EU-MPCs :

Overview of Trade Issues

ContentsContents

Preliminary remarksPreliminary remarks The aim of this overview: questions arising from The aim of this overview: questions arising from

figuresfigures An Asymmetric Neighbourhood An Asymmetric Neighbourhood EU-MPCs integration dynamicsEU-MPCs integration dynamics

AgreementsAgreementsFinancial assistanceFinancial assistanceTrade Trade FDIFDI

The trade liberalisation processThe trade liberalisation process ConclusionsConclusions

Preliminary Remarks:

1. The three pillars within the Euro-Mediterranean Partnership (also known as the „Barcelona Process“):

a) Political and security partnership, b) Economic and financial partnership, c) Social, human and cultural partnership.

2. The main aim of the EMP is to promote economic growth. The main instrument for this is the creation of a Free Trade Area (FTA) by 2010.

3. The components of the EMP:a) The Euro-Mediterranean Association Agreements (EMAAs) aimed at

liberalisation and cooperation in different areas;b) The financial support provided through MEDA and the European

Investment Bank

4. How far the FTA will be reached depends on:a) Relative importancy of liberalization to other factors,b) Amount of liberalization achieved by the agreements.

The aim of this overview: questions arising from figures.

Ten year after the beginning of the Barcelona process it is time to take stock. This is in part the aim of this seminar.Our overview has a narrower aim: to remind you some figures that can help to answer the following questions.

Can we identify progress in the process of economic integration between Europe and Mediterranean partner countries?

Can we detect some sign of positive impact resulting from the Barcelona process on the MPCs development?

Above all, can we say that the role of Europe as economic partner of MPCs has been strengthened by the Barcelona process in comparison with the rest of the world?

How attractive does Europe appear as a partner for MPCs in comparison to the rest of the world?

The aim of this overview: questions arising from figures.

The answers to the above questions are crucial in our view if the general objective of the Barcelona process, and of the announced (future) European Neighbourhood Policy, is to build a security belt around Europe through economic cooperation and integration.

An asymmetric neighbourhood

Source: World Bank

Euro Med - per capita GDP (2003)

0

5000

10000

15000

20000

25000

30000

ALGERIA

MOROCCO

TUNISIA

EGYPT

LEBANON

ISRAEL

JORDAN

SYRIA

TURKEY

EURO A

REA

Cu

rren

t in

tern

atio

nal

$

The total GDP of all MPCs is about the GDP of Spain and about 15% The total GDP of all MPCs is about the GDP of Spain and about 15% lower than the total GDP of EU accession countries.lower than the total GDP of EU accession countries.

MPCs are small economies characterised MPCs are small economies characterised by high level of debt …by high level of debt …

Economic indicators of MPCs (2003)COUNTRIES GDP (level) GDP growth (%) Debt Annual inflation

2000-03 1995-03(billion $) (%) (% of exports) (%)

ALGERIA 66,53 4,0 86 10,1MOROCCO 43,73 3,9 125 1,2TUNISIA 25,04 4,2 146 2,9LIBYA 19,13 (1) n.a. n.a. n.a.EGYPT 82,43 3,8 154 4,7LEBANON 19 1,6 757 2,6ISRAEL 110,23 1,9 n.a. 3,2JORDAN 9,86 4,2 174 1,0PALESTINIAN TERRITORIES 3,45 -9,5 n.a. 10,1SYRIA 21,5 2,4 249 5,1TURKEY 240,38 3,4 227 48,3Note: (1) 2002Source: World Bank

… high population and lack of employment

• High growth of labour force

• High unemployment levels

The economies have not been able to grow fast enough to absorb a fast growing labour force (except Israel)

Demographic characteristics of MPCs (2003)

Total Growth a) Density Total Growth a)(mln) (%) (pop/km2) (mln) (%) (%) (%)

