CHAPTER 2
Trade and Agriculture: Perspectives for the
Association Agreement with the European Union
by José-María García-Alvarez-Coque

2.1 Introduction

International trade in developing countries generates improving opportunities for consumers and for economic growth. Since the late 1990s, Syria has realized the importance of becoming more involved in the world trading system as a needed step to modernize its productive structures, to attract capital for investment and to enhance the market for domestic products. The future of international trade in Syria cannot be understood as something isolated from the economic reform process currently underway in the country. As a matter of fact, trade reform becomes an instrument for supporting the private sector and creating a regulatory environment more favourable to investments.

The Syrian Government is promoting integration in the world community through membership in international organizations. Trade negotiations at the regional and the multilateral level must be seen as substantive elements of the trade reform in Syria. Regional and multilateral trade liberalization does not represent an ultimate goal but an instrument for economic reform. Negotiations with different economic areas, such as the Arab countries and the European Union (EU), with a view at forming Free Trade Areas (FTAs), must be seen under this framework.

For Syria, trade reform involves a challenge because it will probably produce further opening of Syrian agriculture to foreign competition. Therefore, trade reform needs to be based on an analysis of the current position of Syria in international trade. This chapter intends to conduct such an analysis by referring to the main issues and problems associated with the process of trade liberalization in which Syria is currently involved. Given the significance of agricultural trade with the EU and the important challenge for Syria associated with the Association Agreement (AA), a significant part of the chapter is devoted to highlighting the implications of the AA on Syrian agricultural sector.

After reviewing the situation of Syrian agricultural trade and the present setting of interventions affecting trade in the country, the chapter considers the alternative (or complementary) choices for Syria to open to foreign trade, and focuses later on the association strategy with the EU. Finally, the trade reform process in Syria is analysed as an unavoidable step towards a further integration of Syrian agriculture in the world trading system.

2.2 An overview of syrian agricultural trade

The fact that Syria has to undertake further steps towards trade liberalization does not mean that it has been absent from agricultural foreign markets. During the1990s, agricultural and agro-food products accounted for about 18-20 percent of total Syrian imports and from 18 percent in 1990 to 30 percent in 1999 of total exports.^[24]

Two facts highlight the Syrian agricultural trade experience during the 1990s. The first is that Syrian agricultural foreign trade has reacted positively to trade policies. Thus, for example, one element explaining the dramatic growth in agricultural trade during the first part of the 1990s (see Figure 2.1) was the authorization by the Government to the private sector to use export returns in foreign currency to import production inputs and food staples. In the second part of the decade, total imports decreased because of stability of domestic demand as well as the substitution of cereal and meat imports by local production.

Figure 2.1 Syrian agricultural and agro-food trade

Source: GCP/SYR/006/ITA project, extracted from General Customs Department.

The second fact is that Syrian agricultural trade still reflects a pattern of a developing economy with marked inter-industrial specialization. Imports correspond to products that cannot produce domestically (at least in significant quantities). Thus, in 1998-1999 (see Figure 2.2), cereals accounted for more than 20 percent of total agricultural imports, including rice in particular, which is considered a main dish in Syrian diet, though it is not produced locally, and maize, which is used for poultry feeding. Other significant imported products are sugar and its derivatives (15 percent of total agricultural imports); tea, coffee and spices (12 percent); vegetal oils (12 percent); and sheep and goats (3 percent)^[25]. It is important to note that wheat imports dropped dramatically from 1.1 million tonnes in 1989-1990 to almost zero imports in 1998-1999. Moreover, in the last period, Syria exported more than 650 000 tonnes of wheat. This development is illustrative of the country’s policy towards increasing self-sufficiency in basic staples.

Figure 2.2 Composition of Syrian agricultural exports to the world (1998-99)

Source: GCP/SYR/006/ITA project, extracted from General Customs Department.

As an agricultural exporter, Syria concentrates on Mediterranean irrigated crops (see Figure 2.3), such as fresh vegetables (28 percent of total agricultural exports in 1998-1999, in particular tomato, potato, onion and garlic); raw cotton (26 percent); fresh fruit (15 percent) and processed fruits (3.5 percent). Syria is performing relatively well in foreign markets of some agricultural products, compared to other countries in the Mediterranean region with apparently similar resource endowments. Revealed Comparative Advantage (RCA) indices of Syrian exports were calculated for 1997, taking as a reference the MED8 group (Morocco, Tunisia, Egypt, Turkey, Lebanon, Jordan, Cyprus and Syria). For each product “i”, RCA_i can be calculated by the expression: RCA_i = X_i/XMED_i, where X_i = share of product “i” in Syrian agricultural exports; and XMED_i = share of product “i” in MED8 agricultural exports. If RCA_i > 1, there is a possible comparative advantage (“natural” or “policy-driven”). Analysis focused on 28 agricultural products where there was some reported export activity by Syria to the world (e.g.. raw cotton, where Syria is an appreciable exporter). FAOSTAT database provided the data needed for the calculation of RCA. Compared to the MED8 group, Syria showed RCA_i > 1 for anise, apricot, green beans, broad beans, melons, cherries, garlic, grapes, lentils, peaches, pears, pistachio, plums, tomato, and wool. Note that, as the indicator’s name shows, “revealed” competitiveness can be distorted by domestic policies and by the business environment. For example, the indicator may not reflect the export potential of some goods, such as citrus and olive oil. An estimate 51 percent of orange trees have yet to reach twelve years and are not fully mature (Westlake, 1999). With regard to the future situation of the olive oil sector, around 35 percent of the already planted trees have not reached the full bearing age yet.

