The greater arab free trade area (gafta)

The Greater Arab Free Trade Area (GAFTA): An Estimation of the Trade Effects (Preliminary version) Javad Abedini et Nicolas Péridy1 Introduction In 1997, fourteen Arab countries concluded an agreement, aimed at achieving the Greater Arab Free Trade Area (GAFTA) by 1.1.2007 at the latest. The main provisions concerned the progressive removal of tariff and non tariff barriers (NTBs) on intra-GAFTAtrade in manufactures. Agricultural products were provided special treatment: each country could exclude at most 10 agricultural products from the agreement during the harvest season. In addition, rules of origins were set at 40% of the value added. The last provisions provided for the agreement’s conformity with WTO rules as well as special delays for least developed Arab countries. On 1.1.2005,the tariff removal was fully completed, although countries only partially removed NTBs. The great bulk of the existing literature related to the economic effects of GAFTA remains very descriptive (Sekouti, 1999 ; Tahir, 1999; Zarrouk, 2000 ; Hadhri, 2001 ; Bayar, 2005; MINEFI, 2005, etc…). A few ex-ante studies are more analytical, but focus on a small number of countries. For example, Neaime(2005) considers the impact of monetary and financial integration, especially Foreign Direct Investment (FDI) liberalisation across Arab countries. With regard to GAFTA trade provisions, CATT (2005) assesses the GAFTA welfare effect on specific countries, mainly Morocco and Tunisia. This assessment is achieved through computable general equilibrium (CGE) modelling. Results show positive or negativewelfare effects, depending on the terms of trade. Bousseta (2004) also relies on CGE models applied to Maghreb countries. Results conclude to a moderate rise in intraMaghreb trade due to GAFTA. Finally, Péridy (2005a) concentrates on the appraisal of the ex-ante effect of trade liberalisation between Morocco, Tunisia, Egypt and Jordan (Agadir Agreement). Thanks to a modified gravity model, thisauthor shows limited trade effects, mainly because of the lack of trade complementarity between these countries. This paper is aimed at providing additional insight about the GAFTA trade impact by proposing the following contributions. In the first place, it provides a first ex-post appraisal

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University of Nantes (France) Laboratoire d’Economie de Nantes BP 52231 F-44322 Nantes cedex 3Corresponding author: javad.abedini@univ-nantes.fr

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and covers all the GATFA members which have implemented the agreement2 as well as the countries which are expected to carry out the agreement in the coming years3. As a second contribution, this paper is based on a theoretical gravity model which account for new developments, including the impact of sunk costs and expectations (Abedini, 2005),price effects (Anderson and van Wincoop, 2003) as well as bilateral trade costs effects (Anderson and van Wincoop, 2004; Markusen and Venables, 2005). Third, we estimate a panel data model, which cover trade from the 21 GAFTA members (or potential members) to GAFTA countries as well as 35 other reference countries, over the period 1988-2005. This model with triple heterogeneity requires specificeconometric consideration, as stated in the recent literature (Abowd et al.1999; Wooldridge, 2001 and Wolff, 2006). Consequently, a transformed fixed effect model will be first estimated. Some other estimators will also be proposed, in order to solve endogeneity problems in random effects models (Egger, 2004) or in dynamic models (Arellano and Bond, 1998). Finally, the GAFTA trade impact is assessedin several ways, including the use of time dummies (from 1997 onward), the investigation of bilateral fixed effects with regard to intra-GAFTA trade as well as the comparison of border effects within the GAFTA area and across this area. 1. Integration and trade in the Arab area : an overview As mentioned in the introduction, there is an extensive literature concerning the description of...