Intra-mediterranean trade relations in the 1980s

180

INTRA-MEDITERRANEAN TRADE RELATIONS IN THE 1980s Alfred Tovias

This paper deals with an important problem of trade policy confronted by the countries of the Mediterranean Basin: what should be their goals and strategy in the 80s for trading links with other neighbouring countries, regions or trading superpowers? Kqwords: international

organizations;

international

trade; lZlediterranean

countries

IX THE: P.Ast, Mediterranean countries have been passive actors in the international arena in relation to trade policy; merely reacting to initiatives taken hundreds of miles away from the area. The debate on reverse tariff preferences that occurred between the USA and the EEC at the beginning of the 197Os, and which later had a tremendous influence on the shape of Mediterranean countries’ trade policies, is an illustrationof the point. It is too easy to blame the Mediterranean countries themselves for lacking a sense of common purpose, vision, or objectives in view of the cultural and political rivalries in the area. The truth is that the Mediterranean region has its own unity and characteristics from the economic, ecologic and human point of view. In our opinion, it is the conflicting strategies adopted by different trading blocs outside the region that have tended to tear apart the countries bordering the Mediterranean, even if the interests of the latter would have been better served by adopting common stances. We are referring not only to the EEC-US quarrel-which also involved other zones, eg the African-Caribbean-Pacific (ACP) countries-but also to superpower competition for influence in the region, as sometimes reflected in exclusive trading arrangements with client partners (eg former USSR privileged trading relations with Egypt). Existing neocolonial institutional links with outside trading blocs are being rejected by some individual Mediterranean countries. In particular, Arab countries bordering the Mediterranean display an increasing tendency to disregard any integration scheme involving developed countries (eg the EEC). This is due to practical reasons (eg their foreign trade is quantitatively and/or qualitatively unimportant) or ideological reasons (eg Arab, Islamic, or Third World centrality). It is interesting that this is happening at a time when three other Mediterranean countries (Spain, Portugal and Greece) have opted for the The author is with the (Graduate Institute of European Studies, Geneva and thr Hebrew University, ~Jerusalem. Thr author acknowted,qes helpful camnents on an earlier draft that were providrd by E. Font& (University ofGrncva) and D. Etazar (Temple University).

0016-3267/82/030180-9$03.00

0 1982 Butterworth & Co (Publishers) Ltd

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In&a-Mediterranean trade relations in the 1980s

18 1

opposite strategy and applied for membership of the EEC, a trading club mustering one of the highest GNP per capita in the world. When analysing intra-Mediterranean trade relations, one must assume that, at the end ofthe 198Os, five Northern Mediterranean countries will no longer be able to muster their own individual trade policies; the external economic relations of the Twelve will be largely conducted from Brussels. And for both the centre of gravity of their own the EEC and the two superpowers, Mediterranean policies will shift to the East. It is in this context that each ofthe non-EEC Mediterranean countries will be obliged to operate some choice after the second enlargement of the EEC takes place. This is the more so, in view of the expected protectionistic slant that the EEC will take following the enlargement, not only to make room for agricultural and labour-intensive products originating in the three new member countries, but also because the addition of three traditionally protectionistic voices in the formulation of EEC trade policy.1 The dilemmas that face all the countries of the area seem to be more acute for those confronting peculiar problems of foreign policy, like Turkey, Malta, Cyprus, Albania, Yugoslavia or Israel.

Trade strategies open to Mediterranean countries It has been suggested that, since the enlargement is going to reduce export possibilities to the EEC for non-EEC Mediterranean countries, they should look elsewhere for new foreign markets. However, this is far from a valid alternative. Reasons against its implementation are either political (eg in relation to COMECON countries), geographic (eg in relation to Japan or Australia), or economic (in relation to the USA). It is surprising that nobody seems to be suggesting (as we do below) a reorientation of exports towards other Mediterranean countries. Before that, we examine a little closer the possibilities of non-EEC Mediterranean countries (outside the Twelve) extracting from the Community some meaningful measures of compensation. There are two such possibilities. One is to bolster the elements ofcooperation (technical or financial) in the existing agreements. We do not place much faith in the chances of success here for a number of reasons: l

l

l

l

An immediate one: poor growth prospects in the 1980s and deflationary policies in the EEC run against an easy application of such a proposal. The Twelve, as a group, will no longer be a “rich countries’ club”, and the pressure to give financial aid to LDCs will consequently be lower. Also, EEC expenditure for domestic aims (agricultural support measures, Regional Fund aid, etc) is expected to increase substantially, so that it will not be easy to ask for more foreign aid. The three new members (in particular Portugal) will question their participation in foreign aid packages addressed to countries with roughly the same level of GNP per capita as theirs (eg Israel, Turkey, Algeria, Lebanon, or Yugoslavia). As far as Mediterranean Arab countries are concerned, such a policy would overlap and compete with the Euro-Arab Dialogue.

