The Barcelona Process and the Political Economy of Euro-Mediterranean Trade Integration

The Barcelona Process and the PoliticalEconomy of Euro-MediterraneanTrade Integration*

MARCO MONTANARIUniversity of Modena and Reggio Emilia

Abstract

The Barcelona Process aims to create a free trade area between the EU and itsMediterranean neighbours by 2010. This article uses two-level game theory toanalyse the negotiations leading to the signature of the Euro-Mediterranean Associa-tion Agreements. It argues that conflicts of interests between the actors involved in thebargaining process are responsible for the restrictive nature of the agreements, char-acterized by agricultural protectionism, long transition periods and small amounts offinancial support allocated by the EU to its partners. These provisions have preventedthe Barcelona Process from significantly boosting Euro-Mediterranean bilateral tradein the last few years.

Introduction

Preferential trade measures have traditionally played a very significant role ineconomic relations between the EU and extra-European countries in theMediterranean region. In the 1970s, the EU unilaterally granted free accessto its market for most industrial products from those countries. In 1995, itlaunched the Barcelona Process (BP), with a view to establishing a free trade

* I would like to thank the participants in the UACES Student Forum 6th Annual Conference (Oxford,April 2005) for comments on an earlier draft of this article and an anonymous referee for valuablesuggestions.

JCMS 2007 Volume 45. Number 5. pp. 1011–1040

© 2007 The Author(s)Journal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148,USA

area (FTA) with the Mediterranean countries (MCs)1 by 2010. Bilateral agree-ments, known as Euro-Mediterranean Association Agreements, have beennegotiated with each MC. They provide for the progressive dismantling ofbarriers to European exports of industrial products to the MCs over a periodof 12 to 16 years, whereas agricultural trade is still subject to many restric-tions. Following the 2004 Eastern enlargement, the EU has recently launchedthe European Neighbourhood Policy (ENP), which offers ‘the prospect of astake in the EU internal market’ (Commission, 2004b, p. 13) to all countrieslocated near the borders of the EU which have not been granted the perspec-tive of future membership.2

So far the outcome of the Barcelona Process has not been very satisfying:bilateral trade has not received a strong boost; actually, when expressed as apercentage of both EU and MC total trade, it has even decreased. Why has thishappened? This article tries to answer this question by providing an analysisfirmly grounded on a theoretical framework.

The article proceeds in two steps. Firstly, it presents a political economymodel of the negotiation process leading to the signature of the Euro-Mediterranean Association Agreements. The analysis can be considered as avariant of the ‘two-level game’ approach, initially proposed by Putnam(1988). It identifies two conflicts of interests as the main forces shaping theoutcome of the negotiations: the first between the EU agricultural and indus-trial sectors over the extent of trade liberalization; the second between North-ern and Southern EU member countries over the amounts of financial supportallocated to the MCs. The final compromise was characterized by agriculturalprotectionism, long transition periods before completing the FTAs and smallamounts of aid.

Secondly, the article applies the findings of the model to explain why theBarcelona Process has only exerted a limited impact on Euro-Mediterraneanbilateral trade. It finds that the EU agricultural protectionism has preventedthe MCs from exploiting a relevant source of comparative advantage, whilethe length of the transition periods, the limited financial assistance and themissing liberalization of trade in services are responsible for the lack ofincentives for the MCs to reform their economies, which have not becomemore internationally competitive. The article argues, therefore, that therestrictive provisions emphasized in our model have been a key element incausing the limited impact of the Barcelona Process on Euro-Mediterraneantrade.

1 Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia (MCs), plus the Palestinian Authority,which, however, was not included in this study because of a lack of reliable data.2 The geographical coverage of the ENP includes not only the MCs, but also some former Soviet republics:Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine.

1012 MARCO MONTANARI

© 2007 The Author(s)Journal compilation © 2007 Blackwell Publishing Ltd

This article is structured as follows. Section I briefly describes the maineconomic features of the Barcelona Process. Section II presents our politicaleconomy model. Section III applies the findings of the model to the analysisof the evolution of Euro-Mediterranean bilateral trade. Finally, it discussessome policy implications and concludes.

I. The Barcelona Process

The EU has quite a long history of preferential trade relations with theMCs. The Co-operation Agreements signed in the 1970s provided for freeaccess to the European markets for most Mediterranean industrial products,without asking for reciprocity (except for Israel); some restrictions werestill imposed on textiles and clothing, while a high degree of protection wasretained for the EU agricultural market according to Common AgriculturalPolicy rules: products from the MCs were only granted some concessions(Pomfret, 1986).

The Conference of EU and Mediterranean Foreign Ministers in Barcelona(27–28 November 1995) marked the beginning of a new phase in the relationsbetween the two areas, usually called the Euro-Mediterranean Partnership orBarcelona Process (BP).3 Its key objectives were listed in the BarcelonaDeclaration adopted at the Conference and can be grouped into three areas:

– Political and security partnership, aiming at the definition of a commonarea of peace and stability through the reinforcement of political andsecurity dialogue.

– Economic and financial partnership, through the progressive establish-ment of a free trade area (FTA) between the EU and the MCs by 2010,accompanied by EU financial support for economic transition in thepartner countries (MEDA fund).

– Social, cultural and human partnership, with a view to developinghuman resources and promoting understanding between cultures (Euro-Mediterranean Conference, 1995).

This article clearly focuses on the second kind of partnership. Under theambitious goal of creating a Euro-Mediterranean FTA, the EU has negotiatedbilateral agreements, known as Euro-Mediterranean Association Agreements(EMAAs), with each MC. At present, EMAAs are in force with Tunisia(1998), Morocco (2000), Israel (2000), Jordan (2002) and Egypt (2004),while those with Algeria, Lebanon and Syria have not yet been ratified. They

3 The BP also included Cyprus, Malta and Turkey. These countries are not considered in this article becauseof their status as new or prospective EU members.

