A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Liberalization

A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Liberalization

Imperfect Competition Group

Imperfect Competition Small Group No. 1

John Helming

and

Kenneth Baltzer

A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Liberalization

GTAP Working paper No. 31 by

Aziz Elbehri and Thomas W. Hertel

Outline of this presentation• Introduction• Selected Results• Extensions

Introduction

• FTA EU and Morocco versus Multilateral Liberalization

• GTAP application with imperfect competition– Scale economy– Entry/exit firms

• Playing around with GTAP closures– FTA / ML– Entry / exit firms– Full employment / Unemployment– Tax replacement / no tax replacement

Selected results

FTA scenarios Multilateral liberalizationNo entry Entry No entry and No entry Entry No entry and

unemployment unemploymentTotal welfare -392 -16 -1936 415 528 666- allocative efficiency 597 659 445 622 657 646of which profit shifting 149 126 174 8 -9 6- labor endowment 0 0 -1327 0 0 214- scale economies -306 69 -405 -19 83 -2- terms of trade -683 -744 -649 -189 -212 -192

Extensions• What are the differences of the results between GTAP with

imperfect competition and without imperfect competition?

• FTA and effects of different assumptions concerning the labour markets;

• Unilateral liberalisation accompanied by competition policy;

• FTA, technology income transfer from EU to Morocco;

• ML accompanied by compensation for preference erosion.

Extension: Perfect competition

• Characteristics of imperfect competition:– Increasing returns to scale– Positive profits (with no entry)

• How to remove imperfect competition:– Switching off the scale effects

• OSCALE(i,r) = [SCALE(i,r)] * [qva(i,r) - firms(i,r)] - ao(i,r);

– “Zero profit condition”• p_MC_MARKUP(i,r) =

- {FCOSTSHR(i,r)/[1-PROFITSHR(i,r)]} * qof(i,r) + entryslack(i,r);

Results: Welfare effects

Imperfect comp. Perfect comp.

Total welfare -16.0 -141.5

Allocative eff. 659.3 599.8

Scale Econ. 68.8 0

Terms of trade -744.1 -741.4

Allocative eff. 659.3 599.8

Profit shifting 126.3 81.8

Input tax -40.8 -39.6

Consumpt. Tax -35.4 -43.2

Export tax 138.8 140.2

Import tax 470.4 460.5

Results: Profit shifting

Imperfect comp. Perfect comp.

Welfare cnt. 193.1 144.4

per unit profit -26.9 -26.9

qo -65.4 -49.3

pfd = ps -5.3 -9.1

Pf -12 to -15 -14 to -17

Output pr. Firm -11.8 -5.2

Conclusion

• Scale effects may be important

• Profit shifting = “Cutting losses”

• Zero-profit condition = fixed profit condition

• Extra data demand


EFFECTS OF LIBERALIZATION UNDER A EU FTA ON LABOR

Eddy Bekkers

and

Jean-Christophe Maur

APPROACH

• Comparing 4 scenarios of FTA liberalization with free entry:

Full employmentUnemploymentFull employment with sluggish

unskilled laborUnemployment with sluggish unskilled

labor

WELFARE EFFECTS

I.FE

II.UN

III.FE

IV.UN

Sluggish Sluggish

1 alloc_A1 659,3 596,3 533,6 478,1

2 endw_B1 0 -641,1 0 -670,1

Total -16 -726,9 -78,1 -811

LABOR DEMAND UNDER ENTRY

I.

FE II.

UN III.

FE, sluggish IV.

UN, sluggish

unskil skill unskil skill unskil skill unskil skill

Livestock 1,7 1,8 -0,5 0,6 0,5 0,5 -2,2 -0,7

Apparel 14,4 14,9 8,6 14,6 3,6 8,2 -1,4 8,4

Vehicle -64,4 -64,2 -67,5 -65,6 -20,7 -40,9 -24,5 -40,8

Services -0,1 0,4 -5,4 0,4 0,4 0,8 -4,8 0,7


Unilateral liberalisation accompanied by competition policy

Beverages and Tobacco (BVT)

George Serletis

and

George Rapsomanakis

Beverages and Tobacco (BTP) Firm

Disciplinary Effect of FTA on BTP

• Tariff on EU eliminated, introduces more competition in domestic market

• Number Firms held constant

• Morocco BTP market share falls

• Demand elasticity rises with competition and market shares change

Markup

• Power of the mark-up fall as e

• Markup falls by 4.7 percent

εn

1)M1(

P

MCP 1

Result on BTP

• ps -7.5

• qo and qof 2.9

• Welfare Impacts:– Positive change of 3.7– Distortion = 37.4– Liberalization results in distortion declining to

