Vantage View: Can free trade help promote regional reform?

The American administration is working to create a free trade area linking the Middle East and the US by the year 2013.

Trade negotiations with the US will depend on a host of preliminary steps, including bilateral investment agreements, membership in the World Trade Organisation (WTO) and the gradual implementation of political and economic reforms.

The US plan appears similar to the Euro-Mediterranean partnership launched in 1995 which aims to bring 12 Mediterranean countries - Morocco, Algeria, Tunisia, Egypt, Israel, Palestine, Syria, Lebanon, Jordan, Turkey, Malta and Cyprus - into a free trade zone with the EU by 2010.

The regional free trade area is being constructed through bilateral association agreements that also require participating countries to implement specific economic and political liberalisation steps.

The US plan, part of the Administration's vision to re-make the region in its liberal, democratic image, is likely to face enormous difficulties, similar to those faced by Euro-Med-iterranean partnership. Almost eight years have passed since the EU proposal for a free trade area with the Middle East was launched, but so far it has had little impact.

The region's economic and political development continues to be one of the weakest in the world.

The EU committed seven billion euros to help its developing Middle Eastern partners and encourage them to liberalise their economies. The association agreements have already been concluded with all of EU's southern Med-iterranean partners with the exception of Syria.

All association agreements include a legally binding "democracy close" which calls on signatories to press for political change, empower the private sectors and show clear commitment to human rights. It is stipulated that either all or part of the agreement's aid will be suspended if the democracy close was not adhered to.

The EU has also stepped up its funding of civil society programmes without necessarily involving Arab governments. Up until now the "democracy close" has never been invoked against a Middle East state because, according to the EU, it is intended to encourage the move towards reform and liberalisation and not necessarily punish those who resist change and maintain the status quo.

Ambitious strategy

The US is hoping its more ambitious strategy will help overcome many of the problems that faced the EU initiative. The US-Middle East Free Trade Area provides a work plan with sequential steps to reach the goal of a free trade area.

Jordan is the only Arab country to have signed a free trade accord with the US. Its experience has been encouraging.

The agreement helped boost exports to the US and proved extremely useful for export-led growth. With Jordan as a model, the US embarked on free trade negotiations with Bahrain and Morocco, to be followed with Egypt early next year.

Most governments in the region have already started to undertake important political and economic reforms that will help them meet the requirements of EU association and the US Free Trade Area.

Foreign investment

Early reformers include Jordan and Tunisia which have opened to trade and created a more hospitable investment climate, with encouraging results.

Jordan is more advanced in terms of political and legal reforms, with the latest free parliamentary elections successfully completed this summer. Egypt and Morocco have also been implementing trade and investment reforms albeit at a relatively slower rate.

In the Gulf, Bahrain had its parliamentary elections last October. Oman will soon have elections to the advisory council, while Qatar had a referendum on a formal constitution last April. Saudi Arabia indicated that it will hold municipal elections within a year, to be followed after two years with elections for the consultative (Shura) Council.

Reforms on the economic front have been quite visible in various Arab countries. Jordan took the lead in liberalising its economy and privatising major public sector institutions.

In Saudi Arabia, 20 per cent of Saudi Telecom Company was sold to the public through an IPO, and the sector is now open for foreign companies. A new Capital Market Law was introduced, establishing the Saudi Arabian Stock Exchange and a strong government regulatory body, the Saudi Arabian Capital Market Authority (CMA).

A licence was given to Deutsche Bank to open a branch in Saudi Arabia and other foreign investment banks and portfolio managers are now allowed to operate in the country. The Kingdom opened its gas sector to foreign companies including joint ventures with Saudi Aramco. Intra-regional trade is being promoted through the Arab Free Trade Area and the newly established GCC Customs Union.

The EU and the US have laid broad foundations for linking free trade and reform in the region and are indirectly using economic leverage as a tool to encourage liberalisation and democratic reforms. However, the trade initiatives will fail to bring political change unless two developments take place.

First, the US restores its credibility and acts as an honest broker in the peace process by putting pressure on the parties involved, especially Israel, to implement the road map. Without a breakthrough in the Israeli-Palestinian conflict, all attempts at introducing free trade and political reform are unlikely to bear fruit.

The author is the Jordan-based CEO of Jordinvest