POLITICAL ECONOMY OF EURO-MEDITERRANEAN TRADE INTEGRATION 1013


provide for the creation of bilateral FTAs by progressively dismantling bar-riers to European exports of industrial products to the MCs over a period of12 to 16 years,4 whereas agricultural trade is still subject to many restrictions(Brenton and Manchin, 2003).

Following the 2004 Eastern enlargement, the EU has recently starteddeveloping the European Neighbourhood Policy (ENP), intended for thosecountries, including the MCs, that do not currently have the prospect ofmembership but share borders with the EU. Through it, the EU is going tooffer a more intensive political dialogue and greater access to its programmesand policies, including the single market. According to the European Com-mission’s view, the ENP should reinforce the BP and represent a way ofdeepening the level of economic and political integration between the EU andthe MCs (Commission, 2004b).

The method proposed by the European Commission is to define, togetherwith partner countries, a set of priorities, whose fulfilment would bring themcloser to the EU. These priorities are to be incorporated in jointly agreedAction Plans, covering a number of key areas for specific action: among them,great relevance is attributed to trade and measures preparing partners forgradually obtaining a stake in the EU internal market. After the presentationof a Strategy Paper by the European Commission in May 2004, Morocco,Tunisia, Jordan and Israel have been the first MCs to agree Action Plans inDecember 2004 (European Council, 2004).

II. Negotiating the EMAAs

The general aim of the BP is ‘to promote stability’ and ‘to develop a zoneof prosperity [. . .] with whom the EU enjoys close, peaceful andco-operative relations’ (Commission, 2004a, p. 4). Such broad goals arehardly controversial and may be shared by all actors involved in the BP.When one starts to analyse the economic dimension of Euro-Mediterraneanrelations, however, a number of political economy issues arise in the shapeof conflicting aims pursued by different actors. ‘Heterogeneity and conflictof interests are essential to political economy’ (Drazen, 2000, p. 5). Indeedthis article argues that they played a fundamental role in defining thecontent of the EMAAs.

This section presents a political economy model of the negotiation processleading to the signature of the EMAAs. Our analysis can be considered as a

4 Dell’Aquila and Kuiper (2003) correctly point out that ‘the reference to the deadline of 2010 may bebetter understood as an expression of political will that should provide a common discipline to thecontracting parties. As a matter of fact, trade protocols attached to EMAAs provide schedules for tariff cutsthat are not consistent with such a time target’ (p. 26).



variant of the ‘two-level game’ approach, firstly elaborated by Putnam (1988),then developed by Moravcsik (1993, 1998) in his ‘liberal intergovernmental-ist’ theory of European integration. According to this view, negotiationsleading to international agreements take place at two levels: within countries,involving domestic groups with different interests and among states. ‘At thenational level, domestic groups pursue their interests by pressuring the gov-ernment to adopt favorable policies [. . .] At the international level, nationalgovernments seek to maximize their own ability to satisfy domestic pres-sures’ (Putnam, 1988, p. 434).

This article’s model explicitly focuses on the EU side; the reason for thischoice, as shall be discussed more extensively below, is that the EU enjoyeda much stronger bargaining power than any of the MCs and consequentlythe EMAAs have been largely shaped by the EU’s position. The nationallevel is represented by bargaining among domestic interest groups in eachMember State trying to shape their own country’s preferences (Level I).The international level consists of negotiations leading to the definition ofa single EU position (Level II). Obviously, a third level has to be added tothe game, in order to consider the negotiations between the EU and eachMC (Level III).5

The MCs’ preferences are hence treated as exogenous: we are not goingto analyse the way they are determined and, moreover, we make thesimplifying assumption that they are the same for all countries.6 An MC isinterested in an FTA with the EU if trade integration may be preferableto the pre-existing situation. According to the provisions of the oldCo-operation Agreements, European markets have already been open tomost MC industrial products since the 1970s, while the MCs have main-tained their tariff barriers; MC agricultural products were excluded fromthis preferential treatment (see section I of this article). This situation isreferred to as the ‘status quo’.

In a bilateral FTA, an MC should open its market to European industrialproducts, therefore it can be expected to ask the EU to abandon its protec-tionist stance on agricultural products,7 but there is a more general politicaleconomy dimension to consider. As already suggested by the literature onEuro-Mediterranean relations, FTAs with the EU can be a way to ‘lock in’

5 A similar approach is adopted by Forwood (2001) in analysing the negotiations between the EU andcountries of Africa, the Caribbean and the Pacific (ACP).6 The MCs show similar levels of development (except for Israel) and, most importantly, enjoyed a similartreatment according to the old Co-operation Agreements; thus they may be supposed to express homo-genous interests in negotiations with the EU.7 According to trade theory, the MCs should find unilateral liberalization still preferable to the status quoin economic terms (Krugman and Obstfeld, 1994), but this would be politically very hard to accept.



economic reforms in the MCs, which would be politically very difficultto implement without a powerful external stimulus coming from the needto enforce an international agreement (Hoekman and Djankov, 1996b;Philippart, 2003).8 As argued by Petri (1997b), ‘free trade agreements withthe EU could catalyse a broad reform programme, provided that they areattractive enough to the Southern Mediterranean partners to elicit real com-mitments’ (p. 54). The prospective benefits of ‘locking in’ reforms couldinclude increased inflows of foreign direct investment and improved capacityof the economy to cope with international competitive pressures. They add tothe short-term economic effects of FTAs and positively affect the attitude ofthe MCs towards trade liberalization. In our analysis, the MCs’ preferenceswill act as a constraint for the EU. The players participating in Level I andLevel II know their existence and take into account that the EU’s proposalshave to be acceptable to the MCs, hence they cannot be perceived as inferiorto the status quo.