33.7

Competition policy

• Watchdog for competition issues

• Beverages and tobacco products 1/n=0.79

• Simulation:– (P-MC)/P = 1/n with conjectural variation 1/n – Exog. CV_RATE – no entry and exit– Impose 1/n=0.4

• Leave border measures unchanged

Competition policy

• Mark-up over AC 22% stimulates expansion qo

• PM 24% and AC 2%

• qva , scaling effect in line with mark up

• Welfare:– Positive change 33.4– Mkt structure distortion = tax rate 36.4– Competition policy results to a tax rate 18.1


Technology Transfer Extension

Walid Hassan

and

Nassim Oulmane

Introduction:• FTAs between industrial and developing countries are

expected to have much deeper economic effect on the latter. • This is because developing countries typically rely on trade

and have smaller and more poorly functioning industries and hence more sensitive to international competition than industrialized countries.

• This was typically the case of Morocco. The GTAP paper on FTA concluded negative effect on Morocco’s welfare, advising to invest more in the multilateral negotiation.

• The following presentations will explore different compensation mechanisms that might be available to alleviate negative consequences of the liberalizations. .

Article 47Scientific, technical and technological cooperation

The aim of cooperation shall be to:(a) Encourage the establishment of permanent links between the Parties' scientific

communities, notably by means of:• Providing Morocco with access to Community research and technological

development programmes in accordance with Community rules governing non-Community countries' involvement in such programmes,

• Moroccan participation in networks of decentralised cooperation,• Promoting synergy in training and research;b) Improve Morocco's research capabilities;c) Stimulate technological innovation and the transfer of new technology and know-

how;d) Encourage all activities aimed at establishing synergy at regional level.e) Back the effort to modernise and restructure Morocco's public and private sector

industry (including the agri-food industry);(f) Foster an environment which favours private initiative, with the aim of stimulating

and diversifying output for the domestic and export markets;

Technology Transfer

Methodology: Choice of the variable to shock :• We started to shock aoall variable on the manufacturing

sector , but that was not feasible because the variable was endogenous and could not be shocked.

• Equation AVAWORLDregion specific average rate of value added augmenting tech change (all,j,PROD_COMM)(all,r,REG) ava(j,r) = avasec(j) + avareg(r) + avaall(j,r);

• As result we used the avareg variable which is the value add technology change in Morocco( increase the productivity of the primary factors) , by 10 % within a period of 12 years.

Technology TransferMain Results:• There was an overall improvement in

the welfare. On decomposing the allocative eff. we found that the profit has increased , input has decreased, export and import tax has increased.

• There is also a huge increase welfare in consumption tax

• The mark up has increased (by 1-2% in each sec)

• The real GDP has achieved a growth rate of 11%.

• Demand for inputs has decreased due to increased productivity.

• Income of the primary factor has increased due to increased productivity.

