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December 24, 2019
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January 14, 2020

Assessing the Lebanon-EU Association Agreement

‘No nation was ever ruined by trade’, as argued by Benjamin Franklin in the 18th century.[1] From that time, a gradual shift started to a one-world economy where information, goods, and services know no boundaries. This borderless age has shaped modern human history by spreading the capitalist economic system and fortifying international economic organizations. Today, about 25 percent of total global production is exported.[2] Countries do not only exchange final products but also raw materials that create economic interaction in the global system.

Lebanon, the second smallest country in the Middle East, is considered one of the more liberalized economies in the region. The country’s economy has been shaped by trade and underperforming agricultural and industrial sectors. This liberalization has been manifested in the signing of several free trade agreements (FTAs), mainly with the European Union (EU) and the Gulf.[3]

This paper shall explain the impact of the Lebanese foreign economic policy on the economy. It will also go through the effect of the FTA signed with the EU on the agricultural and industrial levels. Then, it will shed light on who is benefitting from the partnership and how can Lebanon take advantage of the agreement. Finally, the paper will conclude by analyzing the role that the government should play in regulating Lebanese economy.

Free Trade Agreements (FTAs) impact on Developing Countries

Globalization nowadays imposes on countries and individuals new norms and rules and has opened a debate about whether it had a good or a harmful effect on the developing countries. In fact, opening up to international trade has helped many countries to grow at the expense of others.

As advocated by the American economist Joseph Stiglitz, developed countries are hypocritical in the way they push emerging countries to eliminate trade barriers while they kept their own.[4]  Even when they are not guilty of hypocrisy, the West drives the agenda of globalization in a way that ensures they are the ones gaining more. Moreover, on the one hand, globalization has decreased the number of people living in poverty, while on the other; it did not reduce the gap between rich and poor.[5] Furthermore, the more open the developing countries become, the less Research and Development (R&D) will be conducted in these countries by foreign investors, as multinational companies usually tend to conduct R&D at their home base.[6] It is worth noting that Singapore is among few countries that represent an anomaly. Its total R&D and the share of its foreign firms in the R&D total is high.[7] Government intervention, in this case is a necessity to promote and encourage innovation through regulations and tax policies. Even the World Bank estimates that removing all developed countries barriers’ to low-income countries exports would result in only minimal income gains for them.[8] On the other hand, under free trade, the ‘comparative advantage’ law argues that all the countries would benefit if they specialized in producing and exporting products they can produce more efficiently than others. Based on these negative impacts of FTA on developing countries, the following section will examine the effect of the FTA signed between Lebanon and the EU.

Overview of the Lebanese economy and the foreign economic policy adopted

Over the past three decades, trade liberalization and laissez-faire commercial tradition have been the critical factors of the official Lebanese economic system. Lebanon’s liberal economy is based on competition, private ownership, and openness to abroad with perfect capital mobility.[9] The government does not constrain foreign investment, yet the investment climate suffers from corruption.[10]

The Lebanese economy relies primarily on the service sector, which accounts for more than 70 percent of the GDP.[11] The principal components are tourism, commerce, and financial services. The ‘tertiary sector’ encompasses around 39 percent of total workers, according to the most recent data that dates from 2009.[12] It is mainly affected by political instability, which occurs a lot in the country.

Agriculture plays a relatively minor role in Lebanon’s economy, contributing only to 3.1 percent of GDP and 11 percent of all jobs in 2016.[13]  In 2012, this sector contributed to around 4.2% of total exports.[14] The top exports are mostly fruits and vegetables. Lebanon’s agricultural goods’ top recipients are five Arab countries (Syria, KSA, Qatar, UAE, and Kuwait).[15]  The top import origins are Europe and North Africa. Nonetheless, this sector is facing many challenges related to low productivity, quality, financial unsustainability, and most importantly, poor access to global markets.[16]

The industrial sector is also neglected and has been suffering for decades from the lack of regulations to support local industries in addition to high production costs and a weak infrastructure. The contribution of this sector to the GDP is limited to 8.3 percent in 2018 as per the United Nations Industrial Development Organization,[17] while official figures estimate it at 14%.[18] Industries employ around 21% of the local labor force based on 2009 national estimates.[19] Agri-food industry is leading exports of this sector to the top five export destinations, which are UAE, KSA, Syria, South Africa, and Iraq.[20] However, after the war in Syria in 2011, total Lebanese exports fell by 35 percent.[21]

Overview of the ‘Association agreement (AA) between Lebanon and the EU.’

