Economic and Trade Relations between North Africa and the Leading Players in the Mediterranean Basin

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Summary: In general, all

of the countries of the Arab

Spring have taken an economic

hit, to some degree, from the

consequences of the drastic

reduction in production and

foreign direct investment (FDI),

the collapse of tourism, and

the upward surge of interna-tional prices on raw materials.

All the governments have

intervened to dampen unrest

stemming from the higher

costs of food by increasing

public wages and subsidies

for food and fuel. Govern-

ments have broken with the old

authoritarian regimes; they are

now in an inevitable transition

phase away from high youth

unemployment, crony capi-

talism, an inefcient welfarestate, and even food shortages.

This policy brief examines the

situations in Tunisia, Libya, and

Egypt, among others.

Mediterranean Policy ProgramSeries on the Region and the Economic Crisis

Policy Brie

Economic and Trade Relations between

North Africa and the Leading Players in the

Mediterranean Basin:

What can be Expected after the Arab Spring

by Maria Rosaria Carli and Luca Forte*

1744 R Street NWWashington, DC 20009

T 1 202 683 2650F 1 202 265 1662

E [email protected]

Prepared in Partnership with Paralleli Euromediterranean Institute (Turin) March 2012

Differences between the Arab

Spring Countries

Starting in early 2011, popularprotests in the Middle Eastern andNorth Arican (MENA) countriesled to the overthrow o regimes inunisia and Egypt, civil war in Libya,revolts in Bahrain, Syria, and Yemen,and protests in Algeria, Iraq, Jordan,Morocco, and Oman, as well as otherprotests scattered in other Middle Eastcountries.

All o these countries are in a periodo transition that could lead to democ-racy aer years under repressiveregimes that ran inecient economies.But at rst glance, there is little incommon in the major economic indi-cators o the countries involved in theArab Spring. While all these countrieshad positive growth rates, the annualper capita GDP in each ranged romaround $10,000 in Egypt, Algeria,and unisia to less than $5,000 inMorocco. Tis growth was jeopar-dized as a consequence o the revolts,

* Maria Rosaria Carli is senior researcher at the Instute for Studies on Mediterranean Sociees of Naonal Research Counci

(CNR-ISSM) and former director of the Instute for Research on the Mediterranean Economy of the Italian Naonal Research

Council. Luca Forte is head of the Mediterranean Economy and Territorial Stascs division at SRM (Economic Research

Center for Southern Italy and the Mediterranean Area).

as was to be expected; it could not beotherwise, considering that most o theeconomic resources o these countriesare derived rom the export o hydro-carbons, tourism, and oreign invest-ments, sectors that are naturally hit byan unclear political situation.

No country on the southern shore o

the Mediterranean had help rom theInternational Monetary Fund (IMF)prior to the Arab Spring. Aer therevolts began, however, many interna-tional institutions provided support tothe economies o these countries, notonly loans rom the IMF, but also aidrom the World Bank and assistancerom the European Bank or Recon-struction and Development (EBRD)and European Investment Bank (EIB).Tis aid should help repair the damagecaused by the decline in tourism andinvestment and the hemorrhaging ocapital, which also compromised thelevels o currency reserves.


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Prior to the revolutions, many businesses were comortable

with payment terms o up to one year. Once civil unrestbegan, however, there were several knock-on eects onexporters and importers operating in the aected coun-tries, as well as on the oreign banks that nance much othis trade activity. rade ows in the region have sueredas credit has become less available and trade conrmationpricing has increased. Suppliers have now been demandingpayments as early as possible. Most companies began askingtheir banks or guaranteed trade nancing tools, such asletters o credit (L/Cs) and even conrmations, instead ousing open account transactions. Te response rom thebanks was to reduce their trade nance limits and monitor

their exposures and returns very closely.In general, all o the countries in the region have been hit,to some degree, by the consequences o the drastic reduc-tion in production and oreign direct investment (FDI), thecollapse o tourism, and the upward surge o internationalprices on raw materials. All the governments have inter-

vened to dampen unrest stemming rom the higher costs oood by increasing public wages and subsidies or ood anduel. Governments have broken with the old authoritarianregimes; they are now in an inevitable transition phase awayrom high youth unemployment, crony capitalism, an ine-

cient welare state, and even ood shortages.

Local Economic Scenarios

Prior to the revolts, the overall economic situation oTunisia could be considered quite solid, allowing thecountry to develop preerential trade relations with theEuropean Union. Te public debt, comortably undercontrol, represented a strength o the unisian economy.Annual GDP growth in 2010 was 3.7 percent, accordingto data rom the World Bank. Remittances rom emigrants(5.0 percent o the GDP in 2010) contributed to this growth,which was higher than its rate the previous year (3.1percent).

Nonetheless, despite the positive actors identied above,the rate o unemployment remains at 13 percent, and, worsestill, aects mostly young university graduates. In addition,the severe deciencies in governance and marked economicand social inequalities create a broad gap between rural andurban areas.

