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Ways to boost Euro-Mediterranean trade, enhance economic integration

Edited by Mark Newton

Tuesday, 03 November 2009 15:31

Euro-Mediterranean Trade Ministers will meet in Brussels on 9 December to discuss ways to enhance economic integration and diversification and boost Euro-Mediterranean trade and investment with a view to achieving a genuine Free Trade Area by 2010.

Ministers will take stock of progress made towards a Euro-Mediterranean Free Trade Area, involving a network of North-South and South-South Free Trade Agreements. On North-South relations, a Commission press release cited progress on a set of negotiations with Mediterranean partners on the liberalisation of trade in agriculture, services and establishment, a dispute settlement and conformity assessment. It added that South-South economic integration was encouraged by the EU as an essential element towards the establishment of a fully-fledged Free Trade Area.

The Euro-Mediterranean Trade Roadmap till 2010 and beyond to be endorsed by Ministers will map out further actions to boost the Euro-Mediterranean Free Trade Area. It includes both concrete measures to address the current weaknesses of Euromed trade and economic relations and proposals to turn the existing Euro-Mediterranean Association Agreements into deep and comprehensive Free Trade Agreements.

According to a study on the economic integration of the Euro-Med region, Euro-MED relations have since the mid-1990s been guided by a number of initiatives and programs. The Barcelona Process continued the process of creating an area of shared prosperity in the Mediterranean, started in the late 1970’s with the establishment of Cooperation Agreements with many countries in the Mediterranean region, with an emphasis on creating a free trade area. This led to the signing of a number of Association Agreements (AA) with countries from the Mediterranean region. Progress has been slow and initiatives have been launched to move forward to better internalize these association agreements and to gradually replace the shallow integration that characterizes free trade agreements towards deep integration that calls for greater harmonization of the regulatory framework.

It is rather early to assess the full potential of AAs. As of 2006 -the year of latest trade data available- for most of the partner countries the process of liberalizing their tariffs with respect to the EU was far from complete. For example Egypt’s AA only entered into force in 2004. The AAs typically have transition periods of up to 12 years and included several exemptions. In early 2000s the growth of MED exports to and imports from the EU was slower than from other regions. There might be several reasons for this apparently disappointing trend. The period under consideration in this study coincided with MFN liberalization that reduced MFN tariffs and contributed to growth of trade with third countries. Also industrial exports from MED region to the EU were already substantially free of tariffs under the earlier Co-operation Agreements. At the same time NTBs and general economic conditions in the Mediterranean partner countries hampered trade expansion.

Preferences and utilization. A major issue regarding the smooth functioning of the AA’s is the extent to which the partners can actually take advantage of the preferences available. Authors of the study found that in the MED5 about 80% or more of exports came in duty free except for Jordan at 70%. There were however up to 10% of exports (18% for Jordan) in categories where there should have been a zero tariff but where a non-zero MFN rate was actually paid. This is thought to be a common issue where tariffs are very low and the cost of obtaining certificates of origin is high.

Further research would be needed to find out whether the 10% or so of trade not getting preferences is due to unimportance of the value of the preferences, misclassifications, or the high cost of origin proof. If it is the latter then action might be needed.

For most of the region the “natural trading partner” is the EU which should imply that the N-S agreement will be net trade creating. However Israel and Jordan have traditionally traded as much or more with the US than with the EU. This may be due to preferences or historic ties; there is nothing in the data to suggest a reversal of this in the foreseeable future.

There is little indication that MED countries are each others’ “natural trading partners” which suggests that the potential S-S agreements will not necessarily be net trade creating. Even though trade between the MED economies is very low, it is exhibiting positive growth. The MED region imports significantly different products from the region than from the rest of the world which suggest that there is also little scope for trade diversion. There is a possibility of there being some trade reorientation as a result of matching preferences with the US - Authors of the study see how this could occur in Egypt and Israel but is unlikely for Morocco. Trade re-orientation is likely to be efficiency enhancing as it removes previous trade diversion created from other preferential agreements.

Looking at how similar MED partner exporting structures are to other MED partner importing structures to assess how well the countries could supply one another other, Authors of the study see that similarity is very low. This suggests that these partners are not each other’s natural trading partners and hence that any of the S-S agreements are likely to have limited trade effects. The MED partner’s exporting structures are becoming increasingly similar, even though they continue to be highly dissimilar. This is a necessary if not a sufficient condition for the emergence of niche specialisation or IIT. The current degree of “deep market integration” between the EM5 countries as identified by way of IIT indicators is still low but it has been growing over time.

In terms of the impact of the AAs on investment, Authors of the study note that the region does not yet attract the kind of EU investment flows that the European neighbours have been able to attract. FDI is still very much resource based and market seeking. As shown in the World Bank scores for the business climate, MED countries (with the exception of Tunisia, Turkey and Israel) score rather low suggesting great possibilities to improve this climate that would certainly enhance its attractiveness for FDI.

A review of the most recent studies based on gravity models of trade indicates that current MED5 exports to the EU are close to their potential levels. Also their trade with each other is not far from potential levels typical for other countries with similar characteristics. However, a deeper integration between the EU and EuroMed countries could lead to a significant growth of exports from the Mediterranean region to the EU. Some estimates indicate that exports to the EU and imports from the EU could triple or quadruple if Euro-Med countries could reach the levels of integration typical for the EU15.