Figure 2.3 Composition of Syrian agricultural imports from the world (1998-99)

Source: GCP/SYR/006/ITA project, extracted from General Customs Department

2.3 Present setting in trade and related policies

Syrian agricultural price and trade policies have been characterized by a high level of Government intervention. Before 1987, prices of many agricultural products such as cereals, fodder, industrial crops, potatoes, garlic and some fruits were determined centrally. Syrian foreign trade was completely monopolized by the public sector. Since 1987, a gradual process of economic reform has been underway easing some constrains on production and marketing. A summary of some remaining interventions that characterize Syrian trade policies is then provided. Many of these measures will probably be reformed during the process of integration of Syria in the world trading system.

Let regulations on import operations be considered first. Non-tariff measures are still present in Syrian foreign trade. For any import operation, providing that the commodity is not banned for import, traders must obtain an import license issued by the Ministry of Economy and Foreign Trade. The Ministry has issued a valid negative list for imports from Arab countries and, at the time of drafting this paper, was elaborating a similar list for products originating in the EU. The declared intention for this negative list of imported products is that it will be cleared of any protective intention and only should include the commodities that cannot be imported for public health and safety reasons.

Some agricultural products (tobacco, sugar) are imported only by public trading companies or, for their own account, by certain private importers, and even by public companies to the account of private traders. The Ministry of Economy and Foreign Trade has declared that actions will be taken to progressively remove the public monopoly on trade of certain commodities. Wheat and wheat flour imports were restricted to the public sector, although recently, imports of soft wheat and wheat flour for pasta production were permitted for the private sector, provided the resulting flour and pasta are exported.

Import procedures are not often straightforward in Syria. All documentary transactions for imports must be by a letter of credit opened at the Commercial Bank of Syria. Typically, the Bank requires the importer to cover 100 percent of the transaction from his own resources offshore or from funds generated by exports. An importer may use foreign exchange earned from exports (export dollars) and deposit it in the Commercial Bank of Syria. The foreign exchange used to cover a letter of credit opened at the Commercial Bank may be his own, or purchased in an informal secondary market.

All goods imported into Syria are subject to customs duty and “unified” tax. Duty rates are progressive and range from 1 percent to 100 percent for agricultural products, depending on the government’s view of the necessity of a product. Foodstuff carries relatively low rates, normally below 75 percent, except for some luxury items (e.g. caviar, 100 percent) or alcoholic drinks (150 percent). The unified tax is a surcharge on all imported goods, and its proceeds are allocated to the military, schools, and municipalities. Unified tax rates range from 6 percent to 35 percent and are collected by the Customs Department. Companies that receive licenses under the investment laws (see Section 2.7) are granted duty-free privileges for the machinery and equipment for a project, including vehicles. Foreign companies must acquire temporary permits for each item of equipment intended for temporary use and subsequent re-export to avoid paying import duties. As indicated above, non-tariff barriers are still applied. Moreover, imports for customs duty purposes are valued at different exchange rates, according to the categories of goods.

Trade reform in Syria foresees the simplification of the import procedures. Moreover, the Syrian administration has declared its intention to accomplish a harmonization of exchange rates. With the introduction of such harmonized system, it is intended to achieve the unification of exchange rates for valuation purposes (at the highest official rate) and the revision of the tariff system (the melting of tariffs and surcharges in one tariff). Exchange rate unification for custom valuations represents a good opportunity to update tariff rates and to undertake the tariff reductions under the schedule established by international agreements.

Export operations and domestic markets are also subjected to different degrees of public intervention. The exporting of Syrian goods does not require a special license. However, the exporter must be registered with a Syrian Chamber of Commerce and must provide an invoice certified by the a local chamber, a certificate of origin, a customs description document and a bank guarantee, stating that hard currency earnings will be returned to Syria within a defined period. In practice, some companies use specialized import/export agents in the Syrian market. However, this practice leads to the loss of evidence of the origin of the products. This usually leads to an inadequate justification for the cumulating of rules of origin, and the corresponding loss of preferences in EU markets.

The agricultural sector in Syria is also subjected to domestic price regulations. Procurement prices are set for strategic crops (wheat, cotton, barley, sugar beets, maize, millet, tobacco and dry legumes). Guidelines for other prices (such as those of fruits and vegetables) tend to reflect market conditions. There is tax on agricultural products, at the processing stage, at rates ranging from 10 percent to 12 percent. This has been cancelled for horticultural products and it is subject to annual review for the remaining products. For some processed products, the tax is refundable after the export has been realized. Market distortions have been phased out in some particular cases. For cotton and its derivatives, export duties and the agricultural production tax are not applicable. Exporters of agricultural products are allowed to retain 100 percent of their export proceed. A decree has been recently issued to exempt all agricultural exports from all taxes and fees. However, price interventions continue to be important in Syrian agriculture.