Revolts broke out in unisia in December 2010, quickly

orcing President Zine el Abidine Ben Ali, to leave thecountry. Over the course o the year, the Central unisianBank, oreseeing a liquidity crisis, increased nancing tosupport the bank sector. Ten, in June 2011, it loweredthe interest rate to 4 percent. Te decit o the balanceo payments or the rst hal o 2011 was made up or byalling back on reserves o $3.1 billion. But the true problemis tourism, the main source o oreign currency, whichgenerally reaches up to 8 percent o the GDP. Te riotsresulted in such a collapse that during the rst hal o 2011,this sector suered a decline o 51 percent compared to theprevious year. Tis had an inevitable impact on the GDP,

the percentage variation o which is expected to be negativeor 2011.

Te Libyan crisis and the resulting unstable situation on theborder and massive migration o Libyan reugees to unisiaalso hit the unisian economy. Aer the European Union,Libya is unisias largest trade partner. Inormal relationsalong the northern border between the two countries arealso considerable, and numerous unisians work in Libya.Te rst signs o the Arab Spring could be seen in Libya inFebruary 2011 and, aer intensiying into open conict,came to an end with the death o Colonel Gadda. Since the

start o the Libyan uprising, thousands o Libyan amiliescrossed the Libyan-unisian border. Despite the return omany o them aer the death o Gadda, thousands o reu-gees remain in unisia.

Te macroeconomic indicators or Egypt beore theArab Spring were also positive. During the second halo 2010, the GDP was mainly sustained by the construc-tion, tourism, and associated services sectors. It rose by 5.8percent compared to the same period o the previous year,when a 7.16 percent increase over 2008 was recorded. Andyet, in spite o this perormance, unemployment peaked

at 12 percent and double-digit ination had eroded amilyincomes.

Tese diculties undoubtedly had an impact on the Egyp-tian riots that broke out in January 2011 and led to theresignation o President Hosni Mubarak. In Egypt, as inunisia and Libya, these riots had important eects on thecountrys economy. During the revolts, production suereda slowdown and, or a ew weeks, banks did not unction atull capacity. Egypt was also hit by serious problems in the


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tourist sector, which had supplied about 2 million Egyptians

with work prior to the uprising. According to estimatesrom the World ourism Organization (WO), this sectorrepresented 17 percent o the GDP. Proceeds rom tourismduring the spring o 2011 were hal o proceeds rom theprevious year, thus contributing to 1.2 percent o the dropin GDP; at the same time, FDI also sank considerably.

Faced with these problems, Egypt initiated a guaranteepolicy o minimum wages and subsidies. Tis inevitablyled to an increase in public spending, thereby orcing thegovernment to rely heavily on monetary reserves. Tus,at the end o June, currency reserves were reduced by 30

percent rom their amount the previous December.Despite all o this, however, the second hal o this year hasshown a slow recovery, although not all risk actors havebeen swept away. Along with short-term indicators, theseshis can be compared to those o unisia and may beseen in all o the other regional countries oriented towardstourism, such as Morocco, Lebanon, and Jordan.

Morocco was also the scene o various protest movements.Tese were not aimed at unsettling the political order, butasked or more intervention against corruption, greaterpopular participation, and increased accountability o state

institutions, along with more systematic support o theless-afuent classes. King Mohammed VI has managed tosatisy a good number o these requests, but with seriousconsequences to the public accounts decit. In act, theprimary expense subsidizing oodstus and energy isabsorbing 5.5 percent o GDP, while an increase in publicsalaries (the minimum rose rom $75 to $125) takes upapproximately 20 percent. Te situation is urther strainedby an increase in the prices o imported goods, especiallyenergy products, on which Morocco is highly dependent.In spite o all this, the services sector tourism, transport,and trade which represents 55 percent o GDP, grewduring 2011, although at more contained rates. Further-more, agriculture has continued to contribute approxi-mately 19 percent to the GDP.

Te economic system in Morocco is recovering, but possibleuture diculties could come rom Europe, whose crisis isresulting in a reduction o European demand. Te EU is thechie market or Moroccan goods, as well as being a sourceo tourists, remittances, and investments, the latter o whichcomprises approximately 80 percent o FDI. Morocco also

boasts specic agreements with Europe, which grant duty-

ree access to its goods, making it the country that takes themost advantage o arrangements derived rom its advancedstatus under the Neighbourhood Policy.

Despite diculties, economic interventions have managedto appease the uprisings in Morocco. However potentialstill exists or tension rom the act that a large part o theMoroccan population continues to live in extreme poverty.Te growth orecast or the uture does not appear to besucient to guarantee the level o public spending sustainedto date and oer a concrete response to a growing laborsupply.

Trade Relations between Western Countries and

Mediterranean Developing Countries1

It is important to oer a oreign trade ramework or each othe Arab Spring countries and underline the strong rela-tions between Mediterranean Developing Countries (MDC)and Western partners in order to orecast the evolution otrade relations between MDC and the chie Western coun-tries.

Such trade relations are closely linked to two critical inter-related and largely unknown actors: the trends o the

economies o Western countries and the consequences othe Arab Spring on the institutional and economic rame-works o the MDC.

Te rst element the persistent weakness o the econo-mies o Western countries has a negative impact on theeconomic activity o the MDC, through the shrinking onancial ows, both in terms o Foreign Direct Invest-ments (FDI) and remittances rom immigrants, and thediminished capacity o Western countries to absorb exportscoming rom the MDC.

