The welfare implications of trade liberalization between the Southern Mediterranean and the EU

The impact on the Southern Mediterranean Countries (SMC) of the current process of trade liberalization with the European Union is explored. The methodology is that of computable general equilibrium modelling under imperfect competition and the model includes ten countries and 11 sectors. This allows for both a cross-country and cross-sectoral analysis of the results. The experiments considered are the full liberalization of tariffs, as well as changes in market access and trade-induced changes in productivity. A key feature of the paper is that the phased introduction of tariff reductions is allowed for as explicitly envisaged in the Agreements. The results show that the process of liberalization may have a substantial, though non-monotonic, impact on the SMC economies in terms of both changes in production and through this on welfare. The welfare impact is potentially very high in particular for the high tariff economies. The sources of the welfare gain tend to derive from perfectly competitive explanations of trade for the high tariff economies, and from imperfectly competitive explanations of trade for the low tariff economies.