Integration of Syria in multilateral and bilateral agreements will surely oblige it to accelerate the reform process of the existing trade intervention setting. In fact, international agreements will commit Syria to step up its efforts for the economic transition. While all the mentioned provisions can be undertaken autonomously by Syria, international agreements provide a framework for assisting the economic reforms. Before referring to such reforms, the different strategies faced by Syria for its insertion in the world trading system have to be examined.

2.4 Regional and multilateral choices for syrian agriculture

Regionalism and multilateralism appear as valid strategies for a developing country to undertake a more liberal trading environment (Dessus et al., 2001). Syrian Government is currently promoting both strategies. Thus, at the regional level, in February 1997, Syria signed the agreement leading to the Arab Free Trade Area (AFTA) and, in 1998 and 1999, bilateral FTAs were signed with Lebanon and Jordan. In October 1997, Syria formally started negotiations on the Association Agreement with the EU (negotiations were still in progress by the end of 2002). At the multilateral level, in October 2001, fifty years after Syria withdrew from the General Agreement on Tariffs and Trade (GATT), it requested accession to the World Trade Organization (WTO).

For Syria both strategies of integration present merits and limitations. International trade agreements become a way of anchoring reforms, which provide signals that reforms undertaken are serious and credible. This does not mean to rely on an only specific institution or country, and this precisely opens a range of possibilities, at both multilateral and regional levels.

WTO membership will help Syria to integrate in the multilateral system of rules and to benefit from the expected opening of agricultural markets in industrial economies, after the conclusion of the Doha Round. However, experience in the WTO negotiations has not been satisfactory for developing countries, given the size and complexity of the negotiating agenda, and the inability for individual countries to focus on issues that concern them directly. By contrast, the regional strategy offers the advantage of lowering the transaction costs implied by trade negotiations. Consequently, it makes sense that Syria has put more emphasis on negotiating with its main trading partners.

With respect to other Mediterranean countries, the Syrian position is quite atypical because it has trade relations with both the EU and other Arab countries. Thus, from the point of view of an agricultural exporter, Syria has stronger links with other Arab countries than with the EU. The EU represents the 12.6 percent of Syrian agricultural exports against the 57.3 percent represented by the Arab countries (Table 2.1). From the view point of Syria as an agricultural importer, the situation is quite different: the EU accounts for 26.9 percent of Syrian agricultural imports against the 9.4 percent represented by the Arab countries. This pattern reveals the interest for Syria to consolidate its exporting position in the Arab countries. However, the relatively low dependence of Syrian agricultural exports on the EU market^[26] may suggest that the association with the EU becomes an opportunity to diversify exports towards high value markets. Consequently, the regional strategy cannot rule out agreements with the EU as well as with neighbouring Arab countries.

Therefore, both regional strategies, the Association with the EU and the AFTA are perfectly compatible. While the (“North”-”South”) Euro-Syrian integration becomes a push for modernizing productive structures, the (“South”-”South”) intra-Arab integration could effectively create a regional trade pattern, which could contribute to the attraction of European investment interested in serving the Middle East region (see below). Thus, the regional integration between Syria and other Arab countries represents a necessary complement of the Euro-Syrian integration.

Table 2.1 Distribution of Syrian agricultural and total trade among main areas (average values 1997-1999)

Source: Central Bureau of Statistics and own calculations.

However the AFTA framework also presents some caveats:

• its almost exclusive focus on tariff elimination, thus giving little room for a deeper scheme of integration that goes beyond tariffs; and

• the fact that temporal exceptions allow agricultural products to be outside the tariff reductions scheme during the peak production seasons, which reduces the ability of the Arab FTA to realize its full potential for regional trade expansion.

Negotiations of the AFTA agreement have been difficult, and by 1999 member countries were allowed to draw up a list of products excluded from the tariff reduction scheme for a three-year period. However, four Arab countries (Morocco, Tunisia, Egypt and Jordan) have recently expressed their intention to create a free trade area between them (the Agadir process) and to open this area to other signatories of AAs. This could be an interesting option for the last wave of countries negotiating AAs, as is the case of Algeria, Lebanon and Syria.^[27]

The AA between Syria and the EU could be complementary with other liberalization schemes faced by Syria and push for a deep integration that includes an action programme for economic reform, and not only tariff liberalization.

However, multilateral liberalization is by no means contradictory with the regional strategy. Regarding the trade impact of the Association with the EU, several forces threaten the potential benefits for Syria to enter in a regional arrangement with the EU. Firstly, as will be seen below, the expected improvement in trade preferences of the new AA is limited, compared with the existing situation. A comprehensive multilateral reform of horticultural trade will benefit Syrian exporters, given the possible dismantling of the remaining non-tariff measures in the EU. Secondly, the multilateral reduction of tariff barriers, within the framework of the WTO negotiations, is eroding the preference margins enjoyed by developing countries in the EU markets. Erosion in preferences granted to Syria could also arise from concessions granted by the EU to developing countries, such as the AAs, the Generalized System of Preferences and the Lomé/Cotonou Agreement. EU trade measures are not static and they may change as trade agreements are renegotiated, as happened in a recent review for Tunisia (2000) and it might result from the current talks with Morocco. In one sense, Syria may gain from the multilateral liberalization while, at the same time, it pursues an integration strategy with the EU.^[28]

Consequently, Syria might find desirable a trade strategy including the integration into the WTO as well as the signature of bilateral trade agreements. Before analysing the Association Agreement, the trade exchanges between Syria and the EU will be reviewed.

