By IB Insights

It is not easy to find economists that agree on something. But international trade seems to be the exception: free trade is better than protection. Or in the words of Adam Smith: “if protection is levied, it will divert industries from more advantageous trade to less advantageous trade.”

Speaking at the 30th meeting of the Organization for Islamic Cooperation (OIC) recently, Turkey’s President, Abdullah Gul called on Muslim countries to recognise the potential of open trade: "We need to liberalize trade among member countries and mitigate barriers for customs as soon as possible”.

Intra-OIC Trade: Over 30 Years of Negotiations

To its credit, the Committee for Economic and Commercial Cooperation of the Organization of the Islamic Conference (COMCEC), the body that is responsible for promoting intra-OIC trade (i.e. trade between Member States of the OIC), started working on a Trade Preferential System as early as 1981. The idea behind this system is to encourage trade and commerce by providing equal treatment of OIC member states and preferential treatment for the Least Development Member States.

The Trade Preferential System is based on three related agreements: i) the Framework Agreement, outlining the general rules and principles for undertaking negotiations, was adopted by COMCEC in 1990 and became effective in 2002 after being ratified by 10 member states; ii) the Protocol on Preferential Tariff Scheme (PRETAS), which lays the framework for tariff removal or reduction and implementation timetable. This agreement came into force in February 2010; iii) and the Rules of Origin, establishing the origin of products, came into effect in August 2011.

Following the ratifications of the above three agreements, the legal foundation for a preferential trade system for OIC countries has been put into place. However, as noted by COMCEC the Trade Preferential System will only be operational once the Member States that have ratified the system meet the conditions laid out in the agreements, including: submitting a list of concessions; “printing TPS-OIC Certificate of Origin; and providing specimen impressions of stamps to the TNC Secretariat.”

The delays in operationalisation of these agreements is causing tension within OIC. “Even though preparations for the implementation have been finalized to a considerable extent, I regret to say that this important agreement has not been operationalized”, President Gul added.

Status of Intra-OIC Trade

Intra-OIC trade remains stubbornly below 20%, as shown in Figure 1, compared with intra-European Union trade touching almost 60%.

Figure 1: Intra-OIC Trade

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Source: ICDT, SESRIC

Furthermore, there is deep concentration of trade by country and product. The top ten countries account for over 70% of intra-OIC trade, with UAE, Turkey and Saudi Arabia leading the way. More significantly, exports are heavily concentrated in primary products like oil, natural gas and metals, with technology intensive manufacturing remaining flat.

Figure 2: OIC Trade: Major Countries in 2012 (Billion US$)

Source: SESRIC

Figure 3: Structure of OIC Trade

Source: UN COMTRADE Database

According to COMCEC trade liberalisation continues to be one of the major challenges facing OIC countries, with 8 OIC Member States ranking in the bottom 20 countries that apply the highest average tariffs. The good news is that there are some leaders in trade liberalisation within OIC. Countries such as UAE, Qatar, Oman, Malaysia and Indonesia having lower tariffs tha the World Trade Organisation’s (WTO) average.

Figure 4: Highest Average Tariffs

Source: WTO Statistics

Moreover, there is great disparity in cost of trade, as noted by COMCEC, with transport costs for Middle East countries higher than the global average.

OIC Member States That Signed / Ratified The TPS-OIC Agreements