Early assessment of the impact of the Euro-MED FTAs on trade indicates that it has contributed to increases of trade with the EU only in the cases of Egypt and Tunisia. Authors of the study find no evidence of any impact of the FTAs on trade of Morocco, Jordan and Israel with the EU. The results indicate a fall in trade with the EU in the case of Lebanon and Algeria. However, these are the two most recent FTAs, hence it might be too early to see any impact of the FTAs on trade flows. The results indicate that in the case of all MED countries, but Tunisia, the FTAs have led to the expansion of exports to and imports from the non-member countries.

The MED5 are in different stages of harmonization of their standards with the EU, but the process of harmonization has been progressing. Only Israel has so far concluded negotiations of an Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA) and initialled a Mutual Recognition Agreements with the EU. This situation reflects the absence of trust in the standards procedures adopted in the MED5 or/and weak domestic accreditation organizations, which lack international recognition. The report also discusses several remaining obstacles to harmonization of standards with the international standards.

In terms of SPS measures there are a number of issues in the MED5 which are not in line with the acquis regulations. Moreover, it appears that stringency of applying measures by the MED5 seem to be relatively stronger at the borders as compared to a less effective monitoring in the domestic market. In the case of SPS measures there are a number of general problems that affect exporters to the MED5 such as ad hoc application of shelf life procedures or multiplicity of documents and regulations required in each country.

All MED5 have undertaken substantial customs reforms though the pace has differed among them. Reforms included amendments of the customs laws to be consistent with the WTO valuation agreement, simplification of customs procedures, and automation. As a result of such reforms, the average clearance time in all MED5 dropped significantly, but further reduction will be needed to enhance competitiveness.

It seems that the cumulation of the rules of origin has not been fully utilized. The main reason for lack of cumulation between the EU and the MED5 are high costs of EU inputs. Within the Agadir Agreement, exports from the various signatories are very similar and there is only a modest level of trade amongst them.

All MED5 have competition laws which vary significantly in their definitions, coverage and exemptions. Regarding state aid, none of the MED5 has provisions that are aligned to those of the EU and this is the major area where cooperation between the EU and MED5 is still lagging. It seems that anti-competitive behaviours exist to a significant degree in MED5 markets and that competition laws remain ineffective in dealing with such cases.

The government procurement procedures of the MED5 differ from those of the EU. They often grant preferences to domestic suppliers, and the EU might be in a less favourite position in some of the countries that have signed bilateral agreements with third countries. For example the US agreements with Morocco and Israel grant national treatment for American firms. All MED5 encounter problems associated with bidding procedures, especially when foreigners are included, and with transparency issues.

The legislations regarding intellectual property rights in the MED5 are in compliance with TRIPS. However, all MED5 have problems with the enforcement of IPR laws and regulations and/or weak provisions in some of their legislation that at times make them non-compliant with TRIPS. The MED5 have amended their laws in an effort to be compatible with TRIPS, however as reports of main trading partners indicate there are some loopholes in the laws.

The results of the business perception survey conducted in the 5 MED countries and the EU indicates that the EU business representatives think that reduced cost of doing business due to tariff/quota elimination and increased business opportunities are the most important achievements of the AAs. Although the tariffs and quotas are low, the existence of quantitative barriers represents a high bureaucratic constraint to the businesses which are both time-consuming and costly. According to the responses of the EU businesses, although the AAs have increased business opportunities, there is still considerable lack of information about opportunities among the business community.

The MED business representatives observed several advantages of the Euro-Med integration such as increased business opportunities, investment attraction and availability of export/import credit. A majority of respondents indicated that cumbersome customs procedures and NTBs constitute an obstacle to further expansion of trade and investment in the region. The Report details the responses for the MED5 and provides an overview of the main issues as they pertain to a selection of sectors including agriculture, manufacturing and services.

In the business survey, Authors of the study investigated the respondents’ knowledge of the PanEuroMed diagonal cumulation of origin and whether their business has benefited from it or not. This information is important as there is no prior knowledge of the utilization rate of this new system as it has been implemented very recently.

The knowledge of the PanEuroMed cumulation of origin is high both among the EU and MED5 respondents (53 percent for both). Several MED5 respondents indicated that the cost of obtaining a certificate of origin was negligible. Although it is difficult to generalize, in some sectors the rate of utilization of the PanEuroMed diagonal cumulation of origin was as high as 70 percent of exports.

A synthesis of both quantitative analysis and qualitative analysis of this study indicates that textiles and clothing, machinery and transport equipment, chemical and services sectors are the most important ones for future deep FTA negotiations.

Although the textile sector is a traditional sector it still accounts for the majority of MED region’s exports to the EU, but its importance is already declining as the region increases its dynamic comparative advantage in more capital-intensive industries.

Also the textile industry is moving into higher value-added products category. For example, German textiles industry is using Mediterranean as a production location for textiles used in the German motor vehicles industry. On the other hand, the majority of machinery exported by Italy to the Mediterranean region is mainly used by the textiles industry in MED region. For the long-term growth of the Mediterranean region, Authors of the study argue that chemicals and machinery and transport equipment and services are going to be the key drivers. However, improving the quality of human capital and R&D and lack of South-South integration will present considerable challenges ahead.

This study evaluates the effects of the current Euro-Mediterranean Free Trade Agreement for the EU and the Mediterranean region, in order to assist policy makers in defining the next steps in the Euro-Mediterranean Road map till 2010 and beyond.

It provides quantitative, qualitative and sectoral assessment of the impacts of the Euro-Mediterranean FTA on trade and investment, points out the partnerships’ strengths and weaknesses and provides policy recommendations with the view of realizing a goal of a well functioning free trade area in the future. The focus of the study is on Egypt, Israel, Jordan, Morocco, and Tunisia (MED5).

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