2.5 The photography of euro-syrian trade relations

a) Overall trade balance

The pattern of bilateral trade between Syria and the EU is quite consistent with a “North-South” pattern of exchanges. Thus, the share of processed products in total Syrian agro-food exports to the EU is relatively low (3.6 percent as a 1997-1999 average). At the same time, the share of processed products in total Syrian agro-food imports from EU sources remains high (85.3 percent for the same period). Moreover, the EU sells more agricultural products to Syria than it buys from Syria. The total agricultural bilateral trade balance of Syria against the EU dropped from -22.5 million Euro in 1995-1997 to -64.8 million Euro in 1997-1999 (Figure 2.4). This sharp worsening of the bilateral trade balance of Syria against the EU reflected, of course, the impact of the drought suffered by Syrian agriculture during 1999. However, the Association Agreement between Syria and the EU should take into consideration the persistency of the bilateral trade deficit with the EU, and the traditional specialization of Syria as an importer of processed (high-value) products and exporter of basic (low-value) products.

Figure 2.4 Syrian-EU bilateral trade balance

Source: COMEXT. Author’s calculations.

b) Syrian exports to the EU

There is a high degree of concentration of Syrian exports to the EU on a limited number of products. At the CN four digit level, in 1997-1999 five products accounted for 89.7 percent of total agricultural exports to the EU. The main developments during the second half of the 1990s are:

(i) the concentration of exports on raw cotton (73 percent of Syrian agricultural exports to the EU);

(ii) the boost of Syrian cotton yarn exports to the EU (from 7 million Euro, in 1995-1997, to 19 million Euro in 1997-1999);

(iii) the general drop in traditional exports (guts and blades, raw skins, wool, olive oil, dried legumes and locust beans); and

(iv) the emergence of Syria as an exporter of horticultural products and potatoes. Exports of potatoes grew from a share of 0.09 percent in 1995-1997 to a share of 2.8 percent in 1997-1999.

The Syrian export specialization becomes clear when it is compared to the export composition of a reference group of Mediterranean countries (Syria included)^[29]. In the period 1997-1999, 42.7 percent of Mediterranean Countries exports to the EU were fresh fruit and vegetables (against 5.4 percent for Syria); 12.9 percent were processed horticultural products (against 0.4 percent for Syria); 7.7 percent were fats and oils (0.4 percent for Syria). Cotton exports only represented 4.7 percent (against 73 percent for Syria). In spite of the location of Syria in the Mediterranean area, and its climatic conditions for Mediterranean cultures, the country has not been able to build a more balanced structure of exports.

c) EU exports to Syria

EU agricultural exports to Syria also show a high degree of concentration on a few products but at a lesser extent than the case of Syrian exports to the EU. The first five leading exported products from the EU to Syria accounted for 73.7 percent of total EU agricultural export value to Syria in 1997-1999. The structure of EU exports to Syria is more balanced than in the other direction: 14 products had a share over one percent of total agricultural export value from EU to Syria in 1997-1999. However, sugar accounts for about 54 percent of the EU export value to Syria. Other significant EU exports to Syria are: barley (5.8 percent), butter and other fats (5.4 percent), milk and cream (5.2 percent), flours, meals and pellets of meat (3.3 percent), seeds for sowing (3.1 percent), malt extract (3 percent), rice (1.8 percent) and potatoes for sowing (1.8 percent). Sixty-four agro-food European products showed a positive export growth to Syria between 1995-1997 and 1997-1999. Out of them, 44 were processed or semi-processed products.

2.6 Issues of the syrian-european association

The co-operation between the EU and Syria dates back to 1977, with the signature of the Co-operation Agreement. This provided for free access to EU markets for manufactures, for some tariff concessions for agricultural products and for financial assistance to Syria through the Financial Protocols. The Syrian European Association Agreement corresponds to a “new-generation” of agreements, launched in the Barcelona Conference in November 1995, which have taken further steps for trade liberalization on a bilateral basis. The AA is considered to be a part of the programme for long-term economic reform needed to encourage private sector exports and orient Syria towards global markets^[30]. By the end of 2002, negotiations between Syria and the EU aiming at signing an AA were in their final stages. The economic target of this process is to create an FTA, although the AAs also refer to a number of issues that go beyond trade liberalization. The AA will also enable Syria to commit to a harmonization process of their domestic laws and standards with international rules - thereby making it easier for Syrian producers to penetrate foreign markets. On the other hand, the EU is committed to the provision of financial assistance for the adjustment costs resulting from the free trade agreement. It is a kind of “North - South” integration that is well justified as a way of modernizing the Syrian economy and economic growth. However, the process will involve some risks for the Syrian economy. Three main sources of risks need be considered. First, the reciprocal trade liberalization; second, the fiscal losses derived from trade diversion; and third, the agricultural exclusion from the free trade arrangements.

