Challenges and Opportunities of integrating agricultural trade in the EU-Arab Free Trade

Agreements: illustration from the Tunisian case

Chokri THABET (ISA de Chott Meriem) and

Mohamed A. Chemingui (UN-ESCWA)

Tunis, 5-6 December 2012

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Plan of the presentation

1. The EU-Med Partnership 2. Impacts of the agricultural policies in rich countries

on SMC3. The challenges and needs for reform4. Agriculture in the Tunisian Economy5. Trends in Poverty incidence6. Tunisia/UE: alternative visions7. The objectives of the work8. Results of simulations using a spatial and dynamic

CGE model for Tunisian economy.

Both parties agreed that the liberalization of agricultural trade would be carried out in harmony with the progression of the multilateral negotiations within the framework of the World Trade Organization (WTO)

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The EU-Med Partnership

Trade between some South Mediterranean Countries (SMC) and the European Union (EU) is ruled by the partnership agreement signed in 1995.

Since that date, several individual partnership agreements with the EU have been signed by some SMC in order to establish a free-trade area (FTA) between them and the EU. However, trade in agricultural and food products is excluded from these agreements.

Both parties agreed that the liberalization of agricultural trade would be carried out in harmony with the progression of the multilateral negotiations within the framework of the World Trade Organization (WTO).

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The EU-Med Partnership (cont)

Since the signing of the first agreements of co-operation between the SMC and the EU in the 70s, SMC have benefited from preferential access for their agricultural exports; destined to the European market.

Conversely, SMC imports of European agricultural products do

not benefit from any privileged treatment compared to the rest of the world.

Any improvement in the access of SMC’s agricultural products to European markets would only be accomplished under a reform of the Common Agricultural Policy (CAP).

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Impacts of the agricultural policies in rich countries on the SMC

Domestic support and export subsidies in rich countries have led to a low world prices, which brought about three important effects for the SMC:

1. SMC have benefited from import prices, which are much lower than the real cost

2. The relatively low cost of their food subsidies policy.

3. The stability of international prices at low levels (before 2007) has allowed many SMC to enjoy an administrated production price level slightly above nominal world prices

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The challenges and needs for reformThis situation is not sustainable over the medium to long term for various reasons:

1. The exorbitant cost of the support policy for the agricultural sector in the EU, mainly after the enlargement of the EU.

2. There is a growing requests from WTO members to liberalize trade in agriculture in order to achieve progress on the other subjects (NAMA, services…)

Any reform of the CAP will affect the SMC economies both directly and indirectly:

1. The direct effects stems from the expected rise of the world prices of the main agricultural products imported by the SMC.

2. The indirect effects derive from the effects of changing relative prices between imported and domestic products on one hand, and between agricultural products themselves on the other.

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Why reforms are needed (cont)

These two effects would certainly be reinforced by any eventual change in the trade preferences accorded to the SMC agricultural products by the EU.

In addition to the macroeconomic impact, the welfare of the SMC’s populations will certainly be affected by these reforms.

The producers of agricultural products will essentially be affected by the changes in production prices, and the conditions of access to foreign markets (mainly the European market), while consumers would be affected by changes in consumption prices of the same products.

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Importance of the CAP to the Tunisian Economy

The Mediterranean countries, such as Tunisia, have been both beneficiaries and losers from the CAP:

- Tunisia is a net importing country for several important foods products, mainly sugar, wheat, and vegetables oils. This situation allowed Tunisia to keep its food trade balance at an acceptable level.

- At the same time, the low level of international prices of these products harms domestic production.

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CAP under DDA Under the DDA, the three pillars of the CAP (domestic

support, market access and export subsidies) are under negotiations.

During the Hong Kong’s ministerial declaration on agricultural trade liberalization in December 2005, the Members of the WTO agreed to eliminate all forms of export subsidies by the end of 2013 if an agreement is reached under the Doha Round.

On the market access pillar, it was agreed that a four-band approach will be used for tariff reduction with flexibility for developing countries.

Lastly, regarding domestic support, it was agreed that disciplines will be developed to achieve effective cuts in trade-distorting domestic support.

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Agriculture in the Tunisian economy

Contribution to GDP: 8-12% and declining

Investment in Agriculture: 10% and not increasing

The private component of the investment represents about 50% and declining.

Agricultural exports : 10% and declining

Imports of agricultural and food products are concentrated on cereals, vegetal oil, sugar and to a lesser extent dairy products and meat. However, exports are dominated by olive oil, sea products and dates

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Agriculture in the Tunisian economy (cont) Employment: 16-18% of total active labor force 90% are

farmers and of family type whereas 10% only are salaried.

80% of farms of size less than 10Ha and representing 20% of arable land. Furthermore, 53% < 5 Ha

Water mobilization: more than 95%

Arable land 1/3 of size of country (4.5 millions Ha) Breakdown of main agricultural activities:

Cereals 1/3

Tree crops 1/3

Other 1/3

Irrigated 8%

Rain fed 92%11

Agriculture in the Tunisian economy (cont)

Agricultural mechanization: Highly mechanized and less dependent on labor force with

disappearance of animal traction and subsidies Highly dependent on energy prices

Increasing pollution of water resources due to excessive use of fertilizers and chemical products in some locations

Finance and exposition to risk: 7 to 8% of farmers do recourse to credit 7 to 9% insurable farms

Professional institutions: Historically politicized and inefficient

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Poverty Incidence in Tunisia (National Level)

National aggregate statistics were constantly revealing that poverty levels were reasonable, as compared to most countries, and they were also on the decline varying from 40% during the sixties to less than 4% in 2010.

