EU Trade Policy and Stability in the Middle East

Peter Mandelson
EU Trade Commissioner

The Hebrew University
Jerusalem, 19 May 2005

EU Trade Commissioner Mandelson stresses role of trade in Middle East stability; offers concrete support for trade facilitation between Israel and the Palestinian Territories.

In this speech, delivered at the Hebrew University in Jerusalem on 19 May 2005, EU Trade Commissioner Peter Mandelson argues that trade can make an important contribution to stability in the Middle East, by creating the economic foundations for a durable peace. He argues that "the European Commission, with its economic powers, can contribute to a future peace. A political settlement will not endure if it does not deliver economic stability and greater well being for the peoples of Israel and the Palestinian Territories - to help improve their lives and turn them from despair or extremism." He says that the European Commission would like to see the EU's PanEuroMed system of cumulation of origin extended to Israel and the Palestinian Territories to encourage and facilitate trade between the two areas and between the Middle East and the wider Mediterranean. 

- Commissioner Mandelson notes that EU markets are already almost entirely open to manufactured imports from Israel and the Palestinian Authority. He argues that future gains would come from extending that preferential access to goods produced jointly in both places through the PanEuroMed system of cumulation.

- Commissioner Mandelson says that the EU would like to see this system extended to the whole Mediterranean region. Commission studies suggest that this could boost trade between Mediterranean countries by as much as 40%. This would require the countries in question to conclude free trade agreements with each other – Mandelson cites the recent Israel- Jordan Trade Agreement as a positive example. In Israel and the Palestinian Authority it would encourage closer links and commercial co-operation and thus contribute to greater stability and prosperity.

- Commissioner Mandelson says the Gaza Strip must remain within the "customs envelope" established between Israel and the Palestinian Territories by the Paris Protocol after Israeli disengagement. Mandelson argues it “would be an own goal if progress towards a two state solution were to lead to new administrative barriers to trade and economic activity arising.”

- Commissioner Mandelson calls on Israel to recognise the Interim Trade Agreement between the EU and the Palestinian Authority, without which the EU would “be hard-pushed to move on with a system of cumulation.”

It is a great pleasure to be here today at the Hebrew University, a distinguished seat of learning where leaders such as Ariel Sharon and Ehud Barak, and I understand no less than three Nobel prize winners from 2004, have studied. Academic institutions should be fearless and independent and able to see both sides of a case. In this respect I take heart from the fact that you have bestowed honorary doctorates on both Margaret Thatcher and Tony Blair!

My responsibility in the European Commission is for Trade. Israel is an important partner. Israel is a world leader in the high-tech sector – highly dynamic, innovative and competitive. Israeli businesses are skilful risk takers. Israel has one of the highest rates of research and development investment per GDP – and your formidable record in filing new patents shows that this works. Adding imports and exports together, the EU is Israel’s biggest trading partner, responsible for 36% of Israel’s total trade. It is a relationship we cherish and wish to strengthen further.

But today I do not want to focus on bilateral trade. I want to share a broader vision of the EU’s future trading relationships with Israel, Palestine and the neighbouring countries and how those relationships can support the process of peace-making and reconciliation in the region.

Despite my experience in a different political context, in Northern Ireland, I am not here to give you my views on the Peace process itself. That is for others – at a higher pay grade – and above all for Israelis and Palestinians themselves. I support the objectives of the Roadmap: a solution in which two independent states can live together in peace and security. So long as Israel’s proposed withdrawal from Gaza is a step towards this final status, and not an end in itself, I welcome it as a positive step forward.

It has certainly created a renewed sense of momentum. And on the Palestinian side Abu Mazen has responded. The Peace Process received an important boost at the Sharm el Sheik summit. Now Jim Wolfensohn has been appointed to help Gaza on the path to economic recovery. These are all positive signs.

My responsibility is to look forward at how the EU, and in particular the European Commission with its economic powers, can contribute to that future peace. One thing is certain. A political settlement will not endure if it does not deliver economic stability and greater well being for the peoples of Israel and Palestine – to help improve their lives and turn them from despair or extremism.

That, after all, is exactly what the European Union is all about. It is the quintessential example in modern history of how political peace thrives on economic cooperation and integration. The war-prone Europeans anchored lasting peace in an agreement on Coal and Steel some fifty years ago. For Israelis and Palestinians it is not coal and steel but textiles, footwear, furniture.

This is now among the highest priorities of EU policy. For the EU, you could argue that the last decade has been the decade of Central and Eastern Europe. We have successfully enlarged the EU to include ten new countries – an enlargement unprecedented in scale and effort. Now the focus has swung towards our neighbouring countries and the Near and Middle East. The Commission has already launched the European Neighbourhood Policy. A policy designed to bring the EU and its neighbours closer together through a wide range of policy initiatives.

So where does trade fit in? I am acutely conscious that talking trade in this part of the world is really a case of carrying coal to Newcastle. The nub of my argument is this. The strength of the EU’s contribution to the Peace Process has in the past been largely in economic and technical assistance. I would argue that both during, and particularly after, the negotiation of a political settlement, our trade policy should in future play an ever bigger role.

