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EU-MPCs Overview of Trade Issues
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Contents

• Preliminary remarks
• The aim of this overview questions arising from
  figures
• An Asymmetric Neighbourhood
• EU-MPCs integration dynamics
• Agreements
• Financial assistance
• Trade
• FDI
• The trade liberalisation process
• Conclusions

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Preliminary Remarks

• The three pillars within the Euro-Mediterranean
  Partnership (also known as the Barcelona
  Process)
• Political and security partnership,
• Economic and financial partnership,
• Social, human and cultural partnership.
• The main aim of the EMP is to promote economic
  growth. The main instrument for this is the
  creation of a Free Trade Area (FTA) by 2010.
• The components of the EMP
• The Euro-Mediterranean Association Agreements
  (EMAAs) aimed at liberalisation and cooperation
  in different areas
• The financial support provided through MEDA and
  the European Investment Bank
• How far the FTA will be reached depends on
• Relative importancy of liberalization to other
  factors,
• Amount of liberalization achieved by the
  agreements.

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The aim of this overview questions arising from
figures.

• Ten year after the beginning of the Barcelona
  process it is time to take stock. This is in part
  the aim of this seminar.
• Our overview has a narrower aim to remind you
  some figures that can help to answer the
  following questions.
• Can we identify progress in the process of
  economic integration between Europe and
  Mediterranean partner countries?
• Can we detect some sign of positive impact
  resulting from the Barcelona process on the MPCs
  development?
• Above all, can we say that the role of Europe as
  economic partner of MPCs has been strengthened by
  the Barcelona process in comparison with the rest
  of the world?
• How attractive does Europe appear as a partner
  for MPCs in comparison to the rest of the world?

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The aim of this overview questions arising from
figures.
The answers to the above questions are crucial in
our view if the general objective of the
Barcelona process, and of the announced (future)
European Neighbourhood Policy, is to build a
security belt around Europe through economic
cooperation and integration.
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An asymmetric neighbourhood
Source World Bank
The total GDP of all MPCs is about the GDP of
Spain and about 15 lower than the total GDP of
EU accession countries.
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• MPCs are small economies characterised by high
  level of debt

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high population and lack of employment

• High growth of labour force
• High unemployment levels

The economies have not been able to grow fast
enough to absorb a fast growing labour force
(except Israel)
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Causes of slow economic growth Oil dependancy,
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High protection
Note Freedom index Free (Score 1-1,99), Mostly Free (Score 2-2,99), Mostly Unfree (Score 3-3,99), Repressed (Score 4-5)
Source World Bank, Heritage Foundation
With exeption of Israel, all MPCs have
protectionist trade policies
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Extensive state interference in economy

• Public sector employment accounts for 1/5 of
  non-military employment in MPCs
• The contribution of the public sector on the GDP
  is significant (30 in Egypt and Tunisia, close
  to 60 in Algeria)
• Public investments in MPCs are close to 40 of
  total investment
• Over-staffed public sector
• Dominant presence of state enterprises

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Causes of slow economic growth in MPCs

Source Kuiper, De Crescenzo (2004)
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Agriculture is an important sector but its role
in the economy differs among MPC
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Agreement integration dynamics

The region trade integration has broadly remained
unchanged for two decades, but in the last few
years some significant efforts have been made.
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Current MPCs trade

• MPCs are relative trade-dependent economies. The
  sum of exports and imports of Mediterraneans
  countries amounted to more than 55 of their GDP
  in 2003

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The EU is the main trading partner of the
Mediterranean Partner Countries (MPC), accounting
for almost 50 of imports and exports of the
region as a whole, although ist weight decreased
in the last decade

• The share of exports from Morocco to the EU has
  grown and Turkey remained constant. The relative
  share of the EU in the exports of the other
  countries has been declining
• The EU share of imports from MPCs has decreased
  in most of the countries (except Algeria, Morocco
  and Tunisia), indicating a diversification in the
  import pattern of MPCs in relation to the rest of
  the world
• In 2004, the MPCs share in total EU25 imports is
  8,1 (6,9 in 1999) and in total EU25 exports is
  8,5 (8,2 in 1999)

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Inter Arab Trade does not seem to be affected by
the EMP only in Morocco the IAT/TET ratio has
decreased between 1995 and 2003

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FDI FLOWS Small FDIs inflows in the region one
of the lowest rate worldwide.

FDI into the MPCs has been minimal and stagnant,
representing around 1 of the world FDI flows
While global FDI flows have increased at a
dramatic rate over the past 15 years
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Between 2001 and 2004 MPCs share in EUs FDI
flows has grown
but it tooks only 1.4 of total EUs FDI.
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Between 2001 and 2004, the share of EU25 and US
in MPCs total inflows was about 50 (31 EU25,
15 US).
Source Eurostat
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Why Such a Small FDI Share?

