President Bush on Friday proposed the lifting of U.S. trade barriers on Middle East nations over the next 10 years, a move that administration officials say would help create a good neighbor policy between Arab countries and Israel.

"The combined GDP of all Arab countries is smaller than that of Spain. Their peoples have less access to the Internet than the people of sub-Saharan Africa," Bush said in his commencement address to the 1,200-member graduating class at the University of South Carolina.

"I propose the establishment of a U.S.-Middle East free trade area within a decade to bring the Middle East into an expanding circle of opportunity, to provide hope for the people who live in that region," Bush said.

The president said Secretary of State Colin Powell (search) and U.S. Trade Representative Robert Zoellick (search) have already embarked on opening up trade relations with regional leaders. They are meeting in Jordan next month to discuss improving the economies of the region.

The administration envisions bringing the countries of the region into a pact one by one. So far, countries like Bahrain and Egypt, which have been allies of the United States, have expressed interest in such an arrangement. Countries like Libya and Syria, both listed as state sponsors of terrorism, would need to make concrete changes before they could join an agreement.

Such a trade arrangement would be governed under World Trade Organization (search) rules. The WTO doesn't support boycotts, however, which would mean Arabs wanting to join the agreement would have to end their boycotts of Israel, which already has a free trade deal with the United States.

Politically, that is one of the goals the Bush administration is trying to achieve. Bush said that he envisions "two states, Israel and Palestine, side by side in prosperity and peace."

By replacing corruption "with free markets and fair laws, the people of the Middle East will grow in prosperity and freedom," Bush said.

Wearing a dark blue graduation gown with black bands, Bush spoke as Powell departed for weekend negotiations in Israel with Prime Minister Ariel Sharon (search) and new Palestinian Prime Minister Mahmoud Abbas (search).

Powell said before leaving on his trip that he is "encouraged that we may have a fresh start" on negotiations for a U.S.-sponsored "road map" for peace. His comments came as violence continued in the region.

On Friday, Palestinians fired six crude rockets from Gaza into Israel, slightly injuring a 10-year-old girl, while Israeli troops demolished eight Palestinian homes near an area where a car bomb exploded earlier, killing a Palestinian who drove the car into an Israeli tank.

Powell is very anxious to get the road map underway in an attempt to establish a Palestinian state by 2005. Key provisions of the road map — formulated by the Bush administration, the United Nations, the European Union and Russia — include a cease-fire to end 31 months of violence, commitments to stop fighting, a freeze on building homes for Jewish settlers on the West Bank and a rollback of some existing settlements.

Bush said that a new free trade agreement with Jordan could demonstrate the way to other Arab nations' acceptance of a similar treaty. Last year, Jordan improved its GDP by 80 percent, increasing it by $400 million.

Analysts say free trade will help security in the region. Sherman Katz, an international business analyst at the Center for Strategic and International Studies, said if businesses in the Middle East are given free access to the United States, the world's largest market, young people who have the choice of taking jobs or joining terrorist groups will choose the former.

Bush made a similar assertion.

"The way forward to the Middle East is not a mystery; it is a matter of will and vision and action. The way forward depends on serving the interests of the living instead of settling the accounts of the past," he said.

Bush's commencement address was not merely to lay out his vision for the Middle East, but to re-visit a state that he won in 2000, and which he hopes to capture again in 2004. Bush was also given an honorary law degree by the university.

Last weekend, nine Democratic contenders for president debated at the same campus, criticizing Bush for his tax-cut plan and the sluggish economy. While Bush returned the South Carolina spotlight back to the presidency, at least one student said he was upset that his commencement address had turned into a political volley.

"My graduation is turning into Bush's speech," said Matthew Brown, a political science major from Charlotte, S.C., adding that last weekend's Democratic debate is a "huge reason why he's here."

After the speech, the president headed to Santa Fe, N.M., to spend the weekend at the home of Roland Betts, a Bush classmate at Yale, campaign fund-raiser and a partner with Bush in the Texas Rangers baseball team. Betts is the lead planner for the redevelopment of the World Trade Center site.

Next week, Bush will speak in New Mexico, Nebraska and Indiana about his economic stimulus plan. On Friday, the House passed a slightly scaled-back version of the plan that the president said was a good starting point to delivering "the economic boost America's workers deserve."

The Associated Press contributed to this report.