Free Trade zones between Iraq and neighboring countries: The economic importance and political-security issues

Fadhil Yasin
Advisor, New Iraq Center
  • Introduction
The world has known the free zones long ago and goods were traded in and out without taxation or customs duties. Those free zones were mostly stops stations on or near international shipping routes and cannels. Those stops were used for storage, packaging and other staff until they were re-exported again1. With the development of the free trade among countries and the exchange of goods movement, the importance of these areas has increased to form one of the hubs of economic and social development to attract Arab capital and industrial investments from the developed countries. Also, to establish new industries that provide many advantages such as employment opportunities, raise the level of rehabilitation of the national labor force and providing and various sources of national income as well as achieving a degree of self-sufficiency. In addition to the Increase in exports and reduce dependence on imports, and attract international technical expertise and activate some of the domestic economic sectors such as ports, air routes and land touts as well.2
Recently, the free trade zones have received a great deal of international attention and have become one of the leading hubs in attracting and settling investments in many countries of the world. These hubs have achieved an increase in production, export, trade, development of foreign exchange resources, as well as Knowledge and localization of technology. To look at this subject in depth and in all aspects that explain the growing interest in these zones inside and outside Iraq, we will address the subject through the following headlines:
First: The idea of free zones in the modern Iraqi state:
Second: The objectives of Iraqi free zones
Third: Recommendations of the Free Zones conferences and its Role in Encouraging    Investment
Fourth: the Iraq experiences in the establishment of free zones with Arab countries:
A- Establishing a Free Trade zone between Iraq and the Egypt in 2001
B- The opening of the border is an important step towards the establishment of free zones between Iraq and Saudi Arabia
Fifth: What is required from the Iraqi side to improve free zones?
  • First: The free zones in the modern Iraqi state:
The important and vital geographical location of Iraq on the international trade routes has helped establishing free zones with the start of modern Iraqi state. However, none of these zones was established at that time until the1969 based on custom article No 8. However, it was not successful, and then another free zone was declared in southern Iraq in 1997, which followed by Law No. 3 1998, that was called the establishment of the General Authority for Free Zones, under which three areas were established: 3
1- Free Zone in Khor Al-Zubair / Basrah.
2 – Free Zone in Nineveh.
3 – Free Zone in AlQaim / Anbar.
These zones were expected to play a crucial role since its start in 2000, however, these zones suffered from the decay of the security, economic and political situations. The international sanctions on Iraq from 1990 to 2003 and the US occupation of Iraq in 2003 as well as the establishment of a new political process have affected negatively the role of the free zones.
  • Second: The objectives of Iraqi free zones:
Generally, the free zones have multiple and complex objectives, both in Iraq and in other countries of the world, with some of the exceptional objectives related to some countries, which can be summarized as follows: 4
  • To advance economic and social development.
  • Attracting local and foreign capital for investments activities in Iraq.
  • Engaging advanced technology and developing human resources through knowledge and training on this technology.
  • Providing employment opportunities for the local workforce.
  • Increase the exports and foreign exchange resources through the establishment of various investment projects.
  • Getting advantages of the primary resources available in Iraq as raw materials to advanced industries.
  • Working to diversify other resources other than heavily depending on oil industry.
  • Third: Recommendations of the Free Zones Seminar and its Role in Encouraging Investment:
On 18-19 September 1988, Seminar on Free Zones and its Role in Investment Promotion was held in Dubai UAE, The outcomes were couple of important recommendations:
  1. Emphasizing on the vital role that free zones can play in attracting and encouraging investments, attracting capital and investors, advanced technologies, training and creating new jobs as well as their role in increasing exports and foreign exchange resources.
  2. Benefiting from the facilities that Arab Free Zones can offer to establish projects as for achieving economic and development integration. Giving the fact that these projects enjoy guarantees by economic agreements, which prevent nationalization and expropriation. In addition, developing the core bases of for judiciary and institutionalizing the free zones, which will help in achieving their investment and development role.
  3. Establishing a long-term strategic plan for the free zones, aiming at encouraging investments and developing export industries at the same time increasing the manufacture of local raw materials to increase their contribution to the GDP. Moreover, creating effective impacts in the national economy, and getting to put a possible plan to deal with the activities of these zones within the country in order to coordinate and develop these activities.
