|
|
|
|
|
|
The World Trade Organization,
the European-Mediterranean Agreements
and the Arab Common Markets:
Complements or Substitutes?
by Ahmed Galal
One of the questions that is raised these days is whether the World Trade Organization, the European-Mediterranean agreements, and the Arab common markets are complementary or substitute arrangements. This question is not only interesting, but also relevant and provocative: It is interesting because the answer is not obvious. For instance, many hold the view that countries may lock themselves into regional trade agreements and might not necessarily feel the pressure to open up their markets beyond those agreements. It is relevant — and not merely academic — as all countries in the Middle East and North Africa region are dealing with it or will have to deal with it in the immediate future. In fact, these countries have been liberalizing their trade regimes, simultaneously negotiating with the EU and, for some time, trying to integrate into an Arab common market. And it is provocative because, in trying to answer it, many people might end up supporting the Euro-Med agreements rather than an Arab common market, which would make others unhappy.
The question of whether trade agreements are compliments or substitutes to the WTO depends in part on whether they are building or stumbling blocks toward full liberalization. It also depends on whether these agreements are favorable to countries’ development. In this connection, three conditions seem to make these agreement beneficial.
First, these agreements work when countries have both the economic and political incentives to conclude them. Here the main issue is that even when the economic incentives are present, political realities might offset them, and vice versa. For example, for some time, countries in the Arab region have been trying to create a common market. Although the political incentives are probably there, perhaps the economic incentives are not strong enough to push countries in that direction. As a result, there is no Arab common market. At the same time, over the last two years, Morocco and Tunisia have signed trade agreements with the EU, Egypt is about to sign one, and other Arab countries are negotiating similar deals.
Why are these countries signing trade agreements with the EU? The reason is that the economic incentives are present and, at the same time, there are no political considerations constraining them. In other words, it is hard to find convincing arguments for these countries not to sign trade agreements with the EU. Moreover, the proximity between Europe and the Middle East and the lack of competition between their respective production structures act as positive factors towards trade cooperation — the latter element being absent among Arab countries, where the production structures are very similar.
Second, trade agreements are successful when complementary domestic reforms are simultaneously undertaken. For instance, if a country such as Egypt signs a trade agreement with EU, as tariff barriers are removed, its domestic industry will face increasing competition from European producers. Although the country might at first have a comparative advantage in terms of labor costs, the transaction costs of domestic production may eventually prove to be too high — even as European inputs become cheaper — to the point where Egyptian exporters would not be able to penetrate European markets. For that reason, for Egypt or any other country to take full advantage of a trade agreement with the EU, it will need to reduce these transaction costs — which include shipping and communications, processing and even bribes. In addition, investments will converge in those areas where production costs are cheap and export markets are large. Therefore, to the extent that transaction costs are high and that domestic reforms are not undertaken to reduce them, investors will tend to look elsewhere. In sum, domestic reforms are an essential condition for the success of trade agreements.
Third, some trade agreements that do not appear advantageous in the short term may be beneficial in the long term. This relates to the fact that "vertical integration" — or trade agreements between countries in the region and the EU — and "horizontal integration" — or trade agreements among countries in the region — can be reconciled in time. On the basis of the existing economic and political incentives, it may appear that it is in the interest of a country such as Egypt to open up its economy first to a large trading partner such as the EU than to other countries in the region. After all, Egypt’s exports to and imports from the EU represent some 50 percent and 40 to 50 percent of the total, respectively.
In contrast, the country’s trade within the region accounts for less than 10 percent of its total trade. Therefore, based on strict reveled preferences, it does not appear that integration within the region is nearly as attractive as integration with the EU now. Moreover, as Egypt, Morocco and Tunisia move towards greater economic integration with the EU, investors from the EU and possibly all three countries will choose to locate where they can serve a larger market — that is, the EU, which will in turn reduce even further the appeal of horizontal integration. However, at a later stage, to the extent that these countries become more open and attractive for investors, it will be beneficial for them to integrate horizontally, as that would create a larger market which would further attract investors to the region. In other words, while horizontal integration may not appear attractive in the short term on economic grounds, the likelihood is that, in the long term, it will become beneficial, mostly as a result of the economic effects of vertical integration with the EU.
