EUROPEAN COMMISSIONDIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS

The EU-MED trade of goods under the influence of the Barcelona Process

Arno Bäcker

CNR – Institute of Mediterranean Societies

International Conference:Bridging the gap: the role of trade and FDI in the

MediterraneanNapoli, 8-9 June 2006

DisclaimerThe opinions expressed here are those of the

speaker and do not necessarily reflect those of the European Commission.

Barcelona Declaration (1995)

o Building on long standing (trade) relations between EU and MED countries and preferential treatment of MED products, particularly since the end-1970s

o Euro-Mediterranean FTA is a core objective …o … and seen as key instrument to increase growth and

improve living conditionso Gradual realisation through bilateral Association

Agreements (AA) and, in addition, free trade agreements between the MED partners

o AAs have prompted progressive asymmetric tariff dismantling in industrial trade, and agricultural preferences for the MED

o ENP offers a “stake in the internal market”o Where do we stand?

Framework developments Nov. 2005 Barcelona meeting: 5-year roadmap for tariff

dismantling, market access, trade-related policies Oct. 2005 “Pan-Euro MED Protocol of Origin” adopted by

Egypt, Israel and Morocco Approximation of standards, technical regulations and

conformity assessments for industrial products March 2005 Marrakech meeting launched negotiations on

services and investment (including right of establish-ment) based on AAs and GATS Art. V (without ALG, SYR) -> July Brx -> text mid -2007

Negotiations have already started with some countries on a progressive and asymmetrical agricultural liberalisation “with a possible selected number of exceptions”.

Negotiations on an efficient dispute settlement mechanism. -> July Brx -> bilateral protocols by end of 2007

Questions

1. Implementation progress

2. Reduction of tariff and non-tariff barriers

3. Actual trade creation

4. [Is tariff reduction sufficient for expected welfare improvements?]

ad 1) EU-Mediterranean cooperation

Association Agreement

Cooperation Agreement

signedtrade provisions into force earlier

into force

Algeria 1 November 1978 22 April 2002 - 1 Sept. 2005 -Egypt 1 November 1978 25 June 2001 1 January 2004 1 June 2004 -Israel 1975 20 November 1995 1 January 1996 1 June 2000 xJordan 1 November 1978 24 November 1997 - 1 May 2002 xLebanon 1 November 1978 17 June 2002 1 February 2003 1 March 2003a -

Morocco 1 November 1978 26 February 1996 - 1 March 2000 x

Palestinian Authority - 24 February 1997 - 1 July 1997b x

Syria 1 November 1978 initialled Oct. 2004 - - -Tunisia 1 November 1978 17 July 1995 - 1 March 1998c x

Cyprusd 1 June 1973

Maltad 1 April 1971

Turkeye 1 December 1964Source: European Commission.a Interim Agreement.b Interim Agreement not recognised by Israel.c Tunisia has unilaterally anticipated the implementation for industrial products from 1 January 1996.d A customs union was one of the long-term objectives of the Association Agreement but did not enter into force before the country became an EU Member State on 1 May 2004. e A customs union between the EU and Turkey entered into force on 1 January 1996. Turkey is a recognised candidate for EU Membership since 1999.

Basic agreements between the EU and MPCEuro-Mediterranean Association Agreement

into force

ENP Action Plan

ad 2) Lags of import-tariff reductions

95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18AlgeriaEgyptIsraelJordanLebanonMoroccoPalestinian AuthoritySyriaTunisiaSource: Data from European Commission.Notes: red - no Association Agreement (AA), yellow - gradual liberalisation, green - full liberalisation.

WTO joined

GAFTA

signedbAGADIR FTA

signedPan Euro MED RoO

US MEFTA

into forcecbilateral

with1 Algeria observer 2002 - -2 Egypta 1995 1998 2004 2006 - 12

3 Israel 1995 - - 2006 1985 44 Jordan 2000 1998 2004 2001 35 Lebanon observer 1998 - -6 Morocco 1995 1998 2004 2006 2006 127 Palestinian Authority - - -8 Syria - 1998 - - 129 Tunisia 1995 1998 2004 - 12

10 Cyprus 1995 - - -11 Malta 1995 - - -12 Turkey 1995 - - - 2,6,8,9

Sources: European Commission, White House, World Bank, WTO.a Since 1998 Egypt is also a member of the Common Market for Eastern and Southern Africa (COMESA).

c US-Mediterranean Free Trade Area suggested by President Bush in 2003.

b Greater Arab Free Trade Area. Other members: Bahrein, Iraq, Kuweit, Libya, Oman, Saudi Arabia, Sudan, Qatar, UAE, Yemen. Except ALG GAFTA became effective on 1 January 2005 with a transitional system of rules of origin demanding a 40% ratio of Arab content.