  4. Total preparation for the requirements of success in terms of providing basic services, facilities, buildings and sidewalks within the free zones. Also, the need to match between the investment goals and the goals of the country in order to fulfill the ultimate goal of these zones.
  5. Promoting the free zones of the Arab countries is very crucial as well as its systems, advantages and facilitations in a way that can be utilized. Also, organizing specialized seminars in this field in cooperation with various Arab and international organizations. Inviting and attracting Arab businesspersons and investors to contribute to these efforts and to seek financial legislation to provide more services, financial facilities to expand the projects of the free zone.
  6. Studying the possibility of granting the products of these zones a certificate of origin according to limited criteria. These criteria are, the capital of these industries should be local or from Arabic countries, otherwise the value added will be less than 40% of the cost of production, there should be no similar industries in the domestic market in the country of that Free Zone.
  7. Getting fast with the establishment of the Arab Federation of Free Zones to be a tool for cooperation, coordination, organization and training for the development of Arab Free Zones and its services and role.
  • Fourth: Some of the Iraq experiences in the establishment of free zones with Arab countries
A- Establishing a Free Trade Zone between Iraq and Egypt in 2001:6
  • Practically, all the economic giving data if there is a real political will are meant to activate the Arab common market as it attracts the interest of the Arab countries to join them. The product will have a big comparative advantage as big as the market. So for example, the products of the UAE, Jordan, Egypt, Syria, or Lebanon, when exported to Iraq without import license and without customs duties, this product will have a competitive advantage in the Iraqi market compared to the other foreign products. In addition, it will the advantage over products from other countries, which are not part of this common market. This will increase the export to Iraq and therefore, the trade activity will be super active which will lead to a better economic atmosphere.
  • The Economic Unity Agreement points out to remove the border between the Arab countries in the movement of goods and services. As matter of fact, this has achieved by the protocol with Egypt, as part of easy transfers of capital among the Arab countries and of movement of individuals as well.
  • Egypt and Iraq agreement to establish a free trade area between the two countries has considered a big successful step as it was described by Egyptian commerce and economic minster. This agreement came along with Iraq’s attempts to escape the grip of international sanctions as well as with the announcement of the intention of Baghdad and Damascus to establish a free trade zone.
  • The former Minister of Commerce Mr. Muhammad Mahdi Saleh at the time, welcomed this agreement, and stressed that Iraq decision was a strategic one. It is known that Iraq has signed The Joint Arab Market was adopted between the Arab states or most of them in 1950 but was not implemented. However, this is the first protocol to be implemented between two Arab countries, which proved that the common Arab market and economic unity is possible and applicable. The Iraqi Council of Ministers approved the trade agreement signed by the Vice President of Iraq with the Prime Minister of Egypt.
  • Having said the above, the establishment of free zones among the Arab countries has more than the material revenues. The benefits is very large at the Arab strategic level, because the unification of two large markets between Iraq and Egypt, and Iraq Syria is an important step towards the unification of the common big Arab market. This will make the Arab countries to look strong in front of the international economic blocs, especially in the current system of globalization. The current system gives advantage to the industrial countries under the World trade organization agreement to dominate over the non-industrial countries. So without the common Arab market, Arab factories may be forced to close its doors, and unemployment will increase due to the invasion of foreign goods to the Arab markets. Therefore, the Iraqi government considered this agreement as a real protection for the economies of Arab countries and Arab industry and the Arab labor force against international economic blocs.
  • Opening the border is an important step towards the establishment of free zones between Iraq and Saudi Arabia After decades of tension; Iraqi-Saudi relations began to improve dramatically following the visit of the first senior Saudi official since 1990, Saudi Foreign Minister Adel al-Jubeir to Baghdad on February 25, 2017. Moqtada al-Sadr’s visit to the kingdom lasted three days 30 July to 1 August 2017 is also the first since 2006 in which he met Saudi Crown Prince (Deputy King) Prince Mohammed bin Salman. Sadr’s visit came two weeks after Iraqi Interior Minister Qassem Mohammad al-Araji on July 17, 2017. moreover, The visit was preceded by a visit to the Kingdom by Iraqi Prime Minister Haider al-Abadi on June 19 and 20, 2017, the first since he took office in late 2014 – Followed by the establishment of a “coordinating council” to upgrade their relations to a “strategic level”.
