Gravity Trade Model Theory and the King’s Highway Help Explain Regional Economic Impact of the Syrian Civil War

Gravity Trade Model Theory and the King’s Highway Help Explain Regional Economic Impact of the Syrian Civil War

The Syrian civil war, birthed out of the 2011 Arab Spring, has rattled the country’s government, society, infrastructure, and economy. The destruction, as a result of political violence and warfare, has set the country back in terms of gross domestic product (GDP) as output has been interrupted. According to the World Bank, from 2011 until the end of 2016, “the cumulative losses in GDP have been estimated at $226 billion,” or about four times the country’s GDP in 2010.[i] The economies of its neighbors, including Jordan and Lebanon, have also felt the effect of war. Violence perpetrated by rebel factions, the Islamic State of Iraq and Syria (ISIS), and the Syrian Arab Army (SAA) have disrupted significant trade routes through Syria that lead to Jordan, Iraq, and Lebanon. In 2015, violence broke out between groups in Syria along the border of Jordan. As a measure of security, Jordan closed the Nasib crossing which connects the countries via the King’s Highway – one of the oldest and most significant trading routes in the region.[ii] The closure of the border meant that inter-regional trade became difficult and costly, putting increased pressure on economies that rely on imports to meet the needs of its citizens and export revenue for economic growth. However, the recent reopening of the border will make trade easier and less expensive as well as begin to revitalize economies that have suffered from regional conflict.

The King’s Highway that runs north and south through Jordan connecting to major highways in Egypt, Syria, Lebanon, and Iraq, is one of the oldest trading and communication routes in the world (pictured). First mentioned in the Old Testament of the Bible, the road was later co-opted in the 1st century by the Roman emperor, Trajana, who named it the “Via Nova Traiana.”[iii] Approximately 208 miles (335 kilometers) long, the King’s Highway connected the capital of the Roman Empire’s new province of Arabia, Busra (in modern day Syria), and Aqaba (bordering the Red Sea in the southwest of Jordan).[iv] Additionally, the highway intersected with the Silk Road and with the deterioration of the Roman Empire, Arabian powers used this intersection to trade goods with Asia.[v] It has also been used as a route for migrants and those taking hajj (Muslim pilgrimage) from Iraq, Lebanon, and Syria to Saudi Arabia. Today, the highway is used to trade goods throughout the Middle East, including the Levant, the Gulf, North Africa, and Turkey.

While it may seem like a stretch to argue that closing one of the oldest ground transportation trading routes in the world has had an impact on the economies across the region, international trade theory and the data that supports it suggests otherwise. It is important to note that disrupted trade patterns throughout the Syrian crisis are not the sole or leading factor in a decreased GDP per capita, but it explains a small portion of the problem. Issues concerning the economy, in the context of the Middle East, are the result of war and violence, low rates of labor force participation, a lack of jobs, and resource scarcity.

The international trade theory under question is the ‘gravity model’ of international trade. Derived from Sir Isaac Newton’s theory of gravitation, the gravity model of trade assesses the size of “bilateral trade flows” between countries based on their economic size and geographic proximity.[vi] In other words, bilateral trade between countries is proportional to their respective GDP’s (economic size) and “inversely proportional to the geographic distance between them.”[vii] The negative relationship between geographic proximity and trade means that as distance (km or mi) decreases trade increases and as distance increases trade decreases. Therefore, countries will experience an increased cost to trade with partners that are geographically further in distance and a decrease in trade costs with countries that are geographically closer. Moreover, while the model might seem to suggest that countries with large GDP’s might only trade with each other, it actually explains that country A will trade with country B proportional to country A’s economic size, regardless of country B’s economic size.[viii] For the purposes of this case study, however, we will be looking at distance as a factor of the cost of trade in the Middle East amidst turmoil in Syria.

The Lebanese economy has been one of the biggest losers in terms of exports throughout the region as a result of the Syrian crisis. In the past, Lebanon has relied on the affordability of trading goods on the ground through Syria, but because of regional hostilities many of its routes have been closed. The closing of the Nasib Border crossing on the Jordan – Syrian border has proved to be an immense set back in terms of exporting goods from Lebanon to Jordan, Egypt, and the Gulf – its biggest markets importing over half of Lebanon’s exports. Upon closure of the crossing in 2015, Lebanese markets were forced to export goods by way of the sea, an expensive and time-consuming way of transporting goods. With increased costs in shipping, the Lebanese government applied subsidies totaling $15 million to offset costs and encourage inter-regional trade. However, exports continued to suffer valuing at $3 billion in 2017, it’s lowest figure since violence erupted with Israel in 2007.[ix] In the first year of the closure of the Nasib, Lebanese export revenue decreased by approximately $1 billion.[x] Since the onset of the Syrian crisis, Lebanon’s GDP per capita has also taken a hit dropping from approximately $9,000 per capita in 2012 to about $8,250 per capita in 2016.[xi]

The impact of the Syrian crisis on Jordan’s economy is just as daunting, especially because the Kingdom relies on imports to meet the needs of its citizens and growing refugee population. The choking of trade routes caused a decline in agricultural exports and imports by 25% and 30% respectively.[xii] Annually, Jordan experiences a trade deficit of approximately $10-$14 billion and has a national debt equivalent of 95% of its GDP as of 2017, a 30% increase from nine years earlier.[xiii] In 2014, exports to Syria and Iraq included $500 million worth of goods, which is $900 million less than 2010 before the war started.[xiv] According to the Washington Institute, however, exports from Jordan through the reopening of the Nasib Crossing would yield little results in terms of economic benefits, since the Kingdom mainly imports from countries to its north via the King’s Highway. Therefore, Jordan should look to increase trade to Gulf States, including Saudi Arabia, which contributes to about 10 – 12% of its overall exports. The opening of the crossing is more beneficial to Gulf States and Egypt as trade via the King’s Highway from these countries were valued at $14.6 billion in 2011 but have since dropped to $5.3 billion.[xv]