Level I is represented by different groups of producers, while Level II iscomposed of EU countries with diverging interests. Among producers, thetraditional divergence of interests arising when free trade agreements arenegotiated concerns export-oriented sectors and import-competing ones, withthe former in favour of liberalization and the latter against it. In other words,‘the negotiations pit the export interests in a country directly against theimport-competing interests in the same country’ (Grossman and Helpman,1993, p. 2). In the context analysed here, the main dividing line can be drawnbetween the industrial and the agricultural sectors of the EU. Europeanindustrial producers should press for free access to the Mediterraneanmarkets. By contrast, the highly protected EU agricultural sector might besubject to competition from some MC products (Garcia-Alvarez-Coque,2002):9 agricultural producers can be expected to lobby for the preservation ofprotectionism in agricultural trade.

However, the picture is more complex. Both the EU industrial andagricultural sectors have to consider that at Level III the MCs may betempted to break up the negotiations if they think the status quo is definitelypreferable to the EU’s proposals. In particular, they will not accept the rapidopening up of their markets (as the European industry would like them to)without any substantial compensation, because in such a case they wouldlose their tariff revenues and competition from EU products would be

8 A prominent example of such reforms is reducing the influence of the state on the economy through theprivatization of state enterprises and the rationalization of public sector employment (Bulmer, 2000).9 The agricultural sector is still quite large in most MCs. According to Eurostat, in 2003 it accounted formore than 10 per cent of total GDP in all these countries, with the exception of Israel and Jordan.



difficult to sustain for their industrial sector, while they would get no newrelevant concessions in comparison with the Co-operation Agreements.Such compensation could exactly be free access to the EU market for theiragricultural products; otherwise the MCs might accept long transitionperiods before completely opening their markets, in order to have moretime for adjusting and modernizing their industrial base. Therefore the posi-tions of the EU industrial and agricultural sectors can be defined moreprecisely as follows:

– the former is mainly interested in gaining access to the Mediterraneanmarkets and presses for quick and complete trade liberalization, includ-ing agricultural products, so as to compensate the MCs;

– the latter prefers to keep its traditional protection, hence it opposes arapid liberalization process: if the MCs are asked to open their marketsfor industrial products, the compensation should consist of long transi-tion periods rather than free access to the EU for their agriculturalproducts.

The second dimension of potential conflict directly involves countries(Level II). During the last 15 years, financial assistance has become a veryrelevant issue in the various bilateral agreements between the EU and lessdeveloped countries, as the experience of the relations with the Central andEastern European countries (CEECs) and the Western Balkans demonstrates(Mayhew, 1998; Welfens, 2001). Aid may perform many tasks, but in thecontext we are analysing, it may be especially important for the MCsbecause it could help them to restructure their economies and compensatethem in the short run for the loss of tariff revenues as a consequence of thelowering of their barriers to trade. Therefore large amounts of financialassistance to the MCs might facilitate their acceptance of a quicker marketopening.

Here, the relevant cleavage is that between large net contributors to the EUbudget and net beneficiaries. Geographically, it tends to coincide approxi-mately with a North–South split: Germany, Austria, the Netherlands, Sweden,the UK and France are among the former, Spain, Greece and Portugal amongthe latter (Commission, 2004c). Northern countries, which would have to paythe largest share of aid, prefer small transfers to the MCs. The reverse is truefor southern EU members: their contribution to aid would not be very sig-nificant, so they are more favourable to large financial assistance (Tsoukalis,1997).

Level I and Level II are usually analysed sequentially: ‘internationalconflict and co-operation can be modelled as a process that takes place in twosuccessive stages: governments first define a set of interests, then bargain



among themselves in an effort to realize those interests’ (Moravcsik, 1993,p. 481). In this context, this would imply that first the bargaining between theagricultural and the industrial sectors would determine each country’s prefer-ences (Level I), then EU Member States would negotiate among themselves toreach a common position (Level II). This approach would not be satisfactorysince it would overlook the existence of another autonomous conflict ofinterests between northern and southern EU countries. Thus the negotiations atLevel I and Level II are to be analysed simultaneously. The trade-off betweenthe preferences of agricultural and industrial producers enters Level II nego-tiations together with the trade-off between large and small amounts of aid. ‘Adomestic prisoner’s dilemma among domestic veto groups – each of whichseeks to be exempted from disadvantageous policy changes [. . .] – translatesinto an international prisoner’s dilemma’ (Moravcsik, 1993, p. 489). Thebargaining among EU states has to take both conflicts of interests into accountand solve them simultaneously.

The features of our stylized model can be illustrated by means of Figure 1.EU agricultural producers (A), the EU industrial sector (I), northern (N) andsouthern (S) EU countries are placed along the four corners of the box. The

Figure 1: The Definition of the EU’s Win-Set

S I2 C S2 I

Liberalisation

Protectionism

N1

E

I1

A1

D

S1

A N2 B A2 N Large aid Small aid

Source: Author’s own data.



location of these four players implies that the trade-off between large andsmall financial aid to the MCs (involving N and S) is represented on thehorizontal dimension, whilst the trade-off between protectionism and tradeliberalization (involving A and I) is depicted on the vertical dimension. Foreach player, his own corner corresponds to his most-preferred outcome in therelevant trade-off. For example, any point in rectangle ABCS would be morefavourable to S than to N, while any point in rectangle ANED would be morefavourable to A than to I.

There are thus four possible outcomes for the intra-EU bargaining; theywill lie in one of the four sectors in which the box is divided:

1. Protectionism + large financial support (A and S win);2. Small financial support + protectionism (A and N win);3. Free trade + small financial support (I and N win);4. Free trade + large financial support (I and S win).

