Arab Customs Union: A new venture or more of the same? (by Abdallah Al Dardari)

Silently, but surely, economic integration among Arab countries is edging towards a dramatically new phase in its 60 year history of small successes and grand disappointments. By January 2015 an Arab Customs Union (ACU) should be operational, creating a single economic border between the 22 members of the League of Arab States (LAS) with the rest of the world, paving the way for free flow of products, with zero tariffs between Arab markets. The Economic and Social Commission for Western Asia (ESCWA) estimates that the full implementation of this Arab summit resolution would lead to a dramatic boost of growth and employment in almost every Arab country. The corridors of the LAS headquarters in Cairo are bustling with experts and officials from member countries, with ESCWA’s technical assistance, working out the complex and difficult compromises needed to effectively launch the Customs Union on time. For despite the political will demonstrated by the Arab Development summit in Riyadh 2013, arriving to the launch date with agreement on all related issues remains a tall order. Arab countries have formerly liberalized exchanges of goods in 2005 through the full implementation of the Great Arab Free Trade Area (GAFTA). However GAFTA’s record has been mixed at best. Total Inter Arab Trade as percentage of total Arab foreign trade stayed at around 10 per cent, and according to a gravity model constructed in ESCWA, actual inter Arab trade remains less than 50 per cent of potential after almost a decade of free trade. Some Arab countries like Syria and Jordan dramatically increased exports to other Arab countries. Others like Egypt and Saudi Arabia also achieved net gains, albeit less than the former, while Maghreb countries remained insulated from the potential expansion of trade with each other and with other members of the LAS. Non tariff measure (NTMs), exception lists, stringent and unclear rules of origin were some of the reasons GAFTA did not fulfill its full desired impact. Therefore moving towards a full Customs Union without designed action plan that considers the lessons learned from GAFTA application and lays down an effective and practical approach to the new venture, would only mean more of the same. The lost opportunity cost would be tremendous. ESCWA is measuring that erecting an effective ACU, along with enhancing labor flows, infrastructure connectivity, and macroeconomic coordination could boost growth across the region by an average of 3 percentage points and reduce unemployment by more than 50 percent in five years. Hence the importance of an action plan that consists of detailed analysis of pitfalls of GAFTA, including NTMs and rules of origin, simulations of different tariffs structure for the ACU, with fiscal consequences of each scenario, and a clear and practical compensation mechanism for countries losing out on tariffs revenues. The last point is crucial since it raises vital questions: where tariffs would be collected? At the point of entry of goods or in the country where they are consumed? And how would the revenues collected at the point of entry redistributed to countries of final destination? More importantly is Arab administration capable of managing these complex systems in an effective and transparent manner? In view of these questions, January 2015 may seem too short a notice for kicking off such a dramatic venture. However, the opportunity is too great to miss, and the political and social challenges facing all Arab countries should encourage them to go the extra mile down regional integration. After all we are fully convinced that without integration, development in the region will always be constrained and sub optimal.