table of contents -...
TRANSCRIPT
1
Table of Contents
Preface
5
Executive Summary
7
Trade and Growth – Study Literature
11
Inter-Arab Trade *Study Literature
13
Overview of the Volume of Inter-Arab Trade 14 Directions of Inter-Arab Trade
19
Development of the Commodity Structure of Inter-Arab Trade
20
Joint Arab Economic Action 20 Economic Integration
20
Elements of Arab Economic Integration 21 Arab Agglomerates 22
Reasons for Weak Arab Trade 26 Study Methodology
32
Study Variables and Data Sources
32
Descriptive Analysis of Key Study Variables 35 Study Model
56
Analysis Results
57
Study Results
67
Recommendations
69
References
72
Appendices
74
2
3
List of Tables
Table 1: Contribution of Inter-Arab Trade to Total Arab Trade (2007-2011) as a
percentage
Table 2: Contribution of Inter-Arab Trade to Total Trade of Arab Countries (2007-2011)
Table 3: Proportional Distribution of the Contribution of Inter-Arab Trade by country to
Total Inter-Arab Trade
Table 4: Contribution of Inter-Arab Trade to Total Trade of Selected Economic Groups
for 2009 (per million dollars and as a percentage)
Table 5: Study Variables and Their Sources
Table 6: Average Cost of Trade in Manufactured Goods between Various Regions
According to the World Bank Classification for 2009 (percent ad valorem equivalent)
Table 7: Average Cost of Trade in Agricultural Goods between Various Regions
according to the World Bank Classification for 2009 (percent ad valorem equivalent)
Table 8: Summary of the Results of Standard Model Analysis Using Scenarios (1, 2, 3)
Table 9: Summary of the Results of Standard Model Analysis Using Scenarios 4-8
Table 10: Summary of the Results of Standard Model Analysis as the Dependent
Variables Change
4
List of Figures
Figure 1: Contribution of Inter-Arab Trade to Total Arab Trade (2007-2011) as a
percentage
Figure 2: Total Imports and Exports of Arab Countries for 2010
Figure 3: Total Goods Imports as a Percentage of the Gross Domestic Product for 2010
Figure 4: Breakdown of Goods Exported by Arab Countries (as a percentage of the Gross
Domestic Product) for 2010
Figure 5: Gross Domestic Product Per Capita for Arab Countries in 2010 (in US Dollars)
Figure 6: Total Trade Cost and Gross Domestic Product Per Capita for Arab Countries
(measured by natural logarithms)
Figure 7: Cost of Trade in Agricultural Goods and Gross Domestic Product Per Capita in
Arab Countries for 2010
Figure 8: Cost of Trade in Manufactured Goods and Gross Domestic Product Per Capita
in Arab Countries for 2010
Figure 9: Average Cost of Total Trade for Arab Countries (for the period of 2000-2010)
Figure 10: Average Cost of Agricultural Trade between Arab Countries (for the period of
2000-2010)
Figure 11: Average Cost of Trade in Manufactured Goods for Arab Countries (for the
period of 2000-2010)
Figure 12: Average Cost of Total Trade between Arab countries for 2010 Divided into
Income Categories
According to the World Bank Classification
Figure 13: Average Cost of Total Trade between Arab Countries by Income Categories
(1995-2010) per: High Income, Upper-Middle Income, Middle Income, Non-OECD
Figure 14: Average Cost of Total Trade in Agricultural and Manufactured Good between
Arab Countries for 2010 by Income Category
Figure 15: Average Cost of Trade in Agricultural Goods between Arab Countries by
Income Category (1995-2010) per: High Income, Upper Middle Income, Middle Income,
Non-OECD
Figure 16: Average Cost of Trade in Manufactured Goods between Arab Countries by
Income Category (1995-2010) per: High Income, Upper Middle Income, Middle Income,
Non-OECD
Figure 17: Value of Statistical Parameters According to Analysis of Scenarios (1, 2 and3)
Figure 18: Value of Standard Model Parameters as the Dependent Variable Changes
5
Preface
The Joint Arab Commission was established and the will to consolidate cooperative ties among
Arabs in economics as defined by the Arab League in 1946. In order to enhance this cooperation
various paths were adopted including the establishment of a joint Arab marketplace in 1964 with
the value of exchanged goods that did not exceed four percent at that time which consequently
indicated that there wasn’t a sound infrastructure for the Arab financial market in place during
the period mentioned which led to a change in the path by using others such as investments and
joint ventures which were completed at the beginning of the 80s when an agreement to improve
trade between Arab countries was launched and called for free trade to be applied for some
goods. This agreement did not call for complete free trade though; it rather increased the amount
of free trade as it integrated this gateway with the path of capital free movement among Arab
countries. Therefore, it did not achieve the benefits of free trade and its potential positive
outcomes though many developed and developing countries consider these benefits the
foundation for both managing assets and increasing production.
At the beginning of 1998 and under the organization of the League of Arab States, Arab
countries formed a new economic bloc based on the notion of free trade which later became the
economic sector cornerstone within the Arab League. This systematic inclusion was based on a
gradual lowering of tariffs till they reached zero in 2005. Tariff rates change accompanied a legal
structure formation for a new Arab market that would meet the World Trade Organization
(WTO) requirements. This process generally occurred under the auspices of the Secretariat-
General, and is currently supervised by Dr. Nabil Al-Arabi who is in charge of the League of
Arab States. This organization also forms the strong foundation source for politics and Arab
defense measures.
During the process of building a new Arab economic infrastructure, the economic
division of the Arab League took the necessary administrative measures for the sake of creating a
greater Arab free trade zone. One of the most important steps taken was the rescinding of all
other trade agreements signed among Arab states. The Arab Leagues trade agreement became the
basis for all negotiations, taking into consideration all the positive and negative aspects of inter-
Arab trade among the member states. This agreement also guaranteed paths for trade
negotiations and called for the cessation of all forms of taxes, tariffs, other inventory and
services fees involved in inter-Arab trade and other issues.
In this context, the legal basis for the national handling of exchanged Arab goods was
formulated. Necessary laws, regulations and agreements were issued and several agreements
were prepared to encourage Arab products exchange. During this process, the major focus was to
create technical committees who report to both social and economic councils as well as regular
and economic summits. These reports should encourage the competitive exchange of Arabic
products through improving overseas transportation and border crossings, as well as providing
facilitating measures such as increasing trade efficiency. These measures include improving
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work conditions, tariffs-related matters, communications, financial services, currency exchanges,
and border crossing. Other issues to be dealt with include resolving terminal tariffs in the
exchange of Arab goods.
The path for a comprehensive Arab trade has become a reality that could not be undone.
It has completely met all the needs of a legal Arab free trade zone. The next stage would deal
with customs and common market unification. Herein, inter-Arab commerce will take place in a
transparent and organized manner. This system will be characterized by elastic and dynamic
inter-Arab free trade that would rely on electronic records dating back to 1998, the date for
incepting Arab free trade zone. The Arab private sector took the responsibility of removing
customs barriers among Arab countries which were represented on the assembly. The goal of
such action was to encourage inter-Arab trade in the same manner that a general understanding
has been achieved in the financial sector for addressing those business impediments which
surround inter-Arab commerce. Presenting the importance of business growth and facing the
challenges of the competitive exchange of Arab goods continue on every level. The main goals
of the economic division in the General Assembly of the Arab League were to strengthen inter-
Arab exports competitiveness and meet the door to door logistical requirements, the decisions
required to achieve this effect were made. Both governmental and institutional research
regarding trade limitations and how to make assets in creating Arab financial growth is still
needed.
Today, we have a historical study conducted by Talal Abu-Ghazaleh Consult – a leading
international institute for business and educational services. Among this Organization's highest
concerns have been joint Arab business. Its wealth has come forth to complete the picture in
front of us. For this end, numerous decisions, specialized programs, and demonstrative
approaches regarding the situation have come about. The purpose of all of these steps was to
increase meaningful influential changes in inter-Arab trade cost. This is an empirical study of the
period (1995-2010) which utilized multiple economic models from a number of Arab countries.
May God, the Highest, the Most Capable, complete the efforts made herein, and make it a
successful product to serve financial policy makers in the Arab world…
Prof. Dr. Mohammed Bin Ibrahim Al-Tuwaijri
Assistant Secretary General of the League of Arab States
7
Executive Summary
Foreign trade is an important factor for all countries in the world including Arab countries. There
is a clear connection between moving goods and services to external markets as well as
providing goods and services from the outside world. This is also true in the exchange and
movement of assets among trading countries. Trade also contributes to treasuries through
supplementing them with hard currencies, by moving assets and production functions. Trade
occupies an important position as the proportion of local production of the total production is one
of the greatest indicators in assessing the development of the external sector and a single
country’s ranking among states.
Regardless of the numerous factors which could help economic integration among Arab states
and increase inter-Arab trade contribution to worldwide trade, inter-Arab trade is still modest.
This could be blamed on numerous challenges that face inter-Arab trade such as price constraints
which result from increasing trade costs either due to increasing prices of production inputs, lack
of variation in production patterns or lack of specialization. Additionally, this may be attributed
to rising shipping costs, or to lack of transit transportation infrastructure. Other restrictions such
as weak coordination, the existence of a non-unified Arab workforce, and the lack of earnestness
to realize Arab economic integration also exist. Moreover, the movement towards the global
market is preferred over Arab integration as customs fees are lowered and a greater knowledge
of products sold between these countries appears.
This study aims to analyze the reality of inter-Arab trade and identify the main obstacles that
hinder its growth and development. It will also examine the key determinants of inter-Arab trade
costs using economic modeling for a number of Arab countries for the period of 1995-2010. This
will be carried out using what is referred to as pool data analysis or cross-sectional time series
analysis in order to create a complete picture of the obstacles that face trade costs among Arab
states: be these total traded goods costs or the trading costs of manufactured and agricultural
goods. Numerous analytical scenarios will be utilized which would provide a wide scope of
independent and known variables.
After conducting analysis and statistical testing, this study puts forth a number of
recommendations integral for decision and policy makers in the trade sector. Their target is to
form a unified Arab policy with the purpose of improving bilateral trade and increasing its
contribution to total trade while removing obstacles which hinder its growth.
The importance of this study lies in the fact that it is– to the best of researcher`s knowledge - the
first study that aimed at studying the determinants of inter-Arab trade cost utilizing the
methodology and database of the World Bank, so that it may be applied to a number of Arab
countries. This study is also characterized by the use of multiple analytical scenarios; it enlists a
large number of economic variables and other variables while conducting a descriptive analysis
8
of these points. Based on income categories, Arab states will be categorized according to World
Bank classification.
Although many scenarios have been used in the analysis, this study concluded that there are
several factors which are statistically significant in determining trade costs among Arab countries
regardless of their different values and varying significance levels. The most significant factors
appeared as: distance between trading countries, exchange rates and shared borders, number of
days required for export, cost of establishing businesses and the LSHI index. Yet, the GDP per
capita did not show any significant figures in the analysis of the first scenario which is based on
trade costs except in limited cases. A statistical significance was shown in the second scenario in
the relationship of the same direction. Likewise, other variables showed different levels of
significance between different models.
