Sat, 10 Jul 2004

Wise trade policy can address the roots of terrorism

Edward Gresser Yale Center for the Study of Globalization Washington

Many people believe economic growth, development, and job creation in the Muslim world could help drain support from radical and fundamentalist groups. Few seem willing to do much about it.

Ask Pakistan. In 2001, then-Commerce Minister Abdul Razak Dawood told a newspaper that "if you want Pakistan to be a liberal and modern state, you are not going to get that unless you've got people employed," and requested an exemption from American textile tariffs. He never got his wish. Three years later, Pakistan's bedsheets and sweaters still get tariffs five to ten times those applied to the chips and cars coming to the U.S. from Japan and Europe.

The issue is not simply Pakistan and American tariffs. It is the economic decline of much of the Muslim heartland, a region accounting for 30 countries and 700 million people from North Africa to Bangladesh. The virtue of free trade as a path to economic development, so often touted by the West in other areas of the world, is generally absent in trade policies towards Muslim nations, making it even harder for the region to reverse its slide.

In 1980, at the peak of the oil boom, this region accounted for almost 14 percent of global exports. Twenty-five years later, the figure is below five percent. Investment is a still more striking case. The "outsourcing" and "offshoring" phenomena so prominent in American trade debates has nothing to do with the Muslim world. All 57 Muslim countries combined now receive barely as much foreign investment as very small European or East Asian economies like Sweden, Singapore, or the Netherlands.

In effect, as most of the world has debated globalization, these countries have conducted an experiment in "de- globalization." Their share of the global economy has contracted by 75 percent in a generation -- and the generation in question is a very big one.

Since 1980, the population of the Middle East has jumped from 175 million to 300 million. That of Muslim south and central Asia has gone from 225 million to 360 million. Thus a quarter of a billion young people are fighting for opportunities no more extensive than those their parents had in the 1970s.

It is not surprising that a large pool of unemployable young people makes easier recruiting for radical and fundamentalist groups.

Even carefully developed trade policy cannot reverse these trends. But just as the series of multilateral trade agreements under the GATT system helped reverse the western "de- globalization" of the 1930s, a movement towards fairer, open markets could help Muslim economies.

Local policies are at the heart of the problem. Nationalist economic policies, long abandoned in Southeast Asia and Latin America, continue to isolate countries from one another and the larger global economy. High trade barriers are one example: Syria's auto tariff, for example, is 200 percent, despite the fact that Syria makes no cars.

The proliferation of sanctions and boycotts in the last twenty years, whatever their political motives, has further speeded regional fragmentation. Jordan's King Abdullah II has described the result as a "series of isolated islands of production." And the Muslim world, despite its influence over energy markets, participates less in global trade policymaking through the WTO than East Asia, Latin America or sub-Saharan Africa.

Such policies, though, are neither immutable realities nor irreversible choices. Europe's majority-Muslim states -- especially Turkey but also Albania and Bosnia -- have a different approach, seeing their destiny in democratization and integration with the European Union. In Southeast Asia, meanwhile, Indonesia and Malaysia are big exporters and influential WTO members. In the Middle East, smaller countries like Jordan, Qatar, the United Arab Emirates and Bahrain are lively policy innovators. Pakistan has been revamping its policies as well, and the recent end of sanctions on Afghanistan and Iraq (and perhaps soon Libya) should help these countries and their neighbors.

Americans and Europeans have an obvious stake in the success of Muslim-world reformists. But their current policies not only fail to respond with help, but in some ways make their work harder.

European farm policies are one example. Subsidies to olive oil producers in Spain, Italy and Greece, for example, total about US$2 billion a year -- more than twice the value of world olive oil trade outside the EU -- push down the price of European olive oil and keep competitive and high-quality oil from Morocco and Tunisia off the world market.

America's free trade agreement and preference network is another. These initiatives now excuse 67 developing countries in Africa and Latin America from tariffs. The unintentional result is to put many Muslim-world exporters at a disadvantage. American retail stores pay no tariffs on a T-shirt made in El Salvador, Lesotho, or Peru, but a 20 percent tariff if they choose to buy the same shirt from plants in Pakistan, Egypt, or Turkey. The pressure will only rise next year, when the end of textile quotas enables India and China to take full advantage of their size and economies of scale.

The current American response is a proposal floated by the Bush Administration for a U.S.-Middle-East Free Trade Area.

Even if it succeeds, its tentative conclusion in 2015 delays any tangible action for over a decade, and in excluding Pakistan, Bangladesh, Afghanistan and Central Asia, it misses countries of central importance in the war on terrorism. The more realistic short-term attempt to build free trade agreements with Bahrain and Morocco is better, but these two countries account for only about 35 million of the region's 700 million people.

An easier, and at least in the immediate future more effective, response would be to return to the approach Dawood suggested three years ago. Congress has already proposed such an idea. Last fall, Senators Max Baucus and John McCain, along with two Democratic Representatives, introduced a bill to drop tariffs on goods from 18 Muslim countries, from North Africa to Pakistan, Afghanistan, and Bangladesh.

Presidential candidate John Kerry had suggested such an approach even earlier, calling for "a general duty-free program for the region, [like] the Caribbean Basin Initiative and the Andean Trade Preference Act."

Such an approach could help spark quick investment and job creation. At minimum, it would improve a trade regime actually tilted against U.S. allies in the war on terror. With a duty-free zone in place, future U.S. Administrations would have a positive foundation to build upon as they consider carefully how to craft deeper and more comprehensive approaches to trade relations with the Muslim world. It's a pity the U.S. didn't act on Minister Dawood's request three years ago. But there's still time to start now.

The writer is Director of the Progressive Policy Institute's Project on Trade and Global Markets.