What happens in Iraq doesn’t matter to U.S. economy

McClatchy Washington BureauJune 18, 2014 

— The unraveling of Iraq is of little consequence to the United States in economic terms.

More than a decade after the U.S.-led invasion, Iraq’s economy remains in shambles and two-way trade outside the oil sector remains minimal.

So disappointing is Iraq’s economy that the Heritage Foundation, the conservative research center that rates countries on its Index of Economic Freedom, is still unable to rank it. Heritage cites “political and security challenges,” and notes on its website that Iraq was last ranked in 2002, when Saddam Hussein was in power.

A few marquee signs of American-style capitalism do exist in Iraq. They include a smattering of fast-food joints: McDonald’s, Pizza Hut and the like.

Citibank announced last year that it would open a branch office in Iraq. And that most iconic of American products, Coca-Cola, purchased a wholly owned subsidiary in 2011 to manufacture soft drinks in Irbil, the capital of the Kurdish-controlled northern region.

But a close look at trade data shows just how little commercial activity there is outside of Iraq’s vast oil and natural gas deposits.

Because of its oil exports, Iraq enjoys a large trade surplus with the United States. Crude oil accounted for almost $13.29 billion of Iraq’s $13.3 billion in exports to the United States last year. That’s up from $8.35 billion in 2004 out of $8.51 billion in total exports to the United States.

After oil, the next largest category is artwork and antiquities. A booming rug trade has taken exports of carpets from $3,000 in 2004 to $389,000 last year. But that’s chump change in the bustling world of international trade.

U.S. exports to Iraq have grown from $856.4 million in 2004 to $2.03 billion in 2013. Military aircraft make up the largest part of that, at almost $173.5 million last year, closely followed by industrial engines at $163.8 million and aircraft engines and parts at $119.9 million.

American ranchers have done better, exporting $115.7 billion in meat and poultry products to Iraq from $15.9 million in 2004.

By comparison, U.S. exports to Saudi Arabia totaled $18.98 billion last year.

But that’s dwarfed by exports to Brazil, another emerging economy, which last year imported more than $44 billion in U.S. goods. Exports to China exceeded $122 billion in 2013.

“The United States is not a large trading partner, outside of oil, with Iraq,” said Raj Desai, a senior fellow who’s studying the global economy for the Brookings Institution, a center-left research center.

When the United States invaded Iraq in 2003, the Bush administration envisioned the country as a model economy for the region. It sought to reverse dictator Saddam’s reasonably robust state-owned manufacturing sector and state-controlled economy. In its place would be a competitive private sector that embraced the free market.

It hasn’t quite turned out that way.

The International Monetary Fund has criticized Iraq for failing to establish a strong stabilization fund that ensures oil revenues will be put to specific social and economic uses. Recent Iraqi governments have left themselves enormous discretion on how this money is used. Critics say it’s led to cronyism and corruption.

The Defense Department, Desai said, encouraged Iraq to restart the former state-run manufacturing sector, particularly in areas such as engines and industrial equipment. But the government has shown little interest in selling off state assets to the private sector.

“The Iraqi government has distanced itself from anything that reeks of privatization,” said Desai, adding that the closest thing it’s offered is profit sharing to foreign investors willing to join a state company.

Consequently, about 60 percent of Iraqis are now in the service sector, selling in markets or making ends meet by working in repair shops, restaurants and the like.

The sectarian violence that’s prevalent in Iraq today makes it unlikely the nation will attract much in the way of new foreign investment.

“It’s not clear there’s going to be an Iraqi state that survives the current conflict,” said J. Daniel O’Flaherty, vice president of the National Foreign Trade Council, a trade group for multinational corporations that advocates for clear global rules for trade and investment. “It’s not clear that there’s going to be a single state.”

The Kurdish-controlled northern region remains the more stable and prosperous region, but the growing sectarian violence threatens that bright spot.

“Although things are going well there right now, the long-term prospect as a separate entity is difficult,” O’Flaherty said, noting that neighboring Iran and Turkey have Kurdish populations who’ve long sought to create a broader new nation. These countries have oppressed their Kurdish populations and haven’t shown interest in ceding their own national territory.

Analysts fear that Iraq might break into two or even three nations, one more factor that’s weighing against any trade and investment in the near term.

“It would take an extraordinarily brave businessman to make an investment anywhere in Iraq right now,” said O’Flaherty.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall.

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