MENAPOL Blog

Trade Integration

Disagreements among economists over sound economic policies run very deep, but they all agree on the benefits of free trade. Mainstream economic thinking on freedom of exchange knows no ideological boundaries. Ever since Adam Smith, there has been virtual unanimity among economists that free trade is in the best interest of everyone.

The Middle East and North Africa (MENA) region, which runs from Morocco's Atlantic Ocean coast to Yemen's Arabian Sea coast, is central to world affairs and home to some of the world's oldest civilizations. However, most of its economies are struggling, and despite the enormous natural resources, most of the local population suffers from high poverty and unemployment rates and severe social disparities.

The MENA region is among the least integrated regions in the global economy and the least commercially integrated regions. Despite having 3.9% of the world's GDP and 5.5% of the world's population, the region only accounts for 1.8% of all non-oil trade globally. Additionally, there are numerous barriers to intra-Arab trade. Arab intra-regional trade, which accounts for 12% of all Arab exports to the world, has barely increased over the previous 20 years. Comparatively speaking, this is not favorable when compared to other groups, such as the European Union (EU), where intra-regional trade makes up more than two-thirds of the total trade of the EU. Cross-border trade between MENA countries is expensive and time-consuming: it costs an average of US$442 and 53 hours to comply with export border requirements, three and four times more costly than trading costs in high-income economies. Poor logistics performance in the region, inefficient customs, high infrastructure costs, inadequate legal frameworks for investments, and rigid regulations in the Arab region add to trade expenses. The region is also one of the most restrictive regarding trades in services. 

Despite recent reform initiatives, the MENA region faces several limitations and challenges that prevent it from fully realizing its enormous potential for economic growth, job creation, and integration into regional and global value chains. Weak economic competitiveness and several trade barriers obstruct the integration of regional economies into regional and international markets. Consequently, the MENA region's progress toward economic development remains hindered.

On the other hand, economic growth, employment, and income per capita have significantly increased in East Asian nations that have chosen free trade and a market economy. According to the Economic Freedom Index of the Heritage Foundation, there is a positive correlation between trade freedom and general indicators of prosperity and human development. Countries with a trade-based development model know greater food security, a healthy environment, increased political stability, and higher levels of social progress.

East Asia as a model: The benefits of free trade and trade integration

East Asia was once one of the poorest regions in the world due to economic and political isolation, but the rapid economic growth and the significant rise in living standards that the region has known in previous decades made it an example to follow. According to the World Bank, the number of people living in extreme poverty has dropped dramatically in the East Asia and Pacific region. In 1990, 60.2% of the region's population lived in extreme poverty, but in 2013 this figure fell to 3.5%. Also, life expectancy increased from 56 years in 1960 to 76 years for males and 80 years for females in 2020.

In the 1980s, East Asia began to implement new development strategies based on attracting foreign investments in the field of manufacturing, and these investments relied on imported components for manufacturing (a trade-based development model). Since they know they are facing severe competition in attracting foreign investments, they have all started reducing import barriers and tariffs, especially on semi-finished and intermediate products, to provide the best environment and advantages for multinational companies. The unilateral competition in lowering trade barriers has made the region attractive to international companies. Accordingly, Asian economies have rapidly grown. As the economist Pierre-Louis Vézina has noted, decades of unilateral tariff cuts in emerging Asian economies have accompanied the most successful development model of the past fifty years.  

Reducing barriers to imports allows countries to participate in global value chains by encouraging foreign investment and lowering input costs. Increasing trade barriers is counterproductive. According to the Organization for Economic Co-operation and Development (OECD), import barriers to intermediate products increase production costs and reduce a country's ability to compete in export markets. Tariffs and other import barriers constitute a tax on exports. In a trade-integrated region, unilateral measures and competitive moves can be the primary tools for trade liberalization and growth. The East Asian model reveals that competition to attract foreign investment can provide the right political incentives for trade liberalization and integration.

In need for more openness and free trade

Despite all of the benefits of free trade, governments in the MENA region still impose a wide range of barriers and restrictions on trade that distort or limit opportunities for businesses and consumers. Policies such as tariffs, quotas that restrict imports, and even policies such as export subsidies; all disrupt the normal flow of trade. Such policies arbitrarily increase costs, reduce efficiency, and can stifle research and investment essential to growth and development.

Trade integration can bring significant benefits to the region. Free trade allows businesses to compete on a level playing field, which promotes innovation and efficiency. By removing tariffs and trade barriers, companies can access larger markets, which can lead to increased competition and lower prices for consumers. In addition, free trade can also create investment opportunities that would eventually increase economic growth and job creation. By attracting foreign investment, Arab countries can gain access to new technologies and expertise, which can help them diversify their economies and become more competitive. 

For a more integrated region, Arab countries must address the underlying factors limiting their ability to trade and invest, including political instability, trade barriers, and limited infrastructure. Also, there has been short cooperation among Arab countries to promote trade and investment, which has limited the ability of these countries to create a regional trading bloc that can compete with other regional blocs, such as the European Union. According to the World Bank, alleviating poverty and promoting economic growth in the post-pandemic age in the MENA area would depend on trade integration within the region and with the rest of the globe. 

Trade liberalization must be comprehensive and beneficial to all sectors, including agriculture and services, for there to be significant benefits from openness. However, trade reforms must advance concurrently with other policy reforms to encourage inclusive growth that benefits all parts of society. Developing a business-friendly environment that promotes business operations and competition is crucial. This means eliminating obstacles to entry, such as excessive regulations and restrictions on foreign ownership, and ensuring a fair playing field for all businesses. Without deep structural reforms, the Arab region will not reap the desired benefits from trade liberalization.

Author: Mohamed Moutii