. 21. World Bank 1998b. 22. Obstfeld 1998. References Alonso-Gamo, Patricia, Susan Fennell, and Khaled Sakr. 1997. "Adjusting to New Realities: MENA, the Uruguay Round, and the EU-Mediterranean Initiative." IMF Working Paper. Washington, D.C. Claessens, Stijn, Asli Demirgurc-Kunt, and Harry Huizinga.1997. "How Does For- eign Entry Affect the Domestic Banking Market?" World Bank, Washington, D.C., processed. Edwards, Sebastien. 1998. "Openness, Productivity and Growth: What Do We Re- ally Know?" Economic Journal 108 (March):383-98. Galal, Ahmed, and Bernard Hoekrnan, eds. 1997. Regional Partners in Global Mar- kets: Limits and Possibilities of the Euro-Med Agreements. London: CEPR and ECES. Levine, Ross, and Sara Zervos. 1998. "Stock Markets, Banks, and Economic Growth." American Economic Review 88 (June):pp. 537-558. 44 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Nabli, Mustapha K. 1997. "Trade Liberalization in the Maghreb Countries in the Context of the Free Trade Area Agreements with Europe in a Comparative Per- spective." Journal of Economic Cooperation among Islamic Countries 18(4):1-- 22. Obstfeld, Maurice. 1998. "The Global Market: Benefactor or Menace?" Boston: NBER. Working Paper 6559. Riordan, E. Mick, Uri Dadush, Jalal Jalali, Shane Streifel, Milan Brahmbatt, and Kazue Takagashi. 1998. "The World Economy and Its Implications for the Middle East and North Africa, 1995-20 10." In Nemat Shafik, ed., Prospects for Middle Eastern and North African Economies: From Boom to Bust and Back. Economic Research Forum for the Arab Countries, Iran and Turkey. London: Macmillan. Sachs, Jeffrey, and Andrew Warner. 1995. "Economic Reform and the Process of Economic Integration." Brookings Papers on Economic Activity. Vol. 1. Wash- ington: Brookings Institution. Wacziarg, Romain. 1998. "Meauring the Dynamic Gains from Trade." Harvard University, Department of Economcis. Cambridge, Mass., mimeo. World Bank. 1997a. Global Economic Prospects 1997. New York: Oxford Univer- sity Press. . 1997b. Private Capital Flows to Developing Countries: The Road to Fi- nancial Integration. New York: Oxford University Press. . 1998a. "Financial Integration Vulnerabilities to Crisis and EU Accession in Five Central European Countries." Development Prospects Group. Washington, D.C.: World Bank, mimeo. 1 998b. Global Economic Prospects 1998. forthcoming. 1998c. World Development Indicators. Washington, D.C.: World Bank. 1999. World Development Report. Washington, D.C.: World Bank. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 45 Annex TABLE 1 .A.1. GOODS AND SERVICES TRADE INTEGRATION RATIOSa (Percentages) Country/region 1970 1975 1980 1985 1990 1995 1996 1997 Volume ratios East Asia nad Pacific 30.9 34.8 44.8 42.8 47.3 58.7 57.9 59.1 SouthAsia 17.0 15.1 19.9 18.4 18.6 23.9 23.9 24.4 Sub-Saharan Africa 62.5 62.8 64.2 55.0 52.4 56.7 59.5 62.1 Europe and Central Asia 30.1 32.7 35.6 32.8 34.6 42.9 46.1 48.5 Latin America 27.4 24.8 27.1 23.3 28.7 40.6 43.1 46.2 MENAb 48.4 53.5 56.1 46.6 48.3 50.0 49.4 51.0 Algeria 39.0 44.3 36.4 36.6 29.8 28.2 27.6 29.5 Morocco 52.1 56.7 49.4 46.3 58.2 73.2 66.1 70.6 Tunisia 60.8 69.4 84.3 70.4 89.9 90.0 83.1 83.6 Egypt 52.5 68.5 57.2 44.9 36.2 34.7 35.4 35.3 Jordan 40.5 72.2 96.4 119.0 166.1 172.2 187.3 185.6 Syria 41.4 61.3 51.6 47.6 39.3 25.5 26.8 26.7 Bahrain 121.0 188.4 168.0 180.8 199.7 168.9 162.7 151.2 Saudi Arabia 80.3 89.3 86.6 88.6 84.4 116.6 116.6 116.6 Kuwait 81.7 84.4 108.8 107.4 65.8 58.1 54.7 57.5 UAE 87.7 94.0 88.9 74.5 100.1 109.7 113.0 124.5 Oman 74.5 87.0 95.2 74.0 77.1 67.0 67.7 70.4 Iran 18.7 21.2 9.3 8.9 11.2 7.2 7.0 7.0 Iraq 63.1 64.2 60.4 53.9 56.2 12.2 13.2 35.6 Yemen 23.9 37.4 51.5 24.4 30.2 40.0 39.1 38.4 Nominal ratios MENAb 52.6 84.3 80.9 49.2 64.7 64.0 63.0 62.2 Algeria 51.0 76.5 64.7 43.9 48.4 58.6 56.2 57.1 Morocco 39.2 55.8 45.3 59.7 59.0 61.3 55.0 59.5 Tunisia 46.7 64.0 85.8 70.2 94.2 93.4 86.0 86.3 Egypt 32.9 61.5 73.4 52.0 52.8 53.0 45.6 47.7 Jordan 41.9 95.1 124.1 113.1 154.6 126.2 125.1 120.4 Syria 38.6 55.4 53.7 37.2 55.1 40.9 41.1 33.7 Bahrain 253.4 195.0 239.3 191.6 221.7 206.6 216.7 186.6 Saudi Arabia 89.0 99.2 101.0 80.0 82.4 69.6 70.1 70.2 Kuwait 83.9 106.5 112.6 96.4 103.0 103.8 96.0 93.1 UAE 113.1 103.2 112.4 89.7 107.3 t25.6 125.3 128.9 Oman 93.4 118.2 100.3 87.0 83.3 92.7 96.6 97.5 Iran 41.9 76.0 29.7 16.0 45.5 36.4 34.7 27.0 Iraq 52.4 86.7 102.0 53.8 38.1 4.1 4.8 13.3 Yemen 15.1 21.6 37.5 28.3 35.1 72.9 90.7 104.6 a. (Exports + Imports of GNFS)/GDP. b. Excluding Lebanon, Libya. and Qatar. Source: World Bank. 46 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 1.A.2. GOODS AND NONFACTOR SERVICES EXPORTS AS A SHARE OF GDP (Percentages) 1970 1975 1980 1985 1990 1995 1996 1997 Low- and middle-income regions EastAsia and Pacific 16.0 18.6 21.8 19.0 24.0 28.8 28.5 30.4 South Asia 6.4 6.8 7.4 6.8 7.9 11.5 11.4 11.8 Sub-SaharanAfrica 31.2 27.8 28.8 26.8 27.5 29.1 30.6 32.0 Europe and Central Asia 13.5 13.6 15.2 16.6 16.0 19.9 21.0 22.1 Latin America 13.1 9.6 9.8 11.3 13.7 17.6 18.8 19.6 MENA total 39.0 35.7 32.5 20.9 25.2 26.5 26.1 26.8 Algeria 23.4 18.6 14.0 13.8 16.1 16.5 17.4 19.2 Morocco 24.7 21.2 20.0 21.4 26.5 33.2 31.7 33.3 Tunisia 27.4 30.5 36.5 30.6 42.1 44.1 41.4 41.0 Egypt 16.3 16.4 15.9 12.4 15.0 15.4 15.9 15.2 Jordan 9.2 24.2 31.1 41.5 60.3 63.8 68.1 67.6 Syria 25.9 20.9 13.3 13.5 14.4 10.9 10.9 10.5 Bahrain 81.4 92.5 84.3 95.5 102.2 88.4 82.5 75.5 Saudi Arabia 76.4 80.9 65.4 42.7 43.1 61.7 61.7 61.7 Kuwait 76.8 71.6 63.1 50.7 39.0 30.7 29.0 29.6 UAE 65.1 54.0 52.0 42.0 65.7 66.8 66.2 72.0 Oman 58.4 49.0 58.7 44.1 48.9 44.4 44.0 45.7 Iran 15.1 12.3 2.8 3.4 5.6 4.5 4.2 4.2 Iraq 56.3 44.7 38.2 26.1 30.8 6.1 6.5 17.5 Yemen 1.3 3.5 4.5 2.9 13.5 22.1 21.0 20.2 Source: World Bank. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 47 TABLE 1.A.3. VOLATILITY OF FDI AND NON-FDI PRIVATE-TO-PRIVATE CAPITAL INFLOWS, 1993-97 (% of GDP) FDI Non-FDI standard Coefficient of standard Coefficient of Country Mean deviation variation. Mean deviation variationW MENA Egypt 1.28 0.61 0.48 -0.84 1.66 1.98 Jordan 0.67 0.31 0.46 -1.67 4.44 2.66 Morocco 1.72 1.1 0.64 1.35 1.82 1.35 Tunisia 2.14 1.12 0.52 1.14 1.39 1.22 Central Europe Czech Rep. 2.9 1.6 0.55 4.6 4.5 0.98 Estonia 4.5 1.4 0.31 3.3 6.2 1.87 Hungary 5.9 2.8 0.47 1.3 6.1 4.6 Poland 1.3 0.7 0.54 0.2 1.1 6.68 Slovenia 1.1 0.3 0.27 0.8 2.4 2.81 East Asia Indonesia 1.7 0.9 0.53 0.8 1.9 2.21 Korea, Rep. of -0.4 0.1 0.25 2.3 2.6 1.17 Malaysia 6.1 1.2 0.20 0.5 8.7 17.3 Philippines 1.6 0.2 0.13 3.8 3.1 0.83 Thailand 1 0.4 0.40 4.7 7.9 1.68 a. Absolute value. Source: Development Economic Prospects Group, World Bank. 48 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 1 .A.4. NET FDI FLOWS TO MENA AND OTHER REGIONS East Latin Europe Asia America and Total to Sub-Saharan and and South Central developing MENA Africa Pacific Caribbean Asia Asia countries US$ billion 1970-74 -0.8 0.7 0.4 1.5 0.0 0.1 2.0 1975-79 0.5 0.8 1.0 3.5 0.1 0.1 6.0 1980-84 0.0 0.9 2.3 5.4 0.2 0.1 8.9 1985-89 1.7 1.3 5.0 6.0 0.4 0.4 14.7 1990-94 2.8 1.8 25.5 15.2 0.9 4.6 50.8 1995-97 0.8 3.4 54.0 36.2 3.5 15.6 113.6 Percentage share of total 1970-74 -365.5 151.5 81.5 209.4 10.9 12.2 100.0 1975-79 6.2 14.4 17.9 58.5 1.8 1.2 100.0 1980-84 -8.2 8.8 27.1 68.6 2.1 1.7 100.0 1985-89 12.1 9.0 33.1 41.1 2.6 2.0 100.0 1990-94 6.5 3.7 48.1 31.3 1.7 8.8 100.0 1995-97 0.7 3.0 47.7 31.7 3.0 13.9 100.0 Percentage share of GDP 1970-74 -0.5 0.8 0.2 0.7 0.0 0.0 0.2 1975-79 0.2 0.5 0.3 0.7 0.1 0.0 0.3 1980-84 0.0 0.3 0.5 0.7 0.1 0.0 0.3 1985-89 0.4 0.5 0.9 0.7 0.1 0.0 0.4 1990-94 0.6 0.7 3.0 1.2 0.2 0.4 1.A 1995-97 0.1 1.1 3.9 2.2 0.6 1.3 2.0 Source: Development Economics Prospect Group, World Bank, based on Global Development Finance. MANAGING GLOBAL INTEGRATION IN THE MIDDLE EAST AND NORTH AFRICA 49 TABLE 1 .A.5. NET NON-FDI PRIVATE FLOWS TO MENA AND OTHER REGIONS East Latinz Europe Asia America and Total to Sub-Saharan and and South Central developing MENA Africa Pacific Caribbean Asia Asia countries US$ billion 1970-74 0.5 0.5 0.9 4.9 0.0 0.5 7.4 1975-79 3.4 2.2 2.7 15.4 0.0 3.2 26.9 1980-84 2.2 2.8 6.1 19.1 1.5 5.4 37.1 1985-89 4.0 0.2 4.9 0.0 3.4 4.7 17.1 1990-94 -0.1 -0.6 16.7 21.8 3.8 7.7 49.3 1995-97 4.9 4.1 37.0 47.8 4.7 18.6 117.1 Percentage share of total 1970-74 7.3 7.1 11.7 67.1 0.0 6.8 100.0 1975-79 12.6 8.2 10.0 57.1 0.1 12.0 100.0 1980-84 6.0 7.6 [6.3 51.5 3.9 14.5 100.0 1985-89 23.1 0.9 28.6 -0.1 20.0 27.5 100.0 1990-94 -0.1 -1.2 33.8 44.3 7.7 15.5 100.0 1995-97 4.2 3.5 31.6 40.8 4.0 15.9 100.0 Percentage share of GDP 1970-74 0.6 0.6 0.4 1.9 0.0 0.1 0.6 1975-79 1.3 1.1 0.9 3.2 0.0 0.5 1.3 1980-84 0.5 1.0 1.4 2.5 0.6 0.6 1.2 1985-89 0.9 0.1 0.9 0.0 1.1 0.4 0.5 1990-94 0.0 -0.2 2.0 1.6 0.9 0.7 1.1 1995-97 0.8 1.3 2.6 2.8 0.8 1.5 2.0 Source: Development Economics Prospects Group, World Bank, based on Global Development Finance. Chapter 2 Incentives for Economic Integration in the Middle East1 Ahmed Galal Egyptian Center for Economic Studies Notwithstanding the slow progress of the Middle East peace talks, what has been accomplished to date was unimaginable a few years earlier. In 1993-14 years after the peace agreement between Egypt and Israel was signed-the first stage of a peace agreement between the Palestinians and Israel was reached, and in 1994 another was concluded with Jordan. Much is still to evolve on the Palestinian front, with Syria and with Lebanon. The rest of the Arab countries will eventually follow suit. While the road to peace is long and far from easy, the remarkable achievements so far suggest that peace is inevitable. The alternatives are costly to all parties. The key question now and in the future is: What kind of economic cooperation, if any, will peace permit? This question raises a set of subsidiary questions. For example, will the preferential trade liberalization prompted by the agreements with the EU serve to stimulate further trade liberalization in the Middle East and North African countries? Will these agreements serve to promote trade and other forms of coop- eration within the region and with the Israeli-Palestinian-Jordanian triad? What are the prospects for extending the incipient steps toward integration within the triad to Egypt and other countries? This chapter makes and evaluates a very simple proposition: Regional integra- tion becomes a reality when the parties involved have sufficient economic and po- litical incentives. When such incentives are lacking, regional integration does not occur, no matter how many times politicians declare their intentions to the contrary. The limited integration in the region, despite repeated attempts at an Arab common market, is a prime example of this. Arab nationalism was not enough-nor will the 51 52 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA peace euphoria necessarily be sufficient-to bring about economic cooperation in the region. Any serious consideration of the prospects of regional integration must therefore be grounded in the economic and political incentives to integrate. The next section documents the degree of intraregional trade and factor move- ments in the last few years. This is followed by an assessment of the current eco- nomic and political incentives to integrate in the region, focusing on Egypt and the triad, and explores the prospects of regional integration in the medium run. Intraregional Trade and Factor Movements Peace was viewed by many as a turning point toward political reconciliation and eco- nomic opportunities. However, significant regional integration has yet to be seen. The data on regional trade in goods and services, capital movements, and labor mobility show limited progress. Similarly, the data for Egypt suggest limited progress on inte- grating with the triad of Israel, the Palestinian National Authority (PNA), and Jordan. Trade in Goods Intraregional trade in merchandise averaged only 9 percent of total exports over the period 1989-97 (Table 2.1). This average compares with over 60 percent for the EU, and over 35 percent for Asia. In addition, intraregional trade is in fact shrink- ing, down from 11 percent in 1989 to 7 percent in 1997. Egypt's exports to the region (relative to its total exports) are also modest (Table 2.2). While the EU countries absorb close to 50 percent of Egypt's exports, Jordan and the PNA import less than 2 percent from Egypt. Although Israel imports a no- table fraction of Egypt's exports, its share declined from a peak of 10 percent in 1991 to less than I percent in 1997. Arab countries, other than Jordan and the PNA, account for a little over 10 percent. This pattern has not changed significantly over the period 1989-97. Although data are not presented on traded commodities, mineral fuels account for the bulk of intraregional trade and no category of commodities is very important (El Erian and Fischer 1996). The Arab-Israeli conflict virtually meant no trade be- tween Israel and its neighbors. Egypt is an important exception, although there has been a dramatic decline in Israel's share in Egypt's exports in the last few years. Capital Mobility Although the region includes relatively capital-abundant countries (oil exporters) and relatively capital-scarce countries (such as Egypt), intraregional capital trans- actions have also been limited. The exception was the large official flows from the oil exporters to other Arab countries, especially in the wake of the 1973-74 and 1979-80 oil price increases (Van den Boogaerde 1991). The information available for the inflows of FDI into the region (North Africa and West Asia) indicates that the FDI share of the total inflows is less than I percent. Egypt and Israel receive more FDI than Jordan, and the trend is favorable for both countries. (See Table 2.3.) INCENTIVES FOR ECONOMIC INTEGRATION IN THE MIDDLE EAST 53 TABLE 2.1. INTRAREGIONAL EXPORTS IN PERCENT OF TOTAL EXPORTS Average 1989 1991 1993 1995 1997 1989-97 Industrialized countries 76 76 73 72 71 74 EU' 60 61 59 64 64 61 Developing countries 36 38 39 42 43 39 Africa 7 8 9 10 10 9 Asia 33 37 38 40 41 38 Europe 28 20 22 30 29 25 Middle Eastb 11 8 7 7 7 8 a. As of 1995, the EU includes 15 countries. b. The Middle East includes Bahrain, Egypt, Iran. Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates (UAE). and the Republic of Yemen. Source: IMF, Direction of Trade Statistics, 1996. TABLE 2.2. EGYPT'S TRADE PATTERN: EXPORTS IN PERCENTAGE OF TOTAL EXPORTS 1989 1991 1993 1995 1997 EU 43.17 43.10 40.10 45.83 41.48 Jordan 1.04 0.98 0.45 0.90 0.67 PNA - - 0.00 0.05 - Israel 6.25 10.08 7.40 5.06 8.03 Other Arab countries 9.05 10.44 13.95 10.06 10.49 Others 40.49 35.39 38.10 38.15 39.33 Total 100.00 100.00 100.00 100.00 100.00 -. Not available. Source: IMF 1996: for the PNA: Ministry of Economy and External Trade, Egypt. Labor Mobility While capital movements are generally assumed to be easier than labor movements, labor mobility in the region has been relatively more significant than capital trans- actions or intraregional trade. Table 2.4 shows the magnitude of labor remittances in absolute terms and as a percentage of GDP for the main suppliers of labor among Arab countries. The numbers are relatively stable, but their relative importance is greatest for Yemen, Jordan, and Egypt. The flows of remittances originate prima- rily in the oil-exporting economies. Although the region does not have the labor mobility enjoyed by Europeans, millions of workers-for example, from Egypt- work in the neighboring countries, and Palestinians rely heavily on employment in Israel. 54 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Regional Integration and Economic and Political Incentives The limited integration between Egypt and the region, including the triad, can argu- ably be attributed to the lack of adequate economic and political incentives to inte- grate. This argument may seem apparent and undeserving of further elaboration. However, most of the previous attempts at explaining the limited integration in the region have focused on the economic or political incentives, rather than on both simultaneously. Second, most attempts dealing with the economic incentives em- phasized the issue of trade creation and diversion, with limited emphasis on the dynamic gains from integration. Finally, most attempts dealing with the political incentives to integrate tended to focus on the nature of governance, culture, reli- gion, and historical events, rather than on the factors that create the political dynam- ics for integration. This section explores the role of economic and political incentives in explaining the limited regional integration so far. TABLE 2.3. INFLOWS OF FOREIGN DIRECT INVESTMENT (millions of dollars) 1989 1991 1993 1995 1997' Total inflows 200,162 158,936 217,559 331,189 400,486 EU 81,134 78,777 80,935 116,792 108,172 Percent 40.5 49.6 37.2 35.3 27.0 North America 72,754 25,539 48,302 69,596 98,994 Percent 36.3 16.1 22.2 21.0 24.7 North Africa' 1,642 886 1,579 1,262 1,811 Percent 0.8 0.6 0.7 0.4 0.5 Of which Egypt 1,250 253 493 598 834 Percent 0.6 0.2 0.2 0.2 0.2 West Asiac -233 1,008 2,728 -1,751 1,105 Percent -0.1 0.6 1.3 -0.5 0.3 Of which Jordan -I -12 -34 13 70 Percent 0.0 0.0 0.0 0.0 0.0 Israel 125 350 580 1,974 3,407 Percent 0.1 0.2 0.3 0.6 0.9 Others (percent) 22.4 32.7 38.1 43.0 46.4 Total (percent) 100.0 100.0 100.0 100.0 100.0 a. Estimated. b. North Africa includes Algeria, Iran, Egypt. Morocco, Sudan, and Tunisia. c. West Asia includes: Bahrain, Iran, Iraq, Jordan, Kuwait, Lebanon, Oman. Qatar, Saudi Arabia, Syria, the UAE, and Yemen. Source: UNCTAD, World Investment Report, 1998 INCENTIVES FOR ECONOMIC INTEGRATION IN THE MIDDLE EAST 55 TABLE 2.4. WORKERS' REMITTANCES (millions of dollars) Labor-exporting countries 1989 1991 1993 1995 1997 Algeria 345 233 700 1,294 1,075 Egypt 3,323 3,723 3,835 3,279 3,256 Jordan 623 450 1,040 1,244 1,582 Morocco 1,337 1,990 1,959 1,970 1,893 Sudan 242 124 - - - Syria 430 350 600 - - Tunisia 450 525 446 680 684 Rep. of Yemen 1,035 998 1.039 1,067 1,J57 Percent of GNP Country 1989 1991 1993 1995 1997 Algeria I I 1 3 2 Egypt 9 11 8 6 4 Jordan 16 12 20 19 23 Morocco 6 7 8 6 6 Sudan 2 1 - - - Syria 5 3 5 - - Tunisia 5 4 3 4 4 Rep. of Yemen - 21 23 31 23 - Not available. Source: World Bank, World Debt Tables, 1999. Economic Incentives The economic incentives to integrate preferentially have evolved over time. In the period following World War II until a couple of decades ago, regional arrangements were initiated when developing countries were following import-substitution strat- egies, with the twin features of heavy protection and state, rather than market, allo- cation of resources. Under these conditions, preferential trade agreements (PTAs) can lead to significant trade diversion, albeit with some trade creation. As elabo- rated by Viner (1950), trade creation results from lowering trade barriers among the members of the PTA. Trade diversion occurs when members of the PTA import from other members whose products are produced less efficiently than in other parts of the world. Where the gains from trade creation outweigh the cost of trade diver- sion, there are economic incentives to integrate. New regional arrangements, in contrast, are taking place among countries charac- terized by keen interest in participating in the world market (Lawrence 1996). These countries are more open, export- and market-oriented, and private sector-dominated (see Table 2.5 for details). The consequence of this development for the incentives to 56 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA integrate regionally is increasing emphasis on the potential dynamic, rather than static, welfare gains from integration. The dynamic gains are associated with the flow of new investment, improved productivity, and low transaction costs. These benefits can out- weigh the net loss in static welfare, provided that investors do not locate in the hub (rich countries) rather than the spoke (developing countries), productivity improves as com- petition increases and services are liberalized, and transaction costs are reduced follow- ing the adoption of more efficient regulatory schemes-for example, with respect to harmonization of procedures, standards, and certification. When countries are in the process of moving away from import substitution strategies toward more open econo- mies, PTAs with large economies (for example, the United States) can serve as anchors that make the associated reforms more credible (Francois 1997). Whether "traditional" or "new," the verdict on regionalism, with respect to the welfare implications for the trading partners, is ambiguous. Accordingly, the eco- nomic incentives to integrate have to be tested empirically on a case-by-case basis. This empirical analysis can be undertaken using sophisticated models (for example, gravity models) or by drawing on anecdotes. The shortcoming of sophisticated models is that they do not capture important effects of integration, especially those arising from investment and institutional changes. On the other hand, anecdotes do not permit generalizations. For both reasons, the approach followed here is somewhat eclectic. It is based on contrasting a number of insights drawn from both theories with some factual data for Egypt and the triad. Conclusions are then made as to whether or not Egypt has sufficient economic incentives to join the triad. What, then, are the main insights that create economic incentives to integrate? The key ones can be articulated as follows: v Geographic proximity, because proximity reduces transportation costs, and therefore encourages trade. v Openness, because PTAs under heavy protection promote self-sufficiency and specialization among relatively inefficient producers, thus promoting trade diversion. TABLE 2.5. REGIONALISM: OLD AND NEW Old New Import substitution, withdrawal from Export orientation, integration into world economy world economy Planned and political allocation of resources Market allocation of resources Led by governments Led by private firms Mainly industrial products All goods, services, and investment Deal with border barriers Deeper integration Preferential treatment for less developed Equal rules (different adjustment periods) Source: Lawrence 1996. INCENTIVES FOR ECONOMIC INTEGRATION IN THE MIDDLE EAST 57 L Investment-friendly economies, because such economies can use PTAs to offer location advantages to multinationals in the form of larger markets for output and various sources of inputs. They also allow domestic inves- tors to specialize and take advantage of economies of scale in production and marketing. L Needfor reform anchor, because PTAs with large economies (such as the United States or Europe) can provide safeguards against policy reversal (Francois 1997). The question is whether Egypt has sufficient economic incentives along these lines to join the triad in a customs union or a free trade area. The answer appears to be "no" in the short run. The possibilities for limited trade and spe- cific projects are probably more appropriate at this stage. As Egypt and other neighboring countries move further in the direction of liberalization, as they conclude PTAs with the EU, and as they undertake more economic reforms do- mestically, the economic incentives to integrate with the triad and other neigh- boring countries will be higher.2 To elaborate the basis for this conclusion, clearly geographical proximity is an advantage. Yet transportation costs do not necessarily correlate with distance. The lack of adequate infrastructure and the sense of insecurity arising from the Arab- Israeli conflict are significant geographical barriers. These barriers are exacerbated when the goods being transported are bulky or perishable. Equally important, Egypt's economic incentives to join the triad at this time are limited because of the high level of protection accorded to several industries in the three countries and the PNA (Table 2.6). Although the Israeli economy is relatively more open, some commodi- ties enjoy high effective rates of protection (for example, food, chemicals and chemi- cal products, and rubber and plastic products). In Egypt and Jordan, the rates of effective protection are even more significant.3 Under these conditions, attempts to integrate with the triad may amount to integration of industries which are relatively inefficient and highly protected from competition. Members of the agreement may give each other access to their markets, but only in those products they import from the rest of the world. This will maximize trade diversion.4 Beside the need for further liberalization, especially in Egypt and Jordan, the limited inflow of FDI to the triad countries and Egypt relative to such fast-growing economies as Malaysia and Thailand suggests that more reforms are needed to make the business environment more hospitable to investment. Until such reforms are adopted, the merits of joining the triad to attract FDI are limited, in part because the size of the economies of the triad is relatively small. Finally, while Egypt can in fact use PTAs to anchor its ongoing structural reforms and gain investors' confidence, it can achieve this objective more credibly by joining the EU or the United States in a PTA.' Of course, joining the EU and the triad are not mutually exclusive-Israel 58 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 2.6. AVERAGE NOMINAL TARIFF PROTECTION AND EFFECTIVE RATE OF PROTECTION FOR SELECTED SECTORS Egypt Jordan israel Sectors Nominal ERP Nominal ERP Nominal ERP Mining 9.0 7.0 22.7 8.5 33.7 13.9 Food 36.0 72.0 41.1 22.5 9.5 114.3 Clothing 68.0 162.0 41.0 146.0 11.0 8.2 Leather 35.0 28.0 47.0 54.0 10.0 2.9 Wood and cork products 33.0 66.0 51.0 92.0 13.7 13.7 Paper and printing material 31.0 90.0 12.0 48.0 Chemicals and products, excl. petroleum 15.0 21.0 26.7 20.1 7.4 43.8 Petroleum refineries 13.0 83.0 6.0 -3.0 - n.a. Metal products 28.0 14.0 17.0 14.0 27.9 14.8 Machinery 27.0 38.0 16.0 5.0 8.1 5.9 Transport equipment 40.0 90.0 31.0 102.0 -3.4 0.8 Rubber & plastic products 24.0 33.0 29.0 65.0 11.9 18.3 Average 29.9 58.7 28.4 47.8 10.8 19.7 - Not available. Source: For Egypt and Jordan, Hoekman and Djankov (1997); for Israel. Halevi (1996). has a free trade agreement with the EU and the United States. But trade diversion and investment issues seem to suggest that Egypt may be better off waiting rather than joining the triad now. Political incentives Even if countries have sufficient economic incentives to integrate with a few coun- tries, they may not follow through because the leaders do not have the political incentives to do so. PTAs can strengthen or erode the position of political leaders, therefore, PTAs are pursued only when their political benefits outweigh their politi- cal costs. The leaders must consider PTAs politically desirable, feasible, and cred- ible to sign them.6 Political desirability is met when the benefits of the agreement to the leaders and their supporters outweigh the costs. It could come about if the current leader- ship and its constituencies face an external shock (for example., war) that changes the political calculations of the costs and benefits in favor of a PTA. Alternatively, desirability may come about if a country has a new leadership with new constituen- cies whose interest is more in line with a free trade agreement. Politicalfeasibility is met when the leaders are able to secure the approval of and support for carrying out the agreement. It requires that the leadership is able to secure the consent of other parts of government-legislatures, bureaucracies, and the state or provincial governments. This is more difficult under democratic re- INCENTIVES FOR ECONOMIC INTEGRATION IN THE MIDDLE EAST 59 gimes, especially where the leaders govern by minority in the legislature. Second, the leadership must be able to compensate the losers, at least partially, especially if they are a vocal minority prepared to destabilize weak coalitions and engage in civil disobedience. Political credibility is met when the winners and losers believe that the prom- ises to deliver the gains and compensations in the future are credible. In the present context, credibility depends in large part on the perception as to whether the agreement will be respected by all parties in the future, and whether the relationship between the parties is based on trust and irreversible peace. The leadership of the members of the PTA must be able to convince the losers that they will be compensated, and the winners that they will not be affected ad- versely. Does a PTA encompassing the triad plus Egypt meet the conditions of desir- ability, feasibility, and credibility? In my view, it does not. Even if some countries meet all three conditions, the successful conclusion of the agreement requires that all political leaders involved find the agreement desirable, feasible, and credible. The foundations of this conclusion are elaborated below, with a particular focus on Egypt. Consider desirability. For Egypt, the constituencies of the leadership are var- ied, as may be suggested by the government majority in parliament. The bureau- cracy does not have a stake in an agreement with the triad. The private sector is more interested in trading in larger markets, especially the EU and the United States. There is a general sentiment, particularly among some in the intellectual commu- nity, that comprehensive peace is a precondition for full cooperation. Besides, Egypt is playing the role of a catalyst for peace in the region, and joining the triad may diminish its capacity to play that role. Overall, then, it does not appear that Egypt would consider joining the triad in a PTA desirable at this time.7 With respect to feasibility, Egypt is in a position to pass an agreement through the legislature if it is deemed politically desirable by the leadership. As already indicated, the government has a majority in parliament. The potential losers from such an agreement are likely to be too few and disbursed. The opposition of some intellectuals could not be stronger than when President Sadat signed a peace treaty with Israel. Therefore, Egypt meets the feasibility condition.' Finally, even if the desirability and feasibility conditions are met, the credibil- ity of the promises to be made in such an agreement may not be believable without external guarantees. Egypt has lived up to its commitments in the peace accord with Israel, but it cannot guarantee the actions of Israel and other parties. Reneging on previous commitments every time a new government is elected, or a disruptive act by opponents of the peace process, would not attract investors to the region, who need to be assured that tranquillity and free trade will be the order of the day. There- fore, that condition may not be attained without full peace and external guarantees of tranquillity, for example, by the United States and other members of the interna- tional community. 60 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Interaction between Economic and Political Incentives The economic and political incentives in favor of regional integration are not inde- pendent of each other. Moreover, the interaction between the two sets of incentives can be positive or negative. For example, the economic gains from regional integra- tion may make a PTA politically desirable if the benefits accrue to the groups sup- porting the governing regime. Here the economic and political incentives work in the same direction. Conversely, where regional integration benefits the opponents of the ruling regime, it would be politically undesirable. In this case, the economic and political incentives are not aligned, and the agreement is not likely to come to fruition. This point may help explain, for example, why the EU is reluctant to liber- alize its agriculture sector with Tunisia, Morocco, and now Egypt. With respect to feasibility, comprehensive peace in the Middle East makes re- gional integration politically feasible, given that not all leaders can necessarily af- ford domestic or foreign opposition and stay in power. This opposition may diminish, however, if the economic incentives to integrate become strong enough for the sup- porters of the leaders to exert corresponding pressure on them to make peace. With respect to credibility, a peace guarantee by strong external forces will obviously reduce the risk facing investors. As a result, FDI may increase, contributing posi- tively to the economic incentives to integrate. In sum, Egypt does not seem to have sufficient economic or political incentives to join the triad in the short run. This should not necessarily be the case in the medium run. Prospect of Integration in the Medium Run The prospects for regional integration in the medium run depend on the changes in economic and political incentives the future brings. While the future is uncertain, it is not divorced from current and past events. Beside peace, two factors currently on the horizon seem to have the potential of influencing the prospects of regional inte- gration in a significant way: PTAs with the EU and FDI. This section explores the role of these two factors on the economic and political incentives to liberalize and integrate in the medium run. The Role of PTAs with the EU Egypt is a full member of the WTO, and is soon to sign a partnership agreement with the EU. The government has also undertaken a series of economic reforms in the 1990s, the effect of which is to open the economy to foreign trade and invest- ment. But Egypt is not the only country in the region moving in this direction. Israel has gone further. Beside liberalizing the economy and acceding to the WTO, Israel has PTAs with the EU and the United States. Jordan started a process of opening up its economy, is in the process of joining the WTO, and has also negotiated a PTA with the EU. The question is whether these agreements will speed or impede re- gional integration and further liberalization.9 INCENTIVES FOR ECONOMIC INTEGRATION IN THE MIDDLE EAST 61 The literature offers a number of reasons as to why the answer could be in favor of further liberalization and regional integration and a number of reasons to the contrary (Frankel 1995). On the one hand, major trading partners outside the PTA may demand accession or liberalization in the countries concluding a PTA, espe- cially where the trade barriers facing them are relatively high. This will put pressure toward further liberalization. Operating in the same direction is the gradual phasing out of protection in the context of a PTA, as this gradualism diminishes domestic resistance to liberalization. Where the phasing out of protection is accompanied by some compensation and technical assistance, the resistance to liberalization is re- duced even further. A final related point concerns the precedent that liberalization in the context of a PTA sets in motion. Subsequent to the agreement, domestic produc- ers will understand that their government cannot easily provide them with protec- tion, which may help further liberalization later. PTAs may also promote regional integration through their potential influence on firm competitiveness. As indicated above, emerging arrangements are not only about trade but also about competition and investment. To the extent that PTAs remove tariffs and bring about reconciliation of divergent national practices with common rules and policies (for example, bringing standards up to mutual recogni- tion), they pave the way for further trade with outsiders. While PTAs may divert trade, they could stimulate reforms that improve the business environment. Not only would this help domestic producers, but it may also make the country a more attrac- tive location for foreign producers. All this will make firms more efficient, and therefore more open to further liberalization. On the other hand. PTAs could make further liberalization and integration more difficult. They could entail new forms of protection by implementing rules of origin and administering antidumping and countervailing duties that have protectionist effects. Krueger (1993) and Hoekman (1993) argue that the new arrangements may include, for example, intricate rules of origin that represent a retreat from freer trade. PTAs could also make further liberalization more difficult if the leaders invest much of their political capital into them rather than in multilateralism (Bhagwati 1992). Firms may, in addition, exert influence in designing new systems of rules that help insiders and hurt outsiders. For example, tariffs may be designed in such a way as to increase protection for certain interest groups, thereby diminishing the political support for multilateral and regional liberalization. Similarly, the way the gradual phasing out of protection is designed can also impede further liberalization, especially where tariffs are removed first on capital and intermediate goods (Hoekman and Djankov 1997). This is because this pattern of tariff reduction will increase effective rates of protection in the interim period, which makes liberalization of final goods more difficult. All told then, it is an empirical question whether PTAs promote or reduce the possibility of further integration and liberalization. Liberalization in Europe coincided with the formation of the European Community and the European 62 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Free Trade Area. In other regions, however, regional arrangements were associ- ated with fragmentation of world markets and eventual failure of such arrange- ments. The EU initiative in the Mediterranean region carries some promise in favor of liberalization in the future, but also some risks. The agreement Egypt is soon to conclude with the EU is expected to resemble those of Tunisia and Morocco. If so, it will require liberalization of manufactured imports from the EU over a 12-year period, and immediate duty-free access to the EU markets for Egyptian manufac- tured exports. It will require the adoption of competition policies as they relate to trade with the EU. In return, the EU will provide financial and technical assistance to help industries adjust to the new regime. The main shortcomings of the agree- ment are that it will provide little in improved access for agricultural products, re- quire no liberalization of government procurement, does not ensure free movement of capital, and makes no commitments to liberalize services. Because the PTA is fundamentally a move toward partial liberalization with a few trading partners, it can be beneficial if it boosts the sectors that are competitive and shrinks the sectors that are not. The danger is that while the agreement may succeed in reducing the size of the import-competing sector, it may do little to stimu- late exports and FDI. In other words, it may contribute toward improving standards and policies, but with no significant impact on FDI. This is why Galal and Hoekman (1997) argue, in the case of the agreement under negotiation between Egypt and the EU, that Egypt should use the agreement to advance a growth strategy with liberal- ization as a critical component.'° Otherwise, the agreement may generate small static welfare gains from trade creation over trade diversion, but leave the EU as the hub and Egypt as the spoke. This will be at the expense of further regional integration, given that countries like Egypt and Israel will prefer exporting to Europe rather than to countries in the region. The Role of Foreign Direct Investment The triad countries and Egypt are not capital-abundant countries. All of them are keen to attract FDI to grow rapidly and raise the standard of living of their popula- tions. In Egypt, a sustained growth of 7 percent per year requires investment ap- proximately equal to 27 percent of GDP, compared with national savings of 18 percent. This leaves a gap of about 10 percentage points of GDP, or about $12 bil- lion. FDI can undoubtedly help, given the limited room for borrowing and the ges- tation period it takes to stimulate domestic private investment. The advantages of FDI go beyond providing capital, to include bringing knowledge about the latest technologies and access to major markets. Will this need for FDI promote regional integration and further liberalization in the future? The answer depends in part on what policies Egypt-and other countries for that matter-adopt. FDI initially moved to developing countries to gain access to raw materials. It then moved to take advantage of import-substitution strategies by selling in internal markets behind high protection. Currently, many multinationals INCENTIVES FOR ECONOMIC INTEGRATION IN THE MIDDLE EAST 63 and governments pursue FDI to service external markets. To the extent that coun- tries follow appropriate policies to promote exports, FDI can foster regional inte- gration. Conversely, to the extent that FDI is attracted to produce for domestic markets under high protection, it may in fact discourage regional integration. Another FDI-related factor in favor of improving the prospects of regional inte- gration is the recent emphasis on privatization, deregulation, and financial liberal- ization. As these reforms intensify in the region, they will attract FDI, especially in such sectors as banking, communications, utilities, and transportation. As a result, domestic services will be produced more efficiently, capital movement will be easier, and the cost of conducting business will be smaller. All these factors will make the countries of the region more attractive locations for FDI, which will enhance the prospects of regional integration. Further reinforcing this is the possibility that coun- tries will also undertake other reforms to attract FDI, including making credible commitments not to expropriate assets in the future, predictable and transparent rules of game, simplified regulatory regimes with respect to establishment and op- eration, and easy access to large foreign markets without complicated customs pro- cedures. On their part, multinational firms can also influence the tendency toward re- gional integration in the future. Because they are increasingly interested in produc- ing complex products across borders, they often find it advantageous to source raw materials in one country, process labor-intensive components in a second, and tech- nologically intensive processes in a third. They consider limited markets to be de- priving them of the benefits of economies of scale in production. Accordingly, they can be expected to push for regional integration, to the extent that these arrange- ments make the movements of goods easier across locations. This is indeed what happened with respect to the regional trading blocks in Europe, North America, and Asia (Fishlow and Haggard 1992). The same can be expected to happen in the Middle East. All told, the prospects of integration in the region are likely to be higher in the future, as countries adopt more investment-friendly environments, liberalize their economies, and harmonize their regulatory systems (standards and the like). These measures will attract FDI and multinationals and promote domestic investment, as well. Investors will in turn attempt to persuade politicians to integrate with other countries in the region to secure larger markets, capitalize on economies of scale, and optimize production across locations. Concluding Remarks This paper dealt with the economic and political incentives of regional integration, focusing, from an Egyptian perspective, on whether the PTAs with the EU will serve to promote trade within the region and with the Israeli-Palestinian-Jordanian triad, and the prospects for extending the incipient steps toward integration within the triad to Egypt. The key points can be summarized as follows: 64 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA * Future regional trade is a big challenge. The data on intraregional trade and factor movements continue to show that the region is remarkably unintegrated, accounting for less than 10 percent of total regional trade. * The poor integration record can be attributed to the limited economic and political incentives to integrate. Economic incentives go beyond trade cre- ation and diversion to cover the dynamic gains associated with investment and deeper integration reforms. Political incentives are not independent of economic incentives, but a regional agreement has to be politically desir- able, feasible, and credible to take place. * In the short run, Egypt has limited economic and political incentives to integrate with the triad. Geographical proximity is offset by the lack of infrastructure and lack of peace. The level of protection is high and may encourage trade diversion. The business environment is in need of improve- ment to permit FDI to take advantage of location and larger markets. And dynamic gains from regional integration will only come with investment, which is a medium run phenomenon. * In the medium run, the prospects for regional integration are brighter. Egypt is about to sign a partnership agreement with the EU, and there is a keen interest in attracting FDI. Both factors are expected to bring about deeper reforms at home and create pressure for regional integration to allow firms secure access to larger markets, optimize locations across borders, and capi- talize on economies of scale. With similar reforms in the triad and other neighboring countries, the prospects for regional integration will increase. Needless to say, peace is critical for all this to happen. Before concluding, one question is in order: What could be done in the interim period until the prospects for deeper integration are present? Assuming satisfactory progress on the peace front, the countries of the triad may have strong economic and political incentives to integrate in an appropriate form. At the same time, effort should be focused on taking incremental steps that will bring about beneficial inte- gration to all parties in the future. Reforms of national policies to make them hospi- table to investment-domestic and foreign-and greater liberalization are key. These efforts can be supported and coordinated regionally. Simultaneously, it may be pos- sible to work on joint regional projects, especially in infrastructure. In short, regional integration, like other policy issues, can be beneficial, pro- vided certain conditions are met. Perhaps the most important condition is that the parties to the exchange have both the economic and political incentives to carry it out. When both ingredients are present, a mutually beneficial integration will be forthcoming, otherwise the promise of integration will remain just that-a promise. INCENTIVES FOR ECONOMIC INTEGRATION IN THE MIDDLE EAST 65 Notes 1. The author would like to thank Mona Aboulkheir and Francis Ng for helpful research assistance, Maha Philip for secretarial support and amiable trouble, and Patti Lord for copyediting. Thanks also go to Samiha Fawzi, Bernard Hoekman, and Mahmoud Mohieldin for useful discussions. The views expressed in this paper are those of the author and should not be attributed to the Egyptian Center for Economic Studies or its board of directors. 2. The prospects of regional integration in the medium run are discussed in "Prospect of Integration in the Medium Run" in this chapter. 3. This statement still holds although Egypt, under the reform program carried out in the 1990s, has unified and devalued its exchange rate, opened up the capital account, and re- duced the maximum and dispersion of tariff rates. 4. Trade diversion will also be higher, the greater the share of imports from outside the PTA (Lipsey 1960) and the less similar the production structure of the members of the PTA (Viner 1950). The latter has been shown to hold in the case of Egypt and Israel (Fawzy 1994). 5. The evidence suggests that Mexico benefited from NAFTA as an anchor for its economic reform (Francois 1997). 6. These conditions were used in World Bank (1995) to explain why some countries reform their state-owned enterprises, while others lag behind. 7. Although it is difficult to ascertain for other countries, the Palestinians may be the key party in favor of an agreement. Mr. Arafat has just been elected, and he enjoys a broad-based support in favor of prosperity. Given that the Palestinian economy is dependent on Israel, not only for trade but also for employment, it seems reasonable to suggest that an agreement is desirable from a Palestinian perspective. On the Israeli front, it is more difficult to say. A new government has been elected, whose interest seems to lie more in security than in peace, trading in goods, or allowing labor movement. However, the government won by a very small margin, suggesting somewhat the contrary. 8. As for the members of the triad, the feasibility condition may not be fully satisfied. The Israeli government may not be able to push the agreement through parliament, because its constituency seems to favor security over peace. The gap in per capita income may also cause some opposition, given that Israeli's per capita income in 1994 was $11,363, com- pared with $1,521 for Jordan and $885 for Egypt. The Palestinians will also find it difficult to push for a trade agreement under limited progress on the peace front. Jordan seems to meet the feasibility condition. 66 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA 9. Openness is key in helping countries begin a process of converging or catching up with richer countries, as shown by Sachs and Warner, 1995. 10. Galal and Hoekman (1997) detail that growth strategy for Egypt. The key reform areas emphasized are reforms to reduce the size of government (to promote domestic savings) and encourage investment, open the economy to trade and investment, and increase competition, mainly through privatization. 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Krueger, Anne 0. 1993. "Free Trade Agreements as Protectionist Devices: Rules of Origin." Working Paper 4352. Boston: National Bureau of Economic Research. Lawrence, Robert. 1996. "Preferential Trading Arrangements: The Traditional and the New." In A. Galal and B. Hoekman, eds., Regional Partners in Global Mar- kets: Limits and Possibilities of the Euro-Med Agreements. London: CEPR and ECES. Lipsey, R. G. 1960. "The Theory of Customs Union: A General Survey." Economic Journal 70:496-513. Sachs, Jeffrey, and Andrew Warner. 1995. "Economic Reform and Global Economic Integration." Brookings Papers on Economic Activity, Vol. 1. Washington, D.C.: Brookings Institution, pp. 1-118. Van den Boogaerde, Pierre. 1991. "Financial Assistance from Arab Countries and Arab Regional Institutions." Occasional Paper 87. International Monetary Fund, Washington, D.C. Viner, Jacob. 1950. The Customs Union Issue. New York: Carnegie Endowment for International Peace. UNCTAD. 1998. World Investment Report. New York: UNCTAD. World Bank. 1995. Bureaucrats in Business: The Economics and Politics of Gov- ernnment Ownership. New York: Oxford University Press. . 1996. World Debt Tables. Washington, D.C.: World Bank. Chaper 3 Turkey, Tunisia, and Israel: A Comparison of Agreements with the European Union Siibidey Togan Bilkent University, Ankara During the 1990s, the European Community (EC) set the objective of strengthening political, economic, and cultural links with Mediterranean countries. Political im- petus to this process was given at the Barcelona Conference in November 1995. A new generation of Euro-Mediterranean Partnership Agreements is being negotiated. Agreements have already been concluded with Morocco, Tunisia, Jordan, the Pales- tinian National Authority, and Israel, and agreements are expected to be signed within the next few years with Egypt, Lebanon, Algeria, and Syria. Turkey established a customs union (CU) with the European Union (EU) starting on January 1, 1996. This chapter studies the trade agreements Tunisia, Turkey, and Israel have signed with the EU, within a comparative framework, and highlights the differences as well as the common aspects in the three agreements. We concentrate on the com- parison of Israeli, Tunisian, and Turkish agreements because these economies are quite representative of the region. Israel is a high-income, open economy. Turkey is a middle-income economy that has liberalized its economy considerably during the 1980s and 1990s. Tunisia is a middle-income economy that is in the process of opening up its economy, facing all the difficulties of adjustment. Comparison of the Israeli, Tunisian, and Turkish Economies Basic data on the Israeli, Tunisian, and Turkish economies are given in Table 3.1. Consideration of per capita GNP figures reveals that per capita income in Israel is 461 percent higher that in Turkey, which in turn is 46.6 percent higher than that in 69 70 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Tunisia. Purchasing power parity (PPP) per capita income figures reveal that the ordering remains unchanged but that the gap between per capita income levels is narrowed. Consideration of foreign trade data shows that 1997 exports (imports) of Israel amount to $22.5 (30.8) billion, of Tunisia to $5.5 (7.9) billion, and of Turkey to $26.2 (48.7) billion, respectively. During the period 1995-97, output increased by the annual rate of 4.6 percent in Israel, 5.0 percent in Tunisia, and 6.8 percent in Turkey. During the same period, the annual inflation rate amounted to 10.4 percent in Israel, 4.6 percent in Tunisia, and 87.1 percent in Turkey. Geographic distribution of foreign trade is shown in Table 3.2. The table re- veals that the EU (EU-15) is the major trading partner of the countries under consid- eration. Thirty-two percent of Israeli, 85 percent of Tunisian, and 50 percent of Turkish exports are directed toward the EU, and the share of imports from the EU in total imports amounts to 52 percent in the case of Israel, 75 percent in the case of Tunisia, and 53 percent in Turkey. The table further reveals that the NAFTA coun- tries account for 32 (21) percent of Israeli, 1 (5) percent of Tunisian, and 8 (9) percent of Turkish exports (imports). The share of Turkish imports (exports) from (to) Israel in total Turkish imports (exports) is 0.5 (2) percent, and the share of Turkish imports (exports) from (to) Tunisia is 0.1 (0.4) percent. Table 3.3 shows the commodity composition of exports by Israel, Tunisia, Tur- key, and the world as a whole. The table has been prepared using the four-digit Standard International Trade Classification (SITC) trade statistics from the United Nations Comtrade database, where the 1,167 commodities have been aggregated to 16 commodity groups using the aggregation procedure of the Annual Report of the World Trade Organization (WTO) (1997). A close consideration of the table reveals the following: TABLE 3.1. BASIC DATA ON ISRAELI, TUNISIAN, AND TURKISH ECONOMIES Israel Tunisia Turkey 1996 population (million) 5.7 9.1 62.7 1996 GDP (S billion) 95.2 19.5 181.5 Surface area (1000 kM2) 21 164 779 GNP per capita, Atlas method (1996, 5) 15,870 1,930 2,830 PPP estimate of income per capita (1995, $) 18,520 4,810 5,977 1997 exports ($ billion) 22.5 5.5 26.2 1997 imports ($ billion) 30.8 7.9 48.7 Real GDP growth rate 1995-97 4.6 5.0 6.8 Inflation rate 1995-97 10.4 4.6 87.1 Sources: World Development Indicators on CD-ROM 1998; IMF, International Financial Statistics on CD-ROM: IMF, World Economic Outlook. May 1998. TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 71 TABLE 3.2. GEOGRAPHIC DISTRIBUTION OF EXPORTS AND IMPORTS, 1996 (Percent) Israel Tunisia Exports Imports Exports Imports EU-15 32.1 51.8 85.1 75.0 NAFTA 31.6 20.6 1.4 5.2 Japan 5.9 3.7 0.3 2.1 Russia 1.3 0.6 0.1 1.1 Israel _ _ Tunisia - - Turkey 1.0 0.9 0.9 1.2 Source: IMF. Direction of Foreign Trade Statistics. TABLE 3.3. COMMODITY COMPOSITION OF ISRAELI, TUNISIAN, TURKISH, AND WORLD EXPORTS, 1996 (Percent) SITC code Commodity Israel Tunisia Turkey World 0+1+4+22 1 Food 5.20 7.34 19.72 8.93 2-22-27-28 2 Agricultural raw materials 1.84 0.73 1.70 2.31 27+28+3+68 3 Mining products 1.25 12.09 3.60 9.99 67 4 Iron and steel 0.15 0.97 8.34 2.76 5 5 Chemicals 13.96 12.74 3.83 9.64 6-65-67-68 6 Other semimanufactures 34.83 4.00 6.92 7.93 71-713 7 Power-generating machinery 0.73 0.12 0.35 1.31 72+73+74 8 Other nonelectrical machinery 6.50 1.21 2.15 8.54 75+76+776 9 Office machines and telecom- munications equipment 15.01 0.78 1.41 12.36 77-776-7783 10 Electrical machinery and apparatus 4.40 6.87 4.14 4.67 78-785-786+ 7132+7783 11 Automotive products 0.15 0.61 3.34 9.78 79+785+786 +7131+7133 +7138+7139 12 Other transport equipment 2.52 0.17 1.22 3.64 65 13 Textiles 1.94 2.73 11.81 3.01 84 14 Clothing 3.15 43.43 26.32 3.01 8-84-86-891 15 Otherconsumergoods 8.10 6.13 3.87 8.86 9+891 16 Other products 0.20 0.00 1.21 3.16 Total exports (US$ billion) 20.4 5.5 23.0 4,810.0 First three sectors with highest shores 6, 9, 5 14. 