Historically, Lebanon has been known to be a country of free and open trade regime. The main focus was and still on the Arab world and Europe. In 1998, Lebanon became a member of the Greater Arab Free Trade Agreement (GAFTA), which according to the 2018 McKinsey report that was commissioned by the Lebanese government, had a positive impact on the economy. Yet other agreements were signed with EFTA states (Switzerland, Lichtenstein, Norway, and Iceland), which entered into force in 2004, and with the EU, which was implemented in 2006. Other ongoing discussions are still in progress to become a member of the WTO (world trade organization) and some countries of Latin America.[22] On another note, Lebanon has neither an FTA nor a bilateral agreement with the USA even though TIFA (trade and investment framework agreement) was signed in 2006 but never came into force.

The AA set the main objectives, which include the necessity of providing a framework for political dialogue between the two parties, the gradual liberalization of goods, services, and capital, and the promotion of trade, social, and economic relations. The agreement also focuses on the cooperation in generating growth, employment, in preserving the environment, modernizing and restructuring Lebanon’s private and public industries. [23]

The essential section of attention for this paper is about the ‘Free movement of goods’, which deals with the issue of establishing a free zone for the free movements of products in a period not exceeding 12 years. Lebanese customs and tariffs on imports would be reduced gradually after 5 years and canceled entirely in the 12th year. On the other hand, European tariffs on products originating in Lebanon were directly exempted from customs duties. However, the AA allowed Lebanon to keep Exceptional tariffs for products or sectors suffering from severe difficulties in Lebanon.

Impact on the Lebanese economic sectors

For the EU, this agreement is essential for widening its relation with Lebanon, which import lots of its products, whereas, for Lebanon, the deal contributed to the increase of the trade deficit from around $5 billion in 2006[24] to around $8 billion in the first six months of 2019.[25]

The most alarming indicator to start with is that most of Lebanon’s imports are from the EU, while most of its exports are to the Arab World [26]. In other words, the agreement opened a new free market to the EU exporters without worrying about new imports from the other party. The EU pushed trade liberalization for the products that they exported while at the same time continued to protect their goods by imposing qualitative measures. The graph below[27] shows import and the export between Lebanon from one party and Belgium, Luxembourg, Denmark, Germany, Greece, Spain, France, Ireland, Italy, The Netherlands, Austria, Portugal, Finland, Sweden, and the United Kingdom in addition to Croatia which entered the EU in 2013 from the other party. For instance, the EU imports from Lebanon accounted for around 0.5 billion dollars in 2017, while EU exports to Lebanon amounted to around 7.6 billion dollars. Moreover, it is essential to note that the exports of the EU to Lebanon increased by 6.28 percent between 2002 and 2007 in comparison with 40 percent between 2008 and 2014 as per Fadi El Gemayel, President of the Association of Lebanese Industrialists.[28] Furthermore, the Lebanese government had lost its revenue when the tariffs were abolished.

Industrial sector

The manufacturing sector is mainly involved in food processing, manufacturing of metal and electric products, and construction material. The Economic complexity index (ECI) measures the productive capability of a country. The ECI of Lebanon has decreased 30 places from 1988 to 2017.[29] This index shows that the Lebanese outputs have a weak productive capability, and a deficient use of knowledge. Lebanon, the 60th on the list of 125 countries, should invest more in research and development, increase competitiveness to compete with other products, and export more. This section will go into details about the challenges the exports of this sector are facing, the role of the government as well as the impact of the AA.

