Trade and the Barcelona process. Memo - Brussels, 23 March 2006

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1 Trade and the Barcelona process. Memo - Brussels, 23 March 2006 Trade Ministers from the EU and the Mediterranean countries will meet on Friday 24 March 2006 in Marrakech, Morocco, for the 5th Euro-Med Trade Conference to foster trade and economic relations across the Mediterranean. During this meeting, Trade Ministers are expected reinforce their commitment to the creation of an integrated Euro-Mediterranean Free trade area by The conference will be followed by the formal opening of negotiations on the liberalisation of trade in services and investment between the EU and a first group of Mediterranean countries. This note looks at the trade dimension of the Barcelona process and the prospects for boosting Euro-Mediterranean trade through the launch of services liberalisation talks, and the eventual creation of a Free Trade Area of the Mediterranean. Trade and the Barcelona process Trade relations between the EU and the neighbouring countries of the Mediterranean (Morocco, Algeria, Tunisia, Egypt, Jordan, Palestinian Authority, Israel, Lebanon, Syria) are governed by the Euro-Mediterranean Partnership, or Barcelona Process, which was launched in November The objective of the Barcelona process is to deepen relations between the European Union and its Southern neighbours. In trade terms, the key goal of the Barcelona process is to establish a Euro-Mediterranean Free Trade Area by The EU has concluded and seen entered into force Association Agreements with all of its Barcelona partners except Syria. The Euro-Med countries enjoy duty free access to the EU market for manufactured goods and agricultural goods are progressively being liberalised. One of the key goals of the Marrakech Ministerial will be to launch negotiations on liberalisation of trade in services and investment. Although Turkey is obviously a key European partner in the Mediterranean region EU trade relations with Turkey are covered by a Customs Union which came into force on 31 December 1995, implementing the 1963 EU Turkey Association Agreement. The Customs Union covers trade in industrial goods, but trade in agriculture is subject to bilateral trade concessions. In addition, areas such as services or public procurement are not included. Trade between the EU and the countries of the Southern Mediterranean The EU is the most important trading partner for the Mediterranean countries accounting for about 45% of both Mediterranean exports ( 40 billion) and imports ( 42 billion) in This is about 5% of both the EU s imports and its exports. The most important EU exports to the Mediterranean countries are in machinery and mechanical appliances (15%), electrical machinery (11%) and vehicles (8%). EU imports from Med countries are dominated by fuels and oil (40%) and to a lesser extent by textiles (10%). The central goal of trade liberalisation in the Barcelona process is to boost these trade flows with the ultimate goal of establishing a free trade area of the Mediterranean by Already the EU has extended duty free access to all manufactured exports from the Southern Mediterranean countries, and Mediterranean countries are progressively dismantling their import tariffs for EU manufactures. Boosted by this new opening, EU trade with the Mediterranean countries has increased substantially since Exports to the EU for Southern Mediterranean countries have doubled between 1995 and 2004, while imports from the EU to the Southern Mediterranean countries have increased by about 60%.

2 The Mediterranean region has a trade deficit with the EU in goods. However the relative size of this trade deficit with the EU has decreased from 20% in 1995 to less than 10% in In agriculture, the EU and Southern Mediterranean countries have already agreed some liberalisation, and a large proportion of agricultural exports from Southern Mediterranean countries already enter the EU duty-free. There is however, further room for liberalisation both between the EU and Southern Mediterranean countries and between Southern Mediterranean countries themselves. Boosting trade between Southern Mediterranean countries The other key trade goal of the Barcelona process is to boost trade and regional economic integration between the countries of the Southern Mediterranean. As integration is deepened, the countries of the region will benefit from economies of scale, become more attractive for inward investment and sharpen their domestic competition all of which stimulate economic growth and employment. However, because of the fragmentation of the Southern Mediterranean market, intra-regional trade currently accounts for less than 15% of the region s total trade. This is the lowest such rate in the world for any region of this size. Progress towards regional trade integration has been slow. Egypt, Jordan, Morocco and Tunisia signed the Arab-Mediterranean Free Trade Agreement (known as the Agadir Agreement) in February 2004, but this has not yet entered into force. Other FTAs have been concluded for instance between Israel and Jordan, Morocco and Turkey, Tunisia and Turkey and negotiations are underway between other Mediterranean countries to establish similar agreements with Turkey. Boosted by this initial progress in regional integration, trade between Southern Mediterranean countries is up from less than 1 billion in 1995 to more than 2.6 billion in This corresponds to an annual average increase of close to 13 per cent. Algeria, Israel, Jordan and Lebanon all show annual average growth rates of more than 15 percent. However, similar flows for Morocco and Tunisia have reduced in the same period. Turkey has significantly boosted its trade with its Southern Mediterranean neighbours. In 1995, this trade totalled 2.5 billion compared to more than 8 billion today. Fuels and manufactured goods are the most important goods in this trade. 2