Accordingly, this study presents recommendations for decision and policy makers to enhance
inter-Arab trade. These also include suggestions to decrease costs and remove obstacles which
stand in its way. The most important of these is the need to promote economic integration among
Arab states as well as reconsider economic policies on duties and tariffs imposed on mutually
traded goods. This also includes diversifying the production and export base as well as
enhancing the infrastructure of trading countries especially the transportation and
communications networks in order to overcome the main obstacles that face trade. This study
also suggests making necessary policy changes to the exchange rates used in order to improve
trade requirements among Arab countries and activate trade agreements to this end. It
recommends striving for a single Arab union which coincides with world trade unions and
contributes to improving the standard of the Arab trade sector as well as increasing its overall
competitiveness.
As a final result, this study asserts the necessity of a deeper analysis for the Arab trade situation
through conducting further specialized studies with the purpose of creating definite
recommendations which take into consideration the specific circumstances of each of the Arab
states and the fluctuations of inter-Arab trade pattern and structure.
Keywords: Inter-Arab Trade, Arab States, Trade Costs, Cross Section-Time Series Analysis.
9
Introduction
Economic problems associated with the relative scarcity of economic resources are seen one of
the major problems that face the world economies. These problems form the essential focus of
economics. For ages, man has attempted to overcome these problems by implementing economic
exchange methods starting with bartering then reaching the most modern trading methods. In
light of today’s open economics, no country can exist in isolation. Trade is the most effective
means for achieving economic integration among countries; it is a means of creating a more
expansive arena of specializing in a specific production pattern when other countries specialize
in other patterns depending on different factors related to the absolute or relative availability of
resources, production inputs relative prices, supply and demand surplus, production costs as well
as other factors.
Trade patterns among countries and their determinants have been the focus of international trade
theories; starting with the theories of Adam Smith, Ricardo, Heckscher and Ohlin, and moving to
classical, neo-classical and economic growth theories which focus on the role of technology in
making qualitative shifts in traditional production patterns and enhancing multi-factor
productivity, as well as changing production and cross-border trade patterns as a consequence.
Regardless of how economic theories have varied in their approach to trade components, cost is
the main determinant of trade as it comprises many relevant factors.
Economics examines trade costs as a group or a set of variables which constitute the difference
between export and import prices. Therefore, trade cost includes a number of items some of
which are related to the traded goods price, transport cost (by land, air or sea) and internal
transport costs in addition to insurance costs imposed on goods from the country of origin till
they reach the importing country, as well as custom duties and tariffs imposed on traded goods
and any other restrictions entailing additional costs. Cost of trade could be fixed paid only when
the exchange transaction occurs or as a percentage of traded units.
Inter-Arab trade can take the following main patters; depending on trade specialization patters:
Inter-industry trade: this is trade of goods from different industries among different
countries. This is what traditional trade theories focus on.
Intra-industry trade: this trade is related to exchanging goods and products within the
same industry among countries; where similar goods are imported or exported. This
pattern does not only apply to goods but extends to services as well.
International trade is considered one of the key indicating factors in economic growth and
development for any country, which is evident in its impact on trade and payments balances, as
well as the GDP of trading countries. Trade also contributes to the transfer of resources:
including labor, capital and technology.
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It is worth mentioning in this respect that trade among different countries in the world faces a
number of qualitative and quantitative challenges and difficulties which sometimes prevent it
from growing in the desired manner. The main challenge to trade movements is the presence of
trade restrictions. The World Trade Organization (WTO) has conducted a number of negotiation
rounds which lead to eliminating many of the restrictions imposed on trade. These successive
rounds reflected continuous progress both in terms of participating countries and eliminating a
number of partnering states in order to remove these barriers. Moreover, the General Agreement
on Tariffs and Trade (GATT) has played a significant role in freeing trade from custom tariffs.
The most important objectives of WTO can be summarized in creating an international free trade
system that would help improve living standards, optimal utilization of the world economic
resources and encouraging capital flow among countries. The most important means to achieve
these objectives include: reducing custom tariffs, minimizing quantitative restrictions imposed
on imports, and preventing discrimination among countries in terms of trade and national
treatment of goods.
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Chapter One
Trade and Growth: Literature on the Subject
The trade sector is one of the key components of national economies. In one way or another, it
reflects the extent of the development of economic activities in a country and its competitiveness
in foreign markets. Trade contributes positively to economic growth by creating viable channels
for dealing with production surplus and encouraging domestic demand. This is in addition to the
fact that countries which are able to reach foreign markets easily can attract more foreign
investments which would in turn increase production efficiency and benefit consumers by
improving products quality.
In the last few decades, a number of studies have examined the relationship between national
exports growth and economic growth in both developed and developing countries. These
theoretical and applied research studies sought to identify the role of national exports in
economic growth and their findings –though different in terms of data nature, type and the
methods of their analysis- indicated the positive role of national exports in achieving economic
growth. These studies also revealed a dialectical relationship between growth and trade as they
affect one another to varying degrees.
In this context, Greenaway and Sapsford (1994) pointed out fourteen studies which were
conducted between 1977 and 1999, twelve of which support the theory on the role of exports in
supporting economic growth. On the other hand, Giles and Williams (2000) found that more than
150 studies conducted between 1963 and 1999 (of which only 57 were cross-sectional, and 10
out of 102 used time series) indicate lack of a clear causal relationship between exports and
growth and which support in many cases the theory stating that “growth drives exports” to find
references to the tenet while “growth limits exports.” Other studies support the idea that “exports
limit growth.” Many studies also support the theory stating that “exports drive growth,” while
only 12 studies support the existence of a mutual causal relationship between them. When Jung
and Marshall (1985) tested Granger Causality between exports and the growth of GDP using a
time series for 38 countries, the causality directed from exports to domestic product was
supported in four countries only. Bahamani Oskooee, et al (1991) tested the causal relationship
between exports growth and economic growth in 20 developing countries. Their study showed
that there was a positive causal relationship directed from the growth of exports to the growth of
domestic production in five countries. The results showed a negative relationship in three
countries. They also concluded that there is positive causal relationship directed from economic
growth to growth of exports in four countries and a negative correlation in one country.
In an article published in 1940, Dennis Robertson noted that that exports drive growth.
Afterwards, Nurkeseh tried to prove that an increase in exports was a stimulus for growth in
countries producing raw material in the second half of the 19th
century. Early in the 1970’s,
Balassa (1971) and other economists described the correlation between trade and growth, and
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studies showed a significant correlation between growth of exports and GDP, as well as
development. On the other hand, literature has shown that countries which experience rapid
growth tend to export more goods and that increased exports lead to rapid economic growth. It
was also shown that those countries which had rapid growth in exports tend to experience rapid
growth in imports as well (Lawrence and Weinstein).
Rashid (1984) believes that the trade sector is particularly important due to its ability to
contribute to the importance and significance of foreign trade which is evident in its short-term
role in creating balance between inflexible production supply and high flexible demand; as
opposed to its long-term role in changing this reality by ensuring the need for developing
investment in necessary goods in order to rebuild the economic structure so that it would be
suitable for production. This specifically benefits goods sector as it diversifies their production
structure. Giles, et al (1995) believe that many developing countries are not capable of
manufacturing goods and services which contribute to improving welfare or development at
acceptable costs and that most third world countries try to obtain capital equipment as well as
managerial and technical expertise from developed countries.
It is worth mentioning that exports growth helps increase the country’s reserve of hard currency
by generating foreign currencies and highlighting the importance of international exchange rates
as a determinant of foreign trade.
A study conducted by Hamidat and Al-Hazaima (1995) confirms the effect of the total national
exports growth coefficient on the growth of GDP. Likewise, Tyler’s study (1981) which
analyzed the relationship between economic growth and the expansion of exports in 55
developing economies for the period 1960-1977 showed a general pattern for developing
countries by measuring the correlation coefficient between growth of GDP, the growth of the
industrial production, the growth of investment, total exports and industrial exports through
using a standard model of the production function based on cross-sectional data. In brief, studies
confirmed a positive relationship between growth of exports and growth of GDP.
A study of the relationship between the volume of trade in goods and services and growth in
MENA region by Fidaa Karam and Shahir Zakii (2013) considered the period 1960 -2011 and
concluded that there was a positive relationship between GDP growth as well as the growth of
goods and services trade. Researchers confirm reforms which minimize trade obstacles
(including the entry costs of foreign service- providing) would stimulate production and
investment and have a positive impact on labor.
With regards to the flow of goods, many applied studies have focused on the nature and type of
goods flow in different regions; whether at the bilateral, regional or international levels. Other
studies have considered the level of inter-Arab trade and trade pattern. These studies include
Schumacher (1983), Greenaway and Milner (1989), and others. The studies have shown that
nearly one-quarter of international trade is intra-industry trade (Krugman and Obstfeld 2000).
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Applied studies showed that the level of intra-industry trade has increased among Asian
countries (Wakasugi, 1997 and Hu and Ma, 1999). In spite of the dialectical relationship between
economic growth, liberalization and growth of trade, the later can lead to economic growth if
carried out properly according to prudent policies which reduce or limit unwanted side effects of
these policies.
Inter-Arab Trade
Study Literature
The topic of trade has been a subject of increasing importance among relevant researchers and
scholars. They attempt to identify what impedes trade, predict trade patterns, and analyze the
impact of trade policies including imposing customs duties, tariffs, quota system and others. A
number of studies have been concerned with the analysis and determination of costs and barriers
which foreign trade faces in different countries in the world. Chin and Nufi (2011) analyzed
trade costs of the European countries.
This study was based on the analysis of trade and production data which differed by sectors; it
used a standard model to understand the possible impact on trade costs. The model included a
number of variables and factors which impact trade such as the distances between countries, as
well as participating in certain European initiatives and agreements such as the Schengen
Agreement.
Ma and Fan (2011) found that trade costs are among the key determinants of trade in China
which are considered part of the international production network. The study concluded that by
understanding the sources of trade costs and knowing the policies which reduce them, it is
possible to develop a production network. Likewise, Anderson and Van Winkoob (2004) pointed
out a group of factors which affect trade, and trade costs in particular in the developed countries.
These include customs tariffs, transport costs, and local distribution costs.
With respect to specialized studies, Al- Sawa‘aii (2004) has shown the effect of free trade
between Jordan and the United States. This study aimed to analyze the nature of intra-industry
trade between Jordan and the United States during the period of 1998-2002 in order to show the
impact of free trade on Jordanian industry and explain trade patterns.
Havrylyshyn’s study (1998) on intra-industry trade between Arab states concluded that the Arab
region does not have an advanced industrial base when compared with other developed
countries, and that the level of intra-industry trade among Arab states is lower than expected.
Mehanna (2002) confirmed that inter-Arab trade was weak between countries in the Middle East
in comparison with the volume of their trade with other countries in the world. At the same time,
it was greater than expected among the GCC states. Gonel (2001), on the other hand, pointed out
14
the importance of intra-industry trade between Turkey and its trade partners. Koukouritakis
(2002) assessed the impact of Greece entry to the European Union on manufactured imports. His
study came to the conclusion that the Greeks had increased their consumption of goods
manufactured in the European Union instead of the Greek products.
