Trade--general provisions

Both sides have agreed to abolish, and not introduce, QRs, or equivalent restrictions, on any imports, as well as to abolish any existing, and not introduce any new, QRs, or taxes on exports, and to refrain from subsidizing exports. Safeguard provisions allow for some limited exemptions from these commitments in the case of dumping, or if import surges cause serious injury to either domestic producers of competing products or in sectors that have a particular regional importance, and in certain other cases where export liberalization causes difficulty.

Trade in industrial products

Free trade of virtually all industrial products is to be phased in over 12 years. No new import tariffs, or equivalent taxes, are to be introduced by either side. An “agricultural element” has been established for certain industrial products, for which tariffs based on the proportion of nonliberalized agricultural inputs in such goods may be maintained. Morocco has undertaken to eliminate all other import duties or equivalent charges with the entry into effect of the AAEU, except for three categories of products for which tariffs (including all duties of a fiscal nature) are to be phased out over a 12-year period as detailed in various annexes (see Table 8). Moreover, with respect to imports of second-hand consumer goods (clothes, motor vehicles, and consumer appliances), a schedule for tariff liberalization is to be established three years after the entry into effect of the agreement.

Table 8.

Morocco: Impact of the Association Agreement on Import Tariffs and Budgetary Revenues, 1997–2009

Sources: Moroccan authorities; and Fund staff projections.

^1/Mostly equipment goods not manufactured in Morocco.

^2/Mostly raw materials and spare parts not manufactured in Morocco.

^3/Other items not manufactured in Morocco.

^4/Most items manufactured also in Morocco.

^5/Selected second–hand clothes, vehicles, and consumer appliances. Tariff reduction to be agreed within three years.

^6/Staff projections.

^7/Projections provided by Morocco’s Customs Office.

^8/Assumes tariffs on imports from EU sources not phased out.

^9/Impact on VAT receipts because VAT is levied on imports inclusive of customs duties.

^10/Assumes tariffs simultaneously phased out on imports from both EU and non – EU sources.

Table 8.

Morocco: Impact of the Association Agreement on Import Tariffs and Budgetary Revenues, 1997–2009

				1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009
			(Reduction as percentage of base tariff)
	Cat I 1/			100	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat II 2/			25	25	25	25	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat III 3/			25	25	25	25	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat IV 4/			– –	– –	– –	10	10	10	10	10	10	10	10	10	10
		of which cars		– –	– –	– –	3	3	3	3	15	15	15	15	15	13
	Cat V 5/			…	…	…	…	…	…	…	…	…	…	…	…	…
			(In percent)
Average tariff rates 6/			Estimated base tariff	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat I		29	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat II		17	13	9	4	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat III		23	17	11	6	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat IV		36	34	31	30	27	24	21	18	15	12	9	6	3	– –
		of which: cars	30	29	29	29	28	27	26	25	21	17	12	8	4	– –
	Cat V 5/		29	…	…	…	…	…	…	…	…	…	…	…	…	…
			(In millions of 1995 dirhams)
Estimated revenue losses 7/
	Total– –EU only 8/			1,030	1,543	2,054	2,916	3,264	3,612	3,960	4,320	4,682	5,043	5,403	5,765	6,122
		Tariffs		479	625	770	1,101	1,285	1,470	1,654	1,842	2,030	2,218	2,406	2,595	2,782
		Import surcharge (PFI)		427	721	1,014	1,421	1,535	1,648	1,762	1,882	2,003	2,124	2,244	2,365	2,484
		VAT 9/		124	197	270	394	444	494	544	596	649	701	753	805	856
	Total (as percent of 1995 GDP)			0.4	0.6	0.7	1.1	1.2	1.3	1.4	1.6	1.7	1.8	2.0	2.1	2.2
	Total– –all imports 10/			1,897	2,703	3,510	4,773	5,230	5,689	6,146	6,616	7,087	7,558	8,028	8,500	8,968
		Tariffs		791	1,006	1,222	1,677	1,917	2,158	2,398	2,642	2,886	3,130	3,374	3,619	3,862
		Import surcharge (PFI)		861	1,337	1,812	2,439	2,590	2,742	2,893	3,051	3,210	3,369	3,527	3,686	3,843
		VAT 9/		245	360	476	657	723	789	855	923	991	1,059	1,127	1,195	1,263
	Total (as percent of 1995 GDP)			0.7	1.0	1.3	1.7	1.9	2.1	2.2	2.4	2.6	2.7	2.9	3.1	3.2

Sources: Moroccan authorities; and Fund staff projections.

^1/Mostly equipment goods not manufactured in Morocco.

^2/Mostly raw materials and spare parts not manufactured in Morocco.

^3/Other items not manufactured in Morocco.

^4/Most items manufactured also in Morocco.

^5/Selected second–hand clothes, vehicles, and consumer appliances. Tariff reduction to be agreed within three years.

^6/Staff projections.

^7/Projections provided by Morocco’s Customs Office.

^8/Assumes tariffs on imports from EU sources not phased out.

^9/Impact on VAT receipts because VAT is levied on imports inclusive of customs duties.

^10/Assumes tariffs simultaneously phased out on imports from both EU and non – EU sources.

View Table

Table 8.