5, 3 14, 1. 13 9, 3, 11 Source: UN Comtrade database. 72 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA * The three commodities with the highest export shares in Israel are "other semi-manufactures," "office machines and telecommunications equipment," and "chemicals." * The three commodities with the highest export shares in Tunisia are "cloth- ing," "chemicals," and "mining products." * The three commodities with the highest export shares in Turkey are "cloth- ing," "food," and "textiles." * The three commodities with the highest export shares in the world are "of- fice machines and telecommunications equipment," "mining products," and "automotive products." It turns out that the share of "office machines and telecommunications equip- ment" in Israeli exports (15.0 percent) is higher than the corresponding share in world exports (12.4 percent). The shares of the same commodity in Tunisian and Turkish exports are 0.8 and 1.4 percent, respectively. Hence, Israel seems to have comparative advantage in this commodity, for which the world demand has been expanding rather rapidly. However, Tunisia seems to have comparative advantage in the production of "clothing," "chemicals," and "mining products." Similarly, Tur- key seems to have comparative advantage in the production of "clothing," "food," and "textiles." Table 3.4 is based on two-digit SITC foreign trade data obtained from Eurostat in Luxembourg. It shows the commodity composition of trade of Israel, Tunisia, and Turkey with the EU. A close consideration of the table reveals that * The category of "machinery and transport equipment" is among the major export and import items of Israel, Tunisia, and Turkey to the EU. * The category of "textiles and clothing" is among the major export items of Tunisia and Turkey to the EU, and it is also a major import item of Tunisia from the EU. * The category of "chemicals and rubber products" is one of the major ex- port items of Israel to the EU, and it is among the major import items of Israel, Tunisia, and Turkey from the EU. * One of the major export items of Tunisia to the EU is "energy," and one of the major export items of Turkey to the EU is "food." Table 3.5 shows the most dynamic exports of Israel, Tunisia, and Turkey de- fined as those commodities with highest average growth rate of exports over the TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 73 TABLE 3.4. COMMODITY COMPOSITION OF ISRAELI, TUNISIAN, AND TURKISH EXPORTS TO AND IMPORTS FROM THE EU, 1997 (Percent) Israeli Israeli Tunisian Tunisian Turkish Turkish exports imports exports imports exports imports SITC code Commodity to EU from EU to EU from EU to EU from EU 0+1+4+22 1 Food 8.55 4.65 8.94 5.70 15.31 2.93 2-22-27-28 2 Agricultural raw materials 3.82 1.25 0.47 2.08 1.83 2.74 27+28 3 Crude fertilizers and ferrous ores 1.45 0.24 0.64 0.46 2.01 2.14 3 4 Energy 1.24 0.38 9.19 5.02 1.03 1.19 67+68 5 Iron , steel, and nonferrous metals 0.76 3.84 0.61 3.24 3.99 5.18 65+84 6 Textiles and clothing 7.66 4.45 53.13 28.28 47.48 5.40 61+83+85 7 Hides and leather 0.30 0.93 6.00 2.74 0.41 1.65 63+82+64 8 Wood manufactures, paper 1.04 4.48 0.45 1.61 1.08 2.79 66 9 Nonmetallic mineral manufactures 20.77 26.52 0.93 0.82 3.03 1.11 5+62 10 Chemicals and rubber products 18.08 12.30 5.40 8.62 3.66 15.38 69 11 Manufactures of metal 2.93 2.69 0.35 2.17 1.65 2.03 7 12 Machinery and transport equipment 22.23 29.99 11.89 32.69 15.78 51.24 81+86+89+9 13 Miscellaneous manufactures 10.31 6.32 1.88 5.61 2.68 6.17 Total trade (ECU billion) 6.3 11.4 4.0 5.3 11.8 22.3 First three sectors with highest shares 12,9, 10 12, 9, 10 6, 12,4 12, 6,10 6, 12, 1 12, 10, 13 Source: Two-digit SITC trade data from Eurostat. period 1990-97, for which the average share of the commodity over the 1996-97 period is not too small. The table reveals the following results: * The dynamic sectors of Israel include telecommunications apparatus, non- metallic mineral manufactures (diamonds), medicinal and pharmaceutical products, electrical machinery, and office machines. * Footwear, electrical machinery, clothing, textiles, and fertilizers are the major dynamic sectors of Tunisia. * The dynamic sectors of Turkey include transport equipment, rubber manufactures, power generating machinery, manufactures of metal, tele- communications apparatus, electrical machinery, textiles, nonmetallic mineral manufactures (glassware, cement, and brick), vegetables and fruit, and clothing. 74 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 3.5A. DYNAMIC EXPORTS, TURKEY Share of commodity in exports, Average growth rate of exports, SITC code Commodity 1996-97 1990-97 97 Gold, onmonetary 0.06 83.80 42 Fixed vegetable oils and fats 0.45 58.22 79 Other transport equipment 4.25 52.12 67 Iron and steel 2.72 37.63 58 Plastic materials 0.14 36.49 63 Cork and wood manufactures 0.09 35.55 61 Leather manufactures 0.11 32.81 78 Road vehicles 3.03 29.60 54 Pharmaceutical products 0.18 24.76 62 Rubber manufactures 1.45 24.18 71 Power-generating machinery 1.19 24.15 72 Specialized machinery 0.35 23.90 73 Metalworking machinery 0.17 19.84 69 Manufactures of metal 1.62 19.63 87 Scientific instruments 0.26 19.44 74 General industrial machinery 0.85 19.15 22 Oil seeds 0.11 17.96 03 Fish and fish preparations 0.72 17.31 76 Telecommunications apparatus 2.63 17.18 77 Electrical machinery 3.99 17.03 28 Metalliferrous ores and metal scrap 0.63 16.66 52 Inorganic chemicals 0.75 16.18 68 Nonferrous metals 0.89 14.65 09 Miscellaneous edible products 0.10 13.80 65 Textiles 11.56 13.51 26 Textile fibers and their wastes 1.15 13.41 55 Essential oils and perfumes 0.091 13.40 66 Nonmetallic mineral manufactures 3.03 12.76 64 Paper 0.14 12.74 11 Beverages 0.12 11.20 05 Vegetables and fruit 12.12 10.87 27 Crude fertilizers and crude minerals 1.39 10.73 5 1 Organic chemicals 0.49 9.58 07 Coffee, tea, cocoa, spices 0.20 8.18 84 Clothing 35.60 7.79 93 Special transactions 0.25 6.78 04 Cereals and cereal preparations 0.10 6.68 06 Sugar and sugar preparations 0.14 6.54 TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 75 TABLE 3.5B. DYNAMIC EXPORTS, TUNISIA Share of commodity in exports, Average growth rate of exports. SITC code Commodity 1996-97 1990-97 54 Medicinal and pharmaceutical products 0.19 50.15 61 Leather manufactures 0.36 34.81 8 Feeding stuff for animals 0.16 29.69 87 Scientific instruments 0.80 29.21 72 Specialized machinery 0.44 24.94 71 Power-generating machinery 0.70 24.04 85 Footwear 5.24 19.86 63 Cork and wood manufactures 0.10 16.08 77 Electrical machinery 7.82 15.96 74 General industrial machinery 0.33 14.15 25 Pulp and waste paper 0.17 13.35 84 Clothing 51.26 10.96 65 Textiles 2.74 9.56 68 Nonferrous metals 0.05 9.18 52 Inorganic chemicals 1.26 8.61 83 Travel goods 0.37 8.56 89 Miscellaneous manufactured articles 0.55 7.60 26 Textile fibers and their wastes 0.15 7.29 56 Fertilizers, manufactured 4.07 7.18 82 Furniture 0.21 7.17 42 Fixed vegetable oils and fats 4.25 6.64 TABLE 3.5C. DYNAMIC EXPORTS, ISRAEL Commodity in exports, Growth rate of exports, SITC code Commodity 1996-97 1990-97 25 Pulp and waste paper 0.04 92.23 21 Hides, skins, and furskins, raw 0.08 39.13 76 Telecommunications apparatus 7.60 32.39 54 Pharmaceutical products 1.30 26.36 53 Dyeing, tanning, and coloring materials 0.21 25.65 79 Other transport equipment 0.71 24.39 55 Essential oils and perfume materials 0.50 21.02 6 Sugar and sugar preparations 0.24 19.06 74 General industrial machinery and equipment 3.54 18.29 66 Nonmetallic mineral manufactures 20.28 17.29 89 Miscellaneous manufactured articles 5.50 16.15 77 Electrical machinery 4.87 15.91 71 Power-generating machinery (Table continues on next page.) 76 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 3.5C. (continued) Commodity in exports, Growth rate of exports, SITC code Commodity 1996-97 1990-97 and equipment 1.06 15.42 69 Manufactures of metal 3.04 12.07 83 Travel goods 0.07 11.99 28 Metalliferrous ores and metal scrap 0.49 11.52 51 Organic chemicals 4.07 10.96 85 Footwear 0.21 9.87 93 Special transactions 0.46 9.54 57 Explosives 1.80 9.51 4 Cereals and cereal preparations 0.12 8.79 87 Scientific instruments and optical goods 2.95 8.77 75 Office machines 2.52 8.69 7 Coffee, tea, cocoa, spices 0.15 8.62 58 Plastic materials 2.11 8.57 Trade Liberalization Turkey's application for association with the EC was made in 1959. The application ultimately resulted in the signing of the Association Agreement in 1963. According to the agreement, the association was to be implemented in three stages: a prepara- tory stage, a transitional stage, and a final stage. In 1967, Turkey lodged its applica- tion for negotiations on entering the transitional stage. The Additional Protocol to the Ankara Agreement, signed in 1970, allowed Turkey to benefit from duty-free access to EU markets for manufactured goods with certain exceptions. The basic aim of the Additional Protocol was the establishment of a customs union (CU). In 1995, it was agreed at the Association Council meeting that Turkey would create a CU between Turkey and the EU starting on January 1, 1996. Before the formation of the CU, the Turkish economy was still highly protected. According to Togan (1997), the average economy-wide nominal protection rate (NPR) during 1994 amounted to 10.2 percent in trade with the EU and 22.1 percent in trade with third countries. The first trade agreement between the EC and Tunisia was signed in 1976. It allowed Tunisia to benefit from duty-free access to EU markets for manufactured goods. The agreement was not reciprocal. Tunisia continued to apply tariffs to goods of EC origin. As emphasized by Lahouel (1998), the import regime was based for a long time on licensing and tariff protection. Licensing had been very restrictive until the 1990s, when the country replaced the positive list with a negative one indicating the goods under restriction. Customs duties were relatively high, exceed- ing 40 percent on average, and widely dispersed, ranging between 5 and 236 per- cent. Under the reform program of 1987-90, average nominal protection rates fell TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 77 to 29 percent for the whole economy and dispersion was also reduced. During the 1990s, the EC set the objective of strengthening political, economic, and cultural links with Mediterranean countries, in line with the objectives set at the Corfu Euro- pean Council in 1994. In the context of the Euro-Mediterranean partnership, a new generation of Euro-Mediterranean Association Agreements were negotiated with Mediterranean countries, and Tunisia was the first country among these countries to sign a free trade agreement (FTA), with the EU in July 1995. In the case of Israel, the first trade agreement with the EC was signed in 1964. With that agreement, the EC reduced the Common External Tariff (CET) on some industrial goods from Israel. The agreement was followed by a preferential trade agreement signed in June 1970. Through the latter agreement, the CET on imports from Israel by the EU was cut by 30 percent immediately and 5 percent on each January I until 1975. On certain products, the reduction was less than 30 percent. During 1972, the EC introduced the Global Mediterranean Policy. With that policy, the EC aimed at the creation of a free trade area in manufactured goods in the whole Mediterranean area. A new agreement was signed with Israel in May 1975. Under this agreement, Israeli manufactured exports, including some processed agricul- tural commodities, enjoyed duty-free access to the EC as of July 1, 1977. Certain sensitive imports from Israel continued to be subject to quotas and other restrictions for some time, but all these terminated at the end of 1979. Israel's agricultural ex- ports were subject to tariffs and controls such as minimum prices, quotas, and vol- untary restrictions. Tariff-free entry for EC exports of manufactured goods to Israel was achieved over a longer period. As emphasized by Pomfret and Toren (1980), Israeli tariffs on manufactured imports from the EC were abolished by January 1, 1980 on 60 percent of EC exports, and they were completely eliminated by January 1, 1985. Quantitative restrictions on imports from the EC were completely abol- ished during the period 1980-85. In December 1995, the 1975 Agreement with Israel was transformed to an FTA within the context of the Euro-Mediterranean partnership. Liberalization of Trade in Industrial Commodities According to the stipulations of the Additional Protocol to the Ankara Treaty signed on November 23, 1970, Turkish imports from the Community were divided into two lists. Those industrial products in which it was thought that Turkey could achieve international competitiveness relatively early were placed on the 12-year list. Other manufactured products were put on a 22-year list, for which a CU would not be achieved until 1995. With the formation of a CU with the EU, Turkey has reduced to zero the NPRs for all of the commodities belonging to the 12-year and 22-year lists. Besides these commodities, there are products within the province of the European Coal and Steel Community (ECSC). For these commodities, an FTA was signed in December 1995 between Turkey and the EU. The agreement envisions gradual lib- eralization of trade in ECSC products over a period of three years. Thus, by 1999, the NPRs for all industrial products will be zero in trade with the EU. 78 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA The EU-Turkey Customs Union Decision (CUD) of March 1995 required Tur- key to adopt the Common Customs Tariff (CCT) against third-country imports by January 1, 1996, and to adopt all of the preferential agreements the EU has con- cluded with third countries by the year 2001. Trade with third countries by the EU can be studied under trade with countries to which the EU applies CCT, and trade with EFTA countries, the Mediterranean countries, the Central and Eastern Euro- pean (CEE) countries, the Baltic countries, developing countries having GSP treat- ment, and the Lome Convention countries. The EU has concluded preferential trade agreements with each of these country groups. Since Turkey, after the formation of the CU, will have to apply the Community's CCT and accept all of the preferential agreements the EU has concluded over time at the latest by 2001, Turkey in three years will be faced with different sets of tariff rates for different groups of countries. In the case of EFTA countries, CEE countries, Baltic countries, and Israel, which have FTAs with the EU, the nominal tariff rates that will be applied by Turkey in 2001 on imports from these countries will be identical to those applied on imports from the EU. Thus, as shown by Togan (1997), the economy-wide average NPRs for countries the EU has FTAs with will be reduced from 22.1 percent in 1994 to 1.3 percent in 2001. However, the economy-wide average NPRs for countries such as the United States, Japan, and Canada will be reduced from 22.1 percent in 1994 to 6.9 percent in 2001, and for GSP beneficiaries from 22.1 percent in 1994 to 2.7 percent in 2001. According to the stipulations of the EU-Tunisia FTA, Tunisian quotas are to be abolished upon the entry into force of the agreement except as allowed by GATT rules. Tunisian tariffs on industrial products will be reduced to zero over a 12-year period. The agreement divides the industrial commodities into five groups, four of which are defined in the Annexes to the Agreement. Tariffs and surcharges on in- dustrial commodities not mentioned in the annexes, accounting for 10.0 percent of imports and for which average tariffs are 21.6 percent, are to be abolished upon entry into force of the agreement. As emphasised by Hoekman and Djankov (1996), tariffs and surcharges on products listed in Annex 3 (Annex 4) accounting for 24.0 (29.0) percent of imports and for which average tariffs amounted to 26.7 (30.4) percent, will be eliminated over a five- (12-) year period. Tariffs and surcharges on products listed in Annex 5, accounting for 36.0 percent of imports and for which average tariffs amounted to 33.8 percent, will be eliminated over an eight-year pe- riod. But during the first four years after the agreement enters into force, the tariffs will remain unchanged and thereafter tariffs will be reduced in steps of 11-12 per- cent per year. Finally, the products contained in Annex 6, accounting for 1 percent of imports, are exempt from tariff reductions. With the EU-Tunisia FTA, the parties agree to abolish mutual barriers to trade in industrial goods over a 12-year period while each party maintains its own policy relative to nonparticipating third countries. Thus, Tunisia will neither adopt the CCT of the EU nor accept any of the preferential trade agreements the EU has concluded over time, and it will keep the protection rates against third-country imports at the TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 79 levels it considers appropriate. Article 23 of the EU-Tunisia FTA states that the agreement shall not preclude the maintenance or establishment of customs unions, free trade areas, or arrangements for frontier trade, except insofar as they alter the trade arrangements provided for in the EU-Tunisia FTA. In the case of Israel, the 1995 EU-Israel FTA confirms the existence of free trade in manufactured goods achieved through the 1975 agreement. According to the stipulations of the agreement, customs duties on imports and exports of indus- trial commodities, and any charges having equivalent effect, are prohibited between the Community and Israel. Finally, we note that the EU and Israel will maintain their own commercial policies toward nonparticipating third countries. Thus, Israel keeps the protection rates against third-country imports at their previous levels, which, according to Razin and Sadka (1993), are relatively high. Article 17 of the EU- Israel FTA' states that the agreement will not preclude the maintenance or establish- ment of customs unions, free trade areas, or arrangements for frontier trade, except insofar as they alter the trade arrangements provided for in the EU-Israel FTA. These considerations reveal that in the case of industrial products, free trade has already been established between the EU and Israel through the 1975 EU-Israel FTA, and that it will be established by January 1, 1999 between the EU and Turkey through the CUD and between the EU and Tunisia by 2010 through the EU-Tunisia FTA. If bilateral FTAs between Mediterranean countries can also be signed by 2010, the countries under consideration will establish a free trade area covering flows of industrial goods. There are some differences between the three trade agreements. The EU-Israel and EU-Tunisia trade agreements are FTAs, and the EU-Turkey trade agreement is a CUD. As such, the EU-Turkey CUD requires that Turkey adopt the CCT against third-country imports by January 1, 1996, and adopt all of the prefer- ential agreements EU has concluded with third countries by the year 2001. Similar restrictions are not imposed on Tunisia and Israel. These countries are free to main- tain their own policies toward nonparticipating third countries. Furthermore, there are no clauses on rules of origin in the CUD, whereas the EU-Tunisia FTA (EU- Israel FTA) discusses the issue of "originating products" in Article 29 and Protocol 4 (Article 24 and Protocol 4). As Mediterranean countries conclude bilateral FTAs among themselves, the introduction by the EC of diagonal cumulation of origin will become an essential tool to facilitate the establishment of the Euro-Mediterranean free trade zone through the development of South-South commercial ties. Liberalization of Trade in Agricultural Commodities According to Articles 22-25 of the CUD, to establish the freedom of movement of agricultural products, Turkey will have to adjust its agricultural policy in such a way as to adopt the Common Agricultural Policy (CAP) measures. How can Turkey adopt the CAP measures? Studies reveal that substantial resources would have to be channelled into Turkish agriculture. Since Turkey cannot devote substantial resources to agriculture from its own sources and since the EU would be unwilling to bear the cost, the idea of Turkey adopting the CAP has to be postponed. Thus, it seems that 80 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA the freedom of movement of agricultural products between Turkey and the EU can- not be achieved in the near future. However, Articles 17-21 of the CUD on pro- cessed agricultural products are of importance for producers and exporters of processed agricultural goods in Turkey. The CUD determines the percentage of prices of processed agricultural commodities that are "agricultural" as contrasted with the percentage that are "industrial." Since the "industrial" component of processed ag- ricultural products will enter European markets duty free and since European pro- tection will apply to the "agricultural" component of these commodities, Turkish firms in the food industry will be faced with more competition, the higher the frac- tion of the "industrial" component is. Similar considerations will apply for Euro- pean firms in the food industry. In the case of Tunisia, the FTA emphasizes gradual implementation of greater liberalization of the reciprocal trade in agricultural and fishery products. According to the agreement, the situation will be reexamined in the year 2001. In the case of Israel, the FTA foresees progressive and reciprocal liberalization of trade in agricul- tural products and extension of precedent concessions on a reciprocal basis. Exist- ing concessions are to be reexamined in the year 2000. In both FTAs, there are provisions dealing with processed agricultural products that are similar to the CUD. Table 3.6 reports the major agricultural exports for each country. The arrangements regulating the importation of agricultural products from Is- rael, Tunisia, and Turkey into the EU are shown in Table 3.7. The table reveals that Israel has obtained duty-free access up to the quota limits from the EU for most of the commodities considered among the first 12 commodities of Table 3.6. None of these quotas were binding for Israel during 1996. Among the five commodities of the second set of commodities in Table 3.7, Tunisia has obtained duty-free access to the EU market for fish, crustaceans, molluscs, and dates. In the case of olive oil, which is the major agricultural export item of Tunisia, during each marketing year from Janu- ary 1, 1996, to December 31, 1999, a customs duty of ECU 7.81 per 100 kilograms will be levied on imports into the Community within the limits of a quantity of 46,000 tonnes a year. The parties will reassess the situation during the second half of 1999 and determine the trade arrangements for olive oil for the period from January 1, 2000. Turkey has benefited from preferential treatment by the EU for most of the commodities considered in the third set of commodities in Table 3.7, which are the commodities with relatively high shares in total Turkish agricultural exports. Table 3.8 shows the unit export values of the commodities considered in Table 3.6 in terms of U.S. dollars for Israel, Tunisia, and Turkey. Of the 34 commodities, for which unit export price figures for both Israel and Turkey exist, the Israeli unit export price is higher (lower) than the Turkish unit export price in the case of 26 (8) commodities. The figures reveal that on average, Israel has obtained more U.S. dol- lars per unit of quantity of agricultural commodities exported from Israel than Tur- key was able to obtain. The high unit price of exports obtained by Israel is probably due to the quality difference of the products. In the case of Tunisia, the concessions obtained seem within a comparative framework to be relatively satisfactory. TABLE 3.6. TRADE IN SELECTED AGRICULTURAL COMMODITIES 1996 1996 Share 1996 1996 Share 1996 1996 Share Israeli Israeli in total 7iTnisian Tunisian in total Turkish Turkish in total exports, exports Israeli agr. exports, exports, Tunisian agr exports, exports, Turkish agr Product metric ton $1,000 exports (%) metric ton $1,000 exports (%) metric ton $1,000 exports (%) Cut flowers and foliage 194,767 13.54 - 996 0.22 - 12,678 0.26 Oranges 247,000 104,710 7.28 21,788 9,250 2.07 84,077 29,072 0.59 Grapefruit and pomelos 123,000 74,000 5.14 0 0 0 44,970 15,880 0.32 Cotton lint (263.1) 26,988 58,300 4.05 0 2 0.00 76,035 124,059 2.51 Bulbs, cuttings, live plants 49,904 3.47 - 1,266 0.28 - 4,565 0.09 Avocados 45,953 45,782 3.18 0 0 0 72 23 0.00 Orange juice, single strength 60,600 39,739 2.76 0 0 0 1,130 648 0.01 Grapefruit juice, single strength 65,000 37,580 2.61 0 0 0 0 0 0 Orange juice, concentrated 21,500 28,264 1.96 6 8 0.00 2,442 1,924 0.04 X Grapefruit juice, concentrated 16,900 26,720 1.85 0 0 0 23 15 0.00 Potatoes (054.1) 74,057 22,297 1.55 3,079 1,188 0.26 240,702 29,857 0.60 Tomatoes (054.4) 10,197 21,761 1.51 1,078 333 0.07 110,763 38,950 0.79 Olive oil 20 60 0.00 28,907 120,258 26.96 23,277 74,354 1.50 Crustaceans & molluscs 15 0.00 - 66,151 14.83 - 22,223 0.45 Dates (057.96) 212 1,407 0.09 18,216 47,914 10.74 130 93 0.00 Cigarettes 53 1,314 0.09 2,244 24,645 5.52 21,057 88,932 1.80 Fish 10,199 0.70 - 22,165 4.96 - 26,762 0.54 Tobacco leaves 4 25 0.00 435 895 0.20 162,027 538,548 10.90 Hazelnuts, shelled 0 34 107 0.02 143,282 442,941 8.96 Pastry 4,000 11,000 0.76 1,252 4,648 1.04 171,714 236,759 4.79 Sugar confectionery 5,500 9,335 0.64 1,434 3,069 0.68 74,076 194,812 3.94 Raisins (057.52) 0 0 0 0 171,869 188,322 3.81 Flour, wheat (046.01,02) 1,000 300 0.02 32,564 9,986 2.23 570,577 175,366 3.55 Prepared nuts (excl. GRNUTS) 25 110 0.00 0 0 0 45,448 134,711 2.72 Margarine & shortening 180 240 0.01 0 0 0 130,599 122,993 2.49 (Table continues on next page.) TABLE 3.6. (Continued) 1996 1996 Share 1996 1996 Slhare 1996 1996 Sliare Israeli Israeli in total Tunisian Tunisian in total 7Tirkish Turkish in total exports, exports Israeli agr exports, exports, Tunisian agr. exports, exports, T'uirkislh agr Product metric ton $1,000 exports (%) metric ton $1,000 exports (%) metric ton $1,000 exports (%) Tomato paste 6,900 4,300 0.29 7,179 7,374 1.65 148,848 122,912 2.48 Lentils 0 0 0 0 0 0 246,142 112,166 2.27 Chickpeas 50 60 0.00 51 59 0.01 192,710 112,104 2.27 Dry apricots 0 0 0 36 18 0.00 43,821 106,072 2.14 Sheep (head) 0 0 0 0 0 0 240,576 82,992 1.68 Figs, dried 7 34 0.00 5 2 0.00 35,367 68,575 1.38 Lemons & limes (057.21) 4,700 2,127 0.14 49 36 0.00 110,441 59,659 1.20 Tangerines, mandarins, clementincs, and satsumas 0 0 0 3 1 0.00 125,956 53,066 1.07 to Total 51.76 71.82 65.24 - Not availiable. Sources: Food anid Agricultural Organization of the United Nations; UN Comtrade daita. TABLE 3.7. TARIFF QUOTAS ON AND TRADE ARRANGEMENTS FOR SELECTED AGRICULTURAL COMMODITIES Reduction of Tariff Reductioni of Tariff Reduction of Tariff the MFN quota the MFN quota the MFN quota customs volume customls volume customs volume duty (%), (tonnes), duty (%), (tonnes), duty (%), (tonnes), CN code Product Israel Israel Tunisia Tunisia Turkey Turkey 060310 and 060491 Cut flowers and foliage 100 19,500 100 750 100 - ex 080510 Oranges 100 290,000 100 31,360 100 - cx 080540 Grapefruit and pomelos 100 - 80 - 100 - 5201 Cotton lint (263.1) n.a. n.a. n.a. n.a. 100 - 0601 and 0602 Bulbs, cuttings, live plants 100 100 (roses) - 100 - 080440 Avocados 100 n.a. n.a. 100 - 200911 and 200919 Orange juice, single strength and concentrate 100 92,600 70 - 100 - X 200920 Grapefruit juice, single strength and concentrate 100 - 70 - 100 - ex 07019051 Potatoes (054.1) 100 20,000 100 15,000 100 - 070200 Tomatoes (054.4) 100 1,000 100 (Nov.-Apr.) n.a. 100 - 150910 and 1510 Olive oil n.a. n.a. (a) (a) 100 (b) 1605 Crustaceans and molluscs n.a. n.a. 100 - 100 - ex 08041000 Dates (057.96) 100 - 100 100 - 240220 Cigarettes n.a. n.a. ina. n.a. 100 - 1604 Fish n.a. n.a. 100 - 100 - 2401 Tobacco leaves n.a. n.a. n.a. n.a. 100 - 080221 and 080222 Hazelnuts, shelled n.a. n.a. n.a. n.a. duty rate 3 % - 1902 Pastry n.a. n.a. n.a. n.a. 100 - Sugar confectionery n.a. n.a. n.a. n.a. 100 - 08061029 Raisins (057.52) 100 - 60 (table grapes) na 100 - 1101 Flour, wheat (046.01, .02) n.a. n.a. n.a. n.a. 100 - Prepared nuts (excl. GRNUTS) n.a. n.a. n a. n.a. 100 - (Table continues on next page.) TABLE 3.7. (continued) Reduction of Tariff Reduction of Tariff Reduction of Tariff the MFN quota the MFN quota the MFN quota custonms volume custolms volume customs volume duty (%), (tonnes), duty (%), (tonnes), duty (%), (tonnes), CN code Product Israel Israel Tunisia Tunisia Turkey Turkey 1517 Margarine and shortening - - - - 100 n.a. 200290 Tomato paste - - 100 2,000 100 (') 071340 Lentils - - 100 n.a. 100 n.a. 071320 Chickpeas - - 100 n.a. 100 n.a. 080910 Dry apricots - - 100 n.a. 100 n.a. 020410-020443 Sheep - - 100 n.a. 100 (d) 08042021-08042029 Figs, dried - - - - 100 n.a. CD 080530 Lemons & limes (057.21) 100 7,700 and 1,000 100 n.a. 100 n.a. .> 080520 Tangerines, mandarins, clementines, and satsutnas 100 21,000 100 n.a. 100 n.a. ii.a. Not applicable. - Not available. a. Each marketing year until December 31, 1999, within the limnits of a quantity of 46,000 tonnes per year, a customs duty of ECU 7.81 per 100 kg shall be levied on imports into the Coimmunity of unitreated olive oil fiom Tuniisia. b. Specific duty is to be reduced by 5-10 percent. c. Prepatred tomatoes (whole or in pieces) are subject to a quota of 8,000 toniuies, other prepared tomatoes with a dry itiatter content of not less than 12 percent by weight are subject to a quota of 30,000 tonmes. d. No tariff quota, but in terms of specific duty there is tariff quota. Sources: EU-Israel FTA; EU-Tunisia FTA; and Decision 1/98 of the EC-Turkey Association Council of February 25, 1998. TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 85 TABLE 3.8. UNIT EXPORT PRICES OF SELECTED AGRICULTURAL COMMODITIES Israeli Israeli Tunisian Israeli Tunisian Turkish over over over unit unit unit Tunisian Turkish Turkish Product price price price price price price Oranges 0.42 0.42 0.34 0.99 1.22 1.22 Grapefruit and pomelos 0.60 - 0.35 - 1.70 - Cotton lint (263.1) 2.16 - 1.63 - 1.32 - Avocados 0.99 - 0.31 - 3.11 - Orange juice, single strength 0.65 - 0.57 - 1.14 - Orange juice, concentrated 1.31 1.33 0.78 0.98 1.66 1.69 Grapefruit juice, concentrated 1.58 - 0.65 - 2.42 - Potatoes (054.1) 0.30 0.38 0.12 0.78 2.42 3.11 Tomatoes (054.4) 2.13 0.30 0.35 6.90 6.06 0.87 Olive oil 3 4.16 3.19 0.72 0.93 1.30 Dates (057.96) 6.63 2.63 0.71 2.52 9.27 3.67 Cigarettes 24.79 10.98 4.22 2.25 5.87 2.60 Tobacco leaves 6.25 2.05 3.32 3.03 1.88 0.61 Hazelnuts, shelled - 3.14 3.09 - - 1.01 Pastry 2.75 3.71 1.37 0.74 1.99 2.69 Sugar confectionery 1.69 2.14 2.62 0.79 0.64 0.81 Flour of wheat (046.01, .02) 0.3 0.30 0.30 0.97 0.97 0.99 Prepared nuts (excl. GRNUTS) 4.4 - 2.96 - 1.48 - Margarine and shortening 1.33 - 0.94 - 1.41 - Tomato paste 0.62 1.02 0.82 0.60 0.75 1.24 Chickpeas 1.2 1.15 0.58 1.03 2.06 1.98 Dry apricots - 0.5 2.42 - - 0.20 Figs, dried 4.85 0.4 1.93 12.14 2.50 0.20 Lemons and limes (057.21) 0.45 0.73 0.54 0.61 0.83 1.36 Tangerines, mandarins, clementines, and satsumas - 0.33 0.42 - - 0.79 Macaroni 2.02 0.65 0.52 3.07 3.85 1.25 Apple juice, concentrated 2.23 - 1.28 - 1.74 - Beans, dried - 0.83 0.72 - - 1.14 Beer, barley(l 12.3 ex) 1.57 1.80 0.58 0.86 2.68 3.08 Apples (057.4) - 1.26 0.60 - - 2.09 Cotton waste 0.8 0.29 1.01 2.70 0.78 0.29 Hen eggs 1.29 4.95 1.09 0.26 1.17 4.51 Grapes (057.51) 1.42 1 0.61 1.42 2.30 1.61 Mushrooms - 3.76 11.89 - - 0.31 Wine 2.42 0.74 1.51 3.26 1.60 0.49 Sunflower seed (222.4) 0.09 0.21 1.97 0.46 0.04 0.10 Cantaloupes and other melons 0.93 - 0.33 - 2.79 - Almonds, shelled 2.84 6.92 4.99 0.41 0.56 1.38 Bread 1.90 24.10 1.67 0.07 1.14 14.40 Chickens (units) 1.31 6.90 0.43 0.19 3.01 15.83 - Not available. Source: Author's calculations. 86 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Antidumping and Safeguard Measures The EU-Turkey CUD offers rapid liberalization of trade. However, there are loopholes in the liberalization provided through antidumping procedures and safeguard measures, which are mentioned in Articles 36, 42, and 61 of the CUD. Article 36 specifies that as long as a particular practice is incompatible with the competition rules of the CU as specified in Articles 30-32 of the CUD and "in the absence of such rules if such practice causes or threatens to cause serious prejudice to the interest of the other Party or material injury to its domestic industry," the Community or Turkey may take the appropriate measures. Article 42 allows antidumping actions as long as Turkey fails to implement effectively the competition rules of the CU and other relevant parts of the acquis communautaire. In those cases, Article 47 of the Additional Protocol signed in 1970 between Turkey and the EC will remain in force. Finally, Article 61 is about safeguards that offer another loophole in the liberalization. The Article states that safeguard measures as specified in Article 60 of the Additional Proto- col will remain valid. According to Article 60, the Community (Turkey) may take necessary protective measures if serious disturbances occur in a sector of the economy of the Community (Turkey) or prejudice the external financial sta- bility of one or more member states (Turkey), or if difficulties arise that ad- versely affect the economic situation in a region of the Community (Turkey). Similarly, the EU-Tunisia FTA aims for liberalization of trade. As in the case of the CUD, however, there are loopholes in the liberalization provided through antidumping procedures and safeguard measures, which are mentioned in Articles 24, 25, and 27 of the EU-Tunisia FTA. Article 24 allows antidumping actions. The agreement specifies that antidumping actions must accord with Article VI of GATT. Since most EU practice is GATT consistent, there is little comfort for Tunisian producers. The Association Council will be informed of a dumping case as soon as the importing party starts investigating. If no solution has been reached within 30 days, the importing party may adopt the appropriate measures. Safeguards offer another loophole in the liberalization. The general safeguard clause contained in the agreement ties in perfectly with GATT rules. The safeguard measures have to be notified to the Association Committee and are subject to periodic consultations to establish a timetable for their abolition. Another derogation in the agreement enables the parties to deal with balance of payments difficulties. According to Article 35, the EU-Tunisia FTA safeguard measures are permitted for limited duration if imports from Tunisia cause "seri- ous balance of payments difficulties for Member Countries." Articles 18, 19, and 21 of the EU-Israel FTA contain clauses about anti- dumping procedures and safeguards. These articles are similar to Articles 24, 25, and 27 of the EU-Tunisia FTA. Article 22 is about safeguard measures the parties may take when they face balance of payments difficulties. It is identical to Article 35 of the EU-Tunisia FTA. TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 87 Rules and Disciplines The CUD, EU-Tunisia FTA, and EU-Israel FTA contain articles on the harmoniza- tion of commercial legislation as regards competition policy, state aids, intellectual and industrial property rights, and technical barriers. Competition Policies Within the Community, a strong common competition policy was seen, since the foundation of the Community, as important to ensure free and undistorted competi- tion, as anticompetitive behavior and subsidies can distort trade in the same way as border measures do. Outside the Community, cooperation on competition policy matters has increasingly been regarded as necessary to prevent anticompetitive prac- tices that could hurt EU companies. Therefore, the EU has introduced clauses on competition policy cooperation into the trade agreements. The competition policy articles of the Treaty Establishing the European Com- munity are Article 85, dealing with anticompetitive practices; Article 86, dealing with dominant market practices; Article 37, dealing with state monopolies; Article 90, dealing with the conduct of public enterprises;, and Articles 92-94, dealing with state aid. The issues are covered by Articles 30-36 of the CUD, Articles 36-38 of the EU-Tunisia FTA, and Articles 25-27 of the EU-Israel FTA. There is a major difference between the CUD and the FTAs. In the FTAs, competition rules are cov- ered under the heading of "Trade Related Provisions" in the EU-Israel Agreement and under the heading of "Competition and Other Provisions" in the EU-Tunisia Agreement. In the CUD, the rules are discussed under the headings of "Competi- tion Rules of the Customs Union" and "Approximation of Legislation." Article 30 of the CUD, which is identical to Article 85 of the EC Treaty, explic- itly states all of the agreements among firms that are considered as incompatible with a proper functioning of the CU. In addition, Article 30 allows agreements among firms that will promote efficiency in production and distribution, promote technical progress, and provide consumers with a fair share of the benefits. An immediate consequence of these negative and positive sides to the article is that each situation has to be studied by competition board on its own merits, and the task of the Turkish Competition Board is to build the appropriate body of case law. Article 31 of the CUD, which is identical to Article 86 of the EC Treaty, prohibits the abuse by one or more undertakings of a dominant position in the territories of the Community and/ or of Turkey or in a substantial part thereof, but only insofar as the abuse may affect trade between the Community and Turkey. It covers, for example, restrictions on supply or technical development and unfair pricing. But unlike Article 30 of the CUD, there is no provision for granting an exemption. According to Article 32 of the CUD, which is identical to Article 92 of the EC Treaty, any public aid that distorts competition is incompatible with the functioning of the CU. Exceptions are aid having a social character granted to individual con- 88 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA sumers, aid promoting economic development of Turkey's less-developed regions for five years, aid aiming at accomplishing structural adjustment necessitated by the establishment of the CU for a period of five years, and aid promoting culture and heritage conservation. Aid to facilitate the development of certain economic activi- ties or of certain economic areas may also be considered to be compatible with the functioning of the CU. Article 37 of the CUD states that Turkey shall ensure that its legislation in the field of competition rules is made compatible with that of the European Community, and is applied effectively. Turkey shall ensure that, within one year after the entry into force of the CU, the principles contained in block ex- emption regulations in force in the Community, as well as the principles contained in the case law developed by EC authorities, shall be applied in Turkey. Within two years after the entry into force of the CU, Turkey will adapt all aid schemes other than those granted to the textile and clothing sector to the rules laid down in Com- munity frameworks and guidelines under Articles 92 and 93 of the EC Treaty. Ac- cording to Article 39 of the CUD, Turkey shall ensure that public undertakings, and undertakings to which special or exclusive rights have been granted, by the end of first year following the entry into force of the CU uphold the principles in Article 90, as well as principles contained in the secondary legislation and the case law developed on this basis. Article 40 of the CUD states that Turkey shall adjust any state monopolies of a commercial character so as to ensure that, by the end of the second year following the entry into force of the CUD, no discrimination regarding the conditions under which goods are produced and marketed exist between nation- als of the member states and of Turkey. Finally, Statements 1 and 2 of the CUD state that the Community will apply safeguard measures such as antidumping and countervailing duties until Turkey effectively implements the measures on competi- tion, including the measures on public aid. In the EU-Israel FTA, Article 25.1 states: The following are incompatible with the proper functioning of the Agree- ment, insofar as they may affect trade between the Community and Is- rael: (i) all agreements between undertakings, decisions by associations of undertakings and concerted practices between undertakings which have as their object or effect the prevention, restriction or distortion of competition; (ii) abuse by one or more undertakings of a dominant po- sition in the territories of the Community or of Israel as a whole or in substantial part thereof; (iii) any public aid which distorts or threatens to distort competition by favouring certain undertakings or the produc- tion of certain goods. Paragraph 3 of Article 25 is about transparency in the area of public aid, and Paragraph 4 excludes the application of paragraph l(iii) to agricultural commodi- ties. Paragraph S of Article 25 states that if a particular practice is incompatible with the terms of paragraph 1, the affected party may take appropriate measures after 30 TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 89 days following consultation within the Cooperation Council. Such measures have to be GATT consistent. Finally, Article 26 concerns state monopolies, and Article 27 is about public enterprises. The competition rules of the EU-Tunisia FTA, covered by Articles 36-38, are similar to the competition rules of the EU-Israel Agreement. The first part of Article 36.1 is identical to Article 25.1 of the EU-Israel FTA. The second part of Article 36.1 allows for derogation under the treaty establishing ECSC. Article 36.2 states that practices contrary to Article 36.1 shall be assessed on the basis of criteria aris- ing from the application of the rules of Articles 85, 86, and 92 of the treaty estab- lishing EC, and in the case of products falling within the scope of the ECSC, the rules of Articles 65 and 66 of the treaty establishing that Community, and the rules relating to state aid, including secondary legislation. Article 36.4 (a) states that for the purposes of applying the provisions of paragraph 1 (c), the parties recognize that during the first five years after the entry into force of this agreement, any public aid granted by Tunisia shall be assessed, taking into account the fact that Tunisia shall be regarded as an area identical to those areas of the Community described in Article 92.3 (a) of the treaty establishing the EC. During the same period, Tunisia may exceptionally, as regards ECSC steel products, grant state aid for restructuring purposes provided that (a) it leads to the viability of the recipient firms under nor- mal market conditions at the end of the restructuring period; (b) the amount and intensity of such aid are strictly limited to what is absolutely necessary to restore such viability and are progressively reduced; and (c) the restructuring program is linked to a comprehensive plan for rationalizing capacity in Tunisia. The Associa- tion Council shall, taking into account the economic situation of Tunisia, decide whether the period of five years should be extended. The remaining competition policy articles of EU-Tunisia FTA are similar to the corresponding articles in the EU-Israel FTA. The above considerations reveal that there are major differences between the competition policy rules in the three agreements. These differences can be summa- rized as follows: Whereas the competition rules of the CUD are identical to Articles 85, 86, and 92 of the EC Treaty, the rules in the EU-Tunisia and EU-Israel FTAs are not. In addition, while the EU-Tunisia FTA makes reference to Articles 85, 86, and 92 of the EC Treaty, the EU-Israel FTA does not. As such, the EU-Israel Agreement is better than the other trade agreements. Under the rules of the EU-Israel FTA, Israel has to develop its own competition policy. Israel will not be subject to rules contained in Articles 85, 86, and 92 of the EC Treaty, Community rules on state aids (including secondary legisla- tion), the principles contained in relevant block exemption regulations in force in the Community, and the principles in the relevant case law devel- oped by EC authorities. Turkey will apply the principles contained in the relevant block exemption regulations in force in the Community as well as 90 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA the principles contained in the relevant case law developed by EC authori- ties in one year's time, and will adopt in two years' time all aid schemes other than those granted to the textile and clothing sector to the rules laid down in Community frameworks and guidelines under Articles 92 and 93 of the EC Treaty. * The declaration by the EC relating to Article 25 annexed to the FTA states that the Community will assess any practice contrary to that article on the basis of the criteria resulting from the rules contained in Articles 85, 86, and 92 of the treaty establishing the European Community, and for prod- ucts covered by the treaty establishing the ECSC, from those contained in Articles 65 and 66 of that treaty and the Community rules on state aids, including secondary legislation Although this is a one-sided declaration, it shows the intention of the EU to refer to Articles 85, 86, and 92 of the EC Treaty in case of disputes. * Whereas the competition rules are covered under "Trade Related Provi- sions" in the EU-Israel FrA and under "Competition and Other Provisions" in the EU-Tunisia FTA, the rules are covered in the CUD under two head- ings: "Competition Rules of the Customs Union" and "Approximation of Legislation." * Turkey can grant aid for a period of five years from the entry into force of the CUD to promote economic development of the country's less-devel- oped regions and to accomplish structural adjustment necessitated by the establishment of the CU. Aid to facilitate the development of certain eco- nomic activities or of certain economic areas may also be considered to be compatible with the functioning of the CU. In the case of Tunisia, any state aid during the first five years after entry into force of the agreement shall be assessed, taking into account the fact that Tunisia shall be regarded as an area identical to those areas of the Community described in Article 92(3)(a) of the treaty establishing the EC. In addition, Tunisia, during the first five years, may grant state aid in the case of ECSC steel products for restructuring purposes. * Competition rules on public undertakings will be applied in Turkey by the end of first year following the entry into force of the agreement, and in the cases of Israel and Tunisia, by the end of fifth year. * Competition rules on state monopolies will be applied in Turkey by the end of second year following the entry into force of the agreement, and in the cases of Israel and Tunisia, by the end of fifth year. TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 91 Intellectual, Industrial, and Commercial Property Rights Besides competition policies, the CUD has clauses on intellectual, industrial, and commercial property rights. Article 29 and Annex 8 of the CUD require Turkey to ensure adequate and effective protection and enforcement of intellectual property rights and to implement the Uruguay Round Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) by 1999. Furthermore, by January 1, 1998, Turkey will have to adopt legislation to secure the patentability of pharmaceutical products and processes. Regarding copyright, the agreement requires that piracy such as counterfeiting or bootlegging be effectively banned and that the terms of protection in cases of translation should not be less than 50 years in those cases in which the term is calculated on a basis other than the life of the person. In addition, Turkey had to accede to various conventions shown in Table 3.9 before the forma- tion of the CU and will have to accede to other conventions indicated in Table 3.9 three years after the formation of the CU. Similar considerations apply in the context of the FTAs. Article 28 and Annex 7 of the EU-Israel FTA state that in three years' time, Israel will accede to major multilateral conventions on intellectual, industrial, and commercial property rights, and ratify in two years' time the Rome Convention of 1961. Finally, Article 39 and Annex 7 of the EU-Tunisia FTA state that in four years' time, Tunisia will accede to major multilateral conventions on intellectual, industrial, and commercial property rights shown in Table 3.9. Technical Barriers Technical barriers exist when countries impose certain standards as conditions for entry, sale, and use; have different legal regulations on health, safety, and environ- mental protection; and have different procedures for testing and certification to en- sure conformity to existing regulations or standards. The Community's approach to removing technical barriers rests on the principle of harmonization of national leg- islation, where uniform standards are set for all member countries. There are basi- cally two approaches to harmonization. The "old approach" incorporates all the technical details of the mandatory requirements in a directive. Under the "new ap- proach," essential policy requirements for particular products are set out, while the development technical standards conforming to the requirements has been entrusted to EU standardizing bodies. Moreover, in 1989, the Community put in place the "global approach to testing and certification," which sets principles for conformity assessment. The global approach is based on mutually acceptable auditing proce- dures. Goods manufactured pursuant to the requirements of the global approach are permitted to display a generic mark of conformity-the "CE" mark. All goods dis- playing that mark are entitled to circulate freely within EU and are exempted from further conformity assessment by an importing nation. In the case of trade with third countries, mutual recognition arrangements (MRAs) were developed to allow competent third-country assessment bodies to TABLE 3.9. MAJOR INTERNATIONAL CONVENTIONS ON INTELLECTUAL PROPERTY Agreement Description EU-Israel EU-Tunisia EU-Turkey FTA CUD FTA Patents Paris Convention Protection of patents and trademarks () () Accede before CU (1883; revised, 1967; Allows for compulsory licensing amended, in 1979) Patent Cooperation Accede in 3 years Accede in 4 years Accede before CU Treaty (1979; modified, 1984) Budapest Treaty International recogniitioni of the deposit Accede in 3 years Accede in 4 years Accede in 3 years (1977; amended 1980) of micro-organisms for the purposes of patent procedure Upov Convention Protection of new varieties of plants (a) Accede in 4 years Accede in 3 years (1961; revised, 1991) Copyright Berne Convention Protection of literary and artistic works Accede in 3 years (a) Accede before CU (1886; revised, 1971; Basic copyright treaty amended, 1979) Trade and service marks Madrid Agreement International registration of marks Accede in 3 years (1891; Stockholm Act 1967; amended, 1979) Protocol relating to IJiternatiortal registratiolt of marks Accede in 3 years Accede in 3 years Madrid Agreement (Madrid, 1989) Nice Agreement Classification of goods and services for (a) Accede in 4 years Accede before CU (Geneva, 1977; purposes of thc registration of marks amended, 1979) Other Rome Convention Protection of performers, producers of Ratify in 2 years Accede in 4 years Accede before CU (1961) phonograms and broadcasting organizations a. Denotes the cases where parties confirm the importance they attach to the obtigations arising from the conventions. Sources: EU-Israel ETA; EU-Tunisia FTA; and EU-Turkey CUD. to 94 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA take part in the EU's conformity assessment activities. Under an MRA, each party is given authority to test and certify products against the regulatory requirement of the other party, in its own territory and before export. MRAs do not require prior har- monization of each party's requirements. According to the stipulations of the CUD, the EU rules and regulations in the standards area will become legally effective in Turkey by the year 2001. After 2001, free circulation of goods must be admitted on the basis of the EC accord. Article 8 of the CUD reads as follows: "Within five years from the date of entry into force of this decision, Turkey shall incorporate into its internal order the Community instru- ments relating to the removal of technical barriers to trade.... The Parties stress the importance of effective co-operation between them in the fields of standardisation, metrology and calibration, quality, accreditation, testing and certification." Article 9 of the CUD states, "When Turkey has put into force the provisions of the Commu- nity instrument or instruments necessary for the elimination of technical barriers to trade in a particular product, trade in that product between the Contracting Parties shall take place in accordance with the conditions laid down by those instruments, without prejudice to the application of the provisions of this decision." Decision 2/ 97 of the EC-Turkey Association Council establishes the list of Community instru- ments relating to the removal of technical barriers to trade and the conditions and arrangements governing their implementation by Turkey. According to this Deci- sion, any instrument corresponding to an EC or EC Regulation will be made part of the internal legal order of Turkey. In the case of instruments corresponding to an EEC or EC Directive, Turkish authorities will be free to determine the form and methods of how to incorporate the Directive into the internal legal order of Turkey. Thus, Turkey over the next few years will have to reduce differences in the fields of standardization and conformity assessment. To this end, Turkey has to promote the use of Community technical regulations and European standards and conformity assessment procedures, and achieve where appropriate the conclusion of agreements on mutual recognition in these fields. In the case of the EU-Tunisia FTA, Article 40 states that "the Parties shall take appropriate steps to promote the use by Tunisia of Community technical rules and Euro- pean