a) Reciprocity

Trade liberalization of imports originated in the EU is a key element of the AA, not just for the agricultural sector, but also for all the Syrian productive activities. “Reciprocity” is a key word that involves the obligation of eliminating tariffs on EU manufactures, within a defined schedule of 10 to 12 years. Syrian industrial exports already have duty-free access to the EU market. Tariff dismantling on EU exports will begin once the AA is in force. The short-term impact of free trade on local industries, which have benefited from decades of protection, is not easy to anticipate. Agro-food processing has a significant weight in the manufacturing sector, particularly some products such as food processing, cotton and sugar. Some of the largest industries are public enterprises. The promised modernization by the AA will not prevent the relatively high adjustment costs likely to face the industrial sector. There are not reliable estimates on the impact of the AA on the Syrian industry and the final result will depend on the agreed schedule for tariff elimination. However, liberalization impacts could be softened if the Syrian-European AA follows a pattern similar to other AAs between the EU and Mediterranean countries. This includes: (i) an initial phase of four years in all cases with elimination of import duties on intermediary products and equipment goods, and (ii) opening up to the finished products competing with the local products. A sufficiently long transition (10 to 12 years) period will provide leeway to undertake the necessary reforms, including industrial rehabilitation.

b) Trade diversion

A second risk arises from the potential loss of public revenues derived from international trade with the EU. The preferential elimination of tariffs is likely to lead to a welfare loss from trade diversion, largely reflected in the substantial loss of tariff revenue. Abed (1998) reports that import taxes on the exchanges with the EU during 1994-1996 accounted for significant shares of the fiscal revenue in most MCs, up to 19.2 percent in Algeria, 7.9 percent in Egypt, 12.1 percent in Jordan, 28.8 percent in Lebanon, 10.3 percent in Morocco, 15.9 percent in Tunisia, but only 7.2 percent in Syria. In fact, the share of total taxes on imports has been declining in recent years, falling from 2.4 percent of GDP in 1994 to 2.0 percent of GDP in 1997-1998. The IMF attributes this development to the significant depreciation in the average effective exchange rate. The Syrian share of tariff revenues on GDP is lower than most countries that have significantly liberalized their foreign trade and reduced their tariffs (IMF, 2000).

c) Special treatment for agriculture

The third risk originates in the special treatment given to agriculture in the AAs signed between the EU and Mediterranean partners. “Sensitive” agricultural products are usually excluded from the full liberalization schedule and market access in the EU is only limited to a progressive opening. This is a direct outcome of the present EU’s Common Agricultural Policy (CAP), which has been shaped by the interests of EU producers.

There are justified concerns in Syria that the AA might not add too much to the limited market access provided by the EU in the 1977 Cooperation Protocol (see Box 2.1). The AA will probably extend preferential agricultural trade in the form of tariff concessions, with or without quantitative limits. Agricultural preferences granted by the EU in the AAs are generally limited to fruit and vegetables, flowers, spices, wine, olive oil, durum wheat, fish and some meats, and certain processed products. For continental products like meat, dairy products and cereals, the EU applies most favoured nation (MFN) tariffs, which are prohibitive in many cases. In any case, EU tariff concessions are still far from full liberalization due to the impact of largely non-tariff measures. These include: tariff-rate quotas (TRQs); the entry price system, which acts as a minimum price; and other trade barriers such as rules of origin and tariffs on food products.

Seasonality still remains as an important factor of the horticultural trade to the EU, as entry prices and tariffs vary significantly along the year. Syrian tomatoes and citrus fruits can be cultivated along the whole year, depending on the production method (protected and field tomato), the variety and the producing region. For example, entry prices for tomatoes peak during April, when a significant EU domestic production is available, but are relatively low between May and December. Seasonality of the EU imports from third countries suggest that there are “windows” opened to Syrian products into the EU markets and that this situation will improve with the negotiation of new tariff concessions. In some markets, MCs enjoy significant market shares of the extra-EU import market, for specific seasons. That is the case of Egyptian and Moroccan potatoes (24.5 percent and 8 percent of the EU imports from January 1 to May 15); of Moroccan tomatoes (17.6 percent from December 20 to December 31). Given all these examples, Syria should also be in a position of exploiting possible “windows” to increase its exports to the EU. Of course, this brings the question on the domestic conditions that make it difficult for Syria to compete with other Mediterranean countries that enjoy similar natural conditions for the production of fruit and vegetables (see below).

As regards other trade measures, rules of origin (ROO) deserve particular attention. ROO have, of course, their logic, which is to avoid “arbitraging”, i.e. the preferred country re-exporting an imported commodity to the country granting the preference. However, the EU has very strict ROO that define degrees of “sufficient transformation” to be met for a product to be declared as “originated in country X.” Cumulating of ROO allows that some processing operations carried out in any given country of the region are counted as local content. Nevertheless, regional cumulating to the Near East countries is conditioned by the conclusion of the free trade area among countries in the region.

As far as food products are concerned, the AA maintain the so-called “agricultural component” of the tariff for processed products, and most of the tariff concessions are granted only for the industrial component. Almost no “basic agricultural products” receive any preferential treatment because these are sensitive products in the EU (dairy products, cereals, rice and sugar). Consequently, a considerable basic component of the tariff is imposed on processed imports and it is not clear to what extent this estimated component creates tariff escalation, although it is perceived by Syrian exporters as a real obstacle to export diversification towards processed foods.

