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Remarks by Ambassador Miriam Sapiro on Trade and Investment with the Middle East and North Africa

Remarks by Ambassador Miriam Sapiro
Deputy U.S. Trade Representative

“Trade and Investment Engagement with the Middle East and North Africa”
Washington, DC
September 15, 2011

*As Prepared for Delivery*

"Thank you, Rick. Let me start by thanking the U.S.-Middle East Free Trade Coalition, the National Foreign Trade Council and WITA for providing this opportunity to discuss an important aspect of the Obama Administration’s approach to the dramatic changes we have witnessed this year in the Middle East and North Africa (MENA). Today, I would like to focus on the general framework for greater trade and investment in the region we are working to establish.

"This audience knows well the critical importance of trade to creating economic growth and jobs. Global trade this year is estimated to total over $20 trillion, or about 30 percent of world GDP. In the United States, every $1 billion in goods and services exports supports an estimated 5,500 jobs. There is no good reason why the MENA region too should not enjoy the benefits of global trade.

"Given the link between trade and jobs, trade liberalization in today’s globalized economy is more important than ever. Eliminating barriers – tariff and non-tariff – has helped countries around the world generate growth and reduce poverty. According to the World Bank, developing countries that lowered barriers the most saw per capita real income increase nearly three times faster in the 1990s than those who liberalized to a lesser degree.

"We also know that enhancing economic security is one of the best ways to promote political and economic reforms and diminish the appeal of violent extremism. Ever since the Arab Spring began, the Administration has been working to define how we can best support the aspirations of the citizens of the region for expanded opportunities. We are particularly focused on ways to create broad-based economic growth that can help support democratic reforms by providing a strong foundation for inclusive development and prosperity.

"For all of these reasons, international trade and investment will play a key role in U.S. engagement with the MENA region. To fulfill this vision, last May President Obama announced a new trade and investment partnership initiative to help advance economic development for nations transitioning to democracy. The key objectives of this partnership are:

"First, to facilitate trade within the region;

"Second, to promote trade and investment integration with the United States and other global markets; and

"Third, to open the door to willing and able MENA partners – in particular those adopting high standards of reform and trade liberalization – to construct a regional trade arrangement.

"Although our initiative encompasses the entire region, the Administration identified Egypt and Tunisia – where the Arab Spring began in earnest – as two countries in which the stakes are high, and where measurable progress can bolster democratic change and economic reforms elsewhere. Libya too will be important as the situation there stabilizes.

"To implement the President’s initiative, key agencies across the government have come together with the common goal of deepening our trade and investment ties to the region. I am delighted to be joined this morning by colleagues from the Overseas Private Investment Corporation and the Trade Development Agency, who will highlight a few of the programs their agencies are launching. Together we are working to develop ambitious ideas, some of which will depend on the availability of funding and technical assistance.

"Let me start with a few of the challenges and opportunities we see in the region, and then describe what we are doing in response.

"With a growing population of over 400 million people and an expanding regional GDP of over $2.4 trillion, the Middle East and North Africa represents an enormous opportunity for mutually beneficial growth in trade and investment. It is currently the fifth largest destination for U.S. exports, and offers significant possibilities for U.S. investors.

"Yet, on the whole, trade and investment with, and within, the region has underperformed. If you exclude oil, the entire MENA region exports roughly the same amount as Switzerland. It is also one of the least integrated regions in the world. In 2009, for example, intra-regional merchandise exports amounted to only 9.5 percent of the region’s total exports. This is the same level of trade as ten years ago. There is no lack of analysis of why this is the case, but there is also no good reason why this situation cannot change.

"Let me highlight a few of the most salient issues we would like to address:

"We know that the greatest untapped resource in the Middle East and North Africa is the talent of its people. But talent requires a supportive environment before it can thrive. As the President has said, “many young people have a solid education, but closed economies [have left] them unable to find a job. Entrepreneurs are brimming with ideas, but corruption [has left] them unable to profit from those ideas.”

"Expanded employment in the region, especially among youth, is clearly critical to future growth and prosperity. The lack of employment prospects for the young has been one of the most visible catalysts for protests and demands for reform. At the same time, the underutilization in the workplace of the female population is striking. Women are a chronically undertapped resource for business; in some countries, women represent 63 percent of university students, but only 28 percent of the workforce. Countries will have difficulty achieving economic growth if they fail to fully empower half of their potential workforce.

