The Analytical Method and the Egypt Case Study

David Evans (University of Sussex)

Ahmed Farouk Ghoneim(University of Cairo)

The Questions Asked

1. How far one can get with the Analytical Method without the help of other methodologies (eg CGE)?

2. What are some of the pitfalls arising from using the Analytical Method that can be in part avoided with reference to a general rather than partial equilibrium methodology?

3. What are the strengths and weaknesses of the Analytical Method as applied to Egypt case study?

3 Key Elements of the Analytical Framework

– 6 rules of thumb based on descriptive statistics to assess likely impact of shallow integration on balance of trade diversion and trade creation

– looking at the details of the agreement - check list of the likely elements and their implications

– likely indicators for the potential for deep integration

What is the Analytical Method?

WHAT TYPE OF AGREEMENT?The partner countriesFTA or Customs union?Overlap with other agreementsExpected ease of negotiationNature of barriers to tradeElements of Deep IntegrationIs the RTA WTO compatible?Role of donors

ASSESSING SHALLOW AND DEEP INTEGRATION

A Case-Study Approach

WINNERS AND LOSERS

How far did we get with the Analytical Method in the Egypt Case Study?

Shallow Integration - rules of thumb

• Framework describes a set of statistical indicators and how to calculate them from easily available and cheap sources (notably WITS and TRAINS databases)

• rules of thumb 1.The effects will be greater the higher are the initial tariffs. 2.The greater the number of RTA partners the more likely it is that

there will be trade creation as opposed to trade diversion. 3.Wide differences in comparative advantage likely to lead to a

welfare improving RTA provided the initial tariffs are not too high. 4. The more similar is the product mix in the economies concerned

and the higher the elasticities of supply the more likely there is to be trade creation

5.The higher the percentage of trade with potential partners the more likely the RTA is to be welfare enhancing.

6.If trade is initially a small share of GNP, an RTA can be considered more likely to be welfare improving.

Potential for deep Integration

• no easily derivable composite indicators of likely potential for and or welfare effects of deep integration

• framework gives suggestions of where to look via indicators of

• market integration• product variety and intra industry trade

• suggests the use of case studies in sectors where regulation appears to be an obstacle to bilateral trade

Outline

• Main features of the EU and Egypt’s trade policies • The 2004 Egypt-EU Agreement – what is “in” and what is

“out”• Application of the Rules of Thumb • Extent of Deep Integration versus Shallow Integration• Compatibility with other Regional Trade Agreements and

World Trade Organization• What can other methodologies add eg CGE model?• Main Findings on Analytical Method

Institutional Dimensions

• New RTA– Egypt cuts all tariffs– EU ends remaining textile and clothing barriers– Limited liberalization of agriculture and agro-industrial

products• Limited regulatory harmonization• Little to improve Egyptian access to EU markets limited

by problems of conformity assessment and accreditation.• Other Egyptian WTO commitments: the Uruguay Round

Shallow Integration

Applying the Rules of Thumb Applied to Egypt

i) The effects will be greater the higher are the initial RTA tariffs:

High initial tariffs, large number of peaks

Tariff Barriers in Egypt and European Union:

Trade Weighted %All products Primary Manufactures

Imports Egypt from EU 2002 13.4 6.6 16.4

Exports from Egypt to EU 2002 2.4 1.5 2.9

MFN tariffs in Egypt 1998 14.8    

MFN Tariff Peaks Egypt SITC2 rev2 1998 11/65    

ii) The greater the number of RTA partners:

Egypt EU FTA has 2 partners

This implies 2 things:

EU is the largest trading partner for Egypt

Bargaining power is significantly different

iii) Wide differences in comparative advantage likely to lead to a welfare

improving RTA provided the initial tariffs are not too high.

On import side, wide differences in RCA’s for Egypt compared to EU

(Coefficient: -0.18),

however this is questionable, since the literature is not clear about issues of rivalry versus complementarity (we

need to look at intra industry trade and inter industry trade)

iv) The more similar the product mix and the higher the supply elasticities, trade creation

more likely. But production or trade similarity?

Finger-Kreinin Index, EU- Egypt for Exports and Imports

  EU-Egypt Export EU-Egypt Import

1985 0.41 0.42

1990 0.30 0.40

1995 0.35 0.49

2000 0.37 0.51

2001 0.37 0.49

2002 0.34 0.47

2003 0.34 0.47

v) The higher the percentage of trade with potential partners the more likely the RTA

is to be welfare enhancing.

Characteristics of Egyptian-EU merchandise trade 1999-2004)

1999 2000 2001 2002 2003 2004

Exports to EU % total exports 34% 40% 32% 28% 32% 33%

Imports from EU % total imports 35% 35% 30% 27% 26% 25%

Egyptian Sources, * January- September

vi) Finally, if trade is initially a small share of GNP, an RTA can be considered more

likely to be welfare improving.

Egypt has a trade share in GDP of 29% in 2003. This compares with 30% for Morocco and 45% for Tunisia and Turkey in the same year.

Compatibility with other Regional Trade Agreements and World Trade

Organization

• Main problems with compatibility with other RTAs are embedded mainly in rules of origin, standards, competition rules, and IPR, however this is not of significant weight

• As for WTO, there are two problems (one is the TRIPS+ of the EU and the other has do with dealing with export subsidies)

Extent of deep integration

• RTA involves very little beyond shallow integration– Focus on tariffs

• No formal agreement on issues such as:– Establish agreed standards– Technical assistance to meet standards (issues of

conformity assessment and mutual recognition are vaguely mentioned)

• Elements of deep integration being achieved by the private sector

Case Study of Potatoes

• Several actions have been undertaken by the EU to stop Egyptian exports

• The case is difficult to assess in terms of whether the EU is adopting protectionist measures or applying genuine SPS measures.