As for the Arab states, it is necessary to point out the need for in-depth analysis of Arab trade
indicators and the degree of Arab states’ economic exposure, while identifying other obstacles
and challenges which hinder trade among these countries and make the volume of inter-Arab
trade relatively modest.
It is worth mentioning that the emergence of free trade zones is one technique used to overcome
trade barriers. It is also one of the means used to achieve economic integration. In the case of
Arab states, the creation of the Arab free trade zone encountered several obstacles including
customs tariffs among Arab countries as well as the requirements, the specifications and the
administrative restrictions governing them including customs revaluation and monetary problems
which exist due to the restrictions some Arab countries impose on transfer procedures, the
varying exchange rates, fees charged by Arab consulates for authenticating certificates of origin
and the amounts payable thereon and limiting import to public sector institutions. Moreover,
seasonal restrictions relating to import, which are governed by bilateral agreements, are also seen
as trade barriers.
Overview of the Volume of Inter-Arab Trade
Inter-Arab trade is very poor; it only accounts for 8% of the total value of Arab trade. On the
other hand, Arab states import (92%) of their needs from other countries due to the lack of
national industries. These numbers are based on the latest estimations done by the Council of
Arab Economic Unity (CAEU). Machines and equipment occupy the top of the import list in the
Arab world due to the Arab countries’ inability to produce them as they lack the relative
technology.
Inter-Arab trade increased from 27 billion dollars in 1999, to 31.3 billion dollars in 2000 with a
growth rate of 16%. It later increased from 33.5 billion dollars in 2001 to reach 39.6 billion
dollars in 2002 with a growth rate of 18%. In 2002 and based on the Joint Arab Economic Report
published in September 2003, inter-Arab trade accounted for 9.5% of (416.3) billion dollars of
the total Arab foreign trade. It was noted recently that inter-Arab exports have increased as a
result of the increased reliance on inter- Arab trade and the increased openness among Arab trade
systems within the framework of creating Arab free trade zone.
At the level of countries’ individual participation in inter-Arab trade, Saudi Arabia headed the
list in terms of inter-Arab trade value; reaching 8064.6 million dollars in 2001 and going up to
9844.9 million dollars in 2002 with a growth rate of 22%. The United Arab Emirates followed as
the value of its inter-Arab Emirati trade reached 4491 million dollars in 2001 and increased to
4905.7 million dollars in 2002, with a growth rate of 9.2%. The Sultanate of Oman, Iraq and
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Jordan ranked third, fourth and fifth with trade values of 3310.3, 2358.2, and 2325.3 billion
dollars respectively.
As for the contribution of Arab countries to inter-Arab exports for the year 2002, Saudi Arabia
was considered the biggest exporter to the Arab countries with 8.9 billion dollars of exports
value. Saudi’s exports to the Arab countries accounted for 37.2% of total inter-Arab exports,
followed by the United Arab Emirates with 2.8 billion dollars accounting for 13.3% of total
inter-Arab exports. In 2002 was the first time the amount of inter-Arab exports of some Arab
countries exceeded one billion dollars. The counties included Syria with 1.3 billion dollars,
Jordan with 1 billion dollars, Iraq with 1.3 billion dollars and the Sultanate of Oman with 1.2
billion dollars.
Raw material and mineral fuel accounted for 52.2% of total inter-Arab exports, followed by
foods and beverages which accounted for 18.2%, chemicals at 16.2%, industrial products at 7.9%
and machines and transportation equipment at 5.5%.
With respect to inter-Arab imports, the United Arab Emirates and the Sultanate of Oman are the
largest importers among Arab states with 2.1 billion dollars. Their inter-Arab imports of each of
them accounted for11.6% of total inter-Arab imports. Saudi Arabia was the second largest
importer from Arab countries with a total of 1.9 billion dollars, or 10.5% of total inter-Arab
imports, followed by Egypt whose inter-Arab imports reached 1.5 billion dollars, or 7.3% of the
total inter-Arab imports.
As for the composition of Arab imports, raw materials and mineral fuel ranked first in terms of
the share of inter-Arab imports; accounting for 42.7%. Foods and beverages are in second place
with 18.7%, followed by chemicals at 17.6%, industrial products at 13.4% and machines and
equipment at 7.6%.
The Joint Arab Economic Report of 2012 pointed out the fact that inter-Arab trade is clearly
affected by oil prices, and in light of high international prices, a 30.6% increase in Arab exports
occurred in 2011, reaching approximately 102 billion dollars. At the same time, imports
increased by approximately 12.8% reaching 753 billion dollars. The percentage of Arab exports’
contribution to global exports increased by 0.6% reaching 6.6%. At the same time, Arab imports’
percentage of global imports dropped in 2011 to 4.1% compared to 4.3% in the previous year.
Regarding the directions of Arab trade, the report stated that the value of Arab exports increased
in 2011 to all main trade partners at different rates. This was reflected in increased shares of
imports of most trade partners. Likewise, the value of Arab imports increased from all main trade
partners, Japan was an exception though.
Concerning development of the Arab commodity structure, the relative significance of the fuel
and minerals group increased, while the share of manufactured products which consist of
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chemicals, basic manufactured products, machines and transportation equipment decreased.
Agricultural goods’ share of Arab exports also decreased compared with the previous year.
As for the commodity structure of Arab imports, the share of manufactured products decreased.
Machines and transportation equipment had the biggest share within this category but their share
of the total imports declined in 2011. On the other hand, the share of agricultural goods
increased, which had been previously ranked second on the commodity structure. The share of
fuel and minerals imports increased and ranked third on the imports commodity structure.
The 2012 report also made it clear that the value of inter-Arab exports increased by 22.1% to
reach a value of 90.3 billion dollars in 2011 in spite of the fact that the value of total Arab
exports grew at a higher rate than the increase in the intra-Arab exports value. This led to a
decrease in the share of intra-Arab trade of total trade to 8.0%. This is after it had reached 8.5%
in 2010. However, the share of intra-Arab imports of total imports rose to 12.3% in 2011 which
was 11.8% in the previous year. The following table presents the development of intra-Arab
trade during 2007-2011.
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The following tables present the details of inter-Arab trade by country.
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Regarding the development of the commodity structure of inter-Arab trade, the value of inter-
Arab trade in crude oil reached 10.6 billion dollars in 2011, accounting for 11.3% of total inter-
Arab trade. As for non-petroleum components of inter-Arab trade, agricultural goods had the
biggest share, followed by basic goods, machines and transportation equipment, chemicals, and
various other manufactured goods.
Concerning the development in the Arab free trade zone in 2011, the member states prepared a
unified Arab rules and antimonopoly manual. Negotiations continued regarding liberalization of
trade in services within the free trade zone. As for the developments regarding implementing the
work program for establishing Arab Customs Union, efforts continued towards developing
unified customs tariffs tables. An agreement was made regarding the standards for eligible
customs ports within the customs union.
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Directions of Inter-Arab trade
According to the Joint Arab Economic Report, the direction of inter-Arab goods imports and
exports structure points, in general, to a concentration of inter-Arab trade among neighboring
Arab states, between one or two countries in particular. Regarding inter-Arab exports in 2011,
Jordanian exports to Arab countries were concentrated in Iraq at a rate of 32% and Saudi Arabia
at a rate of 20%. While, Bahrain’s inter-Arab exports were concentrated in the United Arab
Emirates making up 21% of its exports and Saudi Arabia with 31%. Tunisian exports were
concentrated in two neighboring countries which are: Libya with 53% and Algeria with 19%.
Algeria’s exports to Arab countries were concentrated in three countries, namely: Tunisia, Egypt
and Morocco at the rates of 27%, 36% and 22% respectively.
Sudanese exports to Arab countries were concentrated in a single Arab country, the United Arab
Emirates, accounting for 71% of its total exports. Somalia’s inter-Arab exports were
concentrated in Emirates and Yemen at the rates of 56% and 21% respectively. Iraqi inter-Arab
exports were concentrated in Syria with 51% of its total exports, followed by Morocco with
40%. Oman’s inter-Arab exports were concentrated in Emirates accounting for 71% of its total
exports. Qatar exported 50% of its total exports to the UAE. Finally, Yemen’s inter-Arab exports
were concentrated in Saudi Arabia with 41% and the UAE with 27%. Regarding the variety of
the directions of inter-Arab exports, Saudi Arabia, Kuwait, Lebanon and Egypt each exported to
5 or more of the main Arab states.
Concerning inter-Arab imports, Jordan’s imports in 2011 were concentrated in one country,
namely: Saudi Arabia with 61% of its total imports. Bahrain’s inter-Arab imports were also
concentrated in Saudi Arabia accounting for 81% of its total imports. Tunisia’s inter-Arab
imports were concentrated in Libya and Algeria at the rates of 36% and 30% respectively. Saudi
Arabia’s inter-Arab imports were concentrated in the UAE with 31%. Somalia’s inter-Arab
imports were concentrated in Djibouti accounting for 62% of the former’s total imports. Iraq’s
imports from Syria made up 86% of its total inter-Arab imports. Qatar’s inter-Arab imports were
concentrated in the UAE with 41% and Saudi Arabia with 31%. Oman’s inter-Arab imports were
concentrated in the UAE with 83%. Kuwait’s inter-Arab imports were concentrated in Saudi
Arabia and Emirates at the rates of 42% and 21% respectively. Libya’s inter-Arab imports were
concentrated in Tunisia with 36% and Egypt with 21%. Egypt’s inter-Arab imports were
concentrated in Kuwait with and Saudi Arabia with 35% and 32% respectively. Morocco’s inter-
Arab imports were concentrated in Saudi Arabia and Algeria at the rates of 46% and 18%
respectively. Finally, Yemen’s inter-Arab imports were concentrated in Saudi Arabia and the
UAE with 36% and 35% respectively.
Lebanon is considered to be the country with the broadest imports base among Arab countries.
Lebanon’s imports are spread out among a number of countries at rates ranging between 10%
and 28% of its total inter-Arab imports.
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Developing Commodity Structure of Inter-Arab trade
Regarding the commodity structure of inter-Arab trade, collected data shows that there was an
increased relative significance of manufactured products, as well as a consistency in the relative
significance of mineral fuels and other minerals, beside agricultural products in 2011. Mineral
fuels and other minerals accounted for 23.9% of inter-Arab exports. This percentage is close to
that reported for in 2010. Likewise, agricultural products made up 21.7% of inter-Arab exports in
2011, which is close to its level in 2010. However, the share of manufactured products, which is
the highest among inter-Arab exports, showed an increase from 48.5% in 2010 to 49.1% in 2011.
The share of other sub-categories of manufactured products, namely: machines and
transportation equipment; basic manufactured products and other various manufactured products
increased slightly in 2010.