ALGERIA 31,8 1,2 13,4 11,6 4,0 58,8 28,1MOROCCO 30,1 1,2 67,4 12,7 2,5 57,4 12,4TUNISIA 9,9 0,9 60,5 4,1 2,5 67,4 15,0LIBYA 5,6 1,5 3,2 2,0 3,0 88,5 30 c)EGYPT 67,6 1,4 67,5 27,1 3,0 42,9 10,0LEBANON 4,5 1,0 432,7 1,4 3,1 90,6 18 d)ISRAEL 6,7 1,9 302,6 2,8 2,8 92,1 9,8JORDAN 5,3 2,1 59,4 1,9 4,3 79,1 13,2PALESTINIAN TERRITORIES 3,4 4,3 546,6 n.a. n.a. n.a. 24,2SYRIA 17,4 1,9 94,0 6,0 4,2 52,5 11,5TURKEY 70,7 1,2 91,2 33,5 2,3 67,0 10,5a) Annual growth 2000-03; b) average percentage labour force (2000-03); c) 2004; d) 1997 est.Source: World Bank, FAO, CIA

Urban population

Unemployment b)Population Labor force

Causes of slow economic Causes of slow economic growth: Oil dependancy, …growth: Oil dependancy, …

Exports from MPCs (2003)

0

10000

20000

30000

40000

50000

ALGERIA MOROCCO TUNISIA EGYPT LEBANON ISRAEL JORDAN SYRIA TURKEY

Mil

lio

n $

Total Oil excluded

…High protection…

Trade restrictiveness and Mean Tariff (2003)

20,3

31,534,5

17,122

17,1

5,6

14,9

8,8

35

12,4

4,40

1

2

3

4

5

0

10

20

30

40

Freedom Index Simple Average MFN Tariff

With exeption of Israel, all MPCs have protectionist trade policies

Note: Freedom index: Free (Score 1-1,99), Mostly Free (Score 2-2,99), Mostly Unfree (Score 3-3,99), Repressed (Score 4-5)Note: Freedom index: Free (Score 1-1,99), Mostly Free (Score 2-2,99), Mostly Unfree (Score 3-3,99), Repressed (Score 4-5)

Source: World Bank, Heritage FoundationSource: World Bank, Heritage Foundation

……Extensive state interference in Extensive state interference in economy…economy…

Public sector employment accounts for 1/5 of non-military Public sector employment accounts for 1/5 of non-military employment in MPCsemployment in MPCs

The contribution of the public sector on the GDP is significant The contribution of the public sector on the GDP is significant (30% in Egypt and Tunisia, close to 60% in Algeria)(30% in Egypt and Tunisia, close to 60% in Algeria)

Public investments in MPCs are close to 40% of total Public investments in MPCs are close to 40% of total investmentinvestment

Over-staffed public sectorOver-staffed public sector

Dominant presence of state enterprisesDominant presence of state enterprises

Causes of slow economic growth in MPCs

Source: Kuiper, De Crescenzo (2004)

Agriculture is an important sector but its role in the economy differs among MPC

Contribution of agriculture to GDP and employment in MPCs (2003)

Agriculture Industry Services1990 2003

ALGERIA 10,3 55,1 34,7 26 14MOROCCO 16,8 29,6 53,6 45 40TUNISIA 12,1 28,1 59,8 29 22 a)LIBYA 7,6 b) 49,9 b) 42,5 b) n.a. 17EGYPT 16,1 34,0 49,8 40 32LEBANON 12,2 20,1 67,7 7 n.a.ISRAEL 2,8 a) 37,7 a) 59,5 a) 4 3JORDAN 2,2 26,0 71,8 5 c)PALESTINIAN TERRITORIES 6,2 12,0 81,8 n.a. n.a.SYRIA 23,5 28,6 48,0 32 30TURKEY 13,4 21,9 64,7 n.a. 36Note: a) est.; b) 2005 est.; c) 2001 est.Source: World Bank, CIA world factbook

Composition GDP (%) Agriculture labor force(% total labor force)

Agreement integration dynamics

EMAAs, WTO, GAFTA and Agadir membership of MPCsWTO GAFTA Agadir

Signed Effective MemberALGERIA 2002 b) observerMOROCCO 1996 2000 1995 1998 2003TUNISIA 1995 1998 1995 1998 2003LIBYA observer 1998EGYPT 2001 2004 1995 1998 2003LEBANON 2002 c) observer 1998ISRAEL 1995 2000 1995JORDAN 1997 2002 2000 1998 2003PALESTINIAN TERRITORIES 1997 1997 a)SYRIA d) 1998TURKEY 1995 1995 1995

EMAA

Note: a) Agreements with the Palestinians Territories are an interim agreement; b) Ratification of agreement with Algeria is pending; c) With Lebanon an interim agreement for early implementation of trade measures is in force since March 2003; d) Negotiations with Syria are ongoing since 1997; e) Libya is an observer until UN sanctions are lifted.Source: EU Commission, WTO

The region trade integration has broadly remained unchanged for two decades, but in the last few years some significant efforts have been made.