It is important to note that the country that has suffered the most overall is Syria. According to the United Nations Economic and Social Commission for Western Asia (UNESCWA), the estimated destruction in physical capital and sectoral distribution is over $388 billion, “while the actual physical cost of destruction [is] close to $120 billion.”[xvi] Syria’s GDP before the war began was approximately $60 billion and by 2016 it dropped to about $15 billion. Even more, oil GDP decreased by 93%, while hydrocarbon production dipped to 10,000 barrels per day from 383,000 barrels per day in 2010.[xvii] This is mostly due to the fact that non-state actors and Kurdish forces have seized the means of oil production from the Syrian government.

Albeit one road, the King’s Highway has a significant impact on the economies of the Middle East. It connects trading routes from Egypt to Turkey and is responsible for the transportation of billions of dollars of goods. By connecting the region geographically, it has inherently connected the regions’ economies. After closing the Nasib border crossing between Jordan and Syria, the ability to trade goods across the region inexpensively via the King’s Highway became virtually impossible, forcing governments to subsidize their economies to incentivize trade by way of the sea. The gravity model helps explain the significance of bilateral trade in the Middle East via the King’s Highway. Lebanon and Jordan were most notably affected by the closing as it resulted in losses of GDP per capita, created greater trade deficits, and increased national debts. While Gulf countries saw a decrease in export revenues, their sovereign wealth funds are well-endowed to subsidize economic sectors that suffered from regional conflict. When rebuilding Syria’s economy, implementing policies of trade openness will allow Syria to freely export oil and import goods from regional partners with fewer barriers. Maximizing gravity via the King’s Highway will not only help to rebuild Syria’s economy, but also restore losses in export revenues by its neighbors.

 

[i] The World Bank. “The Toll of War: The Economic and Social Consequences of the Conflict in Syria.” The World Bank. 2017. https://www.worldbank.org/en/country/syria/publication/the-toll-of-war-the-economic-and-social-consequences-of-the-conflict-in-syria.

[ii] Reed, John. “Closure of Syria’s Last Border Crossing Hits Jordan Economy.” Financial Times, April2015. https://www.ft.com/content/c0df376a-dd27-11e4-a772-00144feab7de.

[iii] The Editors of Encyclopaedia Britannica, ed. “King’s Highway: Ancient Road, Middle East.” Encyclopædia Britannica, Inc. 2018. https://www.britannica.com/topic/Kings-Highway; Atlas Tours. “The Kings’ Highway, Jordan.” Atlas Tours. 2018. https://atlastours.net/jordan/kings-highway/.

[iv] ibid

[v] The Editors of Encyclopaedia Britannica, ed. “Silk Road: Trade Route.” Encyclopædia Britannica, Inc. 2018. https://www.britannica.com/topic/Kings-Highway.

[vi] Economics Online. “Gravity Theory of Trade.” Economics Online. 2018. http://www.economicsonline.co.uk/Global_economics/Gravity_theory_of_trade.html.

[vii] Chaney, Thomas. “The Gravity Equation in International Trade: An Explanation”2011. https://www.tse-fr.eu/sites/default/files/medias/doc/by/chaney/distance.pdf.

[viii] ibid

[ix] Cornish, Chloe. “Reopening of Syrian-Jordan Border Revives Regional Trade.” Financial Times, October2018. https://www.ft.com/content/e580c1a6-d6de-11e8-aa22-36538487e3d0.

[x] FRED Economic Data. “Exports of Goods and Services for Lebanon.” Federal Reserve Bank of St. Louis, November 2018. https://fred.stlouisfed.org/series/LBNBXUSD

[xi] The World Bank. “GDP Per Capita (Current US$).” The World Bank. 2018. https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2017&locations=JO-LB-IQ-SY&start=2011&view=chart.

[xii] Saif, Ibrahim. “Impact of Syrian Crisis on Jordan.” The Jordan Times, August 12014.

[xiii] Fishman, Ben. “Taking It Slow at Jordan’s Nasib Border Crossing with Syria.” The Washington Institute. 2018. https://www.washingtoninstitute.org/policy-analysis/view/taking-it-slow-at-jordans-nasib-border-crossing-with-syria; Trading Economics

[xiv] Trading Economics. “Jordan Government Debt to GDP.” Trading Economics. 2018. https://tradingeconomics.com/jordan/government-debt-to-gdp.

[xv] Fishman, Ben. “Taking It Slow at Jordan’s Nasib Border Crossing with Syria .” The Washington Institute. 2018. https://www.washingtoninstitute.org/policy-analysis/view/taking-it-slow-at-jordans-nasib-border-crossing-with-syria; Trading Economics

[xvi] United Nations. “Experts Discuss Post-Conflict Reconstruction Policies after Political Agreement in Syria.” United Nations Economic and Social Commission for Western Asia. 2018. https://www.unescwa.org/news/syrian-experts-discuss-post-conflict-reconstruction-policies-after-political-agreement-syria.

[xvii] The World Bank. “The Toll of War: The Economic and Social Consequences of the Conflict in Syria.” The World Bank. 2017. https://www.worldbank.org/en/country/syria/publication/the-toll-of-war-the-economic-and-social-consequences-of-the-conflict-in-syria.