Te International Monetary Fund

2

estimates an averagegrowth o the GDP o EU countries at 1.6 percent or 2011,with only Germany rising above average, at 3.0 percent. Teestimates or growth in the United States (1.8 percent) isslightly above that o Europe. A mild recession is expectedin 2012 in the EU (GDP -0.5 percent), as a result o sover-eign debt crisis, while in the United States GDP will keep an

1 In this paragraph, only the countries involved in a real regime change will be analyzed, in

consideraon of the greater variability here recorded in foreign trade dynamics.2IMF, World Economic Outlook Update January 2012


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even pace (1.8 percent). In terms o the trend o nancial

ows towards the MDC, the consequences are sizeable.During the most acute period o the nancial crisis, FDIows towards the countries in North Arica (Morocco,Algeria, unisia, Libya, and Egypt) dropped rom $22billion in 2007 to $15 billion in 2010, a decline o over 30percent,3 and the continuing stagnation o the Westerneconomies during 2011-2012 orecasts a urther shrinkageo FDI. Te ow o remittances was more regular, but stillrecorded a drop o almost 7 percent toward MENA coun-tries in 2009, and the pace o growth orecasted or the nextew years (about 5 percent) is ar rom that recorded duringthe years preceding the crisis (21.5 percent in 2007).4

More recent data show proound changes in tradeexchanges between chie Western countries and Mediterra-nean countries in 2011, which shall be examined individu-ally in order to try to understand the possible evolution. Teanalysis will rst ocus on the trade relations ramework oeach o the three countries investigated.

Tunisia

unisia has an economy largely open to international trade.unisias trade value in goods and services (import andexport; able 1) is $48.1 billion, more than 100 percent o

the GDP. Its commercial decit is surprisingly low, espe-cially when one considers the limited export o energy

3UNCTAD stascs, July 20114World Bank, 2011

products, thanks to a surplus in the trade o services. Te

oreign trade in manuactured goods is responsible oralmost 60 percent o the total (over $28 billion), while thecontribution o services is smaller (20 percent: around $10billion).

Tere is a great deal o diversity in unisias oreign trade.Within the manuacturing sector (able 2), the principalareas o trade are machinery and transportation ($10.5billion) and textile/clothing ($7.5 billion). Te decit o thetrade balance in manuactured goods is $4.5 billion.

France and Italy are unisias principal trading partners,ollowed ar behind by Germany. China ranks eighthamongst unisias trade partners, with a trade value o $1.1billion.

In 2011 economic activity in unisia experienced limitedstandstills; IMF estimates a at growth o GDP in 2011,thanks to a recovery in the second hal o 2011, aerthe 2 percent drop recorded during the rst six months.Te trend in oreign trade in the rst 11 months o 2011compared to the same period o 2010 shows an irregularpath, with a sustained rise in exports to its chie tradepartners France (+17.8 percent), Italy (+8.6 percent), andGermany (+10.7 percent)5 and a reduction o exports toother countries with which it has less intense trade rela-

5 The source of data concerning EU countries foreign trade in the rst 11 months of 2011

is Eurostat

Table 1 - Sectors (Import + Export 2010)

Billion

dollars

Weight*

(percent)

Total Products and Services 48.1 100.0

Agricultural raw materials 0.6 1.2

Precious stones 0.0 0.1

Manufactured goods 28.2 58.8

Services 9.6 20.0

Fuels 4.9 10.2

Primary commodities

excluding fuels and

Agricultural raw materials

4.7 9.8

Total trade balance -2.9 -6.1

* weight on total trade in goods and services (percent)

source: UNCTAD

Table 2 - Manufactured divisions (Import + Export 2010)

Billiondollars

Weight*(percent)


Chemical products 4.0 14.1

Machinery and transport equipment 10.5 37.2

Iron and steel 1.4 5.0

Textile bers, yarn, fabrics, and

clothing 7.5 26.6

Other manufactured goods 4.8 17.1

Manufactured goods trade balance -4.5 -15.8

* weight on total trade in manufactured goods (percent)

source: UNCTAD


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tions, such as Spain (-10.5 percent), the United Kingdom(-60.4 percent) and the United States (-3.6 percent).6

Egypt

Egypts commercial trade income, $117.4 billion as o 2010,contributes around 50 percent o the GDP. Manuacturedgoods make up the greatest share o the countrys trade(36.4 percent; $42.7 billion), but the trade in services isalso very signicant (32.4 percent o the total), and vastlysuperior to those o unisia and Libya. Te trade in energy

products is valued at $14.7 billion, and there is an overalldecit o $15.8 billion.

6 Full-year 2011 data; the source of data concerning U.S. foreign trade is the U.S. Depart-

ment of Commerce, Bureau of Census, Foreign Trade.

Te machinery and transportation sector ranks rst in

Egypts oreign trade value ($14.1 billion), ollowed by thechemical products sector. Te trade decit in manuacturedgoods is $20.8 billion, almost 50 percent o oreign manu-acturing trade.

Te United States ranks rst amongst Egypts oreign tradepartners, with $6.5 billion; ollowing it are China ($5.3billion), Italy ($5.2 billion), and Germany ($4.6 billion).

