Arab World Still a Lucrative Market

U.S. exports to the region are soaring, despite all the political turmoil. Here's a look at the hottest parts of the market.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

March 30, 2007

Problems in Iraq aren't hurting U.S. exports to the Arab world. In fact, they're booming this year and are on course to far outdo last year's total of around $35 billion. The National US-Arab Chamber of Commerce, which closely tracks these trade flows, sees the export total reaching $45 billion this year.

Credit the continued high price of oil for fueling demand, even in countries that aren't major energy exporters, such as Egypt and the United Arab Emirates (UAE). They are benefiting from brisk trade with their oil-producing neighbors as well as from record levels of cross-border investment in the region.

Other factors pumping up U.S. exports include the dollar's weakness, which makes American products more price competitive with those from Europe and Asia. Economic reforms under way in a number of Arab countries are also helping to boost domestic demand and hence the thirst for imports. Finally, the war in Iraq is itself a generator of exports as U.S. goods are purchased to supply the troops there.

The UAE is far and away the top prospect for U.S. exports to the Arab world. The country, located on the Persian Gulf side of the Arabian Peninsula, is reaping the benefits of its transformation into a major transshipment hub. The nation is likely to buy about a third of U.S. exports to the region this year.

Major customers of the U.S. also include Saudi Arabia, Iraq, Qatar and Egypt. The latter is making big strides transforming itself from a centrally planned economy to a market-oriented one. Over the past few years, it has slashed corporate tax rates in half, to a flat 20%, and cut average tariff rates to below 7% from above 14%. Cairo has greatly expanded its tax base and pulled in more revenue to invest in key services such as education, infrastructure and health care.

Egyptian consumers are spending more as a result. Coca-Cola, General Motors and ExxonMobil all had their best years ever in Egypt last year, and they all plan to expand operations there. Other U.S. firms doing well from Egyptian sales include Procter & Gamble, Xerox, Microsoft and, of course, such defense giants as Raytheon and General Dynamics.

U.S. sales of defense equipment and gas and oilfield equipment will continue to thrive in the region, and so will sales of civilian aircraft and aircraft parts, trucks, buses, steelmaking materials, wood products, processed foods and beverages, recreational gear, test equipment and generators. The Arab world will continue to rely on the U.S. for imports of energy services, but it will also spend more on construction and engineering services to upgrade its physical infrastructure, on banking services to upgrade its financial architecture and on hospitality services to attract more foreign tourism.

Of course, there are some risks for this rosy trade scenario. Given the high profile of U.S. foreign policy in the region, and the fact that many Arabs disagree with those policies, an eventual backlash against American companies can't be ruled out. In addition, many Arab citizens and firms are frustrated by the problems they encounter when they try to do business in the U.S. The negative U.S. reaction to Dubai Ports World's purchase last year of Peninsular & Oriental Steam Navigation Company, a British firm that managed facilities at a number of American ports, was only one of the highest-profile such incidents. More common, and more frustrating, than such investment protectionism are ordinary hassles that Arabs encounter in trying to obtain visas to visit the U.S., thanks to post-9/11 security measures.

"[The U.S. isn't] the only game in town," says David Hamod, president and CEO of the National US-Arab Chamber of Commerce. Hamod notes that companies from China, India, the European Union and Russia are all bending over backward to attract business from Arab nations. "When you have the United States on one side throwing up barriers and roadblocks to business, and Asians and Europeans on the other side rolling out the red carpet, guess which partners they're going to choose," he adds.

U.S. businesses are aware of a growing image problem abroad, and not just in the Arab world. Public opinion polls in countries as disparate as the U.K., Germany, South Africa, South Korea and Indonesia uniformly rate America's influence in the world as mostly negative. Many of those polled say they're less likely to buy U.S. goods as a result.

Look for U.S. firms and business groups to do more to address America's image problem. For example, foreign alumni of the Fulbright program are being tapped to serve as goodwill emissaries for the U.S. in their home countries. More executives will also be trained in how to deal with other cultures.

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