Monday, April 25, 2005

Non tariff barriers to inter-emirate trade

Yesterday's labor roundup post pointed to an article saying that companies that use expatriate labor cannot sponsor a worker in one emirate and employ that worker in another. If the employees are assigned to work in another emirate, then the employer must gain that emirate's permission. Companies owned by nationals are exempt from the regulation.

Among the effects of this regulation is that it the companies less burdened by regulation (the companies owned by nationals) will gain a cost advantage over their competitors. This is one constituency that favors the regulation.

More broadly, the regulation is creating a non-tariff barrier to trade between emirates. Thus, single-location companies, whether owned by nationals or not, would like protection from companies that want to operate in several emirates.

Small emirates like Ajman may believe these sponsorship rules benefit their local companies. But in fact, the effect may be just the opposite. If the Ajman market is not large enough to support a company, then the application of these rules makes it likely that companies will not locate in Ajman. In any event, rather than encouraging direct investment in the U.A.E. the rule surely discourages it and distorts it.

I wonder if the rule applies to construction companies. Or to, say, catering companies who may want to compete for business in several emirates but have only one office.

Individual emirates may want to pursue independent immigration policies for other reasons besides trade. In particular, in a country that is 80% expatriate, some emirates may be more culturally sensitized than others to controlling expatriate numbers.

But it seems difficult to deny that a motive is the creation of barriers to trade. Some other examples non-tariff barriers to inter-emirate trade:

1. Taxis licensed in one emirate can drop off passengers in another emirate, but have to return empty. The twin cities of Sharjah and Dubai have discussed reciprocity eliminating this barrier to trade, but those talks have not resulted in agreement.

2. Major dumps exist on both sides of the Sharjah-Dubai city border. In addition to externalizing externalities, they stand in the way of adding more inter-emirate roads.

3. Some of the most significant traffic congestion in Sharjah or Dubai occurs at the Sharjah-Dubai border.

4. Where additional connecting roads could be built they have not been built. An additional belt road has been constructed, but it is sufficiently far out from developed areas that few people use it.

5. Additional industrial development is occurring on both side of this border that will be in the way of any inter-emirate exchange.

As I stated in one of my very first posts, the U.A.E. suffers from same weaknesses the U.S. did under the Articles of Confederation. These weaknesses drove the design and adoption of the U.S. Constitution, especially the commerce clause.

This Andrew Coyne article from 1990 gives a nice brief, from a Canadian perspective, of the problems of federations, and the lessons that can be drawn from the design of the U.S. Constitution.

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