standards for industrial and agri-food products and certification procedures. The Parties shall, when the circumstances are right, conclude agreements for the mutual recognition of certification." Article 51 of the agreement states that "the parties shall co- operate in developing: (i) the use of Comrnunity rules in standardisation, metrology, quality control and conformity assessment, (ii) the updating of Tunisian laboratories, leading eventually to the conclusion of mutual recognition agreements for conformity assessment, and (iii) the bodies responsible for intellectual, industrial and commercial property and for standardisation and quality in Tunisia." Public Procurements Public purchasing is often used by governments as a policy instrument to support national or regional firms or industries for strategic reasons, to support employment TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 95 in declining industries, and to support emerging high technology industries. Studies show that the degree of import penetration in public purchases is lower than for the economy as a whole. Concerning public procurements, we note that neither the CUD nor the EU- Tunisia FTA has special arrangements. Article 46 of the CUD states that a date for the initiation of negotiations aiming at the mutual opening of the respective govern- ment procurement markets will be set. In the case of the EU-Tunisia FTA, Article 41 states that the parties shall take as their aim a reciprocal and gradual liberaliza- tion of public procurement contracts. Israel is the only country that has signed two agreements with the EU on, re- spectively, procurement by telecommunications operators and government procure- ment. The agreements were signed on February 24, 1997. The agreement on telecommunications procurements provides for a mutual opening of procurement by telecommunications operators through granting an exchange of national treat- ment. Furthermore, it requires that the procurement procedures and practices com- ply with the principles of nondiscrimination, transparency, and fairness. In Israel, price preference provision in favor of Israeli products will not apply against EU bidders. In the EU, the provisions of the Utilities Directive (93/38 EEC) will not be applied against tenders comprising products of Israeli origin. The EU-Israel Gov- ernment Procurement Agreement complements and broadens the scope of commit- ments under the WTO's new Government Procurement Agreement. Israel is committed to open its government procurement markets in urban transport, ser- vices, and medical equipment. The new rules will be extended to procurements by municipal and state agencies. Cooperation While the principal aim of completing the European market is the removal of barri- ers to free movement of goods and factors, a secondary aim is the enhancement of dynamic efficiency through cooperative R&D arrangements to be coupled with tough competition. The first such cooperative R&D arrangement was the European Stra- tegic Programme for Research and Development in Information Technology (ES- PRIT), which started in 1984. The success of ESPRIT helped to establish the climate for framework programs. The first framework program ran from 1987 to 1991 with a budget of ECU 5.4 billion. The fourth framework program ran from 1994 to 1998 with a budget of ECU 13 billion. Emphasis is placed on information and communi- cation technologies, energy, industrial technologies, and life sciences and related technologies. The Turkey-EU CUD is silent on the issue of Turkey's participation in the EU's cooperative R&D arrangements. Article 47 of the Tunisia-EU FTA states that the aim of co-operation is to (i) encourage the establishment of permanent links be- tween the Parties' scientific communities, notably by means of providing Tunisia with access to Community research and technological development programmes in 96 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA accordance with Community rules governing non-Community countries' involve- ment of such programmes, Tunisian participation in networks of decentralised co- operation and promoting synergy in training and research, (ii) improve Tunisia's research capabilities, (iii) stimulate technological innovation and the transfer of new technology and know-how, and (iv) encourage all activities aimed at establishing synergy at regional level. Israel is the only country among the three that has signed an agreement for cooperative R&D arrangements. The Agreement on Scientific and Technical Co- operation between EC and the State of Israel, signed on March 25, 1996, allows Israeli research entities to participate in all the specific programs of the Fourth Frame- work Programme (except nuclear energy) and in the activities of the Joint Research Centre. According to the agreement, research entities include universities, research organizations, industrial companies (including small and medium-sized enterprises), or individuals, and Israel will contribute to the budgets of the programs adopted for the implementation of the Fourth Framework Programme on the basis of the ratio of Israel's GDP to that of the member states of the EU. The agreement foresees the establishment of an EC-Israel Research Committee, whose function will include regular discussions on orientations and priorities of research policy in Israel and the Community. In the cases of Tunisia and Turkey, it is stressed that provisions will be made for Turkey to take part on a project-by-project basis in all the specific programs of the fifth R&TD framework program (1998-2002), but that Turkey will not be able to draw on the funds allocated to the framework program. In addition, Actions II of the framework program (International co-operation-INC02) will include for the first time an activity targeting cooperation with Mediterranean countries. Tunisia and Turkey will be able to participate fully in INCO2, and will receive Community financing to do so. Furthermore, dialogue on Euro-Mediterranean science and tech- nology policy will also take place within the Euro-Mediterranean Monitoring Com- mittee for Science and Technology Co-operation. Conclusion The purpose of this chapter was to study within a comparative framework the trade agreements Tunisia, Turkey, and Israel have signed with the EU, highlighting the differences and as well as common aspects in the three agreements. The study re- vealed the following results: The EU-Israel FTA, EU-Tunisia FTA, and EU-Turkey CUD aim for free trade in industrial products between the EU and the countries concerned. Free trade in industrial products is already established between the EU and Israel. It was com- pletely established by January 1, 1999, between the EU and Turkey, and will emerge in 12 years' time between the EU and Tunisia. By the year 2010, the EU and the countries under consideration will establish a free trade area covering flows of in- dustrial goods provided bilateral FTAs between Mediterranean countries can also TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 97 be signed by then. There are some differences between the three trade agreements. Whereas the EU-Israel and EU-Tunisia Trade Agreements are FTAs, the EU-Tur- key Trade Agreement is a Customs Union Decision. As such, the EU-Turkey CUD required that Turkey adopt the CCT against third-country imports by January 1, 1996, and adopt all of the preferential agreements the EU has concluded with third countries by the year 2001. Similar restrictions are not imposed on Tunisia and Israel. These countries are free to maintain their own policies toward nonparticipat- ing third countries. Furthermore, there are no clauses on rules of origin in the CUD, whereas the EU-Tunisia FTA and the EU-Israel FTA contain lengthy discussions of the issue of "originating products." As Mediterranean countries conclude bilateral FTAs among themselves, the introduction by the EC of diagonal cumulation of ori- gin will become an essential tool to facilitate the establishment of the Euro-Medi- terranean free trade zone through the development of South-South commercial ties. In the case of agricultural commodities, the agreements foresee progressive and reciprocal liberalization and extension of concessions on a reciprocal basis. Study of the prevailing concessions in agriculture reveal that Israel, Tunisia, and Turkey have obtained relatively satisfactory concessions from the EU. All of the three countries have obtained preferential treatment for most of the agricultural com- modities with relatively high share in their total agricultural exports. Consideration of the unit export prices in terms of U.S. dollars for the three countries reveals that the Israeli unit export prices on average are higher than the Turkish unit export prices. Thus, Israel, compared with Turkey, has been able to receive more U.S. dol- lars per unit of quantity exported of those commodities. The result may be due to the quality difference in the exports of the two countries. In the case of Tunisia, the concessions obtained seem within a comparative framework to be relatively satis- factory. The EU-Turkey CUD, EU-Tunisia FTA, and EU-Israel FTA offer liberalization of trade in industrial commodities. But there are loopholes in the liberalization pro- vided through antidumping procedures and safeguard measures. In addition, the CUD allows antidumping actions as long as Turkey fails to implement effectively the competition rules of the CU and other relevant parts of the acquis communautaire. Comparison of the articles on competition policy in the three agreements re- veals that there are major differences between the agreements. Whereas the compe- tition rules of the CUD are identical to Articles 85, 86, and 92 of the EC Treaty, the rules in the EU-Tunisia and EU-Israel FTAs are not. In addition, while the EU- Tunisia FTA makes reference to Articles 85, 86, and 92 of the EC Treaty, the EU- Israel FTA does not. As such, the EU-Israel Agreement is a better agreement than the CUD and the EU-Tunisia Agreement. Thus, Israel, unlike Turkey, will not be subject to rules contained in Articles 85, 86, and 92 of the EC Treaty, Community rules on state aids (including secondary legislation), the principles contained in rel- evant block exemption regulations in force in the Community, and the principles contained in the relevant case law developed by EC authorities. Furthermore, ac- cording to the CUD, Turkey can grant aid for a period of five years from the entry 98 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA into force of the CUD to promote economic development of the country's less- developed regions and to accomplish structural adjustment necessitated by the es- tablishment of the CU. Aid to facilitate the development of certain economic activities or of certain economic areas may also be considered to be compatible with the functioning of the CU. In the case of Tunisia, any state aid during the first five years after entry into force of the agreement will be assessed according to EU rules for disadvantaged regions (Article 92.3 (a), Treaty of Rome). In addition, Tunisia dur- ing the first five years may grant state aid in the case of ECSC steel products for restructuring purposes. Competition rules on public undertakings (state monopo- lies) will be applied in Turkey by the end of first (second) year after the entry into force of the agreement, and in the cases of Israel and Tunisia, by the end of fifth year. Besides competition policies, the trade agreements have clauses on intellec- tual, industrial, and commercial property rights. The countries are expected to ac- cede to major multilateral conventions on intellectual, industrial, and commercial property rights and ensure adequate and effective protection and enforcement of intellectual property rights. In the case of technical barriers, Turkey decided to make EU rules and regula- tions in the standards area legally effective within the country by the year 2001. Thus, the Turkish approach to removing technical barriers rests on the principle of harmonization of Turkish legislation with EU legislation. For this purpose, over the next few years, Turkey will have to promote the use of Community technical regu- lations and European standards and conformity assessment procedures, and achieve where appropriate the conclusion of agreements on mutual recognition in these fields. In the cases of Tunisia and Israel, MRAs have to be developed to allow these coun- tries' assessment bodies to take part in the EU's conformity assessment activities. Under such a scheme, Tunisia and Israel will test and certify products against the regulatory requirement of the other party, in their own territory and before export. In the case of public procurements, two separate agreements were signed be- tween the EU and Israel. With these agreements, the parties reaffirmed their com- mitments to mutually open their respective procurement markets. In the cases of Tunisia and Turkey, the countries have the option of signing separate bilateral agree- ments with the EU as long as they are willing to open their respective procurement markets and ratify the WTO's new Government Procurement Agreement. Among the cooperation schemes, the cooperative R&D arrangements are of prime importance for increasing dynamic efficiency in the countries under consid- eration. Among these countries, Israel is the only country to be associated with the Fourth Framework Programme of scientific research and technical development. The special status of Israel seems to be the result of its high level of scientific com- petence and the dense network of long-standing relations in scientific and technical cooperation between Israel and the EU. The above considerations reveal that the policy of further opening up the Israeli economy and integrating it into the EU will be successfully pursued with the EU- TURKEY, TUNISIA, AND ISRAEL: A COMPARISON OF AGREEMENTS 99 Israel FTA together with the Agreement on Procurements by Telecommunications Operators, Agreement on Government Procurements, and Agreement on Scientific and Technical Co-operation between EC and the State of Israel. A major remaining issue is to develop mutual recognition arrangements for overcoming technical bar- riers to trade. In the case of Turkey, the major task lies in the approximation of laws and adoption of the acquis communautaire. Turkey could aim to take part in coop- erative R&D arrangements. In addition, Turkey and the EU could commit them- selves to mutually open their respective procurement markets. Tunisia is in the process of opening up its economy, and the adjustment is expected to take a few years. Financial and technical assistance, together with institutional and administrative cooperation by the EU, could help Tunisia to overcome the difficulties of adjust- ment. Note 1. In this chapter, all references to the EU-Israel FTA refer to the Interim Agreement pub- lished in the Official Journal of European Communities on March 20, 1996. References Hoekman, B., and S. Djankov. 1996. "The European Union's Mediterranean Free Trade Initiative." World Economy 19:387-406. Lahouel, M. H. 1998. "Competition Policies and Deregulation in Tunisia." In Nemat Shafik, ed., Economic Challenges Facing Middle Eastern and North African Countries: Alternative Futures. London: Macmillan. Pomfret, R. W. T., and B. Toren. 1980. Israel and the European Common Market: An Appraisal of the 1975 ETA. Kieler Studien. Tubingen: J. C. B. Mohr. Razin, A., and E. Sadka. 1993. The Economy of Modern Israel: Malaise and Prom- ise. Chicago: University of Chicago Press. Togan, S. 1997. "Opening up the Turkish Economy in the Context of the Customs Union with EU." Journal of Economic Integration 12:157-79. World Trade Organization. 1997. Annual Report. Geneva. Chapter 4 Agricultural Trade Around the Mediterranean A. HalisAkder Euro-Mediterranean relations revolve around bilateral cooperation and partnership agreements between 15 members of the EU and 11 Mediterranean countries and 1 autonomous region (Algeria, Morocco, Tunisia, Egypt, Jordan, Syria, Israel, Pales- tine, Cyprus, Malta, and Turkey). Of the countries in the Mediterranean region, only two, Albania and Libya, have never been involved in the so-called Euro-Mediterra- nean relationship. The former Yugoslavia is also an outlier. After its disintegration, Yugoslavia continues to remain outside the Euro-Mediterranean framework, with some of the newly independent states such as Slovenia signing Association Agree- ments and intending to become members of the EU. The intensity of the economic relationship between each Mediterranean coun- try and the EU is not uniform. The major common denominator is that the relation- ship is bilaiteral. Cyprus, Slovenia, and Malta are accepted applicants to full EU membership (although Malta has withdrawn its application). Turkey has established a customs union with the EU, which includes only manufactured goods, and has applied for full membership. Israel (1995), Tunisia (1995), Morocco (1996), Pales- tine (1997), and Jordan (1998) have renewed partnership agreements. Egypt, Leba- non, and Algeria are negotiating similar arrangements. In May 1998, Syria made a start in negotiating an Association Agreement. The far-reaching target of all these agreements is to establish a free trade area around the Mediterranean. As bilateral trade agreernents with the EU are discouraging intraregional trade, recently an Arab Free Trade Agreement was formed to counterbalance this possibility. In 1997, 18 Arab states approved an executive program for establishing the Arab Free Trade 101 102 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Area (FrA), which came into effect on January 1, 1998. The new agreement fore- sees the elimination of import duties and other barriers to trade on goods of Arab origin over a 10-year period. Turkey started a similar regional integration move- ment around the Black Sea and signed preferential trade agreements with Israel and with several Central and Eastern European countries. Euro-Mediterranean Partnership: Interdependence Nonmember Mediterranean countries provide the EU with a substantial external market, and the EU is the main outlet for exports from many of these countries (Table 4. 1). Almost 20 percent of the EU's energy imports come from the Mediter- ranean region. The need for a specific Euro-Mediterranean policy stems from the huge dis- parity between the north and south of the Mediterranean region. The problems of the South diffuse in one way or another into Europe: illegal migration, drug traffic, the threat of unrest in Algeria to oil imports. In a similar manner, the tensions between Israel and Arab countries have negative impact on the EU. All these prob- lems may persist in the future, and largely explain the need for Euro-Mediterra- nean partnership. Drawing upon its experience and on the basis of past performance, the World Bank suggests a challenging scenario for doubling the GDP of the region by 2010. Such a (modest) scenario assumes (a) a peaceful environment (reduced military expenditures), (b) implementation of a wide range of economic policies, (c) effec- tive regional cooperation in all fields of common interest, and (d) appropriate finan- TABLE 4.1. TRADE BETWEEN THE EU AND THE MEDITERRANEAN BASIN (1995) Share of Shore of Mediterranean Mediterranean countries countries EU's share EU's share in imports in exports in imports in exports EU (15 member states) 5.7 8.2 Algeria 56.0 63.5 Belgium and Luxembourg 6.1 12.4 Morocco 53.1 61.3 Denmark 1.4 3.2 Tunisia 69.1 79.0 Germany 4.8 5.5 Egypt 38.9 45.8 Greece 10.2 24.8 Jordan 31.1 5.0 Spain 7.6 12.3 Lebanon 43.6 15.8 France 9.4 11.8 Syria 31.7 56.7 Ireland 1.5 4.7 Israel 52.4 32.3 Italy 9.2 11.5 Palestine Netherlands 4.0 6.9 Cyprus 51.7 34.7 Portugal 8.0 8.0 Malta 72.8 71.4 U.K. 2.6 5.8 Turkey 47.2 51.2 Source: Eurostat, Euro-Mediterranean Bulletin on Short Term Indicators. AGRICULTURAL TRADE AROUND THE MEDITERRANEAN 103 cial flows (domestic savings, workers' remittances, foreign direct investment, and commercial loans). Even under such favorable assumptions, the wealth gap between the EU and the Maghreb and Mashreq countries would possibly widen. The expec- tation is that the dynamic created by the progressive opening up of the Middle East- em and North African economies to the competitive EU (free trade area) will become an additional factor that will hinder further widening of the disparities. Despite the weaknesses in the past, the EU is optimistic in strengthening the current Mediterranean policy by liberalizing trade in manufactured goods. The tra- ditional cooperation area, agriculture, will enjoy only a weak liberalization. Agricultural Trade between the EU and Mediterranean Countries: Market Similarity To determine the extent to which the member and nonmember Mediterranean coun- tries and Central and Eastern Europe compete in the EU for the agricultural mar- kets, the similarity of the geographical composition of exports has been measured (Table 4.2). Such information is useful for discussing the prospective consequences of EU enlargement to the East. For each pair of countries i and j, the similarity of their export markets (Ms) is given by Ms'= X(min M ,Mk), where Mik is the percentage share of market k in total (agricultural) exports from country i and Mik is the share of the same market in exports from country j. This index can take on values between 0 and 100. Zero represents fully different, and 100 indicates identical export profiles. The markets covered here are the 15 member states of the EU. Rather than interpret these 288 pair-wise coefficients separately, an attempt has been made to configure these data by a multidimensional scaling technique that uses approximate similarities among the data. The results can be given spatial rep- resentation consisting of geometric configuration of points as on a map (Figure 4.1), which makes the data much easier to comprehend. The larger the dissimilarity between two countries, the further apart they should be on the spatial map. The structure of the configuration of points indicates the principal export mar- kets of respective countries. For countries on the right side of the x-axis, the Ger- man market dominates, while on the left side we find a group of countries that have their principal market in Italy. The upper part of the y-axis indicates the combina- tion of German and Italian markets, and the lower part indicates the combination of French, Spanish, and U.K. markets. The cluster of countries close to the center (Egypt, Spain, Italy, Bulgaria, France, Turkey, Lebanon) have a diversified (balanced) market distribution. Among these countries, France, Italy, Spain, and Turkey are the main agricultural exporters. The market similarity index, even if it has the same value between two pair of countries, TABLE 4.2. MARKET SIMILARITY COEFFICIENTS AMONG THE MEDITERRANEAN AND EASTERN EUROPEAN COUNTRIES (percentage) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I Turkey 2 France 71 3 Italy 82 56 4 Greece 64 69 52 5 Portugal 56 54 57 46 6 Spain 70 65 68 61 63 7 Malta 39 35 33 59 44 49 8Albania 61 53 49 70 34 53 51 9 Yugoslavia 79 57 67 67 39 61 46 75 10 Morocco 53 50 53 49 72 65 45 41 43 11 Algeria 34 31 34 31 56 44 37 30 29 76 12 Tunisia 36 39 28 65 55 39 69 52 46 53 49 13 Libya 26 36 15 53 23 25 56 57 39 23 20 62 14 Egypt 66 69 55 60 54 58 36 56 49 53 36 37 30 15 Cyprus 46 51 48 35 38 42 16 27 37 34 17 17 19 54 16 Lebanon 81 57 79 59 55 72 43 62 72 55 42 42 27 56 37 17 Syria 70 66 58 67 53 52 32 61 74 52 40 56 36 53 33 67 18 Israel 55 51 60 39 64 60 55 33 36 56 37 32 20 59 59 51 34 19 Jordan 55 54 44 74 48 57 68 59 60 47 29 66 56 56 56 49 44 57 20 Poland 80 56 62 56 39 60 36 55 75 42 24 29 21 53 53 74 64 40 46 21 Czech Rep. 65 43 63 44 28 45 17 41 63 33 14 16 13 39 39 55 54 31 30 71 22SlovakRep. 76 58 60 51 32 54 33 53 76 35 21 25 24 48 48 65 65 38 40 81 72 23 Hungary 78 55 66 58 39 60 33 59 79 45 28 33 26 50 50 73 68 37 47 81 75 84 24 Romania 65 59 56 78 41 60 53 76 77 43 27 52 46 55 55 66 60 36 66 62 53 64 70 25 Bulgaria 80 65 74 58 54 68 35 66 67 50 30 31 33 74 74 67 54 57 56 65 56 62 66 68 Source: Author's calculations from two-digit EUROSTAT trade statistics. AGRICULTURAL TRADE AROUND THE MEDITERRANEAN 105 requires different interpretation. For example, the similarity index between Italy and Spain is 68 percent. This means that both countries export 68 percent of their agricultural exports to the same markets (countries) in the EU. The market similar- ity index for Malta and Jordan is also 68 percent. It also means that both countries export 68 percent of their export to the same markets (countries) in the EU. However, the similarity of the first pair is due to the diversification of exports to several markets, whereas the second pair's similarity is due to the concentration of exports virtually in a single market. The cluster of countries, Hungary, Slovakia, the Czech Republic, and Poland, has high market similarity because of their high share in the German market. Con- versely, Libya, Tunisia, Malta, and Jordan also have quite high market similarity among themselves because of the high concentration in the Italian market. The group of countries in between, Greece, Romania, Albania, Syria, and the former Yugosla- via, has significant shares in both the Italian and the German markets. Algeria, FIGURE 4.1. MARKET SIMILARITIES: MEDITERRANEAN COUNTRIES AND EASTERN EUROPE Italian and German market Ql Libya 1.5 Albania El C1 Syria Yugoslavia Slovak Czech 0.5 El n a PRep. E- Rep. Tunisia El Greece E Romania El Hungary German t Malta Jordan 1 1 Lebanon land market El Turkey E. l a CE France EL Bulgaria El Spain El1 Italy -0.5- Egypt El Morocco E El Cyprus Portugal El -1 - El Israel Algeria El French and UK market Spanish market -1.5 - -2 -1 0 1 2 106 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Morocco, and Portugal export mainly to the French and Spanish markets. The larg- est share of Israel's exports is actually directed to the Netherlands. Other geographic characteristics can also be inferred from the configuration of data products. The line starting from the upper left-Libya, Tunisia, Malta, Mo- rocco, Algeria-includes the Maghreb countries. The next line starting, from Jor- dan to Egypt, Israel, and Cyprus, includes many countries of the eastern Mediterranean region. Portugal, Spain, France, and Italy are the main northern Mediterranean countries. Bulgaria, Turkey, Greece, the formerYugoslavia, Albania, and Romania make up the Balkan countries. Hungary, Poland, Slovakia, and the Czech Republic are (Central) Eastern European countries. Thus, the movement along the horizontal axis from left to right corresponds to a movement from south to north. The structure of the market-similarity matrix appears to indicate traditional (political) ties: France and Italy with the Maghreb, Germany with Turkey and Cen- tral Europe and the Balkans, the United Kingdom with Cyprus and Egypt. Following the eastward expansion of the European Union, the northern Medi- terranean countries will have greater competition for German and Italian markets. The southern Mediterranean countries will compete among themselves for the Ital- ian, French, and Spanish markets. However, competition for the same broad market segments need not necessarily imply competition in the same products. Agricultural Trade between the EU and Mediterranean Countries: Product Similarity The similarities of product distribution among the same 25 countries have been calculated for agricultural products by using two-digit Nimexe categories 01-24 (Table 4.3). For each pair of countries i and j, the coefficient of product similarity (PS) is defined as PS' = I (min P", P'), where Pi' is the percentage share of product t in i's exports to the EU and P" is the share of the same product in exports fromj to the EU. The product similarities were again configured by a multidimensional scaling technique. The structure of the product similarity seems to be quite different from market similarity. In general, market similarities are higher than product similarities. How- ever, this is mainly due to the disaggregation level of the data: there are 15 market segments but 24 product categories. Further disaggregation of the product data would lead to even smaller indices. The structure of this configuration reveals the most important export products of respective Mediterranean countries. These are fish and crustaceans, vegetables, fruits and nuts, olive oil, preparations of fruits and nuts, and beverages. Countries on the left-hand side-Cyprus, Algeria, Spain, Israel, Turkey, Yugo- slavia, and Morocco-export "specialty products," mainly fresh fruit and nuts and TABLE 4.3. PRODUCT SIMILARITY COEFFICIENTS AMONG THE MEDITERRANEAN AND EASTERN EUROPEAN COUNTRIES (percentage) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 Turkey 2 France 25 3 Italy 52 61 4 Greece 53 34 55 5 Portugal 32 54 57 40 6 Spain 58 49 67 52 47 7 Malta 22 24 27 26 33 42 8 Albania 32 26 26 43 37 33 58 9Yugoslavia 67 21 37 30 21 58 30 17 10 Morocco 62 23 50 46 48 68 47 41 57 11 Algeria 54 33 40 32 38 50 34 33 55 48 12 Tunisia 29 18 31 60 29 38 30 42 25 50 35 13 Egypt 27 26 24 19 22 36 34 29 44 32 21 17 14 Cyprus 50 29 46 35 30 68 34 16 70 54 45 23 59 15 Lebanon 26 34 38 37 37 34 23 32 18 24 20 23 24 25 16 Syria 23 27 23 38 18 32 23 37 22 26 10 30 33 21 60 17 Israel 64 28 52 39 29 58 29 24 55 60 43 24 29 52 23 21 18 Jordan 41 33 45 35 36 46 36 20 37 38 22 11 37 46 35 27 33 190 Poland 51 51 58 48 43 57 32 39 40 55 33 33 34 38 28 23 51 36 20 Czech Rep. 24 69 53 32 54 47 44 45 22 25 45 21 30 29 33 18 28 33 18 21 SlovakRep. 23 52 38 24 31 37 37 43 22 22 27 16 32 22 22 23 27 22 51 72 22 Hungary 35 52 46 34 40 45 34 41 29 36 26 18 34 29 29 27 35 32 60 52 50 23 Ronania 37 55 55 37 45 54 34 33 38 39 36 22 38 45 33 33 37 46 61 58 54 54 24 Bulgaria 41 54 58 40 60 49 39 39 31 36 39 17 32 38 35 21 40 43 55 59 45 59 55 25 Libya 13 18 15 17 22 19 17 21 12 19 13 15 16 10 32 32 11 17 27 28 30 20 24 17 Source: Author's calculations from two-digit EUROSTI AT trade statistics. 108 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA preparations of these products (Figure 4.2). Turkey, Israel, and Morocco are the main non-EU-member exporters of these typical Mediterranean products. They stand out in terms of both the total value of their exports and the range of products cov- ered in their exports. The EU was for a long time a net importer of these specialty products. The enlargement of the EU to include Greece and later Portugal, but espe- cially Spain, has changed the traditional trends. EU imports of fruits and nuts from the nonmember Mediterranean countries are declining. The upper part of the central axis of Figure 4.2 clusters those countries that export mainly beverages (wine) and animal products. Wine is another important export of the Mediterranean region to the EU. The lower left section of the central axis includes two countries-Tunisia and Greece-that have concentrated exports of olive oil and fish. Contrary to fruits, fish imports of the EU from the Mediterra- nean region are increasing quite rapidly. Vegetable exports have a large weight in Egypt's and Malta's agricultural exports to the EU and are increasing, too. Syria, Lebanon, and Libya, found on the right side of the axis, export nonfood products FIGURE 4.2. PRODUCT SIMILARITIES: MEDITERRANEAN COUNTRIES AND EASTERN EUROPE Beverages (Wine) 1.5 Jordan O 1 - France Fruit and Hungary Vegetables Bulgaria E3 O Ol Slovak Rep. a] Czech Rep. Algeria El Italy 10.5 -O Romania Algeria C1l Italy [1I 0 Portugal Cyprus O Spain O ° Poland N O l l r [~ rj Libya El Israel Yugoslavia O El Turkey O- Morocco Unedible -0.5 -EO Lebanon Products Greece ElO Malta El Albania -1 -EO Egypt Ol Syria OlTunisia Olive Oil and Fish -1.5 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 AGRICULTURAL TRADE AROUND THE MEDITERRANEAN 109 (inedible residuals). Considering the northeast-southwest diagonal, one can differ- entiate between plant production and animal products or southern and northern prod- ucts. The hidden structure of this configuration, however, is (most probably) the preference hierarchy offered by the EU to the Mediterranean countries. One obvi- ous indication is given by Tunisia. The generous preferences offered for olive oil make Tunisia's positioD almost an outlier. Agricultural Policy Issues The preference hierarchy offered by the EU will be affected mainly by (a) new free trade agreements with the Mediterranean countries, (b) adjustment to the Agree- ment on Agriculture of the World Trade Organization (WTO), and (c) eastward ex- pansion of the EU. After 1972, the so-called "Global Mediterranean Policy" offered the first major trade preferences to Mediterranean countries. Almost all association agreements offered free access to EU markets for all manufactures (except sensitive ones); how- ever, preferential access for agriculture was granted for specific products only. Both the coverage of preference among countries and the preference margins among prod- ucts differed considerably. However, before the Uruguay Round, the EU protected its own market against the main bulk of Mediterranean products by the so-called "reference price system." The reference price system, together with countervailing duties, usually resulted in a maximum quantity, as if a voluntary export quota had been applied. This made price competition among the Mediterranean countries al- most impossible. The maximum quantity at a fixed reference price meant a loss in the market share if the share of the competitor increased. To obtain a larger market share, the exporting firm had to convince the importing EU firm to shift to its prod- ucts rather than those of competitors. The sharing of the implicit quota rent was probably an important device for market sharing. Although the reference price sys- tem did not allow preferential treatment, tomatoes from Morocco and oranges and some citrus from Israel, Tunisia, and Morocco enjoyed exceptions after 1990. The EU had to replace the reference price system after 1995 according to its com- mitments in the WTO Agreement on Agriculture. As the reference price system was a nontariff barrier, it was subject to tariffication. However, direct tariffication would have resulted in paradoxical outcomes. The end result may be considered as a modification of the old reference price system. There are now an entry price and two different tariffs. For imports respecting the entry price, the lower "normal" tariff is applied (tariffs that were already bound before the Uruguay Round). For imports coming in at a c.i.f. price lower than the entry price, "the maximum tariff' is applied. The new system has three impor- tant differences from the old one. First, the reference price system was administered on a country-by- country basis, while the entry price system is administered at a shipment- by-shipment level. Second, the new system will allow preferential treatment. The third new feature concerns protection (the so-called "special safeguard provisions") as the EU has undergone a tariffication for these products. 110 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA After 1993, trade relations between the EU and Mediterranean countries en- tered a new stage. The Euro-Mediterranean Agreements replaced the association agreements. The new agreements aim at the establishment of a free trade area for nonagricultural products and provide for close cooperation in several areas. How- ever, agricultural trade will be organized on preferential terms. This sounds quite similar to the former association agreements, which offered free access to EU mar- kets for all manufactures (except sensitive ones) and preferential access for agricul- ture. The main difference is now the EU's demand for reciprocity and the EU's new international commitments for sensitive products. Another important development concerns the trading arrangements with Cen- tral and Eastern Europe. As indicated in Figure 4.2, the export products of the two regions differ quite considerably. Central and Eastern European countries are ex- porters of core products of Common Agricultural Policy (CAP), the so-called north- ern products. As these products are protected by relatively high tariffs, the preference margins offered to them are relatively higher than those offered to the Mediterra- nean countries, but the product coverage of preferential trade for Mediterranean countries seems to be more favorable. However, an important indirect source of competition for Mediterranean coun- tries may occur in the future. Central and Eastern European countries will become full members of the EU. It might be quite difficult to support their agricultural sec- tor by including them in the existing EU CAP. The budgetary burden may become too high. If the adjustment on account of this expansion were to pose difficulties for southern member states, Mediterranean countries would probably be confronted with new offsetting decreases in preferences. Conclusions The CAP has been able to survive both internal and external criticism and interna- tional negotiations for decades. In spite of some reforms and modifications, the southern (Mediterranean) product component has changed little. The EU offer of free access in manufactured goods but preferential trade in agriculture is also an unchanging policy toward the Mediterranean basin. If agricultural trade is not liberalized to the same degree as the manufacturing sector for a long period of time, several problems may arise and existing ones may persist. The question that necessarily follows is whether the liberalization efforts initiated by the WTO Agreement on Agriculture is sufficient to solve this imbalance problem between agriculture and industry. The Agreement on Agriculture has ne- glected important problems concerning the liberalization of agricultural markets (for example, export taxes) in developing countries, and in spite of considerable liberalization commitments by the EU for core CAP products, the reference price system for the fresh fruit and vegetable sector has prevailed. Considering that many Mediterranean countries are net importers of basic food from the world and from the EU, they will also face problems concerning their AGRICULTURAL TRADE AROUND THE MEDITERRANEAN 111 imports. As the Agreement on Agriculture will be more effective on core CAP prod- ucts, it is more likely that their imports will become more expensive, although no prospects for significant export increases exist. The prospects for an improved agri- cultural situation around the Mediterranean will therefore depend very much on the improvement of domestic agricultural policies. Chapter 5 Egypt: An Assessment of Recent Trade Policy Developments Amal Refaat Egyptian Center for Economic Studies, Cairo After decades of protectionist theories and industrialization policies based on im- port substitution, in the 1980s, economists began advocating development strate- gies based on trade liberalization and export promotion. The debt crisis of 1982; the poor performance of the inward-oriented economies compared to the outward-ori- ented, rapidly growing East Asian countries; and the collapse of the communist system all played an important role in reshaping policy views (Edwards 1993). Since 1983, the pace of global trade in goods and services has accelerated and outpaced the expansion of the world GDP. In the early 1990s, the elasticity of trade to GDP jumped to above two, and the ratio of exports to GDP reached 25 percent in 1995 (European Commission 1997). On the whole, developing countries followed this trend. They have become more open over time, and for most developing countries, trade liberalization has been a gradual process. It usually begins with exchange controls, followed by nontariff barriers (NTBs) and eventually tariffs (Andriamananjara and Nash 1997). In the case of Egypt, it was the first among the MENA countries to adopt a trade liberal- ization policy during the 1970s (Wilson 1986).' But how have liberalization trends evolved in the Egyptian economy since then? This chapter surveys the reforms in Egypt's merchandise trade policy since 1980 to date, to evaluate their impact on the openness of the economy. The analysis also considers the future prospects for trade liberalization in Egypt in light of its current and future involvement in multilateral, regional, and bilateral trade agree- ments. The ultimate objective is to identify the upcoming challenges Egypt will face as it moves toward a more liberal foreign trade sector. 113 114 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA The Main Features of Egypt's Foreign Trade Sector Egypt's trade balance has been continuously in deficit throughout the whole period of the study, from 1980 to 1998. The gap between exports and imports has been increasing since 1981 at an average annual growth rate of 18 percent. In 1997, the share of the trade deficit in GDP was 11 percent, and it has remained in this range since the beginning of the Economic Reform and Structural Adjustment Program (ERSAP) in 1991. The developments in Egypt's trade balance have had different underlying factors over time. Before 1988, the gap between exports and imports widened mainly as a result of an upsurge in the volume of imports, especially that of raw materials and investment goods. This trend was reinforced toward the end of the study period by a deterioration in Egypt's terms of trade (Figure 5.1). Between 1988 and 1993, the trade deficit fluctuated. These fluctuations were closely linked to the changes in the quantities of Egypt's exports. From 1994 onward, the defi- cit has been steadily expanding because of increases in the quantities of imports that outweigh the improvements Egypt has witnessed in its terms of trade for some years. The trade deficit is problematic not only because it is growing, but also be- cause the way it is financed embodies risk, which could have a negative impact on Egypt's balance of payment as a whole. A considerable amount of the financing is closely related to foreign aid and to oil-mainly through the foreign direct invest- ment concentrated in the oil sector and workers' remittances that are indexed to the oil revenues of the Gulf region (Petri 1997). Add to this that oil and its products account for about half of total export revenues. In 1996/97, the official transfers represented 33 percent of the trade deficit and the net private transfers formed another 9 percent. Export coverage of imports was only 33 percent, with petroleum exports accounting for 52 percent of the total merchandise exports. Egypt's exports remained concentrated in a handful of categories for the whole period of the study. The most important export category was mineral products, accounting for 58 percent of total Egyptian exports in 1984 and 47 percent of ex- ports in 1996. The second most important export was textiles and clothing (26 percent in 1984 and 23 percent in 1996), followed by vegetable products (7 percent in 1984 and 10 percent in 1996), base metals and related products (5 percent and 8 percent in the two respective years), and chemical products (2 percent in 1984 and 5 percent in 1996). Within these export categories, the importance of some prod- ucts increased while that of others decreased. These changes translated to an in- crease in the share of manufactured goods in total Egyptian exports from 20 percent in 1984 to 44 percent in 1996, with woven cotton, cotton yarn, aluminum ingots, and bleached rice on the top of the list. Nevertheless, the performance of manufac- tured exports and Egypt's merchandise exports in general have been disappointing, especially when compared with China, Southeast Asian countries, and the Central and Eastern European countries (Sachs 1996). FIGURE 5.1. EXPORTS AND IMPORTS' QUANTITY INDICES AND TERMS OF TRADE, 1980-96 1980 =100 1987 =100 200 250 200 , - 150 /\\ / -.-___ 150 --K 100 . _ = '1 0100 - - ~ ~ ~ ~ ~ ~ ~ - ~ 100 50 50 01 0 0 1980 1981 1982 1983 1984 1985 1986 1987 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ---- Import quantity index -- Export quantity index Terms of trade Source: Calculated from CAPMAS, Foreign Trade Indices, different issues. 116 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Egypt's imports are more diversified than its exports. In 1996, 94 percent of total imports were concentrated in 11 product categories, while 94 percent of total exports were concentrated in only 5 product categories. Machinery and vegetable products remained the most important imports between 1984 and 1996. Some im- port categories, as measured by their share of total imports, declined significantly, such as vehicles (from 12 percent in 1984 to 5 percent in 1996), mineral products (from 9 percent to 4 percent), and living animals and related products (from 7 per- cent to 4 percent). The share of other import categories in total imports increased, including paper, paper-making materials and related articles (from 2 percent to 4 percent); artificial resins, plastic materials, cellulose, and rubber (from 3 percent to 6 percent); and fats, oil, and related products (2 percent to 4 percent). The remain- ing import categories maintained their importance over time. The direction of Egypt's trade changed significantly over the past 10 years. While the share of exports to the United States quadrupled between 1986 and 1996, the share of exports to Eastern Europe declined, as did the imports from this region. Currently, Egypt's major trading partners are the European Union (EU) and the United States. In 1996/97, they absorbed 66 percent of Egypt's exports and supplied Egypt with 65 percent of its import needs. Egypt's trade with the Arab countries is by far less significant. In the same year, only 10 percent of Egypt's exports were destined for Arab countries, and only 4 percent of Egypt's imports came from there (Table 5.1). Changes in Egypt's Trade Policy and the Impact on Trade Openness Egypt began the 1980s with a much less restrictive trade regime, compared to the period from 1958 to 1973, due to the trade liberalization policies implemented in the mid- 1970s. Liberalization measures included eliminating the state monopoly on importation (by virtue of the Export-Import Law No.118/1975), introducing the TABLE 5.1. DISTRIBUTION OF EGYPT'S EXPORTS, IMPORTS, AND TRADE DEFICIT BY TRADING PARTNER 1986/87 AND 1996/97 (Percentage) Exports Imports Trade Deficit 1986/87 1996/97 1986/87 1996/97 1986/87 1996/97 EU 39 34 40 41 -41 -45 United States 8 32 20 24 -24 -20 Arab countries 12 10 1 4 2 -1 Other African and Asian countries It 16 11 14 -11 -13 Others 30 8 27 17 -26 -21 Source: Central Bank of Egypt, Economnic Review, various issues. EGYPT: AN ASSESSMENT OF RECENT TRADE POLICY DEVELOPMENTS 117 Own Import System, phasing out bilateral trade agreements, and creating free trade zones (Wilson 1986).3 These measures focused mainly on liberalizing payments rather than reducing tariffs and NTBs to trade. This is why, at the beginning of the 1980s, the tariff rates were high and NTBs were used extensively.4 The distortive effects of the trade policy were further aggravated by the prevalence of the multiple exchange rate. But how did trade reform proceed during the following years? Have there been significant shifts in the trade liberalization trends? Have the trade policy reforms led to greater or less openness of the Egyptian economy? This section attempts to answer these questions. First, the analysis focuses on the changes that occurred in the main trade policy instruments over the period of the study and then traces the impact of these changes on trade openness. Trade Liberalization Trends: Changes in Trade Policy Instruments In general, there are three main indicators of change toward trade liberalization: changes in tariffs and additional taxes and subsidies, changes in the NTBs to trade, and changes in the exchange rate system. Lowering the average level and dispersion of rates of protection and reducing the coverage and level of NTBs lead to more liberalization. A shift from multiple exchange rates to a uniform rate and a real devaluation also constitute a step toward liberalization. Unification of the exchange rate removes discrimination between tradable activities, and devaluation reduces the pressure of quantitative restrictions on rationing imports and reduces antiexport bias (Papageorgiou, Michaely, and Choksi 1991). The changes in each of these indicators are discussed in detail next. It should be noted that these changes began with the tariff reforms in August 1986 and continued with the announcement of the ERSAP. The latter included a trade liberalization component that aimed at changing Egypt's inward-oriented import substitution strat- egy of the past decades. CHANGES IN TARIFFS, TAXES, AND SUBSIDIES Tariff-Based Protection Over the period of this study, tariffs have undergone several changes that constitute a clear move toward liberalization and the beginning of an efficient use of tariffs as a policy instrument. First, the averages of both the nominal effective rate of protec- tion (NRP) and effective rates of protection (ERPs) have declined over time, as shown in Table 5.2 below.5 The collection rate-the ratio of import duties collected to the value of imports-has also been steadily declining, from 21 percent in 1991/92 to 17 percent in 1995/96 and further to almost 17 percent in 1996/97. It is expected that the collection rate will continue to decrease in the future to reach 15 percent in 1998/89 (International Monetary Fund 1998a). Second, the tariff dispersion, as measured by the range of nominal tariffs and 6 the standard deviation of the NRP and ERP, has been decreasing. The maximum 118 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA tariff rate declined from 110 percent in 1986 to 100 percent in 1992, 80 percent in 1993, 70 percent in 1994, 50 percent in 1997, and further to 40 percent in 1998. The standard deviation of the tariffs has also declined (Table 5.2). Yet, the existing pat- tern of protection discriminates against activities with a comparative advantage. The rank correlation coefficients between domestic resource cost (DRC) and be- tween the NRP and ERP in 1997 were estimated at 0.44 and 0.45, respectively (Nathan Associates 1998). Inefficient sectors that are favored include beverages, furniture, and means of transportation, while efficient sectors that are not favored include cotton ginning. This pattern of protection has had its impact on resource allocation within the Egyptian economy. The most striking example is the cotton and ginning industry that has a comparative advantage but is effectively negatively protected. Discrimination against this industry was associated with a 50 percent decline in its share of total industrial output from the early 1980s to 1995/96. Third, the extent of the economy-wide bias against exports decreased over the past few years from 25.7 percent in 1994 to 18.2 percent in 1997 (Table 5.3).7 At the disaggregate level, the bias decreased in all economic activities except cotton gin- ning where it remained almost constant, and paper and printing and livestock, where there was a slight increase in the bias against their potential exports. Despite these tariff reforms, more needs to be done. Egypt's tariff rates are still above the average tariffs prevailing in many other regions. In 1996, the weighted average tariff in Egypt (28 percent) was well above that of East Asia (21 percent), Eastern and Central Europe (9 percent), Latin America (14 percent), Sub-Saharan Africa (15 percent), and the average for developing countries (21 percent) (Alonso- Gamo, Fennell, and Sakr 1997). Also, the standard deviation of Egypt's tariffs is substantially higher than that of all countries represented in the World Bank, with only a few exceptions (Nathan Associates 1998). Additional Taxes and Fees Egypt's Law No. 87 of 1986 eliminated a series of taxes and fees that were formally levied on imports such as the statistical duty, subsidy tax, marine duty, and munici- pal tax. Currently, the Egyptian Customs Authority levies a 2-3 percent fee on im- ports, depending on the tariff applied. Items with tariffs of less than 30 percent are subject to service fees of 2 percent, and items subject to tariffs of more than 30 percent pay a service fee of 3 percent. A sales tax of 5-25 percent is added to the final customs value of imports (U.S. Dept. of State 1995/96). In terms of exports, the Egyptian government levies charges on exports that are subject to quality inspection. Examples of these goods are citrus fruits, juices, and vegetables. All export taxes were eliminated in late 1992 (International Monetary Fund 1998b). Changes in the NTBs The importance of the different forms of NTBs in Egypt has varied over time. The significance of import bans, as measured by their production coverage, is declining EGYPT: AN ASSESSMENT OF RECENTTRADE POLICY DEVELOPMENTS 119 TABLE 5.2. NOMINAL AND EFFECTIVE PROTECTION (Percentage) Nominal Effective 1986' 1994 1996 1997 1986 1994 1996 1997 Agricultural food products 31.0 8.9 7.0 6.8 38.0 8.8 6.8 6.6 Agricultural nonfood products - 15.7 9.5 9.5 - 16.4 9.6 9.6 Livestock products 12.0 5.0 5.1 5.1 113.0 3.3 4.1 4.2 Food processing 8.0 8.4 6.9 6.9 17.0 7.5 6.3 6.4 Cotton ginning 0 5.0 5.0 5.0 -68.0 -24.6 -10.9 -11.0 Spinning and weaving 34.0 37.6 29.0 28.0 788.0 68.2 49.8 47.6 Ready-made garments 109.0 69.6 50.8 46.6 348.0 87.3 61.8 55.9 Leather and leather products (excl. footwear) 16.0 46.6 33.7 33.1 35.0 79.6 52.7 47.6 Footwear 51.0 63.9 41.4 39.1 160.0 94.1 53.6 50.8 Wood and wood products (excl. furniture) 42.0 11.0 8.7 8.6 40.0 6.8 6.0 6.1 Furniture 110.0 69.8 54.9 49.9 296.0 128.8 95.2 83.8 Paper and printing 16.0 17.1 17.4 17.1 36.0 17.6 18.3 17.8 Chemicals 15.0 11.1 10.1 10.0 75.0 9.2 9.1 9.2 Rubber, plastic, and related products 28.0 33.0 29.8 28.5 563.0 50.0 45.6 43.1 Porcelain, china, and ceramics 75.0 52.5 37.9 35.0 214.0 90.8 60.9 56.0 Glass products 36.0 33.2 21.2 20.7 54.0 39.4 23.8 23.2 Nonmetal products 6.0 23.1 15.4 15.2 1.0 29.0 18.4 18.5 Steal, iron, and metal products 17.0 23.0 17.2 16.1 120.0 26.4 19.4 18.1 Machinery and equipment 28.0 22.5 16.0 15.3 39.0 22.5 15.0 14.5 Means of transportation 60.0 52.7 45.7 44.0 628.0 65.0 57.8 55.6 Unweighted average 36.5 30.5 23.1 21.9 184.1 41.3 30.2 28.2 Standard deviation 32.0 21.9 16.1 14.8 237.6 39.7 2-7.4 24.7 - Not availab.e. Note: Calculations for 1986 are based on the 1983/84 input-output tables, the rest are based on the 1991/92 input- output tables. It should be noted that the 1986 ERP estimates are less reliable than the 1990s ERP estimates because calculations of ERP ignore the effects of price controls, indirect taxes and subsidies, multiple exchange rates, and overvaluation that were more severe in the 1980s compared to the 1990s. Industries with a high positive ERP or below -100 percent will attract resources to them. Those with an ERP between -100 percent and zero squeeze out resources. a. After August 1986 tariff revisions. Sources: For 1994, 1996, and 1997: Kheir-EI-Din 1998; for 1986: Kheir-EI-Din 1989. (Table 5.4). The import ban list, instituted in 1986 as a replacement for the import licensing system abolished in the same year, now covers only poultry parts, certain textiles, and apparel items, down from 210 items in 1990. These account for less than 4 percent of domestic production. As part of the Uruguay Round (UR) Agree- ment, Egypt agreed to remove the import ban on clothing by January 1, 2001; how- ever, products removed from the import ban list are sometimes subject to high duty rates. The tariff on whole poultry, removed from the ban in July 1997, was set at 80 percent. Also, Egypt imposed a tariff of 54 percent, plus a 10 percent sales tax and a 1 percent service fee, on textiles removed from the ban list on January 1, 1998. 