Concerning the structure for inter-Arab imports, it is known that inter-Arab imports are the same
as inter-Arab exports where shipping costs and insurance are added. For this reason and from a
theoretical perspective, the structure for inter-Arab imports should not vary from the structure for
inter-Arab exports. Yet practically speaking, there are statistical differences due to differences in
their order, recording and classification methods. This gave rise to differences between the
figures of inter-Arab imports and exports and to varying values of commodity categories
between inter-Arab exports and imports as a consequence. In spite of these differences, the
collected data on the inter-Arab trade structure for 2011 showed that the main shares of inter-
Arab commodity imports maintained close percentages to the shares of inter-Arab commodity
exports.
Joint Arab Economic Work
A. Economic Integration
Competitiveness among countries varies depending on the level of economic development. For
this reason, free trade among countries leads sometimes the less developed countries to suffer
from heavy burdens such as trade imbalances, general budget deficit, and foreign debt. Trade
relations among countries of the same development levels can develop through effective
measures. This will have appositive impact on cooperating parties through known methods used
to grant mutual preferential privileges. These include bilateral or regional free trade agreements
which exempt goods imported from member states from customs tariffs. In this framework, we
may refer to the great Arab free trade zone. In the case of Arab states, enhancing inter-Arab trade
is an important factor in the development of these countries. At the same time, it would also meet
the needs of their citizens. What renders this process more effective is that these countries are
closely competitive by nature. Therefore, the negative impact of competition among them and
their products would not be exclusive. This would rather provide a stimulating effect. In other
words, it would drive inefficient production to increase its efficiency and effectiveness thus
increasing its competitiveness.
21
A customs union is a more advanced formula for achieving economic integration through
eliminating customs tariffs between member states and establishing a common customs barrier
for non-member states. When studying more developed forms, we find that the common market
does not only eliminate customs obstacles, but also remove barriers from labor and capital
movement. It also adopts common economic, financial, and monetary policies concerning a
unified currency; the European Union is a good example.
Although they affect the trade of non-member states, these forms of cooperation and
coordination eventually have a positive impact on participating parties including the consumers
at these countries. Under some circumstances, they may also lead to an increase in the volume of
trade. Likewise, these cooperation patterns function as a practical preparation for these countries
so that they can meet liberalizing trade requirements at the international level as contemplated by
WTO agreements.
B. Elements of Arab Economic Integration
Historically, the Arab region played a central role in world affairs. It is located at a cross-road of
three continents, namely: Asia, Europe and Africa. It is the cradle of the world’s main divine
religions. The region has witnessed great civilizations more than any other place. Current studies
and international institutes divide various countries into specific groups or agglomerates.
According to these divisions, most Arab countries are included in what is known as the Middle
East and Northern Africa, or the MENA region, a term which also covers non-Arab countries.
Economic studies of Arab countries confirm the availability of special elements within these
countries which enable them to compete with other large economic agglomerates such as the
European Union. Their elements can be summarized as follows:
Arab countries have important elements which are hardly available at the member states
of other agglomerates, such as the common Arabic language, common race, origin and
common history. They also share common spiritual values, social environment and
geography, besides elements of economic integration.
The area of the Arab world is approximately 14.3billion km2, and makes up roughly
10.2% of the world area. It extends from the Atlantic Ocean in the West to the Arab Gulf
in the East. Close to 362 billion people live in the Arab world, or roughly 5% of the
world’s population. The size of this population is an indicator for the breadth of the Arab
marketplace which can act as a jointly negotiated entity in any trade relations with
various countries around the world. The population distribution of the Arab world is
characterized by a growth in the number of people under the age of 15. This indicates that
this is a young society capable of work and creating accomplishments. However, the
average unemployment rate in the Arab world is higher than that of other areas of the
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world; it is approximately 16% while the world average is 6% (The Joint Arab Economic
Report 2012).
Arab countries are rich in many natural resources from agricultural lands to forests and
plains. There is abundant animal life, oil reserves and mineral resources. However, most
of these resources are not utilized to the optimum.
Arab states are blessed with an abundance of human capital and financial resources.
Much of this wealth comes in the form of foreign investment in spite of the fact that
sufficient resources already exist in the Arab world. By investing in Arab countries, it is
possible to form an effective force for growth in the region. Here too, the strength of the
workforce must be affirmed as it covers more than 122 million persons (2010).
The gross domestic product for the Arab world reached roughly 2037 trillion dollars in
2011. The average individual share of the GDP is around 6731 dollars. It is certain that
through a better use of resources, these results could be improved and the standard of
living for Arabs could be raised too.
The Arab world is centrally situated in the mid of the world’s continents. This lends it a
special economic and strategic advantage. The Arab world extends to a number of water
bodies, such as the Atlantic Ocean, the Mediterranean Sea, the Red Sea, the Arab Gulf,
and the Indian Ocean. It is clear that this creates enriched economic possibilities. What is
important when we mention these characteristics is to remember that inter-Arab trade
only accounts for 10% of total Arab foreign trade. This shows that there is a great
potential to increase inter-Arab trade. This indicates that more diligent work is still
needed.
C. Arab Agglomerates
Joint Arab economic work has faced a number of difficulties over years, and has not reached the
levels that it was aspired to achieve. For this reason, a number of Arab states have created
secondary agreements for different economic interests including trade. Looking more deeply at
the issue of Arab trade, it is apparent that a number of Arab states have created a structure of
binding secondary trade agreements and the framework for a distinct free trade zone. This entails
measures related to membership in the World Trade Organization. It is clear that a group of
regulations sets the path for free trade in a number of ways. This may lead to the rise of
contradictions and problems on different levels. For this reason, the important direction in free
trade is to agree on a complete roadmap which takes into consideration different responsibilities
that a country has with another country or with relevant international organizations. This should
also keep pace with global developments.
The rapid pace of development in global economics requires a suitable Arab economic
environment. It is necessary to emphasize joint cooperation as the huge economic regions are
23
presenting a daunting task for individual countries. Increasing inter-Arab trade is an important
step in the formation of integration among Arab states. This process aids in reducing the gap
between them and other economic regions. Integration promises future benefits in economic
development and creates job opportunities. Integration is a necessary requirement not only for
the revival of Arab states, but also for protecting their social and political stability.
When revisiting the efforts to develop Arab economic cooperation, it becomes clear that they
date back to the first half of the 20th
Century. After the foundation of the Arab League in 1945, a
preliminary trade agreement among Arab states was signed. This called for facilitating trade
exchange. It also created a structure for transit trade in 1953. After a period of time, the Arab
common market was formed in 1964. In spite of numerous attempts, the idea of free trade among
Arab states did not materialize. Undoubtedly, the inability to realize economic goals is rooted in
a number of reasons: different economic approaches between various countries along with
disagreements in policy are the most significant ones. Additionally, there are different levels of
development and other infrastructure problems. It is possible to say that the agreement of a
greater Arab free trade zone, which began in 1998, is the first practical effort in this direction.
This effort differs from previous efforts in the manner it deals with trade and Arab agreements at
the level of the Arab world as a whole. This project falls under the auspices of the Arab League
and three regional agreements have been signed to this end.
The Gulf Cooperation Council (1981) which includes Saudi Arabia, Kuwait, Oman,
Bahrain, Emirates and Qatar.
The Arab Maghreb Union (1987) which is made of Algeria, Libya, Mauritania, Morocco
and Tunisia.
Arab Cooperation Council (1991) which includes Jordan, Egypt, Yemen and Iraq
When defining accomplishments on the levels of cooperation and Arab economic integration,
geographical closeness appears as an impetus for creating regional councils among Arab states.
Politics, however, has played major role in preventing the realization of the goals of these
agreements.
More than any other time, Arab states are in urgent need to find ways to strengthen their trade
and economic relations. Recent political developments of the so called the Arab Spring have
assured Arabs that economic measures are a basic foundation for Arabs. In spite of the political
overtones of the Arab Spring in these countries, Arabs understand the importance of economy.
Without doubt, Arab states have been given a special attention in this study since the changes
that occurred in Arab countries are related in one way or another to other Arab states. This
confirms the need for a joint cooperation to solve policy issues that the whole region is suffering
from: be they economic, political or social. The most important step in this direction is the move
towards developing inter-Arab trade since it is corner stone in heading towards achieving global
rankings.
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Regarding the conditions controlling international economic regions, Arab states are
undoubtedly unable to survive alone. The way to serve their need requires forming an economic
zone, which is needed on both regional and international levels. The Arab economic situation
affirms that Arab markets are the best for sales among the region’s products. The reasons stem
from the availability of manufacture products at lower prices and lower labor costs. Arab trade
utilizes the local skills and raw material. It however allows manufactured and agricultural goods
to dump the markets when they do not meet standard specifications.
At the international level, the need for inter-Arab free trade in the framework of economic
agglomerate is necessitated by the challenges and opportunities the Arab states encounter to keep
pace with international trends in trade flows. Regardless of whether the expected impact of
implementing WTO agreements on the Arab economies might be positive or negative, it will
require more work to increase internal trade. The agreements with international trade
organizations have granted the member states’ economic zone with special permission to conduct
business under their auspices. Arab countries can benefit through utilizing trade zones in this
sense. They may achieve trade growth comparable to that of other agglomerates.
The following table was presented by Dr. Jamal Al-Din Zuruuq in his study entitled, “A
Comparison between the GCC Common Market and the European Common Market.” It is worth
noting that the proportion of inter-Arab trade among Arab states appears low when compared
with other international economic zones.
The experience of the European Union is an extremely significant model that emphasizes the
importance of integration through carrying out necessary structural reforms. These reformation
steps deepened integration level among EU members. They are the measures that bring about the
regional market development mechanism and include manufacturing policies which motivate
competitiveness. They also call for central governance and joint supervision over the market in
order to prevent both aggressive trading measures and monopolies formation. This also provides
an environment for a clarification of goods specifications. The trade market is unified through
25
joint legislative measures and the formation of regional bodies that aim at organizing services
including communications, shipping as well as the mutual recognition of industry certificates.
Arab states can benefit from different states’ global trade experiments while assisting each other
in facing challenges. Thus, stronger Arab states are expected to aid other countries in order to
foster trade growth and in various economic sectors. This opens the door to more participation
from relevant joint Arab bodies.
Through the cultural, political and economic developments the world has witnessed in recent
years through globalization, Arab states are expected like any other developing countries to
found an economic basis for their economies as they currently lack economic independence in
their development and economic policies. This condition requires Arab countries to face the
challenges of globalization through mutual collaboration rather than independently. This is only
doable through Arab economic integration.
There is no doubt that the economic integration of Arab states will pay off great returns. It can be
said that on the long run, its realization will aid growth. The benefits of integration can be
summed up in the following points:
Increased amount of inter-Arab trade among Arab countries will lead to the
rationalization of goods exchange. It will lead to increased savings of hard currency and
to stronger negotiating power for the Arab region. Accordingly, there will be an
enhancement of trade regulations within the trade zone.
Growth in markets will open the way for manufacturing projects capable of producing a
sizable amount of goods. This also contributes to handling inefficiency through making
better use of the available economic assets and the under-utilized resources.