The indications of these visits confirmed that, the Gulf countries have conducted a major revision in their attitude towards Iraq. As it was expressed by the Saudi writer Abdulrahman Al-Rashed in his article in The Middle East Magazine, “It is in the interest of the countries of the region to Support independence Iraq and notify its people that they are not alone. The wrong policy of the gulf toward Iraq that made it easier for Iranians to intervene and expand, and that looking at Iraq as a sectarian component is a misrepresentation of the realities of politics on the ground and a lack of understanding of the dynamics of politics and society there.” 7
In fact, Iraq’s relations with the Arab Gulf states, especially the Kingdom of Saudi Arabia, have witnessed significant developments towards the return of Iraq to its Arab family. Here the economist Faghel Bo Aynen stressed that, “There is a focus on the return of Iraq, Political, security and economic. Thus, the Kingdom aimed at restoring economic relations with Iraq in order to revive the Iraqi economy in addition to linking it with the Arab and Gulf economies in particular. This can only be achieved through the opening of borders. Also, This is one of the most important rules of the economy in the two countries, and other arrangements are under way, including the visit of the Minister of Trade and Investment and the promises accompanying major investments that can be read through the accompanying delegation, which guarantees the heads of major companies in the Kingdom.8
The steps taken by Saudi Arabia toward Iraq are important even though late and after a green light from the US. This is part of abrader strategic direction to contain and counter Iranian negative influence and redraw the regional alliances in the Middle East. The Kingdom has aimed at economic openness in Iraq through opening the ports in order to strengthen its presence in the Iraq as well as to reduce the Iranian influence. This will eventually affect Iranian exports and economic relations with Iraq as well as its will accelerate the reduction of the Iranian role in Iraq from the economic, political and security aspects.
This Saudi Arabia’s role and initiatives will accelerate the role of other Gulf States, which are expected to play a complementary role to Saudi Arabia’s role in Iraq, as well as its efforts to neutralize Iran’s presence in Iraq. In this regard, the former officer in the Saudi army and former military attaché Major General Mansoor al-Shihri commented by saying, “The re-opening of the Arar border crossing is an indicator of the reduction of the state of tension, especially as Iraq and Saudi Arabia reach a political agreement and a convergence of strategies. The opening of the port also indicates the intention and determination of the two countries to restore the strategic dimension of their relationship. In addition to the imposition of overlapping, geographical and social structure of privileged relations, as well as a common commitment to fight terrorism. He stressed that, “The signs of security cooperation began to appear through the coordination of security port from both sides to protect the roads leading to it.” He said the new trade activities would also help reduce the influence of the Iranian Revolutionary Guard, as trade exchange would revive Saudi and Iraqi areas on both sides of the border and strengthen relations between the two countries. He said improved tribal and social relations would help in particular to reduce Iranian hegemony in Iraq.9
Now, the commons between Iraq and Saudi Arabia are of the capacity that cannot be limited to the coordination of oil policies given the fact that they are among the main countries in the OPEC. However, the importance of, “The direction of the Kingdom through economic rapprochement with Iraq is a very important step as well as the issue of distribution of oil production quotas and the maintenance of prices. Iraq is now in a phase of reconstruction, the Kingdom may have a large share in the reconstruction phase, and especially Iraq has the necessary human resources and resources, which will contribute to a positive economic movement.10
The quote indicates that these aspirations and based on the economic calculations of the common interests of the two countries, might gradually lead to an agreement on the establishment of a free trade zones that serve those interests and take the initiatives to a new level of its kind.
It is worth mentioning some of the promising aspects in this regard:
First, during the visit of the Saudi Minister of Trade and Investment Majid bin Abdullah Al Qasabi to Baghdad on 22/8/2017, “Minister of Planning Minister of Commerce and Agency Salman Jumaili invited the Saudi side to establish a permanent exhibition in the Baghdad International Fair in addition to their participation in the sessions of the exhibition. The media of commerce stated that, “Jumaili met with his Saudi counterpart and the accompanying delegation after meetings with the Prime Minister and a number of officials to discuss ways to develop bilateral relations between the two countries and on various political and economic levels and to serve the aspirations of the two countries.
Additionally, Jumaili stressed that, “The stability of political relations between Iraq and Saudi Arabia is reflected in the economic relations as well as the opening of the ports, the “desire and strong will between the two sides to facilitate many things scientific and practical steps that are in the interest of the two brotherly countries. Which will contribute to increase the volume of trade exchange between them.”