• The region has long been plagued by violent
  conflict and instability
• Several Mediterranean states have compounded this
  problem with poor economic governance
• Governments have monopolies in most strategic
  sectors especially energy
• Private sectors are generally small and largely
  dominated by family business groups
• Poor social and physical infrastructures (eg.
  education and transport) diminish the
  attractiveness of the region. Electricity per
  capita, telecom and internet penetration rates
  are relatively poor
• Underdeveloped financial sectors (eg. central
  and private banking infrastructures) impede the
  mobilization and channelling of funds.
• Strong local partners (eg. experienced local
  contracting firms) have been lacking, and there
  is a shortage of skilled labour
• Several of the regions administrations have
  lacked accountability and consistency (a feature
  of autocratic systems of governance).
• There are still significant trade barriers in UE
  and MPCs

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Measures to improve FDI conditions specified
under Barcelona Process

• Withdrawal of the state so as to
• improve resource allocation and competitiveness
• increase budgetary resources
• encourage national and foreign private investment
• In-depth reform of indirect taxation, so as to
  reduce fiscal pressure on foreign trade
• Opening up of financial intermediation activities
  to competition and scaling down public sector
  involvement in this field
• Support for privatisation in the Mediterranean
  region

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Financial support through MEDA and EIB

• A cornerstone of the EMP is a financial support
  for the whole region through MEDA.
• MEDA is comparable to the PHARE (Eastern Europe)
  and TACIS (Central Asia) programmes.
• MEDA replaced previous bilateral aid protocols.
  The Funds
• MEDA I (1995-1999) 3,435 million
• MEDA II (2000-2006) 5,350 million
• MEDA pursues the creation of an EMFTZ by 2010 by
  supporting mainly structure adjustment programmes
  and economic transition programmes
• The biggest difference of the new European
  Mediterranean Association Agreements (EMAAs) with
  former agreements from the 1970s is the
  reciprocity
• In addition, the European Investment Bank has
  launched in 2002 the Facility for
  Euro-Mediterranean Investment and Partnership
  (FEMIP) for promoting private sector
  development.Total loans in 2004 2,2 billion .
• The main competitor of the EU, the US, has
  already FTAs with Israel (1985) and Jordan (2002)
  and in 2003 launched a plan to create the Middle
  East Free Trade Area (MEFTA) by 2013.

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Comparison of EU and US financial contributions
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Between 1995 and 2004, the EU15 share in total
MPCs grants and loans has decreased from 53 to
45.
Source OCDE
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The Liberalisation Process

a) The Liberalisation of Agricultural trade

• Key sector in most of the MPCs, for which the EU
  is the principal overseas market.
• EU Agricultural trade policies are a complex
  system of seasonal preferences for sensitive
  products (e.g. tomatoes and oranges)
• EU quantity and quality restrictions
• Tariff rate quotas (TRQs) on a large number of
  fresh fruit and vegetables and some dried or
  processed ones, as well as flowers, Tunisian
  olive oil and all qualities of wine
• Reference quantities (RQs) imposed on many fresh
  fruit and vegetables, some dried or processed
  ones, nuts, and fresh and preserved tropical
  fruit
• Sanitary and phyto-sanitary standards
• MPC preferences are even more limited, both in
  terms of share of preferential over total trade
  flows and in term of tariff reductions for
  strategic products, like cereals and milk, that
  lead to high domestic prices.

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The Liberalisation Process

• Even if a liberalisation of agricultural trade
  would have enormous impact on Euro-Med trade
  flows, no defined prospect for the liberalisation
  of agriculture was stressed under the Barcelona
  Process
• There have been no significant new concessions
  made by the EU for agriculture products in the
  EMAAs, nor are these expected to come about in
  the near future

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The Liberalisation Process

b) The liberalisation of Industrial products trade
The EMAAs set out a trade liberalisation
commitment by the MPCs, which complements the
tariff-free treatment for industrial goods
already granted to their exports to the EU since
mid-1970s Under the EMAAs the MPCs gradually
remove all tariffs on imports of industrial
products from EU over by 2010. The specific time
schedules for dismantling are differentiated
according to the sensitivity of the
goods. Tunisia is ahead of other MPCs in
reforming ist economy and implementing a range of
major reforms, except for abolishing trade
barriers. If the liberalisation of manufactured
goods was implemented overnight, 1/3 of the
industrial firms would go bankrupt. With a view
to achieving a full FTA, the MPCs are also
expected to implement free trade among themselves
(South-South integration)
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The Liberalisation Process
The liberalisation of textiles and clothes trade