In 2011, production activities did not suer notable inter-ruptions (IMF orecasts an economic growth o +1.2percent) and GDP is expected to rise by 1.8 percent in20127. Te trend o trade abroad was not hurt. In act, Egypt

7 IMF, World Economic Outlook September 2011

Table 3 - Trade Partners* (Import + Export 2010)

France 9.0

Italy 7.5

Germany 3.6

Spain 1.9

Libya 1.7

U.K. 1.2

Algeria 1.2

China 1.1

Belgium 1.0

* merchandise trade in billion dollars

source: UNCTAD


Billion

dollars

Weight*

(percent)





Services 38.1 32.4

Fuels 14.7 12.5

Primary commodities excluding fuels

and agricultural raw materials18.4 15.7

Total trade balance -15.8 -13.5


source: UNCTAD


Billion

dollars

Weight*

(percent)




Iron and steel 4.2 9.9Textile bers, yarn, fabrics, and

clothing 5.9 13.7



* weight on total trade in manufactured goods (percent)

source: UNCTAD


United States 6.5

China 5.3

Italy 5.2

Germany 4.6

Saudi Arabia 3.7

Turkey 2.9

France 2.8

India 2.8

Spain 2.5* merchandise trade in billion dollars

source: UNCTAD


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saw a sustained growth in exports to all o its chie Western

partners, except the United States -9,2 percent): Italy (+36.3percent), Germany (+76.3 percent), the United Kingdom(+26.5 percent), France (+30.7 percent), and Spain (+17.8percent). Tis signies the very limited impact o socialprotests on economic activity in the export-oriented manu-acturing sectors.

German interests in the North Arican region, although notas great as those in Eastern Europe, should not be underes-timated. Egypt, or example, is one o the ew Arab coun-tries where German energy companies have been activeor many decades, and RWE Dea activities in the oil sector

could lead to urther business in gas production and export.In addition, many companies (especially auto industries,such as BMW, Daimler, Leoni, and Drxlmeie) outsourcedto Egypt over the last ew years, taking advantage o lowerwages and production costs. Te same is true in unisia,where no ewer than 200 German industries are processingraw materials into semi-nished products or Europeanmarkets. Tus, in the aermath o the Arab Spring, Germanpoliticians and economic stakeholders are acing the di-culty o re-building personal connections with new politicalactors, while also clearly taking advantage o the oppor-tunity to snatch market shares out o French and Italian

hands. Te speed with which they acted and the actionsthey took (or example, organizing the First Arab-GermanFinance and Investment Conerence on November 17 inFrankurt) show that German investors know what is atstake.

Libya

Libyas oreign commercial trade is dominated by its energyproduction, which comprises over 60 percent o the coun-trys trade ($46.7 billion o the $76.4 billion trade total); thetrade incidence o manuactured goods is valued at one-quarter o the total. Te trade balance is strongly positive

($17 billion) thanks to oil exports.

Within the manuacturing sector, machinery and transpor-tation cover almost 50 percent o oreign trade in manuac-tured goods ($9.1 billion o $18.4 billion). Te contributionso the other sectors are much lower. Tere is a high decitin the trade balance in manuactured goods (-$15.6 billion),amounting to over 85 percent o oreign manuacturingtrade.

Italy is, by ar, Libyas number one trade partner. Its tradewith Libya (valued at $19.6 billion) is greater than that oFrance, China, and Germany combined, which rank secondthird, and ourth, respectively, among Libyas trade partners

Libyas conditions in 2011 were more problematic thanthose in unisia and Egypt. Military operations in theeld continued until late October, destroying a large parto the inrastructure and blocking economic activities

in the country. Vast, high-quality oil reserves make it astrong exporter, but stymied production has resulted inthe collapse o the countrys exports, made almost entirelyo crude oil. Drops ranged rom a loss o 35.3 percent inexports to Germany to 67.7 percent to Italy and even 77.2percent to Spain in the rst 11 months o 2011 compared


Billiondollars

Weight*(percent)





Services 5.5 7.2

Fuels 46.7 61.0

Primary commodities excluding fuels

and agricultural raw materials5.4 7.0

Total trade balance 17.0 22.2


source: UNCTAD


Billion

dollars

Weight*

(percent)




Iron and steel 1.8 9.6

Textile bers, yarn, fabrics, and

clothing 1.2 6.7



* weight on total trade in manufactured goods ( percent)

source: UNCTAD


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to the same period in 2010. Libyan imports also sueredlosses, sometimes even higher than exports in terms opercentages (between 64 and 79 percent), indicating thenearly complete cessation o production (see able 10).

Algeria, the other North Arican oil-exporting country,beneted rom the decline in Libyan oil exports and theupward trend in oil prices (rising to over $110 per barrelin 2011, compared to approximately $80 in 20108). Duringthe rst 11 months o 2011, Algerian exports to Westerncountries almost all o which are composed o energyproducts recorded staggering growth rates compared tothe same period in 2010. Between January and November2011 exports to Germany tripled and export to U.K. (+129.1percent), France (+85.3 percent) and Spain (+27.7 percent)grew considerably when compared to the same period in2010, while the trend in export to the United States9 (+0.6percent) and Italy (+5.2 percent), its main trade partners,was less intense.

