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August 5, 2003 No.

24

The Trade Front
Combating Terrorism with Open Markets
by Brink Lindsey

Executive Summary
In May 2003 President Bush announced Hammering out all the details of a mutually
plans to create a U.S.–Middle East free- acceptable agreement with those that are
trade area within a decade. The new trade prepared to take the plunge—and then guid-
initiative aims to combat terrorism, and ing that agreement through approval by
the Islamist extremism that underlies it, by Congress—will be a complex, contentious,
promoting economic and political devel- and time-consuming process. A U.S.–Middle
opment in the Muslim world. The admin- East free-trade area, however desirable, is a
istration moved quickly to begin putting policy goal for the long term. Meanwhile, the
its plans into action by announcing that administration’s initiative fails to include
the United States and Bahrain would soon Turkey, Afghanistan, or Pakistan—all coun-
commence negotiations for a free-trade tries with obvious geopolitical significance.
agreement (FTA). Meanwhile, negotia - Accordingly, the Bush administration
tions for an FTA with Morocco are already should supplement its pursuit of FTAs
under way, and a U.S.-Jordan FTA, now in with an initiative that is simultaneously
its second year, has produced a boom in broader in scope and capable of generating
Jordanian exports. immediate results. Specifically, the admin-
The Bush administration should be con- istration should endorse and actively sup-
gratulated for opening a trade front in the port legislation to grant temporary duty-
war on terrorism. With the proper commit- free, quota-free access to the U.S. market
ment and follow-through, a major U.S. trade for exports of selected Muslim countries.
initiative in the Muslim world can give real The unilateral elimination of U.S. trade
encouragement to desperately needed growth barriers would give tangible, dramatic
and reform in that troubled region. proof of U.S. commitment to the region,
The fact is, though, that negotiating thereby providing a jump-start for the
FTAs will take time. Relatively few countries longer, arduous process of negotiating
in the region are ready to begin serious talks. FTAs.

Brink Lindsey, director of the Cato Institute’s Center for Trade Policy Studies, is the author of
Against the Dead Hand: The Uncertain Struggle for Global Capitalism and coauthor of
the forthcoming Antidumping Exposed: The Devilish Details of Unfair Trade Law.
The administra- poor people into terrorists and mur-
tion’s refashioning Introduction derers. Yet poverty, weak institutions,
and corruption can make weak states
of trade policy to On May 9, 2003, in a commencement vulnerable to terrorist networks . . .
respond to the ter- address at the University of South Carolina, within their borders.2
rorist threat has President Bush unveiled plans for establishing
a U.S.–Middle East free-trade area within the The national security paper emphasized this
moved beyond next decade. With that announcement, he has connection by devoting an entire chapter to
rhetoric and into assigned trade policy a major role in winning trade policy.
the peace after the military victories in The administration’s refashioning of trade
concrete action. Afghanistan and Iraq. policy to respond to the terrorist threat has
The new trade initiative aims to combat moved beyond rhetoric and into concrete
terrorism, and the Islamist extremism that action. On May 21 the United States and
underlies it, by promoting economic and polit- Bahrain announced plans to negotiate a bilat-
ical development in the Muslim world. “The eral free-trade agreement (FTA). Talks on an
Arab world has a great cultural tradition, but is FTA with Morocco are already under way,
largely missing out on the economic progress with completion scheduled for the end of this
of our time,” the president declared in his May year. The initiatives with Morocco and Bahrain
9 speech. “Across the globe, free markets and follow on the heels of the U.S.-Jordan FTA,
trade have helped defeat poverty, and taught initiated during the Clinton administration but
men and women the habits of liberty.” 1 The signed into law by President Bush just weeks
hope is that better integration of Arab coun- after the terrorist attacks on New York and
tries into the global economy will initiate a vir- Washington. The current plan is for these
tuous circle of increased growth and broader bilateral FTAs to serve as building blocks for
economic reforms and that, in turn, a freer and an eventual region-wide agreement.
more prosperous Middle East will be less sus- In preparation for additional FTAs, the
ceptible to the radical Islamist movements that administration has announced that it will be
support and perpetrate terrorism. stepping up efforts to negotiate bilateral invest-
The linkage of trade policy and national ment treaties (BITs) and trade and investment
security has been a recurring theme with the framework agreements (TIFAs) in the region.
Bush administration since the September 11, BITs guarantee basic rights for foreign
2001, terrorist attacks. The white paper outlin- investors, and TIFAs provide for regular bilat-
ing the administration’s national security strat- eral consultations aimed at strengthening com-
egy made headlines last fall by endorsing pre- mercial ties. The United States has already
ventive military action against “emerging entered into BITs with Azerbaijan, Bahrain,
threats.” That document also envisioned many Bangladesh, Egypt, Jordan (now superceded by
other fronts in the war on terrorism in addition the FTA), Kazakhstan, Kyrgyzstan, Morocco,
to military action. In particular, it drew an Tunisia, and Turkey. In July 2003, Pakistan
explicit connection between trade expansion signed a TIFA with the United States, joining
and threat reduction: Algeria, Bahrain, Egypt, Jordan (now
superceded by the FTA), Morocco, and
We will actively work to bring the Turkey. As has happened with Jordan,
hope of democracy, development, free Morocco, and Bahrain, BITs and TIFAs can
markets, and free trade to every corner lead eventually to FTA negotiations.
of the world. The events of September Meanwhile, foreign policy considerations
11, 2001, taught us that weak states, have been exerting influence on the U.S. trade
like Afghanistan, can pose as great a agenda outside the Middle East. Signing of the
danger to our national interests as FTA with Chile was delayed several weeks after
strong states. Poverty does not make Chile failed to support the U.S. position on Iraq

