Friends in need

The big idea Syria's economy is sinking. America needs friends in the Middle East. Josh Landis considers the possibility of renewed co-operation.

The Syrian president Bashar al Assad at the 2007 Arab League summit in Riyadh.

Syria's economy is sinking. America needs friends in the Middle East. Josh Landis considers the possibility of renewed co-operation. The freeze in Syria-US relations is beginning to thaw with increasing speed. Last week Imad Mustafa, Syria's ambassador in Washington, met for two hours with Jeffrey Feltman, the acting assistant secretary of state, in a discussion that he described as positive and constructive. On Monday Secretary of State Hillary Clinton shook hands with Syria's foreign minister at the Gaza donor Conference in Sharm al Shaikh. The next day she announced that Feltman and Dan Shapiro of the NSC would be heading for Damascus. The anticipated next step is for Washington to send an ambassador to Damascus, something it has refused to do for four years since Lebanon's Rafik Hariri was assassinated.

Engagement promises numerous benefits for both countries. Syria is easier to talk to than Iran because the Syrian government very much wants to engage. Doing so could help President Obama make good on his pledge to begin working for peace from day one. At this point, peace with Syria will be easier to achieve than peace with the divided Palestinians. Frederic Hof, one of George Mitchell's former aides, just published a detailed paper titled Mapping Peace Between Syria and Israel for the US Institute of Peace, outlining terms for a possible bilateral agreement. Hillary Clinton is due to visit Ankara on Saturday, where she will be briefed on what it would take to jump-start the Syrian-Israeli negotiations, mediated by Turkey, that were broken off during the Gaza campaign in January.

Progress on the Palestinian front will also require Syria's assistance. Hamas's leader, Khaled Mishaal, is headquartered in Damascus, where he must take Syria's advice seriously. Bashar al Assad can help to convince Hamas to modify its rejection of Israel and to form a unity government with Fatah. In this way, the $4 billion recently promised by donor countries for Palestinian reconstruction can actually begin to flow to Gaza, and Israel can open the border crossings through which cement and building supplies must pass.

In addition to gaining greater co-operation on Iraq, Washington will also want Syria to accommodate Lebanon's interests. This should not be an impossible task. Syria has already opened an embassy in Beirut, and the appointment of a Syrian ambassador is imminent. During the 1990s, Washington and Damascus found an agreement on Lebanon that allowed the country to rebuild its economy and repair the sectarian divisions that had all but destroyed it during two decades of civil war. Damascus has every interest in a prosperous Lebanon. The co-operation over Lebanon that marked the presidencies of George HW Bush and Bill Clinton can be resumed. Hizbollah's refusal to be drawn into the Gaza conflict this January may indicate that it is more interested in becoming a contender in upcoming parliamentary elections and in the delicate political life of Lebanon than in fighting regional wars.

At the same time, Syria has much to gain from ending its isolation and working with Washington in the region. With an embryonic banking sector, low leverage ratios and a nonexistent stock market, Syria seemed ideally positioned to escape the brunt of the global economic crisis. But it has not been so lucky, and gathering economic storm clouds are evident in the statements and actions of Syrian officials.

In an interview early last month, Syria's deputy prime minister, Abdullah Dardari, noted: "Syria's foreign trade makes up 70 per cent of GDP and this means that the country's dependence on external factors is very large." Difficult economic times have made Syrians desperate to see Washington roll back the layers of sanctions stifling their economy, and Dardari made clear this is likely to be a condition for engagement on the Syrian side: "The US should lift its economic sanctions on Syria before relations improve between the two sides. The lifting of such sanctions will likely have a positive effect on increased foreign investment in the country."

Dardari's comments are noteworthy because, until recently, the official line of the Syrian government has been that the economic sanctions imposed by the United States were harmless because the country was still able to attract all the foreign investment it needed. Dardari now admits that the lifting of sanctions will "remove a psychological barrier" to new investment. One can only conclude that US sanctions have indeed been a serious impediment to foreign investment in Syria and a drag on the economy. Undoubtedly, so long as George W Bush was in the White House, Damascus had to put on a good face and deny that sanctions were working, whether out of stubborn pride or simply to notify Washington that it would not "do a Gaddafi" (become suddenly friendly to the West) or knuckle under to threats. Now that Obama is speaking the language of peace and reconciliation, Damascus can be more honest.

According to Dardari, Syria's infrastructure must undergo massive improvements on the order of $50 billion over the next 10 years in order to grease the wheels of commerce and keep its main industries, such as textiles, cotton spinning, plastics, cement and canning from being done in by cheap imports. Oil refining, electric plants, modern ports, motorways and modern airports are all in short supply. Syria needs major capital outlays to make it attractive to capital. Without proper infrastructure and dependable electricity, no company will chose to open a new factory in Syria.

Syria's manufacturing sector has been battling on a number of fronts for the past few years, well before the current global crisis. For decades, it avoided competition from imports thanks to a programme called "national protection". High tariffs on imports gave local producers a false sense of security as they sold inferior products at high prices. But recent economic reforms have opened Syria's doors to a wide array of new imports; tariffs between Arab states have been eradicated altogether, forcing Syrian manufacturers to compete with inexpensive imports for the first time. Chinese goods, falsely labelled as "made in the UAE" are now entering Syria with few markups. To make matters worse, the Syrian pound has risen in value against the dollar at the same time that the government has slashed subsidies on petroleum and electricity. Local producers are reeling from these many challenges.

Government officials have responded with a few stopgap measures to protect local producers, restricting the source countries of products and threatening to buy the products that carry suspiciously undervalued invoices. Importers commonly avoid paying import duties by lowballing purchase prices on their invoices for non-Arab produced imports. While such measures look good on paper, they are notoriously hard to implement and police. Syrian import duties are simply too high, and importers will continue to find ways to avoid exorbitant duties, whether by outright smuggling or by falsifying invoices. It is very hard to keep inexpensive foreign manufactures from getting into Syria. This is a war that local producers stand little chance of winning.

Dardari's recent statements mark the first time that a Syrian official has appeared to proffer a price tag for a possible peace agreement. Attracting the necessary investment of close to $5 billion a year for the next decade will not be an easy task, but it is not impossible if Syria is working with the West rather than against it. To do this, Syria needs peace with Israel. US sanctions will not be lifted so long as Syria remains at war with Israel. Dardari was reminding the Syrian government and military that the best - and perhaps only - chance for prosperity is peace.

The Syrians are eager to be engaged - but they remain wary of Washington's approach. If the US seeks to deal with Syria as a means of weakening Iran - by flipping Syria from its orbit - it will fail; both nations are not likely to fall for such an old trick. Syria will not abandon its supporters and friends as a condition of beginning dialogue, for fear that in the end the US will fail to deliver Israeli agreement - another reason for Washington to avoid the tactics of divide and conquer and engage with Syria and Iran simultaneously.

Joshua Landis is the co-director of the Center for Middle East Studies at the University of Oklahoma and the author of SyriaComment.com.