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Neither do we think that aid is what Mediterranean countries need; they need markets, such as could be provided by the EEC. Moving to the second possibility-strengthening the trade element in existing agreements-we believe the Community will be unable to offer much compensation through preferential tariffs. Agricultural concessions will probably not be offered, because of the difficult political problems posed by this sector in member countries. The same can be said about sensitive industrial products. On the other hand, exports ofother manufactures already have free access nowadays, and there is little new to be offered in this field either. Some nontariff barriers, such as restrictive government procurement policies, could be eliminated for Mediterranean countries in the context of the agreements. This could play a big role in the case of Israel and other advanced developing countries in the area. Another possibility is to ask for a modification of the rules of origin in the existing agreements, so as to allow for the cumulation of value added in various Mediterranean countries outside the Twelve before the goods are exported to the Twelve. In that way, rules of origin could be complied with more easily by individual Mediterranean countries. Preliminary studies by this author show that the impact of such a measure could be significant in some cases, eg textile exports to the European Community from either Egypt or Israel-the idea being that the unfinished goods can be shifted back and forth between the two neighbouring countries, taking advantage of their respective strengths in processing it up to its final completion for export. Of course this solution would require some coordination from Mediterranean non-EEC members in their policies towards the European Community before entering into negotiations with it. Once the possibility ofcooperation among Mediterranean countries has been broached, other trade strategies (some quite revolutionary) can be envisaged. Given the composition of the group of countries concerned, the obvious alternative to going alone, as until now, would be for half of them to create an Arab trading bloc, following the pattern set by OAPEC. This option, apart from the obvious political problems faced when trying to implement it, is difficult to conceive from the economic point of view (see below) and is anyway no solution for the non-Arab countries of the group. Two other strategies could instead be explored. The first would consist of each Mediterranean country deepening its trading relationships with other Third World countries in the framework of existing international groupings, like UNCTAD or the UN Regional Economic Commissions (see below). This would imply a ‘universal’, rather than a ‘regional’ approach to problems. As such, it would probably face weak opposition from most existing trading blocs (because of the ‘neutrality’ of those policies) and have the full backing of GATT. The second strategy would make capital of the increasing degree of economic competitiveness among most of the Mediterranean economies as a factor facilitating the creation of a successful Mediterranean free trade area. This idea is explained and justified below.

Infeasibility of trade integration in the Middle East Since most non-EEC

Mediterranean

countries belong to, or are geographically

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Intra-Mediterranean

trade relation in the 1980s

183

associated with, the Middle East,2 one could conceive the creation of a Middle Eastern Economic Community, a project that would fit with the ambition of Maghreb countries to create their own trading bloc in the future.3 The idea has been proposed in recent years and is derived from the simple observation that factor endowments differ widely from country to country in the region. Arable land and physical capital are scarce in some countries, whereas labour is relatively abundant; others are well endowed with skilled labour and sophisticated equipment while lacking energy resources and skilled labour; the Gulf countries possess abundant energy and financial capital but lack labour. By adopting the common market formula, namely by authorizing the free flow of (as predicted by mobile resources in the region, factor price equalization neoclassical trade theory) could be approximated with the inherent increase of welfare for all the people concerned.+ A common market does not require the unification, or even harmonization, of legislation regulating the flow of factors between individual members and the rest of the world. In some sense, the common market is for factors of production-what a free trade area is for commodities. We are not proposing a customs union, nor an investment club, nor a monetary union; in these three cases, the level of cooperation required among the members is much too high given what could be achieved in the region, even after achievement of a lasting peace in the Middle East. Explosive issues like the redistribution ofcustoms revenue, border taxes, regional investments funds etc, could too easily be transformed into political confrontation, as happened some years ago in the East African Community. A common market for capital flows has been mentioned in the past as being easy to achieve. This is not self-evident, as shown below. What is clear, on the other hand, is that other factors of production are rather less mobile. Land cannot be traded across borders, while labour and natural resources do confront a real problem in transfer costs. The free flow ofworkers in the area would cause many headaches for the governments involved. Nationalist feelings run high in the populations of the region. Among Arab countries, the cultural and historical backgrounds are quite different, not to speak of differences in tastes arising from differences in the standards of living of the populations. On top of this, massive immigration could become a serious social problem for the receiving countries, if the necessary infrastructure and the qualified personnel to manage it are scarce. There is also the danger that immigrants would be not only concentrated in certain regions, but in certain jobs and industries too. Clearly, in the context of the Middle East, this implies security risks, apart from the inevitable sociocultural problems. Overdependence on foreign markets for given jobs or industrial sectors can lead to total paralysis in times of unrest or regional instability. Countries like the Lebanon, Jordan and Kuwait are examples. It seems, therefore, that a Middle East common market should rely mainly on the free movement of financial capital to locations where other resources (such as labour) are abundant, rather than the other way round. This in turn depends on the perspectives that oil-rich countries have for the region in the 1980s. Some authors believe that Saudi Arabia would not agree to share its wealth on an equal-to-equal basis with countries such as Egypt, since Saudi FUTURES June 1982

