Preference Erosion Effects of Multilateral and Regional Trade Liberalisation: Simulating the EU's Trade Agreements with Mediterranean Countries

Abstract

Regional Trade Agreements (RTAs) have widely spread in recent years. The World Trade Organisation (WTO) notes that 546 RTAs were notified by January 2013, whereas only 380 were notified by 2007. RTAs have been considered as a stumbling block for the slow progress of the WTO Doha Round, and multilateral liberalisation is said to cause erosion of preferences enjoyed under bilateralism. That is, third country exporters that benefit from multilateral trade liberalization increase their exports, whereas the preferential suppliers in bilateral trade agreements face a decrease of their exports, given the substitutability between export products from different countries. Preference erosion also occurs when countries take up new bilateral trade agreements that can result in “old” trade partner countries losing their preferential treatment. The European Union (EU) has granted preferential market access to a large number of countries and is by far the main trading partner of its neighbouring countries, including Mediterranean partner countries (MED countries). Following the Association Agreements with the EU, there have been efforts of enhanced engagement and co-operation, especially after the Arab spring developments, but negotiations for so called free and comprehensive trade agreements (DCFTAs) are also under way with other partner countries. The objective of this paper is to look into possible preference erosion effects from the perspective of MED countries by depicting recent EU trade agreements as well as multilateral trade liberalisation in a simulation analysis. We apply the MAGNET (Modular Applied General Equilibrium Tool) model that builds upon the GTAP (Global Trade Analysis Project) model in a recursive dynamic general equilibrium framework, with a reference scenario that reflects the economic and population growth paths via most recent projections taken from the literature.