Speeches

Capitol Hill Forum: Can Free Trade Promote Peace in the Middle East?

By Daniel Griswold
June 23, 2003

Free trade has always been about more than economics-comparative advantage, efficiency, lower prices and all that. Those are reasons enough to support it, but free trade is first about individual liberty. People should be free to engage in peaceful and mutually beneficial commerce across international borders without the heavy hand of government dictating how they should spend and invest their hard-earned money. THAT should be reason enough to support free trade. But there is yet another compelling reason why policy makers should look favorably on free trade: It can be an important tool of U.S. foreign policy, nowhere more so than in the Middle East.

After World War Two, Democratic and Republican administrations alike pursued trade expansion as an important pillar of America’s Cold-War policy. Trade promoted development in post-war Europe and Japan, and cemented relations among allies. War is pretty much unthinkable today among the major powers of Europe in part because of the trade and investment ties that bind their people together. September 11 and its aftermath have reminded us again that trade and foreign policy are intertwined. That connection between trade, security, and foreign policy will dominate the agenda at this weekend’s historic economic forum in Amman, Jordan, which will hear more about in a few minutes.

Free trade is not a panacea, but it is a necessary building block for a more peaceful and prosperous Middle East. Free trade has helped to reduce poverty in those countries and regions of the world that have progressively opened themselves to the global economy. Free trade can till the soil for democracy and respect for human rights by creating an economically independent and growing middle class.

Countries that are open to trade and global commerce are more likely to be working democracies that respect human rights. The Bush administration’s white paper on National Security Strategy last year emphasized the importance of trade in building a more secure world. In his May 9 address in South Carolina, President Bush said, “The Arab world has a great cultural tradition, but is largely missing out on the economic progress of our time. Across the globe, free markets and trade have helped defeat poverty, and taught men and women the habits of liberty.”

We have seen this dynamic in action in South Korea, Taiwan, Chile, Mexico, and other countries where economic reforms and openness have laid a foundation for political competition and democracy. Within the Arab world, those nations that have traveled the furthest on the road of economic reform, and Jordan certainly belongs on that list, are among the leaders of political reform as well.

Sadly, the Arab world is a land that globalization has largely passed by-and their isolation is largely self-imposed. Average tariff barriers in the Arab Middle East are among the highest in the world, and as a consequence the region suffers from chronically declining shares of global trade and investment. Average annual inflows of foreign direct investment to Arab countries are only slightly larger than the inflows to Sweden; non-oil exports from Arab countries to the rest of the world are smaller than those of Denmark. There are more McDonalds franchises serving the 15 million people in the Netherlands serve the 280 million people in the whole Arab world. The government of Jordan took the positive step of joining the World Trade Organization in 2000, but WTO membership is still the exception in the Middle East. Here’s a pop quiz: What do Libya, Sudan, Syria, Iraq, Iran, and Afghanistan have in common? Besides all of them being ongoing or recent sponsors of terrorism, not one of them belongs to the WTO.

Internal market freedom is also lacking in many Arab nations that are still suffering from a bout of so-called Arab socialism. Most Arab countries engage in widespread price controls and state-ownership of enterprises. They lack the legal and political infrastructure to enforce property and contract rights.

Those policies have wrought dismal economic performance. The total gross domestic product of the 280 million people who live in Arab lands is smaller than that of Spain. According to a recent report by the UN Development Program, between 1985 and 1998, real per capita GDP declined in a broad swath of the Arab world. In contrast, real GDP during that same period rose by 30 percent in Israel, 90 percent in Chile, and more than doubled in Thailand, China, and South Korea.

The record on civil and political freedom in the Arab world is no better. Freedom House, the human rights group in New York, reported in its latest study that only 25 percent of Muslim-majority countries in the world are democracies compared to 75 percent of non-Muslim countries. Freedom House noted in most recent report that, “the democracy gap between the Islamic world and rest of the world is dramatic,” and there is no sign that the gap is closing.

That depressing reality feeds terrorism, not because of poverty but because of a lack of opportunity and hope for a better future, especially among the young. It’s a myth that poverty breeds terrorism. In fact, poverty is more widespread in sub-Saharan Africa and South Asia than in the Arab world, in part because of the network of private Islamic charities that help the poorest in society. And many terrorists are well educated and come from relatively privileged families. As Paul Blustein of the Washington Post wrote in a story from Cairo last year: “It is not poverty that drives their discontent so much as an economy that provides few chances for interesting work and upward mobility.”

Young people who cannot find meaningful work and who cannot participate in the political process are ripe pickings for religious fanatics and terrorist recruiters.

All of this gives urgency to the summit in Jordan this weekend, and to what the Bush administration is trying to accomplish with its proposal for a free trade area in the Middle East. The initiative concentrates on negotiating free trade agreements with willing and ready partners in the Middle East, with the goal of establishing a network of agreements within a decade.

The advantage of striking FTAs would be their comprehensiveness. Like the Jordan, Singapore, and Chile FTAs, any agreements we sign should cover all goods and services. FTAs also require liberalization on the part of our negotiating partner, an absolutely necessary step in a region where the greatest barriers to trade are not external but internal.

The catch with FTAs is that they take a long time to negotiate and implement. Negotiation and final passage of agreements can take years. Once enacted, some of the phase-out periods for protection of “import-sensitive” sectors can take up to 12 years. So genuine free trade would come to a significant number of Middle Eastern countries only by 2013 or even later. Our challenge in that region of the world is far too urgent for that to be our only policy option.

A complimentary policy would be to grant immediate, unilateral duty-free access to imports from qualifying Middle Eastern countries. I know Senators Baucus and McCain have introduced a bill to that effect [Finance Committee staff], and companion legislation is being prepared in the House. The beauty of this approach is that it delivers real-time benefits to the people of the Middle East by creating immediate opportunities for their producers to sell in the U.S. market. It also sends a symbolically powerful signal that we are serious about encouraging free trade by making a down payment on the vision of a more open and economically vibrant Middle East. We’ve extended qualified duty free access to the Caribbean Basin countries, to the Andean Trade Preference Act countries, and to sub-Saharan Africa through AGOA. Is not the Middle East just as important to U.S. foreign policy as those other regions?

The drawback of the unilateral approach is that it requires very little policy reform on the part of Middle Eastern governments. It leaves untouched the fundamental problem of a lack of openness and economic freedom within the Arab world itself. And the record of unilateral trade preferences is not spectacular. Studies have found that countries that enjoy preferential access to the U.S. market are no more inclined to liberalize than those that do not.

The answer, of course, is to pursue both approaches simultaneously: Reduce our own trade barriers as soon as possible to goods of most export potential in the Arab world, and at the same time negotiate comprehensive, bilateral agreements along the Jordan model with a coalition of willing reformers in the Middle East.

Free trade is not a magic tonic that by itself will bring peace and hope to the Middle East. But trade can, as it has in other times and other places, bring people together in peaceful cooperation to build a better future. Now is the time to put aside petty, parochial, and partisan concerns to do whatever we can as soon as we can to extend the blessing of freedom to a part of our world that desperately needs it.

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute and author of Mad about Trade: Why Main Street America Should Embrace Globalization (Cato Institute, 2009).