3 Growth in trade for Southern Mediterranean Countries since launch of Barcelona process 1995 Trade Exports Imports Country Average annual growth (%) Average annual growth (%) Algeria West Bank Egypt Israel Jordan Lebanon Morocco Syria Tunisia Turkey All S-Med Countries* Source: COMEXT and COMTRADE. * Excluding Turkey. Trade between Southern Mediterranean countries since launch of Barcelona process 1995 ( million) Country Average annual growth (%) Algeria West Bank n.a. n.a. n.a. Egypt Israel Jordan Lebanon 76 a 185 b Morocco Syria 293 c Tunisia MED countries* Source: COMTRADE. Note: a 1997, b 2003, c 2000 and * Excluding Turkey. Non-tariff barriers and trade facilitation One key focus of the trade dimension of the Barcelona process has been to reduce non-tariff barriers in such as excessive documentation requirements and discriminatory regulatory procedures. It has also tried to reduce the losses to businesses through long delays for customs clearances and over-complex customs procedures. In 2003 Euro-Mediterranean 3

4 governments adopted an Action Plan on Trade and Investment Facilitation to simplify border procedures, adopting common international standards and common administrative procedures. In Marrakech in March 2006, Ministers will define the next steps in bringing regulation in the EU and the Euro-Med countries closer. The goal is to give Euro-Med partners a stake in the European Union s internal market by ensuring that Mediterranean industrial products can enter the EU market without additional testing and vice versa. Textiles and the Southern Mediterranean Textiles make up an important part of the production and export of Southern Mediterranean countries. For example, textiles makes up more than half of the industrial production of Morocco and Tunisia and the huge majority of the production is exported to the European Union. Textile producers in the Mediterranean have faced tough new competition from cheap textile exports to Europe from Asia. In order to help boost the competitiveness of the Euro-Med region the EU s wider review of its Rules of Origin has included the adoption of a Pan-Euro- Med system of cumulation that will ensure that a product produced in more than one country in the region will continue to benefit from preferential access to the European Union, something prevented by the EU s previous Rules of Origin. This will mean that fabric produced in Morocco can be sewn into a shirt in Tunisia, finished in Turkey and then exported to the European Union while still benefiting from preferential access. Assuming that the Southern Mediterranean countries in question has liberalised trade among themselves - as they are now beginning to do then the whole Mediterranean basin can be used as a single factory floor, reducing prices for textile production by encouraging economies of production and scale and helping Euro- Mediterranean textile companies compete with Asian producers. Why the focus on services in Marrakech? The services sector is key to the economies of the Southern Mediterranean countries. Services account for about 50% of GDP in Egypt, Morocco and Syria and around 70% of GDP in Jordan and Lebanon, with Tunisia in-between at 60%. It is less important in Algeria whose economy is dominated by the energy sector. Southern Mediterranean countries stand to make substantial gains from the gradual opening of the services sector and from attracting new investment. They will benefit even more if the negotiations not only open up trade with the EU but also foster services trade among the Southern Mediterranean countries themselves. The potential for developing services trade in the Euro-Med area is considerable. Services trade with the Mediterranean countries currently represents only 3.5% of the EU s total services trade. Trade in services only represents 3.5% of the volume of trade in goods. Services exports from the Mediterranean to the EU are for the moment focused heavily on tourism but there is real potential in a number of other sectors: financial services, telecommunication, distribution, energy, environmental services and transport. According to the World Bank, the effect of trade liberalization of services in the Egyptian economy would add 13% to the GNP and a liberalization of access to EU markets would increase that figure to 21%. For Tunisia, the World Bank estimates that liberalization in six services sectors would provide gains of more than 5% of GDP mainly through liberalization of financial services, telecommunications and transport. Foreign investment flows into the Mediterranean region are also still very low. The share of this region in the EU s total direct investment abroad was less than 3% in Since 2000, the 4

5 Mediterranean countries have attracted on average only 1% of the EU outward Foreign Direct Investment. Liberalisation of investment regimes, coupled with the creation of an integrated regional market, will have a positive impact on the level of domestic and foreign investment in the Mediterranean region. According to an OCDE study from 2001, these gains are at least of the same magnitude as those derived from goods liberalisation, in some case exceeding them significantly. 5