120 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 5.3. CHANGES IN TARIFF-INDUCED BIAS AGAINST EXPORTS (Percentage) 1994 1997 Agricultural food products 8.49 6.48 Agricultural nonfood products 15.40 9.25 Livestock 4.26 4.50 Food processing 5.26 4.45 Cotton ginning 4.99 5.00 Spinning and weaving 32.69 24.44 Ready-made garments 65.49 43.98 Leather products (excl. footwear) 42.72 28.12 Footwear 60.95 36.98 Wood products (excl. furniture) 5.06 4.15 Furniture 64.55 46.24 Paper and printing 7.54 7.59 Chemical products (excl. oil refining) 4.93 4.73 Rubber and plastic products 26.84 23.45 Porcelain products 51.67 34.38 Glass products 27.29 16.91 Nonmetallic products 22.75 14.96 Metals and iron products 21.68 15.16 Machinery and equipment 10.75 7.27 Means of ransportation 30.57 26.62 Unweighted average 25.69 18.23 Source: Author's calculation. Other items that were removed from the ban list, including meat, fruits, vegetables, household appliances, and transformers, were added to the quality control list (Of- fice of the U.S. Trade Representative 1998). Quality control is increasingly gaining importance as an NTB to trade, as noted in Table 5.4. The quality control list now consists of 131 items including foodstuffs, spare parts, construction products, electronic devices, appliances, and many con- sumer goods. Egyptian standards on imports are considered a trade barrier by the EU-Egypt's primary trading partner. Product standards set by the General Organi- zation for Export and Import Control are at variance with internationally recog- nized standards, thus causing problems with imports from the EU, such as processed food, ceramic tiles, sanitary ware, and cosmetics (Nathan Associates 1998). All other NTBs listed in Table 5.4 no longer exist. These include canceling the list of special conditions by Ministerial Decree No. 288/93, as well as canceling letters of credit and servicing requirements. Quantitative restrictions on exports include mainly three measures: export quo- tas, export bans, and prior approvals on exports (Kheir-El-Din and El Dersh 1992). Ministerial Decree No. 266/93 eliminated the only remaining item on the list of export quotas. The remaining item on the list of banned exports is raw hides, down EGYPT: AN ASSESSMENT OF RECENTTRADE POLICY DEVELOPMENTS 121 TABLE 5.4. PRODUCTION COVERAGE OF NTBS ON EGYPTIAN IMPORTS (Percent of domestic production) Before After 1991 1991 trade reform 1997 Public Private Public Private Public Private sector sector Total sector sector Total sector sector Total Import bans 47.5 64.0 52.9 43.7 32.9 40.7 <4 Quality control 3.6 21.4 15.8 19.9 21.9 20.5 - Prior approvals 12.4 9.5 11.5 0 0 0 0 0 0 Special conditions 8.4 2.6 6.8 0.56 0.51 0.55 0 0 0 Suspension letters of credit 9.2 7.9 8.8 0 0 0 0 0 0 Servicing requirements 6.8 1.5 5.4 0 0 0 0 0 0 - Not available. Source: Before and after 1991 trade reform: Kheir-Ei-Din and El Dersh 1992. from 20 items before 1991, six items in 1991, and two items in 1993. This NTB is scheduled to be removed in 1998 (International Monetary Fund 1998b). In 1991, the number of goods subject to prior approvals was reduced from 37 items to one. Changes in the Exchange Rate In 1980, Egypt had a multiple exchange rate in effect. There were three rates of foreign exchange. The first rate was that of the Central Bank, which remained fixed at 0.7ŁE/US$ from 1979 until 1989. The Central Bank's sources of foreign exchange were earnings from exports of petroleum, rice, and cotton; Suez Canal revenues; royalties from the SUMED pipeline; and foreign currency transferred to the govern- ment as foreign aid. These proceeds were used to service debt and finance the im- port of seven basic products: wheat, flour, tea, sugar, vegetables, pesticides, and fertilizers. The second rate was the commercial banks' rate, initially fixed at 0.83fŁEl US$. The commercial banks' pool included the proceeds from all other exports, tourist payments, and workers' remittances. In addition, foreign exchange was traded at a premium in the "own exchange pool." At that time, Egypt faced pressures from its trade balance, in addition to current account imbalances, due to the sharp fall in revenues from the Suez Canal, tourism, and workers' remittances. The exchange rate was not actively used, however, to restore external equilibrium, and instead the government resorted to imposing re- strictions. This was probably motivated by fear that currency devaluation would fuel inflation. As a partial result of this policy, the real effective exchange rate (REER) appreciated by 38 percent between 1982 and 1985, and nonoil exports were dis- couraged by the overvaluation of the exchange rate (GATT 1993). By the mid- 1980s, the exchange rate policy in Egypt had to change signifi- cantly. This was necessary to attract the remittances of the nearly 2 million Egyp- 122 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA tians then working abroad, and because development and industrialization require- ments in Egypt were inconsistent with the overvalued exchange rate. Following pressure from international organizations, Egypt embarked on a gradual reform of the exchange rate. This included both devaluation and gradual simplification of the exchange rate regime. In February 1991, the unification of the exchange rate versus the dollar took place only a few months after limiting exchange markets to two- the primary and secondary markets. The exchange premium effectively became zero in 1991 (Figure 5.2). This was accompanied by currency devaluation between 1985 and 1991, when Egypt began its stabilization program. No significant devaluation has occurred since then, and as a result, there was a real appreciation of the Egyp- tian pound, with the inflation rate in Egypt much higher than that of its trading partners. As measured by the REER, the real appreciation between July 1991 and December 1996 was 30 percent (Subramanian 1997). Despite this real appreciation of the Egyptian pound, a recent International Monetary Fund study concluded that although the REER was substantially overval- ued before 1993, since then it has moved close to the equilibrium real exchange rate (ERER). At the end of 1996, the REER was estimated to have appreciated only 7 percent compared to the ERER. The reason for this improvement is the significant appreciation of the ERER during the period from 1991 to 1995, which can, to a large extent, be attributed to the reduction in the debt service ratio over this period. Other factors that positively contributed to the appreciation of the ERER were tech- nical progress and, to a lesser extent, the Gulf War. Terms of trade, government consumption, and the lagged capital account balance contributed negatively to the FIGURE 5.2. EXCHANGE RATE PREMIUM, 1981-96 1.2 1.0 Commercial bank rate/black market rate -------------------- 0.8 0.6 0.4 Official market ratelblack market rate 0.2 0.0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Source: Calculated from the International Monetary Fund, International Financial Statistics, various issues. EGYPT: AN ASSESSMENT OF RECENT TRADE POLICY DEVELOPMENTS 123 appreciation of the ERER (Mongardini 1998). Sources of appreciation show that the appreciation of the ERER may not be sustainable in the future and that the Egyptian pound could be substantially overvalued if the exchange rate continues to be used as a policy anchor. Changes in Trade Openness Notwithstanding the trade reforms undertaken by the Egyptian government, mea- sures of openness reveal two facts. First, Egypt exhibited a comparatively low trade profile over the period of the study. Second, its economy has become less open and less integrated in the world economy over time. This turn inward occurred in spite of the global trend to intensify international trade relationships. Table 5.5 compares a variety of trade performance indicators for Egypt along with selected fast-grow- ing economies in two periods from 1983 to 1986 and 1993 to 1996. The indicators show that Egypt is the least open economy and is increasingly deviating from the averages of the fast-growing economies. The large public sector, the relatively high tariff barriers, the trade-distorting domestic regulations, and the overall institutional setting within which business is conducted in Egypt, can all be considered contrib- uting factors to the development of Egypt's trade openness. A more favorable business environment would undoubtedly enhance production and exports. Figure 5.3 illustrates the institutional constraints to business in Egypt as perceived by private firms.8 Among the constraints, inefficient regulations on the ports and infrastructure sectors and the inefficiency of the banking system are widely acknowledged as trade barriers. It is estimated that the inefficiencies of the Egyptian port services add 10 percent to the cost of imported goods, and inefficient telecom- munications services and financial services impose a tax on the manufacturing and agriculture sectors equivalent to 50 and 20 percent, respectively (Nathan Associates 1998).9 TABLE 5.5. DEVELOPMENT OF TRADE OPENNESS IN EGYPT AND SELECTED FAST- GROWING ECONOMIES Share in Share in Trade to world exports world imports GDP 1983-1986 1993-1996 1983-1986 1993-1996 1983-1986 1993-1996 Egypt 0.17 0.07 0.54 0.23 32 25 Thailand 0.41 1.05 0.52 1.31 43 71 Malaysia 0.83 1.40 0.67 1.39 89 160 Indonesia 1.08 0.94 0.69 0.77 42 42 Chile 0.21 0.28 0.15 0.3 44 48 Korea, Republic of 1.63 2.35 1.58 2.51 64 55 Average (excl. Egypt) 0.83 1.2 0.72 1.26 56.47 75.08 Source: Calculated from the International Monetary Fund. International Financial Statistics, various issues. 124 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA FIGURE 5.3. OVERALL RANKING OF INSTITUTIONAL CONSTRAINTS IN EGYPT Maximum degree of severity = 100 70 60 50 40 -Ca 20~~~~~~~~~~~ 30 ~~~~~~~0 C. * u oi .Sk ci, 20 E * C o Y lo1C0 1 di ~i c F-> 0 C 0 -- ~~~M __j __ z __ Source: Fawzy 1 998b. As Noll (1997) clearly indicates, in the case of a country like Egypt, where direct trade barriers-tariffs-are relatively high, the trade-distorting regulations should not be interpreted as motivated by the desire to impose indirect trade barriers. For Egypt, distorting regulations are the result of overall disadvantageous policies."' EGYPT HAS GROWN LESS OPEN AND LESS INTEGRATED IN THE WORLD ECONOMY The ratio of total trade imports and exports to GDP dropped by about 10 percentage points from 1980 to 1985 and from 1992 to 1996. Import penetration ratios, another important measure of openness, also reveal this unfavorable trend. The ratio of total imports to GDP declined over the period, as did the ratio of imports of consumption goods to total consumption." Imports of investment goods declined between 1986 and 1991 but gained momentum in the following period (Figure 5.4). FIGURE 5.4. OUTCOME-BASED MEASURES OF TRADE LIBERALIZATION Percent 40 * 1980-85 30 oz 1 986-91 20 | | g | ul~~~~~~~~~992-96 20 0 Trade/GDP Trade excl. ImportUGDP Imports excl. Import of Imports of food/GDP food/GDP consumption Investment/ goods/total total consumption investment Sources: International Monetary Fund, International Financial Statistics, various issues; all other data from CAPMAS, Statistical Yearbook, various issues. EGYPT: AN ASSESSMENT O- RECENT TRADE POLICY DEVELOPMENTS 125 The declining significance of trade in the Egyptian economy can be partly at- tributed to the importance of oil in Egypt's trade and the volatility of its prices. During the 1970s and early 1980s, when there was a remarkable rise in oil prices, Egypt's share in world exports and imports and its trade share in GDP were higher than in the years that followed (Petri 1997). If the openness indicator of trade/GDP is calculated excluding Egypt's trade in fuel, Egypt's openness still declined over time but at a lower rate (Figure 5.5). Windfall gains to the economy from oil and other sources also contributed to Egypt's trade performance. They helped raise the price of nontradables versus tradables and thus attracted investment away from the tradable sectors. Egypt's structural adjustment program has also played a role by suppressing imports during its early stages (World Bank 1995a). Future Directions for Egypt's Trade Liberalization Liberalization trends in the Egyptian economy are expected to continue in the fu- ture, based on the trade agreements that Egypt has already signed and is currently negotiating. This section explores the impact of Egypt's multilateral, regional, and bilateral trade arrangements on the liberalization of the Egyptian economy, besides what they can offer Egypt in terms of market access. Multilateral Liberalization Egypt's unilateral liberalization efforts were essential for allowing its full participa- tion in the UR negotiations, and the UR Agreement has in turn locked in these reforms. On the one hand, under the UR Agreement, Egypt binds 100 percent of its tariff lines in agriculture and 97 percent of its tariff lines in industry, thus approach- ing the commitments of the OECD countries and surpassing those of many other developing countries. After the full implementation of the UR Agreement commit- FIGURE 5.5. OPENNESS INDICATORS, EXCLUDING TRADE IN FUEL 40 * 1980-1985 35 35.5 0 1986-1991 30 30.0 29.3 o1992-1996 25254 | 150 | 11 I u256. 25 _ :|Q|||22.5 20 1 5 10 5 0 Trade/GDP Trade (excl. fuel)/GDP Source: Author's calculations 126 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA ments, however, Egypt's final bound tariffs to both agriculture and industry will be greater than the tariffs applied in December 1995 and the current applied tariff rates. Only 10 percent of all tariff lines will eventually have tariffs lower than the applied tariffs in December 1995. As regards quantitative restrictions on imports, it is ex- pected that they will be eliminated at the end of 2005, except for those that are maintained for health or security reasons. Despite the fact that Egypt's commit- ments substantially exceed the developing countries' average in terms of bindings and the gap between bound rates and applied rates, the UR Agreement will have a limited impact on trade liberalization in Egypt (Hoekman and Subramanian 1996). However, what market access does the UR Agreement offer Egypt? In terms of markets for Egyptian agricultural exports, the Agricultural Trade Liberalization Agreement in the UR Agreement represents one step forward and one backward. The tariffication and binding of all agricultural products is undoubtedly a step for- ward. But many of the newly established tariffs are so high in some countries that they effectively constrain trade. Binding tariffs to the base period of 1986 to 1988, when border protection was at a high point, diminishes liberalization. This is wors- ened in some cases by tariffication, since the new base tariffs offer even greater protection than the NTBs they replaced. The magnitude of extensive tariffication varied among countries and commodities. Among the industrial countries, tariffication was most extensive in the EU. Only Japan offered base tariff equivalents signifi- cantly lower than the nominal protection in the base year, except on rice. In addi- tion, the high levels of bound tariffs fail to stabilize tariffs and improve market access by allowing countries to apply variable tariffs. Also, the UR Agreement did not address issues such as import subsidies, export taxes, and other domestic sup- port measures (Ingco 1995). If this is the case for agricultural products, what is awaiting Egypt's industrial exports? The proportion of industrial country tariffs on manufactured goods subject to bindings rose from 94 to 99 percent under the UR Agreement. About 18 percent of these countries' imports were already bound as duty-free tariff, reductions were applied to 64 percent of imports, and the remaining 18 percent were divided be- tween bindings without reductions and no offers. In industrialized countries, the average tariff reduction on manufactured imports from developing countries is 30 percent, compared with 45 percent on imports from other industrial countries. This could have given Egypt a significant boost in market access, but the textile, cloth- ing, and footwear sectors, which have the highest tariffs, experienced lower price reductions than many other sectors. These two labor-intensive sectors are consid- ered sensitive and accordingly receive below-average tariff reductions. On one hand, it is often said that the phasing out of quotas and the multifiber agreement (MFA) compensate for this; but on the other hand, there is increased competition. In addi- tion, the remaining tariff escalation in industrial markets is a concem to developing countries, including Egypt. As regards the industrial products in developing coun- tries, only 60 percent of the tariffs are subject to bindings. Only 1 percent of their manufactured imports were initially bound as duty free, 32 percent bindings with EGYPT: AN ASSESSMENT OF RECENTTRADE POLICY DEVELOPMENTS 127 tariff reductions, 26 percent bindings without reductions, and for the remaining 42 percent, no offers were made (World Bank 1995b). The ultimate impact of the UR Agreement on Egypt's exports will be the out- come of three market-access effects. These effects arise from most favored nation (MFN) tariff cuts (a positive effect), the loss of preferential treatment due to MFN tariff cuts (a negative effect), and finally from liberalization of the MFA (a positive effect). Hoekman and Subramanian (1996) estimated the impact these three effects on Egypt's nonoil exports to the EU, the United States, and Japan. They concluded that the most significant impact would stem from the liberalization of textile and clothing quotas. The impacts of the other two effects are marginal and almost out- weigh one another. These results should be taken with caution, since the estimation procedure does not take into consideration the impact of the expected increase of competition in textile and clothing due to the phasing out of the MFA. Egypt must reduce costs and increase efficiency to remain a viable exporter. REGIONAL AND BILATERAL LIBERALIZATION Egypt's regional and bilateral trade agreements include the free trade agreements (FTAs) with the EU, the U nited States, and some Arab countries, in addition to the Arab Free Trade Area (AFTA) and the Common Market for Eastern and Southern Africa (COMESA). It is worth noting that membership in an FTA is neither a neces- sary nor a sufficient condition for more liberal trade, according to empirical evi- dence.12 It is a country's general acceptance of a liberal trade policy that can make the difference (Foroutan 1998). AN FTA WITH THE EU Egypt currently has preferential access to EU markets through the EU Generalized System of Preferences (GSP) and through the bilateral cooperation agreement of 1977. The latter grants Egypt duty-free access to the EU markets for industrial goods with some exceptions. A total of 32 textile products are excluded from duty-free entry into the EU.'3 Moreover, textiles and clothing imported from Egypt have been subject to antidumping regulations by the EU. The cooperation agreement also grants Egypt preferential access for agricultural goods. Processed agricultural products imported from Egypt are exempted from the ad valorem tariff the EU imposes on the industrial component but are subject to levies on their agricultural component. As for Egypt, it continues to impose tariffs on goods imported from the EU (Hoekman and Djankov 1997). In general, exporters in Egypt rely more on the bilateral coop- eration agreement than on the GSP. Products not covered by the GSP or the coop- eration agreement are subject to the regulations of the WTO. Egypt is currently negotiating an FTA with the EU as part of the new EU- Mediterranean Strategy outlined in the 1995 Barcelona Declaration.'4 Implementa- tion of the new strategy requires signing bilateral agreements with the Southern Mediterranean countries with the objective of creating free trade areas within a pe- riod of 12 tolS years and providing performance-linked financial assistance, among 128 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA other requirements (Nsouli, Bisat, and Kanaan 1996). The association agreements that the EU has signed with other countries suggest that the EU agreement with Egypt will aim at achieving reciprocal free trade of most manufactured goods and will grant reciprocal preferential access for agricultural products." The Egypt-EU negotiations have been underway for more than three years, mainly because of the debate over agricultural and processed agricultural products. A number of key issues-oranges, rice, and potatoes-have been problematic. Egypt insists on acquiring the best market access for these three products, which it has a comparative advantage producing and which represent 61 percent of Egypt's aggre- gate vegetable product exports and more than 5 percent of Egypt's total exports. The levies the EU imposes on the agricultural component of processed food imports from Egypt have also been a point of conflict. The EU insists on an agricultural agreement that complies with its well-known Common Agricultural Policy (CAP), which provides for limits on production, a high level of external protection, and high support prices. Critics maintain that the CAP could be an obstacle to Egypt achieving full market access for its agricultural products. Evidence for this is the UR Agreement on Agriculture. Negotiations for this agreement lasted for seven years because the EU insisted on ensuring the agreement's compatibility with the CAP. One of the reports by the EU shows the difficulties the Egyptian negotiators face: "The results of the UR give the EU enough room to maneuver to manage its own intemal poli- cies. Its market access commitments do not infringe on the principle of community preference and new possibilities have been opened up to European exporters.'6 Its export commitments are compatible with the 1992 CAP reform and the peace clause puts the EU out of danger of any attacks that non-EU countries may make on its agricultural policies",17 (Directorate-General for Agriculture 1995). This indicates that Egypt and other Mediterranean countries should not have high expectations for the agreement; particularly because the EU considers Egypt's requests unrealistic based on agreements with the other countries, which trade more with the EU. Nevertheless, the association agreement will be an important step toward trade liberalization, particularly because the EU is Egypt's major trading partner. The agree- ment with the EU also encourages liberalizing trade with third parties. For example, if Egypt enters into trade agreements with the other Mediterranean countries, it could benefit from the cumulation of origin allowed for in the agreements already signed with Tunisia and Morocco. An FTA with the EU, however, will not offer increased market access unless it improves the access of Egyptian agricultural exports to the EU markets. If the agreement is not signed, Egypt's access to the EU market will worsen, given that the cooperation agreement of 1977 will not be renewed and Egyp- tian exports will consequently face MFN tariff rates on the EU markets. AN FTA WITH THE UNITED STATES Egypt has preferential access to the U.S. markets through the American GSP regime that offers duty-free access to 3,666 tariff lines-about one-third of all U.S. tariff EGYPT: AN ASSESSMENT OF RECENT TRADE POLICY DEVELOPMENTS 129 lines. Nearly 88 percent of the GSP applies to industrial products: two-thirds relate to machinery and mechanical appliances, chemical products, basic metals, and optical, photography, and cinematography products; 2 percent covers textiles and textile prod- ucts to the United States; and the remaining 10 percent applies to agricultural prod- ucts. Tariffs on other exports are set according to WTO regulations. Under the GSP regime, Egypt exported a total of $41.4 million in 1996, about 6 percent of Egypt's total exports to the United States that year. Egypt, in return, grants MFN status to imports from the United States according to its WTO obligations. Compared to the EU system of preferences, the American GSP is less favorable. The EU system is more reliable because of its contractual nature and because it provides Egypt with better market access, since the coverage of the American GSP is more limited. Egypt and the United States agreed in May 1998 to begin talks on a Trade and Investment Framework Agreement (TIFA) (U.S. Embassy, Cairo 1998). The TIFA is typically a forum for discussing and monitoring trade and investment issues, iden- tifying impediments to trade and investment, and working to remove these impedi- ments. A TIFA is not a binding mechanism for resolving disputes. The TIFA is expected to be an intermediary step before beginning talks for a free trade area agreement at some time in the future. When political and economic conditions are suitable to initiate an Egypt-U.S. free trade agreement, the agreement will likely be finalized more quickly than the Egypt-EU negotiations. This is mainly because the United States' agricultural sector is not as vul- nerable as that of the EU with its CAP policy. Also, the prospects are better for offering Egypt more market access, if the NAFTA Agreement between the United States and Mexico is taken as a model for an agreement with Egypt. In addition to liberalizing trade in industrial products, NAFTA also managed to achieve this full liberalization in the agricultural sector (Office of the U.S. Trade Representative 1997). Table 5.6 shows the impact of NAFTA on tariffs in Mexico and the United States. Given the relatively high tariffs applied in Egypt and the importance of the United States as a trading partner to Egypt, an FTA with the United States will entail a significant reduction of Egypt's average nominal protection. By eliminating all tar- iffs and NTBs on Egyptian exports to the United States, this FTA will increase access to U.S. markets. This is the case because in the absence of an FTA, the Egyptian exports will continue to face tariff barriers on the U.S. markets even after the full implementation of the UR Agreement, which commits the United States to reducing the trade-weighted average tariff on textiles from 17 percent to 15 percent. For spe- cific textile imports, such as clothing, woven cotton fabrics, and textile yarn and thread, the U.S. tariff will be 11.0 percent, 19.0 percent, and 8.57 percent, respec- tively, after the UR Agreement. Also, important Egyptian agricultural exports, such as fresh vegetables, will continue to be subject to tariffs equal to 9.05 percent. AFTA AND EGYPT-ARAB BILATERAL FTAS The AFTA was launched on January 1, 1998. According to this agreement, an Arab free trade area will begin after 10 years, which means that tariff barriers will be 130 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 5.6. TARIFF REDUCTIONS IN MEXICO AND THE UNITED STATES DUE TO NAFTA Product Mexico United States End of groupings 1992 1996 1992 1996 transition period Animals and products 6.5 4.4 0.7 0 Phasing out tariffs and Vegetable productsa 4.1 1.7 5.6 2.8 the immediate or Waxes, fats, and oils 12.0 8.3 2.5 1.0 phased elimination of Food, beverages, and tobacco 15.2 9.6 3.6 2.2 important NTBs Mineral products 3.3 1.7 0.5 0 Chemicals and related products 10.2 4.0 1.0 0.5 Plastics, rubber, and related products 13.9 8.2 1.1 0.2 Leather, travel goods, etc. 8.8 5.1 5.5 1.7 Wood and related articles 14.4 5.0 0.3 0.1 Pulp, paper, and related products 8.4 3.6 0.6 0.1 Textiles and apparel' 16.0 5.3 9.1 1.3 Shoes, headgear, and related products 18.8 0.6 7.8 4.1 Ceramics, glass, and related products 16.0 6.2 4.3 2.6 Jewelry, precious metals and stones 5.4 1.9 0.1 0 Base metals and articles 12.4 6.7 2.0 1.3 Electronic goods and appliances 13.4 4.4 2.6 0.4 Transport equipment 15.1 4.9 1.6 0.6 Scientific and other instruments 12.9 1.5 2.9 0.4 Arms and ammunition 14.7 0 0.2 0 Art and antiques 14.5 0 0 0 a. NAFTA eliminated all NTBs and will eliminate all tariffs by the year 2008. b. Tariffs will be phased out in 10 years for products that meet rules of origin requirements. Import quotas in the United States will be lifted immediately for originating goods. Barriers covering 80 percent of textiles and apparel trade between the United States and Mexico will be eliminated in six years or less. Sources: Office of the U.S. Trade Representative 1997;U.S. Department of Commerce, Office of Textiles and Apparel 1997. eliminated within these 10 years. Tariff reductions already began in January 1998 with a 10 percent reduction on tariffs, taxes, and duties with similar effects (Fawzy 1998a). As regards NTBs, a common list of goods prohibited for health, security, and religious reasons has been prepared. The elimination of the remaining NTBs will be negotiated with the concerned committee. In case some members do not remove unjustified NTBs, the other members can apply the principle of reciprocity. Each country is allowed to draw a list of manufactured goods to be exempted from tariff and nontariff reductions, so that local industries can restructure to withstand competition (Zarrouk 1998). Finally, the agreement allows agricultural products, during the harvest season, to be outside tariff reduction throughout the transition period. Each country is allowed to include a maximum of 10 products exempted EGYPT: AN ASSESSMENT OF RECENT TRADE POLICY DEVELOPMENTS 131 during harvest, provided that exemptions do not exceed a total duration of more than 45 months. As of November 1998, almost a year from launching the AFTA, only 14 of 18 Arab countries signing the AFTA had begun implementation-Egypt being one of them. Besides joining the AFTA, Egypt has been involved in bilateral trade agree- ments with a number of Arab countries.'8 The Arab League and the AFTA encour- age other agreements that allow Arab countries to unilaterally, bilaterally, or multilaterally establish free trade areas as a step toward a comprehensive AFTA to be signed in 2008. The agreements Egypt has signed so far, or is currently negotiat- ing, aim at establishing free trade areas, usually for a period of five years, as a more rapid approach to liberalizing intra-Arab trade, compared to the longer-term AFTA. The AFTA and the Arab bilateral agreements are important in their own right because they can reduce the "hub-and-spokes effect" likely with the EU-Mediterra- nean agreements. They can also enhance border trade in bulky and short-lived goods and encourage Arab joint ventures. It is expected, however, that the AFTA will have limited impact on trade liberalization in Egypt. First, Egypt's trade with Arab states constitutes only a small portion of its total trade. Second, Egypt already exchanges goods at zero tariff with seven Arab countries and offers others preferential tariff treatment (Al Ahram 1998, April 28). The impact on Egypt's market access will depend on the readiness of Arab countries to abandon the restrictive NTBs they impose on imports of agricultural products and other imports, as well as on their ability to overcome the existing institutional and infrastructural constraints that could significantly limit trading opportunities among them. COMESA Egypt joined COMESA in June 1998 (US Embassy, Cairo 1998). This trade agree- ment establishes free trade between its 21 signatory countries by the year 2000. By 2004, these countries will introduce a common external tariff (CET) structure to deal with third parties.'9 The member countries agreed that the CET on capital goods will be zero and 5 percent on raw materials, 15 percent on intermediate goods, and 30 percent on final goods. In 1996, Egypt's imports under COMESA constituted only 0.1 percent of its total imports, and exports to COMESA countries were only 0.8 percent of all Egyp- tian exports. Accordingly, COMESA will have only a limited impact on trade liber- alization in Egypt. The most recent average tariff available to some COMESA countries indicates that the duty-free entry of Egyptian exports into this African 20 market could significantly increase its market access. To conclude, if Egypt enters into FTAs with the United States and the EU, Egypt will enjoy a significantly more liberal trade regime in the 15 years from the signing date; however, this is not the whole story. Egypt faces major challenges to survive in this global environment and must withstand fierce competition in inter- national and domestic markets. These challenges are discussed in detail in the next section. 132 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Future Challenges Export prospects are a major concern for Egypt, given the new international trade environment, which is becoming more liberal over time. The outcome of Egypt's trade liberalization will depend on the country's ability to compete in global mar- kets. In the EU markets, for example, Egypt will face aggressive competition from the Central and Eastern European countries that share Egypt's advantage of rela- tively cheap labor and geographical proximity to the EU. In the U.S. market, there are the NAFTA member countries that also pose a competitive threat. To face this challenge, Egypt must be more engaged in subcontracting activities with its major trading partners, maintaining a responsive exchange rate, and improving the long- term indicators of competitiveness. First, Egypt needs to be engaged to a much larger extent in subcontracting activities with the EU and the United States if it is to compete in today's global trading. Possible industries for cooperation are leather, garments, machinery, and furniture. The experiences of Central and Eastern Europe and Mexico with subcon- tracting have proven subcontracting to be a sound method for reducing the risks and costs of developing export markets while increasing exports. Subcontracting in- creased Central and Eastern European exports to the EU by 26 percent between 1989 and 1993 (Hoekman 1998). Since NAFTA began in 1994, Mexico's exports to the United States have more than tripled (U.S. International Trade Commission 1998). The increased imports of apparel from Mexico are primarily due to NAFTA provi- sions that enable duty-free and quota-free entry for apparel assembled wholly from fabrics that are formed and cut in the United States. Two-thirds of Mexico's textiles and apparel exports to the United States are currently manufactured using U.S. com- ponents, up from 42 percent in 1990. Second, Egypt needs to maintain a responsive exchange rate. With the opening of the Egyptian economy, Egypt's imports are expected to rise, thus imposing pres- sures on the Egyptian pound, which is likely to appreciate. Furthermore, the signifi- cant currency devaluation in some Asian countries in relation to the dollar, a factor in the recent Asian financial crisis, puts additional pressure on the Egyptian pound:. The enhanced competitiveness in these countries could affect Egypt's export pros- pects. Maintaining a responsive exchange rate is also important because a steep real appreciation that undermines the current account generates expectations of reim- posed trade controls. Also, a widely fluctuating real exchange rate implies uncertain profitability in many sectors. These two factors hamper the reallocation of resources toward more productive sectors. Third, Egypt must acquire the long-run determinants of competitiveness. These include obtaining and using technology, developing human capital, promoting in- vestment, making the institutions that influence trade efficient, and ensuring the overall efficiency of economic activity and reliable infrastructure (Rajapatirana 1997). Egypt has made significant progress in macroeconomic and structural reforms, yet more efforts are still required (Galal and Tohamy 1998). Structural reforms are an EGYPT: AN ASSESSMENT OF RECENT TRADE POLICY DEVELOPMENTS 133 essential part of a more comprehensive reform agenda. A comprehensive reform agenda that extends beyond trade policies would help further Egypt's trade agenda and achieve the desired diversification that relies on the private sector initiative. Reform of labor markets, domestic regulation, and capital markets would allow adjustment to changes in world markets, thus preventing the buildup of opposition to liberalization. Negotiating more than one FTA at a time is an additional challenge Egypt faces. Each FTA will have its own set of rules of origin that govern the duty-free entry of goods into the member countries. The Egyptian negotiating teams should coordi- nate to ensure that the various rules are consistent. Numerous sets of rules of origin will be an administrative complication and will cause confusion between export- ers-virtually a new trade barrier. For Egypt, the fear of the trade diversion due to FTAs is minimal, yet there remains the hub-and-spokes effect resulting from agreements with the EU and the 22 United States. As the EU is likely to expand before 2010 to include several coun- tries from Central and Eastern Europe, the hub will become even bigger. Egypt, therefore, needs to be engaged simultaneously in FTAs with other Mediterranean countries, and Arab-Arab trade liberalization now has an additional incentive. Concluding Remarks Over the past two decades, Egypt's trade regime has become more liberal, as indi- cated by the decline in the average tariff; dispersion of tariff rates, trade taxes, and duties; reduced production coverage of NTBs; and finally by the unification and devaluation of the Egyptian pound. Yet indicators show that Egypt has consistently become less open than the fast-growing economies, over the period of the study, and has grown less open and less integrated with the global economy over time. Egypt's comparatively low trade profile can be attributed to the overall business environment, public sector dominance of economic activity, and relatively high tar- iff barriers. One possible reason for Egypt's turn inward is the importance of oil in the country's trade and the volatility of its price. High oil prices contributed to rais- ing trade relative to GDP in the 1970s and early 1980s. In addition, falling prices in the mid-1980s negatively affected this measure of openness. Another possible rea- son for Egypt's decreasing openness is the windfall gains to the economy from the oil revenues and others that raised the prices of nontradables versus tradables and thus attracted investment away from tradable sectors. Economic reform can be con- sidered a third reason, as it was accompanied in its early stages with import sup- pression. Egypt's efforts to liberalize trade through different trade agreements must be reinforced with a strong conviction in the benefits of free trade. To maximize pos- sible benefits from these agreements, Egypt should complement its eagerness to reach the best agreement terms by developing its ability to compete in the different markets. This is crucial considering that Egypt has had excellent access to the EU 134 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA markets for the past 20 years but was unable to penetrate the markets sufficiently and continues to loose ground. A key element in increasing exports should be subcontracting, as in the case of the Central and Eastern European countries to the European Union, and Mexico to the United States. Other challenges include encouraging the role of the private sec- tor, facilitating domestic and foreign investment, and maintaining a responsive ex- change rate. Competitiveness, Egypt's ultimate aim, is best achieved through a comprehensive reform agenda. Long-term determinants of competitiveness will in- clude technology acquisition, openness to investment, human capital development, and efficient institutions that govern the economic activity in Egypt. As Egypt plans to enter into a number of free trade agreements, each with its own rules of origin, it is necessary to guarantee the consistency of these rules across different agreements. Anything other than unified rules of origin will leave import- ers, exporters, and government administration in a state of confusion, thus adding yet another barrier to trade with Egypt. Notes 1. Trade liberalization is defined as a reduction in trade restrictions and an increase in the use of prices instead of discretionary intervention. 2. There was an increase in the significance of refined petroleum in the minerals category (from 7 percent of mineral exports in 1984 to 32 percent in 1996) at the expense of crude petroleum (81 percent to 49 percent). In 1996, raw cotton accounted for no more than 11 percent of the textile exports compared with 50 percent in 1984, whereas ready-made gar- ments and noncotton textile exports increased over time. Aluminum bars, which represented about 80 percent of total base metal exports, accounted for only 2 percent in 1996. 3. According to the Own Import System, the private sector is allowed to use its foreign exchange earnings to finance import purchases. 4. Over the period 1981 though 1985, the unweighted average Most Favored Nation (MFN) tariff in Egypt was 47.4 percent compared with 29.5 percent in Latin America, 26.3 percent in the Middle East and North Africa, and 20.3 percent in East Asia. Between 1984 and 1987, the percentage of tariff lines affected by nontariff barriers in Egypt was 48 percent compared with 40.1 percent in Latin America, 35.6 percent in the Middle East and North Africa, and 30 percent in East Asia. 5. The ERP takes into consideration tariffs on inputs and output. It may be defined as the excess of the domestic value added (value added under the prevailing tariff structure) over the international market value added (value added in absence of nominal protection). It thus reveals the incentive structure prevailing in the economy due to domestic policies. EGYPT: AN ASSESSMENT OF RECENTTRADE POLICY DEVELOPMENTS 135 6. Tariff dispersion in Egypt stems from the escalating nature of its tariff structure. A de- cline in this dispersion is a favorable development, given that a nonuniform tariff structure distorts production and investment incentives by making some sectors more attractive than others. 7. Export bias, B1, against activityj, that is, (B ) occurs when domestic prices exceed export prices, thus making production for the domestic market more profitable. This is calculated as B = tj - 1 x 100, + sj where tj = nominal tariff rate on activity j, and sj= export subsidy rate or the duty drawback per ŁE of exports and is calculated as I ti x mij, the technical coefficient of imported commodity i per unit value of activity j. 8. This is based on a survey of 154 firms. Split according to size, the sample had 31 percent large firms, 34 percent medium-size firms, and 35 percent small firms. According to type of ownership, the sample had 73 percent domestic firms and 27 percent foreign firms. Accord- ing to economic activity, 64 percent of the firms were in the field of industry, 13 percent in trade, 9 percent in construction, 8 percent in tourism, and 6 percent in the oil sector. 9. For the financial sector, the real financial spread in Egypt and the EU were compared. and; accordingly, an implicit tariff of 20 percent was assumed for this sector. A 50 percent tariff equivalent was assumed for the telecommunications sector based on comparing the number of employees per line in Egypt with the world average. 10. See Noll (1997) for a discussion of trade opportunities in Egypt that are hindered by existing policies. 11. This version of the import penetration ratio is a useful indicator since it is the imports of consumption goods that are usually mostly restricted (Andriamananjara and Nash 1997). 12. Chile, the Republic of Korea, Mexico, Turkey, Argentina, Brazil, Peru, Uruguay, and Venezuela are examples of countries that have undertaken important liberalization steps be- fore effectively joining any trade agreement, whereas the trade regime of the countries en- gaged in the Central American Common Market (CACM) and the Andean Pact remained highly protective for years after their establishment. 13. Among these products are woven cotton fabrics, knitted or crocheted fabrics, tulle lace embroidery, ribbons, traveling rugs and blankets, made-up articles wholly or chiefly of textile materials, articles of apparel and textile fabrics, and clothing accessories of textile fabrics. 14. The negotiations started in January 1995. 136 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA 15. The EU already signed association agreements of this nature with Morocco, Tunisia, Israel, Jordan, and the Palestinian National Authority and is negotiating similar agreements with the Gulf States that should be completed by 1998. Negotiations with Syria, Algeria, and Lebanon have already started. 16. The principle of community preference means that preference is given to goods pro- duced inside the community. This principle entails keeping the prices of the community below those of imports to the European market. This led to the institution of two basic mecha- nisms of the CAP: import levies and export refunds (subsidies for exported community prod- ucts to make them more competitive on world markets). 17. The peace clause means that the CAP instruments will not be contested as long as the disciplines resulting from the UR Agreement are fully observed in domestic support, export subsidies, and market access. 18. Egypt has already signed free trade agreements with Jordan (1996), Tunisia (1997), and Morocco (1998) and is in the process of negotiating trade agreements with Lebanon, Ku- wait, Syria, Yemen, Bahrain, and Saudi Arabia. Egypt has also signed economic cooperation agreements with Libya that may lead to eventual negotiations for a free trade area between them. 19. These countries are Angola, Burundi, the Comoros, Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, the Seychelles, Sudan, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe. 20. The tariff rates for some COMESA countries are Burundi, 37.0 percent; Ethiopia, 28.8 percent; Kenya, 19.9 percent; Malawi, 21.0 percent; Mauritius, 29.0 percent; Rwanda, 42.0 percent; Sudan, 50.0 percent; Tanzania, 27.5 percent; Uganda, 17.1 percent; and Zimbabwe, 21.8 percent. 21. Between January 1997 and January 1998, the nominal depreciation in the five most affected Asian countries (the Republic of Korea, Malaysia, Thailand, Indonesia, and the Philippines) ranged between 40 percent and 75 percent, and the real effective exchange rate depreciation ranged from 17 percent to 70 percent. 22. This is because Egypt will be engaged in these agreements with its major trading part- ners. The EU, the United States, and Arab countries together account for 76 percent of Egypt's exports and 69 percent of Egypt's imports. To minimize the diversion effect, Egypt should work to lower its MFN tariffs. 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"Arab Free Trade Area: Potentialities and Effects." Paper presented at the workshop on Benefiting from Globalization, Mediterranean Development Forum II, Marrakesh. Chapter 6 Trade Policies in Jordan, Lebanon, and Saudi Arabia Riad al Khouri Middle East Business Associates Ltd., Amman, Jordan Almost all countries in the MENA region have been reforming and liberalizing their foreign trade regimes as part of a more general process of economic reform. Despite these efforts, the extent of integration of the region into the world economy remains relatively low (see Nabli and De Kleine in this volume). One dimension of this lag is reflected in the limited extent to which MENA countries have been able to elimi- nate or streamline administrative procedures related to trade. Another is that many countries in the region have yet to accede to the World Trade Organization (WTO). Algeria, Jordan, Lebanon, Oman, Saudi Arabia, and Yemen are in the process of acceding or have indicated an interest in doing so. This chapter surveys the trade policy status quo in three of the demandeur coun- tries: Jordan, Lebanon, and Saudi Arabia, focusing in particular on nontariff barri- ers and administrative "red tape." The intention is to document both what has been achieved and what remains to be done in making the trade regime more conducive to international trade. Some of the policies that are identified will need to be changed as part of the process of accession to the WTO; but many will be unaffected. The message of this chapter is that much remains to be done by governments to facilitate trade, and that attention must center on reducing the prevalence of nontariff barriers to trade. To maximize the benefits of WTO membership it is important that efforts are made to facilitate export-oriented production by eliminating to the greatest ex- tent possible trade-related transactions costs. Common to all three countries is continued prevalence of licensing require- ments, to some extent reflecting the scope of exemptions granted to certain types of 141 142 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA goods or importers, but more generally reflecting regulatory regimes. Conformity assessment procedures for goods subject to mandatory product standards and tech- nical regulations are also becoming a more important barrier to trade (see the chap- ter by Kheir-El-Din in this volume). In Jordan and Lebanon, agricultural trade is subject to high barriers on a seasonal basis, with reliance on direct controls rather than price-based instruments such as tariffs. In all three countries, nontransparent customs practices continue to be a problem, despite recent efforts to streamline procedures. Jordan Since its inception as a state in the 1920s, Jordan has suffered from chronic trade deficits and a narrow export base. This has partly been due to the scarcity of natural resources, but a long-term crisis in agriculture, a small manufacturing sector, and the restrictive polices of the government, among other factors, also help to explain the country's continuing trade imbalance. Because of these constraints, trade policy has traditionally tended to be mer- cantilist, and the government has depended on wide-range, high tariffs for revenue. However, Jordan's application to join the WTO has led to measures ensuring a more liberal and open foreign trade regime. By the mid-1990s, inputs for agricul- tural production and a large number of those required for local manufacturing had been exempted from customs duties. Higher tariff rates for manufacturing under- score the benefits that the industrial sector reaps from the relatively low tariffs on raw materials and intermediate goods. In a move to boost exports, the authorities continue to reduce tariffs on a multiple range of raw materials and intermediate goods used in the production of export-oriented finished products. By the mid- 1990s, inputs for agricultural production had also been exempted from customs duties. Most of Jordan's imports come from European Union (EU) countries, espe- cially Germany, Italy, France, and the United Kingdom. Jordan has signed a Euro- Mediterranean Partnership Agreement with the EU that will further boost Jordanian-EU trade and create a Euro-Mediterranean free trade zone, including Jor- dan, by the year 2010. However, Iraq remains Jordan's major trading partner, as it supplies most of Jordan's oil needs. Significant trade reforms have been undertaken in the last decade. The govern- ment has taken a number of measures to reduce the levels and variation in tariff rates, to simplify customs procedures, and to abolish quantitative restrictions on imports. As a result, Jordan now has six tariff bands (0, 5, 10, 20, 30, and 40 per- cent), and the maximum tariff rate is being set at 30 percent. Exceptions are manu- factured tobacco and tobaccos substitutes (70-100 percent) and alcoholic drinks (180 percent). Tariff reductions have been complemented by efforts to apply a Gen- eral Sales Tax (GST) to imports and domestically produced goods in order to main- tain revenue. TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 143 Registration, Documentation, and Customs Procedures Import licensing requirements for all products other than those maintained for na- tional security, health, safety, environmental, and religious reasons have been abol- ished. Registration, documentation, and customs procedures in Jordan have undergone streamlining and simplification through the introduction of computer- ization and decentralization away from customs headquarters in the capital. Never- theless, customs procedures remain cumbersome and are time consuming because of the inefficiency of customs personnel. This inevitably leads to a lack of transpar- ency. Many traders perceive that the situation has actually become worse, despite the adoption of procedural reforms. Import cards are required by an importing firm, which in turn must be regis- tered with the Ministry of Industry and Trade (MIT). Such registration, as well as the annual issue of cards, is routine and subject only to a nominal fee. If the im- porter does not present an import card for goods not requiring an import license, then a fine of 5 percent of the value of the goods is added to the cost of clearance. A customs declaration form must be filled in for all goods, including those exempt from duties and taxes. Every declaration form must be accompanied by original copies of the commercial invoice, which should also state in Arabic the classification of the goods according to the customs tariff and must be signed by the owner or his agent. Both the invoice and the certificate of origin must be certified by the Chamber of Commerce and the Jordanian diplomatic mission in the country where the commodity originated. If a Jordanian diplomatic mission does not exist there, certification from the Chamber of Commerce or other official bodies will suffice. Unsigned invoices or their copies can also be used on condition that they are certified by recognized chambers or Jordanian consulates. Imported goods originating from Iraq, Lebanon, Syria, or Saudi Arabia must be accompanied by a customs declaration from these countries. This also applies to goods that are imported through the ports of these countries and enter Jordan by land. For goods entering country from other non-neighboring Arab countries, an Arab transit manifest is required. If any necessary documentation cannot be submitted, the customs authority imposes a cash guarantee of 1 percent of the goods' value, refunded if the missing documents are presented within 60 days of payment of the guarantee. The Jordanian Customs Department does not yet apply the Brussels Definition of Value or the GATT Valuation Code. Valuation is based on comments from the inspecting officer, invoice of the cargo, and a product price list complied by the Customs Department. The Customs Department has the right to reassess the value of the commodity if it is not satisfied with the figures on the declaration form. If the importer is not satisfied with the final value assessed by the customs official, then a claim may be submitted first to the Director of the Customs Center. A second appeal can be made to the Director General at customs headquarters. It must be noted, however, that the goods cannot be cleared on guarantee or otherwise until the dis- pute is settled. 