The European Union (EU) has recently signed preferential trade agreements (PTAs) with both Tunisia and Morocco. Negotiations for similar agreements are well-advanced with a number of other countries in the Middle East and North African region, notably Egypt, Jordan, Lebanon and Syria. A timely new CEPR book (published jointly with the Egyptian Center for Economic Studies) assesses the potential benefits of this ‘Euro-Med initiative’ and of PTAs more generally.

Although debate continues over the pros and cons of regional as opposed to multilateral liberalization, the move towards PTAs like these may be a positive trend. A growing body of economic research suggests that the benefits of regional integration are greater than conventional analysis might indicate.

This ‘new’ regionalism is grounded more in a general process of increased openness to trade and investment, and less in import substitution, protection of national and regional markets, and managed trade. Recent PTAs in the Americas and Europe, for example, involve countries that place great reliance on market forces, support production for export to world markets and actively welcome foreign investment.

These agreements go beyond the familiar concept of trade liberalization. To varying degrees, they aim for ‘deep’ integration of member countries, involving a mix of harmonization and mutual recognition of national regulatory systems and policies. As a result, they have the potential to generate greater dynamic benefits in terms of economic growth than traditional free trade agreements.

The papers in this volume suggest that there are two key channels through which PTAs can affect economic growth: first, the extent to which their implementation improves incentives for producers and consumers in the partner countries; and second, the extent to which they act as an anchor, enhancing the credibility of government commitments to liberalize the economy and maintain an outward-oriented, investment-friendly policy stance.

For countries like Mexico and the Czech Republic, which have already undertaken far-reaching liberalization on a unilateral basis, the main attraction of a PTA (such as the North American Free Trade Agreement or the Europe Agreements) is its potential to anchor reforms. The strength of such an anchor depends in part on the PTA’s ability to provide greater security of access to partner country markets. Hence, to be a credible anchor, a PTA probably needs to include a country’s largest trading partners.

In contrast, for countries like those of the Mediterranean region, where significant liberalization and policy reform have yet to be achieved, PTAs may be more part of a strategy to open up the economy. In these circumstances, often a great deal needs to be done to change policies and perceptions held by potential investors.

The CEPR Report examines the actual and possible effects of recent trade agreements, particularly focusing on the potential national and sectoral impacts of the Euro-Med agreements. It concludes that the initiative will provide only a modest boost to economic growth for Egypt and the other regional participants – unless it is matched by significant deregulation and liberalization measures in their own economies.

An EU agreement with Egypt could do much more than liberalize trade: it could benefit Egypt in a variety of ways, particularly by stimulating more far-reaching reforms and enhancing the credibility of these reforms. But realization of this potential depends on the substance of the agreement: especially important are measures that liberalize – and increase competition in – the services sector, and those which encourage investment, by guaranteeing the right of establishment and actively pursuing privatization.

The partnership agreement could become a catalyst for enhancing the performance of the Egyptian economy if it is seen as part of a coherent growth strategy. Comparing Egypt’s current growth strategy with those of many economies in South-east Asia and Latin America, it is evident that Egypt is held back from achieving a high rate of sustained economic growth by its limited trade openness, low savings and investment, and insufficient domestic competition.

Since 50% of Egyptian exports go to the EU and 40% of its imports originate there, liberalization under a PTA could have dramatic effects. Egyptian firms would have access to cheaper inputs sourced from Europe, which would reduce costs. But they would also face greater foreign competition, which should encourage them to improve quality.

Much depends on the unilateral complementary policies that Egypt pursues. These are crucial in signalling the government’s commitment to reform, which is, in turn, vital for inducing greater investment, both domestic and foreign. The reforms necessary to enable Egypt to take full advantage of the agreement include increased public sector savings, lower tax burdens, comprehensive privatization and opening the economy to trade and investment from all parts of the world, not just the EU.

The general message of the book is that Egypt and the other Mediterranean countries must pursue ‘deeper’ integration. For its part, the EU should undertake all efforts to facilitate and support implementation and expansions of the partnership agreements.

Although the book focuses on the Mediterranean countries, its analysis can easily be applied to other nations contemplating or engaged in PTA negotiations. Its message is clear: whether the potential benefits of PTAs are realised depends not only on the contents of the agreement but also on the policies adopted by the Mediterranean partners.

Ahmed Galal and Bernard Hoekman (eds), Regional Partners in Global Markets: Limits and Possibilities of the Euro-Med Agreements, CEPR and the Egyptian Center for Economic Studies (1997)