The Impact of NTMs on Agro-food Trade between the EU and Selected MENA Countries Serhat Asci, A. Ali Koç, and M. Şükrü Erdem September 25-26, 2014

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1 The Impact of NTMs on Agro-food Trade between the EU and Selected MENA Countries Serhat Asci, A. Ali Koç, and M. Şükrü Erdem September 25-26, 2014 Workshop on Agricultural Trade and Food Security in the Euro-Med Area Antalya, Turkey

2 Objective Exporters have to comply with non-tariff measures (NTM) including standards and other requirements in order to supply foreign markets. The objective of this study is an attempt to measure the impacts of technical barriers, institutional quality and infrastructure on trade, particularly agro-food trade between selected MENA countries/turkey and the EU-28, using the gravity model with unbalanced panel data analysis. Gravity model measures the impact of various trade costs and measures on the trade flows. Some recent studies applied gravity model in agrofood trade includes (Francois and Manchin 2007; Bao and Qui 2010; and Xiong and Beghin 2012).

3 Non-Tariff Measures World Trade Organization (WTO): Countries have rights to take precautions and to impose measures necessary to protect human, animal or plant life or health. These rights do not count as tariffs or quotas. However, these technical regulations are now being used as political means in place of diminished tariffs and removed quotas. Types of NTMs: Technical barriers to trade (TBT ): Technical and information requirements, Sanitary and phytosanitary (SPS) measures: Import bans due to disease outbreaks, Investment protection, Public procurement, Competition policy, Tariff rate quotas.

4 MENA Countries MENA countries are characterized by: High unemployment rate (among youth and university graduated), High poverty ratio, Highly dispersed inequality situation, Severe trade, current balance and budget deficit positions Import dependency on essential foods. Sensibility to internal/ external shocks (such as world food price spike): Resource scarcity (per capita water and land) Climate change impact, Misuse or misallocation of the resources Environmental overshoot position (carbon blueprint/biocapacity)

5 Turkey and the EU Trade Integration Turkey and the EU trade integration relation started with Ankara Partnership Agreement in Under customs union agreement with the EU (started in 1996), Turkey undertook setting external tariffs no higher than those in the EU (except for a small number of goods) and agreed to provide preferential treatment EU imports. Customs union moderately led to a decline in the simple average tariff rate for imports from 27% in 1993 to 13% in 1998 (Togan, 2012). These measures have led to a more open economy, as the ratio of trade to GDP rose from 34% in 1995 to 49.5% in 2012 (Turkish Ministry of Economy, 2013). In addition, Under accession negotiations with the EU (started in October 2005), Turkey has significantly improved its institution including harmonization of trade and competition rules and infrastructure including food quality and safety control system.

6 Egypt and the EU Trade Integration Egypt signed an Association Agreement with the EU in June 2001 and came into force in June 2004 which involves a free trade agreement for industrial products, preferential access for agri-food trade. A further bilateral trade liberalization agreement between Egypt and the EU was signed on agricultural, processed agricultural products and fish/fishery products in October This agreement facilitates the dismantling of applied tariffs and only a few numbers of sensitive products subject to protection from both sides. Recent data indicates that trade increased from 11.5 billion in 2004 to 23.3 billion in 2011 under the Association Agreement, and the value of imported agricultural products by the EU rose from 527 million in 2009 to 604 million in 2011 under the agricultural agreement (JRC-IPTS, European Commission 2013b).

7 Morocco and the EU Trade Integration The Euro-Mediterranean Partnership started in November 1995 which brought the Morocco-EU Association Agreement in force on March 1st, Moreover, Morocco requested Advanced status within the European Neighbourhood Policy (ENP) in 2008 which further strengthen Morocco and the EU relationship. Lastly, the European Commission concluded the negotiations with Morocco on the Agricultural Protocol in December 2009 which came into force in March 2012 (JRC-IPTS, European Commission 2013b). The latter protocol eliminated tariff rate quotas (TRQs) for allowing full duty-free access to the EU market over time.

8 Tunisia and the EU Trade Integration Euro-Mediterranean Association Agreements signed in 1995 between the Tunisia and the EU for the trade liberalization of the agricultural sector which came into force in Since January 2001, trade in agricultural and food products has been governed by the 2000 Agreement, which followed the Association Agreement of 1995 and established a reciprocal tariff concessions granted by both parties. The process of trade liberalisation between Tunisia and EU will be further enhanced by the opening of new trade negotiations in order to establish deep and comprehensive free trade areas (DCFTA) and Tunisia s obtaining of the Statut Avancé, on November 19th, 2012 (JRC-IPTS, European Commission 2013b).

