The importance of Arab regional integration Perspectives for development Global CGE Analysis Economic Development and Globalisation Division

The GAFTA In 1981, the members of the Arab-League adopted an Agreement to Facilitate and Develop Inter-Arab Trade (AFDIAT). The AFDIAT aimed at liberalization, perhaps even the establishment of a regional FTA, it was vague in its language and left open the selection of covered products to a set of malleable “principales”. It could well have been seen as yet another part of the Arab League’s facade dissimination. Nevertheless, 16 years later was to become the basis for what might be seen as a the Arab trade integration scheme. 2

The GAFTA (Cont.) On February 19, 1997, the Social and Economic Council of the Arab League adopted a declaration on a Pan-Arab FTA establishing an “executive program” for the AFDIAT, which is in fact the text of the GAFTA. The GAFTA required that “all Arab goods traded among the party-states shall be liberalized in accordance with the gradual liberalization principle which shall be applied as of January 1, 1998”, allowing for “full liberalization” by July 21, It established a principle of national treatment among states parties, and a general prohibition on non-tariff barriers”, GAFTA members include 17 of the 22 Arab League countries of which Yemen and Sudan, as LDCs, have a longer period of liberalization (until 2010) and the Palestinaian Authority has been exempted from tariff reductions. In 2002, the Arab League’s Economic and Social Council resolved to accelerate the gradual liberalization process, abolishing tariffs by January 1,

Compared to other regions… The Arab region is less integrated, even compared to African countries Fig1: Intraregional exports as % of total exports (2010) Source: ITC

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

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

Why the impacts are too small? The main GAFTA’s weakness is in the realm of non-tariff barriers, reflecting the general problem. Moreover, trade in services and investment liberalization are not included in GAFTA and will require further efforts. None well determined rules of origins NTMs are not homogeneous across countries Non convergence in terms of indirect fiscal instruments on imports. Other taxes have similar impacts as tariffs are not removed (consumption, excess...) Licenses, negative lists and many other barriers still active Very heterogeneous system of implicit and explicit subsidies on production that affect relative competitiveness harms the development of intra-trade. 7

Scenarios definition 8 Sim 1 (FTA): A full implementation of intra-Arab FTA Sim2 (TR) =Sim1+ a 50% reduction of intra-Arab transport costs Sim3 (CU) : Sim2+ a customs union for non agricultural products. The Common external tariffs is supposed to be equal to the minimum tariff applied by non oil producing countries. Countries that have a lower tariff are supposed to maintain their current tariffs. Sim4 (Migration): Sim3+the replacement of 20% of non Arab migrant stock by Arab migrants sim4:sim3+ An Arab preference for migration quotas in OPC sim3: sim3+a common external tariffs (for non agriculture products sim2: sim1+ 50% reduction in transport cost sim1: A complete Free trade Area

Simulations results: Impacts on trade Share of the intra-Arab trade in total trade 9 A full implementation of the FTA increases intra-Arab trade increase by around 10 per cent. If 50 per cent transport cost is reduced intra-Arab trade could increase by 38.5%. The application of common external tariff increases trade with non-Arab partners as the market access will increase in both directions. The business as usual (BaU) scenario will lead to 8.5 per cent share of intra- Arab trade. If scenario 2 is implemented, the share of intra- regional trade will increase by 3 points Share of the intra-Arab trade in total trade

Simulations results: Impacts on GDP 10

Simulations results: Impacts on Households Revenue 11

Simulations results: Impacts on unemployment 12 both skilled and unskilled unemployment rate can be reduced significantly, by around 4 basis points in the Arab region as a whole. As expected, the impact is most important in the non-oil producing countries that will experience a reduction in both unskilled and skilled unemployment by around 5 basis points. scenario 4 will contribute greatly reduce unemployment in most Arab countries. At the country level, Egypt, Tunisia and Morocco could register around a 5 basis points reduction of unskilled and skilled unemployment. This would reduce both their unskilled and skilled unemployment rate reduced by around 40 per cent. Absolute variation of unskilled unemployment Absolute variation of skilled unemployment

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