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in the United Nations Security Council. As the ment to desperately needed restructuring in that
trade pact with Chile hung in limbo, U.S. Trade troubled region. In particular, properly struc-
Representative Robert Zoellick unveiled the cri- tured FTAs can promote fundamental reform in
teria that will guide the selection of future FTA participating countries. Their successes, in turn,
partners. In addition to satisfying various trade can turn those countries into models for change
and general economic requirements, countries throughout the region.
must cooperate with the United States on for- The fact is, though, that negotiating FTAs
eign policy and national security matters. USTR will take time. Relatively few countries in the
officials have stated that the United States will region are currently ready to commit themselves
not seek an FTA with New Zealand because of to the sweeping policy changes that are entailed,
its refusal to allow nuclear-powered and and hammering out all the details of a mutually
nuclear-armed vessels in its waters. By contrast, acceptable agreement with those that are pre-
the United States is seeking to expedite an FTA pared to take the plunge—and then guiding that
with neighboring Australia, a staunch U.S. ally agreement through approval by Congress—is a
in Afghanistan and Iraq.3 complex, contentious, and time-consuming
Although the Bush administration’s linkage process. A U.S.–Middle East free-trade area,
of trade issues with the war on terrorism marks however desirable, is a policy goal for the long
a new direction for U.S. trade policy, it is only a term. President Bush’s proposed timetable of a A major U.S. trade
variation on a well-played theme. During the decade may well prove too optimistic. initiative in the
Cold War, American trade policy pursued aims Meanwhile, the U.S. interest in pursuing Muslim world can
that transcended merely commercial considera- economic engagement with the Muslim world
tions. Market-opening trade agreements were extends beyond the Middle East. The adminis- give real encourage-
seen as a way to contain communism, not just tration’s new initiative, for example, fails to ment to desperately
militarily, but economically as well. Strengthen- include Turkey, Afghanistan, or Pakistan—all
ing commercial ties with our allies would serve countries with obvious geopolitical significance.
needed restructur-
to maintain Western solidarity; opening our Accordingly, the Bush administration ing in that troubled
markets to developing countries would help to should supplement its pursuit of FTAs with an region.
keep them out of the Soviet orbit. initiative that is simultaneously broader in
Now, in the midst of a struggle against ter- scope and capable of generating immediate
rorism that will likely continue for many years, results. Specifically, the administration should
the national security dimension of trade policy endorse and actively support legislation to
is once again plainly visible. It has become grant temporary duty-free, quota-free access to
painfully clear that Americans live in a danger- the U.S. market for exports of selected Muslim
ous world—and that the primary danger at countries. Legislation along those lines was
present emanates from the economic and polit- introduced on May 22, 2003, by Sens. Max
ical failures of the Muslim world. Those fail- Baucus (D-Mont.) and John McCain (R-
ures breed the despair on which violent Ariz.). The unilateral elimination of U.S. trade
Islamist extremism feeds; no comprehensive barriers would give tangible, dramatic proof of
campaign against terrorism can leave them U.S. commitment to the region, thereby pro-
unaddressed. Promoting economic and politi- viding a jump-start for the longer, arduous
cal reform throughout the Muslim world has process of negotiating FTAs.
become an urgent priority for U.S. foreign pol- While the administration deserves credit for
icy—and trade liberalization, while no enlisting trade policy in the fight against terror-
panacea, is an important part of the equation. ism, it needs to be careful about the extent to
The Bush administration should therefore which it subordinates trade policy to foreign
be congratulated for opening a trade front in the policy considerations. In particular, using trade
war on terrorism. With the proper commitment policy instruments to reward or punish countries
and follow-through, a major U.S. trade initiative for specific positions on specific foreign policy
in the Muslim world can give real encourage- issues is highly unlikely to advance U.S. eco-

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nomic or national security interests. was the ideology of choice; in Syria and Iraq,
It is one thing to refrain from pursuing clos- Baathism rose to power; in Iran, the White
er economic ties with hostile, terrorist-spon- Revolution of the Pahlavi dynasty gave way to
soring dictatorships. It is quite another thing, the ayatollahs’ Islamic Revolution. In Saudi
however, to maintain barriers that restrict trade Arabia and other Gulf States, oil wealth rather
with liberal democracies simply because their than ideology became the basis for ruling-fam-
current governments and ours fail to see eye to ily patronage and control.
eye on some particular issue. From an econom- Today the legacy of the collectivist delusion
ic perspective, failure to pursue trade liberaliza- remains a blight on the region’s economic
tion with willing partners amounts to cutting prospects. Consider two basic indicators of state
off our nose to spite our face. From the stand- control over economic life: the relative impor-
point of national security, the heavy-handed tance of state-owned enterprises and the extent
use of America’s economic leverage will only of price controls. The Economic Freedom of the
perpetuate foreign resentment of U.S. power. World report rates countries on a scale from 0 to
10 with respect to both criteria: scores of 6, 8,
and 10 indicate increasingly market-oriented
Stagnation, Repression, environments, while scores of 4, 2, and 0 indi-
and Terror cate progressively greater government owner-
ship and control. Of the 13 Middle Eastern,
The rise of Islamist extremism over recent North African, and South Asian Muslim coun-
decades is a complex historical phenomenon, tries included in the survey—Algeria, Bahrain,
and it would be facile to try to ascribe it to any Bangladesh, Egypt, Iran, Jordan, Kuwait,
single root cause. That said, the Muslim Morocco, Oman, Pakistan, Syria, Tunisia, and
world’s woeful deficits in economic and politi- the United Arab Emirates—only 2, Kuwait and
cal freedom surely deserve much of the blame. the UAE, earned solidly pro-market scores on
Widespread poverty, high unemployment, the both criteria. For the other 11 countries, the
absence of opportunities for upward mobility, average score was 2.2 for state-owned enterpris-
brutal and corrupt ruling elites, the stifling of es and 3.5 for price controls. 5
dissent, the exasperation caused by seeing spec- The failure to foster market competition
tacular successes elsewhere in the world—all isn’t just a matter of government interference
stoke the rage and despair that win new con- from above. In addition, governments fail to
verts to Islamist extremism. And all are trace- support markets from below with the necessary
able to the failure of liberal institutions—mar- institutions—namely, the political and legal
In much of the ket competition, the rule of law, popular self- infrastructure needed to define and reliably
government—to take root in the region. enforce property and contract rights. Corrup-
Muslim world, the The past quarter century has seen a dramat- tion is rampant in the Muslim world—as,
dead hand of the ic, worldwide turn away from old ideologies of indeed, it is in most developing countries.
collectivist past has central planning and top-down control and Transparency International, an anti-corruption
toward more market-oriented models of eco- watchdog group, publishes an annual corrup-
hardly relaxed its nomic policymaking.4 In much of the Muslim tion perceptions index. In the 2002 index, no
grip at all. world, however, the dead hand of the collectivist Muslim country scored as high as 5 out of a
past has hardly relaxed its grip at all. Pervasive possible “clean” score of 10.6
government controls continue to suffocate com- Another indicator of the sad state of the
petition and throttle entrepreneurship. region’s institutions is the size of the under-
As occurred throughout the postcolonial ground economy, known euphemistically as the
world, collectivism of one stripe or another “informal sector.” In the Middle East and North
became the reigning orthodoxy in most Africa, the informal sector is estimated to
Muslim countries in the years after indepen- account for anywhere from one-quarter to two-
dence. In Egypt and Libya, “Arab socialism” thirds of nonfarm employment, depending on