144 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Levies and Charges (Other than Import Duties) The 1997 Duties and Taxes Consolidation Law No. 7 consolidated many additional fees, paratariffs, and surtaxes into the tariff. However, some fees and taxes are ex- cluded from the consolidated tariff: the GST, the Sales Surtax, and an import and export surcharge of 5 percent imposed under Import and Export Regulation No. 74 of 1993. Import service fees are also applicable to imports from Morocco, Libya, and Lebanon (1 percent) and from Saudi Arabia (0.25 percent). Export service fees are also applicable to exports to Iraq (0.001-0.002 percent); Libya, Morocco, and Lebanon (1 percent); Yemen (0.50 percent); and Saudi Arabia (0.25 percent). As stipulated in the Sales Tax Law No. 6 of 1994 and Amendment No. 15 of 1995, GST must be paid and collected by an importer, irrespective of the volume of imports. GST is due on imported goods at the rate prevailing on the date of the customs declaration and is collected before the goods are released. The standard rate is 10 percent. A higher tax rate of 20 percent of the value of the goods is levied on photographic film, air conditioning units, cosmetics, marble, tiles, cameras, dish- washers, microwaves, satellite transmission and reception systems, and video or voice recorders. Automobiles are subject to a GST ranging between 62 and 141 percent, depending on engine size. Specific taxes are levied on beverages (alcoholic and nonalcoholic), tobacco, certain construction materials, tires, and lubricants. In addition to basic foodstuffs, pharmaceuticals and inputs used by the pharma- ceutical industry, agricultural inputs (including machinery), materials to produce cement, paper and reading material, ambulances and fire trucks, and industrial ma- chinery, the following are exempted from GST: (a) goods imported into free zones and duty free shops; (b) goods in transit; (c) purchases of arms, munitions, transpor- tation means, spares parts, tires, and any other material the Council of Ministers agrees shall be imported or procured tax free by the armed forces, public security service, civil defense, intelligence services, and customs police for their own ac- count; (d) imports exempted by virtue of the Investment Promotion Law No. 16 of 1995;' (e) any goods or persons the Council of Ministers decides to wholly or par- tially exempt in specific cases; (f) imports for mosques, churches, orphanages, and senior or handicapped citizens for their own use; (g) subject to reciprocity, and at the recommendation of the Foreign Minister, imports for embassies, legations, and regular consulates for their official use, as well as those for the personal use of foreign diplomatic and consular staff active in a nonhonorary capacity and accred- ited to the Jordan; (h) imports for international and regional organizations operating in Jordan and their foreign staff who enjoy diplomatic status; and (i) standard ex- emptions for specimens, items with no commercial value, personal effects of visi- tors, etc. Import Bans and Licensing The import of nuclear waste, salt, and vehicles more than five years old is prohib- ited. Import licenses used to be a significant nontariff barrier to trade with Jordan- the rule was that all imports required a license, unless exempted. This changed in TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 145 1997, and licenses are now required only for particular cases. According to MIT Regulation No. 1 of 1997, certain individuals or organizations importing goods into Jordan must apply for an import license with the ministry. Import licenses are is- sued for a period of one year and can be extended upon request for a period of one more year at the MIT. In fact, this requirement has become a mere formality in most cases and can no longer generally be considered a nontariff barrier. Nevertheless, should a severe balance of payments problem or other economic difficulties arise, the regulation, being in force, can be applied more stringently and could form a true barrier as the authorities seek to enforce it. The following imports in particular require licenses: * Goods imported from countries that have trade agreements and protocols with Jordan provided that these goods originate in those countries, namely: Bahrain, Egypt, Iraq, Israel, Kuwait, Lebanon, Libya, Morocco, Oman, the Palestinian National Authority, Saudi Arabia, Sudan, Syria, Tunisia, the United Arab Emirates, and Yemen. * Goods and entities not subject to tariff in order to prove to customs that they are exempt. This pertains to goods imported in the name of banks, companies under establishment, farms, handicraft businesses, hospitals, hotels, ministries and other public institutions, newspapers, and religious, scientific and charitable organizations. - Imports by individuals for personal, noncommercial use; goods brought into the country by passengers, of which the total value does not exceed JD2,000; companies, organizations, and individuals registered with offi- cial bodies to establish development projects in Jordan; foreign contrac- tors and companies, including their branches, which are registered in Jordan as foreign entities; foreign entities permitted to operate a resident branch in Jordan to conduct business outside Jordan and non-Jordanian individu- als working in media establishments; and foreign cigarettes. Failure to ob- tain a license may entail paying a customs fine of 5 percent of the assessed value of the imported goods. Goods and agencies that are specifically exempt from import licenses include diplomatic and consular missions importing goods for official use; goods entering the country on a transit basis; goods entering the country for exhibitions or display, except for movies imported for commercial purposes; samples of goods brought into the country by traders within the limitations stipulated by the Customs Law; re- exported goods before customs clearance; goods imported directly into free zones and duty free shops; cattle; all goods imported according to the Investment Promo- tion Law; state universities; temporary admission goods, excluding goods cleared for local consumption and requiring import license; vehicles for use of the handi- 146 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA capped; goods stored in bonded areas; goods that customs authorities have agreed to place in their stores until customs clearance; and personal belongings and used furniture. In some cases, approval to import certain goods is required from authorized bodies before the importers are able to apply for an import license. These goods currently include 45 categories. They are listed in Table 6.1 along with the authority responsible for issuing their approval to enter the country. Only specific state-owned organizations may import certain items, that is, the Jordan Tanning Co. (raw hides), Jordan Petroleum Refinery Co. (oil and deriva- tives), Jordan Cement Factories Co. (Portland cement), Jordan Phosphate Mines Co. (explosives, ammonium nitrate, rock), and tire retreading companies (tires). These items accounted for 21 percent of the value of Jordanian imports in 1997. Standards and Other Technical Requirements Existing laws and regulations require that samples of certain imported items be examined to ensure that they meet state specifications before they enter the local market. All such products must be inspected by authorized analysts be- fore being cleared by customs. Three samples of the goods are taken for analy- sis to ensure that the quality and the specifications of the goods are in conformity with regulations. Two of the samples are sent to a customs laboratory, and the third is kept at the Customs Center. The importer or the owner of the goods may object to the analysis results within five days from their release, in front of an arbitration committee. If the presence of the goods is not necessary for settlement of the dispute, then customs authorities may clear the goods before completion of the arbitration procedures against a guarantee from the importer. In certain circumstances, especially where perishable goods are concerned, the importer may request to immediately clear the consignment by posting a guar- antee that the goods will not enter the local market until the results of the analysis have been released. In case goods are cleared prior to receiving laboratory ap- provals by authorized bodies, a letter of guarantee must be submitted promis- ing that the goods will not be released in the local market until all approvals are obtained. Goods failing to meet specifications must be re-exported if they do not con- form to Jordanian standards or are deemed unfit for human consumption. In 1997, 51,000 customs transactions were received by the Control Department of the Jordan Institute of Standards and Meteorology. In only 65 cases were products re-exported because they did not comply with Jordanian mandatory standards. Most of these concerned foodstuffs (41) or electrical devices (18). Within three months from the date of re-export, the goods' beneficiary must present the documents to a refund of duties and other charges, except for storage fees, overtime fees, insurance fees, and fees for other services, which are not refundable. Imports under the duty drawback scheme may not enter the local market until the results of the analysis are released. They may, however, be cleared immediately TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 147 TABLE 6.1. GOODS REQUIRING PERMISSION TO ENTER JORDAN Rice Ministry of Supply (MS) Powdered milk MS Flour and derivatives MS Sugar MS Wheat, barley, corn MS Milk for industry MS in coordination with MIT Frozen animal sperm Ministry of Agriculture (MA) Live animals MS in coordination with MA Fresh, cold, and frozen meats MA Weapons and ammunition Ministry of Interior/Public Security (MI/PS) Explosives MI/PS Switchblades MI/PS Toy vehicles operating on fuel MI/PS Remote-control toy aircraft MI/PS Electric toys intended for commercial use MI/PS Electrical self-defense equipment MI/PS Uranium and other radioactive materials Ministry of Energy and Mineral Resources Wireless receivers and broadcast stations Organizing Committee for the Telecommunications Sector (OCTS) Wireless warning devices OCTS Remote-control devices OCTS Location-detecting devices OCTS Wireless receivers and broadcast devices OCTS Mobile telephones OCTS Decoders TV and Radio Corporation (TVRC) Satellite transmission receivers TVRC Color photocopiers Central Bank of Jordan (CBJ) Communication terminals OCTS Medicines and antibiotics Ministry of Health (MH) Nutritious ingredients for athletes MH Potassium pomate MH Foodstuff dyes MH /Nutrition Department Halogenous material Ministry of Municipal and Rural Affairs Postal clearing devices Ministry of Communications Potatoes, onions, and garlic Agricultural Marketing Organization Frozen ice cream in molds MH Asbestos boards and tubes MH Remote-control devices for aircraft toys OCTS Freon gas General Corporation for Environmental Protection Wireless telephones OCTS Wireless microphones OCTS Milk and other food for children MH Artesian wells drillers Ministry of Water and Irrigation Small and large used tires MIT New and secondhand military clothing Jordan Armed Forces Foreign cigarettes MS 148 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA with a guarantee stating the goods will not be disposed of in any manner until the laboratory issues the results. For woven material, leather, or textiles, samples of these materials will need to be attached to the declaration form, so that at the time of export or re-export, a comparison can be made to confirm that the raw material was used in the manufacture of the end product. The samples are stamped and signed by a customs official and given a reference number. Lebanon Historically, Lebanon has relied on services exports and on remittances from abroad to support the balance of payments. The government has always depended on a wide range of relatively high tariffs for revenue. Since the early 1990s, measures have been adopted to reform the fiscal system, implement tariff and tax reforms, and dismantle trade barriers. Overall, tariff levels, the number of rates, and the de- gree of tariff dispersion and escalation have been reduced in an attempt to create an incentive regime conducive to outward-oriented growth. Tariff rates for agriculture are low, as trade in this sector is directly regulated. Customs duties account for 44 percent of total government revenues, the larg- est contributor to the budget. The Lebanese government has regained control of customs after their domination by militias in 1975-91, and much has been done to rehabilitate and improve the administration. As of 1997, a new system, NAJM (an Arabic acronym for "Customs Information System"), based on ASYCUDA (Auto- mated System for Customs Declaration), has reduced the number of steps in cus- toms clearance. A Single Administrative Document was also introduced in the same year. Other customs reforms have included a tariff reform as contained in Law No. 191 of 1993. The reform introduced a general reduction in tariff rates, with the exception of certain items. The following changes were also made: * conversion from the Brussels Tariff nomenclature to the Harmonized System * reduction in the number of tariff bands from 75 to 12 (0,2,4,5, 10, 15, 20, 35, 40, 50, 80, and 100 percent) * consolidation of the tariff schedule from 5,000 to 1,700 items * application of ad valorem rates on 95 percent of import items. Notwithstanding this progress, further reforms of the laws and official require- ments need to be introduced. More also needs to be done to improve the efficiency of customs. Officials earn low salaries, and incentives and compensations are rarely linked to effort and productivity. TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 149 Registration, Documentation, and Customs Procedures Registration, documentation, and customs procedures in Lebanon have undergone streamlining and simplification through computerization. Lebanese customs has launched a major rehabilitation program to modernize and streamline customs pro- cedures. According to the new procedures, it normally takes only three or four steps and an average of four or five days for goods to be released from customs. (About 41 percent of goods now go through customs with no inspection at all, hence reduc- ing the number of steps from four to three.) NAJM has been implemented at the Port of Beirut and Beirut International Airport, covering close to 85 percent of customs volume. Remaining customs of- fices will be adopting this system by the second half of 2000. The adopted reforms have in fact reduced the discretion of officials greatly. Nevertheless, lack of incen- tives for employees and weak oversight measures have resulted in systemic corrupt behavior.2 Once an importer has been assigned to a Verificateur and a Chief Inspec- tor to inspect the goods and set the appropriate tariffs, it is impossible for an im- porter to request another Verificateur or a Chief Inspector in case of a dispute. This gives both the Verificateur and the Chief Inspector great power over the importer, and explains why both earn the larger portion of the bribes distributed to customs officials. There is no effective channel to complain about the bureaucratic delay created by officials. In addition, a dispute between the Verificateur and the importer on the value of the goods imported is to be avoided, since otherwise an expert will be called upon to assess the goods. This will be very costly to the importer, since the expert, who is often a competitor, can do the following: request a fee of Lebanese pounds (L)50,000- 150,000 (Li,500 = $1), or, although it is illegal, demand to check the actual price list of the goods, delay the release of the goods, or increase the value of the goods, hence forcing the importer to pay higher tariffs. The interaction between grand corruption undertaken by high-level customs officials and petty corruption undertaken by low-level customs officials keeps the corrupt system intact. In fact, the low-level officials are left to their own devices within a certain margin to earn bribes and keep the customs running, whereas the high-level officials concentrate on the larger bribes of grand corruption. This con- sensual agreement between high and low levels officials is one of the main reasons for the persistence of the system. Levies and Charges (Other than Import Duties) As mentioned, the recent tariff reform resulted in the consolidation of import du- ties, municipality, and reconstruction fees into one tariff, as listed in the official tariff published by the Supreme Customs Council (SCC) . The reform also specified that excise duties on certain items will be collected at the point of entry. Previously, excises were collected postentry, which rendered accounting and collection proce- dures more difficult. However, this consolidation may be reconsidered in the near future. In addition to the consolidated customs tariff fee, L50,000 is charged as a 150 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA stamp duty on each customs transaction. "Unofficial" informal "facilitation" charges have been estimated at $500-1,150 per smaller shipment or per container. Import Prohibitions and Licensing All imports from Israel are prohibited. Government policies aimed at protecting the agricultural sector from competitive imports have been in place since the mid- 1 950s. These aimed at the protection of domestic production of fruits and vegetables from import competition through the Agricultural Calendar (AC). Under the AC, the im- port of many fresh fruits and vegetables, as well as processed foods (such as potato flour, frozen potatoes and fruits, olive oil, vinegar, and canned tomatoes) and ani- mal products (milk, yogurt, eggs, and chickens) is banned. It is up to the Cabinet, upon suggestion of the Minister of Agriculture, to ban or allow the import of any product, whether or not on the above list. The list is revised during the month of July of every year, upon the suggestions of the Minister of Agriculture and the Minister of Industry. Once ongoing studies and statistics con- cerning the imposition of customs duties for the benefit of local industry and for consumer protection are finalized, the ban on the above-mentioned items will be replaced by customs duties by cabinet decision upon the suggestion of the Minister of Agriculture. Products of animal origin must be covered by a sanitary certificate issued by the appropriate health authorities of the country of origin saying that the products are free from disease. Live animals, whether intended for use in Lebanon or des- tined for transit shipment through Lebanon to another country, require sanitary cer- tificates from the appropriate health authorities in the country of export, and should be legalized by Lebanese consular officials. A health certificate, as issued by the Department of Agriculture, must be presented to a consulate of Lebanon for legal- ization of all food products, frozen foods, live animals, and so forth. Finally, a "free sale" certificate must be issued for medical and pharmaceutical specialties and re- quires legalization by a consulate of Lebanon. Import licenses and similar restrictions form significant nontariff barriers to trade. In fact, most of these apply annually to a limited value of traded items. Some exceptions are imports of certain agricultural products and of all seeds, which re- quire a license, as do certain finished goods, such as sanitary ceramic ware, insu- lated electric and telephone wires, and cables made of copper. Also, medicines and surgical and dental instruments are admitted only under permit from the Ministry of Health in Lebanon. In total, 23 different types of import control permissions are issued by the state (Table 6.2). A total of 42 government departments are involved in issuing import permis- sions, usually individually but sometimes with one or two other departments. In fact, the different permissions issued amount to 73, insofar as more than one government agency may issue the same type of permission, or the same agency may issue differ- ent permissions (Table 6.3). An example of more than one agency issuing the same type of permission would be the Ministries of Health and of Agriculture, respec- TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 151 TABLE 6.2. TYPES OF CONTROL MEASURES APPLIED Control Code 02 License 04 Advance License 05 Transport Permit 06 Transport Permit (Alcohol) 07 Certificate of Purity 08 Goods Subject to Monopoly 09 Invoice Certification 10 Visa I I Permit 12 Advance Permit 14 Analysis and Production Certificate 15 Specialization Certificate 17 Alcohol Certificate 18 Sanitary certificate 19 Sanitary certificate or visa 20 Agricultural Sanitary Certificate 22 Laboratory Inspection Certificate 23 Certificate of origin 26 Agreement 27 Later Agreement 28 Advance Visa 29 Agricultural Calendar 30 Packing Requirements tively, issuing an import license (control code 02). An example of one agency issuing more than one type of permission is the Ministry of Finance, issuing three different types of controls, Transport Permit (Alcohol), Goods Subject to Monopoly, and Al- cohol Certificate. Over 1,250 commodities, ranging from the 4- to 8-digit level of the Harmonized System require import licenses or other special permission to enter Leba- non. In many instances, more than one authorization is needed.3 Standards and Other Technical Requirements In Lebanon, sanitary and phytosanitary measures are established and administered by the Ministry of Agriculture's Direction of Plant Resources, in coordination with the Agricultural Research Institute of Lebanon. There are around 200 sanitary and phytosanitary measures in effect in the country. The institutional capabilities of the ministry are being upgraded to improve the control and the application of these measures. All imports of agricultural and animal products into Lebanon require the presentation of a sanitary certificate and a certificate of origin at the border. The Quarantine Department of the Ministry of Agriculture has the authority to forbid imports of any product not complying with the sanitary and phytosanitary regulations. 152 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 6.3. CONTROL MEASURES BY GOVERNMENT ENTITY Organization, department, etc. Code Council of Ministers-Industry Institute 10 Ministry of Interior 04 Ministry of Interior-Office for the Control of Printed Material 10 Ministry of Interior-Control of Narcotics 26, 27 Ministry of Finance 06, 08, 17 Ministry of Finance-Customs 17 Ministry of Finance-Indirect Taxes 05, 06 Ministry of Defense-General Directorate of the Army 04, 11 Ministry of Health 02, 10, 12 Ministry of Health-Office of the Minister 02, 12 Ministry of Health-Department of Sanitary Engineering 10 Ministry of Health-Department of Quarantine 07 Ministry of Health-Narcotics Unit 02 Ministry of Health-Department of Import/Export of Drugs 10, II Ministry of Health--Department of Pharmaceutical Inspection 10 Ministry of Labor-Syndicate of Pharmacists 09 Ministry of Labor-Syndicates of Doctors 09 Ministry of Agriculture 02, 10, 18, 20, 29, 30 Ministry of Agriculture-Office of the Minister 02, 04, 12,20,23 Ministry of Agriculture-Office of the Minister/Inspection and Control 15 Ministry of Agriculture-Director General 02 Ministry of Agriculture-Department of Animal Resources 02, 10 Ministry of Agriculture-Animal Health Protection 18, 19, 23 Ministry of Agriculture-Health Protection 10, 14, 20, 22, 28 Ministry of Agriculture-Animal Breeding Unit 10 Ministry of Agriculture-Silk Office 12 Ministry of Economy and Trade 02 Ministry of Economy and Trade-Directorate for Price Policies 10 Ministry of Economy and Trade-Consumer Protection Department 10 Ministry of Economy and Trade-Anti-fraud Department 10 Ministry of Economy and Trade and Ministry of Posts/Telecommunications 11 Ministry of Economy and Trade, Ministry of Defense, and Council of Ministers 04 Ministry of Economy and Trade after approval of Ministry of Interior 02, 04 Ministry of Economy and Trade after approval of Ministry of Health 02 Ministry of Posts and Telecommunications 11, 12, 28 Ministry of Tourism-Directorate General for Antiquities 02 Ministry of Industry 02,04, 10 Ministry of Industry-General Directorate of Industry 02 Ministry of Industry-General Directorate of Petroleum 02 Ministry of Environment 10 Standards and technical regulations in Lebanon are the responsibility of the Measures and Standards Organization (LIBNOR), which is the exclusive institution entrusted with the elaboration of standards and technical regulations. The Industrial Research Institute (IRI), an independent public institution, has the function of con- trolling the quality of goods to ensure that specifications conform to international TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 153 export standards, and to control the conformity of imported products with national standards and technical regulations. Both LIBNOR and the IRI are currently in a process of rehabilitation and reinforcement. There are around 160 national stan- dards in Lebanon, and the objective is to conform national regulations with Arab standards as provided by the relevant regional body in the context of the Arab League. Lebanese customs regulations require that imported pharmaceutical products and foodstuffs bear specific labels containing the product's country of origin, and that labels on imported goods must not create any confusion with similar products or labels already protected in Lebanon. Violations of labeling requirements are sanc- tioned under Article 358 of the Lebanese Customs Code and can lead to the re- export of infringing products. Technical controls for both imports and exports take about two to four days. Products subject to mandatory certification include canned vegetables, soups; jams, candies, honey, milk, and cheese; frozen or vacuum-packed meat or fish; canned meat; canned tuna; sardines; fats, oils, and butter; chocolate; pastas, and vermicelli; coffee and tea; sauces, dressings; flour, sugar, starch; prepared food, yeast, dough improver; food substitutes; canned fruits, powder for ice cream; juices; foodstuffs for human and animal consumption; disinfectants; soaps and detergents; hair spray, shampoo; diapers, napkins, sanitary towels; cosmetics, deodorants, perfumes; blades, shaving cream, toothpaste, and toothbrushes; mouth freshener, mouthwash prod- ucts; and batteries for home use. Saudi Arabia The Kingdom of Saudi Arabia's efforts to join the WTO have led to the gradual adoption of a more liberal and open foreign trade regime. The kingdom has stated that it will remove all nontariff barriers that are against WTO rules. However, acces- sion is not expected before the year 2000, and even then the removal of barriers may be slow. A tradition of state bureaucracy coupled with a rising trade deficit in recent years has sometimes complicated the dismantling of trade barriers and the introduc- tion of other forms of liberalization. Although the trade balance is still in surplus, the excess of exports over imports will be too small to cover the deficit in the cur- rent account. From being in balance in 1997, the current account is projected to go into deficit in 1999 by $10 billion. In this context, Saudi Arabia will face a major challenge in opening its market widely to competition. Saudi Arabia, along with Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates, is a member of the Gulf Cooperation Council (GCC), established for co- ordination and integration among its members in fields including economic and financial affairs, commerce, and customs. The GCC has made significant strides in efforts to rationalize and unify members' customs regimes and coordinate external trade policies. No customs duties exist on imports of domestic products from other GCC member states. Goods originating in GCC states are allowed duty-free entry, provided the producing firm is at least 51 percent owned by citizens of GCC mem- 154 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA ber countries. Preferential duty treatment is also extended to some other members of the Arab League, including Egypt, Iraq, Jordan, Lebanon, Syria, andYemen. This includes duty-free entry of certain nonindustrial goods and a 25 percent reduction in duty on some products. In addition, further duty reductions are accorded to im- ports from Arab states with which Saudi Arabia has concluded bilateral trade agree- ments: Jordan, Tunisia, Morocco, Lebanon, Syria, Yemen, and Egypt. Saudi Arabia also has a trade agreement with Canada aimed at promoting trade, and containing a most-favored-nation provision. The National Industries Encouragement Act offers customs duty exemption on all imports for industrial establishments, including equipment, machinery, tools, spare parts, raw materials (primary or semimanufactured), and packing materials, including tins, bags, and cylinders. Concessions are awarded by the Ministry of Industry and Electricity (MoIE) on the recommendation of its Technical Industrial Bureau. The Foreign Capital Investment Act grants foreign capital the same conces- sions as national capital under the National Industries Encouragement Act. New and greatly changed investment laws are in the pipeline, and these should liberalize this process. Registration, Documentation, and Customs Procedures Although Saudi negotiations for WTO membership have resulted in changes in im- port procedures to bring them into line with WTO norms, customs procedures in Saudi Arabia are not transparent. Every commercial establishment must register with the commercial registra- tion office of the Ministry of Commerce (MoC) in one of the major cities in the kingdom. There are no substantive requirements to register with the MoC order to import. Any company, whether Saudi or foreign, that was commercially registered in the field of import trade could import goods without the need to get any further permission or authorization (except for items that require an import license). Saudi Arabia has been implementing the Brussels Harmonized Commodity Description and Coding System since 1991. However, no facilities are available for advance rulings on customs classification. Commercial samples are subject to the payment of customs duty and surcharges either by a deposit equal to the duty at the time of import or by a bank guarantee. A refund is made if the goods are re-exported within 12 months. If the samples are sold, neither the deposit nor the guarantee will be refunded. Prior permission to import samples must be obtained from the director of customs. The request for permission to import must be accompanied by samples, prices, and catalogs. Advertising materials, excluding printed and illustrated calen- dars imported for display, may be imported duty free if the applicable duty is mini- mal. All catalogs and brochures for which no charge is made may be entered duty free. Goods may be entered temporarily for promotional purposes provided they include both an invoice with the value of the goods endorsed by the local chamber of commerce and a certificate of origin. Customs requires a refundable deposit of 12 or 20 percent, depending upon the type of goods. TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 155 Depending on the nature of exported goods to Saudi Arabia, or according to a request from the Saudi importer, certain special documents may be required. Im- porting arms for hunting and similar sports arms needs special permission. Books and publications are subject to inspection and approval by customs for entry. Agri- cultural seeds, live animals, fresh and frozen meat, periodicals, movies and tapes, religious literature and tapes, toxic chemicals and similar materials, pharmaceutical products, radio equipment, products containing alcohol (such as perfume), natural asphalt, and archaeological artifacts require special approval. Requirements for labeling food and food products sold in Saudi Arabia are determined by the Saudi Arabian Standards Organization (SASO). Exporters of these products should comply with (among other SASO standards) Mandatory Standards SSA 1.1984, whether for sample demonstration or for commercial shipments, and must provide the following certificates: * Food Manufacturer's Ingredients Certificate: The certificate should include a description of the exported food products (contents and percentage of each ingredient), chemical data, microbiological standards, storage, and life of product (date of manufacture and expiration). When products con- tain any animal fats, the certificate must confirm the kind of animal from which it is taken, or state that no pork is being used. This signed certificate must be obtained from the exporting country's Ministry of Health (MoH). * Consumer Protection Certificate: The certificate confirms the healthiness of the various ingredients of food products imported into Saudi Arabia, and their safety and fitness for human consumption. The signed certificate must be obtained from an office of the exporting country's Ministry of Agriculture. * Price list: The price list should be issued by the exporter on his letterhead, and it should indicate that the prices of the exported products to Saudi Arabia are the standard local market prices. In addition to the general shipping documents, all meat or poultry shipments must be accompanied by a certificate of Halal meat, indicating that slaughtering has taken place in an officially licensed slaughterhouse according to Islamic proce- dures. The Halal meat certificate should be legalized by a recognized Islamic center in the exporting state. An official health certificate is also required, indicating the date of slaughter, kind of animal, and average age of each shipment. The health certificate must also indicate that animals were examined within 12 hours of being slaughtered, and di- rectly after, by a licensed veterinarian, and were found free from disease and suit- able for human consumption. The health certificate is required for all exports to Saudi Arabia of all meats, (including poultry and seafood), meat products, live- 156 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA stock, vegetables, fruits, and human blood, attesting to the fact that they are free from pests and/or disease. Imports of seed and grains must be accompanied by an authenticated certificate of inspection issued by a company specializing in seed inspection, a phytosanitary certificate (to verify that the seed or grain is free from agricultural disease), a seed analysis certificate (to prove the degree of purity of the seeds), and a certificate of weight. Livestock imports require, in addition to general shipping documents, a certifi- cate of weight, showing the average weight of the exported livestock; a health cer- tificate from a Ministry of Agriculture verifying that the livestock are free from disease; a health certificate issued by a veterinarian; a pedigree certificate issued by a Ministry of Agriculture; production records; and a declaration of inspection and acceptance. All shipments of vegetables and fruits to the kingdom require a radiation cer- tificate certifying that shipments are free from pests, insects, and other agricultural diseases, and that they have not been exposed to ionizing radiation (but the ship- ments may have been treated with aluminum phosphide). SASO certificates of conformity are required for electrical appliances, equip- ment, and accessories. There are two types of certificates: (a) the certificate of con- formity for electrical appliances and equipment, and (b) the certificate of conformity for electrical accessories. The relevant certificate may be obtained from the Saudi consulate and must be issued by the manufacturer on their official letterhead, nota- rized by a notary public, certified by a local chamber of commerce, and then sent for verification to SASO in Riyadh at least two months before shipment date. Upon approval, the certificate will be returned to the manufacturing company, which must attach a stamped copy with each shipment to Saudi Arabia of the particular com- modity. (Such premarket certification of consumer electronics and electrical appli- ances runs against international practice.) At least three months before dispatching the first consignment of any type of motor vehicles in any year, the manufacturer must send to SASO a Motor Vehicles Conformity Certificate in English or Arabic for approval. Individuals must obtain the certificate from the manufacturer prior to shipment of any car for their personal use in the kingdom. A certificate of free sale should accompany all shipments of pharmaceutical and medicinal products to Saudi Arabia and should be presented to a Saudi consu- late with other documents. In addition, imports of pharmaceutical and medicinal products require a certificate issued by the exporter's MoH, stating that the medi- cines are actually used by the public in the exporting country under the same trade name and formula. The certificate must include the name of each product, the for- mula, and the date and number of the permit to manufacture them if one is re- quired. No medicine or pharmaceutical products are admitted into the country unless a prior registration is made with the MoH. The ministry examines the applications, supported by the required certificates legalized by a Saudi consulate, and analyzes TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 157 the samples to ensure that they conform to the specifications before granting a license. Imports of plants, fruits, vegetables, seeds, live animals, and poultry must have the prior approval of the appropriate authorities and must be accompanied by a phytosanitary health certificate stating that they are free from pests and other dis- eases. All shipments of plants will be inspected upon arrival in Saudi Arabia. Manufacturers and suppliers of carpets must indicate in Arabic the thickness or weight of each square meter, type, pile weight, and country of origin, to be applied on each five meters along the carpet roll length. All carpet manufacturers, suppliers, and distributors have to show the captioned data on the sales invoice. Importing used clothing requires an official disinfection certificate. These goods will be sub- ject to inspection by quarantine officials. The country of origin must be mentioned on all products imported, except when it is not feasible. All imports of "expensive" textile products are required to have the origin of the goods printed or stamped thereon indelibly. This requirement was in- troduced to protect consumers against deceptive practices. However, no precise Saudi definition of "expensive" exists, and this particular measure is nontransparent. A textile product is deemed to be expensive depending on an analysis of such factors as the quality, brand name, texture, design, and the price relative to other fabrics. Levies and Charges (Other than Import Duties) Imports are subject to a customs surcharge of 3.0 percent. Port fees per metric ton are levied on all goods exempt from import duty. There is also an inspection tax levied on all imports at the rate of up to 0.5 percent of the customs value of the goods, and the customs department collects a handling charge. Import Prohibitions and Licensing All imports from Israel are prohibited, as are imports of live pigs, pork meat and other pork products, frog legs, long-life pasteurized milk in packaging exceeding one liter (to be replaced with a tariff after accession to the WTO), nutmeg, opium and related drugs, alcoholic beverages, ethyl alcohol, and empty containers bearing marks or information on foodstuffs or cement or trademarks of the manufacturers, excluding those directly imported by companies for their own use. This last item is prohibited to ensure that it is not misused by packing deceptive goods, thus mis- leading the consumer. The restriction does not apply to state-owned firms. Some items may be imported for legitimate purposes by govemment agencies for their own use and not for commercial sale. These include postage or revenue stamps, which can be imported only by government agencies, or parachutes, which can only be imported by the Ministry of Defense for its own use. The entry of some prohibited items may be allowed on a case-by-case basis, but information on goods permitted entry on this basis is not available. The Ministry of Agriculture and Water (MoAW), MoC, Equestrian Club, MoH, Ministry of Interior (Mol), MoIE, and the Ministry of Posts, Telegraph and Tele- 158 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA phone (MoPTT) are the main Saudi bodies with responsibilities concerning import license approval. Any individual or entity with a Commercial Registration may apply for an import license. There are no fees payable for obtaining an import license. The MoC is responsible for issuance of import licenses for chemicals, petro- leum, and asphalt imported by commercial importers, other than explosives and dangerous chemicals, which require approval from Mol and MoH. Chemicals im- ported by factories, as opposed to traders, require a license from the MolE. Each application requires three copies of the Commercial Registration of the importer, three copies of the invoice or pro forma invoice, and three copies of the form giving information about the place of storage and type of material, and explo- sive nature, if any. If the application is complete in all respects, an import license is issued the same day. A copy of the license is sent to the Customs Department at the port or airport of entry. An importer wishing to import distillation equipment, used for producing dis- tilled water by heating and condensation, is required to obtain an import license from the MoC. The importer is required to submit an application to the Deputy Minister of Commerce giving information on the technical specifications of the equipment, name and address of the manufacturer, necessity for the equipment in the field of activity, and place of installation of the equipment and the purpose of its use in detail. The application should be accompanied by a copy of the Commercial Registration of the importer, a copy of the purchase order, a copy of the invoice or pro forma invoice, and a detailed, printed catalog of the equipment. The application will be reviewed by the officials of the MoC, in particular the Director General of the Quality Control Department. If the ministry is satisfied that the import is for the stated use, it will be released. If the ministry is not satisfied, the importer will be so informed and given the reasons for refusal. It takes on average two to three days to either issue the license or convey the refusal. In case of refusal, the importer can appeal to the Minister of Commerce. If the appeal is rejected by the Minister of Commerce, the importer can appeal to the Board of Grievances. There are no time frames fixed for the hearing of appeals or handing down of decisions. The Board of Grievances supplies written judgments to all parties to any appeal. Those judgments include the reasons for the decision. However, there is no legislation governing the appeal procedure of the Board of Grievances. The MoIE has responsibility for issuing licenses for chemicals (other than ex- plosives, dangerous chemicals, and chemicals requiring approval from the MoH) imported by factories. The import license requirement is to make sure the factory has satisfied the conditions of safe transport, handling, and storage of chemicals. The importing factory is required to submit an application to the MolE giving infor- mation on the particulars of the factory, including its name, address, field of activ- ity, and Commercial Registration; a copy of the invoice or pro forma invoice; detailed description of the chemicals to be imported, giving their name, specification, com- TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 159 position, quantity, and value (the quantity is limited to the requirement of the fac- tory for one year). If the chemicals to be imported by the factory are either explosives, dangerous, or those requiring approval from the MoH, the application is referred by the MoLE to the respective ministry. For other chemicals, if these are duty free they are cleared directly by the customs without an authorization from the MolE. For dutiable chemicals, the MoIE issues a release order to the customs and gives a copy to the applicant. For chemi- cals falling in the last category above, the time taken by the MolE is not more than two to three days. In many cases, the release order is issued the same day. All requests for import of chemicals, other than those requiring the approval of the Mol and MoH, are never rejected if all the documentation and information is complete. Narcotics, psychotropics, and controlled substances for medical use; ethyl al- cohol; chemicals the intermediary sales of which could lead to narcotics manufac- turing; nonregistered medicines; biological and blood products; and other chemicals require a license from the MoH. The Directorate General of the MoH processes the application and issues a license. An import license is required from the Mol for explosives and dangerous chemi- cals (Department of Weapons and Explosives of the ministry); radio and electronic equipment (Department of Public Security); TV-monitoring cameras and accesso- ries, closed circuit television, and burglar or fire alarms (Department of Public Se- curity); and high-quality photocopiers. To prevent misuse by criminals or terrorists, import licenses for these items are only issued to government enterprises and firms or individuals who have a contract with the government to supply such security devices from inside the kingdom or abroad. The Mol is the agency that determines whether the importer poses a security risk or not. The list of such items subject to import licensing is under review. The MoPTT is responsible for authorizing imports of wireless sets and radio communication apparatus. The motivation for licensing is national security and ra- tionalization of the use of frequencies. The importer is required to submit the name, address, and Commercial Registration of the importer; name and address of the ultimate user of the equipment; location and exact address of the place where the equipment will be used or installed; a copy of the purchase order; a copy of the invoice or pro forma invoice; a catalog of the equipment; and a detailed description of technical specifications of the equipment, including its conformity with Interna- tional Telecommunications Union (ITU) and Saudi specifications. Applications have to be made before effecting imports. The applications are processed by the Frequency Department and the Licensing Committee of the MoPTT. In the case of radio communication apparatus, it usually takes 1 to 2 months to decide on an application and to issue a license, while for network equipment it could take 6 to 12 months, depending on the peculiarities of each case and coopera- tion on the part of importers, end users, and suppliers. Licenses are required for all agricultural machinery and equipment that is eli- gible for subsidies. Reasons for licensing are to ensure that the imports comply with 160 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA the specifications approved by the MoAW, to determine the right subsidy, and pro- vide the Saudi Agriculture Bank with the price and subsidy for each consignment. The import license is required even if the importer does not intend to apply for a subsidy payment. To get an import license, the importer must have a Commercial Registration; be an authorized dealer or agent; submit the catalog of the machinery, giving technical specifications, the price list, and the invoice price; have a certifi- cate of origin for the machinery, specifying date of production; provide a report about the soils, crops, and climate that suits the use of such machinery; and have a one-year guarantee against any quality or production defect. An import license will be issued to the importer for machinery and equipment that have been approved by the ministry, after the machinery has earlier undergone tests for its suitability. A committee consisting of agricultural and mechanical engi- neers tests the suitability of the imported machine. The period taken to issue the import license is between one to two weeks. All varieties of seeds, transplants, chemical or organic fertilizers and soil en- hancers, agricultural chemicals, pesticides, veterinary tests, and growth regulators require a license from the MoAW. The reason for requirement of import license is to ensure compliance with Saudi standards and specifications and to ensure that in- fected seeds and chemicals are not imported. To obtain an import license, the im- porter is required to submit an application including a copy of Commercial Registration; a copy of the invoice or pro forma invoice; exact description, specifi- cations, and quantity to be imported; and literature on analyses or specifications of the goods. The application will be verified to ensure that the materials meet Saudi standards and specifications, and if so, a license will be issued. It takes one to two days to issue a license if all documentation is complete. The license is valid six months for fertilizers and soil improvers, seeds, and transplants, and three months for potato seeds. Imported pesticides must be registered with the MoAW, a process that takes one to two years. The different average times to deliver a license are not determined by law or by a specific administrative order. Application review times, except for telecommuni- cations, are under 30 days. Data on the proportion of Saudi imports subject to li- censing are not available. Standards and Other Technical Requirements SASO is the sole body charged with the preparation, adoption, and application of standards for Saudi Arabia. Mandatory standards are applied to imports for the pro- tection of health, safety, national security, public morals, and the environment and preventing deceptive practices. Procedures for assurance of import conformity to Saudi standards are enforced by the MoC. SASO maintains an Intemational Conformity Certification Program (ICCP) that relies on the private sector to inspect shipments for compliance verification in the exporting countries.4 The ICCP is a combined conformity assessment, preshipment inspection, and certification scheme to regulate and monitor shipments TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 161 of selected categories of products prior to their leaving their ports of exports before reaching Saudi Arabia (the program currently applies to 76 product categories di- vided into five groups: food and agriculture, electronics and electrical products, automobile and related products, chemical products, and others). A key element of the ICCP is that shipments are certified as being in conformity with SASO stan- dards (or their approved equivalents) in their country of origin, ensuring both ex- porters and importers a streamlined customs process at the port of entry. An interesting aspect of the ICCP is that test data can be produced by nationally or internationally accredited laboratories approved by SASO, or by a manufacturer's declaration of conformity. At the conclusion of the SASO-approved laboratory testing, a Confor- mity Test and Evaluation Report is issued and submitted to the Regional Licensing Center for verification of conformity to SASO program requirements. SASO has contracted with an international firm to carry out certification of these activities. This firm is in turn assisted by a network of accredited testing laboratories and inspection bodies around the world. Appropriate non-Saudi standards have been identified as the basis upon which products may be assessed, as well as the specific deviations that may apply. Saudi Arabia uses international standards except when they are found deficient because of the country's fundamental climatic and other factors. Examples are international standards that do not specify performance or testing of equipment apparatus or material at the high ambient temperatures prevalent in Saudi Arabia. Saudi Arabia is a member of the International Organization for Standardization (ISO) and other international organizations. Certain Saudi standards have an ISO equivalent, which is indicated in the list of SASO standards. SASO refers most standards to technical committees; parties concerned with the subject matter of draft standards are normally represented on the relevant committees, including pertinent government, academic, industry, and trade sectors. Saudi-specific standards exist where the international ones would be an ineffective or not appropriate because of Saudi Arabian fundamental climatic, geographical, or technological problems, as allowed under international agreements. Shelf life standards for food products are developed by SASO. Saudi standards cover sanitary requirements for food products by means of measures following the standards and guidelines of CodexAlimentarius or, if not covered by the standards and guidelines of Codex Alimentarius, based upon scientific studies or other measures consistent with WTO practice. All relevant international bodies are notified of all SASO standards. A high percentage of SASO standards uses international standards and other widely ac- cepted national standards as references. About one-third of SASO standards cover food products predominantly using the Codex Alimentarius as a major reference. A requirement for the marketing of food products is that at least half of shelf life validity remains on food products to allow for reasonable and adequate time for the distribution and marketing of these products throughout Saudi Arabia. Saudi shelf life for perishable food products is based on the assumption of a controlled storage temperature (by refrigeration or freezing) in accordance with internation- 162 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA ally recognized norms. As for shelf-stable products, the main consideration for shelf life determination is the prevailing climatic conditions of Saudi Arabia. Saudi Arabia predominantly adopts the shelf life periods determined by the scientific studies of internationally recognized specialized institutes. In limited cases Saudi Arabia con- ducts the studies itself. Shelf-stable products are normally stored under room or ambient temperature con- ditions. In the case of Saudi Arabia, shelf life determination for these products has to take into account the prevailing, high ambient temperatures in the country (averaging 33 degrees Celsius) and the wide temperature fluctuations between day and night and among seasons, not to mention the extreme variations in humidity. In contrast, shelf life for shelf-stable products determined by most food-exporting countries is based on an ambi- ent storage temperature not exceeding 25 degrees Celsius. Thus, some of the time limits relating to shelf life in Saudi Arabia appear to be unduly short. Sanitary and quarantine measures for animal health, living plants, and seeds, and measures for the prevention of epidemic diseases' spread and the control on the use of veterinary medicines and pesticides are administered by the MoAW, as well as the MoC and the Ministry of Municipalities (MoM). Standards for sanitary mea- sures for food commodities (meat, meat products, and processed foods) are im- posed by SASO but applied by the MoIE and MoC on locally made products, and by the MoC on imported products. The MoM participates in internal control of products in the markets that are mainly controlled by the MoC. Saudi Arabian SPS measures conform to standard guidelines or recommendations issued by the bodies specifically designated by the WTO SPS Agreement, the Codex Alimentarius Commission, the Intemational Office of Epizootics, and International Plant Protection Conventions. For SPS measures related to risk assessment and not covered by the above three intemational bodies (such as microbiological risks and shelf life of food products), Saudi Arabia relies on scientific studies, guidelines, and recommenda- tions either carried out by itself in limited cases or by specialized, intemationally ac- cepted research institutes, universities, or scientific references. There are no approved Saudi standards regarding maximum residue limits of hormones in food products. Most Saudi standards for meat and meat products only state that such products shall be free from synthetic hormones. Plant cuttings and seedlings imported into Saudi Arabia are subject to phytosanitary measures from the country of origin and visual inspection in the quarantine area. Saudi Arabia confirms that it will accept the certification of exporting countries, in accordance with the requirements under the WTO SPS Agreement. Where SPS measures are not found to be consistent with WTO practice, Saudi Arabia will ensure their con- sistency by the time of its accession. Concluding Remarks All three countries discussed above have made significant changes to their trade regimes in the 1990s. Tariffs have been consolidated with other fees and charges, the number of TRADE POLICIES IN JORDAN, LEBANON, AND SAUDI ARABIA 163 tariff bands has been reduced, and the average level of tariffs has fallen. The focus of discussion was on the nontariff dimensions of trade policy, reflecting the author's con- viction that these are very important determinants of the incentive to engage in interna- tional trade. Much remains to be done by governments to reduce the administrative burdens encountered by traders in all three countries. Trade-related transactions costs remain high. Licensing requirements and related regulatory red tape, conformity assess- ment procedures for goods subject to mandatory product standards and technical regu- lations, direct controls on agricultural trade, and nontransparent and uncertain customs practices are all burdensome. Greater efforts to simplify and streamline procedures must be made. In Saudi Arabia in particular, although this is also true of Jordan, attempts have been made recently to enhance the image of the customs administration. Despite this, customs in both countries, as well as in Lebanon and part of the rest of the region, are basically nontransparent and inefficient. Notes 1. Under the Investment Promotion Law No. 16 of 1995, projects in the following sectors may receive incentives, including customs and GST exemptions: industry, agriculture, ho- tels, hospitals, marine transport, railways, recreational resorts, convention and exhibition centers, or any other sector added by the Council of Ministers in accordance with the country's needs. The fixed assets of projects are exempted from taxes and fees within three years of their approval by the Investment Promotion Committee formed under this law. This period may be extended if the nature and size of the project require so. Spare parts imported for the project are exempted from taxes and fees, provided that their value does not exceed 15 per- cent of the value of the fixed assets that require these parts. The parts must be imported within 10 years from the production date after the Investment Promotion's Committee's approval of the spare parts to be imported The fixed assets needed to expand, develop, or modernize the project are exempted from fees and taxes, provided they increase the produc- tion capacity of the project by 25 percent or more. Hotel and hospital projects are granted extra exemptions from taxes and fees on their purchases of furniture and supplies for the purpose of renewal once every seven years. The furniture and supplies must be imported within four years of their being approved by the Investment Promotion Committee. Any increase in the value of imported fixed assets is exempted from taxes and fees if the increase results from the rise in prices, freight charges, or changes in exchange rates. 