Simply put, I have three aims. The first is to help make it easier for Israel and the Palestinian Territories – and I hope eventually Palestine – to trade together. The second is to help improve the conditions for you both to trade with other countries of the region. The third is to help all countries of the region to do more trade with the European Union, including by further opening of European markets.

These three aims overlap. Where Europe can help is in giving new markets to Israeli and Palestinian goods. And in giving markets to goods that are produced jointly between Israel and the Palestinian territories, or with other countries of the region, using the best inputs of each. Be that labour, be that raw material, be that innovation.

Europe’s markets are already open to Israeli and Palestinian goods. In fact, practically all industrial products can be traded duty-free to Europe. The problem today is that as soon as products are made partly in Israel and partly in the Palestinian Territories, this preferential access to the EU market may be lost.

The answer to this is our proposal for what we call PanEuroMed cumulation of origin. The idea is far more elegant than its name.

When we give preferential access to the EU market for goods coming from one of our partner countries, we want to make sure that the benefit really falls to that country. We want to be sure that goods coming to our markets are not simply transiting our partner country, bringing it no significant economic gain. So all our trade agreements include rules on the “origin” of goods. This is not protectionism on our part. It is in the interest of our partner countries, to make sure that the goods they send to our market on preferential terms add genuine value to their own domestic economy.

Our proposed PanEuroMed system of origin will go one better. It is designed to allow goods produced jointly in two or more of the countries of the region to maintain their preferential access to the EU market.

But for that to work, there also needs to be free trade between the countries concerned. Better access to the European market goes alongside better access to other regional markets. Our studies suggest that trade between the Mediterranean countries could be as much as 40% higher once this system of PanEuroMed cumulation of origin is fully implemented. It has the potential to be a powerful incentive for regional economic integration.

For me there is nowhere else in the Mediterranean area where such a system, in which co-operating countries get real economic rewards, holds more promise than here. I mentioned that there needs to be a commitment to free trade between the parties. They need to have common rules and procedures, so that the practicalities back up the principles. This is, of course, made more difficult by the reality of life here. At present the tight security arrangements you are obliged to maintain have complicated economic activity. One objective of peace would be to allow their gradual relaxation. But it would be an own-goal if progress towards a two-state solution were to lead to new administrative barriers to trade and economic activity arising in their place. As new borders and boundaries are put in place, we do not want to lose what “integration” in this field already exists.

One solution to be pursued - at least in the short term – is based on the Customs Envelope that ties the two economies together today. This is not a solution that benefits one side at the expense of the other. Both Palestinians and Israelis stand to gain from such an arrangement. I do, therefore, feel strongly that, if the policy of disengagement from Gaza succeeds, it is essential that Gaza remains part of the Customs Envelope after disengagement. This seems to be essential if the Gaza economy is to be viable after disengagement – which is vital both for the Palestinian Authority and for Israel. A further deterioration in the Gazan economy after disengagement would manifestly affect the stability of the region and the prospects for further progress in the peace process.

Peace can be negotiated top-down – and it requires courage by all parties. But peace can only be cemented bottom-up if we provide the essential conditions for growing prosperity.

So if an improved Gazan economy is in Israel’s interest, Gaza should not be outside an area where Israeli textiles and furniture manufacturers employ Palestinians to work together; it should not be outside a customs area where goods are meant to move freely; it should not be outside an area where it can benefit from the PanEuroMed system of cumulation.

But there is a second reason why I believe Gaza should remain within the Customs Envelope. The Customs Envelope is based on the so-called Paris Protocol, which is the framework that established the interim-period economic relations between Israel and the Palestinian Authority.

This Paris Protocol also sets out how both Israel and the Palestinian authorities negotiate their trade agreements with third countries. Under the right conditions, I do not see why there should not be further trade agreements in the future with other countries in the Mediterranean region that could allow Israel and the Palestinian territories to increase economic cooperation with other partners. Indeed, Europe maintains the goal of working towards an EU-Med free trade area by 2010, and such agreements are the essential building blocks for this.

The recently concluded Trade Agreement between Israel and Jordan shows how this can work in practice. I have been deeply impressed by the way the two countries have worked to deepen their bilateral ties so that they will be able to benefit from PanEuroMed cumulation of origin. Tomorrow, I will join the Israeli and Jordanian trade ministers, in the margins of the World Economic Forum, to celebrate this accomplishment. I want to encourage a rapid implementation of these agreements because it is the key to increasing trade with Europe.

I would like to be able to celebrate such achievements more often. I would like to see both the Palestinians and the Israelis continue to conclude Free Trade Agreements with other countries in the region, using the Paris Protocol. The result, stimulated by Europe’s offer of Pan Euro-Med cumulation, could be a network of trading countries – Jordan, Israel, the Palestinian territories, Egypt, other Mediterranean partner countries and the 25 EU Member States. And these countries will reap the rewards of cumulation and maintain their preferential access into the EU market.