The EU’s common position will be shaped by the relative bargainingpower of the four players, which can be represented in terms of ‘politicalindifference curves’ (Putnam, 1988, p. 446). In this context, such curvesdefine each player’s range of acceptable outcomes (his ‘win-set’, in Putnam’sterminology), from the preferred one (the corner) to the minimum requiredfor approval. For the sake of simplicity, only indifference curves correspond-ing to the latter are plotted; hence the area to the bottom left of A1–A2represents A’s win-set, the area northeast of I1–I2 corresponds to I’s win-setand so on. The overlap of the four curves will then provide the set of feasibleagreements, corresponding to the EU’s win-set. The bargaining power is notthe same for all players, therefore the indifference curves plotted in Figure 1are not symmetric: the stronger a player’s bargaining power the smaller itswin-set, which implies a final agreement closer to his favourite outcome.

Agricultural producers have historically been a powerful lobby in the EU(Rieger, 2000). The different abilities of interest groups in mobilizing them-selves and exerting political pressure have been widely discussed in politicaleconomy literature. Mancur Olson’s ‘logic of collective action’ (Olson, 1965,1982) has proved to be one of the most influential approaches. According tothis theory, interest groups with many members, who receive low per capitabenefits from their activity, are generally difficult to organize, whereas small-size lobbies can provide their members with relatively high benefits fromtheir action and be much more effective in promoting their interests. Thisexplains why agricultural producers, even if they are a smaller group thanindustrial producers, may be more successful in shaping the EU’s position.

The amounts of funds allocated to the MCs depend on the size of the EU’sbudget. Starting from the 1993–99 financial perspectives, net contributors



have succeeded in limiting the expansion of the EU budget: the growth of EUexpenditure (Laffan and Shackleton, 2000). This implies that in our model ofintra-EU negotiations northern EU countries have a stronger bargainingpower than southern ones.

According to my analysis, it follows therefore that agricultural producersand northern EU countries present the smaller win-sets; the former thanksto their effective lobbying activity, the latter because of the increasingfinancial constraints on the EU budget. Thus, in Figure 1, the trade-offbetween protectionism and trade liberalization will be resolved in favour ofA, whereas N will prevail in the trade-off between small and large financialassistance to the MCs. It follows that the EU’s win-set, represented by theblack area in Figure 1, will lie in sector 2 (protectionism + small financialassistance) and, since it requires the overlapping of all the four curves, willalso be small.

Moving to Level III of the game, that between the EU and each MC, onemay observe that the EU has strong bargaining power in negotiating bilateralagreements (Bofinger, 1995; Sedelmeier and Wallace, 2000). FollowingPutnam’s approach, this happens because, before negotiating with a thirdpartner, the EU needs to find a position acceptable to all its members;subsequently, any change in that position during the negotiations has to winsupport from each EU country again. It is thus unlikely that a radical shift inthe EU’s stance may take place during the negotiations, because it would bevery probably resisted by some Member States: ‘a common position that isalready the result of a compromise cannot be easily changed and thereforelimits the possible outcomes to those within the EU’s win-set’ (Forwood,2001, p. 436). Moreover, in the case of the EMAAs (as well as in the case ofother networks of bilateral agreements, such as the Europe Agreements withthe CEECs), another source of asymmetry in relative bargaining power infavour of the EU was evident: the EU negotiated with one MC at a time, notwith the MCs as a whole. Consequently, each MC enjoyed little scope toinfluence the outcome of the negotiations.

The EU got through its position on agricultural trade and financial assis-tance. The BP excludes agriculture from the envisaged FTAs. The amountsof resources allocated through MEDA are €5.35 billion over the 2000–06period (Council of the European Union, 2000); since, according to Eurostat(2001), the population of the MCs was 163 million in 1999, this corre-sponds to only €33 per capita.10 Such sums are quite low, not only in

10 Israel is excluded as it receives no financial assistance through MEDA because of its high level ofdevelopment. Our estimate of per capita amounts is biased upward, because it does not take into accountthe fact that the population of the MCs is not constant, but is rapidly growing.



absolute terms, but also in comparison with the funds allocated to the tenCEECs11 during the same years with a view to preparing their accession tothe EU: €21.84 billion (European Council, 1999), corresponding to €209per capita. Even if the final goal of the EU policy is less ambitious in thecase of the MCs than in that of the CEECs (FTA in the former, membershipin the latter), the contrast is still striking.

The MCs could only obtain a number of minor concessions in these fields;for instance, Morocco gained slightly more generous seasonal export quotasfor some agricultural products (Hoekman and Djankov, 1996b). Thus, accord-ing to our previous analysis, the EU had to grant the MCs long transitionperiods (12 to 16 years) before completing the FTAs, in order to get theirapproval of the entire economic chapter of the EMAAs.

So far, our analysis of the EMAAs has neglected two issues which werevery relevant in the process of economic integration between the EU and theCEECs throughout the 1990s: liberalization of trade in services and regula-tory harmonization.

The benefits from liberalization of trade in services are widely recognized:greater competition can lead to efficiency gains in both the services sectoritself and the other sectors of the economy relying on services as an input.Moreover, when liberalization involves areas with different levels of eco-nomic development, technology transfer from the most advanced countries tothe least advanced ones (for instance, via foreign direct investment) can be asignificant source of additional growth for the latter (Mattoo et al., 2001). Therationale for regulatory harmonization is to overcome the effects of non-tariffbarriers to trade such as standards and regulations imposed for environmental,health, safety or consumer protection reasons, which have become more andmore relevant in determining actual market access.

If one compares the EMAAs to the Europe Agreements with the CEECs,it can be noticed that in the former both issues concerning trade in servicesand regulatory harmonization are covered in a much more limited way than inthe latter. The EMAAs only refer to multilateral obligations under the GeneralAgreement on Trade in Services (GATS), whereas the scope of the EuropeAgreements included establishment and supply of services and movement ofworkers (Brenton and Manchin, 2003). In the field of regulatory harmoniza-tion, the EMAAs mention approximation of MC legislation to that of the EUand reduction in differences in standardization and conformity assessment,but they do not clearly state how to achieve these objectives. For instance, theEMAA with Tunisia identifies ‘mutual recognition of certification only as an

11 Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia andSlovenia.



objective to be put into effect only when the relevant conditions are met’(Lahouel, 2001, p. 93). On the contrary, these issues have actually played animportant role in the integration process with the CEECs, to which the EU hasalso provided relevant technical assistance.