Better conditions would motivate a new pattern of professions and division of labor.
These conditions are related to the developing production structure which in turn offer
greater possibilities for utilizing technological and scholarly developments, and take into
consideration modern production methods that would improve the level of economic
efficiency.
Economic integration allows the distribution of benefits across all involved partners.
Each country may share their strengths with other countries and account for their own
deficiencies. Human capital is a vital factor in meeting the necessary conditions of
economic integration. Countries with smaller populations can make up for this lack of
labor power through a shared labor pool with countries of a greater manpower. This is
one great resource countries facing manpower shortage need. Economic integration also
contributes to the integration of strong labor assets. It is necessary to emphasize that “the
rate of assets and investments returns can be raised through integration in all partner
states regardless of the assets value.” It thus means that poor countries can obtain projects
development resources by offering investment opportunities with available financing.
There are positive effects of Arab states’ economic integration such as having a broader
market for all institutions, prolonging their longevity and enhancing their competitiveness
26
capacity. It is also noted that competition removes inner imbalances from the markets.
There is a strong relationship between free trade and greater efficiency. When
considering the relation between free trade and the ability to face failure, it is noted that
lesser efficient companies adapt to the situation or disappear from the market. It is also
important to mention that markets expansion creates economies of scale for specialized
projects. Thereby within greater frameworks, specialized projects receive preferred
treatment which provides these competitive projects with a better future among other
greater projects in other economic zones.
Reasons for Weak Arab Trade
In the following section, we will analyze the reasons for weak Arab trade:
Trades barriers are possibly one of the problems hindering the fruitfulness of the joint Arab
efforts. Hurdles facing basic and sound administration result in lacking cooperative projects. The
biggest challenge is to encourage inter-Arab trade within a framework bigger that the one
existing within the current economic and political organizations taking into consideration various
parties’ expectations regarding the potential size, value, and benefits of strengthening trade. This
requires considering the effect of internal dynamics and international conditions which normally
demand devoting time and energy to solve current internal crises as well as their consequences
on the long run. Politics has played a negative role in worsening the entire crises due to its lack
of seriousness in applying policies; in being overly- focused on the present and ignoring the
future. The “tyranny” of current crises has squelched future benefits. Political inefficiencies in a
number of areas, most notably, secondary relationships with many other parties is an illustrative
example. Instead of focusing on work, other state issues were being focused on to the extent that
current political situations have led to opening similar markets for each state. Yet, these
individual markets do not aid in erasing the economic challenges facing cooperation and
integration.
Weaknesses in Arab trade are focused in the following areas:
Great reservations towards collective agreements and policies, as well as the slow
implementation of the signed executing agreements. There is also a delay in ratifying
organizing agreements for collaborative projects.
The effect of joint Arab work on the political developments of these countries and the
swift changes Arab relations witness. No priority is given to the materialization of joint
Arab projects and no appropriate time is dedicated for discussion and research in this
area.
The size of Arab States’ economic and political relations with others as well as the nature
of Arab states’ culture.
27
Trade facilitation and customs preferences given to some Arab goods, whether they are provided
for in secondary or regional agreements, were not included in the previous list. Examples of
these include exports of Arab goods to Gulf countries which assess lower customs fees and give
preferential customs processing to those countries with which they signed secondary agreements.
Weak production capacity in the Arab world and lack of diversity make it difficult to realize
concrete measures towards a free trade among Arabs. The real steps to trade among Arab states
are few due to the manufacturing sector size and its production efficiency. Current shipping and
transportation in the Arab world make it difficult for Arab market to blossom regardless of
waiving or decreasing customs barriers.
Other studies have shown a number of other obstacles and barriers which reduce the size and
value of inter-Arab trade. These are as follows:
The primary raw materials for Arab exports, which are normally found in industrial
countries, are problematic due to the industrial countries’ high variety of evolved
products compared to Arab countries’ products. This type of commerce between Arab
states and industrialized countries has resulted in consumerism which weakened
manufacturing. Arab states rely on the industrialized countries to varying degrees. Due
to their solid commerce and in order to maintain their trade relations with them, wealthy
industrial countries signed joint economic and cooperation agreements on loans and
assurances with Arab states.
Weakness in the production base and Arab states’ low level manufacturing led to lack of
diversity of products and absence of variable Arab economies. Instead of encouraging
inter-Arab trade, similar production methods have pushed trade towards foreign markets
which have a strong and diversified production base.
Arab states have different economic and trade policies. Some of these countries practice
open economic and trade policies with non-Arab countries as a whole. There isn’t any
regulation on the movement of assets between them. Other Arab countries practice
protectionist policies on their Arab and gross imports under the fear that this could risk
their internal economic sector. Even other countries have closed economies. They also
possess complete control over imports and place obstacles in their way. They have tight
regulations on external investments and the movement of assets which has led to a
distortion in the price structure and has an effect on the amount of sales and orders.
The level of ties and economic entities differs among Arab states. This is due to a number
of secondary or regional agreements (especially with the United States and the European
Union) which erase or ease customs duties more than the ones singed in Arab
agreements. This has led to hindrances in carrying out collective Arab cooperation.
There are different levels of customs tariffs assessed in the Arab countries. Some of these
are higher while others are lower. The countries who are members of the Council for Gulf
Cooperation (Saudi Arabia, Bahrain, the UAE, Qatar and Kuwait) charge some other
countries higher tariffs. These countries are Egypt, Jordan, Syria and Morocco (Arab
28
Monetary Bank: Foreign trade between Arab countries 1988-1998). Notably, tariffs in the
member countries are graduated. However, tariffs on rare natural resources are well
below tariffs standards for partially manufactured or completely manufactured products.
This is especially the case in textiles, clothing, leather goods, and basic metals products.
This difference in customs tariffs among Arab countries is an obstacle to inter-Arab trade.
It may lead to transit trade between those who have lower tariffs and those who have
higher tariffs. An increase in tariffs across the majority of Arab states would motivate
trading with non-Arab countries. Moreover, most countries have increased tariffs on
different products which could raise protective measures on local products added value
making it higher than the regular trademark infringement costs on the final product.
Tariffs to protect manufacturing would then have a severe negative effect on inter-Arab
trade.
There are complications in customs measures and practices. Customs measures and
practices still hinder goods flow among Arab states. This results from the existence of
multiple authorities which are in charge of imported goods clearance, and the
complicated steps needed to clear goods from customs. In some Arab states, the process
for clearing customs requires more than 18 steps. In many Arab states, goods are turned
back by customs administration and other responsible entities while ensuring their quality
and upholding consumer protection measures. Arab customs offices do not occasionally
recognize foreign entities specialized in handling quality certification for imported goods.
Most of the time, the entire goods are inspected when crossing national borders, a long
process that entails checking goods sample. It negatively affects imports by delaying
trading and manufacturing the imported goods. It also adds increased costs to imports and
limits the local consumer’s buying power as well as the strength of local exporters. In
other words, additional import costs limit Arab exporters to local markets in their
competition with foreign imports.
Transport and transit: barriers to transporting goods directly or indirectly affect the
efficiency of inter-Arab trade. Shipping by land in Arab countries faces increased costs
when considering truck transportation. This is due to the inability of the truck owners to
travel to markets far from their garage, or due to barriers which some countries put in
place to block back loading. Although Arab countries have reached a collective
agreement in 1953 to structure and ease transit trade, some obstacles still exist. Inspection
and clearance at border crossings take a lot of time and cause financial losses in many
cases. Drivers could face problems in getting visas for some neighboring Arab states. In
the case of sea shipping among Arab states, trade suffers mostly from lack of skills in
handling goods rather than lack of resources. There is a severe shortage of qualified
personnel in distribution and handling which slows down the entire process of handling
goods at ports. There is also a great difference in the Arab ports’ structures which leads to
additional shipping costs when shipping goods to a number of Arab countries.
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Regarding the points mentioned above, trade costs among different Arab states especially
transportation costs form a considerable obstacle to inter-Arab trade. For example,
Western Morocco is considered closer geographically to Europe than to the rest of the
countries in the Middle East and the Arab Gulf. In general, there is lack of organized
shipping between Morocco and Eastern Arab countries and prices are not competitive.
This makes trade with Arab countries extremely low. This stands as an impediment to the
development of inter-Arab trade. Complicated procedures at Arab borders as well as the
time needed to overcome obstacles impeding Arab trade need to be addressed. This
requires sufficient shipping lanes for increased Arab exports and setting a number of
companies to service these lanes. These include insurance companies, customs brokers,
and land transportation companies. It is also necessary to put in place agreements to
organize transit shipping among Arab states.
Other non-customs obstacles – administrative, qualitative, monetary, and others: Arab
countries set non-customs obstacles on imported Arab goods from member states. These
include import licenses or other extra forms of documentation. Moreover, there are other
monetary impediments which set barriers in exchange mechanisms for the sake of
opening possibility for Arab trade finance. There are some Arab countries which
implement laws which ban the imports of some manufactured and agricultural goods.
They ban goods under the banner of protecting local products or for safety, health, or
environmental issues, as well as others reasons.
Over use of regulations: another impediment which inter-Arab trade faces is the great
number of regulations which are placed on certain Arab countries upon the receiving
their imports. This includes rigid specifications for labeling and packaging, and labeling
the shelf-life of food products which can easily spoil. They subject these products to a
number of tests in labs in various cities and regions. Special regulations are made on
trucks which carry live animals and ban the entrance of trucks.
Registration and taxes placed on imports have a similar affect: some Arab countries
require non-custom registration and taxes for the products imported, such as licensing
fees and imports complimentary. There are more than ten different types of such fees in
Arab countries. They require the paying these fees and taxes on imported Arab goods
which local goods are not subject to pay or are required to pay a lower rate.
Reappraisal for customs: Arab states differ in their customs processes for imported
goods. Some Arab countries are members of the World Trade Organization and are
required to carry out appraisals. Then they make an adjustment to the value and use this
as the invoice amount and consider value for calculating the amount of customs fees.
However, there are other Arab countries which are not members of the WTO. They
repeat the appraisal of the import invoices according to local procedures for these
products and charge customs fees according to the value assessed by the customs office
on the imported goods. This leaves a possibility to assuming the products values in the
30
Arab markets without the fear of price variability. They would suffer from lack of clarity
in the level of pricing for imported goods relative to local products.
In this context, and in spite of all of the challenges and difficulties facing inter-Arab trade, we
present another group of counterproductive measures which are holding back the Greater Arab
Free Trade Area from realizing its full potential in encouraging and strengthening inter-Arab
trade. These include:
Over-requesting for exemptions, for reductions of customs fees:
The Greater Arab Free Trade Area faces difficulties stemming from the over-requesting for
exemptions and reductions of customs fees when it has a negative effect on national
requirements as they are unable to realize their envisioned goals.
Lack of a mechanism for resolving disputes:
A mechanism for disputes resolution is considered an essential tool for the Greater Arab Free
Trade Area. The greater trade among countries in the Area becomes, the more important its
function becomes. This strengthens trade interest ties among these countries and those who are
working from the private sector in this area. The presence of a mechanism for solving disputes
formed by those parties involved in the area assists in speeding up the process of handling issues.