Tese dynamics may indicate the developments in traderelations between the MDC and Western partners in theshort term; however, these relations will depend, in the

medium and long terms on the political-institutional evolu-tion o the MDC. Tey also will depend on the politicaland commercial strategies utilized by Western countriesto occupy advantageous positions over new global players,as China and urkey compete to meet the interests o thegovernments that will lead unisia, Egypt, and Libya aertheir transitions.

8 ECB, Monthly Bullen, January 20129 Full-Year 2011 data

The Role of Old International Players:

The EU and the United States

o understand the European strategy toward the Mediter-ranean Developing Countries, we need to start rom theso-called Barcelona Process. Tis process provided ora series o democratic reorms aimed at creating a part-nership, within which it would be possible to overcomeconicts arising in the Mediterranean region and oster thecreation o a space o shared peace and prosperity. TeBarcelona Process originally promoted the creation o a

ree-trade zone in the wider Mediterranean region, whichwould provide the basis or enhanced cultural dialogue,promotion o stability and security in the South, and ow onancial and technical aid.

In the mid-1990s, the EU signed an agreement with itspartners on the southern shores o the Mediterranean,beginning with unisia, outlining a project that wouldcreate an area o shared prosperity. oday, over 15 yearslater, many (undoubtedly ambitious) expectations havenot yet been ully met, and the cooperation provided orby the Barcelona Declaration has been only ragmentarilyachieved. Currently, EU policy toward the Mediterranean isconducted through the bilateral Action Plans o the Euro-pean Neighborhood Policy (ENP) and the joint projects othe French-designed Union or the Mediterranean (UM),both o which were born out o the Barcelona Process/Euro-Mediterranean Partnership (EMP).

Te Mediterranean partners collectively voiced theirdispleasure with both the EMP and ENP, with many ArabMediterranean leaders choosing not to attend the 10th


Italy 19.6

France 6.9

China 6.0

Germany 5.9

Spain 4.8

Turkey 3.3

United States 2.2

Korea, Republic of 1.9

Tunisia 1.9

* merchandise trade in billion dollars

source: UNCTAD

Table 10 Libyas foreign trade with chief Western

Countries percentage variation:January-November 2011 on January-November 2010 Exp Imp TOT

United States* -69.5 -56.9 -66.5

Germany -35.3 -66.5 -42.5

France -55.9 -68.6 -44.1

Italy -67.7 -78.6 -69.6

U.K. -66.5 -76.1 -69.3

Spain -77.2 -64.1 -76.9

*full-year 2011 data

source: UNCTAD


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anniversary summit o the Barcelona Process in 2005. Tus

the UM came to be seen as a possibility or a new andimproved version o the EMP with support rom Mediter-ranean partners or a variety o the unions new eatures.Despite original speculative hopes that the UM wouldindeed complement the bilateral approach o the ENP, theUM has been routinely accused o remaining little morethan a project that reects French economic and politicalambitions and concerns. Te main objectives, regionalintegration and the creation o a ree trade zone, have ailed,and the integration tools implemented rst by the neighbor-hood policy and later by the Union or the Mediterraneanhave clearly shown their limits.

In the ollowing years, the EU will strengthen its involve-ment in the region. As a matter o act, according to acommunication on the budget or the next nancial rame-work 2014-2020 adopted by the European Commission, atotal o 16.1 billion will be allocated or the uture Euro-pean Neighbourhood Instrument (ENI). I adopted, thenew unding or the neighborhood policy would representa rise o more than 40 percent, compared to the 11.4billion under the current European Neighbourhood andPartnership Instrument (ENPI), which covers the currentnancial period 2007-2013. European Neighbourhood

Policy Commissioner tean Fle said that: Te signicantincrease reects our commitment to our neighborhood andits growing importance or the EU.

Also, the EU recently launched a number o actions aimedat supporting the transition process, as part o the SPRING(Support or Partnership, Reorm, and Inclusive Growth)program, to encourage a democratic transition, strengthenlocal institutions, and support growth, job creation, andsecondary education. Further measures have recentlystarted in unisia regarding support to the more depressedareas or ostering the creation o jobs and employment,

in addition to improving access to micro-nancing andpromoting cultural exchange and the mobility o teachersand students. A specic measure is aimed at promoting areorm process to encourage unisians to take on greaterresponsibility and participate more actively in the public lieo their country.

Te enlargement process moreover marginalized the Medi-terranean rom the core o EUs priorities or the benet othe Eastern neighborhoods. As a consequence, there has

been a lack o business interest in southern Mediterranean

and there was a very low levels o oreign direct investmentin the region.

Te gravity o these limits has been urther emphasized bythe recent crisis.

In light o the unisian and Egyptian revolutions in 2011and the spread o the Arab Spring across the Middle East,the European Commission and the European Parliamenthave undamentally called into question the eectiveness ocurrent European Union (EU) policy toward the Mediterra-nean Arab states, the EUs southern neighborhood.

oday, Europe should continue to strategically pursuethe creation o a ree-trade area and encourage urthereconomic integration in the region. European CommissionPresident Jos Manuel Barroso declared on March 3, 2011,It is our duty to say to the Arab people that we are on theirside. From Brussels I want to say this particularly to theyoung Arabs that are now ghting or reedom and democ-racy: We are on your side.