On the other side, the Saudi Minister of Trade and Investment confirmed that, “the will of the Saudi government for more cooperation and openness in all fields is very important as well as providing support and expertise in several levels. In addition to cooperation in the areas of inspection and quality control to solve the problems and the obstacles and challenges, facing Iraq and Saudi Arabia are all crucial. 11
Second, the American interest in the Saudi and Iraq rapprochement. So, on Wednesday, 15/8/2017, “the American envoy to the International Coalition, Brett McGirk, inspected the Arar border port between Saudi Arabia and the Anbar province in southwestern Iraq and accompanied the Saudi Minister of State for Gulf Affairs Thamir al-Sbahan. The deputy head of the Anbar provincial council Faleh al-Issawi, met al-Sabhan and Mughajirk at the Arar border post with Saudi Arabia (430 km south-west of Ramadi). Al-Issawi said that Al-Sbahan confirmed his readiness to support the needs of Arar port. “There is an agreement with the Saudi side to rehabilitate the crossing and to open it completely for the purpose of trade exchange and visits between the two countries,” Saad al-Hadithi, spokesperson for the prime minister’s office told AFP. Al-Hadithi pointed out that there are efforts between Baghdad and Riyadh to reopen Al-Jumayma crossing in Al-Muthanna province in southern Iraq.12
Surprisingly, there are big questions in the articles and reports of the media that followed these developments after the announcement of the permanent opening of the Arar port. Some of these questions were like; will the land trade route change from the north to the south i.e from Kurdistan to Anbar? Is it possible to invest in the Iraqi desert like in the Saudi desert before? Moreover, the establishment of a Saudi consulate in the city of Najaf on 14/8/2017 the holy place for the consulate as the supreme reference of the Shiites has certain meanings and religious indicators of the end of the separation with the Shiite and the Wahbali trend in Saudi Arabia. Thus, this step may put an end to a religious-social intellectual conflict and the beginning of a new era of relations between the two countries first and between the two sects.13
It is well known that the Iraqi provinces that share a long border with Saudi Arabia are looking to achieve great interests as a result of openness between the two countries. “The member of the economic committee in Anbar province Fahd Mishaan said that opening the land port is an important step that reflects the priorities of foreign policy in Iraq. The economic return of the opening of the port is very large, it is the only land corridor for the transit of goods and goods and commercial services between the two countries.” The provinces where the border ports and free zones are will benefit from the revenues achieved. although the port is under the supervision of the government But the law permits the transfer of between 35 and 40 per cent of its revenues to the local government, which will allow for more public spending in Anbar at a time when the province urgently needs financial resources for reconstruction.14
Some Iraqi writers have gone even further after finding that “opening Arar permanently between Saudi Arabia and Iraq and many developments between Iraq and the Gulf countries, which was hidden and did not appear to the public and to the media are steps that could open the door to Iraq for membership of the GCC Gulf, while maintaining Iraqi privacy.”15
 
  • Fifth: What is required from the Iraqi side to develop free zones
The movement of the economy and the development of its components require the presence of the developed international effort in Iraq, which can be attract by the safe free zones at the borders or beside the international fast roads. Free zones role also attract capital and advanced technologies that help develop all aspects of the economy. The establishment of free zones have so many advantages on the economy, productivity and service of Iraq. The world has witnessed a great development in the mechanisms of work and achievement. Unfortunately, Iraq stayed away from these mechanisms due to its inability to catch up with the advance world. The incentives to work in these zones represented by providing large facilities for the investor in the field of tax and customs exemptions on the various raw materials involved in the manufacturing process. This will encourages investors to work within these zones to activate factories and trade.
Also, the most important elements of attracting the largest specialized companies globally is the existence of the market for manufactured goods in these areas.  Iraq desperately needs these zones, which are capable of providing support to the productive sectors as well as the detailed services, which has been suffering and lacking for decades. Furthermore, the free zones can also provide many facilities, which lead to attract the global effort to develop the role of recycling the wheel of production within these regions, which is witnessing a large movement in the import and export.16
As a conclusion, the activation of free zones in Iraq requires the intense efforts of various governmental and non-governmental institutions and at many levels to achieve the following: 17
  • The necessity of strengthening international cooperation in the free zones by the Ministry of Foreign Affairs through benefiting from the agreements with many countries. Also turning them into a means of attracting investment projects. Most of international companies want to invest in these areas, benefiting from the geographical location of Iraq. This subject requires fixed regulations between the foreign investor and local in these zones. There is also the possibility of establishing effective free zones in the areas of Safwan, Trebil, Faw and many other areas along the Iraqi-Iranian border, with coordination between the ministries of economy such as the Ministry of Trade, Industry, Planning and Development Cooperation, in addition to the Ministry of Finance and the Ministry of Agriculture to support sustainable development.