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the country.7 The economist Hernando de Soto simple enough: no country ever got rich by The underdevelop-
has attempted to measure the value of extralegal suppressing competition, squelching market ment of markets in
real estate in underdeveloped countries—i.e., signals, and cutting itself off from the outside
dwellings and property holdings to which the world. It should therefore come as no surprise, Muslim countries
occupants do not hold formal legal title. In given the prevalence of anti-market policies, extends beyond the
Egypt, de Soto estimates that 92 percent of that most Muslim countries are floundering domestic economy
urban dwellings and 83 percent of rural economically. The GDP of all Arab countries,
dwellings are held informally. The total value of with a combined population in excess of 280 into the interna-
legally unrecognized property comes to more million, is less than that of Spain.13 Between tional sphere.
than $240 billion—or six times the total value of 1985 and 1998, per capita GDP declined in
all savings and time deposits in the country’s real terms in Iran, Iraq, Jordan, Qatar, Saudi
commercial banks and 55 times the total foreign Arabia, Syria, the United Arab Emirates, and
direct investment in Egypt up to 1996.8 Yemen. By contrast, it rose 30 percent in Israel,
The underdevelopment of markets in almost 50 percent in Uruguay, and nearly 90
Muslim countries extends beyond the domes- percent in Chile; it more than doubled in
tic economy into the international sphere. Thailand, China, and South Korea. 14 Unem-
With all-too-limited exceptions, the Muslim ployment rates in the region are commonly in
world is the land that globalization forgot. double digits.15
Exports from the western Muslim areas (i.e., The Muslim world’s economic backward-
North Africa, the Middle East, Central Asia, ness props up autocracy and repression.
Pakistan, and Bangladesh) currently account Elsewhere around the world, in places as
for only 4 percent of world exports—down diverse as Chile, Mexico, South Korea, Taiwan,
from approximately 13.5 percent in 1980.9 The and Thailand, the economic dynamism
situation with respect to capital flows is just as unleashed by market-based development has
bleak: the entire Muslim world, with 1.3 bil- led to democratization and the expansion of
lion people, receives only slightly more foreign political rights. In most Muslim countries,
direct investment than Sweden. 10 however, the absence of economic freedom
Muslim countries’ isolation from the global goes hand in hand with an absence of political
economy is self-imposed: barriers to trade and freedom. Freedom House publishes an annual
investment are cripplingly high. Average tariff index of civil freedom and political rights,
rates in excess of 20 percent are common in the according to which countries are categorized as
Muslim world.11 The Economic Freedom of the “free,” “partly free,” and “not free.” As of
World report for 2001 featured a trade openness 2001–02, Afghanistan, Algeria, Bahrain,
index based on tariff rates, the black-market Egypt, Iran, Iraq, Kazakhstan, Kyrgyzstan,
exchange rate premium, restrictions on capital Libya, Oman, Pakistan, Qatar, Saudi Arabia,
movements, and the actual size of the trade sec- Somalia, Sudan, Syria, Tajikistan,
tor compared to the expected size. Pakistan, Turkmenistan, Tunisia, the United Arab
Bangladesh, Syria, Algeria, and Iran all ranked Emirates, Uzbekistan, and Yemen were ranked
in the bottom quintile; not a single Arab or as not free; Azerbaijan, Bangladesh, Djibouti,
South Asian country made the top half of the Indonesia, Jordan, Kuwait, Lebanon, Malaysia,
109-country list.12 Afghanistan, Algeria, Morocco, and Turkey were classified as partly
Azerbaijan, Iran, Iraq, Lebanon, Libya, Saudi free. Freedom House found no free countries
Arabia, Somalia, Sudan, Syria, Yemen, and all in the Muslim world.16 The Arab countries in
the Central Asian republics except Kyrgyzstan particular ranked lower in political freedom
have not yet qualified to join the World Trade than any other region in the world. 17
Organization (which, with 146 members and Confronted by the grave threat of Islamist
counting, is hardly an exclusive club). terrorism, the United States has an enormous
The interplay between policies and prosper- and urgent interest in encouraging economic
ity is subtle and complex, but the bottom line is and political liberalization in the Muslim

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world. In much of the region, violent radical- economic dynamism would lead inevitably to
ism is currently the only available avenue for full-scale liberal democracy, the growth of eco-
challenging a clearly unacceptable status quo. nomic power centers outside the state-run sec-
The advance of freedom would open innumer- tor would likely create momentum in turn for a
able new avenues—for building businesses, wider distribution of political power.
pursuing careers, forming and joining and sup-
porting nonprofit organizations, expressing
viewpoints, and banding together for peaceful Free-Trade Agreements
political change. The appeal of radicalism—
and with it the number of potential recruits for Free-trade agreements, if structured proper-
the terrorist jihad—would wane with the ly, can be effective instruments for promoting
emergence of constructive alternatives. economic growth and reform in the Muslim
But what can the United States do to foster world. By eliminating U.S. trade barriers, they
the growth of liberal institutions in the Muslim can give a helpful boost to exports from a
world? In two countries, Afghanistan and Iraq, region whose exports are sorely in need of one.
the U.S. military has ousted entrenched despo- More important, they can commit FTA part-
tisms by force and is now overseeing recon- ners in the region to far-ranging economic
The appeal of radi- struction with large occupying forces. But what reforms—not only eliminating tariffs on U.S.
calism—and with it are the options short of war for effecting goods, but also reducing nontariff barriers to
the number of “regime change”—which, defined broadly to foreign goods generally and opening up vitally
encompass thoroughgoing economic and important service sectors to both foreign and
potential recruits political reform, is the desired objective for the domestic competition.
for the terrorist region? In other words, how can U.S. policy Because FTA negotiations involve at most a
encourage developments in the Muslim world handful of countries, they can proceed much
jihad—would wane that will make future wars less likely? faster and much further than multilateral talks
with the emergence The creative and determined use of trade policy at the World Trade Organization. Those
of constructive is one option with real promise. At the outset, advantages come at a cost: preferential trade
though, a caveat: whether through trade policy or agreements create distortions that can harm
alternatives. other diplomatic initiatives, the United States can partner countries and especially third parties.
exercise at best only modest leverage over condi- With proper attention, though, such distor-
tions in the Muslim world. Whether countries in tions can be kept within tolerable limits so that
the region embrace liberal reform, whether they can agreements yield significant net benefits. 18
find a viable path to prosperity and freedom, is over- Jordan’s experience illustrates the potential
whelmingly up to them. Even in Afghanistan and of an FTA with the United States to spark an
Iraq, where U.S. will is backed by military force on export boom. Jordan’s FTA grew out of an ear-
the ground, success in building institutions that lier program of “qualifying industrial zones,” or
provide even tolerable security for property, con- QIZs, which extend duty-free treatment to
tract, and political rights is by no means ensured. goods produced in joint Jordanian-Israeli fac-
Elsewhere in the region, we must accept that our tories. Under the QIZ program (which began
capacity to promote needed changes is limited. in 1998) and then the FTA (which went into
With that disclaimer, trade policy is an effect in December 2001), U.S. imports from
option for combating terrorism that we ignore Jordan skyrocketed from $31 million in 1999
or slight at our peril. By removing obstacles to to $412 million in 2002.19 The lion’s share of
exports from the region, by convincing Muslim Jordan’s U.S. exports is clothing products; jew-
countries to open their own markets to foreign elry exports have also surged.
competition, we can expand economic opportu- Although $400 million is trivial in the con-
nities in the region and brighten the prospects text of total U.S. imports, it is significant by
for broader, pro-market, pro-growth reforms. Jordanian standards. Jordan’s exports to the
And while there is no guarantee that greater United States account for more than 4 percent