In summary, Syrian agricultural exports to the EU still face significant trade barriers. Trade preferences in the AAs tend to freeze market shares in line with traditional trade flows, and there is little leeway for exploiting the export potential of key Syrian products such as citrus, cut flowers, tomatoes and olive oil. The management of import measures usually involves “red tape” that reduces transparency and normally acts against the exporting country, taking into account that horticultural trade involves perishable products. Trade concessions and seasonality appear to make room for imports in the EU, but licensing systems and TRQs can easily neutralize the market access theoretically improved by tariff preferences^[31]. Even with relatively small tariffs, the introduction of a licensing system becomes a psychological barrier for exporting countries (see Box 2.1).

There is also the question of possible export interests of the EU in the Syrian market. In the period 1997-1999, EU agricultural exports to Syria were significant in the case of barley and sugar, although the drought suffered by the country during the season 1998-1999 severely affected the barley culture, which is 99 percent cultivated in rain-fed areas. The EU could ask for a further opening up of Mediterranean import markets for EU grains and other food products (livestock, beef, dairy products, sugar and processed products). Market access for EU agricultural exports to other Mediterranean Countries, in the context of AAs, is improving through preferential tariffs without limits (Jordan) or through TRQs (e.g. Morocco and Tunisia). This raises the question about the possible impact of a further opening of Syrian agricultural markets to EU products.

2.7 Issues of the Syrian trade reform

Trade policies in Syria will have to adapt to a more open environment, framed by multilateral and bilateral agreements. Three areas require special attention during the reform process: (i) border protection and its coherence with domestic interventions; (ii) the links between trade and investment; and (iii) domestic factors influencing export competitiveness.

a) Border protection and its coherence with domestic interventions

Reform of trade policies will require some time of preparation (the time until the entry in force of the AA might provide some space for adaptation). Discussions have taken place in Syria on the schedule for elimination of the import ban list. Five years after the conclusion of the AA is the period normally suggested by Syrian committees and working groups in charge of studying the consequences of the AA. What has to be clarified is the way the removal of the import ban list will take place for a number of agricultural or agro-food products. A possible transition could envisage the phasing out of the import ban list through the implementation of tariffs and a moderate tariff reduction on EU products within defined quantitative limits or TRQs. It is worth noting that many countries that have faced agricultural trade liberalization have started with a reform of the policy instruments, leading to a tariffication of border measures (e.g. the case of WTO members). Tariff reductions have often come as a second priority, after the full tariffication has been adopted. What has to be stressed here is that both the AA and the WTO memberships would allow leeway for Syria to apply a large range of trade policies and degrees of border protection. It is more a question of choice of trade instruments than a question of degree of support to the agricultural sector.

However, coherence between trade and price policies will be an issue for the domestic administration of the transitional period, under the AA. A further opening of the Syrian foreign markets should maintain consistency with the price regulations in force. Import prices might not be consistent with the public price guidelines and any decrease of import price could create an increasing burden on public budget. This may be the case for some of the strategic crops for which procurement prices have been above the corresponding international parity prices.

Table 2.2 illustrates the need for consistency between domestic and foreign policies. Westlake’s study (2000) provided detailed information in order to account for all the adjustments needed to make international and farm-gate prices comparable. In our case, unit values of French exports to intra-EU destinations were taken to define a proxy of the highest price for which French exports can be carried out, taking into account that the domestic “intra-EU” market is still protected by the EU border measures and price regulations. Comparison between the three first rows in Table 2.2 indicate that for cereals, French farm-gate prices are close to the unit value of French intra-EU exports, and also to the Syrian import parity price (international price, at the farm-gate level, extracted from the Westlake’s study). In fact, the EU is intending to export cereals in the future without the support of export subsidies, which will probably be possible with the programme of reforms initiated by the Agenda 2000 and the Mid-Term Review proposals, presented by the EU Commission in July 2002.

The last two rows in Table 2.2 supply ratios between:

• Unit values of French exports (adjusted to make them comparable with the farm-gate level in Syria) and Syrian farm-gate prices (official prices). That yields the ratio a/b; and

• French farm-gate prices and Syrian farm-gate prices. That yields the ratio c/b.

The Table’s results suggest that France has a price advantage in both kinds of wheat (soft and hard). In barley, Syrian prices are close to parity, and this fact balances the competitive position of both countries, although farm-gate prices are relatively low in France and this could allow France to export barley at a price close to parity. Therefore, the price comparisons suggest that the improvement of market access for EU exports to Syria should be managed with care. Of course, this does not mean that those products should be kept as a part of a Syrian import ban list. They could rather be fully tariffied and subjected to a schedule of tariff liberalization, with the help of TRQs, which could be progressively wider.

Table 2.2 Price comparison between French and Syrian prices of selected cereals (*)

(*) Prices correspond to 1999; (**) Net adjustment to make farm-gate prices comparable with import prices.

Source: Farm-gate prices are taken from New Cronos database (Eurostat); intra-EU export unit values are calculated from data extracted from COMEXT database. Syrian prices and costs are extracted and elaborated from Annex Tables 3.2, 3.3, 3.5 and 3.9, in Westlake (2000). Prices and costs in SP/MT are converted into EUR/MT by using the following exchange rates: SP/US$ = 50; US$/EUR = 1.06578, corresponding to the 1999 average.

