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Trade Integration in the Middle East and North Africa

March 23, 2010

Between 1995 and 2007, the share of MENA’s output traded has increased from 54 to 79 percent.

March 2010 - The Middle East and North Africa (MENA) region is today more open to the global economy than in the early 1990s and the region has significantly increased its participation to the global economy.

Today, all but 5 MENA countries are now members to the WTO. Thus most countries have transitioned to greater rules-based trading system with lower tariff barriers; Progress is also underway to foster regional cooperation. Tariffs have been reduced under the Pan-Arab Free Trade Area (PAFTA), intra-regional tourism is growing, transport connectivity is improving and, thanks to a number of ongoing regional projects, the prospect for regional energy trade good.

Still, compared to other regions, the MENA region is less globally and regionally integrated in terms of trade, investment and capital flows – with the exception of oil – to reap the benefits of the current wave of globalization. While there has been tariff liberalization under the PAFTA, non-tariff barriers continue to impede regional integration. For most Arab countries, regional trade accounts for less than 10 percent of total trade. At less than 5 percent, the Maghreb countries have the lowest share of intra-regional non-oil merchandise trade.

The cost of MENA’s relatively limited regional and global integration is large. According to many studies, limited regional integration means 1-2% lower GDP growth. For a region that has a stock of 20 million unemployed men and women and a labor force that grows by 3.4% annually, the forgone opportunity for job creation is large. Regional and global integration would go a long way in increasing productivity and economic growth through economies of scale and enhanced country specialization and thereby create jobs of the MENA youth.

MENA needs to invent its own model of integration based on its circumstances and conditions, with due account of two major developments in global trade over the last 20 years. The first development is the rise of global production networks in which different stages of the production of a single good occur at different locations based on comparative advantages. In the new world shaped by this development, being competitive requires not just been able to produce at low cost but also to establish a competitive supply and logistics chain, including transport, customs, communications and financial services. The Middle East and North Africa Economic Development Department (MNSED) has a rich program of analytical work, technical assistance and investment projects on these areas and is assisting many MENA countries (e.g. Morocco, Tunisia, Libya and Egypt) enhance their trade facilitation systems.

The emergence of China and India as major international trading powers is another global development that has major implications for the MENA region. A World Bank regional report published in 2009 shows that these large and rapidly growing countries now represent important markets for MENA exporters of fuels and commodities as well as for producers of specialty food products. At the same time, low cost imports from Asia represent a challenge for import competing manufacturers, while MENA consumers enjoy the benefit of enhanced purchasing power. And finally, the emergence of low cost products and services from China and India raises the intensity of competition in third country markets, forcing MENA exporters to reassess their strategies. The extent to which MENA countries can cope with the challenges, and take advantage of the opportunities will have a significant impact on their recovery from the global financial and economic crisis and, more generally, their development prospects.

MNSED’s current trade program consists of analytical products, technical assistance and lending projects. A large number of country-level studies cover the areas of tariff reform, trade facilitation and export promotion. MNSED also provides technical assistance to strengthen capacity for trade policy analysis and formulation such as its assistance to Morocco’s Ministry of Trade in building a computable general equilibrium model for trade policy analysis. Regional trade activities focus on regional studies to identify barriers to investment, collaboration with PAFTA Secretariat to identify and remove non-tariff barriers and support regional integration, and regional offshoring opportunities. Finally, the lending portfolio includes a comprehensive development policy loan and an export development project for Tunisia and a possible competitiveness Development Policy Loan (DPL) for Morocco.