• Ghoneim, Holmes, and Iacovone (2005) investigated the case in details, however reached inconclusive results in terms of whether the polices of the EU are protectionist or genuine measures for protecting plants and soil.

Main Findings on Analytical Method

• Underling trade theory same in Rules of Thumb is basically same as in formal PE or CGE .

• Eclectic vs theory for shallow and deep integration eg New Trade theory or other theories on deep integration.

• Egypt EU Agreement shallow and asymetric with no additional benefits in terms of market access in EU or deep integration eg regulatory harmonisation.

• From Rules of Thumb gains form net trade creation likely to be small.

• Asymmetric nature of agreement puts adjustment heavily on Egypt imports side, but real exchange rate devaluation likely to provide stimulus to exports.

• The agreement will bring preference erosion, little new FDI, agriculture and services exclusion negative.

Key Areas of Weakness of Analytical Method

• No quantification of welfare benefits: unemployment and poverty reduction, trade creation and diversion.

• Economic interdependence not captured eg estimating real exchange rate depreciation required in the adjustment process.

• Estimating the effect of MFN tariff reduction on the above economic variables.

• Estimating the benefits of trade induced technical change were good econometric estimates of the link available as in the case of Egypt.

• Bringing deep integration issues to future Egypt-EU agreements would be helped by PE impact estimation and negotiating framework eg recent Ethiopia and COMESA with PE model. See Round Table.

PE and CGE Models

• In principle highly disaggregated CGE models can use similar datasets as used for the 6 rules of thumb. In practice CGE models usually have 20-30 activities and commodities: a Rolls Royce Deux Cheveaux.

• Strength of CGE models: consistent estimation of database (SAM); economic interdependence a hall-mark of CGE results; structural differences captured in SAMS and parameters; induced technical change and poverty impacts can be included.

• PE models have simpler theoretical structure but can operate in highly disaggregated mode eg at HS6 based on trade data only. Such models give some guidance on welfare effects, trade creation and trade diversion but are potentially most useful as negotiating tool for deep integration.

Trade Liberalisation with Trade Induced

Technical Change • Egypt-EU Agreement was analysed using a global CGE

model using GTAP 2001 database and econometric estimates of the impact of trade liberalisation on total factor productivity in Egyptian manufactures. Parallel work was done for Morocco and the EU.

• Trade induced productivity gains can substantially enhance the benefits accruing to Egypt and substantially reduce unemployment.

• Major trade diversion effects unless off-set by MFN tariff reduction.

• Modest changes in key elasticities affecting Egypt’s exports and import penetration into the EU that might be associated with specific deep integration policies have strong welfare effects.

Some key results from the CGE model for Egypt and the EU

MFN Tariff cuts and Absorption Decomposition (%changes)

Experiment Unemployed unskilled

labourNo technical

change

Unemployed unskilled

labourBase estimate

technical change

Unemployed unskilled labour

Base estimate technical change 33% MFN tariff

cuts

Unemployed unskilled labour

Base estimate technical change 66% MFN tariff

cuts

absorption -1.66 0.07 1.86 5.03

q_domestic -1.95 -0.11 1.01 2.8

t_of_t 0.07 0.04 0.02 -0.01

exports 0.22 0.14 0.83 2.24

How does the Analytical Approach Compare with CGE

Similarities:1. Both are able to emphasize the trade diversion

effect, although reasons might differ. Moreover, CGE quantifies the effect, whereas the analytical approach shows how the effect works despite the change of the main reason behind the CGE approach (high MFN tariffs).

2. Both emphasize that the agreement is not likely to bring much as it is shallow but deep integration could alter the assessment.

How does the Analytical Approach Compare with CGE cont.

• Differences:1. The devil in the details is revealed by the analytical

approach but not by the CGE (e.g. liberalization of agriculture and processed agriculture, rules of origin)

2. The CGE approach is able to capture the impact on productivity whereas the analytical approach cannot.

3. Impact of how tariffs are dismantled is described better using the analytical approach although recent work by Interns from Ministry of Trade and Industry in Cairo incorporates this detail into a single country CGE model of Egypt.

4. Capturing the effect of intra industry trade and similarities in export structure is better done in the analytical approach.

Main findings on Analytical Method

1. The analytical approach might have had more added value if deep integration elements were in the Agreement. These would have been difficult to capture in the CGE models (issues of liberalization of trade in services, harmonization of rules and regulations etc).

2. The results obtained so far complement each other and there is no contradiction, as each approach strengthens the other by adding more information that the first approach is incapable of providing it.

But how well did the analytical method do on gains from agreement, trade creation

and trade diversion?

1. Heart of the matter: what do the descriptive indicators eg height of tariff, Herfindal, FK, tell us?

2. Initial conclusion: not very precise at all, especially when Smithian gains from trade induced technical change.

3. But what do the econometric estimates of trade induced technical change based on firm level data really capture?

4. Does the trade induced technical change as in the CGE models capture reality?

How far has the Analytical Method taken us?

1. The analytical method a very good first step for understanding the Egypt-EU Agreement. Made easier by lack of deep integration issues in the Agreement.

2. Egyptian policy makers not tuned in to trade diversion problem. CGE results likely to help get MFN trade policy reduction to deal with to trade diversion problem on to the agenda.

3. Deep integration in new agreements likely to involve a lot a background work and possible using PE and deep integration framework being developed for Ethiopia and COMSESA.

Thank You