At the Deauville Summit in May 2011, the G8 countriesalready showed clear signs o support and promises o aidto those Mediterranean countries that embraced demo-

cratic values. In particular, support measures have beenassured or economies in the transition towards democracy,including debt cancellation, investment acilitations, andtrade agreements. Te current European policy is basedon the principle o more or more i.e. Europe is preparedto ensure more political and nancial support to thosecountries that introduce more democracy and reorm.More incisive actions are based not on the countrys size orcircumstances, but on merit and commitment at local level.Moreover, in June 2011, the European Union oered a top-

The enlargement process

marginalized the Mediterranean

from the core of EUs priorities

for the benet of the Eastern

neighborhoods.


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to-toe revamping o its neighborhood policy, linking aid

and better trade to political and economic reorms. Lastly,in September 2011, the European Commission announcedplans to kick o ree trade talks with Egypt, Jordan,Morocco, and unisia in line with pledges to improve its tieswith these countries, within the ramework o the neighbor-hood policy.

Te EU should now strengthen its economic relations withthe Southern Mediterranean Countries overcoming themain limiting actors. Te rst and most debated o theseis undoubtedly the issue o the persisting protectionistmeasures in European trade, namely agriculture, due to the

constraints posed by the EUs Common Agricultural Policy.Europe needs to liberalize its trade regime i it is to induceany orm o economic development and promote democ-racy in its southern neighborhood. Removing nontaribarriers to urther liberalize its trade regime and enhancingthe backbone o the EMP with a serious institutional reormare o vital importance or the EU to ulll this immediateduty.

Aer the revolutions sort themselves out, the United Statesand the EU must incentivize the growth o existing regionaltrade agreements, or the creation o new ones. Te U.S.government agrees with and supports this new Europeanpolicy. Recently, in act, U.S. President Barack Obama,reiterating the objective o the United States to promote amodel o development based on liberalization and compe-tition, said that: Its important to ocus on trade, not justaid; on investment, not just assistance. In short, the UnitedStates shares the same goals as Europe, to promote urtherintegration between the Arab Spring countries and the U.S.and EU, especially through the promotion o trade agree-ments. President Obama promised to work with the EUto acilitate more trade within the region, build on existingagreements to promote integration with U.S. and Euro-

pean markets, and open the door or those countries whoadopt high standards o reorm and trade liberalization toconstruct a regional trade arrangement.

The New International Players: China and Turkey

Recent troubles in Libya have revealed the hithertoconcealed presence o over 3,000 Chinese people livingin the country, employed by Chinese enterprises, whoseevacuation has required the large-scale deployment oChinese warships. Although hidden, this massive and

increasing presence oChina in the Mediterranean area

had already been revealed in the construction industry andlarge inrastructure projects in North Arica. Tis presenceis viewed with hostility by local populations, as has beendemonstrated by the attacks and threats on the Chinesecommunities during the Arab Spring uprisings. But thegrowing Chinese presence in the North Arican markets,also arguably damaging to those o the European Unioncountries, becomes even more evident i we observe inter-national trade and the large numbers o Chinese containersin the chie Mediterranean ports.

Moreover, Chinas increasing role clearly emerged when it

demonstrated strong resistance to the UN Security Councilvote on Libya. Although it does not have a oreign policyspecic to the Mediterranean, Beijing has conrmed thatit does not wish to undermine the territorial integrity andnational sovereignty o the Libyan state, despite the act thatthere is proo that China sold arms to the Gadda regimeand that it now wishes to take part in the rebuilding othe country. It was not until September that China nallydecided to recognize the National ransitional Council,most likely a result o threats made by several Libyan oilcompanies stating they would suspend oil supplies to thosecountries that had abstained rom voting on the UN resolu-

tion. Chinas need or energy is much too great to jeopar-dize its economic relations with oil and gas producingcountries.

Turkeytoo has had an active role in the Arab Spring, andit is becoming a concrete source o political support andsocio-economic assistance. Te Middle Eastern dimen-sion has acquired more importance in urkish oreignpolicy, and Ankara has been asserting its ambitions moreopenly and condently in the region. Last September,urkeys Prime Minister Recep ayyip Erdoan, thanksto the support o a business delegation, ensured urkeys

support to, and trade with, Egypt, unisia, and Libya.urkeys inuence in the Middle East is more than evident.urkey and Egypt have a Free rade Agreement (FA),but Exports to Egypt declined by almost 80 percent in therst eight months o 2011 compared to the same period in2010. urkeys exports to unisia experienced the highestincrease amongst the three North Arican countries asunisian imports rom urkey surged to $76 million rom$30 million in the rst eight months o 2011. FollowingRussia, Libya is the second largest market or urkish


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contractors abroad. Erdoans recent trip to North Arica

also conrmed the cultural and historical relations betweenurkey and the Arab world.

urkeys position in the area is also a unction o how it hasmanaged its relations, on several ronts, with other regionalpowers: Israel, Syria, Libya, Iran, as well as the Saudi-ledGul Cooperation Council (GCC). Ankara has expressed itssupport or Palestinian Authoritys bid or statehood at theUN and has also expelled the Israeli ambassador. In Syria,Ankara has supported the popular uprisings by sustainingthe internal opposition to the regime o Bashar al-Assad. InLibya, Ankara has expressed strong contradictions, initially

supporting the Gadda regime while later passing over tothe ransitional National Council. It has also ocused ondiplomacy on several occasions, with eorts to mediateconicts between Aghanistan and Pakistan, Syria andIsrael, and the joint action with Brazil on Irans nuclearpower issue.

urkey has tried to take a dierent and more constructivestand regarding its neighbors with the zero problems withthe neighbors policy. Tis policy oers territorial secu-rity by means o the peaceul settlement o disputes andputting aside current threat perceptions. But Ankaras policyis aced, or example, with a Syria on the brink o civilwar, where dialogue is proving dicult despite the goodpersonal relationship between Erdoan and al-Assad.