Current MPCs trade Current MPCs trade MPCs are relative trade-dependent economies. The sum of exports and imports MPCs are relative trade-dependent economies. The sum of exports and imports of Mediterraneans countries amounted to more than 55% of their GDP in 2003of Mediterraneans countries amounted to more than 55% of their GDP in 2003

Imports and exports (% gdp)1980 1990 1995 2000 2003

ALGERIA 64,7 48,4 57,9 63,8 63,3MOROCCO 45,3 58,9 61,5 69,0 68,7TUNISIA 85,8 94,2 93,4 91,9 90,3LIBYA 97,6 70,8 51,6 51,0EGYPT 73,4 52,8 50,0 39,2 45,3LEBANON 117,9 77,1 50,8 52,4ISRAEL 103,1 80,1 75,4 85,8 81,4JORDAN 124,1 154,7 124,6 110,2 114,6PALESTINIAN TERRITORIES n.a. n.a. 76,8 75,2 59,0SYRIA 54,8 56,3 69,0 67,8 73,2TURKEY 17,1 30,9 44,2 55,6 58,6Source: World Bank, World Development Indicators database

•The share of exports from Morocco to the EU has grown and Turkey remained constant. The relative share of the EU in the exports of the other countries has been declining• The EU share of imports from MPCs has decreased in most of the countries (except Algeria, Morocco and Tunisia), indicating a diversification in the import pattern of MPCs in relation to the rest of the world•In 2004, the MPCs share in total EU25 imports is 8,1 (6,9 in 1999) and in total EU25 exports is 8,5 (8,2 in 1999)

Exports and Imports of MPCs (1995-2003)Exports to EU25 Imports from EU25

(% of total exports) (% of total imports)1995 2003 1995 2003

ALGERIA 66 55 60 62MOROCCO 60 69 52 63TUNISIA 80 78 71 74LIBYA 82 80 66 63EGYPT 47 42 40 37LEBANON 25 19 50 49ISRAEL 33 28 53 41JORDAN 6 3 34 24PALESTINIAN TERRITORIES n.a. n.a. n.a. n.a.SYRIA 59 47 35 30TURKEY 55 55 48 47Source: UNCTAD

The EU is the main trading partner of the Mediterranean Partner Countries (MPC), accounting for almost 50% of

imports and exports of the region as a whole, although ist weight decreased in the last decade

Inter-Arab Trade/ Total External trade (Millions of USD)

Total Inter Arab Trade

Total External Trade

Ratio IAT/TET

(%)

Total Inter Arab Trade

Total External Trade

Ratio IAT/TET

(%)

Total Inter Arab Trade

Total External Trade

Ratio IAT/TET

(%)JORDAN 1.496 5.155 29 1.657 6.496 26 2.807 8.421 33EMIRATES 3.291 45.073 7 4.619 84.844 5 7.582 111.562 7BAHRAIN 2.169 7.878 28 1.750 11.028 16 2.676 12.155 22TUNISIA 991 13.817 7 1.148 14.389 8 1.386 20.318 7ALGERIA 560 20.139 3 503 30.294 2 1.144 38.269 3SAUDI ARABIA 6.474 77.455 8 7.016 107.671 7 10.146 131.983 8SUDAN 537 1.797 30 447 3.359 13 1.475 5.424 27SYRIA 1.298 8.679 15 1.138 9.072 13 2.241 10.565 21SOMALIA 185 417 44 94 375 25 136 483 28IRAQ 714 1.090 66 1.449 18.272 8 1.261 13.045 10OMAN 2.142 10.218 21 3.048 15.797 19 3.249 18.242 18QATAR 572 5.610 10 1.269 14.845 9 1.552 19.314 8KUWAIT 1.263 20.716 6 1.740 25.992 7 2.038 31.623 6LEBANON 761 7.485 10 1.094 6.931 16 1.484 8.612 17LIBYA 1.135 17.021 7 998 16.071 6 1.186 18.002 7EGYPT 924 15.180 6 2.048 23.980 9 2.848 23.495 12MOROCCO 1.145 14.453 8 1.689 18.949 9 1.642 22.928 7MAURITANIA 37 1.229 3 40 1.184 3 69 1.565 4YEMEN 738 3.521 21 1.042 6.121 17 1.819 7.440 24TOTAL 26.431 276.931 10 32.789 415.672 8 46.741 503.445 9Source: Arab Monetary Fund