Why such a striking dissimilarity? The main reason lies in the differentfinal goals envisaged by the two integration processes: EU membership(at least since the 1993 Copenhagen European Council) in the case of theCEECs, only a FTA, to be established after quite a long transition period,in the case of the MCs. The latter constitutes a much looser form of eco-nomic integration than the former: different ambitions lead to agreementscharacterized by different scope and commitments. Using the terminologyof our model, it may be argued that no serious conflicts of interests con-cerning trade in services or regulatory harmonization arose in any of thethree levels of negotiations, because such issues were considered to belongonly to a higher stage of economic integration than that envisaged by theBarcelona Process.

To summarize, our model, even if very stylized, captures the main featuresof the EU–MC negotiations leading to the signature of the EMAAs. Withregard to trade policy, the EU retained its agricultural protectionism and didnot offer any major improvement in the regime already granted to MC exportsby the old Co-operation Agreements. The level of aid was kept quite low,especially in comparison with that destined for the CEECs during the sameperiod. The MCs were compensated more substantively with long transitionperiods before the complete entry into force of the bilateral FTAs. Moreover,substantial liberalization of trade in services and regulatory harmonizationwere excluded from the EMAAs. In the next section, the article examines therecent evolution of Euro-Mediterranean bilateral trade and argues that therestrictive provisions emphasized in our model have so far been a key elementin determining the disappointing outcome of the BP.

III. The Impact of the BP on Euro-Mediterranean Trade

During the period 1995–2003, both EU imports from and exports to theMCs followed a similar trend: growth until 2000–01,12 then a slight declinein the following years. The EU has always enjoyed a surplus; in 2003,its exports amounted to €48 billion, while its imports reached €41 billion(Figure 2).

12 According to Eurostat (2001) data, the large increase in imports in 1999–2000 mainly came from astrong increase in energy imports from Algeria.



Absolute values, however, do not reveal much about the relevance of theMCs as trading partners of the EU, which can be better assessed by examiningthe evolution of the share of total external trade made with the MCs. Through-out the last decade, it actually decreased for both EU imports and exports,which now only represent, respectively, 4 per cent and 5 per cent of total. Ifone compares the MCs to the CEECs, the region representing the mostsuccessful case of economic integration with the EU in the last few years, asharp contrast is evident. EU trade with the CEECs, which started from alower level than that with the MCs at the beginning of the 1990s, has rapidlygrown and its relevance has become almost three times higher than that of thelatter (Figure 3).

A similar pattern can be detected with regard to the importance of tradewith the EU for the MCs (Figure 4). The EU is still their most relevanttrading partner, but its share in their external trade has declined during thelast decade and now is about 47 per cent for both imports and exports. Asin Figure 3, the contrast with the CEECs is striking: the EU’s share in theirexternal trade has risen very significantly and largely exceeds 60 per cent atpresent.

Trade in services too followed the same evolution (Figure 5), with onlyone main difference: the EU is a net importer of services from the MCs, butsimply because of its large demand for tourism-related services (Commis-sion, 2005a).13

13 Data for the CEECs in Figure 5 only refer to Poland, Czech Republic and Hungary (CEEC-3), the threelargest economies in the region, because data for the other countries were not available for the wholeperiod.

Figure 2: Evolution of EU Trade in Goods with the MCs (€ billion)

15

20

25

30

35

40

45

50

55

1995 1996 1997 1998 1999 2000 2001 2002 2003

EU Imports EU Exports

Source: Eurostat.



These figures demonstrate that the BP has not exerted a strong impact onEuro-Mediterranean trade flows. According to our model, such a disappoint-ing outcome is mainly the product of the ‘lowest common denominator’solution in the bargaining process leading to the EMAAs. Two main causes

Figure 3: EU Trade in Goods with the MCs and the CEECs as a Percentage of TotalExternal Trade

2

4

6

8

10

12

14

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

% o

f to

tal e

xter

nal

tra

de

Imports from the MCs Exports to the MCs

Imports from the CEECs Exports to the CEECs

Source: Eurostat.

Figure 4: MC and CEEC Trade with the EU as a Percentage of their Total ExternalTrade

35

40

45

50

55

60

65

70

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

% o

f to

tal e

xter

nal

tra

de

MC Imports from the EU MC Exports to the EU

CEEC Imports from the EU CEEC Exports to the EU

Source: IMF Direction of Trade Statistics.



can thus be identified: EU agricultural protectionism and the lack of effectiveincentives for economic reforms in the MCs, determined by long transitionperiods before the completion of the bilateral FTAs, small financial aid andmissing liberalization of trade in services.

The relevance of agricultural protectionism can be assessed by means ofan analysis of disaggregated trade flows. A simple breakdown by the mainsectors clearly shows that EU imports are dominated by energy (a sectordependent on natural resources) and, to a lesser extent, by textiles and cloth-ing (a typical labour intensive sector). In both categories the EU’s tradebalance is in deficit. Exports, on the contrary, are concentrated in more capitalintensive and technologically advanced products (especially machinery),where the EU enjoys large surpluses. Agricultural trade is quite significantbut, not surprisingly, EU imports are 50 per cent lower than its exports(Table 1).

The MCs globally account for 4 per cent of total EU agricultural imports(see Appendix, Table A.1). The most relevant products mainly belong to onlytwo categories: typical Mediterranean fruits or vegetables (citrus fruits, toma-toes, dates and figs) and fisheries. It is significant that 87 per cent of tomatoes,23 per cent of citrus fruits and 24 per cent of molluscs (as well as 73 per centof potatoes) imported by the EU come from this area. At a country level, some

Figure 5: Evolution of EU Trade in Services with the MCs and the CEEC-3 (€ billion)

2

4

6

8

10

12

14

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Imports from the MCs Exports to the MCs

Imports from the CEEC-3 Exports to the CEEC-3

Source: Eurostat.



single MCs account for a considerable share of EU imports of specificproducts: tomatoes are very important for Morocco (78 per cent of total EUimports originate from here), olive oil for Tunisia (52 per cent), potatoesfor Egypt (36 per cent) and Israel (27 per cent) as well as flowers for Israel(16 per cent).

