The Analytical Method and the Egypt Case Study David Evans University of Sussex Ahmed Farouk Ghoneim

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The Analytical Method and the Egypt Case Study
David Evans (University of Sussex)Ahmed
Farouk Ghoneim(University of Cairo)
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The Questions Asked

• 1. How far one can get with the Analytical
  Method without the help of other methodologies
  (eg CGE)?
• 2. What are some of the pitfalls arising from
  using the Analytical Method that can be in part
  avoided with reference to a general rather than
  partial equilibrium methodology?
• 3. What are the strengths and weaknesses of the
  Analytical Method as applied to Egypt case study?

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3 Key Elements of the Analytical Framework

• 6 rules of thumb based on descriptive statistics
  to assess likely impact of shallow integration on
  balance of trade diversion and trade creation
• looking at the details of the agreement - check
  list of the likely elements and their
  implications
• likely indicators for the potential for deep
  integration

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What is the Analytical Method?

• WHAT TYPE OF AGREEMENT?
• The partner countries
• FTA or Customs union?
• Overlap with other agreements
• Expected ease of negotiation
• Nature of barriers to trade
• Elements of Deep Integration
• Is the RTA WTO compatible?
• Role of donors
• ASSESSING SHALLOW AND DEEP INTEGRATION
• A Case-Study Approach
• WINNERS AND LOSERS

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How far did we get with the Analytical Method in
the Egypt Case Study?
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Shallow Integration - rules of thumb

• Framework describes a set of statistical
  indicators and how to calculate them from easily
  available and cheap sources (notably WITS and
  TRAINS databases)
• rules of thumb
• The effects will be greater the higher are the
  initial tariffs.
• The greater the number of RTA partners the more
  likely it is that there will be trade creation as
  opposed to trade diversion.
• Wide differences in comparative advantage likely
  to lead to a welfare improving RTA provided the
  initial tariffs are not too high.
• The more similar is the product mix in the
  economies concerned and the higher the
  elasticities of supply the more likely there is
  to be trade creation
• The higher the percentage of trade with potential
  partners the more likely the RTA is to be welfare
  enhancing.
• If trade is initially a small share of GNP, an
  RTA can be considered more likely to be welfare
  improving.

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Potential for deep Integration

• no easily derivable composite indicators of
  likely potential for and or welfare effects of
  deep integration
• framework gives suggestions of where to look via
  indicators of
• market integration
• product variety and intra industry trade
• suggests the use of case studies in sectors where
  regulation appears to be an obstacle to bilateral
  trade

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Outline

• Main features of the EU and Egypts trade
  policies
• The 2004 Egypt-EU Agreement what is in and
  what is out
• Application of the Rules of Thumb
• Extent of Deep Integration versus Shallow
  Integration
• Compatibility with other Regional Trade
  Agreements and World Trade Organization
• What can other methodologies add eg CGE model?
• Main Findings on Analytical Method

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Institutional Dimensions

• New RTA
• Egypt cuts all tariffs
• EU ends remaining textile and clothing barriers
• Limited liberalization of agriculture and
  agro-industrial products
• Limited regulatory harmonization
• Little to improve Egyptian access to EU markets
  limited by problems of conformity assessment and
  accreditation.
• Other Egyptian WTO commitments the Uruguay Round

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Shallow Integration

• Applying the Rules of Thumb Applied to Egypt

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The effects will be greater the higher are the
initial RTA tariffsHigh initial tariffs, large
number of peaks
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ii) The greater the number of RTA partners

• Egypt EU FTA has 2 partners
• This implies 2 things
• EU is the largest trading partner for Egypt
• Bargaining power is significantly different

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iii) Wide differences in comparative advantage
likely to lead to a welfare improving RTA
provided the initial tariffs are not too high.

• On import side, wide differences in RCAs for
  Egypt compared to EU
• (Coefficient -0.18),
• however this is questionable, since the
  literature is not clear about issues of rivalry
  versus complementarity (we need to look at intra
  industry trade and inter industry trade)

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iv) The more similar the product mix and the
higher the supply elasticities, trade creation
more likely. But production or trade similarity?
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v) The higher the percentage of trade with
potential partners the more likely the RTA is to
be welfare enhancing.
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vi) Finally, if trade is initially a small share
of GNP, an RTA can be considered more likely to
be welfare improving.

• Egypt has a trade share in GDP of 29 in 2003.
  This compares with 30 for Morocco and 45 for
  Tunisia and Turkey in the same year.

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Compatibility with other Regional Trade
Agreements and World Trade Organization

• Main problems with compatibility with other RTAs
  are embedded mainly in rules of origin,
  standards, competition rules, and IPR, however
  this is not of significant weight
• As for WTO, there are two problems (one is the
  TRIPS of the EU and the other has do with
  dealing with export subsidies)

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Extent of deep integration

• RTA involves very little beyond shallow
  integration
• Focus on tariffs
• No formal agreement on issues such as
• Establish agreed standards
• Technical assistance to meet standards (issues of
  conformity assessment and mutual recognition are
  vaguely mentioned)
• Elements of deep integration being achieved by
  the private sector

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Case Study of Potatoes

• Several actions have been undertaken by the EU to
  stop Egyptian exports
• The case is difficult to assess in terms of
  whether the EU is adopting protectionist measures
  or applying genuine SPS measures.
• Ghoneim, Holmes, and Iacovone (2005) investigated
  the case in details, however reached inconclusive
  results in terms of whether the polices of the EU
  are protectionist or genuine measures for
  protecting plants and soil.