2. Corruption, while persistent in most other countries of the region, is more open in Leba- non, particularly in the lower echeslons of customs. 3. See al Khouri (1999) for a more detailed listing of licenses by issuing organization and commodity. Available on request from the author at MEBA@nets.com.jo. 4. This paragraph draws on Messerlin and Zarrouk (1999). 164 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA References al Khouri, Riad. 1999. "A Survey of Non-Tariff Barriers in Selected Arab Coun- tries." Middle East Business Associates, Amman. Unpublished paper. Messerlin, Patrick, and Jamel Zarrouk. 1999 (forthcoming). "Trade Facilitation Tech- nical Regulations and Customs Procedures." The World Economy. Chapter 7 Para-Tariff Measures in Arab Countries' Jamel Zarrouk Arab Monetary Fund, Abu Dhabi, UAE Economic Research Forum, Cairo The purpose of this chapter is to shed some light on the general rules and prin- ciples for identifying para-tariffs and taxes with an effect equivalent to tariffs and to discuss collected information on the most common forms of para-tariff measures in Arab countries. The information on para-tariff measures used in this study has been derived from various sources, including the Arab Trade In- formation Network (IATIN) of the Program for Arab Trade Financing, the Trade Analysis and Information System (TRAINS) of the United Nations Conference on Trade and Development (UNCTAD), and various reports of the World Bank and World Trade Organization (WTO). In addition, the customs authorities in selected countries were also surveyed to verify the accuracy and maintenance of certain para-tariff measures. Last, in order to highlight the quantitative impor- tance and incidence of para-tariffs on import costs in an Arab country, a ques- tionnaire was filled out by a sample of importing firms in Egypt to indicate all import taxes and charges that they must frequently disburse. Main GATT Rules and Practices in Identifying Para-Tariffs In this section an attempt is made to define and describe para-tariffs in light of the GATT rules and the past discussions of the GATT Council involving the use of import surchages by contracting parties. 165 166 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA The Nature of Tariffs and Other Taxes and Charges Applied to Imports In general, taxes and charges levied on imported commodities may be classified into three main categories: tariffs, other taxes and charges on imports, and internal charges and taxes on Imports. Tariffs are often calculated as ad valorem duties based on the CIF (cost, insur- ance, and freight) price. The CIF price coincides with the cost of the commodity at the port of entry. The applied ad valorem rates on imports are in general specified in the country's tariff schedule at the so-called tariff line corresponding to a specific commodity or group of commodities. National tariff schedules (statutory tariffs) are published in the Official Gazette, in accordance with the customs laws in force. Other charges and taxes on imports are border charges and taxes complement- ing customs tariffs. These are collected in return for services rendered to importers and exporters. Examples include charges for legalizing certificates of origin and importation invoices, port services charges (unloading, storage, and so forth), and charges for inspection of goods. Internal charges and taxes are levied on both domestic and imported products. Examples of internal taxes with a broad consumption base include the sales tax, the value-added tax (VAT), and the consumption tax. Nevertheless, as will be discussed later, internal taxes on imports may be collected in a discriminating fashion on do- mestic and imported goods. In this case, the internal tax is considered to have an effect equivalent to tariffs. Definition of Para-tariffs on Imports Para-tariffs fall within the category of import surcharges and taxes as well as inter- nal charges and taxes. These are considered as additional charges and taxes not directly related to services rendered in import-export transactions. An Internal tax or charge may also be considered a para-tariff if it is collected on imported goods but not on goods locally produced, or is calculated in a discriminatory way com- pared with those applied to locally produced goods for the government to raise revenues, protect domestic producers from foreign competition, or other reasons. Para-tariffs are levied under various names through various laws and regulations issued by government agencies that are different in their activities, nature, and ob- jectives. Methods of calculating para-tariffs vary according to the nature of goods imported and the purposes that the government concerned is striving to achieve. Impact of Para-tariffs Para-tariffs play a similar role to that of customs tariffs in that they aim at protecting products of national origin and generating revenues for the state treasury or ad- dressing difficulties in its balance of payments. Para-tariffs have an effect similar to that of tariffs on import cost, but the magnitude of para-tariffs' impact is stronger. While ad valorem duties are calculated as a constant proportion of the value of the imported goods, many forms of para-tariffs tend to be much less transparent than PARA-TARIFF MEASURES IN ARAB COUNTRIES 167 tariffs. Para-tariff measures discriminate against imports and the customs valuation through decreed prices (which might be higher than the real value). In addition, para-tariffs raise the price of imports directly and restrict imports indirectly. GA7T Provisions for Para-tariffs Despite the practical complexities of identifying the forms of para-tariffs in the import taxes structure of individual countries, general rules and principles for iden- tifying such charges and ways of removing or reducing them in the context of a multilateral trade liberalization process have been established. The main GATT Articles and practices emanating from GATT Council decisions for applying the said rules are presented and briefly discussed below. Article II (2c) and Article VIII (I-a) of the GATT stipulate that a State desiring to levy charges and taxes on imports or exports in addition to customs duties shall collect such charges or taxes [only] in return for specific services rendered and that these shall be computed on the basis of actual cost of services rendered in the conduct of a commercial trans- action (be it an importation or exportation transaction). The GATT pro- hibits party-states from imposing additional charges or taxes on imports in any other form for the purpose of protecting national products or col- lecting additional revenues for the State treasury in an indirect manner. Article VIII (a), (f), and (c) of the GATT call upon states to reduce the number of additional charges and taxes they impose, making them limited to the number of direct services rendered to importation or exportation activities. Among the examples on charges related to commercial transactions subject to the above-mentioned rules are charges for port services, inspection of goods, and certification. Additional charges levied on imports on the basis of actual cost of services rendered entail abstaining from computing them as ad valorem, that is, in percent- age of the import price. In this case, such surcharges will have an effect equivalent to tariffs and will consequently be considered an integral part of the customs duties. Article III (2) of the GATT stipulates the application of the principle of national treatment in imposing internal charges and taxes on imports at rates and amounts applied to like domestic products. However, the existence of differences in the rates of internal taxes applied to domestic products and like imported products is consid- ered a violation of the principle of national treatment. Moreover, the imposition of some internal charges and taxes on imports, while exempting like national products, is also considered a violation of the principle of national treatment. The Executive Program for establishing the Pan-Arab Free Trade Area (PAFTA) calls in its Article 1 (4) for granting goods of Arab origin national treatment in respect of internal charges and taxes. The GATT permits the use of para-tariffs and taxes on dumped imports that cause material injury to domestic industry or whenever it is proven that a foreign 168 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA state is subsidizing its exporters and this damages producers in the importer state concerned. Finally, the GATT permits the use of para-tariffs justified on balance of payments grounds. In this case, temporary measures can be used to restrict imports, such as the imposition of additional surcharges on imports. The country concerned must specify the period in which import surcharges and taxes will be used, and is required to hold periodic consultations with the WTO and the International Mon- etary Fund (IMF) to gradually reduce such charges and taxes and eliminate them in line with the balance of payments improvement. It should be noted that countries that use para-tariffs under all the above situations may not simultaneously use quan- titative restrictions. One or the other instrument must be chosen to address a dete- rioration in the balance of payments. Classifying Para-tariffs The most common forms of para-tariffs in Arab countries can be classified into three main categories: "service" charges affecting importers, "special" import taxes and charges complementing tariffs, and internal taxes on imports. "Service" charges affecting importers: Although such charges are levied on imported goods in return for specific services, they become para-tariffs if the col- lected charges exceed the actual cost of such services. For example, computing the charges for the service rendered as an ad valorem rate (a percent of the value of imports) is a violation of GATT rules; consequently, a charge computed on this basis becomes part of customs duties. This category includes stamp taxes and con- sular fees calculated as a percentage of the invoice price of imported goods, or where the charges increase progressively with the import value. Other "service fees" may be maintained without having a direct relationship with the service provided to importers in as much as they are maintained in the general public interest. For ex- ample, importers are charged for veterinary fees and phytosanitary control fees, both of which serve the public health of consumers, and customs statistics fees, which also serve the general interest of the country. "Special" import taxes complementing customs tariffs: These are import taxes collected without any services rendered in return. Included in this category are ad- ditional import taxes that may be imposed to support a country's economic and social development programs, to make up for shortfalls in revenues of the state treasury, or to address balance of payments difficulties, in addition to additional import taxes imposed as antidumping and countervailing duties. In general, "spe- cial" import taxes are temporarily levied and then removed when the situation call- ing for their imposition improves. Internal taxes and charges violating national treatment: These are internal charges and taxes on imports, such as the sales tax or the VAT, that exceed those levied on domestic-like products, or an internal tax that is calculated in a manner different from that applied to the similar domestic products. Note that when a sales tax is levied on the basis of the value of an imported product inclusive of any tariffs, the sales tax accordingly increases the protective effect of tariffs. PARA-TARIFF MEASURES IN ARAB COUNTRIES 169 Collected Data on Para-tariffs in Arab Countries This section presents data on the most common para-tariffs maintained in Arab countries, using the previously described groups of charges and taxes to classify them. A brief discussion of the main characteristics of such charges and taxes fol- lows. Four Arab countries (Saudi Arabia, Qatar, Bahrain, and Kuwait) were found not to levy para-tariffs. Scope and Coverage of Para-tariffs by Surveyed Country JORDAN * "Service" charges affecting importers: - Fees for customs overtime wages are levied on all goods at 0.2 percent of the CIF value of imports and 0.1 percent of the value of exports. - Legalization charges of JD2 for certifying import invoices and cer- tificates of origin and their attachments are levied on FOB value of imports ranging between JDI,000 and JDlO,000. The certification fee is JD20 for FOB imports value exceeding JD10,000. - Additional specific duties are expressed as a fixed monetary amount per physical unit of the product imported, as shown in Table 7.1. * "Special" import taxes complementing tariffs: none. * Internal taxes or charges violating the national treatment of imports: Sales taxes of 10 and 20 percent of the CIF import value plus customs tariff and other customs duties are charged. Sales tax is levied on both locally manufactured and imported goods, except for staples (wheat, corn, sugar, gas, agricultural machines and equipment, and medications). UNITED ARAB EMIRATES * "Service" charges affecting importers: none. * "Special" import taxes complementing tariffs: Surcharges are levied on imported tobacco and its derivatives, expressed as a fixed monetary amount per ton of the imported quantity. This is in addition to the high tariffs levied on tobacco and cigarettes at 80 percent of the CIF value (as of July 1, 1998). * Internal taxes or charges violating the national treatment of imports: none. 170 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 7.1. MAJOR SPECIFIC DUTIES AND TAXES APPLIED IN JORDAN Nature of imported Specific duties Method of Percentage or Agencyfor whose account commodity subject and taxes calculation lump sum charge is collected to the surcharge Surcharge on Percentage of n.a. Ministry of Municipal Gas and diesel oil flammables CIF value Affairs; Ministry of Finance Surcharge on Percentage of n.a. Ministry of Agriculture Raw tobacco tobacco for CIF value farmers' assistance Veterinary Per head 20 fils Ministry of Agriculture Sheep charges Customs duties Per head JD5 Ministry of Finance Sheep on sheep' Agricultural Per ton 250 fils Ministry of Agriculture Vegetables and fruits quarantine charge Head count tax Per head n.a. Ministry of Agriculture Sheep Culture tax Percentage of n..a. Ministry of Information All audio and video CIF value tapes and magazines Excess load Perton n.a. Ministry of Transport Bulky goods trans- charges ported by road Traffic Per period of n.a. Traffic Department Foreign cars, by Department stay number of charges cylinders Road passage Per period of n.a. Ministry of Transport Foreign trucks and charges stay lorries a. Imported sheep are subject to duties as a fixed amount per head. They are exempted from tariffs. n.a. = not available Source: Survey by author. TUNISIA • "Service" charges affecting importers: - "Services" charges (Redevance de Prestations Douanieres) are levied at the rate of 3 percent of the total amount of collected tariffs and other import taxes or charges. If the good is exempted from tariffs, a fee of TD 5 per each section of the customs declaration is charged. - A computer data word-processing fee of TD2 per each page of cus- toms declaration is charged. * "Special" import taxes complementing tariffs: The FODEC tax (duty to assist the Fonds de Developpement de la Competitivit6) is levied at the rate PARA-TARIFF MEASURES IN ARAB COUNTRIES 171 of 1 percent of the CIF value of imported goods that compete with similar local products. * Internal taxes or charges violating the national treatment of imports: - Consumption tax is levied on imported goods and goods produced locally. This tax is computed only on the basis of CIF import value and ranges between 11 and 470 percent (luxurious passenger cars). However, the rate of 90 percent is applied to the majority of the goods subject to this tax. - VAT, which is levied on both imports and locally made products, con- sists of four different rates: 6 percent, 10 percent, 18 percent, and 29 percent. This tax is levied on the CIF import value plus the customs tariff and the FODEC tax, as well as the consumption tax, if appli- cable. SUDAN * "Service" charges affecting importers: not known. * "Special" import taxes complementing tariffs: - Defense tax is collected at the rate of 4 percent of the CIF value of all goods except staples. - Business profit tax is collected at the rate of 5 percent of the CIF im- port value plus the customs tariff and other customs duties. This tax is levied on imported goods competing with locally produced ones. - Consumption tax is collected at the rate of 10 percent of the CIF im- port value plus the customs tariff and other customs duties. This tax is levied on consumer goods, including footwear, tobacco, soaps, and processed foodstuffs. * Internal taxes or charges violating the national treatment of imports: not known. IRAQ * "Service" charges affecting importers: not known. * "Special" import taxes complementing tariffs: Import charges to assist ex- ports are collected at the rate of 0.5 percent of the CIF import value of capital goods and 0.75 percent of the CIF value of consumer goods. * Internal taxes or charges violating the national treatment of imports: not known. 172 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA SYRIA * "Service" charges affecting importers: - Import license fees are collected at the rate of 2 percent of the CIF value of all imported goods, except for imports by the public sector. - Consular fees for certifying all import invoices to Syria are collected. These fees are a function of the import value. They start with a mini- mum of 4 percent on the first SŁ1,000, then 3 percent on the next SŁ1,000 and 0.4 percent on all amounts exceeding the first SŁ2,000. The collected consular fees differ by country of shipment. For instance, consular fees for legalizing commercial documents by the Syrian Embassy in Washington, D.C., for shipments bound for Syria from the United States, start from a monetary amount of $5 for imports values ranging between $1 and $100, and rise to as much as $606 for CIF import values that exceed $150,000. * "Special" import taxes complementing tariffs: Additional import taxes are levied on all imported goods. These are calculated as a percentage of the CIF value of imports. The rates are progressive with the ad valorem tariff rates. They range from 6 percent to 35 percent and comprise 24 band rates. For example, an additional import tax of 12 percent is collected on the CIF import value subject to tariff rates ranging between 3 percent and 6 per- cent. It increases to 14 percent for import values subject to ad valorem tariff rate ranging between 12 percent and 18 percent, and so forth. (The Syrian authorities have announced that the complementary import taxes and the ad valorem tariff rates were merged into unified ad valorem rates starting in 1999). * Internal taxes or charges violating the national treatment of imports: not known. LEBANON * "Service" charges affecting importers: - Additional customs duties are levied on imported cars at 20 percent for the first LŁ25 million of the CIF value, and 35 percent for the balance of the CIF value of the imported car. - Specific duties are collected on alcoholic beverages and beer. - Stamp fees are levied on all imports at the rate of LŁ3 per each LŁ1,000 of the CIF imported value. * "Special" import taxes complementing tariffs: not known. PARA-TARIFF MEASURES IN ARAB COUNTRIES 173 * Internal taxes or charges violating the national treatment of imports: not known. LIBYA * "Service" charges affecting importers: not known. * "Special" import taxes complementing tariffs: - An additional import tax, the "Artificial River Tax," is levied at the rate of 15 percent of the CIF import value. This tax is paid upon opening a letter of credit by the importer with his local bank. Im- ported products that are exempted from this tax are medications, staples, processed food products, and imports financed from the state treasury. * Internal taxes or charges violating the national treatment of imports: not known. EGYPT - "Service" charges affecting importers: - The customs statistical tax, a flat fee of 1 percent of the FOB value of imports, is levied on all imports for services provided by customs. - The customs surcharge is collected at a rate of 2 or 3 percent of the import value of goods subject to ad valorem tariff rates between 5 percent and 29 percent or 30 percent and above, respectively. - X-ray (sic), health, and food control charges are levied on foodstuffs at the amount of $1 per ton. - Certification and stamp duties are collected progressively with the im- ported value. "Special" import taxes complementing tariffs: A specific surcharge to con- trol standards and quality of exports is levied on imported goods and ex- pressed as $7.30 per ton (25ŁE per ton). * Internal taxes or charges violating the national treatment of imports: - The general sales tax (GST) levies two rates of 5 percent and 25 per- cent for imported and locally produced goods. The GST applies to the CIF import value plus tariffs and other customs charges. - Essential commodities such as basic foodstuffs are exempt from the sales tax, as are newsprint, papers, and magazines and some pharrmaceuticals. 174 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA - "Income" tax of 1 percent on the CIF import value plus tariffs and other customs duties is levied. This tax is withheld as an advance de- posit for income tax on the importer's income. MOROCCO * "Service" charges affecting importers: A para-fiscal tax (taxe para-fiscale) is collected at the rate of 0.25 percent of the CIF import value and levied on all imported goods, except those exempted from or subject to minimum customs tariffs. This tax is collected to assist standards and quality inspec- tions of export-oriented goods, the Moroccan crafts industry, the Moroc- can Center for Export Promotion, and the Industrial Development Council. * "Special" import taxes complementing tariffs: - Fiscal withholding on imports (pre1vementfiscale a l'importation) is levied at the rate of 15 percent of the CIF import value plus the cus- toms tariffs. - Specific import duties on timber (except wooden manufactured ar- ticles) are levied at the rate of 6 percent on the CIF import value plus tariffs and other customs duties as well as the fiscal withhold- ing import tax. * Internal taxes or charges violating the national treatment of imports: - VAT is levied on both imported and locally manufactured goods. This tax comprises five rates: 0 percent granted to certain foodstuffs; 7 per- cent levied on the consumption of electricity, water, medications, pe- troleum products, table oils, medical services, legal services, and bank and other financial services; 10 percent levied on imports of sugar and other derivatives; 14 percent levied on transport; and 20 percent levied on some other goods. The VAT levied on imports is calculated on the basis of the CIF value plus tariffs plus the fiscal withholding and other customs duties and charges. - Consumption tax is levied as a specific duty as follows: ,, surchages on imported alcoholic beverages, wines, and beer at the amount of Dh5 per 100 liters ,, surcharges on imported sugar and artificial sweetener (duty not known) ,, surcharges on imported rubber sheets, pneumatic tubes, and wheel tires (duty not known) >> charges on the consumption of fuels and other energy products (duty not known) ,, charges for assaying and assuring gold, silver, an platinum con tents (duty not known). PARA-TARIFF MEASURES IN ARAB COUNTRIES 175 Overall Assessment of Para-tariffs in Arab Countries Virtually all the surveyed Arab countries have been found to use para-tariffs on imports, except for Bahrain, Saudi Arabia, Qatar, and Kuwait. Moreover, numerous para-tariffs lack transparency and are often disguised forms of trade tax, having an effect equivalent to tariffs. Detailed data on specific surchages-that is, expressed as a monetary amount or a physical unit of the imported good-are not available in most of the surveyed countries. According to the aforementioned classification of para-tariffs, there are six countries that have been known to have used the first cat- egory of "'service' charges affecting importers." These surcharges vary widely in their forms and ad valorem incidence on import costs. Moreover, many of this form of para-tariffs are not directly related to import transactions-for example, the road- way passage fee and traffic administration fee in Jordan. In addition, numerous "service" charges affecting importers do not reflect the actual cost of services ren- dered to traders. In many cases, they are levied as ad valorem duties or expressed as progressive monetary amounts per the imported values. Illustrative examples are the consular certification fees and customs "services" statisitical fees. The second category of para-tariffs is "'special' import taxes complementing tariffs." They are used by five countries for numerous purposes, either to address shortfalls in treasury revenues (fiscal withholding on imports in Morocco) or for assistance to economic and social development projects, such as the defense tax used in Sudan and the "Artificial River Tax" used in Libya (Table 7.2). Finally, the third category of para-tariffs is "internal taxes or charges violating the national treatment of imports." Available information on this category indicates notable differences in the methods of determining the base for calculating internal taxes on imports. Table 7.3 shows that Arab countries that impose internal taxes- such as sales tax (Jordan and Egypt), the VAT (Tunisia and Morocco), or the con- sumption tax (Tunisia and Morocco)-levy such taxes on imported goods on the basis of import value plus tariffs and other surcharges and taxes. Note that when such internal taxes are levied on the basis of the value of an imported product inclu- TABLE 7.2. "SPECIAL" IMPORT TAXES COMPLEMENTING TARIFFS AS KNOWN IN SOME ARAB COUNTRIES Ad valorem Country Nature of tax rate (%) Tax base Tunisia Fonds de Developpement de la Competitivite I CIF value Sudan Defense tax 4 CIF value Syria' General import tax 6-35 CIF value Libya Artificial River Tax 15 CIF value Morocco Prelevement fiscal a l'importation 15 CIF value + customs tariff a. This tax has been unified with the customs tariff rates as of early 1999. 176 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 7.3. INTERNAL TAXES OR CHARGES ON IMPORTS IN SELECTED ARAB COUNTRIES Country Nature of tax Applied rates (%) Tax base Jordan Sales 0, 10, 20 CIF value + customs tariff and other customs duties Tunisia VAT 0, 6,10, 18, 29 CIF value + customs tariff + competitiveness pro- motion tax (if applied) + consumption tax Consumption 11-470 CIF value Egypt Sales 0, 5, 25 FOB value + customs tariffs + customs services charges + other customs duties Morocco VAT 0. 7, 10, 14, 20 CIF value + customs tariff + fiscal withholding tax + specific consumption tax Consumption Variable according to CIF value the nature of imported goods sive of any tariffs or surcharges, this internal tax accordingly increases the protec- tive effect of tariffs and weakens the national treatment principle. Illustrative Examples of the Impact of Para-tariffs on Import Cost To quantify the relative importance of para-tariffs on import cost in one Arab coun- try, importers in Egypt were surveyed through a questionnaire on the taxes and charges that they must disburse for imports of selected prodcuts: a primary product (for example, apples), a semiprocessed good (for example, industrial chemicals [res- ins]), and a finished good (for example, silk ties). Questionnaire returns (Table 7.4) indicate that the ad valorem incidence of para- tariffs on import cost is estimated between 5.5 percent and 5.7 percent of the FOB import value. The main forms of para-tariffs in Egypt are "service" charges affect- ing importers. These include X-rays, health, and food control fees and customs sta- tistical fees. The GST as an internal tax is assessed on the basis of the final value of imports, which is the CIF value plus all the import taxes (that is, tariffs and para- tariffs). Such a valuation procedure increases the protective effect of tariffs against imported goods. Overall, this finding shows that the most binding constraints in import cost for Egyptian importers are high tariffs, which rank first, followed by freight and transportation costs. Although the estimates on para-tariffs in Egypt show that they are relatively low as compared with the applied ad valoren tariff rates, para-tariffs increase the PARA-TARIFF MEASURES IN ARAB COUNTRIES 177 TABLE 7.4. EGYPT: MAIN TAXES AND CHARGES LEVIED ON IMPORTS OF SELECTED PRODUCTS Agricultural Industrial Finished products chemicals products (apples) (resins) (ties) Value Rate Value Rate Value Rate (US$) (%) (US$) (%) (US$) (%) Value (FOB) (=100) 100.00 (') 100.00 n.a. 100.00 n.a. Freight (on FOB value) 30.00 (b) 10.00 (b) 6.00 (b) Insurance (on FOB value) 1.00 n.a. 1.00 n.a. 1.00 n.a. CIF value (= items 1+2+3) 131.00 n.a. 111.00 n.a. 107.00 n.a. Import duty (on CIF value) 52.40 40 11.10 10 57.78 54 Subtotal (items 4+5) 183.40 n.a. 122.10 n.a. 164.78 n.a. Customs statistics charge (on FOB value) 1.00 1 1.00 1 1.00 1 Other customs surcharges (on FOB value) 3.00 3 3.00 3 3.00 3 X-rays, health, and food control charge (on FOB value) 0.20 (') n.a. n.a. n.a. n.a. Standards and quality control of exports charge (on FOB value) 1.50 (d) 1.50 (d) 1.50 (d) Other (consular fees, cost of letter of credit) (on FOB value) 2.00 2 2.00 2 2.00 2 Port charges 2.00 (N) 2.00 (1) 2.00 (C) Final value of imports 193.10 131.60 n.a. 174.28 n.a. GST(on port charges) 0 Exempt 6.58 5 43.57 25 Whole sales cost 193.10 n.a. 138.18 n.a. 217.85 n.a. Memorandum Ratio of para-tariffs 5.7 5.5 5.5 (to FOB value) Ratio of port charges 2.0 2.0 2.0 (to FOB value) n.a. Not applicable. a. A single import shipment of 200 tons and (FOB) value of US5100,000 is assumed for imports of apples. The estimated (FOB) values were converted to 100 units for illustration purposes. b. Freight via refrigerated trucks (for apples), via sea (for industrial chemicals), via air (for ties) c. X-rays, health, and food control charges are levied for an amount of USS I per ton. d. Standards and quality control of exports charges are levied for the amount of $7.30 per ton (5E25 per ton). e. Port charges are estimated for around US$ 10 per ton or 2 percent of FOB value. Source: Survey by author. effective rate of duty collection for Egypt to about 10 percent of the average tariff rate. Another element that may increase import cost through the imposition of para- tariff charges is the lack of transparency of these charges as well as their valuation procedures in numerous Arab countries. 178 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Summary and Recommendations Para-tariffs can be classified into three main categories: "service" charges affecting importers, "special" import taxes complementing tariffs, and internal taxes or charges violating the national treatment of imports. A survey of 10 Arab countries was conducted to identify para-tariffs and their implications for import costs. The collected information indicates that with respect to "services" charges affecting importers, these are often higher than the actual cost of the service rendered. As far as import taxes complementing tariffs are concerned, these are found to be de facto customs duties in some countries but are kept separately via the procedural and legal bases on which they haved been imposed. Finally, internal taxes and charges that are violating the national treatment of imports have been tracked in the surveyed Arab countries in the form of stricter valuation procedures than those applied to domestically pro- duced goods. Countries that apply broad-based consumption taxes (sales tax or VAT) calculate internal taxes on the basis of the CIF import value plus the other customs duties and surcharges, thereby increasing the protective effect of tariffs against imported goods. In light of this, it can be said that liberalizing intraregional trade among Arab countries in the framework of the Executive Program establishing the Pan-Arab Free Trade Area (PAFTA) requires further efforts from the member countries to implement a number of measures: X There is a need for Arab countries signatory to the PAFTA to disclose all para-tariffs and also their methods of calculation. Making information on all para-tariffs available to traders will help significantly to better predict trade cost and, overall, enhance the credibility of government trade policy reforms in the private sector. * Arab countries that currently use service charges affecting importers should pledge to link the actual cost to service rendered. Other service charges levied without corresponding service directly related to import transac- tions should be removed. * Special import taxes complementing tariffs, if any, should be consolidated and unified with national tariff schedules in order to be subjected to the tariff reductions. * To grant full national treatment to intra-PAFTA imported goods, an agree- ment should be reached in the context of PAFTA on unifying the base for calculating internal taxes on imported goods. In this connection, a recom- mendation would be that internal taxes imposed on intra-PAFTA imports- for example, VAT or sales taxes-be calculated on the basis of the CIF PARA-TARIFF MEASURES IN ARAB COUNTRIES 179 import value only, that is, excluding tariffs and the other customs duties from the tax base of the imported value. Note 1. The views expressed here and the included information are solely the responsi- bility of the author and should not be attributed to the Arab Monetary Fund or the Economic Research Forum. Bibliography Arab Trade Finance Program. 1998. IATIN database, iatinhq@emirates.net.ae. GATT. 1965, May 25. "The Use of Import Surcharges by Contracting Parties." Note by the Secretariat, Document No. COM.TD/F/W/3. Geneva. GATT. 1969, March. The Text of the General Agreement on Tariffs and Trade 1947. Geneva. Hoekman, B. 1998. "The WTO, the EU, and the Arab World: Trade Policy Priorities and Pitfalls." In Nemaat Shafik, ed., Prospects for Middle Eastern and North African Economies: From Boom to Bust and Back? London: Macmillan. Hoekman, B., and S. Djankov. 1997. "Effective Protection and Investment Incen- tives in Egypt and Jordan During the Transition to Free Trade with Europe." World Development 25(2):281-91. Kostecki, M. M., and M. J. Tymowski. 1985. "Customs Duties versus Other Import Charges in the Developing Countries." Journal of World Trade Law 19(2):269-86. League of Arab States. 1997. "Executive Programme of the Agreement on Facilitat- ing and Developing Intra-Arab Trade for Establishing the Greater Arab Free Trade Area (GAFTA)." Secretariat of the Arab League, Directorate of Economic Af- fairs, Cairo. UNCTAD. 1997. Database on Trade Control Measures (TCMs). Geneva. World Trade Organization. 1995a. The Results of the Uruguay Round of Multilat- eral Trade Negotiations, The Legal Texts. Geneva. . 1995b. Trade Policy Review: Tunisia. Geneva. 180 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA . 1996a. Trade Policy Review: Kingdom of Morocco. Geneva. . 1996b. Working Parties'Memorandum on Saudi Arabia and Jordan. . 1999. Trade Policy Review: Egypt. Geneva. Zarrouk, Jamel. 1992. "Intra-trade: Determinants and Prospects for Expansion." In Said El-Naggar, ed., Foreign and Intra-trade Policies of the Arab Countries. Washington, D.C.: International Monetary Fund. -. (Forthcoming). "Greater Arab Free Trade Area: Limits and Possibilities." In Bernard Hoekman and Jamel Zarrouk, eds., Catching Up with the Competi- tion: Trade and Global Integration in the Middle East and North Africa. Studies in International Economics. Ann Arbor: University of Michigan Press. Chapter 8 Trade Liberalization and Tax Reform in the Southern Mediterranean Region1 George T7 Abed International Monetary Fund Association agreements have been signed with the European Union (EU) by Israel, Jordan, Morocco, and Tunisia, and are under discussion with Algeria, Egypt, and Lebanon. The agreements seek to establish, by the end of a 12-year transition pe- riod, a free trade area for industrial products. Detailed discussions of the broader Euro-Mediterranean Initiative under which the agreements have been negotiated have been presented by others (see, for example, Havrylyshyn 1997, August, Nsouli and others 1996, and Nabli 1996). This chapter adopts a narrower focus: it exam- ines the impact of tariff reductions on budgetary revenue in the Southern Mediterra- nean Region (SMR) and assesses these countries' progress in implementing domestic tax reforms. These reforms are intended to help these countries compensate for the loss of tariff revenue and, more generally, to adjust to a more competitive environ- ment of closer integration with the EU. The principal economic provisions of the agreements include the elimination of any remaining restrictions maintained by the EU on the SMR countries' exports of industrial products, the gradual elimination (over a 12-year period) of all tariffs on industrial imports from the EU, the immediate removal of all quantitative restric- tions, and the harmonization of policies and regulations concerning competition, intellectual property, and industrial standards. The agreements also grant margin- ally better access to the SMR countries' agricultural exports, and provide for a re- view of agricultural access no later than the year 2000. During the first four years under the agreements, tariffs on lightly taxed imports (for example, raw materials and capital goods) will be reduced or eliminated, followed by a gradual lifting of 181 182 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA tariffs on other imports. The phasing of tariff elimination will take into account the extent to which such imports compete with domestic production. The signatory coun- tries are also to receive financial assistance in the form of structural adjustment grants (from the EU) and loans (from the European Investment Bank). Given the large share of the SMR countries' trade with the EU and the rela- tively high initial effective tariff rates (see below), the complete elimination of all tariffs (and other charges with equivalent effect) on all EU imports will represent a radical change in the trade regimes of these countries. The economic effects would probably be greater if the SMR countries were to pursue similar liberalization with non-EU countries in order to avoid the adverse effects of trade diversion. Some SMR countries have pointed out some less desirable features of the agree- ments, such as the "hub-and-spoke" problem,2 limited EU access for the SMR's agricultural exports, and the restricted application of the rules of origin. Neverthe- less, the long-run, dynamic effects of this type of trade liberalization are widely recognized as important and generally positive, although any quantitative estimates of such benefits remains highly tentative. Given comparable experience elsewhere,3 the SMR economies are likely to reap efficiency gains as they respond to the more Darwinian environment of global competition, from improved prospects for "deeper integration" with the EU (for example, harmonization of standards and market regu- lations, possible liberalization of financial and other services), and from improved opportunities for the transfer and development of new skills and technology. Under certain conditions, foreign direct investment in the SMR could also increase signifi- cantly; however, as is well known in such cases, the ability of a liberalizing, devel- oping country to benefit from closer integration with a larger, more industrialized region depends on the developing country's own policy response. Specifically, ben- efits tend to be greater when liberalization in the developing country is accompa- nied, or preferably preceded, by policies aimed at stabilizing the macroeconomic environment, improving the flexibility of labor markets, and enhancing the adapt- ability of economic institutions. For the SMR countries, economic and financial costs in the short to medium term could be significant, the magnitude of the costs being a function of (a) the degree of liberalization already achieved by SMR states (essentially rendering the adjustment less painful, the greater the progress achieved in reducing levels of pro- tection); (b) the countries' macroeconomic performance as measured by such key indicators as the fiscal stance, the balance of payments, and the proximity of the exchange rate to its long-run equilibrium value; and (c) the international competi- tiveness of domestic industries. Specifically, the immediate revenue impact will depend on, among other things, the weight of import tariff receipts in total budget- ary revenue and on the response of import demand to tariff reductions, whereas the capacity of a particular SMR country to respond to any revenue loss depends on the degree to which the structure and administration of the domestic tax system have been reformed, as well as the capacity to process and tax larger volumes of imports under a more liberal regime. TRADE LIBERALIZATION AND TAX REFORM 183 As important as the longer-term, dynamic benefits are, the primary focus of this chapter is on the more immediate fiscal implications of the agreements. Spe- cifically, this chapter examines the impact of the association agreements on SMR countries'budgetary revenues and assesses these countries' capacity to reform their domestic tax systems to compensate for the loss of tariff receipts.4 The EU, for its part, is providing financial assistance to SMR countries, partly to compensate for the loss of revenue but also to help these countries adjust to a more competitive environment. (The latter objective is being pursued in collaboration with the World Bank and other international organizations.) It should be emphasized that in focusing on the agreements' impact on budget- ary revenue and on the search for compensatory measures, one should not lose sight of the more interesting, and potentially more important, long-run issues of eco- nomic policy. Given the current worldwide tendency toward trade liberalization and globalization, the focus must surely be on the opportunities the agreements provide SMR countries to reform their tax systems (and other key aspects of their econo- mies) so as to benefit more fully from trade liberalization and economic integration. In this broader context, a reformed tax system would not only help generate the budgetary revenue needed to meet the exigencies of tariff reductions, but also, by reducing distortions in production and exchange, it could serve to improve resource allocation and potentially contribute to the achievement of higher rates of sustain- able growth over the long term. Revenue Impact of the Agreements The revenue impact of the elimination of tariffs on SMR countries' trade with the EU depends on (a) the initial share of import taxes in total tax revenue, (b) the import demand response to tariff reductions, (c) the share of imports from the EU in total imports, and (d) the elasticities of substitution between imports from the EU and from third countries (as an indication of the potential for trade diversion) as well as between all imports and import-competing goods and services produced domestically (an indicator of the potential for erosion of the domestic tax base). To help gauge at least the initial magnitude of the problem faced by these countries, the ratios given in Table 8.1 may be instructive. As a first-order approximation and taking into account the shares of tariff re- ceipts from EU imports in total tax receipts,5 the revenue impact, measured in rela- tion to total tax revenue, is likely to be the most adverse for Lebanon and Algeria. The potential revenue losses are smaller for Tunisia, Jordan, and Morocco.6 A country's heavy dependence on trade tax revenue from EU imports may be due either to a relatively higher share of EU imports (for example, Tunisia, Algeria, and Morocco) or to higher tariff rates in general, even when the EU share in imports is not exceptionally high (for example, Egypt and Jordan). Israel (and, to some extent, the West Bank and Gaza Strip [WBGS]), which has already adjusted to its free trade association with the EU and which had been liberalizing its trade regime for many 184 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 8.1. SOUTHERN MEDITERRANEAN REGION COUNTRIES: TARIFF REVENUE FROM TRADE WITH THE EU (Averages 1994-96) Import EU share in Import duties from duties total imports EU trade In percent In percent of total In percent of total In percent tax revenue of GDP In percent tax revenue of GDP Algeria 29.96 3.45 64.12 19.21 2.21 Egypt 19.74 3.37 39.84 7.87 1.34 Israel 1.26 0.40 52.40 0.66 0.21 Jordan 34.63 5.77 35.02 12.13 2.02 Lebanon 59.28 6.83 48.59 28.80 3.32 Libya - - 67.27 - Morocco 17.55 4.30 58.78 10.32 2.53 Syria 21.81 2.43 33.11 7.22 0.80 Tunisia 22.18 4.45 71.49 15.86 3.18 - Not available. Sources: Country authorities; IMF staff estimates; and IMF, Direction of Trade Statistics Yearbook (various years). years before signing the agreement, has not had to face a particularly difficult task in compensating for the revenue loss, especially in light of its highly developed and efficient domestic tax system, which helps generate budgetary revenue equivalent to about 38 percent of GDP. However, going beyond this simple view, one can distinguish several direct and indirect revenue effects.7 The most obvious, and initially the largest, is the loss of revenue from tariff reductions on EU imports. A second effect arises from the substitution, by consumers in the SMR countries, of EU imports (made cheaper by tariff removal) for non-EU imports, thereby reducing tariff revenue collected on the latter. Indirect effects are more difficult to assess, as they are related to the possible switch by consumers in the SMR countries from domestic nontradables to imports (or to import-competing domestic products). This would reduce the tax base associated with the former, whereas the possible relative decline in the prices of domestically produced tradables as a result of competition from lower-priced imports could induce a shift toward export markets (thereby possibly affecting both direct and indirect tax bases). The restructuring of domestic industries and the resulting unemployment during the transition could have an adverse impact on direct and indirect taxes as profits, wage incomes, and turnover are reduced. How- ever, this effect may be offset to some degree by the decline in the prices of im- ported raw materials and capital goods, nearly fully liberalized in the earlier phase of the 12-year period, which could lower production costs and hence stimulate domestic output. A negative revenue impact could also be directly felt if this re- structuring were to affect the public and quasi-public enterprise sector, causing a TRADE LIBERALIZATION AND TAX REFORM 185 decline in profit transfers to the budget while raising the possibility of higher bud- getary outlays. Over the medium to long term, these budgetary costs would, of course, be expected to be more than offset by the positive effects of higher invest- ment and growth. As indicated earlier, such benefits will materialize only if the liberalizing country succeeds in achieving the needed macroeconomic and struc- tural reforms. Some attempts have been made to estimate the size of the direct and indirect effects. A study by Rutherford, Rutstrom, and Tarr (1993) for Morocco used a com- putable general equilibrium model to estimate the longer-term growth and welfare gains from trade liberalization. The model calculated potential revenue losses at the equivalent of 3.3 percent of long-run equilibrium GDP.' Devarajan and others (1997) dealt more explicitly with some of the key direct and indirect revenue effects and, by assuming certain values for the relevant parameters, calculated the revenue losses for six of the SMR countries (Algeria, Egypt, Jordan, Lebanon, Morocco, and Tuni- sia). The direct effects as a percentage decline in total budgetary revenue ranged from 8.6 percent for Egypt to 31.4 percent for Lebanon. In terms of ratios to GDP (not calculated by Devarajan and others), the corresponding ratios would be 1.5 percent for the former and 3.6 percent for the latter. (Not surprisingly, these esti- mates are quite similar to those given in Table 8.1.) The indirect effects depended essentially on the assumed values for the elasticities of substitution between im- ports from the EU and those from third countries (that is, the extent of trade diver- sion). On the assumption of an elasticity of substitution of 2 for both cases, the indirect effects ranged from negligible for Morocco to an additional loss of 4.5 percent of total revenue for Algeria. A simpler and more direct approach was developed in IMF staff studies on Morocco and Tunisia. This approach relied on more disaggregated data on trade and tariff revenue and took into account the phasing of the different tariff reductions over the 12-year transition period. Appendix Tables 8.A.1 and 8.A.2 show the re- sults for Tunisia. These assume a static relationship between imports and GDP,9 and no trade diversion. The revenue losses derive from simply applying the reduced tariff rates to the remaining categories of taxed imports from the EU in each of the 12 years. According to this calculation, revenue losses are estimated to rise gradu- ally from about 0.3 percent of GDP in the first year to about 2.6 percent of GDP by the end of the 12th year of the transition period. This estimate is higher than the 1.82 percent of GDP estimated by Rutherford, Rutstrom, and Tarr (1993). The difference may be attributed to the positive dynamic effects of increased trade incorporated in the model of Rutherford and his colleagues that help mitigate the adverse revenue effects. In the case of Morocco, two alternative assumptions of no diversion and total diversion of imports from third countries were made (Appendix Tables 8.A.3 and 8.A.4). On the assumption of no trade diversion, revenue losses would rise from 0.3 percent of GDP in the first year to 1.8 percent of GDP in the 12th year; whereas, if total diversion were assumed, the comparable ratios would be 0.4 percent of GDP and 2.4 percent of GDP, respectively. 186 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA To put these estimates in perspective, it is worth noting that both Morocco and Tunisia are relatively "high tax effort" countries, collecting tax revenue equivalent to about 25 percent of GDP and 20 percent of GDP, respectively. Both countries have for some time been liberalizing their trade regimes and strengthening their domestic tax systems. As a result, trade taxes account for about one-fifth of total tax receipts. An increase in domestic tax revenue to compensate for the elimination of tariffs on imports from the EU in Morocco and Tunisia would, therefore, require an improvement in the productivity of their domestic tax systems of about 12-15 per- cent over the 12-year transition period. For Lebanon, preliminary analyses reveal more serious revenue losses. Although Lebanon's imports from the EU constitute only 49 percent of its total imports, the country's heavy reliance on trade taxes as a source of revenue (about 59.3 percent of tax revenue is derived from import tariffs), together with its relatively less devel- oped domestic tax system (Lebanon's tax ratio was only 11.4 percent in 1995), reduces its capacity to compensate for the loss of trade tax receipts in comparison with either Morocco or Tunisia.'