Though globally the MCs are not very important suppliers of agriculturalproducts to the EU, their exports are concentrated in a limited number ofproducts, in which their market share is quite large. This explains why, on theone hand, European agricultural producers may ask for protection, but itshows, on the other hand, that imports from the MCs do not actually representa serious threat to the EU agricultural sector as a whole. By contrast, therelevance of agricultural exports to the MCs is further demonstrated by theirpatterns of comparative advantage. To examine them, an index of revealedcomparative advantage is used, as first proposed by Balassa (1965). Themeasure is similar to that employed by Brenton et al. (2001), because I onlyfocus on exports to the EU and is defined as:

RCA X X X Xik i Wk W= ( ) (1)

where

Xik is the value of MC i’s exports of sector k to the EU;Xi is the value of MC i’s total exports to the EU;XWk is the value of world exports (including EU member countries) of sector

k to the EU;XW is the value of total world exports (including EU member countries) to the

EU.

This index is thus calculated as the ratio between the share of a particularsector in country i’s exports to the EU and the share of this sector in worldexports to the EU. Values above 1 reveal that a country has a comparative

Table 1: EU Trade with the MCs in 2003 By Product (€ billion)

EU Imports EU Exports Balance

Energy 15.4 1.4 -14.0Textiles and clothing 6.6 4.3 -2.3Machinery 4.0 12.7 8.7Agricultural products 2.8 4.3 1.5Chemical products 2.7 6.5 3.8Transport material 1.0 5.9 4.9

Source: Eurostat.



advantage in the production (or a specialization in the export) of a givenproduct. The sectors included in the analysis are 99, corresponding to theHarmonized System nomenclature (two-digit codes) employed by Eurostat.The MCs can be divided into two groups according to the number of sectorsenjoying a comparative advantage (Table 2). The first is composed of Jordan,Syria and Algeria, with a very low number of efficient sectors. The secondincludes Israel, Morocco, Egypt, Lebanon and Tunisia, which display a morediversified pattern of specialization, though none of them reveals a compara-tive advantage in more than 30 sectors.

At a sectoral level, the highest values of the RCA index are mainlyconcentrated in just three areas: textiles and clothing, chemicals and, as weexpected, agricultural products (see Appendix, Table A.2).14 Therefore a realopening of the EU agricultural market to its Mediterranean partners’ productscould have boosted their exports, by giving those countries the chance ofexploiting an important source of comparative advantage. According to arecent study, the dynamic gains induced by the liberalization of agriculturaltrade after a period of five years could be considerable for the MCs: 1.4 percent of GDP for Morocco, 3.3 per cent for Egypt and 0.4 per cent for Tunisia(Lorca and Vicens, 2001).

My analysis also suggests that growth in agricultural exports could helpthe MCs to lower the adjustment costs faced by their less competitive manu-facturing sectors. This introduces the second cause of the small impact of theBP on trade: the lack of incentives for economic reform in the MCs. In ourmodel, the extent and pace of trade liberalization and the amounts of financialsupport from the EU strongly affect the possibility of locking in such reform.A detailed study of the MC economies is far beyond the scope of this article;

14 Not surprisingly, Algeria, Egypt and Syria also have an intense comparative advantage in mineral fuelsand oils.

Table 2: Number of Sectors Enjoying a RCA (2003)

Algeria 4Egypt 24Israel 30Jordan 13Lebanon 24Morocco 28Syria 8Tunisia 23

Source: Eurostat and own calculations.



it is limited to noting that the literature has identified high protectionlevels and strong state intervention as the main determinants of the feebleinternational competitiveness of their industrial sectors (Riess et al., 2001;Dell’Aquila and Kuiper, 2003; Handoussa and Reiffers, 2003; Philippart,2003; Commission, 2004a).

The limited scope of the current agreements, however, has not been able togenerate enough pressure for a considerable reduction in protection levels andstate intervention. According to the most recent Index of Economic Freedomby the Heritage Foundation, Israel is the only MC among the 50 countriesenjoying the highest levels of economic freedom (it ranks 33rd out of 155);moreover, the situation of the MCs has not significantly improved in the lastfew years and at present only Israel and Jordan are classified as ‘mostly free’economies, while the other MCs are still considered as ‘mostly unfree’(Heritage Foundation, 2005).

The low degree of economic freedom is also reflected by the very smallinflows of foreign direct investment (FDI) attracted by the MCs in the lastdecade (Petri, 1997a; Lahouel, 2001). The contrast with the CEECs is strikingindeed: at the beginning of the 1990s, FDI flows from the EU into the MCsamounted to about €0.5 billion, whereas those into the CEECs totalled €2billion; after a decade of growth, in 2000 the former reached a maximum ofonly €4 billion, as against €21 billion for the latter (Figure 6).

The link between FDI and trade in services is very close. Konan andMaskus (2004) test the effects of the liberalization of services in Tunisia using

Figure 6: EU-15 FDI Flows into the MCs and the CEECs (€ billion)

0

2

4

6

8

10

12

14

16

18

20

22

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

CEECs MCs

Source: Eurostat.



a computable general equilibrium model. They estimate that GDP shouldgrow by 7 per cent, which would represent more than three times the gainscounted on from the liberalization of the trade in goods. They further find that75 per cent of these gains would derive from the liberalization of barriers toFDI. Analogously, Hoekman and Konan (1999) study the effects of theEMAA between the EU and Egypt and estimate that tariff reduction alonewould even yield a small welfare loss for Egypt, but if it were accompaniedby an extension of the process of services liberalization, changes in marketsaccess and improved harmonization of standards, the welfare gains could riseto between 13 per cent and 20 per cent of GDP. Both studies emphasize therole of services as important determinants of competitiveness for the MCeconomies (see also Hoekman and Messerlin, 2002).

