Morocco's free trade agreement with the European community : a quantitative assessment

Morocco is interested in developing a reciprocal free trade agreement with the European Community (EC), although it already enjoys free access to EC markets in industrial products and is not obligated to give EC exporters reciprocal access. But Moroccan agricultural exports are impeded by agricultural protection in the European Community. A free trade agreement would require that Morocco lower its moderately high tariffs against its most important trading partner. Tariff reductions against the European Community but not against the rest of the world may provide benefits provided the trade diversion costs of preferential tariff reduction do not dominate. The authors apply a 39 sector general equilibrium model of the Moroccan economy which includes the sectors most likely to be affected by such an agreement. They investigate the economic effects of the prospective free trade agreement as well as five other trade liberalization scenarios for Morocco. Some of their most important findings are: The welfare benefits to Morocco from a free trade agreement with the European Community would be about 1.5 percent GDP. Such substantial welfare gains partly reflect the benefits of reducing dispersion in the tariff regime. Welfare benefits of about 2.5 percent of GDP would accrue from liberalizing trade with the rest of the world - with only slightly higher adjustment costs. Liberalizing trade with the world would provide greater benefits because it would eliminate the trade diversion costs associated with discriminatory trade liberalization. (Although the fact that significant benefits would accrue from discriminatory liberalization against imports from either the European Community or the rest of the world indicates that trade diversion is not dominant.) As a result of improved access to the European Community, employment and output in the vegetable and citrus fruit sectors would expand. But the phosphate sector stands to gain most from the free trade agreement because liberalization wouldinduce a depreciation in the real exchange rate. Morocco's cereal, meat, dairy, and sugar sectors would loose more in terms of employment, because of significantly lower import prices from the European Community. The nontraded goods sector would also contract slightly. The value added tax would have to be increased to compensate for the loss in tariff revenues, on which Morocco depends. Estimates are provided as ranges, with probability assessments, because of the element of uncertainty.