° Available estimates of the loss of trade tax re- ceipts from the association agreement range up to 4.2 percent of GDP in the final year of the transition period (Appendix Table 8.A.5). This implies that to maintain the same ratio of tax revenue to GDP, Lebanon would have to increase revenue collection from its domestic tax system by nearly 60 percent, and by more if the tax ratio is to rise to levels that would be required to meet essential public expenditures. Given Lebanon's undeveloped tax system and weak administrative capacity, the task would be quite difficult to accomplish. In summary, the revenue impact of eliminating tariffs on EU imports, even when taking into account likely trade diversion, is projected to be in the range of 1 percent to 4 percent of the terminal year GDP, with losses for most SMR countries being less than 3 percent of GDP, if no offsetting improvements in collection are made elsewhere in the tax system. Tax and Tariff Reforms in the SMR Since the mid-1980s, most SMR countries have undertaken tariff and tax reforms with the primary goal of addressing fiscal imbalances, often in the context of mac- roeconomic and structural adjustment programs. Progress, however, has been slow and uneven. To place these reforms in perspective, it may be instructive to recall the key features of what constitutes "good practices" in a reformed tax system in devel- oping countries. These features may be summarized as follows: * There should be increased reliance on a broad-based consumption tax, such as a VAT, preferably with a single rate and minimal exemptions, and a threshold to exclude the smaller enterprises. Excise taxes should be levied at ad valorem rates, or, if specific, adjusted for inflation in order to protect real revenue, and should be restricted to a limited set of products, princi- TRADE LIBERALIZATION AND TAX REFORM 187 pally petroleum products, alcohol, tobacco, and some luxury items (for example, private automobiles). The VAT and excises, where applicable, would be applied equally to imports and domestic products. * Import tariffs should have a moderate to low average rate and, most impor- tant, a limited dispersion of rates-perhaps three nonzero rates ranging up to 20 percent. Export duties are to be avoided. * A personal income tax should be characterized by (a) limited personal ex- emptions and deductions, (b) a moderate top marginal rate and few brack- ets, (c) an overall exemption limit that would exclude persons with modest incomes from paying taxes, and (d) extensive use of final withholding at source. A corporate income tax should be levied at one moderate rate, pref- erably the same rate as the top marginal rate under the personal income tax. Provisions, such as depreciation allowances, should be uniform across sectors and recourse to tax incentive schemes minimal. a Nontax revenue, to the extent it reflects the extraction of surpluses from parastatals or profits from central banks, should decline with the develop- ment of the economy and, especially, with the devolution of the state's role in productive activities." * Tax administration reforms should be designed to enhance the accuracy and fairness of assessment, increase the efficiency of collection, reorga- nize the tax and customs administrations along functional lines, and im- prove taxpayer registration procedures as well as collection enforcement and audit. Computerization is generally required for more effective man- agement of taxpayer databases, while pay incentive programs and greater autonomy for the tax authority, supported by the development of special- ized skills among tax officials, are intended to promote honesty and effi- ciency in tax administration. Among the SMR countries, considerable progress has been achieved, notably in Egypt, Jordan, Morocco, and Tunisia. Nevertheless, tax and tariff systems in most SMR countries remain complex, inefficient, and difficult to administer. Three of the SMR countries (Lebanon, Libya, and Syria) do not have a broad-based consump- tion tax, whereas the VAT systems in the other countries do not fully conform to "good practices" because of numerous exemptions and multiplicity of rates (Table 8.2). In general, business profits taxes have been reformed and rates are reasonable, although a few countries apply more than one rate. Five of the nine countries have maximum personal income tax rates in excess of 40 percent, and in all but one (Tunisia), these rates differ from the corporate tax rates. Special tax incentives are common. The impact of domestic tax reforms can be observed in those countries 188 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA that, in line with long-term trends and good international practice, have shifted more of their revenue generation to broad-based consumption taxes. This has been achieved through the introduction of a VAT in Morocco (1986), Tunisia (1988), Algeria (1992), and the WBGS (1994), and a generalized sales tax (GST) in Egypt (1991) and Jor- dan (1994). Because of the slow pace of tariff reforms, these countries have not significantly reduced their reliance on trade taxes. However, the introduction of a VAT has triggered more comprehensive reform of domestic indirect taxes in gen- eral, thereby further improving revenue performance. Many excises have been trans- formed to ad valorem rates in the reforming countries, but several others remain specific and are inadequately adjusted for inflation. Income tax systems have been simplified. Most SMR countries apply one or two rates to business profits and several rates to personal income. Personal income tax rates remain high and, in most of the SMR countries, large differences exist between statutory rates and effective rates due to weak tax administration and wide- spread exemptions. Even some of the reforming countries maintain special invest- ment incentives that exempt businesses not only from the corporate income tax and from customs duties but also from the VAT (Algeria and Tunisia), while in some cases reducing or eliminating personal income taxes for employees (Egypt) or taxes on interest income from corporate bonds (Jordan). In addition, a number of the SMR countries have established free economic zones (Egypt, Jordan, Morocco, Syria, and Tunisia) and provided other exemptions and tax relief that could lead to tax evasion and abuse. In Morocco, however, a major step toward reforming tax incen- tives was taken recently with the promulgation of an Investment Charter to replace the various investment codes. Finally, several of the SMR countries rely heavily on nontax revenue, which, in most cases, reflects the collection of rents from the ex- ploitation of a natural resource (Algeria, Egypt, Libya, and Syria) or from extensive public sector ownership of enterprises (Egypt, Jordan, and Syria). As these coun- tries liberalize their trade regimes and, more generally, their economies-and there- fore privatize public sector enterprises-economic rents in the form of nontax revenue are likely to come under pressure, thus increasing the urgency of domestic tax re- forms. As indicated earlier, tariffs have been undergoing simplification and rational- ization in most countries of the region. In Morocco, the number of rates was re- duced from 47 in 1980 to 6 nonzero rates in 1996, and the dispersion was narrowed by reducing the maximum rate to 45 percent. However, an additional fiscal levy of 15 percent still applies to most imports, while numerous commodities remain sub- ject to notional pricing that renders tariff rates on some commodities as high as 300 percent." The effective tariff rate, about 14.9 percent in 1995, was about average for the SMR but relatively high for the Middle Eastern region as a whole. More impor- tant, numerous exemptions are granted, leading to loss of revenue and creating op- portunities for evasion and fraud. Reform of the customs administration is currently underway; systems and procedures have been simplified, selective and targeted con- trols have been introduced, and changes in organization and personnel have been TABLE 8.2. SMR COUNTRIES: STATUS OF TAX AND TARIFF REFORMS, 1997 Algeria Egypt Jordan Lebanon Libya Morocco Syria Tunisia WBGS" 1. Broad-based consumption tax: * Rates (in percent) VAT GST GST - VAT - VAT VAT 7,13,21 10 10 7,10,14,20 6,17,29 17 2. Excises * Ad valorem/specific Mixed Mixed Mostly Mixed Mixed Mixed Mostly Mostly ad Mostly ad specific specific valorem valorem * Coverage Broad Narrow Broadb Narrow Broad Narrow Narrow Narrow Narrow 3. Tariffs * Quantitative None Very few 3 Yes (on Yes Yes Yes Yes (8% Yes restrictions Commodities specified (specified (specific (numerous of domestic (agricultural commodi- imports) agricultural and products) commodities) ties, import products and complex) bans) few others) zD * Maximum rate 50% 50% 40% 100% 100% 45% 200% 43% 100% * Number of rates 6 8 5 12 n.a. 7 n.a. 26 85 * Surcharges 0%-6% 3%-2% Numerous None Numerous 15% fiscal Numerous 2% + other 2% port fee levy + 0.25% 1.5% other parafiscal * Effective tariff 16.98% 16.72% 12.31% 16.72% n.a. 14.9% 9.93% 19.62% n.a. 4. Business profits tax * Maximum rate 38% 40.55% 35% 10% 20%-60% 39.5% 11%-66% 35% 37.5% * Number of rates 2 3 3 I Numerous 2 Numerous I 1 5. Personal income tax * Maximum rate 50% 32% 30% 10% 90% 44% 17.25% 35% 48% * Numberof rates 6 2 6 1 8 5 5 6 5 6. Special tax incentives Limited Numerous Numerous Numerous Numerous Limitedc Numerous Limited Limited (Table continues on next page.) TABLE 8.2. (continued) Algeria Egypt Jordan Lebanon Libya Morocco Syria Tunisia WBGS" 7. Total revenue/GDP de 31.02 24.88 30.24 16.26 24.75 24.52 25.92 25.48 17.24 *Tax revenue 11.52 17.05 16.65 11.52 7.32 24.52 11.12 20.06 14.87 * Other revenue 19.49 7.83 13.59 4.74 17.43 - 14.17 5.42 2.37 a. The tariff structure for the WBGS is, for the most part, that of Israel; customs duties on import shipments are collected by Israeli customs. b. Included in CST. c. Incorporated in an Investment Charter anid applicable to all investments. d. See Table 8. e. Averages 1994-96. Source: IMF, Govern,nient Finance Statistiis (various years); IMF, World Econoomic Ouatlook, May 1997; Alonso-Gaino, Fennell, and Sakr 1997; counitry documents; and IMF staff estimates. Co TRADE LIBERALIZATION AND TAX REFORM 191 effected. As a result, at the port of Casablanca, for example, customs officials no longer perform examinations on all shipments, and the average period of stay of goods in the port has thereby been reduced from 16 days to 3. (It is 1-2 days in most industrial countries.) Tunisia, starting from even higher protection rates, has also been implementing reforms since 1988. However, the system contains inefficiencies, including quanti- tative restrictions on about 8 percent of the value of imports. The number of rates has been reduced to 26 and the maximum rate to 43 percent; but both remain rela- tively high, as does the effective tariff rate-about 19.6 percent (1995). Although customs administration has been undergoing significant structural reform in recent years, the prevalence of exemptions continues to lead to revenue losses, due to eva- sion and fraud; revenue losses due to exemptions were estimated at about 25 per- cent of total customs receipts in 1994.' In Jordan, tariff reforms have reduced the number of rates to five, but several surcharges, special taxes, and fees still apply. Although the maximum tariff rate is set at 40 percent, in effect, duties range from 0 to 320 percent. Exemptions are widely applied, including generous incentives granted under the Investment Law and other discretionary exemptions. Petroleum imports are not subject to import duties, but to price markups of 10 to 15 percent-implying an implicit tax of equal magnitude as domestic distribution is controlled by a public authority. The tariff system remains poorly coordinated with the domestic tax system, particularly the GST. In Lebanon, the tariff system has been undergoing reform since the end of the civil war (1992). In 1995, the tariff structure was simplified by consolidating the numerous supplementary charges into the standard tariff rates, reducing the number of rates to 12, and eliminating all quantitative restrictions. Rates, however, remain high-a maximum of 100 percent and an effective tariff rate of 16.7 percent. Algeria's tariff reforms, implemented in recent years in the context of an IMF-supported ad- justment program, started from a high level of protection and included reducing the maximum rate to 50 percent, consolidating the number of rates to six, and removing all quantitative restrictions. Tax administration reform has progressed even more slowly than tax policy reform. However, the introduction of a VAT in the late 1980s in Algeria, Morocco, and Tunisia, and the GST more recently in Egypt and Jordan, have provided impor- tant incentives for modemizing tax administration. Progress is now being made; for example, in these countries, tax administrations are being reorganized along func- tional lines, computerization is being introduced (at the level of subnational units in Algeria, Egypt, Morocco, and the WBGS), and taxpayer registration (including the use of unique tax identification numbers) is expanding steadily. However, even in countries with relatively more developed tax systems and improved tax administra- tions, performance can be strengthened. Assessment and collection of business profits taxes poses a particular challenge. In Tunisia, a relatively high tax effort country, fewer than half the businesses declare a taxable profit in any one year. Audits are cumbersome, infrequent, and are carried out long after the end of the financial year. 192 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Administrative systems for the VAT in both Morocco and Tunisia are relatively well developed in comparison with those in effect in other countries of the region. Re- cent IMF staff analyses of VAT administrations in Morocco and Tunisia indicated an efficiency ratio for domestic VAT collection of about 65 percent. This ratio, which is comparable to that of Portugal, can be raised, but only gradually; any improve- ment will have to follow an enhancement of institutional capacity, modernization of systems and procedures, and skill development of tax personnel. Nevertheless, over the medium term, the ratio can be raised, especially if the above administrative improvements are reinforced by a simplification of the VAT structure itself (con- solidation of rates, elimination of exemptions, and broadening of the base). For example, a 10 percentage point improvement in the efficiency of the VAT would generate nearly 1 percent of GDP in revenue in both Morocco and Tunisia. In short, the key tax and tariff policy reforms needed to help the SMR countries address the challenges of the association agreement are: * The introduction of broad-based, modem VATs in the remaining countries of the region (Lebanon, Libya, and Syria) and the reform of existing VATs through consolidation of rates (Algeria, Morocco, and Tunisia), removal of exemptions, and generally broadening the tax base (Egypt and Jordan). l The reform of excises through the introduction of ad valorem rates or proper adjustment for inflation, to help ensure revenue buoyancy, and through increases in the taxation of petroleum products in countries where these are sold far below comparable international levels. * The simplification of the business profits tax through the adoption of a single rate in the neighborhood of 35 percent and the elimination of special tax exemptions. i Adjusting the top marginal rates for personal income tax to a level compa- rable to the business profits tax rate (through reductions in Algeria, Libya, Morocco, and the WBGS, and increases in Lebanon from 10 percent and Syria from 17.25 percent) and limiting the number of deductions and ex- emptions. * To help smooth the transition to the more liberal trade regime envisaged under the association agreements, tariff reforms should proceed in the di- rection of further reducing maximum rates and the number of rates to no more than three nonzero rates while simplifying the structure and limiting exemptions. These reforms would preferably need to be generalized to non- EU countries to minimize the risks of trade diversion. Customs administra- tion reforms already underway in Morocco and Tunisia need to be completed and similar reforms implemented in the other states of the region. TRADE LIBERALIZATION AND TAX REFORM 193 The reform of tax administration in the region would be most effective if pre- ceded by a simplification and rationalization of the tax systems as indicated above. Specific tax administration reforms that merit particular attention are the following: * Restructuring existing organizations along modem, functional lines and giving special emphasis to the most productive taxes and to the largest taxpayers * Simplifying and modernizing systems and procedures and the introduction of efficient management practices * Expanding computerization, based on simplified and rationalized proce- dures, to facilitate the rapid processing of declarations, and the more effec- tive use of the taxpayer databases to strengthen audit and enforcement * Reorienting the audit strategy toward the VAT, focusing on short, well- designed, and targeted interventions * Ending the separation of assessment and collection in the francophone coun- tries of North Africa, which has led to inefficiencies, evasion, and the buildup of tax arrears * Attracting and developing quality staff resources by providing intensive in-house and external training, better pay incentives, and greater autonomy for tax officials Revenue Shares in the SMR Countries Although the features of a liberal trade regime can be readily distinguished from those of a more restrictive one, it is difficult to devise an unambiguous measure of the degree of trade liberalization in an economy.'4 Given the focus of this chapter, a useful measure may be the effective tariff rate, which is relatively easy to compute and may be traced over extended periods. By relating changes in effective tariffs to changes in the share of import tariff receipts in total tax revenue over time, one can explore the possible impact of changes in the trade regime on trade tax shares. Tak- ing a global view of trends in effective tariff rates, most countries appear to have achieved some liberalization of their trade regimes in recent decades."5 Table 8.3 shows that OECD countries liberalized the fastest, with the average effective tariff declining from 5.84 percent in 1975 to 1.82 percent in 1995. Non-OECD countries on average reduced their effective tariff rate from 15.74 to 13.47 or by 15 percent over the 20-year period. SMR countries also underwent steady trade liberalization by this measure, with the (unweighted) average effective tariff declining from 21.03 percent in 1975 to 194 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 8.3. EFFECTIVE TARIFFS BY WORLD REGIONS, 1975-95 (In percent) Last available 1975 1980 1985 1990 year All countries 12.70 11.28 12.17 11.18 10.14 OECD countriesa 5.84 3.95 3.28 2.80 1.82 Non-OECD countries 15.74 14.26 15.85 14.60 13.47 Non-OECD African countries 19.62 17.66 19.11 18.76 16.98 Non-OECD Asian countries 14.05 12.04 15.58 16.48 13.44 Non-OECD Middle Eastern countries 16.47 14.33 14.07 10.70 11.39 Non-OECD Western Hemisphere countries 12.37 12.31 13.66 11.27 10.91 a. Excluding the Czech Republic, Hungary, Luxembourg. and Poland. Sources: IMF, Government Finance Statistics (various years); IMF 1997. 13.23 percent in 1990 (Table 8.4). However, since then there appears to have been a reversal, as the average effective rate rose to 15.31 percent in the latest year for which data are available. This increase is due largely to a reversal of the downward trend in Algeria, Egypt, and Jordan. In Algeria, the increase reflects the impact of the tariffication of quantitative restrictions, a sharp currency devaluation, and im- provements in customs administration. Another factor may have been a shift in the composition of imports toward those more heavily taxed products in recent years. Improvements in customs administration may explain some of the increases in the cases of Egypt and Jordan, but in the absence of any major exchange rate movement and no evident shift in the structure of imports, the increase in effective tariffs in these two cases must be due to reclassification of imports and additional levies in the form of surcharges and other fees. Although over extended periods tariff reform tends to reduce a country's reli- ance on trade tax receipts, in the short run, the impact of trade liberalization on budgetary revenue may be ambiguous. Indeed, starting from a highly restrictive trade regime, tariff reforms could lead to an increase in budget receipts from cus- toms duties. For example, the tariffication of quantitative restrictions, by transfer- ring rents previously collected by traders to the budget, could increase budget revenue. Similarly, reductions in excessively high tariff rates and exemptions could limit the incentive (or the opportunity) for evasion and raise import tax receipts. Simplifica- tion of tariff structures could facilitate customs administration and improve collec- tions. When tariff reform is carried out in conjunction with an exchange rate devaluation, as is often the case, the domestic currency value of imports rises and, for a given tariff structure, customs receipts may increase after the devaluation. TRADE LIBERALIZATION AND TAX REFORM 195 TABLE 8.4. EFFECTIVE TARIFFS IN SELECTED COUNTRIES OF THE MIDDLE EAST AND THE SMR, 1975-95 (Percentage) Last available 1975 1980 1985 1990 year' Selected non-OECD Middle Eastern countries Bahrain 2.26 2.24 3.53 2.61 3.61 Iran 9.49 20.93 11.23 6.49 12.28 Israel - 4.43 4.96 1.58 0.63 Oman 0.12 1.32 3.68 3.36 3.07 Pakistan 19.54 24.61 25.53 31.65 28.73 Unweighted average 7.85 10.71 9.79 9.14 9.66 SMR countriesb Algeria, 9.34 8.08 10.81 12.79 16.98 Egypt 43.24 25.84 28.57 9.58 16.72 Jordan 11.94 16.47 14.05 9.51 12.31 Lebanon - - - - 16.72 Morocco, 25.38 26.32 15.37 19.08 14.92 Syria 16.40 11.56 - 8.43 9.93 Tunisia 19.84 20.91 29.97 19.98 19.62 Unweighted average 21.03 18.20 19.75 13.23 15.31 - Not available. a. Last available year is 1995 for most countries, but when this information is not available the last available year is used. b. Libya and the WBGS are excluded for lack of data. c. Data provided by the country authorities and IMF staff estimates. Sources: IMF, Government Finance Statistics (various years); IMF 1997. Over the long run, however, and once the highly restrictive features of a trade re- gime are eliminated, further reductions in tariff rates toward those prevailing in industrial countries invariably lead to reductions in the shares of trade taxes in total tax receipts. For those SMR countries that have signed (or will sign) free trade association agreements with the EU, such an outcome is inevitable. On a global scale, revenue components as a share of GDP for the major world regions clearly indicate a steady decline in reliance on trade taxes in the past two decades, with the world average decreasing from 4.2 percent of GDP in 1975 to 3.2 percent of GDP in the mid-1990s (Appendix Table 8.A.6). As expected, OECD countries reduced their reliance on trade taxes to negligible proportions as they completed the liberalization of their trade regimes and built up their domestic tax capacity through tax reform. For all non-OECD countries combined, the ratio of trade taxes to GDP declined from 5.3 percent in 1975 to 4.3 percent for the latest year available. It is worth noting that this drop was due entirely to the virtual elimi- nation of export taxes, as the ratio of import duties to GDP, although it varied over the period, was nearly unchanged in the mid-1990s from its value in 1975. 196 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA For purposes of this chapter, a more relevant measure is the share of import duties in total tax receipts, and, in this regard, the data in Appendix Table 8.A.7 provide useful indications. For non-OECD countries, the data show some decline in the share of import duties in total tax receipts in contrast to no change when the share of import duties is related to GDP (implying that nontrade taxes rose faster than GDP over the period). Among the developing regions, two (the African and Asian groups) reduced their relative reliance on import duties between 1975 and the mid-1990s, whereas the other two (the Middle Eastern and Western Hemisphere groups) did not. All regions drastically reduced their reliance on export tax receipts over the 20-year period. When the trends in the shares of trade taxes for each of the regions during this period are gauged against the corresponding trends in effective tariff rates, differ- ences arise, indicating that, even in the long run, tariff reductions do not imply a one- to-one relationship with declines in import tariff receipts. The disparity is due to a number of factors, including the response of import demand (more broadly, the bal- ance of tradables and nontradables) to tariff reductions, changes in the structure of the economy over long periods, the impact of macroeconomic policies that may have accompanied tariff liberalization, and possibly other factors.'6 The SMR countries, which, as indicated, have undergone steady trade liberaliza- tion, have also reduced their reliance on trade taxes in relation to GDP and as a share of total tax receipts, although a rising trend seems to have set in since 1990 (Table 8.5). In those countries for which long-term data are available, the ratio of trade taxes to GDP declined steadily from 6.30 percent in 1975 to 4.53 percent in 1990 before rising to 5.45 percent in the mid-1990s. At this ratio, reliance on trade taxes remains relatively high-much higher than other Middle Eastern countries and only slightly below non-OECD African countries. A similar relationship emerges from a compari- son of the shares of trade taxes in total tax revenue (Table 8.6). Thus, although the SMR countries have liberalized their trade regimes in recent years, the progress re- mains modest and, more strikingly, may have been reversed in a few cases since 1990. A closer look at the revenue structure of SMR countries in a global context confirms a relatively high reliance on trade taxes, but it also indicates strong rev- enue performance in the area of consumption taxes. The SMR region's revenue from this source is equivalent to 6.98 percent of GDP in the most recent years for which data are available (1994-96)-higher than any other non-OECD region (Table 8.7). This relatively good performance is due principally to the introduction of a VAT in six of the nine SMR countries, which replaced complex systems of con- sumption taxes, but also to the relatively high rates of excises. By contrast, the productivity of direct taxation, at 3.75 percent of GDP, is the lowest among the world's regions, reflecting the narrow bases on which direct taxes are assessed and the weakness of the region's collection and enforcement capacity. One feature that stands out in the SMR revenue structure is the relatively high share of nontax rev- enue to total budgetary receipts, a feature common to other Middle Eastern coun- tries. Whereas in the OECD countries, nontax revenue constitutes less than 10 percent of total receipts, and in the non-OECD regions, about 20 percent, the comparable TRADE LIBERALIZATION AND TAX REFORM 197 TABLE 8.5. TAXES ON INTERNATIONALTRADE IN SELECTED COUNTRIES OF THE MIDDLE EAST AND THE SOUTHERN MEDITERRANEAN REGION, 1975-95 (As percentage of GDP) Last available 1975 1980 1985 1990 yeara Selected non-OECD Middle Eastern countries Bahrain 2.61 2.18 3.00 2.42 2.79 Iran 2.62 2.52 2.26 2.43 2.39 Israel - 1.88 2.61 0.64 0.19 Oman 0.23 0.53 1.19 0.80 0.95 Pakistan 5.11 5.60 5.01 5.92 4.88 Unweighted average 2.64 2.54 2.82 2.44 2.24 SMR countries' Algeria, 3.30 1.83 1.73 2.11 3.37 Egypt 10.97 8.12 5.57 3.16 3.76 Jordan 7.52 8.79 7.01 7.01 7.23 Morocco, 4.20 4.83 3.74 4.69 5.00 Syria 4.69 3.82 - 1.62 3.05 Tunisiad 7.14 7.79 9.49 8.61 8.39 Unweighted average 6.30 5.86 5.51 4.53 5.13 - Not available. a. Last available year is 1995 for most countries, but when this information is not available, the last available year is used. b. Libya and the WBGS are excluded for lack of data. c. Data provided by the country authorities and IMF staff estimates. d. Includes VAT on imports. Source: IMF. Government Finance Statistics (various years). ratios for Middle Eastern countries is 42.2 percent and for the SMR countries, 38.7 percent. As indicated earlier, these high ratios reflect heavy regional dependence on government income from the exploitation of energy resources or from ownership of productive enterprises. The relatively high nontax receipts have enabled the SMR group of countries to attain one of the highest regional revenue-to-GDP ratios in the world (24.4 percent) despite an unremarkable tax effort. The tax-to-GDP ratio is 15.0 percent, somewhat higher than in non-OECD Asia but lower than in either Africa or Latin America. As the SMR countries proceed to liberalize their econo- mies over the medium -to long term, nontax revenue is bound to decline. In view of the relatively high expenditure ratios built into these countries' fiscal systems,"7 failure to reduce spending and/or improve the tax effort points to a potential revenue shortfall and an increased risk of fiscal deterioration in the future. Table 8.8 shows the revenue structure of the individual SMR countries and con- firms observations made earlier. Morocco and Tunisia and, to a lesser extent, Egypt and Jordan, have relatively well-developed tax systems and generate high tax rev- enue in relation to GDP (in the range of 16-25 percent of GDP); however, in most 198 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 8.6. TAXES ON INTERNATIONAL TRADE IN SELECTED COUNTRIES OF THE MIDDLE EAST AND THE SMR, 1975-95 (As percentage of tax revenue) Last available 1975 1980 1985 1990 yeara Selected non-OECD Middle Eastern countries Bahrain 18.08 49.70 40.82 30.31 28.27 Iran 29.22 36.70 24.76 33.58 29.11 Israel 14.29 4.75 6.53 2.21 0.62 Oman 1.71 4.86 9.93 7.75 11.49 Pakistan 46.71 41.94 40.66 44.44 31.83 Unweighted average 22.00 27.59 24.54 23.66 20.26 SMR countries' Algeriac 8.06 4.96 4.58 14.34 29.05 Egypt 39.44 26.40 25.10 18.89 16.63 Jordan 52.22 61.38 44.67 37.62 34.45 Morocco, 20.01 23.75 18.99 20.59 19.80 Syria 40.82 36.26 - 9.67 15.85 Tunisiad 31.37 32.30 38.32 35.87 33.47 Unweighted average 31.99 30.84 26.33 22.83 24.88 - Not available. a. Last available year is 1995 for most countries, but when this information is not available, the last available year is used. b. Libya and the WBGS are excluded for lack of data. c. Data provided by the country authorities and IMF staff estimates. d. Includes VAT on imports. Source: IMF, Government Finance Sratisrics (various years). other cases, heavy reliance on nontax receipts helps to augment modest collections from weak tax systems. This is the case especially in Libya, Syria, and Lebanon, which have yet to introduce a broad-based consumption tax. As noted earlier, trade taxes constitute an important share of total tax receipts in Lebanon, Jordan, Tunisia, and Morocco, although in the case of the last two, a reasonably well-developed do- mestic tax system should facilitate the transition toward a more liberal trade regime with reduced reliance on import tariffs. As noted earlier, revenue from direct taxes remains relatively weak, and the ratio of direct tax receipts -to GDP of 3.75 percent for the region as a whole, low by international standards, is buoyed by the case of Egypt, whose high ratio of 6.16 percent is due to the exceptional importance of tax collections from the oil sector, the Suez Canal, and central bank profits. Concluding Observations The decision by several SMR countries to proceed to establish a free trade area with the EU, although carrying some risks, provides these countries with the opportunity TABLE 8.7. REVENUE STRUCTURE IN WORLD REGIONS, 1994-95 Taxes on income, profits Domestic taxes on goods International trade and capital gains and services taxes of which: of which: of which: General sales, Total Tax Other turnover, Import Export Property revenue revenue revenue Total Individual Corporate Total or VAT Excises Total duties duties taxes As percent of GDP Unweighted average OECD 33.62 30.36 3.27 9.01 7.54 2.42 10.32 6.24 3.17 0.56 0.56 0.00 0.71 Africa 20.13 16.40 3.73 4.62 2.19 2.37 5.54 2.85 1.83 4.77 4.19 0.31 0.28 Non-OECDAsia 19.62 14.41 5.21 4.91 1.81 2.74 5.81 2.94 1.96 2.52 2.39 0.12 0.12 Non-OECD Western Hemisphere 20.74 17.42 3.32 3.77 1.02 2.25 6.22 3.63 2.03 3.72 3.66 0.06 0.40 Middle East CO (including Israel) 27.01 15.61 11.40 5.36 2.58 2.99 5.48 2.60 1.86 2.98 3.02 0.07 0.37 (excluding Israel) 25.38 12.95 12.43 3.56 0.39 2.93 4.09 0.59 1.95 3.44 3.48 0.08 0.37 Mediterranean5 1 24.41 14.96 9.45 3.75 1.39 3.15 6.98 4.90 2.47 4.21 4.09 0.12 0.31 As percent of total revenue Unweighted average OECD 100.00 90.28 9.72 26.79 22.44 7.19 30.69 18.56 9.43 1.67 1.66 0.00 2.11 Africa 100.00 81.48 18.52 22.95 10.85 11.79 27.50 14.14 9.08 23.69 20.79 1.55 1.41 Non-OECD Asia 100.00 73.44 26.56 25.02 9.25 13.95 29.64 15.00 10.01 12.86 12.20 0.63 0.62 Non-OECD Western Hemisphere 100.00 83.98 16.02 18.18 4.89 10.85 29.99 17.51 9.77 17.95 17.63 0.29 1.92 Middle East (including Israel) 100.00 57.80 42.20 19.86 9.56 11.08 20.30 9.62 6.90 11.03 11.17 0.26 1.39 (excluding Israel) 100.00 51.02 48.98 14.05 1.54 11.55 16.10 2.32 7.67 13.55 13.73 0.33 1.47 Mediterranean"5 100.00 61.29 38.71 15.35 5.68 12.91 28.61 20.07 10.14 17.25 16.75 0.50 1.27 a. Data provided by the country authorities and IMF staff estimlates. b. Data refer from 1994-96; for Libya, data arc for 1994-95; for the WBGS, for 1995-96. Sources: IMF, Government Finance Statistics (various years);IMF, International Financial Statistics (various years). TABLE 8.8. SMR COUNTRIES: CENTRAL GOVERNMENT REVENUE STRUCTURE, 1994-96 (As percentage of GDP) Taxes on income, profits Domestic taxes on goods International trade and capital gains and services taxes of which. of which: of which: General sales, Total Tax Other turnover, Import Export Property revenue revenue revenue Total Individual Corporate Total or VAT Excises Totalb duties duties taxes Algeria 31.02J 11.52 19.49 2.78 1.51 ... 4.91 ... 0.97 3.45 3.45 ... ... Egypt 24.88 17.05 7.83 6.16 0.70 5.46 4.57 4.57 ... 3.37 3.37 ... 0.01 Jordan 30.24 16.65 13.59 3.31 1.21 2.10 7.09 ... ... 5.90 5.77b .. .. Lebanon 16.26 11.52 4.74 1.65 1.36 ... ... ... ... 7.34 6.83 ... 1.26 Libya' 24.75d 7.32 17.43 ... ... ... ... ... ... ... ... ... ... Moroccoc 24.52' 24.52 - 5.90 2.75 2.03 10.61 5.71 4.87 4.31 4.30 ... 0.03 Syria, 25.29d 11.12 14.17 3.85 0.78 3.03 0.97 0.63 0.34 2.63 2.43 0.19 0.19 Tunisia 25.48' 20.06k 5.42 4.69 ... ... 9.82 5.34 3.54 4.57 4.45 0.05 0.35 WBGSi 17.24 14.87 2.37 1.64 ... ... 10.89 8.24 2.65 2.11 2.11 ... 0.02 Unweighted averagei 24.41 14.96 9.45 3.75 1.39 3.15 6.98 4.90 2.47 4.21 4.09 0.12 0.31 a. Including hydrocarbon revcnuc. b. Including additional tax on imports. c. Data are for 1994-95. d. Including oil revenue. e. Calendar year data through 1995; starting 1996 fiscal year data are forJuly/June. The 1996 calendar year data are estimated by averaging fiscal year data for the first half of 1996 and 1996-97. f. Excluding privatization. g. General government. h. Excluding social security and payroll taxes. i. Data are for 1995-96. j. The components do not add up to the unweighted aiverages of tax revenue because detailed data are not available for all countries. Soutces: Data provided by the country authorities anid IMF- staff estimates TRADE LIBERALIZATION AND TAX REFORM 201 to deepen and accelerate fiscal reforms and thus enhance the economic benefits of a more liberal trade regime. Fiscal reforms in general, that is, reforms affecting both revenue and expenditure, contribute to macroeconomic stability, a condition for re- alizing the benefits of trade liberalization, while enhancing national savings and facilitating productive investment and growth. Tax and tariff reforms, the focus of this chapter, reinforced by institutional modernization and capacity building in cus- toms and tax administration, would ensure more durable improvements in revenue mobilization and allow the SMR countries to reduce their reliance on the taxation of imports. Equally important, these reforms would help reduce economic distortions and improve the efficiency of resource allocation, thereby promoting higher rates of sustainable growth. On the expenditure side, structural reforms may also need to be undertaken. Given the relatively high levels of government spending and persistent deficits in the SMR, fiscal consolidation could further reduce the pressure on resources and stimulate private sector activity. A larger role for the private sector could, among other things, contribute to greater flexibility in adapting the region's economies to the more competitive environment of freer trade and wider economic integration with the EU. Reform of government spending would not only help eliminate the less productive government activities, but by shifting spending priorities toward investment in essential physical and human capital, it could stimulate higher rates of sustainable growth. Fiscal reforms in the context of, or as a response to, trade liberalization are not carried out in isolation but are generally accompanied by other reforms in the mac- roeconomic and structural areas. Although trade liberalization in the SMR countries would, in the context of the association agreements with the EU, proceed gradually, the more vigorous liberalization episodes have required, or at least been accompa- nied by, exchange rate devaluations. In such cases, to guard against possible erosion of the benefits of an exchange rate action and prevent a possible deterioration of the external current account, monetary and fiscal policies generally need to be some- what more contractionary than otherwise. To further enhance the benefits of trade liberalization, structural reforms are also required. These commonly include the introduction of greater flexibility in labor markets, an improved regulatory environ- ment, and reform of the banking system and of state institutions, including more vigorous privatization of enterprises. Finally, if the SMR countries are to overcome the adverse consequences of the "hub-and-spoke" problem inherent in current agree- ments with the EU and benefit more fully from the rules of origin for promoting exports, they should more quickly eliminate the existing barriers to the movements of capital, labor, and products among themselves and establish policies and institu- tions to achieve closer regional integration. Several of the SMR countries have already made considerable progress in re- forming their fiscal systems and liberalizing their economies. However, these coun- tries remain heavily dependent on international trade taxes. The implementation of the association agreements with the EU will increasingly compel the signatory states 202 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA in the SMR to find alternative sources of revenue and, simultaneously, to confront a more competitive trade environment. A more vigorous reform of domestic tax sys- tems, as outlined in this chapter, will therefore become increasingly urgent, both for its revenue mobilization potential and for its likely impact on economic efficiency. The benefits to the SMR from closer trade and economic relations with the EU, in terms of inward investment, greater efficiency, and economic growth, could be con- siderable. However, as the experience of trade liberalization elsewhere clearly indi- cates, these potential gains can be realized only if the SMR countries accelerate and deepen ongoing fiscal and macroeconomic reforms and reinforce them with needed structural and institutional reforms. Appendix TABLE 8.A.1. TUNISIA: REVENUE LOSSES FROM REDUCTIONS IN IMPORT DUTIES ON EU TRADE (In millions of 1995 Tunisian dinars) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 List 1 35.71' 35.4b 354 35.4 35.4 354 35.4 35.4 35.4 35.4 35.4 35.4 35.4 List 2 0 35.3 52.9 70.6 88.2 117.6 117.6 117.6 117.6 117.6 117.6 117.6 117.6 List 3 0 24.3 36.4 48.5 60.7 72.8 84.9 97.1 109.2 121.3 133.5 145.6 151.7 List 4 0 0 0 0 13.3 25.5 37.7 49.9 62.1 74.3 86.5 98.7 110.8 Total 35.7 95.0 124.7 154.5 197.6 251.3 275.6 300.0 324.3 348.6 373.0 397.3 415.5 a. Loss resulting from taxation of capital goods (EU and non-EU origin) at zero rate. b. Loss resulting from completely phasing out tariffs on all products on the list. Regular taxation resumed as of January 1, 1997 for non-EU countries. Sources: Tunisian Directorate of Customs and IMF staff estimates. o TABLE 8.A.2. TUNISIA: REVENUE LOSSES FROM REDUCTIONS IN IMPORT DUTIES AND THE ELIMINATION OF COMPENSATORY DUTIES ON EU TRADE (In millions of 1995 Tunisian dinars) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Customs duty losses 35.7 95.0 124.7 154.5 197.6 251.3 275.6 300.0 324.3 348.6 373.0 397.3 415.5 DC, losses 19.0 28.3 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 Total 54.7 123.3 156.9 186.7 229.8 283.5 307.8 332.2 356.5 380.8 405.2 429.5 447.7 Percent of GDP 0.3 0.7 0.9 1.1 1.3 1.6 1.8 1.9 2.1 2.2 2.4 2.5 2.6 a. Compensatory duty. Sources: Tunisian Directorate of Customs and IMF staff estimates. TABLE 8.A.3. MOROCCO: REVENUE LOSSES FROM REDUCTIONS IN IMPORT DUTIES-NO TRADE DIVERSION (In millions of Moroccan dirhams) Year I Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Import duties 430 566 701 1,019 1,202 1,384 1,568 1,751 1,935 2,119 2,303 2,487 Fiscal levy 399 694 1,110 1,395 1,507 1,619 1,731 1,853 1,976 2,099 2,222 2,345 VAT 122 200 277 408 462 516 569 625 682 738 794 850 Total 951 1,460 2,088 2,822 3,171 3,519 3,868 4,229 4,593 4,956 5,319 5,682 (as percent of GDP) 0.3 0.5 0.6 0.8 1.0 1.1 1.2 1.3 1.5 1.6 1.7 1.8 Sources: Data provided by Moroccan Directoratc of Customs and Indirect Taxes and by IMF staff cstinlates. 0 TABLE 8.A.4. MOROCCO: REVENUE LOSSES FROM REDUCTIONS IN IMPORT DUTIES -TOTAL TRADE DIVERSION (In millions of Moroccan dirhams) Year I Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Import duties 582 836 995 1,446 1,690 1,935 2,179 2,425 2,672 2,917 3,163 3,410 Fiscal levy 540 955 1,371 1,937 2,089 2,240 2,391 2,553 2,715 2,877 3,039 3,201 VAT 168 280 392 577 649 965 793 868 943 1,017 1,092 1,167 Total 1,290 2,071 2,758 3,960 4,428 5,140 5,363 5,846 6,330 6,811 7,294 7,778 (as percent of GDP) 0.4 0.6 0.8 1.3 1.4 1.6 1.7 1.8 1.9 2.1 2.3 2.4 Sources: Data provided by Moroccani Directorate of Custorns and Indirect I'axes and by IMF statff estimates. TABLE 8.A.5. LEBANON: CUSTOMS REVENUE LOSSES IMPLIED BY TARIFF DISMANTLEMENT, 1996 (In billions of Lebanese pounds) Tariff EU imports, By year rates 1996 1 2 3 4 5 6 7 8 9 10 I1 12 13 2 1,199 24.0 24.0 - - - - - - 5 502 25.1 25.1 25.1 25.1 25.1 23.1 21.1 19.1 17.1 14.0 10.0 5.0 0.0 10 1,035 104.0 104.0 104.0 104.0 104.0 95.2 87.0 79.0 70.4 56.0 41.4 21.0 0.0 15 335 50.3 50.3 50.3 50.3 50.3 46.2 42.2 38.2 34.2 27.1 20.1 10.1 0.0 20' 524.1 113.2 113.2 113.2 113.2 113.2 96.4 88.1 80.0 71.3 57.0 42.0 21.0 0.0 25 134 33.4 33.4 33.4 33.4 33.4 31.0 28.0 25.4 23.0 18.0 13.4 7.0 0.0 30 237.2 71.2 71.2 71.2 71.2 71.2 66.0 60.0 54.1 48.4 38.4 29.0 14.2 0.0 35 57 20.0 20.0 20.0 20.0 20.0 18.2 17.0 15.1 14.0 11.0 8.0 4.0 0.0 40 0.5 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.0 0.0 50b 204 199.2 199.2 199.2 199.2 199.2 183.3 167.3 151.4 135.4 108.0 80.0 40.0 0.0 80 11 8.4 8.4 8.4 8.4 8.4 8.0 7.0 6.4 6.0 5.0 3.4 2.0 0.0 100 0.3 294.0 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.1 0.0 Total customs revenue from the EU 648.3 648.3 624.4 624.4 624.4 567.0 518.0 468.2 419.0 333.0 246.4 123.2 0.0 Memorandum items: Implied gross revenue lossc - - -24.0 -24.0 -24.0 -82.0 -131.0 -180.2 -230.0 -36.0 -402.0 -521.1 -648.3 As a percent of total customs revenue - - -1.9 -1.9 -1.9 -6.4 -10.3 -14.1 -18.0 -24.8 -31.5 -41.2 -50.9 As a percent of total revenues - - -0.8 -0.8 -0.8 -2.7 -4.3 -6.0 -7.6 -10.5 -13.3 -17.4 -21.5 As a percent of GDP - - -0.2 -0.2 -0.2 -0.5 -0.9 -1.2 -1.5 -2.1 -2.6 -3.4 -4.2 - Negligible. a. Includes imports of cars of which irnports from the EU generated customs revenue of LL75 billion in 1996. b. Includes imports of some petroleum products that are taxed at ad valorem tariff rates of 50 percent but assessed according to the max-min valuation procedure. Data provided by country authorities. c. The gross revenue loss is the maximum loss to result from the application of the tariff reduction schedule to EU imports under static conditions and in the absenice of any offsetting measures. Source: IMF staff calculations based on data submitted by the Lebanese High Customs Council, and limited to the period of January I-September 30, 1996. 206 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA TABLE 8.A.6. TAXES ON INTERNATIONAL TRADE IN WORLD REGIONS, 1975-95 (As percentage of GDP) Last available 1975 1980 1985 1995 year' Trade taxes All countries 4.21 4.20 4.20 3.38 3.24 OECD countries 1.23 1.02 0.89 0.68 0.61 Non-OECD countries 5.30 5.25 5.36 4.46 4.34 Non-OECD African countries 6.67 6.25 6.56 5.49 5.61 Non-OECD Asian countries 3.80 4.76 5.25 4.35 3.76 Non-OECD Middle Eastern countries 5.01 4.25 4.08 3.48 3.64 Non-OECD Western Hemisphere countries 4.28 4.68 4.48 4.05 3.82 Import duties All countries 3.24 3.36 3.44 3.12 3.01 OECD countries 1.18 0.86 0.80 0.65 0.59 Non-OECD countries 4.00 4.20 4.38 4.15 4.04 Non-OECD African countries 4.98 5.02 5.45 5.30 5.21 Non-OECD Asian countries 2.78 3.07 3.76 3.85 3.32 Non-OECD Middle Eastern countries 4.34 4.11 3.88 3.27 3.54 Non-OECD Western Hemisphere countries 3.08 3.80 3.69 3.72 3.61 Export duties All countries 0.85 0.73 0.49 0.23 0.16 OECD countries 0.05 0.14 0.04 0.02 0.02 Non-OECD countries 1.14 0.93 0.66 0.31 0.23 Non-OECD African countries 1.61 1.14 1.06 0.34 0.31 Non-OECD Asian countries 0.71 1.26 0.71 0.49 0.43 Non-OECD Middle Eastern countries 0.56 0.09 0.05 0.04 0.05 Non-OECD Western Hemisphere countries 1.00 0.82 0.40 0.31 0.08 a. Last available year is 1995 for most countries, but when this information is not available, the last available year is used. Sources: IMF, Government Finance Statistics (various years); IMF, International Financial Statistics (various years). TRADE LIBERALIZATION AND TAX REFORM 207 TABLE 8.A.7. TAXES ON INTERNATIONAL TRADE IN WORLD REGIONS, 1975-95 (As percentage of tax revenue) Last available 1975 1980 1985 1990 year' Trade taxes All countries 26.36 25.92 24.00 21.71 19.42 OECD countries 5.70 4.83 3.42 2.66 2.16 Non-OECD countries 33.63 32.85 31.21 29.10 26.42 Non-OECD African countries 41.23 36.77 35.54 33.77 32.46 Non-OECD Asian countries 29.59 32.99 33.07 27.34 23.98 Non-OECD Middle Eastern countries 29.39 31.26 29.86 28.89 26.91 Non-OECD Western Hemisphere countries 26.89 27.76 24.88 25.63 21.46 Import duties All countries 20.21 19.88 19.02 18.68 17.05 OECD countries 5.38 3.78 3.16 2.57 2.10 Non-OECD countries 25.51 25.25 24.65 25.22 23.21 Non-OECD African countries 30.87 28.35 27.85 28.75 27.36 Non-OECD Asian countries 23.06 21.21 23.44 21.83 18.88 Non-OECD Middle Eastern countries 25.35 30.26 28.64 26.98 26.35 Non-OECD Western Hemisphere countries 19.15 21.02 19.84 23.06 20.25 Export duties All countries 5.07 5.11 3.44 1.98 1.36 OECD countries 0.28 0.95 0.12 0.06 0.05 Non-OECD countries 6.78 6.50 4.62 2.75 1.91 Non-OECD African countries 9.34 9.03 8.22 5.08 4.03 Non-OECD Asian countries 4.63 6.60 3.70 2.10 2.04 Non-OECD Middle Eastern countries 3.14 0.60 0.29 0.19 0.28 Non-OECD Western Hemisphere countries 6.50 6.00 2.87 2.28 0.41 a. Last available year is 1995 for most countries, but when this information is not available, the last available year is used. Sources: IMF, Government Finance Statistics (various years):lMF, International Financial Statistics (various years). 208 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Notes 1. This chapter is based on the author's presentation given at the "Middle East Economic Forum" held in Marrakesh, May 15-17, 1997.1 wish to thank A.M. Abdelrahman, Adrienne Cheasty, Liam Ebrill, Julio Escolano, Reint Gropp, Janet Stotsky, and the staff of the Middle Eastern Department for helpful comments and suggestions, and A. Wolde Mariam for valu- able research assistance. 2. This refers to the tendency for trade and investment flows from third countries to become even more concentrated in the EU as a way of accessing individual markets in the SMR, partly because of weak economic links among the SMR states themselves but also because the EU has pursued separate agreements with each of the SMR countries. (See Galal and Hoekman 1997.) 3. See Nabli (1996) for a comprehensive survey of trade liberalization experiences. 4. It is worth noting that trade liberalization does not necessarily imply revenue loss. For example, starting from a highly restrictive trade regime, certain trade liberalization mea- sures (for example, the tariffication of quantitative restrictions and reductions in excessively high tariff rates, which may have encouraged evasion) could initially lead to higher tariff receipts. However, most SMR countries are liberalizing from moderate protection levels and tariff reductions, therefore implying the loss of revenue for most countries in the region. 5. Excises and VAT on imports, where applicable, are also collected at customs, the latter being normally assessed on a tax base that includes tariffs. To the extent that tariffs are eliminated, VAT assessments and collections at customs would also be expected to decline. 6. When measured in relation to GDP, the revenue losses would be highest for Lebanon and Tunisia, the latter mainly because of its relatively high ratios of tax revenue to GDP and EU imports to total imports. 7. See Devarajan and others (1997) for a fuller analysis of the main direct and indirect revenue effects. For a more comprehensive treatment of the revenue impact of trade liberal- ization, see Ebrill, Stotsky, and Gropp (Forthcoming). 8. Rutherford, Rutstrom, and Tarr did not measure the revenue loss directly but took it to be equivalent to the additional VAT collections that would be needed to restore revenue neutrality. 9. This assumption may not be as unrealistic as it first appears. Since 1976, trade between Tunisia and the EU countries has been progressively liberalized and the ratio of imports from these countries to total imports has remained in the range of 65-75 percent through 1995, with an average of 70.3 percent. A similar trend has also been observed for Morocco and to a somewhat lesser extent for Algeria. TRADE LIBERALIZATION AND TAX REFORM 209 10. Other features of Lebanon's economy and the terms of its agreement under discussion with the EU also make the gains from a closer trade association with the EU appear rela- tively less attractive. See Martin (1999). 11. Nontax revenue can still be an important component of a reformed tax system. For example, the user fees that would result from the appropriate commercialization of the sup- ply of government services in areas such as health and education would count as nontax revenue. Moreover, profits realized by parastatals in a perfectly competitive market environ- ment could also be considered a durable source of revenue, although such cases are likely to be rare. Of course, in countries rich in energy resources such as Algeria and Libya, nontax revenue is likely to remain significant for some time. 12. These are to be phased out beginning in June 1998, when Morocco applies the terms of the World Trade Organization. 13. It should be noted that some exemptions are legal and represent common practice (for example, diplomatic franchise, imports by nongovernmental organizations); some are either unnecessary or economically inefficient, even when legal (for example, targeted investment incentives), and in these cases, revenue losses can be reversed by amending existing legisla- tion. However, some revenue losses due to exemptions represent abuse of privilege or out- right fraud. 14. In a recent IMF staff study, a 1 0-point index of trade liberalization was computed for 27 developing countries combining the effects of import tariffs and nontariff barriers (NTBs). Five classifications of import tariffs and three classifications of NTBs were used to construct the index, with the most open import tariff and NTB regimes assigned a "I ," the most restric- tive a "10" (see IMF [1998]). 15. See Ebrill, Stotsky, and Gropp (Forthcoming) for further analysis of this point. 16. For more discussion of this and related points, see Ebrill, Stotsky, and Gropp (Forth- coming). 17. The average expenditure ratio in the SMR countries (excluding Israel) during 1994-96 was 31.2 percent, compared with 30.5 percent for the OECD countries and 18.9 percent and 28.1 percent for non-OECD Asian and African countries, respectively. References Abed, George T., Liam Ebrill, Sanjeev Gupta, Benedict Clements, Ronald McMorran, Anthony Pellechio, Jerald Schiff, and Marijn Verhoeven. 1998. "Fiscal Reforms 210 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA in Low-Income Countries: Experience Under IMF-Supported Programs." IMF Occasional Paper No. 160. International Monetary Fund, Washington, D.C. Alonso-Gamo, Patricia, Susan Fennell, and Khaled Sakr. 1997. "Adjusting to New Realities: MENA, the Uruguay Round, and the EU-Mediterranean Initiative." IMF Working Paper 97/5. International Monetary Fund, Washington, D.C. Alonso-Gamo, Patricia, Annalisa Fedelino, and Sebastian Paris Horvitz. 1997., "Globalization and Growth Prospects in Arab Countries." IMF Working Paper 97/125. International Monetary Fund, Washington, D.C. Dean, Judith M., Seema Desai, and James Riedel. 1994. "Trade Policy Reform in Developing Countries Since 1985: A Review of the Evidence." World Bank Dis- cussion Paper 267. World Bank, Washington, D.C. Devarajan, Shantayanan, Delfin S. Go, Sethaput Suthiwart-Narueput, and John Voss. 1997. "Direct and Indirect Fiscal Effects of the Euro-Mediterranean Free Trade Agreements." Unpublished. World Bank, Washington, D.C. Ebrill, Liam P., Janet G. Stotsky, and Reint Gropp. Forthcoming. "Revenue Impli- cations of Trade Liberalization: Statistical Evaluation and Case Studies." Inter- national Monetary Fund, Washington, D.C. Galal,Ahmed, and Bernard Hoekman, eds. 1997. Regional Partners in Global Mar- kets. London: CEPR. Havrylyshyn, Oleh. 1997, August. A Global Integration Strategy for the Mediterra- nean Countries: Open Trade and Market Reforms. Washington, D.C.: Interna- tional Monetary Fund. Hoekrnan, Bernard, and Simeon Djankov. 1997. "Towards a Free Trade Agreement with the European Union: Issues and Policy Options for Egypt." Working Paper No. 10. Egyptian Center for Economic Studies, Cairo. International Monetary Fund. 1997. World Economic Outlook, May 1997: Global- ization Opportunities and Challenges. World Economic and Financial Surveys. Washington, D.C. . 