A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Liberalization Imperfect Competition Group

Imperfect Competition Small Group No. 1 John Helming and Kenneth Baltzer

A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Liberalization GTAP Working paper No. 31 by Aziz Elbehri and Thomas W. Hertel Outline of this presentation Introduction Selected Results Extensions

Introduction FTA EU and Morocco versus Multilateral Liberalization GTAP application with imperfect competition –Scale economy –Entry/exit firms Playing around with GTAP closures –FTA / ML –Entry / exit firms –Full employment / Unemployment –Tax replacement / no tax replacement

Selected results

Extensions What are the differences of the results between GTAP with imperfect competition and without imperfect competition? FTA and effects of different assumptions concerning the labour markets; Unilateral liberalisation accompanied by competition policy; FTA, technology income transfer from EU to Morocco; ML accompanied by compensation for preference erosion.

Extension: Perfect competition Characteristics of imperfect competition: –Increasing returns to scale –Positive profits (with no entry) How to remove imperfect competition: –Switching off the scale effects OSCALE(i,r) = [SCALE(i,r)] * [qva(i,r) - firms(i,r)] - ao(i,r); –“Zero profit condition” p_MC_MARKUP(i,r) = - {FCOSTSHR(i,r)/[1-PROFITSHR(i,r)]} * qof(i,r) + entryslack(i,r);

Results: Welfare effects Imperfect comp.Perfect comp. Total welfare Allocative eff Scale Econ Terms of trade Allocative eff Profit shifting Input tax Consumpt. Tax Export tax Import tax

Results: Profit shifting Imperfect comp.Perfect comp. Welfare cnt per unit profit-26.9 qo pfd = ps Pf-12 to to -17 Output pr. Firm

Conclusion Scale effects may be important Profit shifting = “Cutting losses” Zero-profit condition = fixed profit condition Extra data demand

Imperfect Competition Small Group No. 2 EFFECTS OF LIBERALIZATION UNDER A EU FTA ON LABOR Eddy Bekkers and Jean-Christophe Maur

APPROACH Comparing 4 scenarios of FTA liberalization with free entry:  Full employment  Unemployment  Full employment with sluggish unskilled labor  Unemployment with sluggish unskilled labor

WELFARE EFFECTS I. FE II. UN III. FE IV. UN Sluggish 1 alloc_A1659,3596,3533,6478,1 2 endw_B10-641,10-670,1 Total ,9-78,1-811

LABOR DEMAND UNDER ENTRY I. FE II. UN III. FE, sluggish IV. UN, sluggish unskilskill unskilskill unskilskill unskilskill Livestock1,71,8 -0,50,6 0,5 -2,2-0,7 Apparel14,414,9 8,614,6 3,68,2 -1,48,4 Vehicle-64,4-64,2 -67,5-65,6-20,7-40,9 -24,5-40,8 Services-0,10,4 -5,40,4 0,8 -4,80,7

Imperfect Competition Small Group No. 3 Unilateral liberalisation accompanied by competition policy Beverages and Tobacco (BVT) George Serletis and George Rapsomanakis

Beverages and Tobacco (BTP) Firm

Disciplinary Effect of FTA on BTP Tariff on EU eliminated, introduces more competition in domestic market Number Firms held constant Morocco BTP market share falls Demand elasticity rises with competition and market shares change

Markup Power of the mark-up fall as e  Markup falls by 4.7 percent

Result on BTP ps  -7.5 qo and qof  2.9 Welfare Impacts: –Positive change of 3.7 –Distortion = 37.4 –Liberalization results in distortion declining to 33.7

Competition policy Watchdog for competition issues Beverages and tobacco products 1/n=0.79 Simulation: –(P-MC)/P = 1/n  with conjectural variation 1/n –Exog. CV_RATE – no entry and exit –Impose 1/n=0.4 Leave border measures unchanged

Competition policy Mark-up over AC  22% stimulates expansion qo  PM  24% and AC  2% qva , scaling effect  in line with mark up Welfare: –Positive change 33.4 –Mkt structure distortion = tax rate 36.4 –Competition policy results to a tax rate 18.1

Imperfect Competition Small Group No. 4 Technology Transfer Extension Walid Hassan and Nassim Oulmane

Introduction: FTAs between industrial and developing countries are expected to have much deeper economic effect on the latter. This is because developing countries typically rely on trade and have smaller and more poorly functioning industries and hence more sensitive to international competition than industrialized countries. This was typically the case of Morocco. The GTAP paper on FTA concluded negative effect on Morocco’s welfare, advising to invest more in the multilateral negotiation. The following presentations will explore different compensation mechanisms that might be available to alleviate negative consequences of the liberalizations..