184

Intra-Mediterranean trade relations in the 1980s

Arabia does not see the need or urgency to act this way.5 If the idea of setting up a common market or a customs union in the Middle East seems unrealistic, has the free trade area formula more chance of succeeding? It is easier to evaluate this idea, because there is a precedent-the ‘Arab Common Market’. Briefly, its record can be put like this. Arab Common Market Despite its name, the Arab Common Market, founded in 1964, has only been a free trade area among four Arab countries (Egypt, Iraq, Syria and Jordan) from 197 1. In practice, however, trade among the members has not been totally freed because, at the end of the 1960s tariffs and quantitative restrictions were losing importance for three of the four members of the Common Market in favour of other trade policy instruments, eg state-trading monopolies. On top of this, intra-area trade was a victim of continuous political conflict among the members. An analysis of data shows that tariff liberalization among the four countries had had little effect on their mutual trade. Recent research by Poulson and Cliallace~ leads to the somewhat paradoxical result that intraregional trade in the Middle East has increased relative to total world trade since 1973, but that this was due to huge increases in intraregional exports by Kuwait, the United Arab Emirates, Saudi Arabia, Iraq and Bahrain, while the most rapid growth in intraregional imports occurred in Tunisia, Moroco, Iran and Saudi Arabia. This is hardly the pattern of trade that one would expect from integration among Egypt, Syria, Jordan and Iraq. The authors have calculated a dynamism index for exports (or imports) separately for each country, defined as a ratio between average intraregional exports (imports) for 1976-77 and the average figure for 197 l-72. These data lit with our needs since, as stated above, the Free Trade Area was achieved by 1971. It appears that the index for any Arab Common Market country never reached more than 3.87 (for exports ofJordan to the other fellow members) with four indexes out of eight below 2.0, while trade for the four members with other countries in the region reaches much higher levels, not to speak of the export indexes calculated for oil-producing countries, like the United Arab Emirates (around 45) or Kuwait (around 19). A possible explanation for the poor record of the Arab Common Market is that government intervention in foreign trade may have prevented costly trade diversion in favour of the members taking place. The low degree of overlapping in the range of commodities produced in the four countries points to a weak likelihood of trade creation, and strong likelihood of trade diversion. Given that tariffs are high in the four countries, the costs ofdiversion in terms ofwelfare can be enormous, and state trading companies (eg in Egypt, Syria, Iraq) may have tried to prevent this. To sum up, regional trade liberalization in the Middle East has not much appeal as long as the economies joining such a group are not more articulated or diversified.

