Secretary of State Colin Powell and other officials outlined the plan on the closing day of a special World Economic Forum summit that focused on the region's crises.
"With peace you need economic development or people will not benefit," Powell said on the closing day of a "reconciliation summit" that drew some 1,100 business, political and civic figures from around the world.
Questions of security and access have held up the benefits of a free-trade deal the United States signed with the Palestinians in 1995, U.S. Trade Representative Robert Zoellick said. A free trade agreement Jordan signed with the United States after making peace with Israel has been a "driver for acceleration of growth," said Jordan's Trade Minister, Salah Eddin Bashir.
At the conference, Jordan and Israel agreed to create more industrial zones where businesses from the two countries jointly produce goods to sell in the United States. The U.S. government allows the products to enter free of tariffs and quotas.
Yasser Abbas, son of Palestinian Prime Minister Mahmoud Abbas and a Palestinian businessman, said the proposed regional agreement could encourage peace and development.
"I know countries are running toward such a proposal," he said.
In contrast to centuries ago when the Mideast was a pivotal trading center, the region's current share of international trade and foreign direct investment is among the lowest in the world.
Zoellick blamed that decline on several factors, including "old hatreds, political instability, corruption, bureaucracies and the privileged few who resist the competition of economic reform."
At a news conference with Powell, Zoellick said the U.S. initiative for a regional free trade area, announced last month, was part of the Bush administration's plans before the Iraq war to help regional development.
"We recognized it was important to not only have a secure environment in military terms," but economically as well, Zoellick said. "We wanted to capture what we hope will be a positive moment."
Zoellick said that Washington would seek to "create the opportunity" for Iraq to move from a stagnant, state-controlled economy to open markets and free trade.
But he and Powell insisted the United States would not impose a free trade agreement on the country. "It's up to the people of Iraq ultimately to make that decision," Powell said.
At a separate panel, European Union Trade Commissioner Pascal Lamy said Iraq needs a legitimate government before it can be included in plans for economic development in the region.
"We might do well to hold back ... from offering too many solutions," he said.
Lamy also urged Arab nations to remove their own trade barriers and work toward regional integration. "How can we really trust our neighbors if they don't trust their brothers?" he asked.
Many of the problems are internal, delegates at the conference said. There is no lack of capital given the region's oil riches, said Nahed Taher, senior strategic economist at The National Commercial Bank in Saudi Arabia.
"What we lack is an investment climate," she said, including a modern legal system and confidence in the financial system. "Even local investors don't want to take the risk," preferring to send their money to Europe or North America.