Article 47 Scientific, technical and technological cooperation The aim of cooperation shall be to: (a) Encourage the establishment of permanent links between the Parties' scientific communities, notably by means of: Providing Morocco with access to Community research and technological development programmes in accordance with Community rules governing non- Community countries' involvement in such programmes, Moroccan participation in networks of decentralised cooperation, Promoting synergy in training and research; b) Improve Morocco's research capabilities; c) Stimulate technological innovation and the transfer of new technology and know- how; d) Encourage all activities aimed at establishing synergy at regional level. e) Back the effort to modernise and restructure Morocco's public and private sector industry (including the agri-food industry); (f) Foster an environment which favours private initiative, with the aim of stimulating and diversifying output for the domestic and export markets;

Technology Transfer Methodology: Choice of the variable to shock : We started to shock aoall variable on the manufacturing sector, but that was not feasible because the variable was endogenous and could not be shocked. Equation AVAWORLD region specific average rate of value added augmenting tech change (all,j,PROD_COMM)(all,r,REG) ava(j,r) = avasec(j) + avareg(r) + avaall(j,r); As result we used the avareg variable which is the value add technology change in Morocco( increase the productivity of the primary factors), by 10 % within a period of 12 years.

Technology Transfer Main Results: There was an overall improvement in the welfare. On decomposing the allocative eff. we found that the profit has increased, input has decreased, export and import tax has increased. There is also a huge increase welfare in consumption tax The mark up has increased (by 1-2% in each sec) The real GDP has achieved a growth rate of 11%. Demand for inputs has decreased due to increased productivity. Income of the primary factor has increased due to increased productivity. WelfareExtensionFTA Allocative eff1083,4659,3 Scale& tech3303,568,8 TOT-894,2-744,1 Total3492,7-16 Allocative eff1083,4659,3 profit shifting190,6126,3 input tax-25-40,8 consum. tax144,1-35,4 Export tax165,6138,8 Import tax608,1470,4 Scale& tech3303,568,8 value add3448,60 scale-145,268,8

Consumption tax import welcnt dvoltaxrattaxrateuTotal 16 ofp2,367,208,778,3 17 btp0,52,42030,553,4 18 txt5,927,82030,584,2 19 wal99,8466,32030,5616,5 20 wdp10,348,72030,5109,4 domesticwelcnt dvoltaxratebtaxrateuTotal 15 sgp-2,135,8-8025,7 16 ofp-0,429,908,738,3 17 btp1,46,52030,558,4 7 lvk2,398,308,7109,3 27 utl2,426,1716,451,8

Sectoral Analysis Bevrage&tobac coTextiles Wearing app Welfare contr.29,162,5276,6 Output increase10329 Export increase12135 Skl labour demnd-1,19-5,9915,72 Unskil lab demnd-0,56-5,3116,56 Capital demand0,22-4,4717,59

Sectoral Analysis FTA Bevrage&to bacco Textile s Wearin g app Welfare contr.29,162,5276,6 Output increase10329 Export increase100,357,998,1 Skl labour demnd-1,19-5,9915,72 Unskil lab demnd-0,56-5,3116,56 Capital demand0,22-4,4717,59 technology Bevrage&tob accoTextiles Wearing app Welfare contr.6,137,5225,5 Output increase-0,12,815,2 Export increase68,767,491,6 Skl labour demnd-1,062,3214,91 Unskil lab demnd-1,451,8614,4 Capital demand-0,283,2215,93

Imperfect Competition Small Group No. 5 Multilateral Liberalisation and Preference Erosion with Output-based Compensation Angus Charteris and Roger Martini

Multilateral Liberalisation Simulation  30% multilateral cut in import tariffs  But some sectors in MOR enjoy substantial preference margins into EU  Compensate those sectors by:  1/ assuming a trade augmenting technical change (ams)  2/ output support based compensation  Need to hold qo(i,r) fixed: swap ams(i,r,s) with qo(i,r)  Assume ICRTS, unemployment and tax replacement

Welfare Effects  Dairy, sugar and textiles do better by holding output constant (i.e. output falls under base scenario). BUT growth is being constrained in the other preference sectors.  This limits the import efficiency effect and has a smaller impact on employment.  Smaller output growth leads to smaller benefits from economies of scale through IRTS SMALLER OVERALL INCREASE IN WELFARE  LESSON: Shouldn’t assume ex-ante fears will translate to a ex-post welfare decline! Entry with compensationBase: Entry Total Welfare658,23963,37 Allocative Efficiency606,39695,27 Import effect552,93625,83 Profit effect-15,6-14,1 Labour Endowment236,75387,1 Scale Economies98,7496,31 Terms of Trade-260,11-197,55 Multilateral liberialisation scenarios

Preference erosion with output- based compensation We identify the value of the rents lost to preference erosion, and give this back to the sectors as a payment based on output

Results General welfare is increased relative to the non- compensating scenario –Allocative efficiency effects are driving this; motor vehicles may be part of the story. Output does indeed (relatively) increase for most of the goods, but falls for vegetables and fruit, dairy products, and sugar products. –These three receive relatively smaller shocks, and compete for inputs with other products receiving higher support rates (meat products). –Use shares are highly similar (and maybe a bit dodgy)

Different output support rates cause re-allocation Many of these sectors use agricultural products as inputs; competition for land as well as agricultural intermediates is important

Shares in intermediate use tell an interesting story