Gaining from free trade

Article in Jordan News

Tue 22 11, 2022 

Jordan signed the EU Association Agreement (AA) with the EU in 1997, two years after the Barcelona Declaration. The AA, which entered into effect in 2002, covered political, trade, economic, social, and cultural venues of cooperation. Moreover, in 2016, to help with the refugee situation in what became known as the Jordan Compact, the EU, through the EU Relaxation Decision (No.1/2016), relaxed requirements concerning certificates of origin for certain goods produced in Jordan for a 10-year period, until December 31, 2026. Now that 20 years have passed, it is only fair to ask whether the AA added value, and had a discernible impact on employment and foreign direct investment (FDI) in Jordan, and, if not, what remedies/changes can be done to fix the AA.

 EU is Jordan’s largest trade partner, accounting for 14.7 percent of Jordan’s trade in 2020. EU imported goods from Jordan worth 0.4 billion euros, and its exports to Jordan reached 3.0 billion euros. However, Jordan’s trade with the EU does not represent more than 3 percent of its total trade. Interestingly, there is something of a rule in economics, which says that for a small country to gain from trade with a large country, the latter should be altruistic toward the smaller one. It is not by chance that the EU is the leading foreign investor in Jordan, accounting for 55 percent of the foreign direct investment (FDI) stock in the Kingdom, and that the EU became a major donor to Jordan after the signing of the AA (EU aid to Jordan averaged 130 million euros per year during 2014–2020).

A recent report, “Trade liberalization and jobs in the Mediterranean: towards a new generation of trade agreements”, by the Center for Mediterranean Integration (CMI), underscores that the impact on jobs, value-added, and FDI has been mixed (a hodgepodge of few winning and losing sectors) and mild (underwhelming is the wording of the authors) across the Jordanian economy. In fact, other regional developments, such as the Palestinian Intifada, the invasion of Iraq, the Arab Spring, the influx of refugees from Syria, may have more of an impact than the AA.

So what can be done to make the AA more beneficial to Jordan (and the other three countries, Tunisia, Morocco, and Egypt)? According to the CMI report, three things can be done: liberalization of the services sectors (such as business services, information, telecommunication, and financial services), which contribute to enhancing the value added in the manufacturing sector; attracting FDI in manufacturing to promote knowledge-intensive production, especially in labor-intensive sectors; improving the competitiveness of the industry and addressing the non-tariff barriers (which are more forbidding to trade than tariffs sometimes).

Clearly, one must agree with the report that by simply signing a free trade agreement a country does not immediately benefit from trade, particularly if it is the smaller partner, which is Jordan’s case. Jordan needs to do much more than simply sign a free trade agreement to benefit from trade. It needs to put in place and implement a strategy to develop its manufacturing industry. It should facilitate the manufacturing sector’s access to finance, which remains a challenge today.

Jordan needs to focus on value-added everywhere (services, industry, and agriculture). There is a great need to support firms to become exporters to the EU market (market access). In other words, there is a whole cluster of activities that ought to be done internally to ensure that local producers enhance their competitiveness and gain from trade.

 

*Yusuf Mansur is CEO of the Envision Consulting Group and former minister of state for economic affairs.

https://www.jordannews.jo/Section-36/Opinion/Gaining-from-free-trade-24862