The progressive opening of Syrian markets could offer some opportunities for a further deepening of the price policy reform in Syria. A gradual opening of foreign markets, as suggested in the last pages, would not force a dramatic dismantling of the regulating role of the Syrian State. Official procurement prices have not been subjected to significant changes since 1996, and there is a declared intention to reduce the number of commodities classified as strategic. However, the producer prices should be put more in line with international parity prices, in order to reduce the burden on the budget and to improve competitiveness in a more open trading environment. The generalized subsidy on wheat has been the largest expenditure item within the Price Stabilization Fund (PSF) amounting to 3.8 percent of GDP in 1999, reflecting the differences between the farm prices of wheat and the flour sold to bakeries. The opening of the agricultural import markets should be then accompanied by a number of actions addressed to bring more flexibility to the domestic price system. Intervention prices would have to play a role more like a “safety net” than a direct orientation for the resource allocation in the agricultural sector. Lower import prices, under a gradual opening of the Syrian agricultural markets, would help to keep consumer prices down and to counteract the inflating effects of a devaluation of the exchange rates used for custom valuing. The public savings in the agricultural reform could help the government implement measures to alleviate local impact on rural areas, if possible within development programs and the EU assistance.

b) Understanding links between FDI and trade

The signature of international agreements should contribute to enhance incentives for increased foreign direct investment (FDI) in Syria. Given the importance of agriculture in Syria, including agricultural trade in the multilateral and bilateral agreements, becomes crucial to create opportunities for private investment. Potentially, the Syrian “assets” for attracting foreign capital are the appropriate natural conditions for the culture of Mediterranean products, relatively low labour costs, and relative proximity to Europe and the Arab countries. Available information does not report on significant European investments in Syrian agriculture and agribusiness. Many interviewed stakeholders referred to the Nestle food processing facility as the “European” exception that confirmed the rule. However, things seem to be moving slowly to the preparation of investment plans of European companies, some of them in process of execution, in particular in the olive oil sector.

Of course, the lack of expectations imposed by the limited access for Syrian products to the EU markets may provide an explanation for the little European investment in Syrian agricultural and food industries. Increased market access in the EU for a large number of products would become a right sign to guide future investments in the future. EU investments could be based on the potential for a large regional market (including intra-Arab integration), and not on the high protection of the domestic market, as has been the case of some US firms which have licensed products for Syrian production, such a fruit juice, fertilizer and pesticide.

However, not all the responsibility for the lack of European investment can be attributed to the closeness of the EU agricultural markets to foreign products. In recent years, diminished foreign aid, drought, and regional recession have hurt the Syrian economy. Furthermore, an uncertain Middle East peace process has surely influenced the investor’s confidence.

Some important elements of the Syrian reform program directly affect foreign investment (Maletta, 2001). These include the provision of fiscal incentives to private investors (Law nº 10 of 1991, and its amendment Decree nº 7 of 2000); exchange rate simplification with a progressive shift to a fewer and more depreciate exchange rates; opening of previously monopolized sector to the private initiative; export tax elimination; and import measures liberalized. Foreign investment will be facilitated with the now open possibility, after Decree nº 7 of 2000, that a company may be 100 percent foreign-owned, and the owners may be allowed to specify their own company laws, and assign their own management. This will open the door not only to the penetration of European companies, but also to the possibility of joint ventures with Arab capitals.

There is also the question of the general climate of the Syrian economy to attract FDI. The absence of organized capital, foreign exchange, and financial markets continues to be an important impediment to private investment, both domestic and foreign. The systematic overvaluation of the official rates, the complication of the system and the constraints to currency convertibility do not help to attract foreign investors. The private sector has had no access to official foreign reserves since 1984. All foreign exchange operations must be generated from company exports and transacted through the investor's foreign exchange account at the Commercial Bank of Syria. Except for transfers made under the 1991 Investment Law No. 10 and 2000 Decree 7, capital outflow is absolutely prohibited. Investors authorized under these laws may repatriate their capital or transfer their profits, but the hard currency must then be generated from export proceeds. Foreign companies operating outside the two investment laws may transfer capital only in accordance with special agreements, usually in the form of a presidential decree, which allow their operation in Syria. All Syrian banks are government-owned and offer only rudimentary banking services. In June 2000, the Syrian government took a further step toward financial modernization, permitting the operation of private foreign banks in Syria’s free zones. Another step is the recently passed Law Nº 28 of 2001, to allow the opening the activities of private banks in Syria. However, Government plans foresee certain limits to the participation of foreign investors and to the exercise of commercial and industrial activities by the authorized banks.

Syrian Government has declared its intentions for removing the remaining constraints on foreign investment, including further steps to liberalize the current exchange rate regulations. While the direction of the reforms seems right, their speed must accelerate for Syria to take full advantage of the trade agreements. Full currency convertibility is needed to attract EU firms interested not only in performing exporting activities, but also in obtaining profits from sales of goods and services at the Syrian domestic market. Wholesale traders and retail distribution in Europe, and even small and medium enterprises, could be interested in setting branches in Syria, which could improve the efficiency of the Syrian marketing system. Reports on the food distribution in Europe do not show significant negative impacts on employment, while the coexistence of big distribution firms with modern wholesale markets and specialized small and medium enterprises is still possible.

c) Removing constraints to export activities

At the farm gate level, Syrian production shows cost advantage for horticultural products, especially for some seasons of the year. Thus, Syrian potatoes addressed to Germany, mainly of the Nicola and Diamond varieties, already take a significant market share during January when wholesale prices are high during few weeks. By contrast, studies on the Syrian olive oil market (Malevolti, 1999) have stressed the relatively high prices of Syrian olive oils, and their high production costs, compared with those of Syria’s direct competitors in the Mediterranean (Turkey, Tunisia and Morocco). However, the fact that the Syrian domestic market keeps being considered by the farmers and oil producers as a «safe shelter» against foreign competition, does not help to promote price competitiveness (SEBC, 1998, p. 73).

