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GTAP Resource #1779

"Which road to liberalization in the Mediterranean? Analyzing different regional trade liberalization scenarios for Morocco and Tunisia "
by Kuiper, Marijke and Frank van Tongeren

1) Aim and scope

After the Barcelona meeting in 1995, the EU and its Mediterranean Partner Countries (MPCs) engaged into an ambitious venture of increased economic, political and social cooperation, consisting of Euro-Mediterranean Association Agreements and financial cooperation. Ambitions in terms of economic cooperation were especially high, aiming at a Free Trade Area by 2010. This should create an area of shared prosperity, fostering peace and stability at the turbulent Southern borders of the EU.

Although the Euro-Mediterranean Partnership (EMP) in spirit aims at fostering economic growth and stability at the Southern borders of the EU, the actual contents of the agreements reflect more narrow economic interests of specific EU member states. Key characteristics of the Euro-Mediterranean Association Agreements are an asymmetric focus on liberalizing trade in manufacturing goods by the MPCs, while EU trade barriers on agricultural products are maintained.

The pursuit of narrow economic interests of EU member states is incoherent with the interests of the EU as a whole in stability and prosperity at its Southern borders. The MPCs have high rates of unemployment coupled with a still growing labor force. Maintaining and if possible increasing employment is thus of paramount importance. Implementation of the current asymmetric agreements, however, most likely will have the opposite effect. Subjecting highly protected industries to competition from the EU will results in a decline of employment, while maintaining of barriers on agricultural trade limits employment in relatively labor intensive horticultural production.

The aim of this paper is to search for a road to liberalization of the trade in the Mediterranean that supports stability at the Southern borders of the EU. It contributes to existing studies of the EMP a focus on both employment and on diverging interests between Northern and Southern EU member states.

2) Methodology

Most existing studies of the EMP use a single country model of a MPC. This allows a detailed analysis of the impact on individual MPCs, but misses the impact on third countries. A main reason for the asymmetric character of current EMP is the economic interest of mainly Southern EU member states in protecting their producers of Mediterranean horticultural products. Coupled with a limited interest of Northern EU member states in gaining access to the agricultural markets in the MPCs, this resulted in a lack of specific steps to reduce barriers to Mediterranean agricultural trade. In order to assess the full impact of the EMP and the scope for steps towards FTA, one therefore needs to account for the differential impact on different EU member states. This calls for the use of a multi-regional general equilibrium model, capable of distinguishing the different interests if Northern and Southern EU states.

The GTAP model is readily available and capable of separating Northern and Southern EU member states, and will be used for a quantitative analysis. While allowing us to distinguish the impact of the EMP on different EU member states, it limits us to focus on Morocco and Tunisia as case studies of the impact of the EMP. Apart from Morocco and Tunisia, only an aggregate of MPCs denoted by Rest of North Africa (RNA, encompassing Algeria, Egypt and Libya) is distinguished as a separate region in the Version 6 GTAP database. Since Libya has recently been invited to join the Barcelona process, the RNA aggregate will be taken as an aggregate of MPCs. The GTAP database also includes a Middle East aggregate, but this aggregate includes a large number of countries not involved in the EMP, like Iran and Saudi Arabia. We will thus not be able to assess the impact of the EMP on Middle-Eastern MPCs.

We use a modified version of the GTAP model that accounts for different substitution possibilities between agricultural sectors. A special feature of this model is the segmentation of factor markets for labor and capital. This allows a more accurate representation of shifts in agricultural sectors following trade liberalization. We furthermore rely on detailed 6 digit level tariff information to model tariff reductions as agreed upon in the EMP.

3) Regional versus political interests

We employ the GTAP model to analyze two different trade liberalization scenarios focusing specifically on the employment in the MPCs and on trade flows with Northern and Southern EU member states. The first scenario consists of implementation of the current EMPs with Morocco and Tunisia. We dub this scenario regional interests since the current absence of agricultural concessions reflects the regional interests of mainly Southern EU member states.

The second scenario focuses on an alternative interpretation of the EMP in line with the long term political interests of the EU in promoting stability and prosperity at its Southern borders. We dub this scenario political interests. This scenario aims at identifying a sequence of reforms which is in line with the socio-economic circumstances in the MPCs, focusing on maintaining and preferably even increasing employment during reforms. The sequence of liberalization, and possibly the identification of additional domestic policies to restructure the economy, will depend on an assessment of the sectors in which Morocco and Tunisia have a comparative advantage, and those sectors that use large amounts of (unskilled) labor.

4) Concluding remarks

Although limited to analyzing the specific cases of Morocco and Tunisia, the scenarios defined in this paper refer to issues which are relevant for all MPCs. Moreover, by including the RNA aggregate as a separate region in the quantitative analysis, we can assess whether the case study findings can be generalized to the other MPCs. Given the currently existing focus on MPC country studies, we feel that a focus on the differential impact of the EMP on EU members will contribute to the policy debate on the future steps to be taken in the Barcelona process. More specifically, comparison of the scenario with the current EMP (analyzed in the regional interest scenario) with the political interest scenario yields an insight in the extent to which regional economic interests need to be sacrificed when pursuing the political interests of the EU as a whole.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Version: DRAFT
Created: Kuiper, M. (5/4/2005)
Updated: Batta, G. (6/21/2005)
Visits: 2,769
No keywords have been specified.

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