In recent months, the Middle East and North Africa have been rocked by trends dangerous to business in the region--war, terrorism, anti-American vitriol--and threatening to the area's future stability. Yet despite these problems, some shippers, airlines, and other transporters believe the region may not prove as problematic in the coming year as some analysts have predicted. In fact, many companies that transport goods to and through the Middle East are hopeful that it may be entering a period of relative stability.

Certainly, the Iraq war, the continuing terrorist threat, and the anti-U.S. sentiment have complicated transport in the Middle East and North Africa. Over the past six months, freight rates have risen by more than 30 percent for companies shipping through the region, as marine insurance companies raised rates on shippers since the Iraq war by as much as 50 percent. According to marine insurance companies, shipping rates have been pushed to their highest level in years, and U.S-registered ships face even higher security costs, due to the increased threat of terror attacks on American vessels.

In addition to rising insurance costs, companies shipping through and to the region must factor in the price of fuel, which remains higher than a year ago, and the cost of boycotts of American products. Pepsi and Coke, for example, have both seen sales drop in the Middle East since some religious leaders called for a boycott of the soft drinks last year.

These higher costs can decimate small firms that rely on Middle Eastern transportation infrastructure to move cargo through the Suez Canal to Asia. "It's tough for small companies to survive now in an environment like some parts of the Middle East, where you're facing instability and have to pay more to guarantee security," says Mark Baxter, an expert on the Middle East at Southern Methodist University. Meanwhile, several airlines that service the Middle East slashed route schedules in the region in the months before the Iraq war, making it harder for executives of smaller multinationals to oversee projects and attend strategy sessions in the region. (Many larger companies use company jets to shuttle executives.) What's more, continuing instability and the possibility of future conflict--between the U.S. and Syria, for example--hinders growth in the Middle East, thereby preventing governments from accumulating the financial resources needed to upgrade transportation infrastructure.

The World Bank estimates that the region will grow by less than 4 percent in 2003. Four percent is not nearly enough growth to allow most states with key ports and waterways--Egypt, Yemen, Jordan--to modernize outdated infrastructure in order to meet just-in-time shipping needs. And as growth slows, shippers and exporters become wary of dealing with foreign clients, further complicating trade and transportation.

Many foreign customers no longer can afford to guarantee payment for exports received, says Bob Duncan, president of Leawood Export Finance Inc, a Kansas-based export facilitator. Consequently, many goods destined for export to the Middle East and North Africa have been piling up in U.S. warehouses.

And yet the region is hardly bereft of positive signs of increasing stability. In recent months, major airlines such as British Airways have restored many flights to the Middle East. Furthermore, several leading U.S. shippers have said that the Iraq war did not disrupt business as much as they expected. They were able to plan for the higher freight charges, given that war, unlike terrorism, has a long build-up and thus is easier to make contingency plans for, including re-routing supply chains. "A terrorist incident is much worse for global trade, since it catches companies off-guard," says Sherman Katz, an expert on trade at the Center for Strategic and International Studies, a Washington, D.C. think-tank.

More important, even as the region has been hit by serious problems, several Middle Eastern transport hubs actually have taken advantage of the economic downturn to upgrade their infrastructure in an attempt to woo businesses. Most notably, Dubai has invested hundreds of millions in upgrading its seaport and airport, slashed virtually all its tariffs, built Dubai Internet City, a high-tech office park, and constructed the plushest hotels and business centers in the region, making visiting foreign executives feel at home. (English is the most widely-used language in Dubai.) At the same time, Dubai has stepped up efforts to battle corruption in its customs service and other government agencies. Other ports in the region, seeing Dubai's modernization, have vowed to significantly upgrade their transport infrastructure once economic growth rates rise again.

Already, several other states also have made inroads against graft, historically a major problem for transporters in the Middle East. According to Transparency International, the leading global graft fighter, "the incidence of ... corruption in the Middle East and North Africa declined in 2001-02." Following Dubai's lead, other Middle East nations also have begun pushing for closer trade links within the region, including an Arab Free Trade Area, and freer trade with the rest of the world, a process that would involve slashing tariffs on foreign goods and duties for shippers.

Finally, in the long-run, the Iraq war actually could prove a boon for shippers and other companies operating in the Middle East. The reconstruction of Iraq probably will dwarf similar recent rebuilding efforts in Afghanistan and other nations. The Bush administration has announced that rebuilding Afghanistan will take roughly $20 billion. In contrast, the Center for Strategic and Budgetary Assessments, a research organization, has calculated that the non-military rebuilding costs in Iraq could come close to $500 billion.

This rebuilding will result in contracts for companies in a range of industries, including many in the transport business; when it is completed, it will leave Iraq with a modern transportation infrastructure for foreign companies to use. "The Bush administration has very ambitious goals for Iraq . . . the reconstruction is planned to totally modernize the country," says Steve Kosiak, director of budget studies at the Center for Strategic and Budgetary Assessments.

Already, Seattle-based Stevedoring Services of America, a shipping and marine cargo company, has landed a $4.8 million deal from the U.S. government to upgrade Iraq's deep-water port of Umm Qasr, a vital sea lifeline. Many other shipping and transport firms expect to win similar large deals as the reconstruction process continues. And, though the long-term presence of the American military in the Middle East could increase the risk of maritime terrorist attacks, in many respects it could help improve transportation throughout the Middle East. Over the long run, the presence of the U.S. navy should deter piracy and smuggling, major problems in the Straits of Hormuz and other important waterways.

Sidebar: U.S. Trade Reform Targets Middle East

The Bush Administration is moving quickly to initiate reform in the Middle East designed to enhance opportunities for U.S. manufacturers.

The President has proposed establishing a U.S.-Middle East Free Trade Area within the next decade, building on existing U.S. Free Trade Agreements with Israel and Jordan. In the future, the U.S. plans on taking the following steps:

• help reforming countries become members of the World Trade Organization (WTO);

• negotiate Bilateral Investment Treaties (BITs) and Trade and Investment Framework Agreements (TIFAs) with governments determined to improve their trade and investment regimes;

• complete negotiations on a free trade agreement (FTA) with Morocco by the end of 2003;

• launch, in consultation with Congress, new bilateral FTAs with governments committed to high standards and comprehensive trade liberalization; and

• provide assistance to build trade capacity so countries canbenefit from integration into the global trading system.

According to a White House fact sheet, the U.S. will also work with its partners in the region to:

• establish a Middle East finance facility to help small- and medium-sized businesses gain access to capital and generate jobs;

• reform commercial codes, improve the climate for trade and investment, and strengthen property rights through a new initiative for commercial law in cooperation with U.S. and Middle Eastern law schools and jurists, and business-to-business contacts; and

• promote transparency in public finances, help countries fight corruption, and support financial sector reforms based on international best practices.