A SouthSouth Given

trade strategy

the standing

of many Mediterranean

developing

countries in the Group FUTURES June 1902

Intra-Mediterranean

trade relations in the 1980s

185

of 77 or in the Non-Aligned Movement (eg Algeria, Egypt, Yugoslavia), the temptation could be to adopt a wider strategy involving privileged trade links with developing countries at large, although possibly starting trade liberalization at a regional or subregional level first. The project would lit nicely with the decisions taken in May 1979 in Manila by UNCTAD V (Resolution 127 (V)). It would therefore have full international backing. A second advantage would be that historical animosity between countries of the region could be played down initially by working through UN-sponsored channels. A further reason for implementing such a plan is that an institutional framework already exists and some Mediterranean countries are already participating in it.7 We are referring here to the “Protocol Relating to Trade Negotiations Among Developing Countries”, signed in October 197 1 under the auspicies of GATT, by which 16 developing countries exchanged a limited number of tariff preferences. Three other nations have since joined the scheme. The concessions exchanged numbers about 750, one-fifth of which cover agricultural products and raw materials, the rest concerning processed food and manufactures. Negotiations towards further concessions on a wider coverage of products started in 1979. The scheme is open to any developing nation wishing to join; therefore any Southern Mediterranean country could apply for membership by simply entering into negotiations with the original members. Data made available to GATT by 14 participating countries show that trade covered by the agreement rose from $24 million in 1972 to $173 million in 1977. This represents a nominal increase of 620%, the real increase being quite impressive despite the decreasing purchasing power of the US dollar. However, it is clear from these figures that the group is still far from being a Third World trading bloc, and it is difficult to envisage cooperation reaching the level ofa free trade area or a customs union, given the geographically dispersed structure of the group, including countries in Africa, Asia and Latin America. This is why a more limited strategy applicable only to Mediterranean countries is worth exploring. This is done in the next section.

Creating a Mediterranean free trade area Political and strategic interests in the Middle East differ widely from country to country, and this may in effect preclude advanced forms of economic integration. A Mediterranean free trade area could be an alternative to the Middle East framework. After all, most Middle Eastern countries share the physical, economic and human characteristics common to all Mediterranean-bordering countries. This solution would take better account of the fact that there has been a movement towards ‘Egyptianization’ and away from pan-Arabism in FgY Pt. Furthermore, there has been a recent tendency in the Mediterranean region to pool resources for cooperation8 in areas such as pollution, common security or a common position towards the ‘North’. Also, a global framework of relations between Mediterranean countries and the EEC already exists, namely what has been known since 1972 as the Global Mediterranean Policy (GMP) of the EEC. It can be said that, if we leave aside one-commodity economies (such as Libya or Algeria), the region displays a degree of ‘rivalry’ much higher than the FUTURES June 1962 13

I86

In&a-Mediterranean trade relations in th 1980s

Middle East Area. It contains such articulated and diversified economies as Israel, Turkey, Yugoslavia and the Lebanon. There is much more overlapping in the range of commodities produced, and this increases significantly the likelihood ofoverall welfare gains for the integration area. There are overlaps in at least the following sectors: agricultural products: fruits and vegetables, wine, olive oil, tobacco, rice; processedfood: fruit juice, preserved fruit and vegetables; l chemical products: relined petroleum products and phosphate; 0 construction materials: cement, glass, ceramic materials; l semimanufactured products: leather products, cork and wood products, textile products, plastic materials; and l manufactured products: clothing, footwear, tapestry, household equipment, furniture, art objects, toys. l

l

Most of these categories are based on abundant labour, capacity to dispose of wastes, and unsophisticated technologies based on the transformation of domestic raw materials. The free trade area alternative seems a feasible project, because transport facilities exist in the area, the Mediterranean Sea being the natural link between the countries. Another apriori highly valuable factor is that tariffs, which are generally quite high (including on the above-mentioned products), are protective rather than fiscal. To prevent costly trade diversion effects, products on which high fiscal tariffs are imposed would be deliberately left out. Such products include, for example, private vehicles and electrical household equipment. The present low level of trade between Mediterranean countries is due not only to high tariffs but also to the fact that some of these countries have offered the EEC reverse preferences, which they do not apply in their mutual trade:! The free trade area would restore the situation by eliminating this absurd discrimination towards neighbouring countries. It would also strengthen the position of the Mediterranean countries vis-ri-vis the EEC in future trade negotiations for the improvement of the GMP. This was one of the main purposes in the creation of EFTA-to counteract the EEC’s bargaining power. The idea is appealing, even if Spain, Portugal and Greece do not participate because of their entry into the EEC. In the first place, Portugal may after all not enter. Then, following the EEC tradition, Jordan should be included among Mediterranean countries; other countries that should be considered are Egypt, Israel, the Lebanon, Syria, Turkey, Cyprus, Malta, Yugoslavia, Morocco and Tunisia. Future trading links After the second enlargement of the EEC to the South, the weight of the ‘special cases’ in the remaining Mediterranean countries will increase, not only because they represent strategic assets for the developed world (Turkey, Yugoslavia, Israel), but also because of their economic potential. The temptation for each of them will be to establish privileged or exclusive links with its trading partners in the OECD. By acting in this way, they tend to forget that any trading superpower (eg the FUTURES June 1982