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of its GDP and employ some 40,000 workers.20 countries and different types of processing can
The country’s non-U.S. exports increased by occur in yet other countries before the final good
more than $290 million, or 20 percent, between reaches the consumer, it is far from obvious what
1999 and 2002. 21 Accordingly, the new sales to criteria should be used to determine whether a
the United States are not simply coming at the given import is “made in Country X.”
expense of other markets. As long as rules of origin are based on neu-
The effectiveness of FTAs in promoting tral criteria like “substantial transformation” or
the exports of partner countries depends heav- minimum value added, they amount to no
ily on how the agreements are written. The worse than a necessary complication of pursu-
European Union, for example, has negotiated a ing liberalization through FTAs. However,
number of “association agreements” with when they are manipulated to deny duty-free
“Mediterranean” (i.e., Middle Eastern and treatment to legitimate production operations
North African) countries. Those “Euro-Med” in an FTA partner, rules of origin become
agreements provide for the eventual elimina- instruments of hidden protectionism. A partic-
tion of duties on industrial goods but generally ularly notorious example is the “yarn-forward”
do little or nothing to liberalize trade in agri- rule for textile products that appears in
culture and services. Consequently, important NAFTA and many other U.S. trade-preference
export opportunities remain blocked. The programs. Under this rule, clothing is not eligi-
United States, to its credit, grants more com- ble for duty-free treatment unless it is cut and
prehensive market access in its FTAs. sewn in the preference area from fabric woven
Both the United States and the EU reduce in the preference area out of yarns spun in the
the immediate value of FTAs with extended preference area. Fortunately, the U.S.-Jordan
time periods for full elimination of duties. The FTA contains more liberal rules of origin for
U.S.-Jordan FTA, for example, phases out tar- textiles. Future FTAs in the region need to fol-
iffs over a 10-year period. Tariffs of less than 5 low that good example.
percent are eliminated after 2 years; tariffs of at Although promoting exports from the
least 5 percent but less than 10 percent are Muslim world is one good reason for the
gradually reduced to zero over 4 years; for tar- United States to pursue additional FTAs in the
iffs of at least 10 percent but less than 20 per- region, it is not the most important reason. The
cent, the phase-out period is 5 years; the high- major potential benefit of the Bush adminis-
est tariffs are gradually reduced to zero over the tration’s proposed Middle East free-trade area
course of a decade. For this particular FTA, the is the market opening in the Muslim world
leisurely pace of liberalization has been less of a that it would entail—and the impetus to
problem because many Jordanian exports broader economic reforms in the region that it The effectiveness
already qualify for immediate duty-free treat- would provide. For anything like the full
ment under the QIZ program. As additional potential gains to be realized, though, FTAs
of FTAs in pro-
FTAs with other Muslim countries are negoti- must be properly designed to minimize the moting the exports
ated, however, long phase-out periods could distortions caused by gradual, preferential tariff of partner countries
significantly compromise the short-term cutting. Furthermore, FTAs must push far
encouragement given to FTA-partner exports. beyond tariff cutting to address nontariff barri- depends heavily on
Another way for FTAs to shortchange on ers to goods trade as well as pervasive barriers how the agree-
market access is through restrictive rules of ori- to competition in the services sector.
gin. FTAs need rules for determining whether In addition to reducing export opportuni-
ments are written.
goods are products of an FTA partner; other- ties for FTA partners, extended time periods
wise, merchandise from anywhere in the world for duty elimination can also cause problems in
could be transshipped through one FTA coun- the FTA partners’ own markets. The political
try and receive duty-free treatment in all the case for long phase-out schedules is clear
rest. In the current world of globalized produc- enough: the gradual reduction of tariffs damp-
tion, where inputs can come from a number of ens opposition to liberalization by giving

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Liberalization of domestic import-competing industries time to Tariffs may be the most obvious and easily
key service indus- adjust to the new competitive realities. quantifiable barrier to trade in goods, but they
Nevertheless, the economic effects are perverse are by no means the only barrier—or even nec-
tries is absolutely because of the problem of tariff dispersion. essarily the most important one. Many Muslim
vital if Muslim Paradoxically, the combination of high tariffs countries supplement customs duties with a
countries are to suc- on some products and low tariffs on others can wide range of nontariff barriers, including
actually cause worse economic distortions than quantitative restrictions, onerous product test-
cessfully integrate high tariffs across the board. Specifically, what ing and certification requirements, unscientific
into the global economists call the “effective rate of protection” and arbitrary food safety inspection systems,
conferred by a high tariff on a final consumer customs valuation methodologies that inflate
economy. good is much higher when tariffs on upstream, dutiable value, and good old-fashioned corrup-
intermediate products are low.22 Accordingly, tion. A recent study by the International
zeroing out low tariffs quickly tends to worsen Monetary Fund estimated that the incidence
the protectionist effects of the remaining high of such nontariff barriers in many Middle
tariffs, thus compounding the misallocation of Eastern and North African countries is 10
resources that must ultimately be corrected. times higher than in the developing markets of
The upshot is that FTAs can actually reduce Southeast Asia.25
economic welfare in the short run as effective Trade in goods is not really free as long as
rates of protection increase. 23 Such transition nontariff barriers remain so prevalent. And
costs can be mitigated by accelerating duty although reforming such trade restrictive prac-
phase-out schedules. tices and policies is far more complicated than
Tariff cutting through FTAs is further simply cutting tariff rates, doing so in an FTA
complicated by the problem of trade diversion. entails fewer risks of inadvertently distorting
Preferential trade agreements result in both trade flows. The problem of dispersion is less
trade creation and trade diversion: in other relevant here; likewise, it is more difficult to
words, they expand total imports by reducing reform nontariff barriers on a preferential basis,
tariffs on imports from FTA partners, and at and so concerns about trade diversion are less
the same time they reshuffle imports from tra- pressing. Consequently, FTAs are well suited
ditional sources to the now-favored FTA part- to addressing these kinds of trade barriers. The
ners. Trade creation enhances economic wel- country-specific focus of FTA negotiations
fare in the liberalizing country; trade diversion allows for detailed treatment of the specific
reduces welfare by depriving the government barriers of concern. And when negotiations
of tariff revenue without any compensating succeed in tackling a problem, the country’s
benefit in the way of increased competition. If policies toward the whole world, not just its
trade diversion predominates over trade cre- FTA partner, are often improved.
ation, eliminating tariffs under an FTA can The biggest prize in FTA negotiations—the
end up causing a net welfare loss.24 hardest to attain, but offering the richest
The trade diversion effects of future FTAs rewards—is liberalization of trade in services.
with Muslim countries will be mitigated by the Services are the dominant contributor to GDP
fact that many of the countries in question throughout much of the Muslim world and are
have already entered into association agree- frequently the largest employer. Yet in those crit-
ments with the EU, which is a major source of ical service industries that constitute the back-
imports into the region. Efforts to negotiate bone of a modern economy—transportation,
intraregional free trade among Muslim coun- utilities, telecommunications, financial services,
tries further reduce distortions caused by “hub- distribution—competition, whether foreign or
and-spoke” trading arrangements in which one domestic, is typically stunted or nonexistent. As
country has preferential agreements with a a result, productivity in those industries is
number of countries that lack such preferences abysmal by world standards—and thus the
among themselves. potential benefits of liberalization are immense.