That is the objective and the vision. How do we get there? I have said in my meetings today with both Palestinian and Israeli leaders that I think our first step should be to sit together on a trilateral basis to work out the details. Of course there are formidable problems – both political and technical – but we need to discuss what can feasibly be done. I believe that what I have set out is a credible goal in the context of continuing political détente in the region. I think the experts need to get together now and work out how it can be made to happen.

I can tell you already what one of these difficult issues is. This is the recognition by Israel of the interim Trade Agreement that the EU has concluded with the Palestinians. I raise it because without such recognition we will be hard-pushed to move on with our system of cumulation.

Now for another aspect of the third part of my agenda: opening the European market.

I believe in open trade. I believe in progressively removing protectionist walls that stand between countries. I believe in that even more so when countries are geographically close, when we are talking about the Mediterranean region with which we have historically strong economic, cultural and political links, and when Israel shares its own very particular heritage with Europe.

I do not see open trade as an end in itself. Open trade will lead to growth and to higher productivity and that I see as a way of creating employment, social cohesion and long-term sustainability.

Why do I mention all this? Because many countries in this region have suffered from a long period of economic marginalisation. If you look at World Bank reports, you can see how serious this is. To quote some of their examples:

The Middle East and North Africa has a combined population of 300 million inhabitants. Yet it has fewer non-oil exports than Hungary.

Less than 2% of Europe’s Foreign Direct Investment goes to its nearest southern neighbours.

Whereas most regions have improved their trade-to-GDP ratio, and a close linkage has been established between this and rising living standards, in the Middle East and North Africa this ratio actually fell.

Israel is of course a case apart. But these facts give a strong incentive for all who care about the Middle East to think hard about increasing trade in the region. Integration of the regional economy into the modern global economy is an essential foundation stone of a broader strategy to promote stability and security and to counter extremism. Somehow or other, we need to ensure that the region is not falling behind when the global economy moves on.

The Commission is currently working on two initiatives: (1) the liberalisation of agricultural and fishery products, led by my colleague Marian Fischer Boel, who is responsible for Agriculture and (2) the liberalisation of services and establishment, for which I am responsible.

Let me start with agriculture. I have the feeling that the international trade community has not taken sufficient notice of what the Commission is trying to accomplish here. The Commission is gearing itself up to open Europe’s trade with the region in agricultural and fishery products, with only a very limited number of exceptions. And this is for the entire Mediterranean region.

I cannot overstate the importance of this. People think of Europe as an agricultural Fortress. Well the trumpets have sounded and the walls of Jericho are falling.

Most Mediterranean countries already benefit from practically 100% duty-free access for industrial products. If we now succeed in adding liberalisation of agricultural and fishery products, with only a limited number of products exempted, free trade in goods between the EU and its Mediterranean partners will be all but complete. And that will be a major achievement.

But that should not mean that as trade negotiators we sit back and relax. On the contrary, success in one field provides the incentive to keep going. We must now look beyond goods towards the liberalisation of trade in services – the second of our initiatives.

Why liberalise services? Services account, on average, for almost 60% of GDP in the Mediterranean countries. Someone told me that for Jordan, this figure is as high as 73%.

The economic benefits of the liberalisation of trade in services are expected to outweigh the benefits of the liberalisation of goods by a factor of two to three times! It can provide an impulse to growth and employment. It will increase the competitiveness of our service companies all round.

I have therefore decided to ask EU Member States for a mandate to enter into negotiations with you and all your neighbouring Mediterranean countries to liberalise services and investments in manufacturing. Here too, what I want to achieve is not a "hub and spoke" network of bilateral agreements between the EU and its partners, but a truly integrated regional approach to services and investment liberalisation. In other words, in my vision, the market access any country offers to the EU should be matched by an equivalent offer to all other countries who take the bold leap of participating in regional services liberalisation.

So there you have the three pillars of my agenda. First helping trade between Israel and the Palestinian Territories – and I hope the future Palestine. Second, helping to knit that trade into an integrated, preferential regional trading system, with Europe and with other Mediterranean countries, through the introduction of the new rules on regional cumulation of origin. Third, improving access to European markets through liberalisation for agricultural and fishery products, to complete the liberalisation of goods, and by a new initiative on liberalisation of services and establishment.

A last word. We need to do all this. Because in recent times we have been going backwards. Since the start of the intifada, exports from the EU to the Palestinian Territories have dropped on average by a catastrophic 26% per year. Between 2000 - 2003, Israeli exports to the EU fell on average by 9% per year. EU exports to Israel also dropped in that period on average by 10% per year.

This should be no surprise. Peace and prosperity go hand in hand. Violence and war can only destroy. I believe that we have the opportunity now to start to reverse the trend. And I am convinced that in the Near East, as in Europe, economic cooperation is the key to lasting peace and the prospect of eventual reconciliation. It is for the European Union, as the regional economic superpower, to show the way forward. Over the nest five years this will be among my own highest priorities. I hope we can work on this together.