9 New EU Directive on Free Trade with MENA Counties The EU adopted negotiating directives at the end of 2011 for deep and comprehensive free trade areas (DCFTAs) with Egypt, Tunisia, Morocco and Jordan in order to strengthen democracy and economic reforms in these MENA countries (JRC-IPTS, European Commission 2013b). These agreements aim not only to remove tariffs in trade but also to protect investments and intellectual property and to standardize rules of origin and competition policies (European Parliament, 2012). Moreover, there has been a significant decline in public sector support for agriculture for 20 years that leads a lost to access key inputs and services for producers. Therefore, DCFTA on the agri-food sector would have a significant impact on agricultural policies and agri-food trade.

10 Data and Model The bilateral trade data between MENA (Israel, Morocco, Tunisia, Egypt), Turkey and EU-28 ): EUROSTAT database for period Total trade, Food products, Industry goods, and fruits/vegetables (HSC-1988). Non-tariff barriers index (Fraser Institute): Survey data from Global Competitiveness Report and World Bank s Doing Business data on compliance cost. Institutional quality (economic freedom index from Fraser Institute): Forty-two World Bank, IMF and UN indicators are used to construct a summary index in five broad areas: Size of Government, Legal System and Property Rights, Sound Money, Freedom to Trade Internationally, Regulation. Infrastructure indexes (computed from World Bank indicators): Internet and land/mobile phone membership, roads paved, ATMs, air cargo freight. Gravity Model: lnm ln GDP _ ex k ijt ln Dist 5 0 ij 1 ln NTB 8 k jt it ln GDP _ im ln EFW 9 2 k it lnm: Bilateral Trade Value (in $) lngdp: Income, Gross Domestic Products- current; lnpop : Populations; lndist : Distance ; lnntb: Non-tariff barriers; lnefw: Institutional quality; lninf : Infrastructure index; FTA_Dummy: Free Trade Agreement Dummy. i exporter country; j importer country; t time; and ln natural logarithm. 10 jt ln Pop _ ex 3 ln INF k it ti ln Pop _ im FTA _ Dummy 11 4 k it ijt jt

11 TRADE VALUE (BILLION EURO) Data Interpolation - 1 TURKEY VS EU-28 Food - Export Industry Goods - Export Food - Import Industry Goods - Import Customs Union

12 TRADE VALUE (BILLION EURO) Data Interpolation MENA COUNTRIES VS EU-28 Food - Export Food - Import Assoc. Agree. (Tunisia) Industry Goods - Export Industry Goods - Import Association Agreements (Egypt, Israel and Morocco)

13 Results Gravity Estimation Results between MENA Countries and EU-28 Selected MENA Countries Total Trade Fruits/Vegetables Trade Intercept 7.564*** *** 4.216** 5.877** (0.993) (0.999) (2.148) (2.063) lngdp_importer 0.388*** 0.350*** 1.035*** 1.035*** (0.030) (0.034) (0.064) (0.077) lngdp_exporter 0.662*** 0.658*** *** *** (0.030) (0.030) (0.069) (0.072) lnpop_importer 0.618*** 0.631*** (0.052) (0.052) (0.111) (0.108) lnpop_exporter 0.287*** 0.291*** 1.407*** 1.464*** (0.052) (0.052) (0.122) (0.117) lndist *** *** ** ** (0.118) (0.118) (0.251) (0.235) lnntb * (0.097) (0.225) lnefw 0.370*** (0.132) (0.310) Free Trade Agreements - dummy * *** (0.026) (0.012) lninf (0.014) (0.059) n-observation R-Squared F-Test F(3,4651)=16.37** F(3,3597)=9.43** In the parenthesis are standard errors. *** significant at 1% level; ** significant at 5% level; * significant at 10% level

14 Results Gravity Estimation Results between MENA Countries and EU-28 Selected MENA Countries Food Products Industry Goods (excl. fuel/petr.) Intercept 3.782*** *** 7.069*** 7.093*** (1.648) (1.655) (1.007) (1.014) lngdp_importer 0.429*** 0.438*** 0.374*** 0.329*** (0.054) (0.062) (0.031) (0.035) lngdp_exporter 0.293*** 0.256*** 0.707*** 0.703*** (0.054) (0.055) (0.031) (0.031) lnpop_importer 0.523*** 0.503*** 0.652*** 0.670*** (0.087) (0.088) (0.053) (0.053) lnpop_exporter 0.899*** 0.927*** 0.282*** 0.287*** (0.087) (0.087) (0.053) (0.053) lndist *** *** (0.194) (0.191) (0.119) (0.120) lnntb * (0.190) (0.101) lnefw *** (0.264) (0.138) Free Trade Agreements - dummy * (0.190) (0.101) lninf * (0.050) (0.027) n-observation R-Squared F-Test F(3,4416)=16.37** F(3,4653)=9.43** In the parenthesis are standard errors. *** significant at 1% level; ** significant at 5% level; * significant at 10% level