1998. Trade Liberalization in IMF-Supported Programs. World Economic and Financial Surveys. Washington, D.C. . Various years. Direction of Trade Statistics Yearbook. Washington, D.C. TRADE LIBERALIZATION AND TAX REFORM 211 . Various years. Government Finance Statistics. Washington, D.C. . Various years. International Finance Statistics. Washington, D.C. Martin, Will. 1999. "Assessing the Implications for Lebanon of Free Trade with the European Union." In B. Hoekman and J. Zarrouk, eds., Catching Up with the Competition: Trade Opportunities and Challenges for Arab Countries. Ann Ar- bor: University of Michigan Press, forthcoming. Moukarbel, Iskandar. 1996. "The Proposed Free-Trade Agreement Between Leba- non and the European Union Countries: Evaluation and Recommendations." Unpublished.Association of Banks of Lebanon, Beirut. Nabli, K. Mustapha. 1996. "A Comparative Perspective on Trade Liberalization in the Magreb Countries in the Context of the Free Trade Area Agreements with Europe." Unpublished. University of Tunis and North African Bureau of Eco- nomic Studies, Tunis. Nsouli, Saleh M., Amer Bisat, and Oussama Kanaan. 1996. "The European Union's New Mediterranean Strategy." Finance and Development 33 (September): 14-17. Page, John, and John Underwood. 1997. "Growth, the Maghreb and the European Union: Assessing the Impact of the Free Trade Agreements on Tunisia and Mo- rocco." In Galal and Hoekman 1997. Rutherford, F. Thomas, Elisabeth E. Rutstrom, and David Tarr. 1993. "Morocco's Free Trade Agreement with the European Community." World Bank Working Paper 1173. Washington, D.C. Saidi, Nasser. 1996. "Lebanon and European Union at the Crossroads: An Interim Assessment of the Partnership Agreement." Unpublished.Association of Banks of Lebanon, Beirut. Chapter 9 Enforcement of Product Standards as Barriers to Trade: The Case of Egypt' Hanaa Kheir-EI-Din Cairo University Crossing international borders gives rise to transaction costs that are not faced by domestic producers. Even in the absence of formal trade barriers such as tariffs, quotas, or bans, cumbersome administrative procedures and customs clearing can act as trade impediments. Export checks and import clearance procedures may im- pose a considerable burden on producers, traders, and investors, in addition to con- sumers. Imposition of costly procedural requirements to assure that imports satisfy formal specifications and national product standards can be especially burdensome for importers. The Role of Standards in Egypt Product standards and technical regulations are meant to facilitate trade and pro- duction and to ensure health and safety of consumers. Buyers of final and of inter- mediate goods want to know the specifications of these goods in terms of their characteristics-reliability, uniformity, safety of use. This information may be con- veyed by individual producers and traders but is increasingly ensured through de- veloping common product standards underwritten by recognized expert bodies. Compliance with such standards is usually voluntary, particularly if the standard relates to the quality of the product. Quality is an issue to be settled between the buyer and seller and is usually reflected in the price of the product. However, the government may enforce mandatory standards or product specifi- cations (technical regulations) to ensure the health and safety of consumers, animal 213 214 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA or plant life, or the environment. Numerous international bodies have been created over time with the mandate to develop common and compatible standards in vari- ous areas. Major standards developing bodies include the Intemational Organiza- tion for Standardization (ISO), the International Telecommunications Union (ITU), the Centre Europeen de Normalisation (CEN), the International Electro-Technical Commission (IEC), and the Food and Agricultural Organization of the United Na- tions (FAO). While standards are extremely useful for buyers and sellers and have been shown to be an important source of economic growth and consumer welfare, they may be a potential nontariff barrier (NTB) to trade when they are applied in a discriminatory fashion to favor domestic production against foreign competition. This explains why a number of international agreements require members to move toward adopting international standards and accepting foreign testing and certification. Two interna- tional agreements are of particular relevance for Egypt: WTO and the European- Mediterranean Partnership Agreement. The WTO Agreement on Technical Barriers to Trade (TBT) seeks to ensure that technical regulations and standards as well as testing and certification proce- dures in member countries do not create unnecessary obstacles to trade. It further encourages the use of international standards when they exist and the mutual recog- nition of national conformity assessment. It also requires that procedures for deter- mining the conformity of products with national standards be fair and equitable between domestically produced goods and equivalent imported goods. A complementary agreement is that on the Application of Sanitary and Phytosanitary Measures (SPS), which concerns the enforcement of food safety and animal and plant health regulations. This agreement also encourages members to adopt international standards, guidelines, and recommendations where they exist. This agreement, while recognizing the right of governments to protect the health and safety of consumers, stipulates that any measure applied should be limited to protecting human and animal or plant life or health and should not unjustifiably discriminate between members where similar conditions prevail. Although the Euro-Mediterranean Agreement (EMA) that is being negotiated between the government of Egypt (GOE) and the European Union (EU)-which is to replace the preferential trade and technical assistance programs and the financial protocols that have been developed since the 1970s-is not likely to require the harmonization of standards and the mutual recognition of conformity assessment procedures, it will require substantial reform of the current Egyptian system of stan- dardization and quality control if the EMA is to function effectively. Egypt's current system of standards and practices reflects a history of inward orientation and a strategy of import substitution implemented by a dominant public sector since the beginning of the 1960s. Many standards and regulations were cre- ated not only to protect consumers from unsafe products but also to enforce quality standards that are not relevant to health and safety considerations. Authority to im- pose quality standards or specifications was given to several ministries. ENFORCEMENT OF PRODUCT STANDARDS AS BARRIERS TO TRADE 215 With the Open Door Policy of the 1970s, Egypt started following a more out- ward-looking orientation; since the mid-1980s, as a result of increasing structural imbalances and the accumulation of external debt, the pace of economic reform has been accelerated. This encouraged increased participation of the private sector and a greater reliance on market forces, foreign trade, and foreign technology. Trade barriers were reduced: tariffs were lowered and rationalized; and NTBs (bans, let- ters of credit suspensions, prior approvals by specified authorities, servicing facili- ties requirements, public import monopolies, and prior import deposits) removed or considerably liberalized (Kheir-El-Din and El-Dersh 1992). These reforms increased the visibility of other regulatory interventions that restricted trade, including the enforcement of product standards. A list of products covering 1,550 tariff lines was made subject to mandatory quality control requirements (World Bank 1997). Review of the Current System of Standards and Quality Control The system of standards setting, quality control, and inspection in Egypt has been the subject of consultations with the United States and with the EU and its member states. It has been the subject of exhaustive review by joint teams of the GOE, USAID, and consultants. This section draws on the results of these studies (Nathan Associ- ates 1996, 1997, 1998a, 1998b) to describe the status quo in Egypt in this area. Creation of Standards The current system of standards and quality control includes several governmental bodies with direct control over the creation and enforcement of standards. They are the Ministry of Industry and Mineral Wealth (MOI), the Ministry of Supplies and Foreign Trade (MOTS), the Ministry of Health (MOH), and the Ministry of Agri- culture (MOA). In addition, the Atomic Energy Organization (since the Chernobyl accident) also has inspection responsibility for food products, and the Ministry of Scientific Research has recently participated more actively in the standards system. In Egypt, every product has a standard. The standards are either uniquely Egyp- tian or they follow an international standard (ISO, IEC, and so forth) or a national norm that has been developed in an OECD country. The Egyptian Organization for Standardization and Quality Control (EOS) is the recognized national standards body. It is under the jurisdiction of the MOI and is the sole authority for elaboration of Egyptian national standards for industrial products, testing and measurement equipment, and methods of testing and inspection. The EOS also has responsibility for testing and inspection of materials and products, certification of products (it issues conformity marks and quality marks), technical consultation and training concerning standardization, and liaison with international, regional, and foreign cor- responding organizations. The EOS is authorized to develop, adopt, and publish standards and codes of practice as Egyptian standards. It can amend or revoke such standards or codes. It is charged with operating in accordance with internationally recognized systems and principles. 216 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA To develop an EOS standard, at the end of each year by circular letter, the EOS requests from all relevant ministries and other interested parties (including trade and industry associations and importers) proposed new standards or revisions to existing ones that are needed or desired. After examination by EOS technical com- mittees and with reference to intemational norms, a draft standard is prepared and circulated among the groups involved in requesting or revising standards, and a final draft standard is prepared and submitted to the EOS. If approved, it is signed by the MOI, and then the standard becomes a voluntary Egyptian standard. Officially, Egyptian standards are voluntary, except for those related to public health, safety, and consumer protection. A standard is made mandatory by ministe- rial decree issued by the MOI mandating the relevant standard. An EOS standard may also be made mandatory by ministerial decree by other agencies. In practice, there are additional channels through which standards are effec- tively rendered mandatory. Through a series of mandatory technical specifications and regulations embodied in ministerial decrees from not just the MOI, but also the MOTS, MOA, and MOH, product coverage by mandatory standards has been ex- tended to a vast array of goods; some 1,550, or 25 percent, of all tariff lines-of which about half are foodstuffs-are subjected to quality control. The lists of prod- ucts covered by "quality control" inspection reported by customs and by the EOS in the publication Mandatory Standards do not coincide. Moreover, they go beyond 2 conventional norms of consumer protection. When enforced, they give rise to con- siderable economic costs. Once applicable duties have been paid on goods sub- jected to inspection requirements, at least I percent of each consignment must be sampled and inspected for compliance with the relevant Egyptian standards. Input into the standards creation process varies by product. A particularly intri- cate process is that of the creation of standards for food and agricultural commodi- ties. Three ministries and five public organizations are involved in the establishment of regulatory standards and technical specifications in Egypt for food and agricul- tural products. These are: * the MOTS through the EOS - the MOH through the Food Control Department and the Nutrition Institute * the MOA through three public organizations: the Veterinary Medical Ser- vices, Plant Protection and Quarantine, and the Central Laboratory for Food and Feed. In addition, the General Organization for Import and Export Control (GOIEC) and the Atomic Energy Organization also apply standards for the control of food and agricultural products. Control of food and agricultural products in Egypt is achieved through a set of product standards and technical specifications that are made mandatory through ENFORCEMENT OF PRODUCT STANDARDS AS BARRIERS TO TRADE 217 implementing laws and decrees. While these official product standards and techni- cal specifications cover many if not most situations, they do not cover them all, particularly in the food and agriculture field. In cases where EOS standards or min- isterial technical specifications do not exist, ministries indicate that international norms apply. Specifically, product standards and technical specifications (that is, permitted food additives, pesticides, microbiological criteria) of the EU, the United Kingdom, Germany, France, the United States, Japan, and Codex Alimentarius and ISO can be used. In practice, the situation is often very different. Although the MOH has the ultimate responsibility to ensure public health, the large number of product standards, the often vague nature of the quality attributes that have a regulatory status, and the multiplicity of agencies involved in ultimately accepting or rejecting the product make the current system cumbersome and costly. Substantial reforms are required to increase transparency and ensure due process, thereby making the system both efficient and in compliance with the WTO. As far as manufactured commodities are concerned, mandatory product stan- dards are less complex than for food and agricultural commodities. In the past, a standard was simply made mandatory on request by the EOS. Currently, there is a trend away from such comprehensive standards in favor of performance standards. There are now 138 mandatory product standards being enforced for reasons of qual- ity control. The objective is often one of consumer protection from lower-quality products, especially, but not exclusively, imports. Many of the standards are more specific than the applicable, comparable international standard. Pressure to make a standard mandatory can emanate from anywhere, but it is typically channeled through the EOS to the MOI and through GOIEC to the MOTS. The Enforcement of Mandatory Standards In cases where health and safety are legitimate concerns, the current system-when implemented-frequently suffers from mandatory compliance rules that are nontransparent and redundant. Substantial disincentives are created for investment, production, and trade. For food and agricultural products, control in Egypt is shared by the five previ- ously mentioned agencies and their dependent organizations. The focus is primarily on imported food products, although exports often also have to meet mandatory EOS standards (and which may as a result inhibit export production). Domestic markets are also checked, particularly by the MOH to ensure that products not meeting EOS standards are not sold. However, there is evidence that standards applied to imports may differ from those applied domestically. As an example, the frozen meat standard appears to apply only to imports; similar meat products produced domes- tically are ignored. Each food control authority operates in a similar manner characterized by a head office in Cairo with field offices located throughout Egypt. The importation process for most food products is cumbersome and restrictive. It involves at least 30 different steps (SRI International 1997). The entire import process comprises five 218 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA broad stages, each one consisting of multiple steps. These stages are preshipment requirements, initial import procedures, product inspection and testing, appeal pro- cedures, and final clearance. The inspection and testing stage involves the notification of all required food inspection agencies. Up to four agencies may be involved. All food consignments will be inspected by the Atomic Energy Organization (for irradiation), the GOIEC (for quality), and the MOH (for safety and quality). MOA and the Veterinary Medi- cal Services will be involved for all meat, poultry, seafood, and dairy products (for safety and quality). Appropriate forms must be completed separately with each agency. With the exception of frozen meat and poultry, each agency samples and tests the consignment independently. For frozen meat and poultry, a combined sam- pling is done but testing is still done independently by each agency. All agencies must approve the shipment before release is granted. Failure by any one of the agen- cies to clear a sample results in the rejection of the whole shipment. The MOH grants the final release of the consignment. A problem directly related to multiple agency inspection and mandatory in- spection of each consignment is the excessive loss of product that occurs. In addi- tion, a substantial portion of the resources devoted to inspection and testing involves factors that have no bearing on the safety of the product but are rather devoted to quality testing-particularly testing by the GOIEC. Rejection of consignments may be appealed by the importer. This requires the submission of a notice to appeal, the resampling and reanalysis of the product, and an often lengthy review by the MOH Technical Review Committee for Import Ap- peal. This review process is time consuming, generally doubling or tripling the clear- ance time. A particular problem for importers concerns mandatory shelf life requirements. The EOS sets shelf life standards for a multitude of products, including many food items. These are periods after which a product may not be sold. The periods set do not necessarily reflect actual shelf life of the product, even under the climatic con- ditions prevailing in Egypt. They restrain trade because the limitations placed on the allowable shelf life are sometimes alleged to be excessively short, especially as products may not be imported if more than 50 percent of the allowed shelf life has already expired. Delays caused by inspection, testing, and other import clearing procedures can result in shortening the remaining shelf life for a product to such an extent that the importer has little time to move the product to the market. Without an absolutely guaranteed market for the product, the standards can effectively prohibit imports. While shelf life dates are important, especially for food products subject to spoilage and deterioration, they are better left as an issue to be determined by the producer with government oversight to ensure implementation. Monitoring and enforcement of mandatory standards for manufactured goods is vested in three agencies: the Department of Industrial Control (MOI), which monitors domestic compliance to EOS-recognized mandatory standards at the fac- tory level; the Department of Control (MOTS), which inspects for fraudulent prod- ENFORCEMENT OF PRODUCT STANDARDS AS BARRIERS TO TRADE 219 ucts domestically; and the GOEIC (MOTS), which is responsible for monitoring the EOS mandatory standards for imported and exported goods. Domestically produced products and their production processes must be in com- pliance with mandatory standards issued by the EOS. Factories are checked at least once a year by the Department of Industrial Control. Failure to comply can result in administrative shutdown. Imports and exports of manufactured products are less regulated than are food products. However, since 1990, mandatory inspection by the GOEIC has increased to more than 100 product groups from the 17 products previously inspected. This was partially due to lifting import bans on certain prod- ucts and easing import licensing procedures: in effect, quality control replaced the import bans and became an NTB (Kheir-El-Din and El-Dersh 1992). When controlled products move through the ports, the GOEIC samples each lot. It is allowed by law to take up to 1 percent of a consignment for sampling, and can take another 2 percent if the product is initially rejected. Importers and exporters complain of long delays, unclear procedures, and excessive sampling. Testing of industrial products sometimes takes a long time, especially if the required equipment is not available. Importers who regularly buy the same product from the same for- eign suppliers are subjected to inspection of every shipment received. For some prod- ucts, the fees involved are significant. Fees charged for inspection are based on either the weight of or the units in a consignment. They range from 0.5 piaster per kilogram to a maximum of Ef10,000 per consignment. Fees for goods intended for retail sale are at least twice as large as those applied if the goods are not prepared for retail sale. Problems and Economic Costs of the System The current system is disruptive to producers and traders. In part this is due to ill- conceived goals and the design and history of the system, and in part it is due to problems of implementation. The system imposes large welfare losses in the aggre- gate and has made it costly and difficult for producers to obtain inputs required for export production. Major problems with the system are that quality is confused with safety, there are multiple centers of authority, there is a lack of transparency and consistency, compliance costs are higher than necessary, and there is significant negative overall impact on the economy. Quality Confused with Safety The standards set by the EOS and made mandatory by various agencies for a large number of products combine safety and health-related elements with quality-re- lated elements. While the former provide a legitimate rationale for governments to intervene (determine whether products should be allowed to circulate), the latter do not. The mandatory use of quality standards, particularly by the GOEIC in its evalu- ation of imported and exported products, unnecessarily restricts product variety on the Egyptian market and goes beyond the legitimate role of governments in setting product standards. 220 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA This is most obvious in the food sector, where physical characteristics of prod- ucts such as size, shape, color, and texture are frequently subject to mandatory re- quirements, as are excessive composition elements such as fat or sugar content. The problem extends to the manufactured goods sectors, where the amount of ink in a ballpoint pen or the length of matches is a mandated requirement. EOS standards often also contain quality norms that are vague, subject to interpretation, and re- strict the ability to produce and/or import and export a variety of products. As much as two-thirds to three-quarters of Egypt's regulatory analytical capacity has been said to be devoted to quality testing. Because emphasis is set on products' quality, attention and resources available for helping to ensure product safety are reduced; this may actually lead to a greater level of unsafe products existing within Egypt than would otherwise be the case. Because the focus of testing is on product quality, laboratory instrumentation and technical expertise are inadequate for safety testing. Many countries impose mandatory product standards to ensure safety or avoid economic fraud. However, the EOS standards combine a mixture of quality and compositional standards and of safety standards that is both inappropriate and un- necessary. Standards seem to be used for multiple purposes: for product identifica- tion, for the purpose of tariff classification, for identification of counterfeit products to prevent fraud, to protect the consumer against spoiled products, and for "quality" more generally. A careful review of all applied standards and the acceptance of existing international norms (the Codex, ISO, IEC, and so forth) are necessary to improve the Egyptian system of standards control. Multiple Centers ofAuthority Egypt maintains a regulatory system involving multiple governmental agencies. Its impact is felt most in the importing of food products. Multiple problems exist within the current importing system that lead to extended clearance times, loss of product, uncertainty as to the standards to apply, excessive costs of container unloading charges, port and warehouse rental charges, labor costs in clearing product, and dispute resolution. As mentioned, up to five agencies can be involved in inspection, sampling, and testing of food products. Importers must not only file regular customs documents but must additionally file import documents with-and pay fees to-each agency. Prod- uct inspections are almost always carried out independently, with the exception of frozen meat and poultry. Each agency obtains its own samples and independently tests the product. Delays of two to four days to inspect the product are not uncom- mon. Duplicative testing is the rule. All consignments are sampled, regardless of compliance history, although the international norm samples consignments based on compliance history of the product, the country of origin, and the compliance perfor- mance of the importer, exporter, and shipper. Inspection is carried out by a technical committee of three individuals and leads to an excessive use of manpower. The system of multiple inspection, sampling, and testing must be discontinued. A single agency should have the responsibility for testing food imports. Similarly, a ENFORCEMENT OF PRODUCT STANDARDS AS BARRIERS TO TRADE 221 single agency should have the responsibility to examine manufactured (nonfood) products. Sampling based on compliance history of a product should be implemented. Quality testing should be eliminated. This in turn requires a comprehensive review of existing standards to ensure that these are centered on health- and safety-type rationales, are justified, and are worded in performance terms rather than specifying design characteristics. Single inspectors-rather than committees-should be re- sponsible for conformity assessment. Lack of Transparency and Due Process One of the most important difficulties with the existing quality control system for imported products, as well as for domestic and exported products, is the lack of transparency and due process in setting and enforcing the regulations. Transparency requires that all affected parties know clearly what regulations apply to a product and are informed and consulted in advance of proposed changes that will be made and the rationale for such changes. There should also be no uncertainty, at the time of importation, how a product will be classified and what technical requirements will be applied. Due process refers to the process by which laws, decrees, standards, and tech- nical specifications are made and implemented so that all affected parties can have advance knowledge of proposed laws, decrees, technical specifications, and pro- posed changes to them; can provide input into the decisionmaking process, and can have a legitimate mechanism of appeal. Without due process, transparency cannot be achieved. The absence of transparency and predictability in Egypt is not only a source of economic loss, but also implies that Egypt does not meet the requirements of the WTO in this area. High Compliance Costs The prevailing system of Egyptian standards and product safety entails costs of compliance that are high by international standards and imposes many unnecessary costs on consumers and producers. These costs result from laboratory deficiencies, limited testing capabilities, port delays as a result of excessive and unnecessary sampling and testing, unnecessarily rejected consignments, product wastage due to excessive sampling, multiple fees paid for duplicative procedures, and the need (in- centive) to provide informal payments to officials to speed clearance. A sample survey of 33 producers and traders (3 public and 30 private) was conducted by Nathan Associates in 1996 and the results systematically compiled. It showed that: * More than half the firms surveyed encountered problems or delays in secur- ing raw materials due to GOE product standards or technical regulations. * Fewer than one-quarter of the firms said that they could comply and did with Egyptian standards and technical regulations. 222 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA About three-quarters of the firms encountered business difficulties in at- tempting to comply with the existing system of standards and technical regulations. It is worth noting that most of the firms surveyed were well aware of the impor- tance of quality and used Total Quality Management (TQM) practices within the firm. Economic Impact of the Current System Some preliminary estimates of the economy-wide impact of the current quality con- trol system based on the cost estimates reported in the survey and field interviews have been attempted (Nathan Associates 1996). The results suggest that the cost impacts are largest for food-related and consumer goods' producers and traders and smallest for industrial products and pharmaceuticals. Using World Bank estimates that about 25 percent of Egyptian tariff lines are subjected to some form of manda- tory technical regulations, it has been estimated that: * Direct and indirect additional costs to affected producers and traders vary between 5 percent and 90 percent according to industry, with the highest costs for food products and imported final consumer goods. - Exports are lowered by 9 percent to 12 percent, as the system of quality control raises import costs of raw materials, intermediate inputs, and capital goods; market access to the regionally important Euro-Med market is re- duced; and the incentive for foreign and domestic investment is lowered.3 All in all, Nathan Associates estimate that the aggregate welfare loss of the current system exceeds I percent of GDP, reflecting higher import costs, lower ex- ports, reduced product variety and availability, reduced access to best available tech- nology, and the waste of government resources expended on duplicative and unnecessary activities. Harmonization and Cost of the Current System in an Integrating World Using a system of standards that is not compatible with international norms gives rise to a variety of costs for the economy. These costs could be avoided through harmonization with widely used codes and practices. Standards are dynamic in that they are continually being developed and modified as technology and markets evolve. Thus, international standards (Codex, ISO, and so forth), while aiming at reducing uncertainty, evolve in response to technical change and expectations of producers and traders. They are increasingly used to coordinate production and distribution. This points to the importance for Egypt of coordinating its rules and regulations with its major trading partners. ENFORCEMENT OF PRODUCT STANDARDS AS BARRIERS TO TRADE 223 Gainsfrom Coordination of Standards within the EMA One of the potential gains for Egypt from joining the EMA emanates from a reduc- tion in administrative costs in dealing with other members. Membership in the EMA may facilitate recognition of administrative requirements for product standards, test- ing and certification procedures, and customs documentation, including that cur- rently required by the GOIEC, MOH, and MOA. In a simulation analysis of the potential gains to Egypt, Konan and Maskus (1997) calculate the amount of overall gain associated with a reduction in administrative barriers. Hoekman and Djankov (1997) argue along the same lines, although they do not quantify the impact of an Egypt-EU Free Trade Agreement (FTA). The more integrated the economy into the regional market, the larger is the investment inflow into the economy. A potentially negative outcome would result if the Egyptian economy is not reasonably harmonized with the EU, as the FTA that eliminates tariffs on EU exports to Egypt could result in reduced investment and product sourcing from EU countries instead. The facts that FDI in export manufac- turing in Egypt is still very small and the European market accounts for over half of Egypt's nonoil exports emphasize the importance of harmonization of standards for Egyptian industry and reduction of compliance costs. Furthermore, with increased competition facing Egypt within the European mar- ket and domestically from direct imports, Egyptian producers will be threatened by internal and external competition. As Egypt's competitors are increasingly using harmonized European standards to enhance their competitive advantage, it becomes compelling for Egyptian firms to join in the process of market integration. This is all the more urgent given that the process of integration of the wider European mar- ket (including Central and Eastern European countries as well as Turkey) is evolv- ing rapidly at the political, economic, and business level. This process is also spreading to southern Mediterranean countries such as Morocco and Tunisia. Of course, as the market grows, the use of voluntary product and service standards to guide business relations within the private sector will certainly also continue to rise. The current Egyptian system for standardization acts as a barrier against inte- grating into the regional markets and, even more, into the global market. This points to the necessity of reconsidering the system and aligning it with international norms as represented by ISO guidelines and CEN processes. Reviewing the basic charac- teristics of standardization in Europe as compared with Egypt is necessary. Stan- dards and technical regulations in Egypt are not conducive to increasing trade and investment between European and Egyptian firms. Maintaining tight administrative control of the economy-as reflected by the current system of standards in Egypt- is incompatible with attempting to achieve export-led economic growth. Consistency of the Current GOE Practices with Commitments to the WTO As mentioned earlier, the Uruguay Round agreements include two subsidiary agree- ments, the TBT and the SPS. All 134 members of the WTO (among which is Egypt) 224 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA are required to abide by the provisions of both the TBT and SPS agreements. These agreements require countries to use international standards except where the stan- dard is an ineffective or inappropriate means for the fulfillment of the legitimate objectives pursued (TBT) or a more stringent standard can be scientifically justified (SPS). The most relevant requirements of the TBT agreement for the Egyptian system of quality control are the following: * Treating imports no less favorably than domestic products (national treat- ment). * Ensuring that technical regulations are not prepared or adopted with a view to or with the effect of creating unnecessary obstacles to international trade. * Where relevant standards or their completion is imminent, members must use them, or their relevant parts, as a basis for their technical regulations. * All members must play a full part in the preparation by appropriate inter- national standardizing bodies of standards for products for which they have adopted, or plan to adopt, technical regulations. * Members must give "positive consideration" to accepting the regulations of other members if they are equivalent, even if different. * Technical regulations should be based on product performance rather than design or descriptive characteristics. * All proposals to create new standards must be published, notified to the WTO Secretariat, and allowed a reasonable interval before entering into force, except in cases of urgency for safety, health, environmental protec- tion, or national security. As noted above, in a number of respects, Egypt is not in conformity with the various requirements of the WTO. Reforming the system to be consistent with these requirements would help to reduce the costs of the present system. Conclusion and Recommendations Although it is legitimate that governments interfere to ensure safety and integrity of products produced domestically, or those imported or exported, the system applied by the GOE is complex, superfluous, and costly. Substantial changes must be intro- duced within the current system to provide for a more dynamic and efficient economy, to offer Egyptian consumers greater product variety and quality, and to allow Egypt ENFORCEMENT OF PRODUCT STANDARDS AS BARRIERS TO TRADE 225 to meet its obligations, especially under the GATT/WTO. These changes point to the following main directions of reform required by the current system in Egypt (see also Nathan Associates 1998a, 1998b): * Streamline the system to conform to the WTO TBT agreement. The most important obligations under this agreement are the requirements that each member adopt international standards as a basis for its own standards and abide by the national treatment principle. * Make product quality attributes a voluntary matter to be dealt with by the market, and limit mandatory technical product regulations to instances where this is justified to achieve safety, health, and environmental objec- tives. * Reform the operation of the MOTS and GOIEC by elimination of inspect- ing and testing for quality, ensuring that products that have already been inspected by another agency of the GOE are not reinspected, and creating a register of repeatedly imported or exported products and exempting these products from testing. * Establish interministerial cooperation to avoid duplicative sampling and testing and to avoid inconsistent application of regulations. Harmonization of standards and regulations with international norms would greatly help in this direction. * Require acceptance by the MOTS and GOIEC of precertification and preinspection. The GOE should consider immediate and unilateral recog- nition of International Safety Marks (precertification) for all nonfood prod- ucts that guarantee the safety of the products by a thorough international system of inspection and minimize safety risks. Preinspection at ports of export, while not as efficient as precertification, is preferable to inspection in Egypt upon arrival. An internationally accredited entity can ensure that goods are inspected before being exported to Egypt, using the Egyptian standards where required. This would ensure speedier inspection and test- ing in addition to ensuring accuracy and reducing consumer risks. Streamlining the system of product standards, technical regulations, and in- spection and testing for conformity along the lines prescribed above will have the benefit of reducing barriers to trade and lowering import and export transactions costs. This would stimulate both imports and exports and should result in lower consumer prices in addition to reducing consumer risk. Furthermore, harmonized standards lead to international recognition of both quality and safety standards, which would enable Egyptian manufacturers to export their products much more freely. 226 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA Practical steps toward implementing these reforms in the short term could in- clude: * Reducing the number of imported products requiring inspection at the port of entry by releasing without further testing or inspection products bearing an internationally recognized product certification safety mark and prod- ucts that have been preinspected or tested in the country of origin by an accredited laboratory, when accompanied by certificates of compliance (see below). Products tested by an Egyptian-accredited inspection company recognized by the GOIEC should also be released without further inspec- tion. In all cases, inspection by the GOIEC (or the substitute body pro- posed below) should be limited to spot checks. For noncertified and non-prespecified products, the GOIEC would continue to inspect and test products at the port of entry in its own laboratories or through a recognized third party. * Creating of a register of repeatedly imported products that meet Egypt's requirements and that have a good record of compliance. Inspection of items on this list should be limited to spot checks. * Requiring that inspection and checking be undertaken by a committee from customs and security bodies. The committee will confine its checking of each consignment for security reasons and illegal products. The importer presents customs with the necessary documentation to clear the shipment. After review, customs will either clear the shipment for release or will direct the consignment to other bodies for inspection and testing. * Establishing a system for identification and recognition of competent in- spection and testing companies. These companies should be made known to all importers and manufacturers, and certificates of compliance based on the results of their inspection and testing should be accepted by Egyp- tian authorities. * Speeding up the process of harmonization of Egyptian standards with exist- ing internationally recognized standards (ISO, IEC, Codex, and so forth). New standards developed by these bodies should be directly adopted in those instances where it is deemed necessary to make the norms mandatory. A national body should be created to determine what products are to be regulated and whether technical regulations are required. The recently formed Egyptian Accreditation Council might be able to fulfill this function. * Establishing a national product conformity and consumer protection body, combining GOIEC and EOS functions into a single national inspection and ENFORCEMENT OF PRODUCT STANDARDS AS BARRIERS TO TRADE 227 testing organization. This body would provide certificates of conformity to international safety marks and to Egypt's technical regulations for both ex- ternally and domestically manufactured products. It would avoid costly con- tradictions in test results arising from separate government inspection bodies and eliminate costly duplication of effort in the prevailing inspection pro- cess. This body would also provide spot-check services in response to re- quirements of consumer protection and authorities responsible for the quality and safety of products supplied in the Egyptian market. These recommendations would streamline the inspection and testing processes for imported goods-which suffer the most from the current enforcement system- without compromising consumer safety, public health, or environmental protection. The resulting cost savings to industry and to the government would enhance trade and promote economic activity. Notes 1. This chapter relies extensively on the findings of four studies by Nathan Associates: "Research Study on the Quality Control System in Egypt," July 1996; "Egypt: Review of Selected Egyptian Organization for Standardization (EOS) Food and Manufactured Durable Goods Standards with Respect to International Norms," October 1997; "Egypt: Review of Selected Egyptian Organization for Standardization (EOS) Food Standards with Respect to International Norms," March 1998; and "Pilot Study for Pre-Certification of Imported Prod- ucts," March 1998. 2. Nathan Associates (1998a) report that the official list of inspected and tested items pro- vided by the GOIEC contains 130 line items, 26 of which are foods and agricultural prod- ucts. The list contains categories or groups of products that do not appear to have any safety. public health, or environmental implications. A study to compare this list to the 320 to 340 mandatory standards issued by the EOS would be useful. 3. The costs in terms of reduced employment from the current system are twofold. Reduced investment and trade translate into employment reduction of corresponding magnitudes. Furthermore, since imports tend to be more capital intensive relative to exports in Egypt, the current system of quality control, by effectively protecting import-competing activities at the expense of export-oriented firms, encourages investment in relatively capital-intensive industries. 228 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA References Hoekman, B., and S. Djankov. 1997. "Towards a Free Trade Agreement with the European Union: Issues and Policy Options for Egypt." In A.Galal and B. Hoekman, eds., Regional Partners in Global Markets: Limits and Possibilities of the Euro-MedAgreements. London: CEPR and ECES. Kheir-EI-Din, H., and A. El-Dersh. 1992. "Foreign Trade Policy in Egypt, 1986- 199 1." In S. El-Naggar, ed. , Foreign and Intratrade Policies of the Arab Coun- tries. Washington, D.C.: International Monetary Fund. Konan, D. E, and K. E. Maskus. 1997. "A Computable General Equilibrium Analy- sis of Egyptian Trade Liberalization Scenarios." In A. Galal and B. Hoekman, eds., Regional Partners in Global Markets: Limits and Possibilities of the Euro- MedAgreements. London: CEPR and ECES. Nathan Associates for the USAID/DEPRA Project. 1996, July. "Research Study on the Quality Control System in Egypt." Cairo. Nathan Associates for the USAID/DEPRA Project. 1997, October. "Egypt: Review of Selected Egyptian Organization for Standardization (EOS) Food and Manu- factured Durable Goods Standards with Respect to International Norms." Cairo. Nathan Associates for the USAID/DEPRA Project. 1998a, March. "Egypt: Review of Selected Egyptian Organization for Standardization (EOS) Food Standards with Respect to International Norms." Cairo. Nathan Associates for the USAID/DEPRA Project. 1998b, March. "Pilot Study for Pre-Certification of Imported Products." Cairo. SRI International. 1996. Industry Diagnostics and Roadmaps to Increase Egypt's Export Performance. Cairo. World Bank. 1997. Country Economic Memorandum, Egypt: Issues in Sustaining Economic Growth, Main Report. Vol. II. Report No. 16207 EGT. Washington, D.C. Chapter 1 0 Electronic Data Interchange, Trade Facilitation, and Customs Reform' Benita Cox and Sherine Ghoneim The Management School Imperial College for Science, Technology and Medicine, London The increasing competitive pressures from both global and domestic markets are forcing nations to adopt new trade practices and standards. Nations need to adjust to new methods of trade information exchange, open up their telecommunications sys- tems, and learn to take full advantage of harmonized procedures, standards, and practices for trade documentation. The role of electronic commerce and electronic data interchange (EDI), in particular, is rapidly evolving in the face of increasing pressure from global markets to provide standardized methods and practices for international trade. A general term to describe these changes in international trade administration is "trade facilitation." With the gradual removal of international trade barriers and the increasing in- terdependence between international markets, EDI is expected to play a significant role in facilitating international trade (Farhoomand and Pace 1995). EDI is the most prevalent form of electronic commerce supporting trade transactions across various industry sectors on a national and international level. EDI, as a system of exchang- ing standardized trade-related information, is not only a fundamental information technology (IT) business process reengineering tool (Swatman 1994; Swatman, Swatman, and Fowler 1994; Venkatramann 1991), but also a key electronic com- merce technique for a reengineered trade facilitation process (Schware and Kimberley 1995), especially with respect to customs and excise applications. Experts forecast a million users of EDI by the end of the year 2000. Recent statistics suggest that EDI users (excluding financial EDI users) are estimated to be in the region of 170,000 users, 70 percent of whom are in the United States and Europe. 229 230 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA At the national level, the simplification and speeding up of trade information flows offers significant national benefits. Singapore claims that properly applied trade facilitation is already saving it in excess of 1 percent of its gross domestic product ($700 million in 1994) each year. As a result, reengineered trade processes based upon trade facilitation principles and EDI have become a global phenomenon (Schware and Kimberley 1995). An increasing number of nations are in the process of developing their EDI industry, and there is a rapidly growing need for the devel- opment of national frameworks and implementation guidelines. Developing nations, therefore, find themselves in the position of having to rap- idly adapt their traditional trading practices if they are to be able to participate fully in international trade. Although Western countries have expended much energy in recent years defining international trade standards and founding the EDI and elec- tronic commerce infrastructure, for developing nations, barriers to developing their national EDI industries and electronic trading communities are both different and more complex than in more developed nations. While there are a number of lessons to learned from mature Western EDI mar- kets, these models are not necessarily appropriate for developing countries. For ex- ample, the literature suggests that EDI successes in the United Kingdom were primarily driven by the retail and manufacturing industries, which could benefit from an advanced state of EDI service provision and telecommunications deregula- tion. In the case of Egypt, there is not only an absence of the required EDI industry service provision and electronic commerce infrastructure, but also much less in the way of interorganizational cooperation and communication of the type existing be- tween retail and manufacturing in the United Kingdom. The main objectives of this chapter are twofold: First, to identify the factors that influence success in IT-facilitated trade processes, particularly within the frame- work of introducing EDI to nations in the early stages of formulating their EDI and electronic trading policies; second, to identify nation-specific requirements within a multidisciplinary implementation framework and determine the respective policy implications. For concreteness, the focus of attention will be on the necessary con- ditions for using EDI to improve the operation of customs in Egypt. Schware and Kimberley (1995) note that, "The purpose of best practice within the context of trade facilitation is to replace paper documents with electronic equiva- lent, but not in an exact substitution." Properly designed, an EDI system will stream- line documentation procedures and retool practices among the parties involved in the trade and transport procedures. The concept of replacing paper documents with EDI, representing much of the detail with codes and harmonized processes (trade facilitation), and the simplification of procedures (reengineering) represents the complete IT-facilitated trade process. Developing a national EDI adoption framework should not be confined to ad- dressing technical requirements. To maximize potential benefits, a national strategy will have to take into account the context in which the development of the EDI industry is undertaken. It must consider the nation's particular political and eco- ELECTRONIC DATA INTERCHANGE,TRADE FACILITATION, AND CUSTOMS REFORM 231 nomic goals and constraints, the business culture, and sectoral structure as well as the organizational domestic and international requirements that may influence or be affected by the adoption of EDI. Factors that influence and are influenced by EDI adoption on a national, industrial, and organizational level include the context (po- litical, economic, and social environments), infrastructure (technical requirements and know-how), and the capacity to change in developing a national EDI strategy. These elements give rise to what we call the CIC framework, a multidimensional research approach that recognizes the complexity and interrelatedness of the busi- ness and technical determinants of successful EDI implementation. The proposed framework identifies the major criteria to be considered when adopting EDI. Rather then call for a universal EDI strategy, a successful EDI strat- egy must grow out of a sophisticated understanding of the surrounding business and technical requirements and structure and how they are changing. Only strategies that are tailored to the particular business requirements and existing inter- and intrafirm systems and processes, and that have the flexibility to accommodate change are likely to succeed.3 The CIC Framework Successful development of a national EDI strategy requires that an analysis be un- dertaken of the context, infrastructure, and capacity to change. Contextual Environment for EDI Successful EDI implementations have been made in response to demand pull condi- tions: nations adopting EDI were either driven by increased globalization and re- gional integration pressures translated into trade facilitation initiatives, or by national business requirements. Business requirements on a national, industry, and corpo- rate level have been particularly important in successful EDI adoption. The 'contex- tual" influences will not only vary from one nation to another, but also according to specific industry requirements, differences in corporate objectives, and the role of government in the economy. Infrastructure and Know-How Technical infrastructure involves not only information technology resources, but also telecommunications platforms and legislative aspects to govern interorganizational relations. At the national level, the legislative framework as well as the national information technology and telecommunications infrastructure, in general, and the role of value-added networks and coordinating bodies, in particu- lar, have to be investigated. Capacity to Change Exploiting EDI's technical capacity to accommodate changing business and techni- cal requirements has been identified as a critical success determinant in developing 232 TRADE POLICY DEVELOPMENTS IN THE MIDDLE EAST AND NORTH AFRICA an EDI strategy. In this chapter, "capacity to change" refers to EDI's technical abil- ity to accommodate changing business and technical requirements. The Case of Egypt Contextual Environment for EDI A number of factors influence the decision to adopt EDI on a national level. These factors stem from the political, economic, social, and technical environment (Fig- ure 10.1). POLITICAL ENVIRONMENT It is crucial that due attention be given to the political environment into which EDI is to be introduced. Of primary importance is the role of government in establishing successful national EDI strategies. Singapore is a clear example of a successful government-sponsored EDI initiative, whereas Latin America has achieved limited success with trade facilitation initiatives primarily because of the lack of serious government intervention (Schware and Kimberley 1995). In Europe, there have been a number of initiatives, both national and international, aimed at establishing Euro- pean-wide EDI policies and standards. The European Commission has, for example, allocated ECU 30 billion to spend over the next 10 years to establish a pan- FIGURE 10.1. EDI CONTEXTUAL PRESSURES ,,-- -- ----------m - . - Economic Sca q 6-465 5S 31 Tel: 90-2 2 2613 19 28 Haleb Bridi \NVold Batnk IstiiCue I 3 I Wa§ishinton, D)C USA 1el: (202) 473-631(O