Country

1995 2000 2003

Inter Arab Trade does not seem to be affected by the EMP: only in Morocco the IAT/TET ratio

has decreased between 1995 and 2003

FDI Inflows (1970, 1980, 1990, 1995, 2000-2004)

Developed countries

Developing countries

0

500000

1000000

1500000

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2500000

3000000

1970 1980 1990 1995 2000 2001 2002 2003 2004

Millio

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SD

World

While global FDI flows have increased at a dramatic rate over the past 15 years

…FDI into the MPCs has been minimal and stagnant, representing around 1% of the world FDI flows

FDI Inflows (1970, 1980, 1990, 1995, 2000-2004)

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

160 000

1970 1980 1990 1995 2000 2001 2002 2003 2004

Millio

ns U

SD

Africa Latin America and the Caribbean Asia MPCs

FDI FLOWS Small FDI´s inflows in the region: one of the

lowest rate worldwide.

Between 2001 and 2004 MPCs share in EU‘s Between 2001 and 2004 MPCs share in EU‘s FDI flows has grown …FDI flows has grown …

…but it tooks only 1.4% of total EU´s FDI.

EU25 FDI outflows (2001)

EU2552%America

33%

Asia (- MPCs countries)

9%

MPCs1%

Europe-EU253%

Africa (- MPCs countries)

1%

Other countries1%

EU25 FDI outflows (2004)

EU2561%

Europe-EU257%

Africa (- MPCs countries)

4%

America11%

MPCs1%

Other countries6%

Asia (- MPCs countries)

10%

Source: Eurostat

Between 2001 and 2004, the share of EU25 and US in MPCs total inflows was about 50% (31% EU25,

15% US).

EU25 and USA FDI outflows to MPCS

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EU25 US EU25 US EU25 US EU25 US

2001 2002 2003 2004

Mil

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US

D

Why Such a Small FDI Share?•The region has long been plagued by violent conflict and instability

•Several Mediterranean states have compounded this problem with poor economic governance

•Governments have monopolies in most strategic sectors – especially energy

•Private sectors are generally small and largely dominated by family business groups

• Poor social and physical infrastructures (eg. education and transport) diminish the attractiveness of the region. Electricity per capita, telecom and internet penetration rates are relatively poor

• Underdeveloped financial sectors (eg. central and private banking infrastructures) impede the mobilization and channelling of funds.

• Strong local partners (eg. experienced local contracting firms) have been lacking, and there is a shortage of skilled labour

• Several of the region’s administrations have lacked accountability and consistency (a feature of autocratic systems of governance).

•There are still significant trade barriers in UE and MPCs

Measures to improve FDI conditions specified under

Barcelona Process

•Withdrawal of the state so as to:

improve resource allocation and competitiveness;

increase budgetary resources;

encourage national and foreign private investment

•In-depth reform of indirect taxation, so as to reduce fiscal pressure on foreign trade

•Opening up of financial intermediation activities to competition and scaling down public sector involvement in this field

•Support for privatisation in the Mediterranean region

Financial support through MEDA and EIB• A cornerstone of the EMP is a financial support for the whole region through

MEDA.

• MEDA is comparable to the PHARE (Eastern Europe) and TACIS (Central Asia) programmes.

• MEDA replaced previous bilateral aid protocols. The Funds:

MEDA I (1995-1999) 3,435 million €

MEDA II (2000-2006) 5,350 million €

• MEDA pursues the creation of an EMFTZ by 2010 by supporting mainly structure adjustment programmes and economic transition programmes•The biggest difference of the new European Mediterranean Association Agreements (EMAAs) with former agreements from the 1970s is the reciprocity

• In addition, the European Investment Bank has launched in 2002 the Facility for Euro-Mediterranean Investment and Partnership (FEMIP) for promoting private sector development.Total loans in 2004: 2,2 billion €.