After 14 January 2011, confusion was created as to what the social welfare reality in Tunisia was like?

Recent released statistics by public authorities show that poverty at national level is much higher (15-20%) and that the distribution of that poverty between regions is quite different with some locations inside the country recording more than 40%.

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INS ApproachWorld Bank Approach

Region Poor Population(in 1,000 persons)

Poverty Incidence Poor Population in 1,000 persons

Poverty Incidence(in percentage)

North (region 1) 140 (35.2%) 3 115 (29.2%) 2.4

Center West (region 2) 98 (24.6%) 7.1 149 (37.8%) 10.8

Center East (region 3) 50 (12.6%) 2.4 40 (10.2%) 1.9

South (region 4) 110 (27.6%) 7.5 90 (22.8) 6.2

All Tunisia 399 4.2 394 4.1

Table 1: Poor Population and Poverty Incidence by Region in the year 2000

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Tunisia/UE: Alternative visions

For trade in agricultural staple commodities (cereal, meat and milk) :

The UE is rather exporter but with refunds: reduction of support but indirect support to farmers’ incomes via aid per ha

Tunisia imports cereals at international prices and since the domestic price is fixed below their international counterparts (after 2007), the government budget is heavily impacted with the increase of subsidies.

Cereal growers are considered as penalized as world prices are higher than their domestic levels after being subsidized before 2007 where domestic prices were set at levels higher than international prices.

For livestock production (milk and meat), In Tunisia, they respond to producer advantageous prevailing policy which are designed to meet rather social considerations. Several studies have shown that they are uncompetitive (milk and bovine meat).

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EU Trade policy vis-à-vis Tunisian agricultural exports

The protection system applied by the EU on fruits and vegetables use specific instruments due to its perishable character and prices instability.

Price Entry System is the main protection tool applied by EU to

fruits and vegetables imports and Customs tariffs are variable according to the periods of the year.

In this system, the protection level varies according to the import price level of the product. Above a certain threshold price called ‘trigger price’, the exporter pays only an ad valorem tax calculated on the basis of a certain % of the import price.

Each time that the import price is lower than the trigger price, a specific rate is added to the ad valorem tax. The latter is expressed in euros/kg.

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EU Trade policy vis-à-vis Tunisian agricultural exports

This PES is applied on the main 12 horticultural products produced the EU: Oranges, Citrus, Apples, grapes, Peach, plum, apricot and cherry, tomato, cucumber and artichoke.

PES applies to all third countries entering the EU market

including SMC and Tunisia.

According to the product, the PES system can be applied during all the year or just for certain periods.

The protection system of fruits and vegetables is characterized by an important seasonality. Hence, the ad valorem tax and the trigger price vary according to the season.

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Objectives The objective of this study is to provide a detailed analysis

of these issues and to estimate the impacts on poverty of a plausible scenario for reforming the CAP.

This study is limited to analyzing the changes in the FTA between Tunisia and the EU in terms of access of agricultural products under alternative scenarios of agreements.

The analysis of the impact of reforming domestic agricultural and trade policies was already covered in two past studies (Chemingui and Dessus 2001, and Chemingui and Thabet in 2005).

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Simulations

Two scenarios are tested and reported here using the dynamic spatial CGE model for Tunisia:

SCENARIO 1: Agricultural products included in the FTA without any changes in the CAP in 2014

SCENARIO 2: Reform of the CAP under the DDA starting 2014, and FTA covering agriculture enter into force in 2014.

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Results

Impacts on national GDP and trade (average yearly change over the period 2013-2015)

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Impacts on households by decile at national level (private real consumption)

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Impacts on households at regional level

North Center-East

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Spatial Impacts

Center-West South

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Results

The large financial support provided by the EU to its agricultural sector in the form of domestic support and export subsidies allowed Tunisia as many other developing countries to reduce the level of its food bill and maintain domestic prices for imported food products at a relatively low level.

Over the long run, the EU’s agricultural policy is not sustainable and its reform has become both a domestic imperative and an international obligation.

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Results (Cont.)

Extending the FTA between Tunisia and the EU to agricultural products will affect the Tunisian economy in both cases: reform of the CAP or not.

If the CAP reformed in 2014, the effects will be particularly acute for the agricultural sector and the welfare of households depending on this sector.

While the overall effect on the Tunisian economy will be relatively limited due to the low contribution of the agricultural sector to the economy and to inefficient price transmissions, the effects will vary significantly across regions, depending on the importance of agricultural activities in the region’s GDP and household income.

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Main messages

Agriculture sector is very sensitive at the regional level but not too much at national level

Trade liberalization in agriculture may have higher social pressures than trade in manufacturing

Extension of the FTA between Tunisia and the EU to agriculture will be possible after the reform of the CAP (starting in 2014) otherwise, list of products should be excluded or mechanism of compensation designed and implemented.

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Thank you for your attention…

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