A League of Nations in Transition – Regional Integration for the Arab Spring!

As the Arab Spring is turning to its second (and harder) phase of conducting elections and forming legitimate transitional government, the need for an economic strategy is becoming painfully apparent.  The people, who marched on the streets demanding political freedom, were also demonstrating for economic freedom and the general improvement of their future economic prospects.  Rising food prices, inflation, unemployment, all played a significant role in motivating people to demand democratic and accountable governments.

Much has been made about the comparisons of the fall of communism in Eastern Europe and the Arab Spring.  Although similar in origin and motivation, most analysts are quick to point out the glaring difference: Eastern Europeans had a vision of what they wanted – EU and NATO membership.  Eastern European countries in constitutional transition during the 1990’s, had something to look towards – something to emulate.  The people of the Arab Spring don’t have that.

Now more than ever, the Arab people need a vision of what life after dictators could look.  Because of the instability, the Arab people need reassurance and certainty for the political and economic future that awaits them.  In essence, they are in need of targets and in need of benchmarks; for something to aspire, both politically and economically.

They need to organize and form a regional integration group, modeled after the EU.  They need a new regional integration strategy that includes as many elements of the Eastern European accession treaties as possible, in a way that is of course particular to the needs and idiosyncrasies of the region.

This will not be easy, considering that intra-regional trade is currently very low: between 4% and 7%.  On the other hand, exports to the EU make-up 40% of total exports.  However, this economic trade relationship with the EU has created a foundation on which convergence could be achieved.

A League of Nations in Transition –

At a time when all the people of the Arab world are going through this political and sociological transformation it might feel inappropriate to embark on any regional integration effort.  However, now is the time to think big and find inspiration from each-other.  The people are following developments around the region and are connected (in solidarity) in a way that should make regional integration feasible.

This ‘League of Nations in Transition’ could start with the countries that have overthrown their dictators: Tunisia, Egypt, and Libya.  After that comes Jordan and Morocco, both of which have embarked on some (meaningful or not remains to be seen) important democratic reforms, and continue with Lebanon, the Palestinian Territory, Yemen, Syria, and eventually Algeria (if/when they continue with their political reforms).  [Eventually, including a democratic Israel willing to conclude negotiations on the Palestinian issue, will be the ultimate sign of braking with the past.]

Members should adopt a set of principles – similar to democratic values (respect for the party system and elections – freedom of the press to report on candidates and elections – independent judiciary – rule of law).  Democratic standards and criteria should be used for membership, and members-nations should use each-other for peer-review and monitoring, to ensure the successful transition to democracy.

Although the countries of the region face high budget deficits and are in need of immediate financial assistance, the long-term challenge remains the absence of a vibrant private sector that can create jobs domestically and export/compete internationally.  For oil-importing countries like the majority of the Arab Spring nations in constitutional transition, who cannot rely on oil production to attract foreign investments and create jobs, trade agreements with the west (and each-other) could increase foreign direct investment and encourage domestic reforms that improve the domestic business climate.

The key to economic growth and long term prosperity for the whole region is Regional Integration like the EU.  Start with a common energy policy, then common custom/tariff regulations/levels, then common investment/banking regulations.  Eventually, what would be very important for the region is labor mobility, especially considering the labor needs of the oil-exporting nations of the Gulf and the labor surplus of the non oil producing nations of North Africa.

Of course, integration of regional trade will require: 1) customs facilitation, 2) transportation/infrastructure improvements, 3) transparency of trade regulations, 4) harmonization of regulatory requirements, and eventually 5) political integration.

What if the foundation for all that was already there because of 30 years of legal and regulatory harmonization with the EU?

Backdoor Integration through Trade with the EU –

Regional integration through trade is not something new for North Africa and the Middle East.  The countries of North Africa in particular have in the past joined trade agreements with the EU and among themselves, with devastatingly unsatisfactory results.  Of course, there are other regional integration efforts currently in place (like the Arab Maghreb), but they are seriously tainted by their origin and affiliation to past dictators and autocrats.

However, democratization, or at least the possibility of removing dictatorial control of the people and the markets, changes the existing paradigm and hopefully the counter-productive conditions on the ground.  The lesson from Eastern Europe is that well-structured trade agreements can help create the conditions which encourage countries in transition to undertake appropriate reforms.

Starting in the 1960s, the European Community began concluding first-generation Cooperation Agreements (CAs) with Mediterranean countries.  By the beginning of the 1990s, the EU had signed a series of CAs with most Arab states in the eastern and southern Mediterranean, which mainly covered aid and trade liberalization.  Though commerce in general rose between Europe and the region, the region’s balance of trade with the EU worsened under the CAs.

Because these CAs were clearly not enough, negotiations started on Association Agreements (AAs) between the EU and the eastern and southern Mediterranean countries to replace the existing CAs.  Provisions of these AAs have many economic aspects in common, including establishing WTO-compatible free trade over a transitional period of up to twelve years; provisions related to intellectual property rights, services, public procurement, competition rules, state aid, and monopolies; and economic cooperation in numerous sectors.  With time, more areas of cooperation have been included, thus further bringing the regulatory and legal regimes on the ground in sink.

