City View Room
Elliott School of International Affairs
January 25, 2007

The Oman - US Free Trade Agreement
By Her Excellency Hunaina Al-Mughairy
Ambassador of Oman to the United States of America

(Source: Omani Embassy)

Ladies and gentlemen, it is a pleasure to be here, and thank you for your kind and friendly welcome.

I am most grateful for the opportunity to make these remarks on such an important topic. And I am particularly pleased that it is the Oman-US Free Trade Agreement that is the basis for my talk. I appreciate that the broader issue before us is economic growth in the Arab world, however the FTA is truly an excellent case study, not only for the wider question of Omani economic development, but also for our neighbours in the Arab world, and on the Indian Ocean rim.

The path leading up to the negotiation and conclusion of the Oman-US FTA connects with all the key issues relating to the modernization and globalization of Oman's economy, and indeed also to similar issues facing many of our friends and neighbours.

For decades, our economies have been based on energy resources. In Oman, when His Majesty Sultan Qaboos came to power in 1970, one of his first observations was that our economy needed to be diversified and modernized if Oman and its citizens were to become active participants in the global economy.

As any government minister from an emerging market will tell you, talking about diversification and development and actually implementing programs to achieve these ends are two very different things. It requires the commitment of huge resources, often in the context of a struggling economy. It requires a very keen eye to keep the horizon in focus. It requires an incredible amount of perseverance and patience. And last but not least it requires rock hard dedication to a set of key social and economic principles, regardless of the transient political and economic challenges of the time.

In one very important sense the first step on Oman's path to the FTA with the U.S. dates right back to 1833, when we were one of the first Arab states to engage in diplomatic relations with United States. More recently, our accession to the WTO in 2000 and the creation of the Gulf Cooperation Council Customs Union in 2003 were important precursors. And our Trade and Investment Facilitation Agreement with the U.S. served as the actual springboard from which the FTA negotiations began in 2005.

The impact of FTAs on economic development is still the subject of debate among economists. As the Congressional Research Service has put it: "The debate has relied largely on theory since empirical data are scarce save for the experience of the European Union." [CRS Report #RL31356, August 1, 2006] That report observes that the economic impact analysis of FTA is based primarily on the perspectives of trade creation and trade diversion. For Oman - and probably for many if not most Arab states - the analysis of the impact of the FTA probably will not find much instruction using those concepts.

For Oman, our trade relations with the U.S. have been really very small in absolute dollar values. In 2005, the U.S. exported $593 million worth of goods to Oman - which was an 80 percent increase from 2004. In the same year, Oman exported $555 million in goods (including agricultural products) to the U.S. This was an increase of about 33 percent from 2004. This is a good performance in percentage growth but negligible in terms of our mutual overall trade volumes. And foreign direct investment from the U.S. into Oman has also been relatively small - amounting to only $438 million in 2005.

It is on the investment side that we in Oman are hopeful that the FTA will make the greatest contribution to our economic modernization program. In recognition of the room for improvement in our bilateral commercial relations, His Majesty Sultan Qaboos charged our government with the responsibility of concluding an FTA with the United States. He recognized that in order for Oman to reach its economic diversification goals, we had to globalize our economy, which would serve as a driving force to upgrade the skills of our workers, and to create more jobs through private sector investment.

As you may know, Oman is a middle-income economy with significant oil and gas resources. We know these resources will not last forever. Or for instance they may not continue to have the value they currently enjoy, as alternative energy resources become more viable commercially. So we have embarked on an aggressive economic program called 'Vision 2020' that seeks to reduce our reliance on hydrocarbons for our economic well being. We plan to drop the oil sector's share of our GDP from what is now approximately 40 percent to 9 percent by the year 2020, and to increase the share of the non oil sector from 7.5 percent to 29 percent.

The second great economic challenge is posed by our demographics. The Population Reference Bureau of the Arab World estimates that the population of Oman will have doubled between 1996 and 2010. Of this population, 55 percent are currently between the ages of 15 and 64 and represent a huge job creation challenge. It is interesting to note that in the age range of 0 to 14 years our population is evenly split between males and females, also indicating a significant change in the gender availability for employment in the not too distant future.

The challenges I have just noted we hope will be met, at least in part, by the new opportunities fostered by the FTA. If the truth be told, Oman did not primarily pursue the FTA for the export expansion that it might offer. That could be a useful benefit. But the main purpose for the FTA, from Oman's perspective, will be the new investment and attendant know-how and economic diversification that we hope FTA status will bring.

Oman is already the venue for some mega projects, such as the Dow Chemical petrochemical project, and the multinational LNG facility now approaching completion. These are wonderful additions to our economy but in order to maximize the multiplier effect that will create the necessary second and third tier suppliers and community support businesses radiating from such projects, Oman needs to show the U.S. and the world that our investment climate is world-class. How better to provide that proof than by being one of only 11 countries undertaking the rigorous requirements of a U.S. bilateral FTA. Add this new legal/business friendly endorsement by the U.S. to a quality of life standard that ranks as one of the best in the region and the package becomes compelling in its attraction for foreign investors.

We do not believe our expectations are misplaced. Many economists list several positive long-term effects that can result from a FTA. They include:

• Increased efficiency of domestic production as producers face new competition with the removal of tariff barriers,
• Economies of scale and consequent reduction in costs and prices as domestic producers enjoy an expanded market for their goods,
• Increased foreign investment from outside the FTA as firms seek to locate operations within the borders of the FTA to take advantage of its liberalized access to a major new market.

For Oman, the last point is significant given our strategic regional location. Many countries familiar and comfortable with our culture and society will begin to see Oman as the preferred venue for production for export to the U.S.

Notwithstanding the small amount of empirical date available, I think the Jordan FTA experience is instructive for Oman and other states in our region. In a 2006 Agency for International Development report prepared by Chemonics International Inc., the US- Jordan FTA was credited with supporting "dramatic" increases in bilateral trade from its inception in 2001. In five years the bilateral trade flow - not including textiles or wheat - increased by 453 percent or, on average, 91 percent per year for the past five years. Importantly, although the report did not focus on investment impact, it recognized that investments were made in Jordan expressly because of the FTA. For economic development purposes, the report also made the following comment: ".the FTA will cause output and employment to increase in Jordan," [USAID contract 278-C-00-02-00210-00, Final Report by Chemonics International Inc., June 2006]. We expect that in a few years the impact of the Oman-US FTA will provide further empirical data to confirm this view.

I applaud the United States for its interest and efforts to promote free and fair commercial relations with my country, in this case through a bilateral free trade agreement. Such agreements foster so much more than just increased trade and investment. That is just the stone thrown in the pond. The ripple effects that such agreements have on societies are profound and long lasting. It is my sincere hope that the United States will continue its leadership in expanding economic relations among the nations of the world. It is a policy and a promise that is truly a unique and positive American contribution to global development.

Thank you for your kind attention.