GAFTA: MORE BURDEN THAN BENEFIT FOR SYRIA?

C O N F I D E N T I A L SECTION 01 OF 03 DAMASCUS 002633 SIPDIS SIPDIS NEA/ELA NSC FOR ABRAMS/SINGH TREASURY FOR GLASER/LOEFLER E.O. 12958: DECL: 06/01/2016 TAGS: ECON ETRD EINV SY SUBJECT: GAFTA: MORE BURDEN THAN BENEFIT FOR SYRIA? Classified By: CDA Stephen Seche for reasons 1.4 b/d ¶1. (C) Summary: Although the Greater Arab Free Trade Agreement (GAFTA) was fully implemented on January 1, 2005, the benefits to Syria's economy have been limited. While trade exchange between Syria and the Gulf countries may have increased marginally, most Syrian business contacts and economists believe that GAFTA has thus far negatively impacted Syria on balance. Though there is potential for Syria to take advantage of expanded inter-Arab trade to help attain higher economic growth rates, the SARG's limited ability to promote increased Syrian trade or enforce GAFTA regulations will likely continue to limit Syria's economic gains. End summary. ¶2. (C) Though the January 1, 2005 elimination of customs duties on inter-Arab trade under the Greater Arab Free Trade Agreement (GAFTA) was heralded as a means of encouraging free trade, increasing economic growth, and achieving regional competitiveness in the global economy, our Syrian contacts, reactions to GAFTA have been lukewarm, with most suggesting that while GAFTA has potential to increase Syria,s inter-Arab trade, the tangible benefits of the agreement thus far have been limited. -------------- --- Shortcomings of GAFTA to Syria... -------------- --- ¶3. (C) One of the potentialities for GAFTA trumpeted by the SARG is the creation of increased trade among signatory countries. Though Syrian economist Nabil Sukkar told us that the SARG has not conducted studies on the economic effects of GAFTA, based on his own research, he believes that Syria has not witnessed significant increases in inter-Arab trade since January 2005. Fellow Syrian economists Samir Seifan and Ayman Midani offered similar assessments, with Seifan stating that Syrians are generally not benefiting from GAFTA and that, if anything, GAFTA has helped cause a trade deficit and trade imbalance since its initial implementation in 1998. Official SARG statistics lend some credence to these arguments. SARG statistics indicate that Syrian imports increased steadily between 2004 and August 2005 - from $6.72 billion to $6.84 billion. Comparatively, exports during the same time period decreased from $6.5 billion to $5.1 billion. This trade balance has been attributed in part to the elimination of customs duties as a result of GAFTA. Seifan expressed concern that under GAFTA, Syria imports more goods in which it has a comparative advantage - textiles, furniture, and agricultural products - than it exports because the imports are either less expensive or considered to be of better quality. Additionally, other contacts with whom we spoke stated that the soon-to-be released GAFTA "negative list," a safeguard provision that allows Syria to exclude certain products from tariff elimination, could potentially undermine the SARG's expressed goals of trade liberalization and private sector development. ¶4. (C) Though Seifan claims that no Syrian industries have been dislocated as a result of GAFTA, he believes those that will ultimately be most negatively impacted under the agreement include textiles, foodstuffs, and personal care products. Roula Zelhouf, who started her children,s clothing company in 1988 and exports to Jordan and most countries in the Gulf, says that she believes GAFTA has neither helped nor hindered her business. Though she admits that she faces competition from third-country goods illegally imported duty-free into Syria under GAFTA, she claims that her established clientele in the Gulf and her brand,s reputation will allow her to compete effectively with what she perceives to be lower quality Asian imports. She contends that more than GAFTA, the SARG,s decision in the past month to monitor and control the retail price of children,s clothing in Syria has significantly impacted her ability to market her products locally. ¶5. (C) One of the biggest short-term challenges that Syria is facing as a result of GAFTA is the duty-free import of goods from Asia (namely China and Korea) through Dubai and Jordan. Business contacts contend that companies in neighboring countries simply create a certificate of origin that attests DAMASCUS 00002633 002 OF 003 that Asian goods were produced in Arab countries, and are therefore eligible for duty-free treatment. According to GAFTA regulations, a signatory country must add 40 percent value to the finished good before exporting it to another Arab country. Though specific calculations to determine the origin of the good are laid out in the GAFTA agreement, they are rarely enforced. Sukkar contends that Syrian customs officers are unfamiliar with the specifications under GAFTA, and can easily be bribed at the border to authenticate a product's certificate of origin. Attorney Rabie Khushana from the Syrian Intellectual Property Association claims that GAFTA's weak enforcement, arbitration, and penalty measures are contributing to the already significant IPR loss in Syria. ¶6. (C) A constant refrain among Syrian producers is that while importers in Syria are undoubtedly benefiting from