  • The importance of local governors in the provinces to take measures to facilitate the establishment of free zones within their borders to benefit from the financial, economic and social aspects. Also to activate coordination between the General Authority for Free Zones and the National Investment Authority, in a manner that does not interfere with its activities to promote investment opportunities and attract foreign and national capital to Iraq. Additionally, the coordination with neighboring countries to benefit from the expertise and information in this area, and to develop a future vision for the requirements of the success of free zones.
  • Experts in economic affairs also support the idea of establishing free zones between the provinces to bring foreign investors, their companies, and their capital and activate the investment movement in Iraq.
  • Completion and development of the transportation network:
A: Iraq can achieve large financial returns through the investment of its geographical location, which is the shortest way of linking East and West. Global trade support short roads. This is available only in a limited number of countries in the world, including Iraq. thus, the need to establish advanced transportation routes and railways stretching from southern Iraq to the Mediterranean Sea and the Red Sea through the Jordanian Gulf of Aqaba.
B – Iraq as part of the Arabian Gulf region has to develop strategic plans to establish a network of highways with international specifications and railways, which link the ports of the Arabian Gulf ports with the Mediterranean for the achievement of great economic facility. The investment of railways and air, land, sea transport will activate the trade and the exchange of good between the countries of the Middle East. Iraq as a link between Asia, Europe and Africa, could be an international carrier of goods, which will ensure the attraction of hundreds of millions of dollars annually.
C – There is an urgent need for further dialogues and meetings with the concerned countries to provide railways to link Iraq to the countries of the region.
D – Invite Arab and foreign companies to invest and expand in the field of railways is crucial. The most important is the implementation of the Basrah-Shalamjah border in Iran as well as the railway project (Yusufiya, Musayyib, Karbala, Najaf and Samawah) 288 kilometers. In addition to establish a railway in (Baghdad Central Station – Baghdad International Airport) with a length of 25 km.18
  • Margins
1, 2  Khawla Bursali, Free Zones Forum and its Role in Investment Promotion, Forum (Legal, Islamic and Human Sciences), August 7, 2016,  http://cutt.us/HmKM
3, 4  General Authority for Free Zones, Ministry of Finance / 2013, http://www.mof.gov.iq/pages/ar/GeneralAuthfreeZone.aspx
5, 6  Mohammad Mahdi Saleh, the former Iraqi Minister of Trade, with the program “Meet Today” on Al-Jazeera TV on January 26, 2001, http://cutt.us/GiGH7
Between the “penetration” and the “hug” Saudi Arabia sends political messages to Iran via Iraq, hav Post Arab / 4 August 2017, http://cutt.us/TXTk3
8, 10  Abdullah Al-Fayfi, Economists: Saudi-Iraqi Convergence: Neutralizing the Crimes of the “Mullahs’ Economy in Iran,” Riyadh, Saudi Arabia, 11 September 2017, http://www.alriyadh.com/1622299
9, 14  Alaa Hussein, Walid Abu al-Khair, Iraq and Saudi Arabia Open a Border Outlet After a 27-Year Closure, 31 August 2017, http://cutt.us/5ahRh
11  Iraq Calls for Saudi Arabia to Establish Permanent Exhibition in Baghdad, Website (Free Event) / 23/08/2017, http://www.alhurrahadath.net/15301–.html
12  Makkirk and Saudi and Iraqi officials during the visit to Arar port, Al-Hurra website (August 16, 2017), http://cutt.us/LtVWx
13, 15  Tariq Harb, Iraq New Member of the Gulf Cooperation Council, Al Zawaman Newspaper, 15 August 2017, https://www.azzaman.com/?p=211639
16 Hussein Thoghb, Free Zones Attracting Capital, Iraqi Media Network / 31 May 2017, http://www.imn.iq/archives/163065
17, 18 Adel Mahdi, Iraq Needs to Activate Free Zones and Transport, Voice of Iraq (May 2, 2017), http://cutt.us/U10P3

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