Welfare Extension FTA

Allocative eff 1083,4 659,3

Scale& tech 3303,5 68,8

TOT -894,2 -744,1

Total 3492,7 -16

Allocative eff 1083,4 659,3

profit shifting 190,6 126,3

input tax -25 -40,8

consum. tax 144,1 -35,4

Export tax 165,6 138,8

Import tax 608,1 470,4

Scale& tech 3303,5 68,8

value add 3448,6 0

scale -145,2 68,8

Consumption tax

import

welcnt dvol taxrat taxrateu Total

16 ofp 2,3 67,2 0 8,7 78,3

17 btp 0,5 2,4 20 30,5 53,4

18 txt 5,9 27,8 20 30,5 84,2

19 wal 99,8 466,3 20 30,5 616,5

20 wdp 10,3 48,7 20 30,5 109,4

domestic welcnt dvol taxrateb taxrateu Total

15 sgp -2,1 35,8 -8 0 25,7

16 ofp -0,4 29,9 0 8,7 38,3

17 btp 1,4 6,5 20 30,5 58,4

7 lvk 2,3 98,3 0 8,7 109,3

27 utl 2,4 26,1 7 16,4 51,8

Sectoral Analysis

Bevrage&tobac

co TextilesWearing

app

Welfare contr. 29,1 62,5 276,6

Output increase 10 3 29

Export increase 1 21 35

Skl labour demnd -1,19 -5,99 15,72

Unskil lab demnd -0,56 -5,31 16,56

Capital demand 0,22 -4,47 17,59

Sectoral Analysis

FTA Bevrage&to

baccoTextile

sWearing app


Output increase 10 3 29

Export increase 100,3 57,9 98,1

Skl labour demnd -1,19 -5,99 15,72

Unskil lab demnd -0,56 -5,31 16,56

Capital demand 0,22 -4,47 17,59

technologyBevrage&tob

acco TextilesWearing

app


Output increase -0,1 2,8 15,2

Export increase 68,7 67,4 91,6

Skl labour demnd -1,06 2,32 14,91

Unskil lab demnd -1,45 1,86 14,4

Capital demand -0,28 3,22 15,93


Multilateral Liberalisation and Preference Erosion with Output-based

Compensation

Angus Charteris

and

Roger Martini

Multilateral Liberalisation Simulation

30% multilateral cut in import tariffs But some sectors in MOR enjoy substantial preference margins into EU Compensate those sectors by: 1/ assuming a trade augmenting technical change (ams) 2/ output support based compensation Need to hold qo(i,r) fixed: swap ams(i,r,s) with qo(i,r) Assume ICRTS, unemployment and tax replacement

Sector MOR ROW Pref. MarginDairy 1,27 87,68 86,41Sugar 7,09 76,41 69,32Meat 4,83 63,00 58,17Other Food 1,5 30,24 28,74Veges & Food 3 14,51 11,51Wearing Apparel 0 10,71 10,71Textiles 0 9,08 9,08

EU Import Tariffs

Welfare Effects

Dairy, sugar and textiles do better by holding output constant (i.e. output falls under base scenario). BUT growth is being constrained in the other preference sectors.

This limits the import efficiency effect and has a smaller impact on employment.

Smaller output growth leads to smaller benefits from economies of scale through IRTS SMALLER OVERALL INCREASE IN WELFARE

LESSON: Shouldn’t assume ex-ante fears will translate to a ex-post welfare decline!

Entry with compensation Base: Entry

Total Welfare 658,23 963,37

Allocative Efficiency 606,39 695,27

Import effect 552,93 625,83

Profit effect -15,6 -14,1

Labour Endowment 236,75 387,1

Scale Economies 98,74 96,31

Terms of Trade -260,11 -197,55

Multilateral liberialisation scenarios

Preference erosion with output-based compensation

• We identify the value of the rents lost to preference erosion, and give this back to the sectors as a payment based on output

Sector MOR ROW Pref. Margin Export Flow Value of Pref. MarginDairy 1,27 87,68 86,41 2,3 198,74Sugar 7,09 76,41 69,32 7,38 511,57Meat 4,83 63,00 58,17 0,98 57,01Other Food 1,5 30,24 28,74 454,52 13063,36Veges & Food 3 14,51 11,51 339,07 3901,34Wearing Apparel0 10,71 10,71 2280,2 24430,06Textiles 0 9,08 9,08 341,57 3102,14

EU Import Tariffs

Results

• General welfare is increased relative to the non-compensating scenario– Allocative efficiency effects are driving this; motor

vehicles may be part of the story.

• Output does indeed (relatively) increase for most of the goods, but falls for vegetables and fruit, dairy products, and sugar products. – These three receive relatively smaller shocks, and

compete for inputs with other products receiving higher support rates (meat products).

– Use shares are highly similar (and maybe a bit dodgy)

Different output support rates cause re-allocation

• Many of these sectors use agricultural products as inputs; competition for land as well as agricultural intermediates is important

Output Support

RateCompensated

Non-Compensated

Fruit and Veg 0,52 3,13 3,2Meat Products 2,21 75,25 61,4Dairy Products 0,16 -0,89 -0,2Sugar Products 0,14 -14,8 -14,5Other Food Products 1,01 7,76 6,9Textiles 0,81 3,47 -0,4Apparel 0,94 7,3 3,0

Change in Output

Shares in intermediate use tell an interesting story

Shares GrainsFruit and

VegSugar Livestock

Meat Prod

Dairy Prod

Sugar Prod

Other food

Land 8 8 8 6 0 0 0 0Unskilled Labour 41 41 39 32 6 12 9 10Skilled Labour 0 0 0 0 1 2 2 2Capital 23 23 22 18 2 7 6 5Grain 1 0 0 1 21 18 19 19Sugar 0 0 5 1 2 2 2 2Livestock 4 2 1 14 14 14 15 14Other Agriculture 0 2 0 1 9 7 8 8Resource Industries 2 2 2 0 0 0 1 1Processed food 0 0 0 5 4 3 16 10Manufactures 5 7 6 15 16 14 5 10Services 15 14 18 8 24 21 19 20Total 100 100 100 100 100 100 100 100

A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Liberalization

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