• The countries in the Southern and Eastern
  Mediterranean area employ over 3.7 million people
  in the textile sector 39 of total employment in
  Morocco, 41 in Tunisia, 34 in Turkey.
• The share of TC exports of their total exports
  to the EU is high (e.g. 54 for Tunisia, 53 for
  Morocco, 47 for Turkey)
• The importance of this sector is double
• Because of the very important dependance of MPCs
  on the Eu market for their exports and
  employment
• Because of the close relationship between EU TC
  industry and the TC industry of those countries,
  via investment and subcontracting relationships
• In 2004, the EU imports from MPC represent 28 of
  EU textile market (12,8 billion ) and EU exports
  to MPC represent 14 of EU textile market (2,3
  billion )
• Due to WTO, the Agreement on textiles and
  clothing expired on 2005
• Between January and May 2004, the EU imports from
  China represent 11 of EU textile market. One
  year late, the EU imports from China represent
  22 of EU textile market.

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The Liberalisation Process

c) The liberalisation of trade in Services

• The liberalisation of trade in services
• will spill over into the production and export
  of goods
• will serve to improve the functioning e.g.,
  transport, energy, telecoms, finance in the MPCs
• Regional solutions to promote liberalisation of
  trade in services
• Reform of the transport sector at national level,
  definition and promotion of an efficient regional
  transport infrastructure network, with national
  transport systems linked to each other and with
  Trans-European Networks
• Development of appropriate energy policies
• Modernisation of the telecomunications sector and
  facilitation of interconnections as a
  prerequisite for the development of the
  Information Society.

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The Liberalisation Process

• In the context of the EUs relationship with its
  Mediterranean partners, rules of origin (ROOs)
  are increasingly seen as playing an important
  role.
• In principle the Mediterranean partners should
  adopt what is known as the pan-European system
  of cumulation of rules of origin
• Rules of origin can indeed serve to restrict
  suppliers ability to buy their inputs from the
  cheapest available source. In so doing rules of
  origin impact upon patterns of trade, production
  and consequently also welfare. Clearly to the
  extent that rules of origin do indeed have such
  an impact, this is likely to fall most heavily on
  small, possibly less diversified economies, who
  consequently find it more difficult to source
  their inputs domestically and competitively.

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Conclusion 1
What do these figures tell us? The European
Commission has reached a critical level in order
to have a significant impact on national policies
only in some Mediterranean Partner Countries. The
total MEDA I and II commitments for the period
1995 -2004 have been less than one third of the
USAID economic assistance for the same period
(even if this assistance has been concentrated in
three countries Israel, Egypt and Jordan). The
EU15 (European Commission and member states)
share in total MPCs grants and loans has
decreased from 53 to 45 .
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Conclusion 2
The MPCs are not following the global trend
towards trade liberalisation and this implies
that these countries are losing in terms of
international competitiveness relative to other
regions in the world. This creates a cumulative
process high protection rates increase the
relative strength of import-substitution
inefficient industries and in this way the
strength of lobbies in favour of maintaining high
protection rates increases as well. The
mechanism is made possible in presence of inflows
of foreign exchange coming from remittances,
export of natural resources, financial official
assistance (grants and loans) and FDI. A role in
maintaining the mechanism was the preferential
access to European markets that some MPCs
countries enjoyed for some products (for example
textiles and clothes). Currently, the
liberalisation of textiles and clothes imports
from Asia dramatically changes the context in
which MPCs have to compete in European markets
and the expected returns of investments made in
these sectors.
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Conclusion 3

Some final considerations within the framework
above described Trade liberalisation needed for
attracting more FDI and increase competitiveness
of the MPCs production creates major problems for
government tariff revenues and for the social
impact of the structural adjustment process in
both import-substitution industries and
export-oriented industries. Which are the
financial resources and the size of unilateral
trade liberalization that EU is willing to offer
to MPCs for alleviating their structural
adjustment?
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Conclusion 3

The increasing trade with the US suggests that
their trade agreements and financial support are
more effective than the European initiatives. In
fact, when the prime objective is political as
well as related to creating development, the
quantity of assistance, both in terms of absolute
value and in proportion to the offer by other
donors, becomes an important factor in the
effectiveness of the policy itself. This is the
case particularly when other countries offer
assistance, having objectives not always
consistent with or in conflict with European
ones. In conclusion what does the EU currently
offer to MPCs in order to carry on the Barcelona
process?