It is also worth looking at the level of intra-industry trade between the EUand these countries. According to the new theories of international trade, theprinciple of comparative advantage is still able to explain trade in differentsectors among countries with differences in the endowment of productivefactors or in the level of technology (inter-industry trade), while monopolisticcompetition, determined by increasing returns to scale and product differen-tiation, is associated with intra-industry trade, i.e. trade in similar productsamong countries with similar production structures (Helpman and Krugman,1985).

The theory stresses that the nature of trade is also important for theconsequences of a process of trade liberalization between countries orregions. Necessary economic adjustments are easier when intra-industrycompetition predominates, because a lower share of the labour force needsto be reallocated from import-competing sectors to export-oriented ones,since increasing imports in a sector can be compensated by greater exportopportunities in the same sector (Greenaway and Milner, 1986; Frieden andRogowski, 1996; Chevallier and Freudenberg, 2001).

We use a classical measure of the intensity of intra-industry trade: theGrubel-Lloyd index (Grubel and Lloyd, 1975), defined as:

GL X M X Mi k ik ik k ik ik= − − +( )1 Σ Σ (2)

where

Xik is the value of EU exports of sector k to country i;Mik is the value of EU imports of sector k from country i;k = 1, . . . , 99.

The index takes a value between 0 (if all trade is inter-industry) and 1 (ifall trade is intra-industry). The figures in Table 3 show that, except in the caseof Israel, the current level of intra-industry trade between the EU and the MCs



is very low. The GL index takes a value of 0.639 for Israel, then it ranges from0.383 for Tunisia to 0.030 for Algeria. These figures look even more modestwhen compared to those for the countries involved in the EU enlargementprocess. If the value for Israel is similar to that for Poland (but the indexexceeds 0.7 for Hungary, the Czech Republic and the CEECs as a whole), theother MCs do not even reach the level of Bulgaria, Romania or Turkey.

Moreover, the increase in intra-industry trade since the beginning of theBP has been very modest: the value of the index is only slightly higher in2002–03 than in 1995–96 for most countries; for Syria and Algeria it iseven lower. On the contrary, as many studies have emphasized, intra-industrytrade between the CEECs and the EU grew strongly throughout the 1990s,especially in the first half of the decade (Hoekman and Djankov, 1996a;Freudenberg and Lemoine, 1999; Dupuch et al., 2004).

From these figures one can thus conclude that the low intensity of intra-industry trade implies a greater need for adjustment of economic structures inthe MCs, i.e. economic reform becomes even more necessary in order tomake a success of the process of trade liberalization.

The findings of this section confirm our previous arguments about thelimitations of the BP in promoting growth in Euro-Mediterranean trade. Thelength of the transition periods, the relatively small amounts of financialassistance and the absence of liberalization of trade in services reduce theincentives for the governments of the MCs to engage in a reform process and

Table 3: Grubel-Lloyd Index of Intra-Industry Trade with the EU

1995–96 2002–03

Israel 0.489 0.639Tunisia 0.320 0.383Morocco 0.254 0.303Egypt 0.181 0.213Jordan 0.113 0.116Lebanon 0.071 0.105Syria 0.066 0.057Algeria 0.061 0.030Poland 0.462 0.626Czech Republic 0.628 0.812Hungary 0.671 0.709Bulgaria 0.387 0.423Romania 0.353 0.428CEECs 0.577 0.736Turkey 0.319 0.475




thus limit the possibility of locking in major shifts in their economic policy,which would improve the competitiveness of their manufacturing sectors.These effects add to that of the missing liberalization of agricultural tradediscussed above, which prevents the MCs from exploiting their comparativeadvantage and increasing their exports to the EU.

Conclusions

This article has tried to evaluate the impact of the Barcelona Process onEuro-Mediterranean bilateral trade relations. The negotiation process hasbeen analysed by means of a political economy model emphasizing theconflicts of interests between the EU agricultural and industrial sectors andbetween northern and southern EU countries. Such conflicts are responsiblefor the restrictive nature of the agreements between the EU and its partners,characterized by agricultural protectionism, long transition periods beforecompleting the bilateral FTAs and small amounts of financial support. Lib-eralization of trade in services and issues concerning regulatory harmoniza-tion were almost excluded from the agreements. The article has argued thatthese provisions prevented the Barcelona Process from significantly boostingEuro-Mediterranean bilateral trade.

In the last few years the EU’s efforts in the field of external relations havemainly concentrated on the Eastern enlargement. Following the conclusion ofthe accession process on 1 May 2004, relations with the Mediterranean regionmay now become a priority on the EU’s external agenda, especially forgeopolitical reasons, such as the fight against terrorism. The first sign of theincreasing attention paid to the MCs is the emergence of the new ENP, whichaims to mark a radical overhaul of the BP. Our analysis suggests three finalremarks concerning the economic aspects of the ENP.

First, agricultural trade liberalization could be very beneficial to the MCsand, at the same time, would not pose a serious threat to the EU agriculturalsector. Only a few EU products (mainly some fruits and vegetables) wouldprobably face a real competition and their producers could receive some formsof compensation, for instance measures promoting rural development (Garcia-Alvarez-Coque, 2002). Nevertheless, the ENP Strategy Paper does not offermore liberalization, but only mentions that ‘convergence with EU standards forsanitary and phyto-sanitary controls will greatly enhance reciprocal tradebetween the partner countries and the EU’ (Commission, 2004b, p. 15).

