Economic integration and market structure: An empirical analysis of the Morocco-European Union Free Trade Area

This research offers an empirical analysis of the economic effects on Morocco from implementing a Free Trade Area (FTA) with the European Union (EU) signed in 1996. Since the FTA translates largely into unilateral discriminatory tariff elimination against EU imports, there are concerns about the substantial negative fiscal implications while the welfare and employment effects of the FTA are not well understood. The effects on domestic industries from increased competition will come from both trade liberalization and its interaction with the market structure given the prevalence of oligopolistic behavior. The consequences of the changes of production and trade patterns on employment are critical given the high rate of labor unemployment. For a rigorous analysis of these issues, an applied general equilibrium model, GTAP, is employed emphasizing market structure, factor market rigidities in the short run, and dynamic effects of investment and capital accumulation in the long run. To our knowledge, this is the first economy-wide empirical analysis for a small developing country that relied on plant-level data for modeling market structure. The short run analysis showed that the FTA results in significant welfare gains with a net positive effect on unskilled labor employment. The long run analysis also showed that dynamic growth effects of the FTA are substantially higher in the presence of foreign direct investment. At the sector level, there are clear patterns of resource shifts towards labor-intensive industries (e.g., textile/clothing) and resource-based sectors. The procompetitive effects of the FTA shows reductions in excess profits with expanded output for export-oriented sectors and output contraction for import-substitution sectors. There is a positive interaction between welfare gains from scale economies and positive unemployment. This result supports the argument that developing countries can reap scale economies from regional integration, particularly in labor-intensive export-oriented sectors. Simulations of complementary policies to the FTA shows that revenue losses can be corrected by a more uniform value added tax structure. Also extending tariff liberalization to non-EU partners significantly boosts welfare and helps diversify exports, while services liberalization (particularly transport services) is more likely to enhance Morocco\u27s agricultural exports than additional market access concessions from the EU