Moreover, farm cost advantage is not sufficient for the export success. In fact, assessing foreign competitiveness means to take into account non-price factors, related to quality standards, grading, marketing organization and human skills. This is particularly important if an improvement of Syrian exports to EU markets is pursued. Studies undertaken under the GCP/SYR/006/ITA project, suggest that most of the fruit and vegetable exports by Syria, mainly addressed to Gulf countries, are mostly sold under consignment, and they normally lack regularity and volume. In the short term, this export behaviour does not suit to the EU markets. International competitiveness is also influenced by the availability of an efficient marketing system, and by harvest and post-harvest technologies, refrigerated facilities and transport to the main markets. Present studies in Syria suggest that transport and marketing costs of fruit and vegetables represent a heavy constraint, mainly to the EU destination. According to a study carried out by the Syrian European Business Centre (SEBC, 2000), the costs of delivery from a packhouse in Syria to the international markets (including trading commissions, transport and other marketing costs) may account for very high percentages of the international wholesale market price, up to: 45 percent for oranges, 69 percent for stone fruit, 51 percent for vegetables, and 42 percent for potatoes. With growing concentration at the retail distribution in Europe, the Syrian exporter could still aim at targeting traditional outlets, such as wholesale markets. But this strategy, mainly based on a price advantage, has its limits.

In addition, exporters have to satisfy the specifications laid down by the distribution firms. That means responding to constraints as to quantity and quality, processing and services imposed by the purchaser. Syrian horticultural production for export to the EU has to comply with environmental regulations and standards required by the distribution firms. As regards the quality of citrus sent to foreign markets, the reputation of Syrian citrus has improved during the last years due to an increase in biological control, post-harvest preparation and waxing. A wider access to the EU could create the right incentives for further implementation of grades and standards accepted in the EU markets.

The opening of agricultural and agro-food markets in Syria would also promote the price competitiveness of some products with export potential, such as processed fruit and vegetables, olive oil and cotton. Domestic prices of cotton delivered to domestic spinning plants are 30 percent above international prices, which has negatively influenced the competitiveness of Syrian textile industry. Olive oil and cotton should gain price competitiveness in order to increase their position in foreign markets. This also leads to the need for facilitating an adequate environment for private and foreign investments in agriculture, in particular in the cotton sector, where private investment is still restricted for some operations.

2.8 Concluding remarks

The present chapter has underlined the crucial moment faced by the Syrian agricultural sector, with regard to trade liberalization. In fact, the Syrian position is motivating for trade researchers, given three facts: (i) the relatively high degree of trade intervention that still characterizes Syrian agricultural policies; (ii) the declared willingness of the Government to opening the Syrian economy; (iii) the mixed strategy of Syria, which combines the regional integration (with Arab countries and with the EU) with the insertion in the multilateral trading system.

A first assessment of the potential of Syrian agricultural trade invites moderate optimism. Low labor costs, comparative advantage in Mediterranean crops and advantageous geographical location, conform a good basis for the future. However, for this potential to become a reality, the agricultural sector should benefit from the reform process of the Syrian economy. A quick assessment of the regional integration with the EU suggests that the AA would involve some efficiency gains by decreasing the import costs of equipment. There are risks, of course, but with a long transition period (10-12 years), the Syrian manufacturing and agro-food sectors could soften the adjustment costs and maintain effective protection. A scheme of deep regional integration with the EU would assist the modernization of the Syrian economy, with relatively low social costs. However, long transition does not mean an argument to slow down the path of policy reform. It is clear that a reform of trade practices, in line to the WTO rules, would be needed to ease the regional integration with other Arab countries and with the EU, and to introduce transparency in agricultural trade. A reform of policy instruments, leading to a full tariffication of border measures, could be undertaken. The opening of the agricultural import markets should be accompanied by a number of actions addressed to bring more flexibility to the domestic pricing system, more in line with a market economy. The gradual but progressive trade liberalization would also be a way of promoting price competitiveness of Syrian products, also for those with export potential, such as processed fruit and vegetables and cotton.

Increased market access in the EU and the progressive intra-Arab integration are crucial for transforming Syria in an appealing destination of FDI. However, this could be complemented by the continuation of the process of economic reforms in Syria, including the banking system, the currency regulations, the movement of capitals and the administrative procedures for foreign commercial transactions. While the current direction of the reforms seems to be right, their timetable should be clearly defined and speeded. The Euro-Syrian joint ventures in the agricultural sector will surely react positively to the removal of existing constraints to FDI. The AA includes a series of provisions establishing clear commitments for economic reform, which represent an “intangible” asset of the Syrian-European co-operation. However, the actual rate of reforms, independently of the multilateral and bilateral choices taken by Syria, will remain a Syrian responsibility.