This may include settling cases such as disputes between trade companies, so that their economic
interests are not put at risk.
Origin regulations / Detailed origin regulations:
Detail origin regulations for Arab goods are a central concern for the Greater Arab Free Trade
Area. By this means, it becomes possible to ban the leak of foreign goods into Arab countries
and keep them from benefiting from the special treatment which Arab goods find in the Area.
This is one mechanism which can assure that the production between Arab states benefits from
the cumulative regulations.
The work on origin regulations has reached a transition phase which relies on the tenet of local
Arab assembly (the added value). It has defined accounting measures for added value to be
utilized until the completion of detailed origins regulations takes place.
Similarity between production and economic structures:
The similarity between production and economic structures in Arab countries leads to fears of
opening Arab markets to each other. This resemblance has led to a similarity in products
exported from Arab countries. The pricing of exports might be considered inflated or non-
competitive when compared to similar products imported from other countries around the world.
31
Issues related to dealing with international police:
There are other problems related to regulations and policies connected with the Greater Arab
Free Trade Area (GAFTA) which it has placed upon itself. There are for example issues with the
descriptions of products, Intellectual Property Rights, origin documents and other issues. There
are questions regarding whether GAFTA will require itself to follow ISO requirements or the
regulations of the World Trade Organization, or of the European Union or not. This is especially
the case after a number of Arab states have already begun to apply international standards and
regulations which are considered an integral part of globalization.
Lack of necessary data regarding inter-Arab trade:
The private sector institutions suffer from lack of economic and trade data. It more specifically
suffers from lack of information regarding trade laws in Arab markets. The private sector has
difficulty in obtaining formal data on trade facilitation. More importantly, it does not have access
to data on customs services, storage, shipping, transit goods, exchange rates, insurance or
consultations. There is a dearth of information related to different markets and goods,
consumption patterns, as well as data on specifications, types, and quality. These are normally
produced in reports where exports are analyzed then by a third party outside the Arab market.
Difficulty in the movement of people and assets among Arab states, and the difficulty in
granting visas
Lack of inclusion of all Arab states in the agreements to establish GAFTA: Still, there is
a group of Arab states which are not included in the agreements.
Lack of extensiveness of the service sector in the executive plan where the trade of
services among Arab states plays a great role in economic and investment activities. The
free trade of services leads to increased trade in products and services and to greater
economic growth and more job opportunities, as confirmed in recent efforts.
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Chapter Two
This chapter will clarify the methodology which this study utilizes in defining the key factors in
determining trade costs among Arab states. Likewise, this chapter will include the study
variables, their definitions and resources, and the quantitative analysis that will be used.
Additionally, there will be a special section in this chapter for analyzing the study variables and
the results of the empirical analysis.
Study Methodology
In order to identify inter-Arab trade determinants represented by the most important issue herein,
the cost of trade among Arab states, the study model and its variables have been defined based
on previous literature especially by Arvis, et al (2013). This chapter handles the issue from many
different perspectives, and includes a group of economic and non-economic variables. After
defining study methodology, the study relies on cross-sectional time series analysis or pool data
analysis (pooled time series) to analyze the cost of trade among Arab countries. This will include
data on study variables for 15 Arab states for the period of 1995-2010. It is important to note that
the basis in choosing countries included in the study was the availability of data for these
countries (both sectorial and time series data).
The significance of using the above mentioned analysis method lies in the many benefits it
provides. The most important of these benefits is the possibility for analyzing data not only over
a period of time, but also for different units (countries). Thus, this process integrates two
methods of data analysis. It offers a great number of measurable observations, reduces
collinearity, contains the greatest numbers of degrees of freedom, and therefore gives the greatest
efficiency in analysis.
Study Variables and Data Sources
This study relies basically on data related to international trade collected by international
organizations, most significantly the World Bank, the World Trade Organization and the United
Neighborhood Centers of Milwaukee trade (UNCOM). Secondary sources for some variables
were also utilized, especially the ones related to geographical data.
This study covers the time period from 1995-2010 and includes the following countries: Algeria,
Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, Tunisia, the
UAE and Yemen. Other countries were not included in the study due to insufficient data.
Some variables were notably lacking data for the entire period studied. Therefore, a methodology
was employed to calculate and fill data gaps. This was accomplished by studying patterns change
33
over a period of time and relying upon averages for the same study period while disregarding
outliers and abnormal years (by employing trend analysis and average growth rates).
Following the World Bank approach, Arab states were divided into groups according to GDP per
capita in order to study the variance of the variable trends within groups, especially the ones
regarding trade costs and their relationship to domestic production.
For the study variables, the following table lists these variables and their sources:
34
35
Descriptive analysis of key study variables
As previously- mentioned, the selection of Arab states for this study was based on the
availability of the data required to apply quantitative analysis, especially, the study primary
variables representing trade costs among Arab states, this data was obtained from the World
Bank databases according to clear links mentioned in the variables tables above.
Arab states studies vary in a number of facets, most significantly in the size of their gross
domestic product, GDP per capita, ratio of foreign trade to GDP, type of their imports and
exports (petroleum, agricultural, manufacturing) and their ratio to GDP, amount of customs
tariffs on exchanged goods, trade costs among these states, and other indices. These indices have
been internationally prepared and published aiming to assess the external sector for Arab states
and to rank these states according to some international standards and sub-indices. These include
36
a number of indices such as logistics performance index, trade facilitation index, and cost of new
business.
In this section, there will be a descriptive analyses of Arab trade indicators/variables and other
related indicators which were obtained from many sources. The section aims to give a picture of
the variance in these variables and the extent to which these variables operate in the states
studied and to test the possible impact of these variables on trade costs among Arab states by
applying a proper econometric analysis tool.
Trade Balance
Trade imbalance is a historical and continuing problem that represents one of the most
significant problems for a number of Arab states, where the number of imports does not equal
their equivalent number of exports. Figure 2 presents data for the amounts of imports and exports
for Arab states in 2010. For the absolute value of imports, UAE was ranked first in imports with
a value reached 232 billion dollars. The Comoros ranked last with their imports reaching the
amount of 275 million dollars.
Regarding exports value for 2010, Saudi Arabia holds the highest rank as its exports reached
approximately 266 billion dollars. Again, the Comoros held the lowest ranking in exports, with a
value that did not exceed 85 million dollars.
Based on 2010 data, the Comoros, Djibouti, Yemen, Jordan, Lebanon, Syria, Tunisia, and Egypt
suffered from trade deficit. The latter had the highest trade deficit which reached to
approximately 10 billion dollars.
37
Considering the composition of Arab exports, Figure 3 shows the ratios of total exports,
agricultural exports, manufactured exports and petroleum and metals exports to GDP for 2010.
This distribution makes it obvious that the ratio of total goods exports to GDP was the highest in
Libya at a rate of 69%, followed closely by Emirates at 66%. The Comoros had the least amount
reaching 7% in 2010.
38
Regarding the breakdown of export goods, Djibouti appeared to have the highest amount of
agricultural exports relative to its GDP which reached 7%, followed by Jordan with the
percentage of 4%. Both Libya and Qatar had the least amount of agricultural exports which
reached 0.05% and 0.02% respectively.
Concerning manufactured goods, Tunisia had the highest rate of manufactured products exports
compared to its GDP with 28%, followed by Jordan with 18%. At the same time, Iraq and Sudan
had the lowest rate at 0.10% each.
On the topic of petroleum and metals exports, Libya had the highest rate with 65% of its GDP,
followed by Iraq with 56% for 2010. Djibouti and Comoros came in last in this category with
petroleum and metals exports accounting for a mere 0.11% and 0.07% of their GDP respectively.
39
Trade costs among Arab states
As previously mentioned, data related to trade costs was obtained from the World Bank special
database created for this purpose. This includes special data for Arab states (inter-Arab trade
among Arab states). The average amount of trade costs for each country trading with other Arab
40
states was calculated for each year including: gross trade, trade in manufactured goods, and trade
in agricultural products.
An assessment was made regarding the relationship between trade costs and the standard of
living for the Arab states, including the countries considered in this study. First, the average trade
cost was found to be tied to the per capita GDP for each country. Then, Arab states were divided
into groups according to World Bank categories.
What is notable in the following figures is that the increase of trade costs for Arab states in 2010
is accompanied with a corresponding decrease in per capita GDP, regardless of few exceptions.
Agricultural products and manufacturing goods had the same trend whereas the relation is more
obvious for the gross costs and this corresponds with the conclusions of the trade cost study
conducted by Arvis, et al (2013).
When compared with other Arab states, the United Arab Emirates appeared to have the least
average cost of total trade and manufactured goods in 2010. Among the studied states, the UAE
is ranked the third in per capita GDP, when Qatar is ranked first and Kuwait the second.
Regarding trade costs for agricultural products, Qatar had the least average trade costs among
Arab states.
41
42
43
44
In a consistent way with the conclusions of Arvis, et al (2013) (and as in the following figures)
trade costs are notably decreasing in the Arab states over the period (2000 – 2010) for the three
groups of costs: gross trade, agricultural and manufacturing trade in a fluctuating manner, some
exceptions were apparent for some countries such as Sudan and Yemen in the field of
agricultural trade, this may result from the political circumstances Sudan was facing as well as
the lack of deploying technology for production development purposes which can help to reduce
costs.
45
46
47
The Cost of trade Among Arab states based on income categories
As previously mentioned, the Arab states studied were divided into groups according to the
World Bank -income categories. This section will cover the analysis of trade costs for these
groups based on income levels.
When considering trade costs by income level, it is significant to note that total trade costs are
decreasing among Arab countries with higher income level relative to the other groups; costs of
trade between the group of Arab states (with higher income levels (from non OECD countries))
and their counterparts are the lowest when compared to trade costs with other groups of income
categories for 2010. But the trade cost of “lower middle income” countries was higher than the
one of “upper middle income” countries. (This partially coincides with the study by Arvis et al
which has been mentioned earlier.)
48
On the other side, Trade cost between lower middle income countries and their counterparts from
the same category was the least among other income categories for the year 2010. And the trade
cost of the upper middle income countries with their counterparts from “lower middle income”
countries was the least compared to the trade cost with other groups for the mentioned year.
It is clear from this figure that trade costs are decreasing over time. This may result from the
increased technology adaption in production processes and improved products. This may also be
beneficial to increased production, to have economies of scale and to acquire new ways of
production which contribute to reducing costs. In agreement with this conclusion, the following
figures show changes in total trade costs which become (in general) characteristically decreasing
for the time period between 1995 and 2010 but in a fluctuating trend. However, they vary across
all the income groups as has been pointed in the literature previously mentioned.
49
Figure 13: Average Cost of Total Trade among Arab States by Income Categories (1995-2010)
per: High Income, Upper-Middle Income, Middle Income, Non-OECD
50
Similarly, the same manner of change in trade costs exists for agricultural and
manufacturing goods for each income group. However, the amount of variance was
greater in agricultural goods.