"In addition, the institutional infrastructure in parts of the region is often insufficient for promoting broad-based growth. For instance, bank lending to small- and medium-sized enterprises (SMEs) is the lowest in the world, with only ten percent of SMEs financing their investments with bank loans. Indeed, as a general matter, opportunities for SMEs and new market entrants – often powerful engines for broad-based growth for the disenfranchised – have been lacking, as institutions have tended to favor the privileged few. This has hobbled the many entrepreneurs who could thrive on a more level playing field.

"A snapshot comparison with other economies is revealing. The average age of a firm in still-growing Central Asia is just over 10 years; within MENA, it is nearly double, at 19 years. In fast-growing East Asia, managers have an average of seven years on the job; within MENA, the number is twice that. The lack of opportunity for newer, dynamic entrants to the MENA market has created stasis, rather than economic growth.

"Yet there are good reasons for hope, and these can help shape our response in the region. Notably, across the Arab world, citizens are mobilizing, often at local levels, to demand better services and greater accountability from their public institutions. They are seeking increased transparency across the board from public authorities, and greater participation in how rules are set. This extends to the economic sphere, where frustration with secretive business dealings among elites was a prime motivation for many who took to the streets.

"To help the MENA region address these challenges, the Administration has outlined a new economic vision for countries committed to democratic and economic reform.

"This vision builds upon our already significant trade and investment ties to the region. We have trade agreements with Bahrain, Israel, Jordan, Morocco and Oman. And we have in place trade and investment framework agreements with eleven other MENA countries, as well as bilateral investment treaties with several more. Our intent is to build on these relationships, and create new ones wherever possible.

"From the outset, let me stress that our initiative is not about seeking to impose any particular model on any country. Rather, our goal is to discuss with each government different options for effectively stimulating the economic growth their populations are demanding.

"We further realize that some in the region are skeptical of economic reform programs, and of foreign companies in general, because of memories of certain elites who abused their access in the past. Yet it is clear that promoting a higher level of integration within the region, and with the international community, is one of the surest paths to economic growth, diversification and job creation.

"Our first task thus has been to listen: to talk to the broadest possible range of private and public sector stakeholders, both in the United States and in the region, to consider the most appropriate means of using trade and investment to boost overall growth and job prospects. We have engaged already with stakeholders, both here and in the region, including representatives from transitional governments, to understand better their priorities.

"To this end, just over a week ago, we published a notice in the Federal Register soliciting public comments on the priorities for fleshing out the President’s trade and investment initiative. The deadline for comment is one month from today – October 15th – please provide us with the benefits of your insights. We will incorporate these views as we further develop, elaborate and pursue our initiative. We are fully aware that the initiatives we pursue and the timetable for pursuing them will depend on continued close consultations with a broad range of stakeholders and, most significantly, with the newly forming governments in the region.

"So, what have we learned from our discussions about priorities thus far? And where are they likely to lead us in the future? Let me offer two general observations.

"First, on a fundamental level, there are a few bedrock principles that are indispensable to any set of specific initiatives if they are to satisfy the political and economic aspirations that created the Arab Spring. Notably, any meaningful trade and investment initiative has to promote the objectives of transparency, public participation, and anti-corruption. In the trade and investment realm, one might express this broadly as the need for an economic 'rule of law.' The revolutions were to a large degree fueled by the failure of previous regimes to respect these principles, and to widely share the benefits of economic growth, trade and investment. Any initiative that is not fundamentally compatible with basic tenets of democracy, rule of law, and public integrity will not succeed.

"Second, there are a number of areas that would likely promote these objectives and appear – subject to further consultation and refinement – to present strong opportunities for increasing trade, investment and job growth. Of these, there are clearly some on which we could begin work now and that could deliver results relatively quickly, and others that will require more time. However, we see no reason why longer term goals should delay shorter term objectives. Therefore, we intend to prioritize various areas in order of their ability to be implemented and produce results. In this way we can use each of these areas, step-by-step, as building blocks to increasingly greater trade liberalization.

