Trade in intermediate goods and Euro-Med production networks

This paper examines the involvement of North African (NA) countries in regional production networks using a gravity model of trade augmented with imports of intermediate goods. The model is estimated using disaggregated bilateral exports of final and intermediate goods from four NA countries (Algeria, Egypt, Morocco and Tunisia) to OECD countries over the period 1995–2008. A first hypothesis argues that the Euro-Mediterranean process has led to a greater integration of NA countries in regional production networks. A second hypothesis states that manufacturing companies may transfer part of their production process to countries with lower labour costs, thereby generating increasing trade links between intermediate goods. Our results indicate that NA countries have indeed become more integrated in Euro-Mediterranean production networks and that this has a positive impact on trade flows between the two sides of the Mediterranean Sea. We conclude that the increase in exports from NA countries has been mainly channelled through changes in the rules of origin and the increase in imports of intermediate goods.