Manufactured exports suffered a lot; thus, free trade contracts that were signed to help did actually harm the sector. Mr. Hajj Hassan, former minister of industry, once declared that the agreement did not go as planned, seeing that it did not strengthen Lebanon’s exports as it was expected.[30] Or maybe it is more accurate to declare that ‘Lebanon negotiated the agreements in a situation of inferiority’, as put by the current minister of industry Wael Bou Faour.[31] It is hardly surprising that even the small list of the tradable goods is subject to non-tariffs measures making it almost impossible to enter the European markets. Looking in more detail into this matter, Lebanese products are predisposed to discrimination and ‘disguised protectionism’. ‘In front of the EU, the game is unbalanced’[32], as per Frederic Farah, professor of economics. The EU ban Lebanon from exporting non-Lebanese origin products like ‘nuts’, but it exports to Lebanon cotton t-shirts that are not made in the EU. [33] Adding to that, the EU retained high tariffs on ‘cut flowers and flower buds, sugar beet and chemical sucrose, and wine of fresh grapes’ considering them sensitive products.[34]

Therefore, access to European markets is limited. Although, the country has benefited from financial and technical assistance through many programs like the ‘Metropolitan Economic Development Association’ (MEDA), which is the main financial instrument of the European Union.[35] In addition to ELCIM (Euro-Lebanese center for industrial modernization), that facilitate the access of SME to loans by developing their financial feasibility studies. [36]

As was already stated, the industrial sector suffers from high costs of energy and raw materials, limited application of international standards, and shortage of skilled labor.[37] Yet, this sector is facing other significant challenges, such as difficulties in borrowing money and scarcity in liquidity due to the economic situation and the high interest rates. This is exemplified by the fact that Kafalat, a firm that guarantees loans for small and medium enterprises, guaranteed only 16 loans by August 2019 in comparison with 102 by August 2018.[38] All these reasons make it almost impossible for industrialists to increase their production and hence their exports.

It is significant to examine details on the product level to identify the market for each product. Processed fruits and nuts, chocolate, baked goods, pasta, and sauces, with the exception of wine, are exported to Arab countries. Chemical products, which include mainly packaged medicaments, phosphatic fertilizers, perfumes, hair, and beauty products, are mostly shipped to Kuwait, Iraq, UAE, Saudi Arabia, and Jordan. Machines like computers, electric generating sets, and insulated wire are mostly exported to Gabon, Iraq, Syria, and Kuwait. In addition to precious metals like Gold, which is exported to South Africa. Mineral products that consist primarily of refined petroleum and cement are exported to Syria. These were examples of the predominantly exported industrial products which were generally exported to non-EU countries in 2017.[39] Hence, there is a strong need to promote and support the promotion of the right product at the right price to the right market.

In fact, Lebanon should focus on the production and the export of specific goods, and specialize in unique processed products that may interest the Europeans, such as labneh (yogurt), fruit compote, different kind of jam, and hummus. The government should also implement a series of actions to improve the infrastructure and the labor skills to boost the competitiveness in industries. Based on all of the above, it is clear that helping industries cannot increase exports to the EU countries, but can for sure reduce imports from them and increase local consumption.

However, it is noteworthy that a duty of 2 percent was introduced recently, in the budget of 2019, on around 20 products.[40] The revenue generated from this tax should be used to modernize and help local industries, but in reality, a small part of it will support this cause.[41] Moreover, last September, the central bank (BDL) launched a series of encouragement and incentive facilities for industries, including rising in the ceiling of the lending from 3 to 5 million dollars.[42] These are few of numerous steps required to support the neglected sector.

Agricultural sector

Crops of uncertain nature make the risk in agriculture higher than in the industries. The products of this sector are characterized by a certain degree of variability (seasonality, weather…) and other factors related to the agricultural land. These influence the products’ price, which explains the necessity of maintaining a higher level of local market transparency[43] where information is accessible to all buyers and sellers.