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A recent study by the Council on Foreign Future U.S. FTAs in the region should build
Relations found that service reform through upon the Jordanian example. Ambitious, far-
FTAs can bring considerably bigger welfare gains reaching FTA commitments on services can
than conventional tariff removal. Estimating the facilitate and energize purely domestic privatiza-
effects of Euro-Med agreements with Egypt and tion and reform initiatives. In that way FTAs can
Tunisia, the study concluded that removal of all pave the way for the broader economic restruc-
tariffs on trade with the EU would increase real turing that the region so desperately needs.
income by 4.4 percent in Tunisia but would actu-
ally decrease welfare in Egypt by 0.3 percent
because of trade diversion. By contrast, service Opening U.S. Markets Now
reform—full liberalization of cross-border trade in
services and elimination of barriers to investment For all their promise, FTAs suffer one crip-
in service industries—would boost real income by pling drawback: they are slow. They take years
9.3 percent in Tunisia and 6.5 percent in Egypt.26 to negotiate and gain congressional approval,
Opening up competition in services would whereupon their commitments are gradually
do more than raise productivity in the liberal- phased in over yet additional years. Jordan is in
ized sectors: it would boost performance only the second year of a 10-year period of tar-
throughout the whole economy. Agriculture iff elimination; negotiations with Morocco
The administration
and manufacturing in Muslim countries would have just gotten under way; plans for talks with should call upon
enjoy greater competitiveness in world markets Bahrain have just been announced. Congress to extend
if the cost of service inputs were substantially Meanwhile, the rest of the countries in the
reduced. Likewise, foreign investment in the region have not even begun the process; many duty-free, quota-
region would be much more attractive if vari- if not most are years away from being ready to free access to the
ous costs of doing business now inflated by launch FTA talks with the United States.
inefficient services could be slashed. In short, President Bush spoke in May of a U.S.–Middle
U.S. market now to
liberalization of key service industries is East free-trade area within a decade. A decade selected countries
absolutely vital if Muslim countries are to suc- is probably optimistic under the circum- in the Muslim
cessfully integrate into the global economy. 27 stances—and yet, with the urgent need for
The U.S.-Jordan FTA has taken real if lim- action that confronts us in the post-9/11 world.
ited steps toward liberalizing Jordanian service world, a decade seems interminably long.
industries. In particular, the agreement allows Meanwhile, the administration’s plans for a
100 percent foreign ownership by 2002 in U.S.–Middle East free-trade area are confined
research and development, convention services, to countries in the Middle East and North
education, health care, and social services; 100 Africa. As a result, many Muslim countries
percent foreign ownership in courier services (including some, like Afghanistan, Pakistan,
by 2004; and 60 percent foreign ownership in and Turkey, of critical importance in the war on
air transportation immediately. 28 That elimina- terrorism) are left on the outside looking in.
tion or loosening of ownership restrictions Although the Bush administration’s FTA-
either accelerates or adds to commitments based strategy is a good one, it needs to be sup-
made by Jordan under the WTO General plemented with an initiative that is broader in
Agreement on Trade in Services. Meanwhile, scope and offers immediate results. Specifically,
outside the FTA, Jordan has been pursuing a the administration should call upon Congress to
vigorous program of privatization in the ser- extend duty-free, quota-free access to the U.S.
vices sector. Privatization transactions under- market now to selected countries in the Muslim
taken thus far include the sell-off of the Public world. Such a unilateral preference program
Transportation Corporation (which operates would demonstrate the seriousness of the U.S.
bus routes in the greater Amman area), the commitment to Muslim economic growth and
Water Authority of Jordan, the Aqaba Railway development, thereby helping to lay the ground-
Corporation, and the Ma’in Spa.29 work for future FTAs in the region.

9
Legislation along those lines was recently in encouraging economic development in the
proposed in Congress. On May 22, 2003, Sens. Western Hemisphere and sub-Saharan Africa.
Max Baucus (D-Mont.) and John McCain (R- But is the U.S. interest in promoting growth in
Ariz.) introduced the Middle East Trade and the Muslim world any less strong? Surely, in the
Engagement Act, which authorizes the presi- midst of an ongoing war against Islamist terror-
dent to extend duty-free treatment to countries ism, the goal of overcoming the Muslim world’s
of the “greater Middle East.”30 The bill lists 18 sad legacy of stagnation and repression is of
countries (Afghanistan, Algeria, Azerbaijan, paramount importance. How serious, though,
Bahrain, Bangladesh, Egypt, Iraq, Kuwait, can the United States really be about achieving
Lebanon, Morocco, Oman, Pakistan, Qatar, that goal if we fail to offer Muslim countries the
Saudi Arabia, Tunisia, Turkey, the United Arab same market access that Caribbean, Andean,
Emirates, and Yemen) and the Palestinian and African nations now enjoy?
Authority as potentially eligible for benefits. The need to open the U.S. market to
Under the legislation’s provisions, though, exports from the Muslim world is especially
countries qualify for trade preferences only if pressing in light of the impending elimination
the president finds that they meet certain crite- of import quotas on fabrics and clothing at the
ria: the countries are making progress toward end of 2004. Textile products are major export
economic and political reform; they do not items for many countries in the region: in
engage in activities that undermine U.S. 2002, textiles’ share of total U.S. imports was
national security or foreign policy; they are not 37 percent for Egypt, 48 percent for Turkey, 86
listed by the State Department as state spon- percent for Pakistan, and 88 percent for
sors of terrorism; and they do not participate in Bangladesh.31 The quota system currently
the Arab League boycott of Israel. The bill insulates Muslim countries from the full brunt
stipulates that duty-free treatment would of foreign competition for the U.S. market. In
expire at the end of 2011. 2005, however, when quotas have been elimi-
In addition to providing unilateral trade nated, many exporters from Muslim countries
preferences, the Baucus-McCain bill seeks to are likely to suffer serious erosion in market
encourage the negotiation of FTAs between share at the hands of Chinese competition—
the United States and countries in the region. especially since they do not at present enjoy the
In particular, it would establish a “United preferential treatment now accorded to fabric
States–Middle East Trade and Economic and clothing exporters from Caribbean,
Cooperation Forum” that would convene Andean, and African countries. Extending
annual high-level meetings among officials of similar preferential treatment to Muslim coun-
The need to open the U.S. government, the governments of Israel tries is necessary if the region’s already precari-
and Jordan (our present FTA partners in the ous position in the global economy is to avoid
the U.S. market to region), and the governments of all beneficiary another major setback. 32
exports from the countries for purposes of improving commer- A region-wide preference program would
Muslim world is cial ties between the United States and the also protect against inadvertent trade diversion
region. The bill would also require the presi- damage caused by negotiating FTAs in the
especially pressing dent to report to Congress on plans for negoti- region. For example, as Edward Gresser of the
in light of the ating additional FTAs. Progressive Policy Institute has pointed out, an
The case for something like the Baucus- FTA with Morocco would allow olive oil pro-
impending elimina- McCain bill is compelling. The United States ducers to boost their sales to the United
tion of import quo- already has three regional trade-preference pro- States—at the expense not only of European
tas on fabrics and grams that provide duty-free access to the U.S. rivals but also competitors in Turkey, Lebanon,
market: the U.S.–Caribbean Basin Trade and Tunisia.33 Since competitiveness in export-
clothing. Partnership Act, the Andean Trade Preference ing a particular product to the United States is
Act, and the African Growth and Opportunity often shared by a number of Muslim countries,
Act. Yes, the United States has a strong interest granting duty-free treatment to one country