Mediterranean regional trade agreements (extra EU)

ad 3) Trade between EU and MED countries

Source: European Commission (data for 2004).

Trade opennessExports and imports (% of GDP)

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

MED11

MED9

MED9-ALG

Source: Eurostat.

Trade between EU and MED countriesMED share in extra-EU trade of goods (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

EU-15 imports

EU-15 exports

EU-25 imports

EU-25 exports

Source: Eurostat

Based on EUR values

Trade between EU and MED countriesMED share in extra-EU15 trade of goods (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

EU exports to MED

EU exports to MED9

EU exports to MED9 except ALG

Source: Eurostat.

Trade between EU and MED countriesMED share in extra-EU15 trade of goods (%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

EU imports from MED

EU imports from MED9

EU imports from MED9 except ALG

Source: Eurostat

Trade between EU and MED countriesEU trade balance

-15,000,000

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

100

0 E

CU

Algeria

Cyprus

Egypt

Gaza +JerichoIsrael

Jordan

Lebanon

Malta

Morocco

Syria

Tunisia

Turkey

Source: Eurostat, COMEXT database.

Source: European Commission (Mio EUR).

Net barter terms of trade (2000 = 100)

70

80

90

100

110

120

130

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Israel

Jordan

Morocco

Tunisia

Source: World Bank, World Development Indicators 2005.

Issues

No direct measure of aggregate EU-MED tariff reduction -> measure trade creation

Trade data “polluted” by other factorsMethods to isolate the EU-MED FTA effect

Gravity models T vs T’=T’(Y,Y*,P,P*,D,Ś)Export/import functions, e.g. M=M(Y,e,Ś)

Determine AA impact

Import function M=M(Y, e, …) AA dummy variable other dummy variables to control for

conflicts (ALG, ISR, …) N=5 (ALG, ISR, JOR, MOR, TUN) T=13 (1991-2003) Data: Eurostat COMEXT, IMF

Model IDependent Variable: LMM? Method: Pooled Least Squares Date: 06/15/05 Time: 00:42 Sample(adjusted): 1991 2003 Included observations: 13 Excluded observations: 1 after adjusting endpoints Total panel (balanced) observations 60 Convergence achieved after 9 iteration(s)

Variable Coefficient Std. Error t-Statistic Prob.

LGDP? 0.461647 0.103262 4.470636 0.0000 LEURUSD 0.402553 0.146658 2.744835 0.0080

AA? 0.127096 0.055258 2.300046 0.0251 ISR95? -0.302313 0.072552 -4.166836 0.0001 ISR03? 0.289769 0.089854 3.224874 0.0021 ALG96? -0.110672 0.032456 -3.409875 0.0012 AR(1) 0.613443 0.092154 6.656715 0.0000

Fixed Effects _ALG--C 11.86817 _ISR--C 10.12358 _JOR--C 10.19442 _MOR--C 12.95852 _TUN--C 10.88073

R-squared 0.989714 Mean dependent var 15.33114 Adjusted R-squared 0.987357 S.D. dependent var 0.730859 S.E. of regression 0.082178 Sum squared resid 0.324157 Log likelihood 80.67947 F-statistic 769.7743 Durbin-Watson stat 2.035739 Prob(F-statistic) 0.000000

Conclusions (1)

EU-MED bilateral trade liberalisation until today has mainly concerned industrial goods.

The EU opened its markets for these products already at the end of the 1970s. Most MED countries have started liberalising imports from the EU only recently.

Conclusion after accounting for other factors: the tariff reduction prompted by the AAs has already increased MED imports from the EU significantly. This is also a catalyst for MED exports and the technology transfer.

Nevertheless, the overall picture of (EU-) MED trade is unsatisfying. Trade volume is probably to low to make sufficient welfare progress within a satisfactory time horizon. This is due to low regional integration, slow liberalisation and structural problems…

Conclusions (2) … EU-MED trade liberalisation is incomplete (in particular

services trade). However, since the beginning of 2006 complementary measures are being discussed or entering into force.

Regional trade liberalisation is progressing only slowly and hampered by political conflict. It is also held back by transport and other transaction costs in the MED countries. ~> Agadir FTA, productive infrastructure investment and trade facilitation

The MED countries need to strengthen the private sector, business and investment climate (competitiveness!). This is also necessary to prepare for the “stake in the Internal Market”. (~> European Commission, DG ECFIN (ed.), Occasional Papers No. 17 and 25)

The European Neighbourhood Policy helps to support the necessary reform process, for instance with guidance through ENP Action Plans.