"With this approach in mind, in our discussions to date we have focused on several specific areas that appear particularly promising:

"The first is in the area of trade facilitation – the goal of making it easier for goods to cross borders – where we see significant possibilities for early productive collaboration, not only bilaterally with our MENA counterparts, but also with other governments and international institutions. Improvements and cooperation in customs procedures and establishing fair, predictable, and transparent rules are essential. Trade facilitation also involves a broader range of initiatives to speed the movement of goods across borders. In addition to negotiations on trade facilitation taking place in the World Trade Organization, the United States, the EU and some of the multilateral development banks (MDBs) have pursued initial programs in recent years aimed at improving the capacity of local authorities to process goods more efficiently and securely.

"A second idea we are exploring is promoting greater SME involvement in trade- and investment-related activities. Time and again, the SME sector, which I mentioned earlier, has proven to be the key source of dynamism in a modern economy. Support of various forms for SMEs, pursued in conjunction with broader SME development activities undertaken by other strategic partners and MDBs, can help meet the demands of people in transition countries for a more direct stake in their economies. Indeed, OPIC, which is providing up to $2 billion in financial support to catalyze private sector investment in the region, is prioritizing the SME sector.

"Moreover, in addition to being a promising avenue for building economic inclusiveness and job creation, SMEs often benefit groups that have been historically marginalized, such as women entrepreneurs. Helping SMEs can help these groups.

"Third, there is great potential for progress in the services and investment areas. All MENA economies would benefit from increased investment. Transition governments that implement policy changes creating a welcoming environment for investment – especially the transparency, predictability and rule of law I noted earlier – will be the first to see foreign investment flow, spurring welcome innovation along with new jobs. And, of course, one of the hallmarks of a 21st century economy is the growth and diversification of the services sector. Here TDA is laying the groundwork for increased collaboration with U.S. businesses in countries such as Egypt by providing grant funding in the form of pilot projects, feasibility studies and technical assistance.

"The advantages of creating a favorable investment and services environment are of course not limited to foreign direct investment. Purely domestic firms, including SMEs, will benefit tremendously from predicable and transparent rules that encourage new investment.

"Fourth, improving access to and utilization of preference programs, such as the Generalized System of Preferences (GSP), could bring improvements in trade flows for qualifying products and countries.

"Of course, there is much work beyond these areas that will be important to future MENA prosperity, some of which by its nature will be a longer term undertaking. For example, we are examining additional measures to stimulate trade and investment in the agricultural sector that could yield significant dividends in terms of economic growth and jobs. In addition, businesses of all sizes – in both developed and emerging economies – increasingly view adequate protection of intellectual property rights (IPR) as an essential element of sustaining global competitiveness and fostering innovation.

"Similarly, work to further develop good regulatory practices and enhance the ability of exporting and importing companies to meet regulatory requirements could go a long way toward enhancing trade and investment. Companies routinely note to us that confusing or onerous government regulations represent one of their greatest challenges in the MENA region. While this goal may take longer to achieve than others, a targeted approach can yield important benefits later.

"I want to highlight one other aspect of our initiative, which is working wherever possible with other trading partners, such as the European Union. The United States and the EU already share many goals for the MENA region, including a strong interest in increasing intra-regional trade and integration and a climate that supports investment and job creation. Where possible, we are seeking to maximize our collective resources to help trade and investment grow.

"As I mentioned earlier, we recognize that the stakes are high and the needs significant for Egypt and Tunisia. For this reason, we have focused our initial efforts on these two countries. However the President also articulated a vision of opening the door to those willing and able partners – in particular those adopting high standards of reform and trade liberalization – to construct a regional trade arrangement.

"While we are focusing initially on key trading partners in transition, we are also structuring our cooperation in a way that facilitates greater economic integration within the region and creates opportunities for other regional partners to join us. We envision sitting down with our regional counterparts and starting a dialogue that will enable us, as a group, to identify the most promising avenues for increasing trade and investment with, and within, the region. This dialogue would be an important step towards constructing a broader trade arrangement that fuels growth, development and greater economic security.

"We have done considerable work to create a trade and investment initiative that is both meaningful and flexible enough to adapt to contingencies and changing dynamics on the ground. Ambassador Kirk and I will continue to develop it in collaboration with our regional partners and our stakeholders, including all of you, who share our commitment to helping build a more democratic and prosperous MENA region. Thank you very much."