10
through an FTA would likely inflict harm on Bank study of the U.S. Generalized System of U.S. policy must
other exporters in the region. Legislation like Preferences (a program that gives duty-free look beyond unilat-
that proposed by Senators Baucus and McCain treatment to selected exports of underdeveloped
would prevent such trade diversion by putting countries) between 1976 and 2000 concluded eral preferences
countries on an equal footing in the U.S. mar- that countries that lost their eligibility for GSP and set its sights on
ket regardless of FTA status. adopted freer trade policies than those receiving
The whole purpose of a regional preference GSP benefits.35
encouraging inter-
program is to encourage exports to the United Accordingly, U.S. policy must look beyond nal reform in the
States from that region. Accordingly, it is utter- unilateral preferences and set its sights on Muslim world.
ly counterproductive to thwart the favored encouraging internal reform in the Muslim
exports with restrictive rules of origin. To its world. Immediate opening of the U.S. market
credit, the Baucus-McCain bill proposes a sen- should be seen as just a first step—a down pay-
sible, across-the-board rule under which prod- ment, as it were, that demonstrates the serious-
ucts are eligible for preferential treatment when ness of American resolve to work with Muslim
at least 35 percent of their value was added in countries and help them to help themselves.
any of the beneficiary countries as well as The ultimate aim of U.S. policy must be, as
Jordan and Israel. By contrast, other regional President Bush has indicated, mutual liberal-
preference programs have been marred by a ization in which Muslim countries commit to
protectionist “yarn-forward” rule for textile open their own markets and overhaul their
products. In the case of the AGOA, for exam- own policies and institutions.
ple, a recent IMF study concluded that the leg- By granting unrestricted access to the
islation’s boost to exports would have been American market unilaterally, the United
more than four times greater if a liberal rule of States would give up one type of leverage—the
origin for clothing had been used. 34 Making ability to use U.S. trade barriers as a bargaining
the same mistake in a preference program for chip in FTA negotiations—to accomplish that
the Muslim world would likely have similarly ultimate aim. However, the benefits of unilat-
dismal consequences, given the region’s depen- eral U.S. liberalization—providing immediate
dence on textile exports. encouragement to regional exports, protecting
Such protectionist games must be avoided against fallout from the lapse of textile quotas
this time. It is bad enough to put the parochial and FTA-caused trade diversion, and offering
interests of the U.S. textile industry ahead of a potent demonstration of U.S. goodwill—
the U.S. national interest in promoting eco- should greatly outweigh any loss of U.S. bar-
nomic development in poor countries. But to gaining power.
do so in legislation that aims to reduce the like- Meanwhile, the United States still has plen-
lihood of future 9/11s would be unforgivable. ty of leverage in FTA negotiations. FTAs
Unilateral trade preferences, when structured make permanent unrestricted access to the
properly, can be a real help to people in the American market a binding international com-
Muslim world. Nevertheless, they are no substi- mitment of the United States. By contrast,
tute for the determined pursuit of FTAs. As dis- duty-free access under unilateral preference
cussed above, the primary obstacle to economic legislation typically comes with an expiration
development in the Muslim world—the failure date—the end of 2011 under the current
to foster market competition through appropri- Baucus-McCain bill. FTAs thus allow coun-
ate policies and institutions—is self-imposed. tries to “lock in” their access to the U.S. market
Removing U.S. barriers to exports from the with the added security of mutual internation-
region will do nothing to address that funda- al obligations—a distinct improvement over
mental problem. Indeed, without other tracks of dependence on temporary, if renewable, trade
U.S. engagement with the region, unilateral preferences. In addition, FTAs with the United
trade preferences on their own could actually States offer a kind of official “seal of approval”
reduce momentum for reform. A recent World of a country’s commitment to international

11
openness and ongoing economic reform. Since Congress to enact legislation with those objec-
the credibility of that commitment is a crucial tives in mind.
factor in determining the attractiveness of a
country to foreign investors, countries seeking
to encourage foreign investment will have a An Olive-Branch Trade Policy
strong incentive to pursue FTAs with the
United States. For example, the countries of In the immediate aftermath of the terrorist
the Southern African Customs Union are now attacks on New York and Washington, U.S.
negotiating an FTA with the United States Trade Representative Robert Zoellick charac-
even though they enjoy unilateral benefits terized the administration’s trade agenda as an
under AGOA. integral element of the “counteroffensive”
Finally, it is possible to structure regional against America’s terrorist adversaries. “Trade
preference legislation with staged benefits that is about more than economic efficiency,” he
link a country’s access to the U.S. market to its wrote in a September 20, 2001, op-ed in the
own track record in reducing trade barriers at Washington Post. “It promotes the values at the
home. The current Baucus-McCain bill features heart of this protracted struggle.”36
an all-or-nothing approach: countries must The Bush administration deserves praise
Countries seeking meet certain criteria to be eligible for preferen- for drawing the connection between trade pol-
to encourage for- tial treatment, but once they do they receive full icy and combating terrorism—and then pursu-
eign investment will duty-free access. It is worth considering the ing that connection with plans for FTAs with
addition of an intermediate level of preferences: Morocco, Bahrain, and other Muslim coun-
have a strong incen- for example, duty-free treatment for a country’s tries. And as the administration recognizes,
tive to pursue FTAs top exports accounting for 50 percent of its trade policy’s role in bolstering national securi-
with the United exports to the United States and a 50 percent cut ty goes beyond initiatives with the Muslim
in duty rates for all remaining exports. world. In his provocative Washington Post op-
States. With that addition, preference legislation ed, Zoellick called for responding to the 9/11
would offer staged benefits that lead gradually attacks with a vigorous assertion of American
from the status quo to FTA partnership with economic leadership across the board—in par-
the United States. Criteria along the lines of ticular, through an aggressive policy of bilater-
those set forth in the Baucus-McCain bill al, regional, and multilateral market opening.
would determine eligibility for the intermediate How does reducing trade barriers around
level of benefits. For full duty-free access, the world make America safer? First, by help-
though, a country would have to meet addition- ing the global spread of markets and liberal
al requirements. Possible requirements might democracy. Wherever it exists and in whatever
include maxima for average tariff levels and tar- form, tyranny spawns war and conflict and ter-
iff peaks and benchmarks for progress in priva- ror—and, consequently, threats to U.S. global
tization and service-sector reform. Countries interests and national security. Promoting pro-
entitled to full duty-free access would then be market policies in other countries is one small
eligible to enter into FTA negotiations. but effective way for the United States to min-
Whether or not it featured staged benefits, imize those threats by fostering conditions
the immediate opening of the U.S. market more favorable to human freedom.
would energize U.S. economic engagement Second, leading the world toward closer
with the Muslim world. While a regional pref- commercial ties can reduce threats to
erence program is no substitute for the admin- American interests and security by calming
istration’s FTA strategy, it would complement fears and resentment of American power. A
that strategy superbly. The Bush administra- nation as overwhelmingly dominant as ours
tion should therefore embrace the concepts will inevitably face some level of reactionary
embodied in the legislation proposed by opposition—opposition that has now intensi-
Senators Baucus and McCain and call upon fied after the recent exertions of U.S. military

