The Multifiber Agreement Phase Out and the EU-China Agreement of self-limitation of exports: impact on the Tunisian economy

International workshop, “Bridging the gap: the role of trade and FDI in the Mediterranean”, Naples 8-9

Mohamed Ali MAROUANIUniversité Paris1-Sorbonne/IEDES, DIAL and ERF

marouani@univ-paris1.fr

Presentation outline

Introduction

What happened since the 1st January 2005?

The ex ante quantitative assessment framework

Simulations and results

Conclusion

Introduction

The MFA dismantling : a demand of developing countries The Agreement on Textile and Clothing (ATC) : 1995-2005

The accession of China to WTO in December 2001

Erosion of preferences for countries indirectly protected by developed countries quotas : competition between D.C.

Observed outcome : negative for MENA except Turkey

Better than expected : EU-China agreement June 2005

After January 2009

Developing an ex ante quantitative assessment framework

Taking into account the dynamic dimension of the shock,

and labor market imperfections

What happened since the 1st January 2005 ? China increased its market share by 145% in

volume and 95% in value for products which quotas have been removed in 2005

Table 1: Changes in the Value of Exports of textile and clothing to the EU

CountryChina India Turkey Tunisia Morocco Egypt Jordan

% change in year-to-date Jan-Sept 2004/2005

45.0 16.0 3.3 -5.6 -9.1 -4.2 -11.4

Source: The World Bank (2006)

The EU-China agreement of June 2005 Many complaints from the European T&C Industry Inside the EU, heterogenous position

Producing countries vs importing Industry vs distributors China is a significant trading partner

Agreement imposed on ten categories of products (among 35 liberalized): fixes the rates of growth of Chinese exports between 8 and 12.5% Higher than the 7.5% which the special safeguard clause

would have allowed the EU to impose

The ex ante quantitative assessment framework

An intertemporal GE model Households smooth their consumption (intertemporal utility

function) Firms maximize their discounted value under the capital

accumulation constraint A quadratic adjustment cost function

The advantages of a dynamic setting Take into account the gradual dimension of the shock

The expectations of agents, adjustments costs and demographics

The evolution of public and external debt

The dynamic calibration: the economy is not on its steady state growth path

Structure of the intra-period model

The production block (nested function)

Labor market: HT, efficiency wages and public employment

The income and expenditures block (including financial)

The foreign trade block (export demand function)

Equilibrium conditions and model closure: Macro, Government, Foreign Trade, Labor Market.

Imperfect labor markets and efficiency wages

Labor market segmentation

Efficiency wage theories

The imperfect monitoring model

Implementation in a multisectoral framework

The multisectoral efficiency wages model

i,j : sectors

f : skill

b : turn over rate

q : probability of being detected shirking

e : disutility of effort

r : discount rate

U : unemployment rate

jf

n

j fjf

jfjfjfif

if

ifif e

Uq

Lqbe

q

rbw

1

)()1(

The database The SAM

Data manipulation: employment, wages, demographic hypothesis, structure of the labor force, etc.

Reference scenario includes the FTA between Tunisia and the EU

Determination of the tariff dismantling schedule in each industrial sector depending on the weight of each product in the four lists of the Euro-Tunisian Agreement.

The dynamic calibration procedure The economy is not on its steady-state growth path

Calibration of the macro parameters (depr, elasth, prt)

Calibration of the sectoral parameters (adjustment cost function share parameter)

Second calibration of the macro parameters

Until we approximately attain the observed growth path of the main macro and sectoral variables

The simulations First scenario: a gradual decrease of

export demand from 2002 to 2004 (10% in three years), than a decrease by 10% in 2005 and a decrease by 20% in 2009.

Second scenario: adds to the first a decrease of world prices of apparel products by 10% in 2009.

