A customs union among Islamic countries? What good news '15.04.2007'


An interesting item about some prospective economic cooperation projects among Islamic countries appeared in the press a few days ago. OIC member states took a first step towards a customs union (Zaman, March 12, 2007): The piece reported that the Organization of the Islamic Conference (OIC) was preparing to initiate a preferential trade regime among its member states from Jan. 1, 2009. One step further down the road was customs union and even a common market. If it does not get forgotten along the way then this is quite obviously an exciting piece of good news. Economic cooperation and a possible integration among the Muslim countries will no doubt increase trade volume, expand investment and employment possibilities, hence accelerating economic growth in the Muslim world. In addition to possible economic benefits, such a project would contribute to solutions for many political disputes among Muslim countries, currently showing a less-than-desirable outlook in many respects. This article evaluates some of the benefits that would be brought about by an economic cooperation among OIC member states. Economic union means common adoption of common fiscal, andcommercial policies Economic integration projects can be grouped under six categories: 1 -- preferential trade regime, 2 -- free trade area, 3 -- customs union, 4 -- common market, 5 -- monetary union and 6 -- economic union. The first stage of these, a preferential trade system, proposes that trade partners reduce tariffs and other protective measures in certain sectors or products. This means less or no protection over certain, preferred sectors. In a free trade area member countries remove all barriers to trade (tariffs, quotas, other non-tariff barriers, etc.) so that goods and services move freely across borders. A step further, customs union, requires the adoption of a common external tariff system against non-members in addition to the removal of trade barriers. Common market, which adds free movement of production factors -- labor in particular -- across member states on top of the customs union. Monetary union implies adoption of a common currency by the member states in addition to the common market. Finally economic union means adoption of common fiscal, monetary, financial and commercial policies and common rules of competition within the region. Economists have long been aware of the importance of and mutual gains from trade. One of the strongest and longest-lasting theories of modern economics is the theory of comparative advantages, which has been around since David Ricardo, the famous British-born classical economist (1772-1823). The theory asserts that both trading partners would gain from trade -- even if one country has an absolute advantage in all sectors -- as long as each country specializes on the products where it has comparative advantage, i.e., lower relative cost. The theory of comparative advantages, which has been extended and improved by many economists of later generations, is the theory most widely used, even today, to explain international trade. There are many different gains countries may get from free trade -- some static and some dynamic. Free trade increases the overall supply of goods and services, reduces prices, promotes product variety and improves product quality. Accordingly consumers get a chance to consume cheaper and higher-quality goods and services, which positively affects consumer welfare. Furthermore free trade, contrary to a common misconception, benefits rather than harming domestic producers. To the extent that free trade increases competition, domestic producers faced by foreign competition will try to minimize costs, eliminate waste of resources and renew their technological infrastructure. This in turn will improve competitive power of the firms, enabling them to produce not only for the domestic market, but also foreign markets. Market size will increase thanks to the opening of borders for free trade. This will enable firms to have access to a much larger population of consumers, while at the same time allowing consumers to choose from a greater variety of goods and services. In short free trade is a process that increases wellbeing, reduces prices, raises competitiveness, accelerates growth, enlarges market size, ensures efficient allocation of resources and minimizes rent-seeking, hence increasing the wealth of nations. Free trade is the best means to reduce the possibility of war and promotes friendly relations between countries. As French economist Frederic Bastiat once nicely put it, if goods and services are not allowed to cross the borders, those borders will be crossed by soldiers. In recent decades several economic integration projects have emerged in order to benefit from static and dynamic gains from trade. The European Union is generally seen as the most successful example of an economic integration project. With Bulgaria and Romania joining on Jan. 1, 2007, the EU has become a giant trading bloc with 27 member states and almost half a billion people, accounting for one third of world production and around one quarter of world trade. Another important trading bloc is the North American Free Trade Agreement (NAFTA) signed between the US, Canada and Mexico. When taken together with the Asia-Pacific Economic Cooperation (APEC) more than two thirds of world trade is accounted for by these three major trade blocs. It was saddening not to see the Muslim world in this picture where so much of the world has become part of a free trade area. Unfortunately the share of the Muslim world in terms of global production and trade is not something to be proud of, given the vast amount of resources the Muslim countries have. Having 64.6 percent of worlds oil and 51.6 percent of natural gas reserves and located at the heart of major energy distribution channels, the Muslim world has a relatively young population, which accounts for 23 percent of the world total. However as of 2005 its share in global gross domestic product was only 5.6 percent and in world trade about 8 percent (2004 figure). Compare this for example with the EU; a population of around 7 percent of the global total, but accounting for almost 25 percent of world trade. Currently intraregional trade between the 57 members of the OIC accounts for only 12 percent of their total trade volume. It is obvious that there is a huge potential here to be exploited. It seems that OIC, almost 40 years after its foundation in 1969, has started to think about establishing free trade and customs union among member states. Better late than never they say; it is good to see efforts nicely shaping towards utilization of economic cooperation possibilities. Possible relationship between OIC members and EU It all started with the extraordinary OIC summit in 2005 in Makkah, Saudi Arabia, where a 10-year action plan was drafted. The plan proposed establishment of an Islamic common market among member states. The common market, as mentioned above, involves removal of all trade barriers among members, imposition of a common external tariff system against third countries and free movement of labor within the region. Such a project means a huge market with 1.5 billion consumers and tremendously high trade and investment possibilities. Turkey, having already established a customs union with the EU in industrial products, seems to be more than ready to take part in such a project. It is too early to elaborate on what kind of complications such an engagement would pose to Turkey-EU relations, but one should note that average protection rates between OIC members and the EU are generally lower than the protection imposed on the trade between many OIC members themselves. This sort of an integration initiative would definitely put Turkey in a key position. In any case an in-depth cooperation or integration in the economic sphere would open the doors for prosperity and contribute greatly to alleviate political problems in the course of time, hence reversing the unfortunate destiny the Muslim world has been suffering for the last 300 years.