51
Regarding the trend of the variable “agricultural goods trade cost”, it noticeably showed
variability across the period of 1995-2010. But generally speaking it was decreasing along the
time period or returning back to points near the initial ones. Whereas there was some increasing
pattern with a few occasional jumps became apparent such is the case in trade of upper middle
income countries with higher income countries. Costs increased near the end of the study period,
2009-2010, with the appearance of some jumps as had been seen previously in 1997.
52
There was also certain fluctuation in the costs of trade in manufactured products between Arab
countries. However, this trade cost decreased at the beginning of the period, then increased, and
later decreased again to start increasing after that (for high income non-OECD countries as
traded partners).
53
54
A comparison between trade costs among Arab states included in this study and Arvis, et al
(2013) study results was conducted. A slight increase in trade costs was noted among Arab states
in the study which is consistent with the results of the aforementioned study (pp 22-23) for each
manufactured and agricultural product. This is presented in the following two tables.
55
When looking at the trade cost of the manufactured goods between the mentioned Arab countries
and other regions, it is clearly seen that the related value came relatively close to its counterpart
for trade between MENA countries themselves (139.6 compared to 119.77). In addition, the
former value was close to the ones of trade cost between South Asia and “East Asia and the
Pacific” from one side, and with trade cost between Europe and Central Asia themselves from
another side
The same is true for the cost of trade in agricultural goods. Its value was relatively close to the
values of the aforementioned regions, except for Europe and Central Asia. The specific value in
these later two regions exceeded the Arab states. This is due to the fact that these countries do
not have an active agricultural sector; therefore the costs of trading in agricultural goods will be
higher.
It can be summarized that trade costs among Arab states (whether manufactured or agricultural
goods) are markedly decreasing in comparison with trade costs in other regions. Therefore, this
should be a motivating factor for Arab states to benefit from increased inter-Arab trade.
According to the study, the above table shows that trading costs for agricultural goods are
generally higher than manufactured goods. This is also consistent with the results found in Arvis,
et al (2013).
56
The study model
The study will follow the model used by Arvis, et al (2013) and apply it to the Arab states based
on the variables presented in the List of variables. The model will take the following form
In order to assess the impact of the selected variables on trade cost, a number of different
scenarios will be applied for the econometric analysis based on the available data.
Each independent variable will be estimated by applying different scenarios, mainly for the
variables between parentheses since they represent equivalent substitutes for other variables
aiming at excluding the use of variables which are highly correlated with each other, and to
compare the results of their impact – if any- on trade cost. The above-mentioned variables will
be regressed against each of total trade costs, trade costs of agricultural goods, and trade costs for
manufactured goods (dependent variables).
Same model will be applied by regressing the independent variables against the dependent ones
by using the same techniques but with changing the dependent variable each time (as in scenario
2). Herein, the variable for trade costs has been replaced by ‘net trade’ as another indicator of
trade costs as was previously mentioned.
Aiming at reducing the variance between the variables, in addition to calculate the elasticity of
these variables, variables were calculated in the logarithmic form. It is clearly known that when
the model takes the logarithmic form, the coefficients (b’s) represent elasticity.
57
Analysis Results
Table 8 shows the results of applying different scenarios. Herein, each scenario includes
different variables which were regressed according to the model against the three dependent
variables: gross trade costs, agricultural goods costs, and manufactured goods costs.
58
What is notable in Scenario 1 is the model’s high degree of significance. The adjusted R-square
points to a value of 91% which means the independent variables help to explain 91% of the
changes in the total trade costs, and 95% of all agricultural and manufactured goods. This means
that there is an increase in the ability to explain the dependent variables by interpreting change of
the independent variables. The high significance level could be explained by the
comprehensiveness of a large number of variables in the model. Durbin-Watson value points to
the non-existence of multi-collinearity among the variables.
The results show that the average customs tariffs, the exchange rate, the distance between trading
countries, existence of common borders between trading countries, and TFI index were all
statistically-significant for the three scenarios except for the TFI variable for the case of
agricultural goods, this result could be explained by the nature of this index and sub-indices it
includes, results for exchange rates in the case of agricultural goods were similar to the TFI case.
Other variables were not statistically significance as shown in the above mentioned results.
Regarding the expected signs of the coefficients; the distance coefficient appeared positive, this
means that increase in distance causes increase in trade costs between trading countries.
Regarding the exchange rate, it is obvious that the coefficient sign showed a negative value; total
trade cost and agricultural costs are decreasing with the increase in the official exchange rate.
This finding is consistent with trade policies aim at stimulating exports through the devaluation
or the depreciation of local currency (currency devaluation (depreciation) -based external
policy).The results were different in the case of manufactured goods, which could be explained
by the fact that Arab countries rely for the most part of their trade on external imports to serve
their demand for manufactured goods (with variant patterns). Therefore, an increase in exchange
rates of local currencies leads to an increase in the imports price, and then in trade costs.
Concerning the presence of shared borders among Arab states, the coefficient shows a positive
value; trade cost decreases with the existence of shared borders among Arab states. It can be
understood that when borders are shared, shipping costs among countries will be less which
leads to lower trade costs. This is consistent with the previously- mentioned characteristics of
Arab trade (in the first section) that inter-trade is concentrated on trade between neighboring
countries.
By adding a “cost of new business” variable to the study model, we notice a slight increase in the
significance level despite of the in-significance of this indicator, per se, as noted in the table. In
addition, the results show that the average customs tariff became non-significant by doing so.
It is noted in Scenario 3 that the TFI variable was removed from the model, new business cost
and the necessary time for exports were added. The level of significance in the model becomes
relatively low. Each of the variables: the extent of shared borders and average tariffs remained
statistically significant for explaining changes in the trade cost. The exchange rate and average
tariff rate remained statistically significant only for the case of manufactured goods (at 10%
59
significance level). Whereas cost of new business appeared statistically significant with a
negative sign of coefficient for the overall trade cost and the manufactured goods, which means
an increase in the cost of new business leads to decrease in the trade cost except for the
agricultural goods. This result could be explained by the knowing the nature/ definition of this
variable which concentrates on business activities and disregard the agricultural ones.
By adding the variable “number of days required for exports” to the model, the related
coefficient appeared positive and statistically significant ;trade cost increases with an increase in
the number of days needed to export, this result could be explained by the fact that increases in
the number of procedures required to export leads to increase in the number of required days
needed for export which in turn leads to more cost of keeping these exports in a good manner
and then higher trade cost for the exporting countries.
The following figures present a comparison of the values of significant coefficients as in
the three scenarios.
60
61
In Scenario 4, TFI as well as shared borders between countries were excluded from the model
whereas the cost of new business and the number of days required for imports and exports
remained included. In this scenario, the aforementioned variables were statistically significant.
And the distance variable remained effective factor to explain changes in trade costs. In this
scenario, the time required for import and export showed a negative sign. Hereby, an increase in
the number of days required for import contributed to a decrease in trade costs. This difference
can be justified by knowing the definition used to calculate the cost of imports and the exports,
which include/ exclude shipping costs in the FOB or CIF. This means that there is an additional
charge associated with an increase in the number of days needed to complete the procedures
needed to export/ import.
In Scenario 5, the AMFN variable was replaced with the tariff rate variable. It’s clearly shown
that there is a notable reduction in the overall significance level of model when compared to
other scenarios but it remains within the acceptable range of significance level.
The average applied tariff appeared significant in the case of agricultural goods only and in a
positive direction. This could be related to methodology applied to calculate this indicator or due
to the nature of Arab trade which includes a high portion of agricultural products.
62
By adding cost of new business variable to the aforementioned model once again, the
significance level returned back to increase and the coefficients appeared statistically significant
except for the case of agricultural goods. The distance factor, shared borders and the number of
days needed to export remained statistically significant.
In Scenario 7, the variable LSHI was added to the model. An increase in the overall significance
level of the model was noted with a decrease in Durbin Watson value but remained within the
acceptable margin.
The results showed that the LSHI variable was statistically significant in all three cases (total
cost, agricultural and manufactured products). The coefficient was negative in the first and the
third cases, but not in the agricultural trade; an increase in the value of LSHI variable leads to a
decrease in trade costs where this indicator includes other indicators related to customs fees and
shipping cost among states. This undoubtedly leads to negative effects on trade costs.
Scenario 8 followed the methodology of Scenario 7 and added another geographic variable to it
(in addition to distance and shared borders), which is the (Land100) variable aiming at assessing
the role geographical factors help in determining trade costs. The analysis results show an
increase in the overall significance level of the model accompanied with a decrease in Durbin-
Watson stat value and remaining within the acceptable range.
Results show that the geographical variables remain statistically significant for the three cases
whereas Land100 did not show the same result except for agricultural goods case. It is apparent
from the results that trade cost elasticity to the Land100 indicator for the agricultural goods case
was positive; trade cost increases/ decreases when the”Land100” increases/ decreases. This
result could be explained by the fact that increase in the land distance between trading countries
tends to increase shipping cost especially with the absence of effective transit system between
trading countries which undoubtedly increase trade costs in turn. The result of this unique
significant relationship in the case of agricultural goods could be explained by the nature of these
goods since they require specific shipping and storage conditions which means additional cost to
the standard shipping charges, in other words, this type of goods are vulnerable to damage when
the distance increases without taking into consideration the special conditions such types of
goods requires, the special conditions require additional charges to be added to the trade cost.
63
64
Analysis of results with changes in the dependent variables
This section will discuss the analysis of the methodology previously-mentioned, in this section the dependent variable will be amended; The trade cost variable is replaced with inter-Arab net trade (the difference between imports and exports) since this indicator reflects the inter-Arab trade costs among countries due to the differences in the previously mentioned methodology used to define the cost by adding/ removing shipping and insurance costs to the trade cost.
In this section, two scenarios were applied, they differ in the tariff variable regressed in the model, For example, in Scenario 1 AMFN was used, where in the second , only the tariff rate was used, all other variables remain the same.
The analysis results showed a high level of statistical significance in both cases. Durbin- Watson. Value was relatively high indicating the lack of multi-colinearity in the model. Most of the variables were statistically significant except customs tariffs (for the both variables used) and the variable for geographical distance, Land100.
In line with the previous scenarios, semi-elasticities for exchange rate, the cost of new business, and LSHI indicator appeared negative (coefficients in this model represent the semi-elasticities since the dependent variable wasn’t taken in the logarithmic form due to the availability of negative values), whereas elasticity for each of the variables of distance, shared borders, and the time necessary for export appeared in a positive direction. This coincides with the findings in the first section.
What distinguishes these results is the appearance of the variable GDP per capita as statistically significant variable, the coefficient sign appeared positive, this means that the increase in the GDP per capita in Arab countries tends to increase trade costs represented by difference between imports and exports. This is because of the consumerism in Arab countries; as incomes increase, demand of consumption goods increases. Such types of goods represent a large share of imports of Arab countries (particularly the high income- countries such as the Gulf area, these countries spend a large share of their budgets on consumption and luxury goods), which consequently leads to increased trade costs.