In essence, the EU has established a network of AAs with most countries of the region, with the only exception of Syria, though currently the coverage of these Agreements is essentially limited to trade in goods.  To that end, the EU has developed a system of pan-European rules of origin. This allows diagonal cumulation among regional members in order to export to Europe as long as they adhere, among themselves, to the same rules of origin introduced in Europe.

These ‘mandates’ as they are called (to be completed by the end of 2011 and then submitted for ratification by EU member states) are with Morocco, Tunisia, Egypt, Jordan (and Libya) for ‘second generation’ FTA’s (that go beyond goods and also cover services, investment, competition, government procurement, etc.).  In particular, negotiations are currently in progress on the liberalization of trade in services and establishment, on further liberalization for agricultural, processed agricultural and fisheries products, a Dispute Settlement Mechanism, and on an Agreements on Conformity Assessment and Acceptance of Industrial Products (ACAA).

The AAs also cover political dialogue, respect for human rights and democracy, cooperation related to social affairs and migration (including the readmission of illegal immigrants), and cultural cooperation. After they are signed, AAs must undergo a lengthy ratification process by EU member national parliaments.

Therefore, these EU AAs with North African countries have the potential of harmonizing regulations across the region.  By participating in FTA’s with the EU, regional countries could end up (and are certainly in the process of) with the same rules and regulations for a number of critical sectors responsible for economic growth, foreign direct investment, and trade.  Country specific accession to FTA’s with the EU and compliance with EU regulations for market access and trade, could lead to a ‘backdoor’ regional integration.

The Agadir Agreement –

The Agadir Agreement is a free trade agreement between four Arab countries: Egypt, Jordan, Morocco and Tunisia (covering 115 million people) – all countries that have been going through some serious constitutional transition due to the Arab Spring.  It was launched in May 2001, signed in February 2004 and came into force in March 2007.  The Agadir Agreement is open to further membership by all Arab countries that are member of the Arab League and the Greater Arab Free Trade Area, and linked to the EU through an Association Agreement or an FTA.

Its purpose is to facilitate integration between Arab states and the EU under the broader EU-Mediterranean process, by enhancing investments in the Agadir partner countries and eliminating barriers to trade; the overall objective being to boost economic activity, to support employment, and to improve living standards.  The rationale behind Agadir is that integration would be easier to achieve with a core of countries, and that others could join later when they were ready.

Trade among the Agadir signatories is limited, both in absolute size and compared with exports to other destinations.  The exports of the four countries to each other were $1.06 billion in 2006, or 2.1% of the region’s exports.  In contrast, more than 51% of all exports from the four Agadir signatory countries went to the EU.  However, since the agreement’s inception, intra-Agadir trade exchange has registered a 45% increase.  In Jordan, exchange with Agadir signatories jumped by 70% between 2007 and 2009.  During the same period, Egypt saw a 160% increase in trade with member states, while Morocco witnessed a 30% rise.

Many technical issues are to be tackled by the four signatory countries with the EU’s financial and technical support.  The European Commission has contributed 8 million euro since the beginning of the process, investing in a Technical Unit that works on practical aspects: legislative approximation, custom regulations, rules of origin, etc.  Three sectors were identified to kick start inter-Arab trade exchange: textile, leather and automotive technology.  One important feature of the Agadir Agreement is that it uses the EU’s rules of origin.  The EU allows its Mediterranean FTA partners to cumulate value-added. This means that it turns a blind eye to where value was added, for the purpose of preferential tariffs, as long as it was in an FTA partner country.

In Conclusion –

Regional integration for the region will be hard under normal circumstances, let alone under the current Arab Spring.  Any meaningful effort for regional integration will require external help and assistance in building and facilitating infrastructure (roads – railways – air and seaports) at a regional level.

However, the Agadir Agreement offers the perfect vehicle on which to build and grow a ‘League of Nations in Transition.’  The ongoing harmonization of rules and regulations with the EU is leading to substantial conversion of rules and regulations among the four countries.  Adding Libya and building on the existing progress could significantly improve regional trade and real economic growth for the people of the Arab Spring.

Other Sources:

The Star (Amman, Jordan) – ‘Made in Agadir Zone’: An ambitious vision of the future’.

European Commission – Overview of FTA and other Trade Negotiations.

Carnegie Papers – EU and the U.S. Free Trade Agreements in the Middle East and North Africa.

The Washington Quarterly – American and European Response to the Arab Spring: What’s the big Idea?

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About Nasos Mihalakas

I am an Assistant Professor of International Business and Government policy, and a former U.S. Government policy analyst. I have over nine years of experience with the U.S. government as a trade policy analyst, and U.S.-China trade relations. I have worked for both a Congressional Commission advising Congress on the impact of trade with China and for the U.S. Department of Commerce investigating unfair trade practices. However, my education has been on constitutional and comparative law, with an LLM from University College London, and a JD from the University of Pittsburgh. Currently I am writing a book on the evolution of Federalism in the U.S., and the application of Federalism as a form of governance around the world. You can contact me at: nasos.mihalakas@gmail.com
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