15 Results Gravity Estimation Results between selected MENA Countries and EU-28 Turkey Total Trade Fruits/Vegetables Trade Total Trade Fruits/Vegetables Trade Intercept ** ** *** *** (2.278) (2.259) (2.247) (3.624) (2.617) (2.643) (5.402) (4.963) lngdp_importer 0.590*** 0.503*** 1.317*** 1.112*** 0.590*** 0.761*** 1.701*** 1.605*** (0.062) (0.080) (0.118) (0.156) (0.055) (0.068) (0.136) (0.166) lngdp_exporter 0.743*** 0.766*** *** *** 0.280*** 0.275*** 0.363** 0.427** (0.062) (0.063) (0.119) (0.122) (0.055) (0.056) (0.141) (0.137) lnpop_importer 0.912*** 0.922*** *** 0.727*** * (0.130) (0.138) (0.211) (0.232) (0.126) (0.129) (0.269) (0.259) lnpop_exporter 0.898*** 0.845*** 2.634*** 2.601*** 0.464*** 0.412*** 1.108*** 1.040*** (0.130) (0.129) (0.229) (0.227) (0.126) (0.129) (0.305) (0.283) lndist *** *** (0.290) (0.287) (0.462) (0.458) (0.304) (0.307) (0.629) (0.573) lnntb * ** (0.144) (0.311) (0.192) (0.534) lnefw 0.555** 1.017** ** (0.229) (0.483) (0.261) (0.727) lninf *** (0.016) (0.108) (0.027) (0.444) n-observation R-Squared F-test In the parenthesis are standard errors. *** significant at 1% level; ** significant at 5% level; * Egypt F(3,923)=5.02** F(3,809)=2.35* F(3,923)=16.37** F(3,730)=0.19 significant at 10% level

16 Results Gravity Estimation Results between selected MENA Countries and EU-28 Tunisia In the parenthesis are standard errors. *** significant at 1% level; ** significant at 5% level; * Morocco Total Trade Fruits/Vegetables Trade Total Trade Fruits/Vegetables Trade Intercept ** ** ** ** *** *** (2.019) (2.032) (6.362) (6.158) (3.171) (3.310) (9.603) (10.018) lngdp_importer 0.131** *** 0.713*** 0.183*** *** 0.535*** (0.054) (0.056) (0.190) (0.201) (0.063) (0.079) (0.168) (0.204) lngdp_exporter 0.456*** 0.420*** *** *** 0.552*** 0.550*** *** *** (0.054) (0.055) (0.205) (0.209) (0.063) (0.071) (0.179) (0.188) lnpop_importer 0.903*** 0.823*** *** 1.133*** 0.914*** 1.074*** (0.117) (0.120) (0.390) (0.385) (0.111) (0.120) (0.329) (0.347) lnpop_exporter 0.746*** 0.823*** 1.788*** 1.571*** 0.658*** 0.669*** 2.037*** 2.065*** (0.117) (0.120) (0.420) (0.424) (0.111) (0.118) (0.430) (0.442) lndist *** *** *** *** (0.230) (0.231) (0.717) (0.690) (0.372) (0.381) (1.131) (1.166) lnntb (0.144) (0.672) (0.332) (0.741) lnefw 0.628*** *** 1.889* (0.193) (0.483) (0.467) (0.993) lninf * (0.017) (0.432) (0.039) (0.138) n-observation R-Squared F-test F(3,923)=16.37** F(3,773)=16.37 F(3,923)=16.37 F(3,646)=16.37 significant at 10% level

17 Conclusion Institutional and infrastructure quality on total trade-volume exhibits positive relationship between selected MENA countries and EU-28 We capture negative effect of non-tariff barriers on trade-volume (Only in total and industry goods). Free trade agreements negatively effect the trade flow. In the disaggregated models results suggest that institutional quality generally has positive impact on trade flow except for Egypt. We do not observe substantial impact of infrastructure on trade with the EU. The estimated parameters for non-tariff barriers confirm negative impact on trade although we capture a few statistical significant coefficients in the results. One of the important results obtained in this study is that fruits/vegetable exports from MENA countries to the EU will decline as GDP increasing in all MENA countries except Egypt. The result implies that MENA countries will further more import dependent countries in terms of food-security as GDP increasing.

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