GAFTA, little is being done to market Syrian products in the region. One contact expressed frustration that consumers can find French fruits and Italian olive oils in Dubai, but not their less expensive Syrian counterparts. Several contacts have also expressed concern that neither Syrian producers nor the SARG have proactively familiarized themselves with Gulf markets or consumer needs, but rather are waiting for Gulf vendors to come to them. One Syrian source also told us that about three years ago the Chambers of Commerce and Industry called on the SARG to appoint Syrian commercial attaches in the region to promote Syrian products, an idea which was dismissed without consideration by the regime. Additionally, diplomatic contacts from GAFTA signatory countries claim that Syrian businessmen are not actively seeking new markets, such as those in the Maghreb countries. Brahim Rezgui, Economic Counselor for the Tunisian Embassy says that since January 2005, there has been no change in the $50 million/year bilateral trade, and that irrespective of GAFTA, both Syria and Tunisia will likely continue to focus more attention on trade ties with Europe than with each other. -------------- -------------- ...Are They Outweighed by Potential Benefits? -------------- -------------- ¶7. (C) Nonetheless, both Sukkar and Seifan argue that GAFTA represents an opportunity for growth and reform in the Syrian economy, suggesting that the trade agreement may push the SARG to reduce the economic role of its inefficient state-owned enterprises and focus its attention on export-led industrialization strategies. Seifan believes that GAFTA will encourage Syrian industrialists to shift to less labor-intensive products and more fully automate their production lines. Other business contacts believe that GAFTA will make Syrian products more competitive regionally by forcing Syrian industries to contend with their more efficient private sector counterparts in neighboring countries. Contacts also claim that GAFTA will allow Syrian industrialists to "test the waters" before ratification of other pending free trade agreements - with Turkey and the European Union. However, opponents maintain that other free trade agreements, specifically the Syria-European Association Agreement, will create bilateral trade patterns that discourage inter-Arab regional economic ties. ¶8. (C) Contacts have indicated that one of the biggest "winners" under GAFTA will be Syria,s pharmaceutical industry. Dr. Fouad Mujallid, resident WHO representative, believes that there is strong potential under GAFTA for private pharmaceutical companies in Syria to increase their exports throughout the region because they are more cost competitive than their European counterparts. However, Mujallid claims that in the Gulf, Syrian pharmaceuticals are often viewed as cheap, unregulated products that fall short of European or American standards. Mujallid told us that he believes that Syrian pharmaceutical companies are either unfamiliar or unconcerned with how to market their products in the Gulf region, stating that even reputable pharmaceutical companies such as Attar or Nahas are not the primary profit-making foci of the family-owned business groups. ¶9. (C) We have also heard anecdotal evidence that GAFTA has more easily facilitated a trade exchange between Syria and DAMASCUS 00002633 003 OF 003 the Gulf countries. For example, several exhibitors at Syria,s largest industrial exhibition, Buildex, spoke positively of GAFTA, saying that the low customs fees and transportations costs between the Levant and the Gulf have encouraged the establishment of new painting and construction companies in both regions. Additionally, businessmen like Saud Safadi have attracted new foreign direct investment, in part because of Syria's preferential access to the Gulf market under GAFTA. Safadi,s production facility, a joint-venture with Japanese company Otsuka, is expected to begin bottling a sports drink within the next six months. Safadi contends that his company represents the only Japanese FDI in Syria, and that he was able to attract investors partially because of the expanded regional market under GAFTA. Finally, GAFTA has offered Syrian consumers greater choice through a broader range of goods - including Coca-Cola, and Proctor and Gamble products manufactured and exported from the Gulf - which were previously prohibited in the Syrian market. ¶10. (C) Comment: The Asad regime continues to point to GAFTA as a success in its effort to encourage economic reform and growth, as well as a step on the path of continued international economic integration that will be fulfilled by the European Union Association Agreement and ultimately Syria's accession to the WTO. However, despite a year and a half of full implementation of GAFTA, the trade agreement has fallen short of the SARG's hype and has not yet delivered significant, tangible economic benefits for Syria's business community. Although increased trade under GAFTA has the potential to contribute to economic growth for Syria, the SARG's and Syrian businesses' failure to research or target the markets available under GAFTA, as well as the regime's unwillingness or inability to enforce GAFTA regulations will continue to stymie Syria's ability to fully benefit from inter-Arab trade. SECHE