• The main competitor of the EU, the US, has already FTAs with Israel (1985) and Jordan (2002) and in 2003 launched a plan to create the Middle East Free Trade Area (MEFTA) by 2013.

Comparison of EU and US financial contributions

MEDA I and II commitments and USAID economic assistance

1995-99 2000-04 1995-99 2000-04 1995-99 2000-04 1995-99 2000-04Millions euro

Millions euro

(% total bilateral)

(% total bilateral)

Millions USD

Millions USD

(% total) (% total)

ALGERIA 164 233 6 10 3 14 0 0MOROCCO 656 678 25 29 85 136 1 1TUNISIA 428 329 17 14 6 1 0 0EGYPT 686 354 27 15 4307 3172 38 31LEBANON 182 74 7 3 57 197 1 2ISRAEL 5980 3659 53 36JORDAN 254 204 10 9 511 2089 5 21PALESTINIAN TERRITORIES 111 351 4 15 354 922 3 9SYRIA 99 136 4 6 0 0 0TOTAL BILATERAL 2580 2359 100 100 11303 10191TOTAL REGIONAL 480 739TOTAL 3060 3098 11303 10191 100 100Source: European Commision, USAID Greenbook

MEDA I e II Commitments USAID economic assistance

Source: OCDE

Between 1995 and 2004, the EU15 share in total MPCs grants and loans has decreased from 53%

to 45%.

EU15 ODA grants and loans in MPCs

0

20

40

60

80

100

(% o

f to

tal)

1995 2004

•Key sector in most of the MPCs, for which the EU is the principal overseas market.

• EU Agricultural trade policies are a complex system of seasonal preferences for sensitive products (e.g. tomatoes and oranges)

• EU quantity and quality restrictions:

Tariff rate quotas (TRQs) on a large number of fresh fruit and vegetables and some dried or processed ones, as well as flowers, Tunisian olive oil and all qualities of wine;

Reference quantities (RQs) imposed on many fresh fruit and vegetables, some dried or processed ones, nuts, and fresh and preserved tropical fruit;

Sanitary and phyto-sanitary standards

•MPC preferences are even more limited, both in terms of share of preferential over total trade flows and in term of tariff reductions for strategic products, like cereals and milk, that lead to high domestic prices.

a) The Liberalisation of Agricultural trade

The Liberalisation Process

Even if a liberalisation of agricultural trade would Even if a liberalisation of agricultural trade would have enormous impact on Euro-Med trade flows,have enormous impact on Euro-Med trade flows, no no defined prospect for the liberalisation of agriculture defined prospect for the liberalisation of agriculture was stressed under the Barcelona Process was stressed under the Barcelona Process

There have been no significant new concessions There have been no significant new concessions made by the EU for agriculture products in the made by the EU for agriculture products in the EMAAs, nor are these expected to come about in EMAAs, nor are these expected to come about in the near futurethe near future

The Liberalisation Process

b) The liberalisation of Industrial products trade

The EMAAs set out a trade liberalisation commitment by the MPCs, which complements the tariff-free treatment for industrial goods already granted to their exports to the EU since mid-1970s

Under the EMAAs the MPCs gradually remove all tariffs on imports of industrial products from EU over by 2010.

The specific time schedules for dismantling are differentiated according to the sensitivity of the goods.

Tunisia is ahead of other MPCs in reforming ist economy and implementing a range of major reforms, except for abolishing trade barriers. If the liberalisation of manufactured goods was implemented overnight, 1/3 of the industrial firms would go bankrupt.

With a view to achieving a full FTA, the MPCs are also expected to implement free trade among themselves (South-South integration)

The Liberalisation Process

The liberalisation of textiles and clothes trade

•The countries in the Southern and Eastern Mediterranean area employ over 3.7 million people in the textile sector: 39% of total employment in Morocco, 41% in Tunisia, 34% in Turkey.