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Main Findings on Analytical Method

• Underling trade theory same in Rules of Thumb is
  basically same as in formal PE or CGE .
• Eclectic vs theory for shallow and deep
  integration eg New Trade theory or other theories
  on deep integration.
• Egypt EU Agreement shallow and asymetric with no
  additional benefits in terms of market access in
  EU or deep integration eg regulatory
  harmonisation.
• From Rules of Thumb gains form net trade creation
  likely to be small.
• Asymmetric nature of agreement puts adjustment
  heavily on Egypt imports side, but real exchange
  rate devaluation likely to provide stimulus to
  exports.
• The agreement will bring preference erosion,
  little new FDI, agriculture and services
  exclusion negative.

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Main Findings cont.

• Weak anchoring of domestic reforms increasing
  effective rates of protection and lack of
  commitment to serious trade policy reform eg
  phasing of implementation of Egypt-EU agreement
  over 16 years phases in sectors with most trade
  diversion last.
• The politics behind adopting certain policies and
  actions cannot be revealed except by anecdotal
  evidence.
• Uruguay Round MFN tariff cuts by Egypt in 2004
  likely to alleviate trade diversion but such
  effects accidental.

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Key Areas of Weakness of Analytical Method

• No quantification of welfare benefits
  unemployment and poverty reduction, trade
  creation and diversion.
• Economic interdependence not captured eg
  estimating real exchange rate depreciation
  required in the adjustment process.
• Estimating the effect of MFN tariff reduction on
  the above economic variables.
• Estimating the benefits of trade induced
  technical change were good econometric estimates
  of the link available as in the case of Egypt.
• Bringing deep integration issues to future
  Egypt-EU agreements would be helped by PE impact
  estimation and negotiating framework eg recent
  Ethiopia and COMESA with PE model. See Round
  Table.

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PE and CGE Models

• In principle highly disaggregated CGE models can
  use similar datasets as used for the 6 rules of
  thumb. In practice CGE models usually have 20-30
  activities and commodities a Rolls Royce Deux
  Cheveaux.
• Strength of CGE models consistent estimation of
  database (SAM) economic interdependence a
  hall-mark of CGE results structural differences
  captured in SAMS and parameters induced
  technical change and poverty impacts can be
  included.
• PE models have simpler theoretical structure but
  can operate in highly disaggregated mode eg at
  HS6 based on trade data only. Such models give
  some guidance on welfare effects, trade creation
  and trade diversion but are potentially most
  useful as negotiating tool for deep integration.

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Trade Liberalisation with Trade Induced Technical
Change

• Egypt-EU Agreement was analysed using a global
  CGE model using GTAP 2001 database and
  econometric estimates of the impact of trade
  liberalisation on total factor productivity in
  Egyptian manufactures. Parallel work was done for
  Morocco and the EU.
• Trade induced productivity gains can
  substantially enhance the benefits accruing to
  Egypt and substantially reduce unemployment.
• Major trade diversion effects unless off-set by
  MFN tariff reduction.
• Modest changes in key elasticities affecting
  Egypts exports and import penetration into the
  EU that might be associated with specific deep
  integration policies have strong welfare effects.

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Some key results from the CGE model for Egypt and
the EU
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How does the Analytical Approach Compare with CGE

• Similarities
• Both are able to emphasize the trade diversion
  effect, although reasons might differ. Moreover,
  CGE quantifies the effect, whereas the analytical
  approach shows how the effect works despite the
  change of the main reason behind the CGE approach
  (high MFN tariffs).
• Both emphasize that the agreement is not likely
  to bring much as it is shallow but deep
  integration could alter the assessment.

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How does the Analytical Approach Compare with CGE
cont.

• Differences
• The devil in the details is revealed by the
  analytical approach but not by the CGE (e.g.
  liberalization of agriculture and processed
  agriculture, rules of origin)
• The CGE approach is able to capture the impact on
  productivity whereas the analytical approach
  cannot.
• Impact of how tariffs are dismantled is described
  better using the analytical approach although
  recent work by Interns from Ministry of Trade and
  Industry in Cairo incorporates this detail into a
  single country CGE model of Egypt.
• Capturing the effect of intra industry trade and
  similarities in export structure is better done
  in the analytical approach.

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Main findings on Analytical Method

• The analytical approach might have had more added
  value if deep integration elements were in the
  Agreement. These would have been difficult to
  capture in the CGE models (issues of
  liberalization of trade in services,
  harmonization of rules and regulations etc).
• The results obtained so far complement each other
  and there is no contradiction, as each approach
  strengthens the other by adding more information
  that the first approach is incapable of providing
  it.

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But how well did the analytical method do on
gains from agreement, trade creation and trade
diversion?

• Heart of the matter what do the descriptive
  indicators eg height of tariff, Herfindal, FK,
  tell us?
• Initial conclusion not very precise at all,
  especially when Smithian gains from trade induced
  technical change.
• But what do the econometric estimates of trade
  induced technical change based on firm level data
  really capture?
• Does the trade induced technical change as in the
  CGE models capture reality?

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How far has the Analytical Method taken us?

• The analytical method a very good first step for
  understanding the Egypt-EU Agreement. Made easier
  by lack of deep integration issues in the
  Agreement.
• Egyptian policy makers not tuned in to trade
  diversion problem. CGE results likely to help get
  MFN trade policy reduction to deal with to trade
  diversion problem on to the agenda.
• Deep integration in new agreements likely to
  involve a lot a background work and possible
  using PE and deep integration framework being
  developed for Ethiopia and COMSESA.

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Thank You