Evolution of the main variables characterizing the apparel sector in Tunisia, 2006-2020 (change in % of the reference scenario level)

2006 2009 2015 2020

SIM1 SIM2 SIM1 SIM2 SIM1 SIM2 SIM1 SIM2

Production -11.3 -14.9 -17.3 -32.4 -19.5 -36.7 -20.4 -38.3

Exports -12.2 -15.8 -19.0 -35.6 -21.3 -39.9 -22.2 -41.5

Investment -26.7 -47.6 -29.5 -57.8 -26.2 -49.6 -24.2 -45.2

Unskilled labor -11.7 -13.7 -19.0 -36.5 -19.9 -38.1 -20.1 -38.4

Skilled labor -12.0 -13.9 -19.5 -37.3 -20.5 -39.0 -20.8 -39.4

Highly skilled labor -11.4 -16.0 -16.7 -30.2 -19.8 -36.6 -21.0 -38.9

The textile-clothing sector is very negatively affected by the shock

Investment is the variable that reacts the most (due to firms expectations)

The impact of the combined shocks of export demand and prices decreases is much stronger

Propagation to the rest of the economy?

Impact on the apparel sector

Effects on unemployment SIM1

0.99

1

1.01

1.02

1.03

1.04

1.05

1.06

1.07

2006 2008 2010 2012 2014 2016 2018 2020

Years

Re

fere

nc

e s

ce

na

rio

= 1

.00

Total

Unskilled

Skilled

Highly skilled

Effects on unemployment, SIM2

0.991

1.011.021.031.041.051.061.071.081.091.1

1.111.121.131.14

2006 2008 2010 2012 2014 2016 2018 2020

Years

Re

fere

nc

e s

ce

na

rio

= 1

.00

Total

Unskilled

Skilled

Highly skilled

Evolution of wage inequality sk/unsk

1

1.005

1.01

1.015

1.02

1.025

2006 2008 2010 2012 2014 2016 2018 2020

Years

Re

fere

nc

e s

ce

na

rio

= 1

.00

SIM1

SIM2

Evolution of wage inequality hsk/sk

1

1.005

1.01

1.015

1.02

1.025

2006 2008 2010 2012 2014 2016 2018 2020

Years

Re

fere

nc

e s

ce

na

rio

= 1

.00

SIM1

SIM2

Evolution of total investment

0.99

1

1.01

1.02

1.03

1.04

2006 2008 2010 2012 2014 2016 2018 2020

Years

Re

fere

nc

e s

ce

na

rio

= 1

.00

SIM1

SIM2

Evolution of investment of the main sectors

0.930.950.970.991.011.031.051.071.091.111.131.151.171.19

2006 2008 2010 2012 2014 2016 2018 2020

Years

Ref

eren

ce s

cen

ario

= 1

.00

Tourism

MEI

Chim

Constr

Evolution of total household consumption

0.985

0.995

2006 2008 2010 2012 2014 2016 2018 2020

Years

Re

fere

nc

e s

ce

na

rio

= 1

.00

SIM1

SIM2

Comments Investment increases in the exporting

sectors due to the Dinar Depreciation

Consumption decreases due to higher unemployment

No effects on GDP

Conclusion The MFA dismantling has negative effects on T&C

industry in Tunisia

It raises unemployment and wage inequality

The degree of substitutability between Tunisian products and those of its competitors is one of the main driving variables

The effects on prices could be lower than expected

Directions for future research

Using more disaggregated data

Studying the effects of the shock on female labor

Linking this model to a global CGE to assess the decrease of world textile products

Introducing heterogeneity (firm and household level) by linking this model to a microsimulation model

Limits The perfect foresight hypothesis

The absence of credit constraints

The representative agent hypothesis

Policy implications Monitoring the evolution of Tunisia’s competitors exports in

the European market (degree of similarity)

Focus on the medium/high segment of the clothing market: incentives for products with higher value-added

Promote the development of substituting activities targeted on female labor

Take into account the MFA phase out in regional development policies

Incentives for foreign investors who are ready to reallocate their investments in other sectors