Second, an increase in financial support for the MCs is clearly needed. TheEuropean Commission has recognized it, by proposing the creation of aEuropean Neighbourhood and Partnership Instrument, which should replace



all the current instruments (including MEDA) for the countries participatingin the ENP. During the period 2007–13 it would receive €14.9 billion, whichwould represent a considerable increase in comparison with the presentamounts15 (Commission, 2004d). However, the negotiations for the 2007–13financial perspectives will be tough and an expansion of the EU budget seemsunlikely; therefore the actual amounts agreed by the Member States could belower.

Third, the ENP seems to acknowledge the importance of trade in servicesand of regulatory harmonization in order to make a success of the BarcelonaProcess. For all Mediterranean ENP countries, negotiations on trade in ser-vices are mentioned as short-term goals in all Action Plans, while work toharmonize technical legislation, based on the Euro-Mediterranean Trade Min-isterial Conference in Palermo (July 2003), has already started (Commission,2005b). However, it is too early to assess whether the political will to markserious progress in these areas really exists.

Finally, the ENP, while disclosing promising long-term prospects sinceeconomic integration between the EU and the MCs would progress fromthe creation of an FTA to the participation of the latter in the single market,is still defined very vaguely. On the one hand, this is understandable fromthe EU’s viewpoint, as ‘uncertain policies engender less opposition thanthose that are immediate, precise and targeted. Policies often become morecontroversial as specific provisions are negotiated and the real effectsbecome evident’ (Moravcsik, 1993, p. 490). On the other hand, the absenceof any schedule for the progress and completion of the integration processlimits the possibility of locking in economic reform in the MCs, becausethe prospect of participating in the single market may be perceived as tooremote and uncertain to justify the large efforts that it requires. The futureof Euro-Mediterranean bilateral trade relations will crucially depend on thesolution to this trade-off.

Correspondence:Marco MontanariFaculty of EconomicsUniversity of Modena and Reggio EmiliaVia Berengario 5141100 ModenaItalyTel +39 059 2056844email: [email protected]

15 In 2000–06, €5.35 billion was allocated to the MCs and €3.14 billion to the other ENP countries.



mailto:[email protected]

Appendix

Table A.1: The Most Important EU Agricultural Imports from the MCs in 2003(Harmonized System 4-digit Code)

Algeria

Product Value of EU imports(€ million)

Share of total EUagricultural imports

Dates and figs 14.0 1.738%Crustaceans 6.0 0.275%Wine of fresh grapes 3.5 0.155%Cocoa butter, fat and oil 2.1 0.687%Molluscs 1.5 0.115%Fresh or chilled fish 0.8 0.056%Beans 0.7 0.650%Preserved vegetables 0.5 0.441%

TOTAL 32.5 0.046%

Egypt



Potatoes 57.8 36.420%Leguminous vegetables 23.8 11.462%Molasses 21.2 8.403%Grapes 16.7 1.939%Dried vegetables 13.7 5.730%Citrus fruits 11.8 1.298%Guts and bladders 11.2 2.411%Starch and similar residue 10.3 6.679%

TOTAL 241.9 0.344%

Israel



Cut flowers and flower buds 108.9 16.117%Dates and figs 80.0 9.877%Vegetables, n.e.s. 62.3 10.947%Citrus fruits 61.6 6.745%Food preparations, n.e.s. 60.5 9.412%Fruit and vegetable juices 56.0 3.497%Potatoes 42.3 26.698%Sugars, n.e.s. 33.3 35.101%

TOTAL 814.6 1.158%



Table A.1: (Continued)

Jordan



Vegetables, n.e.s. 1.7 0.314%Cucumbers and gherkins 1.2 5.325%Ground-nut oil and its fractions 1.1 1.078%Leguminous vegetables 0.2 0.147%Tomatoes 0.2 0.114%Fruits, n.e.s. 0.1 0.035%Dates and figs 0.1 0.018%Cheese and curd 0.1 0.019%

TOTAL 5.8 0.008%

Lebanon



Guts and bladders 12.1 2.592%Wine of fresh grapes 7.9 0.348%Vegetables, n.e.s. 1.3 0.258%Sugar confectionery 0.8 0.362%Prepared/preserved fruits and nuts 0.7 0.089%Tobacco, unmanufactured 0.7 0.036%Bread and pastry 0.4 0.155%Waters 0.4 0.213%

TOTAL 28.8 0.041%

Morocco



Molluscs 277.2 21.118%Tomatoes 169.9 78.372%Prepared or preserved fish 154.0 9.288%Citrus fruits 128.2 14.028%Fresh or chilled fish 87.5 5.590%Fruits, n.e.s. 62.3 12.659%Crustaceans 62.0 2.799%Vegetables, n.e.s. 54.6 10.749%

TOTAL 1417.1 2.014%



Table A.1: (Continued)

Syria



Guts and bladders 18.4 3.928%Wheat 14.7 0.808%Seeds of anise 7.6 20.236%Vegetable products, n.e.s. 5.5 9.336%Preserved vegetables 2.2 1.790%Dried vegetables 2.0 0.837%Beans 1.7 1.472%Tobacco, unmanufactured 1.5 0.073%

TOTAL 63.0 0.089%

Tunisia



Dates and figs 50.9 6.285%Crustaceans 42.8 1.933%Molluscs 37.2 2.838%Olive oil 35.1 52.307%Human hair 11.6 66.407%Citrus fruits 10.3 1.125%Fresh or chilled fish 7.5 0.481%Live fish 4.0 3.162%

TOTAL 235.2 0.334%

MCs



Molluscs 316.1 24.084%Citrus fruits 212.3 23.230%Tomatoes 190.4 87.891%Prepared or preserved fish 155.4 9.380%Dates and figs 146.3 18.050%Potatoes 117.3 73.858%Cut flowers and flower buds 113.4 16.789%Vegetables, n.e.s. 112.0 19.671%

TOTAL 2838.9 4.035%




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The Barcelona Process and the Political Economy of Euro-Mediterranean Trade Integration

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