Te elimination o visas or citizens rom Syria, Jordan,and Lebanon seems to conrm the prospect or a commonmarket also including unisia, Morocco, Egypt, and Pales-tine, all o which already have ree-trade agreements withurkey.

Te urkish economic model has been looked to as anexample or the Southern Mediterranean area. Te urkishGDP grew by 8.2 percent in 2010 and 11 percent in the

rst hal o 2011. urkey has become one o the top 20global economies in the world. However, this growthis obtained through the large contribution o oreign invest-ment, and its current account decit doubled in the rsthal o 2011. Te trade volume between urkey and Italyhas developed in recent years and reached to $16.7 billionin 2010, and the country has entered into a Free radeAgreement (FA) with Egypt while intensiying trade withunisia.

Te image o a urkey trying to resolve its problems with

neighboring countries was avorably received in the region.Te Justice and Development Partys policy has built on theconcept that urkeys role in the region should not only bethat o a bridge between the West and East but also thato a pivotal state. urkey appears to not be dened by itsmilitary capabilities and geo-strategic/geo-political posi-tions but instead by its democratic identity and economicpower. However, urkeys ambitions could be halted romwithin i its economy were to collapse and the conict withthe Kurdish separatists o the PKK escalates. Tis is anextremely delicate moment during which urkey could losethe popularity it has achieved over the last ew months.

urkish oreign policy seems to be increasingly that oa trading state seeking markets and economic benetsrather than that o an ideologically driven state seekingundamental reorientation. Te economic interests in theMiddle East are very deep and urkey has played a leadingrole. Tere was much uncertainty over European and U.S.actions in the Middle East at the outbreak o the ArabSpring, as was seen an ineectiveness in their actions, buturkey is without doubt the winner coming out o the ArabSpring. As some observers have remarked, the Arab Springarrived perhaps a ew years too soon or Ankara to obtain

the ull results o its leadership.

Conclusions

Te Arab Springs events have proved to be an importanttesting ground or the United States, Europe, and urkey,but especially or local governments. Tey have provided ahistorical moment or the realization o a regional coopera-tion, though to achieve long-term goals, the EU needs toshoulder the lions share o responsibilities.

oday, local transitional governments are aced withdicult decisions. Tey are called on to tackle and balance

conicting interests, speedily improve the living standardso their people, ensure political and social stability, ghtagainst avoritism and corruption, oster a more openeconomy, and guarantee a degree o welare. In a reportissued in June 2011, the Economist Intelligence Unitoutlined three possible uture scenarios or governments inthe region. Te most probable one (at 60 percent) eaturesthe armation o not ully democratic regime. At 20percent each are the likelihood o a return to the status quo,with the survival o the current regimes; and a successul


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transition to democracy, with a change o regime and the

taking root o a representative democracy. Four monthshave been sucient to reverse this orecast, ollowing theelections in unisia and the death o Gadda, to mentiononly the two most signicant events.

Over the long term, the presence o a democracy couldbring about considerable economic benets and contributeto rapidly narrowing the gap with the worldwide average. Inthe medium and long term, the costs o the transition willstart to drop, while the benets resulting rom democracywill begin to show their positive eects. Te more optimisticscenarios oresee a growth o approximately 4 percent

average or the MDC, which is nevertheless below the levelorecast prior to the Arab Spring. Tis requires greaterinvestments in the individual countries, with the risk,however, that they may soon be aced with heavy budgetdecits.

Meanwhile, the uprisings and riots have seriously damagedlocal economies, with very high social costs, to the pointthat countries that have experienced the Arab Spring havewitnessed a worsening o their social and economic condi-tions. Te negative impacts o the revolts on the societiesand economies o these countries will continue to be eltor many years to come, except or the oil countries thatwill have a greater capacity or recovery. On the other hand,they will also have to ace rising prices o oodstus. Never-theless, there is still a certain degree o optimism. Te more

recent outlook is that when the domestic situation in the

individual countries has stabilized, all o the economies willbe able to start expanding again at very high rates.

As already stated, the capacity by the West to provide nan-cial aid and other orms o support to the Middle East andNorth Arica is undoubtedly a key opportunity to re-estab-lish improved economic and nancial as well as politicaland cultural relations with these countries on completelynew grounds, such as political and economic cooperation.Unemployment and poverty remain the most importantchallenges acing Southern Mediterranean countries. TeEU should chiey ocus on accommodating the developing

countries interests in using trade liberalization as an engineor their sustainable development. In accordance with theEurope 2020 Strategy, there is generally agreement on theimportant role o trade policy in ensuring growth andprosperity. Western nations should link democratic devel-opment with access to Western markets, and promise todeliver the benets o preerential trade access to the peopleo those nations that embrace democracy. Te promotionand acilitation o a regional trade agreement should be atthe oreront o any Western economic initiative about theArab Spring.