Intra-Mediterranean trade relationsin the 19wOs 187

TABLE 1. EXPORTS Total Eva* Algeria Egypt France Greece Israel Italy Jordan Zbaa”o” Ma Yta Morocco Portugal g;;; Tunisia Turkey Yugoslavia

AWa

5 809425 1708341 633:; 3083173

1796104 13982

45062434 249 300 502467 11423054 246 736 1299867 2013358 10217737 1063045 929 077 1753 026 4896401

fbt$a”o” Malta Morocco Portugal g;;!$ Tunisia Turkey Yugoslavia

FmIlCe

Greece

218

737 279 60826

3769 105163

W&58 161333

466007 49’991

33;R5CIf& 64088; 9109 7297 2435 T&Z

722;8& 2447 126981 551 10965

401X059 76559

2610

286267 21s

58%

5916 20915 Libya

617 15485 109198

33233

1175227

X

2563 2 922 21942 17615

321527 159 741 1631672 76305 165929 94 117 127275

(1977) IN $MILLIONS Israel

cco

195783

Portugal

6654364 193961 80113 181’227

276 6993

2% 41879 126551 1572 94893

413980 25 741 272791

46Kz

141063 13892 1707740 18058 12338 877133 2044

27717 422 142 7489 12xl8O 10322 6142 160465 319126 234’223 1728 4770 23210 1558 12058 13556 93591

Source: UN Yearbook of International

Spaln

627?: 97465 42 929 x 1665 3554 14925

Italy 315711 180 514

l!Z

Mom-

21007 398 072 966446 125 137

11429

198 741 14744

653897 2843 5094 740 23

COUNTRIES

EsVpt

l&39

Lebanon Algeria Egypt France Greece Israel Italy Jordan

OF MEDITERRANEAN

Syria 27845 266036 27319

i399 6 710 1916821 10353 79091 75263 519855 140636 128931 162339 818 510

29227 15 185

8314 17926

19”sss

21 131 9887

Tunisia Turkey

ylZZ-

536855 5631

37R! 477414 79464 16295 729868

28:% 12918 33617 183850 474164 216836 27 107 4310 29882 6219 493 276753 855 44338 x

Jordan

272 10785 10x284 12 180 20709

25’748

2z: 51900

37548 15054 8357 X

Trade Statistics.

EEC, the USA, the USSR) has many ‘customers’ in the area and that the tendency is to maintain an equilibrium of concessions offered to each of the latter. Such was the policy of the EEC at the beginning of the 1970s and such was the disappointment of individual Mediterranean countries that had expected otherwise. Shortly after, they were discovering not only that they were lreing ‘satellized’, but that one was being played offagainst the other. The story seems to repeat itself at the beginning of the 1980s with the option taken by Greece and Spain, something which is going to hit other Mediterranean countries. Should these other countries wait for compensation, acting individually, or find alternative solutions to maintain and improve the level of their foreign trade and, with it, the standards of living of the people in the area? This paper has tried to give some elements of a provisional answer. Notes and references 1. See A. Tovias, EECEnlargement: Papers No 5, 1979).

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thesouthern Neighbows (University ofSussex, Sussex European

188

2. 3. 4. 5. 6. 7. 8.

Intra-Mediterranean trade relations in the 1980s

The list includes Libya, Malta, Egypt, Israel, Jordan, Syria, Turkey, Cyprus and some non-Mediterranean Arab countries. In that way, only Yugoslavia and Albania would be left over. Full economic integration is akin to factor price equalization. See F. Machlup. A History of Thought on Economic Integration (London, Macmillan, 1977), page 19. See for example, J. Waterbury and R. El Mallakh, The Middle East in the Coming Decade (New York, McGraw-Hill, 1978), page 25. B. Poulson and M. Wallace, “Regional integration in the Middle East : the evidence of trade and capital flows”, in The Middle East Journal, Autumn 1979, pages 464-478. Egypt, Spain, Greece, Israel, Tunisia, Turkey and Yugoslavia. Of particular interest here is the initiative taken by the Mediterranean coastal states jointly with the UNEP to launch a ‘Mediterranean Action Plan’ dealing with environmental management in the Mediterranean region (Barcelona Convention, 1976).

countries, see Table 9. For an illustration of the low level oftrade relations among Mediterranean 1 where exports ofevery country for the year 1977, according to destination are related to total exports. The importance of trade with France and Italy dominates the pattern of intraMediterranean trade relations nowadays.

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