12
might. Although some of the backlash may be inflict heavy damage on exporters in the
unavoidable, it is clearly true that, all things world’s poorest and most desperate countries.
being equal, we would be better off with fewer We cannot right those wrongs soon enough.
detractors around the world. Accordingly, To date the Bush administration’s overall
whenever we can avoid giving gratuitous record on trade policy is mixed. There have been
offense or causing unintended harm, we would serious protectionist lapses—notably, the impo-
be wise to do so. sition of 30 percent steel tariffs and the signing
Seen in this light, U.S. trade policy can of extravagant farm subsidies legislation. On the
serve as an olive branch to the world. By open- plus side, the administration is now actively pur-
ing our markets to the rest of the world— suing market opening through a variety of bilat-
whether unilaterally or in concert with other eral, regional, and multilateral initiatives. If those
nations—we demonstrate that America’s inter- initiatives can be brought to successful comple-
est lies, not in keeping other countries down, tion, this presidency will have significant trade
but in encouraging them to rise and prosper. policy accomplishments to be proud of.
The Bush administration should therefore That, however, is a big if. The Bush admin-
reconsider its recent tendency to use trade pol- istration’s ambitious trade agenda in the Muslim
icy as a means for settling scores with countries world and elsewhere will not be easily imple-
that have “crossed” us. Specifically, the threat- mented. Finding common ground at the nego-
ening delay in signing the FTA with Chile and tiating table will frequently be difficult, though
the frosty attitude toward FTA negotiations it may seem simple in comparison with the chal-
with New Zealand run directly counter to what lenges of pushing the resulting trade deals
should be the guiding spirit of U.S. trade poli- through Congress. Creativity and dedication
cy. Those nations are two of globalization’s glit- and, not least, significant expenditures of politi-
tering success stories; we should be doing cal capital will be required if the administration’s
everything possible to encourage other coun- bold plans are actually to become policy.
tries to follow their example. To fail to do so In pursuing his trade agenda, President Bush
because of specific foreign policy disagree- would do well to remember the example of
ments would only undermine U.S. interests in other presidents who understood that free trade
the long run. Trade policy is woefully ineffec- is about more than dollars and cents. During the
tive at securing unswerving international sup- Cold War, President Eisenhower insisted that
port for U.S. foreign policy positions—as anti-import special interests must take a back
amply demonstrated by the failure of NAFTA seat to the larger national interest in an open and
partners Canada and Mexico and new FTA prosperous international economy. “[A]ll prob-
partner Chile to support the U.S. position on lems of local industry pale into insignificance in By opening our
Iraq. But attempting to use trade policy this relation to the world crisis,” he declared.
way can be all too effective at giving credence Protectionism, in the context of the twilight
markets to the rest
to the caricature of the United States as a struggle against communism, amounted to of the world, we
heavy-handed bully. “shortsightedness bordering upon tragic stupid- demonstrate that
In aligning overall U.S. trade policy with the ity.”37 President Kennedy, likewise, was adamant
needs of national security, the proper focus is in linking open markets and national security. America’s interest
not on our grievances against other countries. Trade liberalization, he said, was “an important lies, not in keeping
We have other, better ways of dealing with new weapon to advance the cause of freedom,”
those when we have to. Rather, we should be since “a vital expanding economy in the free
other countries
focusing on other countries’ legitimate griev- world is a strong counter to the threat of the down, but in
ances against us. Textiles tariffs and quotas, world Communist movement.”38 encouraging them
high trade barriers and profligate subsidies for Previously the threat was communism; today
many U.S. farm products, arbitrary and prohib- it is Islamist terrorism. But whether we are con- to rise and prosper.
itive protectionism under the antidumping and tending with secular totalitarians or religious
other trade remedy laws—all of these policies ones, trade policy can lend valuable assistance.

13
A determined poli- The liberal trading system constructed after Protection in Middle East and North African
Countries,” International Monetary Fund
cy of market open- World War II was crucial to two great Cold War Working Paper 00/27, February 2000, p. 21, www.
victories: the reconstruction of Western Europe imf.org/external/pubs/ft/wp/2000/wp0027.pdf.
ing can help to and the rise of East Asia. Today, a determined
12. James Gwartney et al., Economic Freedom of the
reduce the appeal of policy of market opening can help to reduce the World: 2001 Report (Vancouver: Fraser Institute,
Islamist extrem- appeal of Islamist extremism—and fear of the 2001), p. 73.
American colossus.
ism—and fear of The domestic and international political 13. United Nations Development Programme, Arab
Human Development Report 2002: Creating Opportunities
the American challenges are, as usual, formidable: tenacious for Future Generations (New York: United Nations
political opposition here and abroad will seek Development Programme, 2002), p. 85, www.undp.
colossus. to undermine trade liberalization at every turn. org/rbas/ahdr/CompleteEnglish.pdf.
But if the task is daunting, the potential 14. Per capita GDP statistics were taken from
rewards are surely worth the effort. Angus Maddison, The World Economy: A Millennial
Perspective (Paris: Organisation for Economic Co-
operation and Development, 2001).
Notes 15. United Nations Development Programme, p. 92.
1. The president’s speech is available at www. white
house.gov/news/releases/2003/05/20030509-11. html. 16. Freedom House’s rankings are available at
www.freedomhouse.org/ratings/index.htm.
2. The National Security Strategy of the United States of
America, September 2002, introduction, www. 17. United Nations Development Programme, p. 27.
whitehouse.gov/nsc/nss.pdf. 18. See Daniel T. Griswold, “Free-Trade
3. See “Zoellick Says FTA Candidates Must Support Agreements: Steppingstones to a More Open
U.S. Foreign Policy,” Inside U.S. Trade, May 16, 2003. World,” Cato Institute Trade Briefing Paper no. 18,
July 9, 2003.
4. See Brink Lindsey, Against the Dead Hand: The
Uncertain Struggle for Global Capitalism (New York: 19. Trade statistics were obtained from the
John Wiley & Sons, 2002). Library of International Trade Resources at www.
litr.com.
5. James Gwartney et al., Economic Freedom of the World:
2002 Annual Report(Vancouver: Fraser Institute, 2002). 20. For the employment effects of Jordan’s export
Kuwait scored 6 on state-owned enterprises and 6 on boom, see Gresser, “Blank Spot on the Map,” p. 4.
price controls; the UAE scored 6 and 8. 21. Trade statistics were obtained from the website
6. The 2002 index is available at www. transparency. of the Jordan Export Development & Commercial
org/pressreleases_archive/2002/2002.08.28.cpi.en. Centers Corporation, www.jedco. gov.jo.
html. 22. Consider a hypothetical case involving, unsur-
7. See Economic Research Forum for the Arab prisingly, widgets. Assume that a widget is manu-
Countries, Iran and Turkey, “The Informal Sector factured from one tradable input called a gadget.
in the MENA Region: Engine of Growth?” Forum The price of a widget under free-trade conditions
3, no. 1 (March 1996), www.erf.org.eg/nletter/ is $100 and that of a gadget is $60. Value added in
Mar96-01.asp. widget production is therefore $40 per unit. Now
assume that the tariff on widgets is 30 percent,
8. Hernando de Soto, The Mystery of Capital: Why but gadgets can be imported duty-free. Widgets
Capitalism Triumphs in the West and Fails Everywhere now sell for $130, and value added has climbed to
Else (New York: Basic Books, 2000), p. 254. $70. The effective rate of protection is equal to the
difference between value added with the tariff and
9. Edward Gresser, “Blank Spot on the Map: How value added under free trade divided by value
Trade Policy Is Working against the War on added under free trade—in this case, 75 percent.
Terror,” Progressive Policy Institute Policy By contrast, if gadgets were also subject to a 30
Report, February 2003, p. 2, www.ppionline.org/ percent tariff, the effective rate of protection for
documents/Muslim_Trade_0203.pdf. widgets would fall to 30 percent.

