Chapter 1

BOX 3.1
Tunisia-European Union free trade agreement: Estimated benefits and costs
Tunisia already enjoys relatively open and preferential access to the EU market. Nevertheless, the static trade and dynamic benefits to the
Tunisian economy from an FTA with the EU are significant-an estimated 4.5 percent of GDP a year (TD 720 million), provided Tunisia
removes the high tariffs on the most protected sectors in the short-term and follcws appropriate exchange rate policies. It would, thus, be
beneficial for Tunisia to compress the schedule of QR eliminations and tariff reductions currently agreed with the EU. If Tunisia undertakes
full liberalization with the rest of the world, the gains would increase to an estimated 5.3 percent of GDP a year (TD 850 million) and possible
trade diversion costs would be diminished or eliminated.' The benefits from the accord with the EU come almost equally from three
sources: (I) the preferential reduction of Tunisia's remaining tariff and nontariff baniers with the EU; (2) the harmonization of product standards
with European requirements; and (3) reduced costs in trade administration from improved transportation and telecommunications.
Lowering tariffs reduces government revenues. To keep the real value of govemment revenues unchanged, the IDF study estimates that
the uniform VAT rate must increase from an average of 20 percent to 26 percent. The problem, however, is that Tunisia does not apply the
VAT in a uniform manner across sectors. The study estimates that if the Govemment eliminated exemptions and moved to a uniform VAT
rate, it could lower the current average VAT rate (even if the Govemment lowered tariffs), and the revenue welfare impact would be even
greater than the benefits from tariff reductions under a free trade agreement with Europe. The Govemment needs to undertake the necessary
fiscal reforms which will ensure that tax revenues from improved collection and wider application of the VAT compensate for reductions
in tariff revenues (see chapter I).
The estimated labor adjustment costs are based on the assumption that about 2 percent of the labor force will have to change jobs within
the next three years. There are also estimated short-run capital adjustment costs, due to changes in relative prices as some plants and equipment
become redundant and unadaptable for use in other industries. Total short-term costs are estimated at less than TD 150 million, while
the welfare benefits are larger (TD 720 million).
a. See A Panagariya, 'Rethinking the New Regionalism,' 1994, for discussion of trade diversion costs.
Source: IDF 1995; Rutherford, Rutstrnm, and Tarr 1995.
market for services and agricultural goods have been post- industries-closing down some activities and opening new
poned for four years, except for the olive oil quota, which activities and investments-takes longer (and is therefore
will be enlarged by 3 percent a year over the next four years. more costly) and (2) the slower pace often increases the
The EU market already grants preferential access to most likelihood of reversals, as those parties opposed to the trade
Tunisian manufactured goods, while Tunisia still has high liberalization have more time to block changes.
tariffs and some QRs against EU products. Nevertheless, this agreement with the EU marks a critical
A preliminary review of the agreement shows that all step in Tunisia's liberalization program, and offers the counremaining
QRs (except for some agriculture, processed TABLE 3.3
foods, and some textile items) will be removed as soon as the Tunisia-EU FTA tariff liberalization schedule of
agreement takes effect. Tariff protection is to be removed Industrial products
gradually, with imports that are most likely to compete with (pe-cent)
(and potentially disrupt) domestic production, being phased of Percent shwe of Pement share of
in over several years. Safeguard measures have also been libeWizadlon 1992 domestJc 1994 EU
included in the agreement in case of dumping or other inter- Number products production' Importsb
nal disruption, permitting reinstatement of the original tariff I in 1996 14 12
rates or the introduction of additional tariffs of up to 25 per- 2 5 years,
cent for up to five years, for industries suffering damage starting in 1996 20 28
from the liberalization. Table 3.3 shows the share of total 3 12 year,
manufactured EU imports to Tunisia that will be liberalized starting in 1996 22 30
ia a given time perio an I gives a rough indication of the
magnitude and pace of the liberalization process.
4
5
8 years,
starting in 2000
Exempted
43
I
29.5
0.5
The main drawbacks to the gradual implementation of
a. Warld Bank cabjolaioi,s, 1995.
trade liberalization are that (1) the adjustment of domestic b. GCaemment cak:ulations. 1 995.
STRENGTHENING MARXET FORCES 31