•The share of T&C exports of their total exports to the EU is high (e.g. 54% for Tunisia, 53% for Morocco, 47% for Turkey)

•The importance of this sector is double:-Because of the very important dependance of MPCs on the Eu market for their exports and employment;-Because of the close relationship between EU T&C industry and the T&C industry of those countries, via investment and subcontracting relationships

•In 2004, the EU imports from MPC represent 28% of EU textile market (12,8 billion €) and EU exports to MPC represent 14% of EU textile market (2,3 billion €)

•Due to WTO, the Agreement on textiles and clothing expired on 2005

•Between January and May 2004, the EU imports from China represent 11% of EU textile market. One year late, the EU imports from China represent 22% of EU textile market.

The Liberalisation Process

c) The liberalisation of trade in Services

The liberalisation of trade in services

• will spill over into the production and export of goods

• will serve to improve the functioning e.g., transport, energy, telecoms, finance in the MPCs

• Regional solutions to promote liberalisation of trade in services:Reform of the transport sector at national level, definition and promotion of an efficient regional transport infrastructure network, with national transport systems linked to each other and with Trans-European NetworksDevelopment of appropriate energy policiesModernisation of the telecomunications sector and facilitation of interconnections as a prerequisite for the development of the Information Society.

The Liberalisation Process

In the context of the EU’s relationship with its Mediterranean In the context of the EU’s relationship with its Mediterranean partners, partners, rules of originrules of origin (ROOs) are increasingly seen as (ROOs) are increasingly seen as playing an important role.playing an important role.

In principle the Mediterranean partners should adopt what is In principle the Mediterranean partners should adopt what is known as the “pan-European system of cumulation of rules of known as the “pan-European system of cumulation of rules of origin”origin”

Rules of origin can indeed serve to restrict suppliers’ ability to Rules of origin can indeed serve to restrict suppliers’ ability to buy their inputs from the cheapest available source. In so buy their inputs from the cheapest available source. In so doing rules of origin impact upon patterns of trade, doing rules of origin impact upon patterns of trade, production and consequently also welfare. Clearly to the production and consequently also welfare. Clearly to the extent that rules of origin do indeed have such an impact, extent that rules of origin do indeed have such an impact, this is likely to fall most heavily on small, possibly less this is likely to fall most heavily on small, possibly less diversified economies, who consequently find it more difficult diversified economies, who consequently find it more difficult to source their inputs domestically and competitively.to source their inputs domestically and competitively.

The Liberalisation Process

Conclusion 1

What do these figures tell us?The European Commission has reached a critical level in order to have a significant impact on national policies only in some Mediterranean Partner Countries.The total MEDA I and II commitments for the period 1995 -2004 have been less than one third of the USAID economic assistance for the same period (even if this assistance has been concentrated in three countries: Israel, Egypt and Jordan).The EU15 (European Commission and member states) share in total MPCs grants and loans has decreased from 53 % to 45 %.

Conclusion 2

The MPCs are not following the global trend towards trade liberalisation and this implies that these countries are losing in terms of international competitiveness relative to other regions in the world. This creates a cumulative process: high protection rates increase the relative strength of import-substitution inefficient industries and in this way the strength of lobbies in favour of maintaining high protection rates increases as well. The mechanism is made possible in presence of inflows of foreign exchange coming from remittances, export of natural resources, financial official assistance (grants and loans) and FDI.A role in maintaining the mechanism was the preferential access to European markets that some MPCs countries enjoyed for some products (for example textiles and clothes). Currently, the liberalisation of textiles and clothes imports from Asia dramatically changes the context in which MPCs have to compete in European markets and the expected returns of investments made in these sectors.

Conclusion 3

Some final considerations within the framework above described:Trade liberalisation needed for attracting more FDI and increase competitiveness of the MPCs production creates major problems for government tariff revenues and for the social impact of the structural adjustment process in both import-substitution industries and export-oriented industries. Which are the financial resources and the size of unilateral trade liberalization that EU is willing to offer to MPCs for alleviating their structural adjustment?

Conclusion 3

The increasing trade with the US suggests that their trade agreements and financial support are more effective than the European initiatives.In fact, when the prime objective is political as well as related to creating development, the quantity of assistance, both in terms of absolute value and in proportion to the offer by other donors, becomes an important factor in the effectiveness of the policy itself. This is the case particularly when other countries offer assistance, having objectives not always consistent with or in conflict with European ones.In conclusion what does the EU currently offer to MPCs in order to carry on the Barcelona process?