Te EU cannot aord to continue ignoring the need toliberalize the barriers to trade with the newly democratizingMediterranean. Perhaps the most obvious technical obstaclethat has played a role in the ailure o the EMP has beenthe current state o the EUs Common Agricultural Policy.Europe needs to seriously liberalize its trade regime i it isto induce any orm o economic development and promotedemocracy in its southern neighborhood.

Except or Libya, short term FDI has not been aected incountries transitioning politically rom the Arab Spring.Economic relationships between the new governments andthe West are yet undetermined. Te results o last Octoberand November elections avored moderate Islamic partiesin unisia, Egypt, and Morocco, which made many Westernnations question their uture economic relations with theregion. Nevertheless, such ears seem rather prematuregiven that the uture o economic relations between theMDC and its Western partners is currently in jeopardy.

In act, the West takes great risks by ailing to providethe resources needed in the transition o the countriesconcerned. In unisia, aer the victory o the moderate

The uprisings and riots have

seriously damaged local

economies, with very high

social costs, to the point thatcountries that have experienced

the Arab Spring have witnessed

a worsening of their social and

economic conditions.


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Islamic party An-Nahda, its leader, Rachid Ghannouchi,

wanted to quickly ensure economic and trade relations withinternational investors. unisia, as well as Morocco throughthe leading party PJD (Parti de la Justice et du Developpe-ment), make specic reerence to the policies presented byurkish Prime Minister Erdoan. In Egypt, the anticipated

victory o Te Muslim Brotherhood and the surprisingsuccess o the Salas o An-Nour caused worry amongst theinternational community. But, as in unisia and Morocco,it will be the policies o the uture government to inuencethe countrys economic relations with the West. From thispoint o view, the policies o Te Muslim Brotherhood aswell as the most radical An-Nour may prove to be liberal in

economic relations and open to international trade.

References

ECB, Monthly Bulletin, October 2011

EIU, Spring ide, Will the Arab Risings Yield Democracy, Dicta-torship or Disorder? Te Economist Intelligence Unit, 2011

Sabine Fischer, Erwan Lannon, Te ENP Strategic Review: TeEU and its Neighbourhood at a Crossroads, Analysis, May2011

IMF, Middle East and North Arica: Economic Outlook and KeyChallenges, September 2011

IMF, World Economic Outlook, October 2011

Intesa Sanpaolo, Short note: MENA, March 2011

Intesa Sanpaolo, Focus economia: unisia, October 2011

Intesa Sanpaolo, Focus economia: Egitto, October 2011

Intesa Sanpaolo, Focus economia: Marocco, October 2011

Nathalie occi, Te European Union and the Arab Spring: A(Missed?) Opportunity to Revamp the European Neighbour-hood Policy, Brie n. 2 Imed, June 2011

World Bank, Migration and Development Brie. Outlook orRemittance Flows 2011-2013, May 23, 2011.

Franco Zallio,La Cina nel Mediterraneo: sviluppi recenti e nuovesde, Paralleli, policy brie January 2011

About the Partners

The German Marshall Fund o the United States (GMF) is a non-par-

tisan American public policy and grantmaking institution dedicated to

promoting better understanding and cooperation between North Amer-

ica and Europe on transatlantic and global issues. GMF does this by sup-

porting individuals and institutions working in the transatlantic sphere,

by convening leaders and members o the policy and business communi-

ties, by contributing research and analysis on transatlantic topics, and by

providing exchange opportunities to oster renewed commitment to the

transatlantic relationship. In addition, GMF supports a number o initia-

tives to strengthen democracies. Founded in 1972 through a git rom

Germany as a permanent memorial to Marshall Plan assistance, GMF

maintains a strong presence on both sides o the Atlantic. In addition to

its headquarters in Washington, DC, GMF has seven oces in Europe:

Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF

also has smaller representations in Bratislava, Turin, and Stockholm.

www.gmfus.org

Paralleli Euromediterranean Institutes mandate is to contribute to the

creation o a Euro-Mediterranean area o reedom and o economic and

social development. The institute acts at the local, national, and interna-

tional level with the aim o meeting the needs o the North-West region o

Italy concerning its relations with the other sides o the Mediterranean Sea.

The activities o the Institute all within the process o Euro-Mediterranean

partnership initiated by the European Union with the 1995 Barcelona

Process and currently undergoing a major relaunch through the Union

or the Mediterranean, since July 2008. Paralleli intends to contribute to

the reinorcement o political relations, economic cooperation, cultural

exchange, and human fows between the European and the South-East

Mediterranean countries. Its main objective is to promote dialogue atcultural, social, and political level between the societies o the Mediter-

ranean countries, with the aim o encouraging and improving economic

relations between them, with a particular ocus on the dimension o sus-

tainability and co-development. For this reason, the institute has decided:

to involve civil society in the development o Euro-Mediterranean relations;

to create and to support networking in the Mediterranean area; and to

increase the value o research in order to suggest truly eective policies to

local, national, and international actors.

www.paralleli.org

Economic and Trade Relations between North Africa and the Leading Players in the Mediterranean Basin

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