10. Ibid., p. 2. 23. See Thomas F. Rutherford, Elisabet E. Rutström,
and David Tarr, “The Free-Trade Agreement
11. See Maria-Angels Oliva, “Estimation of Trade between the European Union and a Representative

14
Arab Mediterranean Country: A Quantitative mna/mena.nsf/Attachments/Privatization+Story/$
Assessment,” unpublished paper, July 13, 1999, p. File/Jordan_Privatization_Story_for_Exweb. PDF.
16, copy in author’s files. The authors examined the
practice in Euro-Med agreements of first eliminat- 30. The proposed legislation, S. 1121, is available
ing tariffs on goods with the lowest tariffs that at http://frwebgate.access.gpo.gov/cgi-bin/get-
account for 40 percent of total import value and doc.cgi?dbname=108_cong_bills&docid=f:
then phasing out remaining duties over 12 years. s1121is.txt.pdf.
They found that the initial elimination of low tariffs
in the Arab country produced welfare gains by 31. Library of International Trade Resources.
reducing the overall average tariff level but that 32. See Gresser, “Blank Spot on the Map,” pp. 5–6.
those gains were overwhelmed by losses produced
by increasing tariff dispersion. In other words, they 33. Edward Gresser, “String of Pearls or Multi-Car
concluded that such an agreement would produce a Pile Up? The U.S. Negotiates New Trade Agree-
net welfare loss for the Arab country in the short ments with 15 Countries,” Progressive Policy
term. See also Henri Ghesquiere, “Impact of Institute Policy Report, April 2003, p. 3, www.
European Association Agreements on Mediter- ppionline.org/documents/FTA_0503.pdf.
ranean Countries,” International Monetary Fund
Working Paper 98/116, August 1998, p. 7, 34. Aaditya Mattoo, Devesh Roy, and Arvind
www.imf.org/external/pubs/ft/wp/ wp98116.pdf. Subramanian, “The African Growth and Oppor-
tunity Act and Its Rules of Origin: Generosity
24. See Griswold. Undermined?” International Monetary Fund Work-
ing Paper 02/158, September 2002, p. 17, www.
25. Oliva, pp. 12–13. imf.org/external/pubs/ft/wp/2002/wp02158.pdf.
26. Bernard Hoekman and Patrick Messerlin,
35. Çaglar Özden and Eric Reinhardt, “The
Harnessing Trade for Development and Growth in the
Perversity of Preferences: The Generalized System
Middle East (New York: Council on Foreign
of Preferences and Developing Country Trade
Relations, 2002), p. 50.
Policies, 1976–2000,” World Bank Working Paper
27. See Bernard Hoekman and Patrick Messerlin, no. 2955, January 13, 2003, http://econ.worldbank.
“Initial Conditions and Incentives for Arab org/files/23188_wps2955.pdf.
Economic Integration: Can the European Com- 36. Robert B. Zoellick, “Countering Terror with
munity’s Success Be Emulated?” World Bank Trade,” Washington Post, September 20, 2001, www.
Research Working Paper 2921, October 2002. washingtonpost.com/ac2/wp-dyn/A59531-2001
28. See U.S. Agency for International Develop-ment, Sep19? language=printer.
“Economic Impact and Implications for Jordan of
37. Quoted in Alfred E. Eckes Jr., Opening America’s
the U.S.-Jordan Free Trade Agreement,” February
Market: U.S. Foreign Trade Policy since 1776 (Chapel
2001, pp. 65–76, http://usembassy-amman.org.jo/
Hill: University of North Carolina Press, 1995),
FTA-USAID.pdf.
p. 167.
29. See World Bank, “Privatization: The Jordanian 38. Quoted in ibid., p. 178.
Success Story,” http://lnweb18.worldbank.org/

15
Board of Advisers CENTER FOR TRADE POLICY STUDIES
James K. Glassman
American Enterprise
Institute T he mission of the Cato Institute’s Center for Trade Policy Studies is to increase public
understanding of the benefits of free trade and the costs of protectionism. The center
publishes briefing papers, policy analyses, and books and hosts frequent policy forums and
Douglas A. Irwin conferences on the full range of trade policy issues.
Dartmouth College Scholars at the Cato trade policy center recognize that open markets mean wider choices
and lower prices for businesses and consumers, as well as more vigorous competition that
Lawrence Kudlow encourages greater productivity and innovation. Those benefits are available to any country
Kudlow & Co. that adopts free-trade policies; they are not contingent upon “fair trade” or a “level playing
field” in other countries. Moreover, the case for free trade goes beyond economic efficiency.
José Piñera The freedom to trade is a basic human liberty, and its exercise across political borders unites
International Center for people in peaceful cooperation and mutual prosperity.
Pension Reform
The center is part of the Cato Institute, an independent policy research organization in
Razeen Sally
Washington, D.C. The Cato Institute pursues a broad-based research program rooted in the
London School of traditional American principles of individual liberty and limited government.
Economics
For more information on the Center for Trade Policy Studies,
George P. Shultz visit www.freetrade.org.
Hoover Institution
Other Trade Studies from the Cato Institute
Walter B. Wriston
Former Chairman and
“Free-Trade Agreements: Steppingstones to a More Open World” by Daniel T. Griswold,
CEO, Citicorp/Citibank
Trade Briefing Paper no. 18 (July 10, 2003)

Clayton Yeutter “Ending the ‘Chicken War’: The Case for Abolishing the 25 Percent Truck Tariff” by Dan
Former U.S. Trade Ikenson, Trade Briefing Paper no. 17 (June 18, 2003)
Representative
“Grounds for Complaint? Understanding the ‘Coffee Crisis’” by Brink Lindsey, Trade
Briefing Paper no. 16 (May 6, 2003)

“Whither the WTO? A Progress Report on the Doha Round” by Razeen Sally, Trade
Policy Analysis no. 23 (March 3, 2003)

“Free Trade, Free Markets: Rating the 107th Congress” by Daniel T. Griswold, Trade Policy
Analysis no. 22 (January 30, 2003)

“Reforming the Antidumping Agreement: A Road Map for WTO Negotiations” by Brink
Lindsey and Dan Ikenson, Trade Policy Analysis no. 21 (December 11, 2002)

“Antidumping 101: The Devilish Details of ‘Unfair Trade’ Law” by Brink Lindsey and Dan
Ikenson, Trade Policy Analysis no. 20 (November 21, 2002)

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