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U.S. seeks to fight Mideast terrorism with trade
The Washington Diplomat / October 2003

By Larry Luxner

Free-trade agreements with specific countries are not enough to combat Middle East terrorism and the Islamist extremism that feeds it, argues a prominent expert on the subject.

Brink Lindsey is director of the Center for Trade Policy Studies at Washington's Cato Institute. In a new paper issued last month, he says that "the Bush administration should be congratulated for opening a trade front in the war on terrorism." He stresses, though, that "the effectiveness of free-trade agreements depends heavily on how the agreements are written."

In particular, said Lindsey, agreements should avoid long phase-out periods and restrictive rules of origin, and they must go beyond simple tariff cutting to encompass non-tariff barriers and restrictions on competition in services.

Lindsey's 15-page study, entitled "The Trade Front: Combating Terrorism with Open Markets," calls for Washington to unilaterally scrap trade barriers with countries throughout the Muslim world, and not just the Middle East.

In May, the Bush administration announced plans to create a U.S.-Middle East free trade area within 10 years. An FTA signed two years ago between the United States and Jordan is already producing an export boom for the Jordanian economy, while similar agreements are now being negotiated with Morocco and Bahrain.

"The unilateral elimination of U.S. trade barriers would give tangible, dramatic proof of U.S. commitment to the region, thereby providing a jump-start for the longer, arduous process of negotiating FTAs," said Lindsey. "Speedy liberalization is also important because 2005 marks the removal of U.S. textile quotas, and Muslim nations need to be on an equal competitive footing with the Caribbean, Andean, and African countries that already enjoy duty-free access to the U.S. market."

Lindsey who calls himself "the top trade expert at one of the biggest think tanks in town" last year published a book on globalization entitled "Against the Dead Hand: Uncertain Struggle for Global Capitalism."

In a phone interview, he said that the FTA strategy is a step in the right direction, but that it's not enough because FTAs take too long to negotiate.

"In view of the urgency of the situation following 9/11, waiting around for years is too leisurely," he told The Washington Diplomat. "Therefore, I endorse legislation to unilaterally eliminate duties on exports from select Middle East and Muslim countries."

This list would include Turkey, Afghanistan and Pakistan all countries with obvious geopolitical significance.

"Outside of petroleum, the products that Muslim countries are best at making agricultural and textile exports are generally the most heavily protected in the United States and Europe, their major markets," he said. "Removing those barriers will be a boost. Right out of the box, a unilateral step to grant duty-free treatment to Muslim countries will encourage exports."

But Lindsey concedes that "it's not a silver bullet," and that "these countries have not done a very good job of integrating themselves into the world economy."

In May, two senators, Max Baucus (D-Montana) and John McCain (R-Arizona) introduced the Middle East Trade and Engagement Act, which authorizes the president to extend duty-free treatment to countries of the "greater Middle East."

The bill lists 18 countries as potentially eligible for benefits: Afghanistan, Algeria, Azerbaijan, Bahrain, Bangladesh, Egypt, Iraq, Kuwait, Lebanon, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Tunisia, Turkey, the United Arab Emirates and Yemen. The Palestinian Authority is also on the list.

"Under the legislation's provisions, though," said Lindsey, "countries qualify for trade preferences only if the president finds that they meet certain criteria:the countries are making progress toward economic and political reform; they do not engage in activities that undermine U.S. national security or foreign policy; they are not listed by the State Department as state sponsors of terrorism, and they do not participate in the Arab League boycott of Israel. The bill stipulates that duty-free treatment would expire at the end of 2011."

Another advantage of a region-wide preference program, says Lindsey, would be to protect against inadvertent trade diversion damage caused by negotiating FTAs in the region.

"For example," he said, "an FTA with Morocco would allow olive oil producers to boost their sales to the United States at the expense not only of European rivals but also competitors in Turkey, Lebanon and Tunisia. Since competitiveness in exporting a particular product to the U.S. is often shared by a number of Muslim countries, granting duty-free treatment to one country through an FTA would likely inflict harm on other exporters in the region. Legislation like that proposed by Baucus and McCain would prevent such diversion by putting countries on an equal footing in the U.S. market regardless of FTA status."

In the meantime, Jordan is an encouraging example of what free trade can do for a small country.

Maher Matalka, director of the Jordanian Embassy's Economic and Commerce Bureau, said "people need to see results on the ground as soon as possible."

"You can't tell people to wait until 2015 when they start to see the fruits of a regional FTA," he said. "That doesn't play well. This is more of a practical approach."

In 1999, the Hashemite Kingdom exported only $31 million worth of goods to the United States. In 2002, that number had jumped to $412 million mainly garments and textiles representing more than a quarter of Jordan's total $1.538 billion in exports for that year.

The U.S.-Jordanian FTA grew out of something called Qualifying Industrial Zones (QIZs), which itself is a result of the Jordanian-Israeli peace treaty signed in 1994. Products manufactured or assembled in QIZs must contain 35% value-added materials, of which 12% must be of Jordanian origin, 8% Israeli origin and the remaining 15% or either Israeli, Jordanian or American origin.

To date, 13 QIZs have been established, containing dozens of apparel, garment and other factories. Many are joint ventures with foreign companies including Israeli and Chinese investors.

"Nearly 30,000 jobs have been created," said Matalka. "That's something tangible."

He added that the FTA is helping to increase Jordan's per-capita income of $1,750 a year, and that "as economic prosperity enhances quality of life, you'll start to see people paying more attention to that instead of violence."

Says Lindsey: "The combination of those two programs, the QIZs and the FTA, has encouraged a big boom in Jordanian exports, and tens of thousands of jobs at a time when economic conditions have been rocky at best. Inspite of everything, the FTA has really been a shot in the arm for the Jordanian economy. As a result, the Jordanian government has been a big booster for expanding this kind of policy more broadly."

Bahrain, at only 239 square miles the Arab world's tiniest country, also hopes to have an FTA in place with the United States.

Khalifa Bin Ali al-Khalifa, Bahrain's ambassador in Washington, said final notification has been submitted to Congress to start negotiations, which should get off the ground by the end of this year or early in 2004.

"I think this is a great initiative," the ambassador said. "It will bring benefits to the peoples of both countries, and will expand the long relationship we have had with the United States. At the end, it will be a win-win situation."

Al-Khalifa said that despite a population of only 650,000 and an area of only 239 square miles less than half the size of Maryland's Montgomery County "Bahrain has a diverse economy. In addition to oil and gas, we are a financial center for the Gulf region, and we have an aluminum industry. A free-trade agreement would open new opportunities and would remove obstacles to our potential market."

The concept is much the same for Morocco, with 31 million people and a Gross Domestic Product of $105 billion. The North African nation has already begun formal negotiations toward an FTA with the United States.

"An FTA would open tremendous opportunities for both countries because tariff barriers will be lowered," said Mohammed Ariad, economic counselor at the Moroccan Embassy, estimating current bilateral trade at around $1 billion a year. "Morocco has always been a true friend and ally of the United States, and we were the first country in the world to recognize U.S. independence, in 1777. We have the longest unbroken international foreign relations treaty between the U.S. and any foreign country."

And that's the kind of relationship Washington should be encouraging in the long run, says Lindsey.

"Leading the world toward closer commercial ties can reduce threats to American interests and security by calming fears and resentment of American power," he writes. "Previously, the threat was communism; today it is Islamist terrorism. But whether we are contending with secular totalitarians or religious ones, trade policy can lend valuable assistance ... The challenges will be formidable, but if the task is daunting, the potential rewards are surely worth the effort."

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