Local supply in the Lebanese agricultural sector is not sufficient, which explains why the dependence on imported food has increased. Following the AA, the EU insisted on setting a specific quota and significantly reducing agricultural exports. It is important to point out that the production of olives in Lebanon is between 80 and 180 thousand tons per year.[44] Accordingly, it will not be surprising to state that the AA, for example, allows Lebanon to export only 1000 tons of olive oil to the EU tariffs free.[45] Also it is important to mention that a list of 25 items, including apples, potatoes, oranges, tomatoes, olives, and oil is prone to tariff quotas.[46] However, restrictions on Lebanese goods go beyond tariffs and quotas by implementing standard requirements. Many agriculturalists claim that European norms on fruits and vegetables are too strict for they require, for example, apples to have a specific size. Products are also rejected due to lack of conformity assessment in standards, sanitary, and phytosanitary measures (SPS).[47] Lebanese soil is contaminated, given the excessive usage of fertilizers and pesticides, 452 kg/hectare versus 131 kg/hectare in OECD countries.[48] This is also the result of lack of training and unskilled labor.

Many programs were created to help the ‘primary’ sector, which is the last in Lebanon. For instance, ‘Agri Plus’, is a national program that subsidies exports through reimbursing part of the transportation costs, conditional on meeting some quality standards.[49] This scheme, which intended to target farmers, has benefited traders without improving quality standards.[50]

Implementation of serious measures is required to improve quality standards and meet European demands. In addition to the amelioration of post-harvest infrastructure, cold storage, and packaging facilities.[51] The role of the government is not only limited to signing agreements with abroad. It is primordial to support farmers and ensure the application of modern methods for a better quality of agriculture and food safety. Moreover, support is needed for marketing enhancement, promotion, finding new markets, investing in research and development, and utilization of new technologies. Offering financial products and facilitating access to agriculture will amplify opportunities for profitable investment. Finally, the focus should be on higher-value crops like avocados, which generate more profit.[52]

It is noteworthy to explore the recipients of each category of agricultural and animal products in 2017. Fruits, including apples, pears, and others, are exported to Russia, Belarus, and Egypt. Vegetables, including potatoes, citrus, and lettuce, are mostly exported to Kuwait, UAE, Oman, and Qatar. Raw sugar and raw tobacco are also exported to non-EU countries. Pure Olive oil is exported to Arab countries, the USA and, Canada. However, Lebanon exports to EU members in the FTA, tanned equine, and Bovine (animal hybrids) that accounted for almost 7 million dollars, and trunks and cases, which accounted for 3 million dollars in 2017. Animal organs accounted for 18 million dollars also to European countries.[53] In general, Arab countries are importing the highest share of Lebanon’s agro-food products. Also, in 2018, exports of fruits and vegetables products reached 1.1 million dollars, mostly to the gulf region.[54] These statistics of two consecutive years show the need for free trade agreements between countries for mutual benefits.

Conclusion

In conclusion, Lebanon has built its economy on free market principles, acting as an intermediary between the Arab and the European countries. The rejection of protectionism allowed imported products to dominate the local market. The neoliberal strategy adopted has favored the financial and service sectors at the expense of agriculture and industry.

Trade deals are a zero-sum game; there will always be losers and winners. Free trade was not a fair trade for Lebanon. The AA has hurt the economy and has worsened the trade deficit. It is time to reframe and renegotiate free trade agreements with Europe. However, some observers are worried that this would negatively impact the process of receiving CEDRE funds. FTAs are essential; yet, they should be done with countries that have complementary economies.

Laissez-faire didn’t lead to economic development in Lebanon. The government should implement an effective system of protection for industries to take better advantage of the free economic exchange and the country’s geographical position. In the short term, a tariff policy is needed to tax imported luxuries and other products that enter the country in large amounts at prices lower than the local production cost. Simultaneously, the authorities build a reliable infrastructure, finance the productive sectors. In the long term, Lebanon must have benefited from its moderate climate, fertile soil, and abundant water resources to develop agriculture and after that agro-industries. It will also be useful to sacrifice non-competent production to focus and put all the resources and efforts needed in the top products.

References

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[54] Supra note15

Alice Kfoury
Alice Kfoury
Alice Kfoury was a research intern at MEIRSS. She holds a BA in economics from the Lebanese University and is currently pursuing her MBA in financial economics as well as a certificate in geopolitical competition in the Middle East. She is mainly interested in political economy and international trade.