1. The Multifiber Agreement Phase Out and the EU-China Agreement of self-limitation of exports: impact on the Tunisian economy International workshop, “Bridging the gap: the role of trade and FDI in the Mediterranean”, Naples 8-9 Mohamed Ali MAROUANI Université Paris1-Sorbonne/IEDES, DIAL and ERF marouani@univ-paris1.fr

2. Presentation outline  Introduction  What happened since the 1st January 2005?  The ex ante quantitative assessment framework  Simulations and results  Conclusion

3. Introduction  The MFA dismantling : a demand of developing countries The Agreement on Textile and Clothing (ATC) : 1995-2005 The accession of China to WTO in December 2001  Erosion of preferences for countries indirectly protected by developed countries quotas : competition between D.C.  Observed outcome : negative for MENA except Turkey  Better than expected : EU-China agreement June 2005

4. After January 2009  Developing an ex ante quantitative assessment framework  Taking into account the dynamic dimension of the shock,  and labor market imperfections

5. What happened since the 1st January 2005 ?  China increased its market share by 145% in volume and 95% in value for products which quotas have been removed in 2005 Table 1: Changes in the Value of Exports of textile and clothing to the EU Country ChinaIndiaTurkeyTunisiaMoroccoEgyptJordan % change in year-to-date Jan-Sept 2004/2005 45.016.03.3-5.6-9.1-4.2-11.4 Source: The World Bank (2006)

6. The EU-China agreement of June 2005  Many complaints from the European T&C Industry  Inside the EU, heterogenous position Producing countries vs importing Industry vs distributors China is a significant trading partner  Agreement imposed on ten categories of products (among 35 liberalized): fixes the rates of growth of Chinese exports between 8 and 12.5% Higher than the 7.5% which the special safeguard clause would have allowed the EU to impose

7. Degree of Competition (measured by the Cos Cos Indicator) 0.15 0.39 0.62 0.64 0.79 0.87 0.90 00,20,40,60,81 India China Bangladesh China * Romania Poland Morocco

8. The ex ante quantitative assessment framework  An intertemporal GE model Households smooth their consumption (intertemporal utility function) Firms maximize their discounted value under the capital accumulation constraint A quadratic adjustment cost function  The advantages of a dynamic setting Take into account the gradual dimension of the shock The expectations of agents, adjustments costs and demographics The evolution of public and external debt The dynamic calibration: the economy is not on its steady state growth path

9. Structure of the intra-period model  The production block (nested function)  Labor market: HT, efficiency wages and public employment  The income and expenditures block (including financial)  The foreign trade block (export demand function)  Equilibrium conditions and model closure: Macro, Government, Foreign Trade, Labor Market.

10. Imperfect labor markets and efficiency wages  Labor market segmentation  Efficiency wage theories  The imperfect monitoring model  Implementation in a multisectoral framework

11. The multisectoral efficiency wages model i,j : sectors f : skill b : turn over rate q : probability of being detected shirking e : disutility of effort r : discount rate U : unemployment rate

12. The database  The SAM  Data manipulation: employment, wages, demographic hypothesis, structure of the labor force, etc.  Reference scenario includes the FTA between Tunisia and the EU Determination of the tariff dismantling schedule in each industrial sector depending on the weight of each product in the four lists of the Euro-Tunisian Agreement.

13. The dynamic calibration procedure  The economy is not on its steady-state growth path  Calibration of the macro parameters (depr, elasth, prt)  Calibration of the sectoral parameters (adjustment cost function share parameter)  Second calibration of the macro parameters  Until we approximately attain the observed growth path of the main macro and sectoral variables

14. The simulations  First scenario: a gradual decrease of export demand from 2002 to 2004 (10% in three years), than a decrease by 10% in 2005 and a decrease by 20% in 2009.  Second scenario: adds to the first a decrease of world prices of apparel products by 10% in 2009.

15. Evolution of the main variables characterizing the apparel sector in Tunisia, 2006-2020 (change in % of the reference scenario level) 2006200920152020 SIM1SIM2SIM1SIM2SIM1SIM2SIM1SIM2 Production-11.3-14.9-17.3-32.4-19.5-36.7-20.4-38.3 Exports-12.2-15.8-19.0-35.6-21.3-39.9-22.2-41.5 Investment-26.7-47.6-29.5-57.8-26.2-49.6-24.2-45.2 Unskilled labor-11.7-13.7-19.0-36.5-19.9-38.1-20.1-38.4 Skilled labor-12.0-13.9-19.5-37.3-20.5-39.0-20.8-39.4 Highly skilled labor-11.4-16.0-16.7-30.2-19.8-36.6-21.0-38.9

16.  The textile-clothing sector is very negatively affected by the shock  Investment is the variable that reacts the most (due to firms expectations)  The impact of the combined shocks of export demand and prices decreases is much stronger  Propagation to the rest of the economy? Impact on the apparel sector

17. Effects on unemployment SIM 1

18. Effects on unemployment, SIM 2

19. Evolution of wage inequality sk/unsk

20. Evolution of wage inequality hsk/sk

21. Evolution of total investment

22. Evolution of investment of the main sectors

23. Evolution of total household consumption

24. Comments  Investment increases in the exporting sectors due to the Dinar Depreciation  Consumption decreases due to higher unemployment  No effects on GDP

25. Conclusion  The MFA dismantling has negative effects on T&C industry in Tunisia  It raises unemployment and wage inequality  The degree of substitutability between Tunisian products and those of its competitors is one of the main driving variables The effects on prices could be lower than expected

26. Directions for future research  Using more disaggregated data  Studying the effects of the shock on female labor  Linking this model to a global CGE to assess the decrease of world textile products  Introducing heterogeneity (firm and household level) by linking this model to a microsimulation model

27. Limits  The perfect foresight hypothesis  The absence of credit constraints  The representative agent hypothesis

28. Policy implications  Monitoring the evolution of Tunisia’s competitors exports in the European market (degree of similarity)  Focus on the medium/high segment of the clothing market: incentives for products with higher value-added  Promote the development of substituting activities targeted on female labor  Take into account the MFA phase out in regional development policies  Incentives for foreign investors who are ready to reallocate their investments in other sectors