Trade Liberalisation with Trade Induced Technical Change in Morocco and Egypt: Findings and Wider Research Implications

Since the Barcelona Declaration of 1995, the EU and the countries of the Southern Mediterranean, referred to here as the Mediterranean and North African or MENA countries, have been engaged in a more active process of integration and trade liberalisation. Whereas prior to 1995 the relationship was primarily asymmetric, the Barcelona process envisaged trade relations becoming both more symmetric as well as deeper than heretofore. The context of these developments in the MENA countries is an explosion in the number of regional trade agreements in recent years. An analysis of such agreements and historical analysis of patterns of trade and formation of trade blocs in the post-war period suggests that RTAs can be categorised into three types: (1) bloc creation, (2) bloc expansion, (3) market access. (see Evans et al 2006). In assessing any regional trade agreement it is important to consider the impact of policies and trends affecting both “shallow” and “deep” integration. “Shallow” integration involves the lowering or elimination of barriers to the movement of goods and services across national borders within the region. Within this context “negative” integration entails the lowering trade barriers created by national policies. “Deep” integration: Involves establishing or expanding the institutional environment in order to facilitate trade and location of production without regard to national borders. In this context “positive” integration suggests policies designed to encourage trade and facilitate segmentation of production processes and value chains. An important component of such deep integration is Smithian trade induced technical change based on local scale economies and externalities. This paper considers closer economic relations between Morocco and the EU, and Egypt and the EU. These agreements are primarily market access agreements but with some elements of deep integration. The primary methodology used is a regional Computable General Equilibrium (CGE) model referred to as the MENA CGE model, a methodology well suited to the analysis of shallow integration. In addition, two elements of deep integration included. First, preliminary econometric estimates of trade induced technical change are included in the MENA CGE model, based on (Gasiorek et al 2005 and 2006. The preliminary econometric results suggest a positive relationship between trade shares in output and total factor productivity change at the firm level. Second, some experiments designed to capture possible orders of magnitude of welfare gains from incorporating a degree of regulatory harmonisation product standards or process standards that may generate production externalities such as Smithian gains. The trade induced productivity linkages were included in the MENA CGE model, based on (McDonald et al., 2005). This facilitated estimates of the impact of changes in tariffs and trade-induced technical change on from FTA’s with the EU. In the case of Morocco, a direct estimate of poverty impacts was also made. The second element of deep integration from regulatory harmonisation considered was from notional increases in export supply elasticities for Egypt and Morocco, and for import demand elasticities for the EU. Thus, the MENA CGE model experiments were designed to assess: • the economy-wide impact of shallow integration in Morocco, Egypt and the EU on economic welfare assuming only the reduction of tariff barriers in a FTA with the European Union. Note that the FTAs considered are asymmetrical because EU tariffs on manufactured imports from Morocco and Egypt have already been eliminated whilst Morocco and Egyptian protection against EU exports of manufactures that is eliminated in the FTAs is high. • the economy-wide impact of trade policy reform together with deep integration in the form of trade-induced productivity changes using response elasticities based on the preliminary econometric findings reported in (Gasiorek et al 2005 and 2006). • the economy wide impact of a broader trade policy reform with additional deep integration defined as a degree of harmonisation of standards inducing increased export supply elasticities in Egypt and Morocco and import demand elasticities in the EU.• With respect to these policy experiments, we report on the impact of the simulations on aggregate performance (trade, GDP, absorption), on factor markets, and for Morocco, on poverty. Most experiments reported have a fixed wage for unemployed labour allowing for changes in unemployment of unskilled labour, , roughly reflecting high recorded base year levels of unemployment in both MENA economies. • In our preliminary experiments, there was evidence of some trade diversion in Morocco, and strong trade diversion in Egypt, at base levels of MFN tariffs. Egypt has begun a process of reform of MFN tariffs and some additional experiments were conducted to estimate the impact of such MFN tariff reforms on economic welfare and trade diversion.