65
The following table presents a summary of the results for the two scenarios. The other figure
shows the coefficients’ values according to the model applied.
66
67
Study Results
Based on the information presented in the first section of this study regarding the subject of the
study and the theoretical approach employed, and the second empirical section of the study, we
may summarize the main findings of this study as follows:
Trade cost is considered as one of the most important challenges to trade among Arab
states. It is one of the main factors for decreased Arab trade if compared to international
trade.
Among Arab countries, trade costs are decreasing with the general increase in GDP per
capita and the increase in the standard of living in the same country. Likewise, trade costs
are decreasing among Arab trading states over time due to technology impact and the
improvement of production methods (some Arab countries remain exceptions).
Trade costs for high income-Arab states with other countries with the same income level
are decreasing but this is not the case for countries with lower middle income levels.
Arab exports are characterized by an overall lack of variety in their composition.
Agricultural products and petroleum are the prevailing traded commodities. This is due to
the weak manufacturing infrastructure and lack of diversification among countries in the
products manufactured.
In comparison with other countries, Arab states rely more on imports to meet their needs
in the field of equipment and heavy machinery.
Saudi Arabia is the greatest exporter country due to the amount of oil it exports, and the
UAE is the greater importer.
The distance between trading countries is one of the primary challenges of trade costs.
When distance increases, trade costs similarly go up.
Shared borders contribute to a great extent in lowering trade costs among countries which
result from lower shipping costs between neighboring countries, Arab states are an
example.
The exchange rate also presents a challenge for trade among Arab states. Trade costs
increase when exchange rates decrease.
Empirical results didn’t show significant impact for tariff rate as trade costs obstacles
among Arab states as shown in scenario 1 though most of the previous studies listed it as
one of the major obstacles hindering trade among Arab states.
In general, the variable indicating the time needed for exports is considered a defined
difficulty to trade costs among Arab states. The greater the number of days needed to
export, the higher the amount added to the trade cost will be.
There was an increase in the starting business cost indicator. This leads to a decrease in
trade costs among Arab states.
The LSHI variable was shown to be a challenge for trade costs among Arab states. It
appeared a significant indicator but in a negative direction towards trade costs, except in
agricultural goods where it is presented positively.
68
Geography still has a great impact on trade. It can, however, be regarded positively in the
case of Arab states since Arab countries are relatively close to each other than to other
countries. This should affect and encourage inter-Arab trade. Regardless of the
improvements in communication channels, these improvements have not isolated the
geographical impact and its importance as a determinant for trade cost.
In spite of the number of scenarios utilized in the analysis, most of them generally
conclude that distance between trading countries, exchange rate, shared borders, time
needed for exports, the cost of starting business, and the LSHI indicator were all
statistically significant. This occurred at different rates and at different levels of
significance.
There was a similarity in the significant findings of Arvis, et al (2013) regarding the
impact of the distance between countries, LSHI, shared borders, exchange rate, and the
cost of starting business. However, the key conclusions which the aforementioned study
came to was that the indicators LSHI and LPI constitute an important source to explain
fluctuations in trade costs among Arab countries to a greater extent than the geographic
variables do. The present study concluded the importance of geographic variables
including distance and shared borders. This could be explained by the fact that Arab trade
is characterized by trading with neighboring countries. Hence, it is pointed out earlier in
this study that geographic factors are an important source for understanding changes in
trade costs.
Except in few cases, GDP per capita did not show statistically significant impact for trade
costs in the analysis of the first scenario. On the other hand, it did show statistically
significant in Scenario 2 in a positive direction, when for instance there is an increase in
the per capita GDP, trade costs among Arab states increase.
69
Recommendations
In light of the above, and based on the results of this study and the findings of previous studies, it
is possible to put forth a set of recommendations for policy changes for the purpose of forming
policies to encourage inter-Arab trade. These also include suggestions on how to face obstacles
which hinder its growth. These are as follows:
Seeking to remove obstacles that hinder inter-Arab trade so that it may play a natural role
in growth and stimulate investment. This undoubtedly requires collective efforts to form
a legal structure for its organization and for its related services which requires in turn
effective cooperation among Arab states. This should be tied to a framework for meeting
the defined milestones capable of gaining confidence in different forms of Arab
cooperation.
The need to tie trade policy to growth goals which requires seeking clear consultation and
maintaining a complete economic freedom for the organizations. This should include fair
and acceptable treatment in meeting the individual essential needs. To increase growth
levels, attentions should be given to mitigate any negative effect on the standard of living
To reduce inter-Arab trade costs, it is vital to improve infrastructure in many Arab
countries. This assists in facilitating ties with these countries, opening ways for realizing
savings in shipping costs and communications with other countries. This entails roadways
infrastructure as well as gas, oil and electrical systems. It also demands improving inter-
Arab trading ports with the outside world. It thus requires an increase ports and airports
quality and improving ties among Arab states in the joint lines.
Developing a shipping network which connects the Arab states to each other and
decrease trade costs. This covers rail lines for their important role in moving both imports
and exports. Keeping in mind that ground transportation in the Arab World is in good
condition. Serving trade interests costs were, however, raised in comparison with other
forms of transportation.
Building suitable ports in a number of Arab states to increase their potential effectiveness
in reaching regional and international markets and facilitate performing Arab imports’ tax
and customs processing at a common window at Arab ports.
To reduce costs, it is also necessary to remove obstacles which hinder storage,
distribution and handling. These obstacles have a special effect on perishable goods. The
remedy of this problem is associated with Arab goods customs processing which entails
handling technical, administrative and financial obstacles.
Reducing inter-Arab trade costs requires working on two levels: the first is the internal
level of each country which handles issues related to customs processing, shipping, air,
sea, land and ports projects. The second level is regional where the existing authorities
70
for most of the countries organize crossings measures for goods. This will lead to
increased efficiency and would save time and effort.
Providing data required specifications and/or necessary measures to complete clearing
goods from border controls as well as the requirements of transit. This should pertain to
transparency and clear governance to generally make this data available from all of the
applicable government services.
Growth of e-Trade and considering means to increase inter-Arab trade. This requires
raising the awareness of the need to develop a special infrastructure for this type of trade
and create the necessary legislative measure to ease its practice in order to reduce trade
costs, increase Arab products’ competitiveness, while supporting the capacity of the Arab
markets to compete with the international markets.
Partnering with the private sector in decisions related to inter-Arab trade so that it creates
possibilities for proposals ensuring trade costs reduction. This partnership enriches the
chances for opening up different community parties and encouraging their participating
in economic and social building development in the Arab states.
Undoubtedly, serious work is a foundation for the joint Arab projects taking into
consideration joint interests and the need to define time lines for the required measures.
This, however, demands the economic sector and trade supply to initiate joint projects.
Yet, it is necessary to have faith in the cooperation and coordination of those laying the
foundation of this operation that should be targeting the maximum use of Arab states
available resources. Arab and Islamic treasuries and institutions are needed to be
involved in improving trade. This should be accomplished by means of encouraging
technical and marketing programs aiming at raising Arab manufacturing exports
competitiveness in traditional markets and simultaneously opening new markets for them.
It is also vital for the Arab League to take the necessary measures to accelerate reliance
on the tenets created for exchanged goods in the Greater Arab Free Trade Area.
Planning for the next level of cooperation though stimulating inter-Arab trade stands at
the forefront of the joint Arab market agreement. This requires all GAFTA Arab member
states to start implementing this agreement articles without placing any obstacles in its
way. This agreement would be applied gradually in a series of steps as a preface to
entering the joint Arab market towards unifying customs. Hereby, its zone can become
competitive among other global economic zones.
Diversification of production infrastructure in Arab states through increasing resources
and available material optimal utilization. This will occur through diversifying
production since it is a fundamental basis for any regional economic integration. This
calls for raising productivity and increasing direct mutual investments. Increasing
cooperation levels and working towards an effective use of resources generate positive
effect in many directions. It is necessary to increase joint Arab projects opportunities.
Understanding economic integration benefits all countries’ trade balance, particularly as
71
it decreases trade costs for countries with high incomes. Creating a developed
manufacturing environment also increase Arab products competitiveness.
It is essential to encourage Arab states’ joint partnerships (especially the ones not tied
with the US dollar) in order to reduce fluctuations in exchange rates. This will lead to
trade stability in the trading countries. In general, it is necessary to coordinate economic
policies among Arab regions and on all levels which would maximize economic
resources in these regions.
Increasing the benefits of globalization. This is achievable through institutions and
projects development which raise performance levels and improve administrative
effectiveness. It additionally integrates technology, communication, programming and
other fields and utilizes them in an effective manner in conjunction with the
manufacturing process. This aids in lowering the trade costs of goods traded. Likewise, it
contributes to upgrading Arab states rank in international reports especially those related
to trade and economic openness among countries which would in turn improve its status,
and its international contribution.
Building competitive markets is an essential basis for assuring continued growth for all
local products. To reach this goal, it is necessary to break down regional trade barriers
that are widely spread around the Arab world.
Establishing standard Arab specifications for goods exchanged among GAFTA members.
Multiple standards are indeed a more complicated barrier than customs barriers. A
number of successful experiments conducted by regional organizations concluded that
coordination, quality standards, and unified efforts in the area of specifications are the
pillars of success. Organizing efforts can overcome both problems and challenges that
face inter-Arab trade.
Necessity to coordinate administration policies in Arab states taking into consideration
politics has a greater effect on carrying out agreements measures especially the ones
related to Arab economic cooperation. It is necessary to regain trust among Arab states
and resolve their disagreements. On this note, it is essential to decide on a basis for
implementing the agreements reached.
Future Studies
In order to make more accurate recommendations concerning Arab trade, as well as
understand the subject in a more detailed manner, this study recommends that a number
of detailed studies be conducted for each Arab country over different periods of time.
Thereby, more precise recommendations can be made for each country depending on its
consumption and production patterns.
A database mentioned in this study should be realized especially the one concerning trade
costs. This would be a special data resource with a large number of data specifically
related to trading countries. Hereby, this study recommends that more analytical, applied
and comparative studies be conducted using this database for each individual country.
72
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2570. 11() .2012 :(. 12() .2011 :( :. 13( ,) .2010 :(.
14() .2004 :(
. 15() .2000 :(
20 . 16() .2004 :(. 17() .2010 :(
,2010. 18() .2001 :(
. 19() .2004 :( . 20() .2012(:
. 21() .2012 :(
.
1( ) .2013 :(.
2() .2012 :( ).( 3() .2004 :(
. 4() .2010 : ( . 5() .2012: ( 1
. 6() .2011 : (
, ,. 7() .2005 :( . 8() .2010 :( :. 9() .2009 :(
. 10()2009 :( .
2570. 11() .2012 :(. 12() .2011 :( :. 13( ) .2010 :(.
14() .2004 :(
. 15() .2000 :(
20 . 16() .2004 :(. 17( ,) .2010 :(
,2010. 18() .2001 :(
. 19() .2004 :( . 20() .2012(:
. 21() .2012 :(
.
Arabic References
73
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74
Appendix 1:
List of Arab countries by income level according to World Bank categories
75
76
