The European Union's Mediterranean Free Trade Initiative

The option of a Euro-Mediterranean Agreement gives the Mediterranean countries a unique opportunity to credibly pursue far-reaching trade liberalization gradually. Further unilateral efforts will be required to ensure that Mediterranean countries gain. Liberalization of foreign direct investment and the service sector are essential to ensure a supply response and create new job opportunities. Many countries in the Middle East and North Africa that are considering liberalizing, privatizing, and deregulating markets face difficult policy issues. Gradual, piecemeal reform efforts have had limited success. The option of a Euro-Mediterranean Agreement (EMA) offers a new opportunity to implement structural reform. Two questions can be posed: (1) Why pursue regional integration? and (2) Is an EMA sufficient? Justifications for regional integration include the following: ° The EMA may offer a stronger mechanism for locking in economic reform than does the World Trade Organization (WTO), while the preferential nature of an EMA might help overcome domestic resistance to liberalization. ° Harmonization of regulatory regimes and administrative requirements could facilitate trade. ° Market access could be more secure if countries agreed not to impose contingent protection, such as antidumping actions. ° Transfers from the European Union to partner countries (financial or technical assistance) would help offset lost tariff revenue and the costs of trade diversion. The EMA signed between Tunisia and the European Union does not go significantly beyond existing multilateral (WTO) disciplines. The long 12 - year transition path may reduce incentives to initiate rapid restructuring and may create problems in implementing future tariff reductions. While the EMA option gives the Mediterranean countries a unique opportunity to pursue far-reaching trade liberalization credibly and gradually, the economic benefits will be limited if trade liberalization is restricted to manufactured products. Service markets and foreign investment must also be liberalized to ensure a supply response and create new employment opportunities. Equally important are factors that cannot be imported through an agreement with the European Union: efficient public institutions, domestic competition, investment in education, high rates of private savings and investment, a stable economy, and openness to the world economy. The greater the extent to which the EMA-based preferential liberalization is extended to non-European countries, the greater the benefits for participating Mediterranean countries. This paper - a product of the Private Sector and Finance Team, Technical Department, Europe and Central Asia, and Middle East and North Africa Regions - is part of a larger effort in the department to monitor trade policy developments in the region.