Morocco: Impact of the Association Agreement on Import Tariffs and Budgetary Revenues, 1997–2009

				1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009
			(Reduction as percentage of base tariff)
	Cat I 1/			100	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat II 2/			25	25	25	25	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat III 3/			25	25	25	25	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat IV 4/			– –	– –	– –	10	10	10	10	10	10	10	10	10	10
		of which cars		– –	– –	– –	3	3	3	3	15	15	15	15	15	13
	Cat V 5/			…	…	…	…	…	…	…	…	…	…	…	…	…
			(In percent)
Average tariff rates 6/			Estimated base tariff	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat I		29	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat II		17	13	9	4	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat III		23	17	11	6	– –	– –	– –	– –	– –	– –	– –	– –	– –	– –
	Cat IV		36	34	31	30	27	24	21	18	15	12	9	6	3	– –
		of which: cars	30	29	29	29	28	27	26	25	21	17	12	8	4	– –
	Cat V 5/		29	…	…	…	…	…	…	…	…	…	…	…	…	…
			(In millions of 1995 dirhams)
Estimated revenue losses 7/
	Total– –EU only 8/			1,030	1,543	2,054	2,916	3,264	3,612	3,960	4,320	4,682	5,043	5,403	5,765	6,122
		Tariffs		479	625	770	1,101	1,285	1,470	1,654	1,842	2,030	2,218	2,406	2,595	2,782
		Import surcharge (PFI)		427	721	1,014	1,421	1,535	1,648	1,762	1,882	2,003	2,124	2,244	2,365	2,484
		VAT 9/		124	197	270	394	444	494	544	596	649	701	753	805	856
	Total (as percent of 1995 GDP)			0.4	0.6	0.7	1.1	1.2	1.3	1.4	1.6	1.7	1.8	2.0	2.1	2.2
	Total– –all imports 10/			1,897	2,703	3,510	4,773	5,230	5,689	6,146	6,616	7,087	7,558	8,028	8,500	8,968
		Tariffs		791	1,006	1,222	1,677	1,917	2,158	2,398	2,642	2,886	3,130	3,374	3,619	3,862
		Import surcharge (PFI)		861	1,337	1,812	2,439	2,590	2,742	2,893	3,051	3,210	3,369	3,527	3,686	3,843
		VAT 9/		245	360	476	657	723	789	855	923	991	1,059	1,127	1,195	1,263
	Total (as percent of 1995 GDP)			0.7	1.0	1.3	1.7	1.9	2.1	2.2	2.4	2.6	2.7	2.9	3.1	3.2

Sources: Moroccan authorities; and Fund staff projections.

^1/Mostly equipment goods not manufactured in Morocco.

^2/Mostly raw materials and spare parts not manufactured in Morocco.

^3/Other items not manufactured in Morocco.

^4/Most items manufactured also in Morocco.

^5/Selected second–hand clothes, vehicles, and consumer appliances. Tariff reduction to be agreed within three years.

^6/Staff projections.

^7/Projections provided by Morocco’s Customs Office.

^8/Assumes tariffs on imports from EU sources not phased out.

^9/Impact on VAT receipts because VAT is levied on imports inclusive of customs duties.

^10/Assumes tariffs simultaneously phased out on imports from both EU and non – EU sources.

In the event of serious difficulties, Morocco may under certain conditions suspend the schedule of tariff dismantling, but for no more than one year and not beyond the 12-year period. In case of severe economic or social problems, or in exceptional cases and to protect an infant industry, Morocco may also raise or reestablish tariffs, but only within certain limits and for a limited period of time. To this end, the Association Council (AC)⁵⁷ may authorize Morocco to maintain tariff protection for a maximum period of three years even after the 12-year period. Reference import prices are to be phased out within three years, or earlier if so required by Morocco’s commitments under the GATT/WTO.

Trade in agricultural products

The AAEU does not envisage a general liberalization of agricultural trade, but provides that the EU and Morocco will work towards a greater liberalization of trade in agricultural and fishing products. Protocols annexed to the agreement list the conditions for trade in such specific products through the year 2000, when the applicable regime will be reviewed with a view to achieving further liberalization. The trade regime for agricultural products may be changed through consultation if agricultural policy in either Morocco or the EU were to change.

Regarding Morocco’s exports to the EU, ad valorem duties are to be reduced by 5-100 percent for the listed products (mainly cut flowers, fruits, fruit juices and wine, vegetables, meat and live animals, and olive oil products); for certain products the reduction applies only up to certain quantities (e.g., cut flowers, potatoes, tomatoes, a number of other vegetables, oranges, Clementines, quinces, orange juice, and wine), or only for a certain period of the year (various fruits and vegetables), or both (cut flowers, potatoes, onions, and certain other vegetables). Some of these tariff quotas will be raised through four equal annual increases during 1997-2000 by a total of 12 percent. More modest duty reductions are provided for exports of some of these products in excess of the tariff quota, or outside the specified periods. With few exceptions, no reductions are envisaged for the specific duties the EU levies on certain items, in addition to the ad valorem duty. For certain products (tomatoes, courgettes, artichokes, cucumbers, Clementines, and oranges), Morocco undertakes not to export more than the agreed tariff quotas; moreover, agreed entry prices apply to these products and quantities, which are to be reduced at the pace bound by the EU under the WTO. As long as actual entry prices are more than 8 percent below the agreed entry prices, the specific customs duties at the level bound under the WTO will apply; if actual entry prices are between zero and 8 percent below agreed prices, specific duties will be set correspondingly at zero to 8 percent; no specific duties apply if the actual entry prices are equal to or exceed the agreed entry prices. For a number offish and fish products, customs duties are eliminated; for canned sardines, the duty elimination applies only for a tariff quota of 19,500 tons in 1996, 21,000 tons in 1997, and 22,500 tons in 1998; exports beyond these quotas are subject to import duties of 6 percent, 5 percent, and 4 percent, respectively.

Regarding the EU’s exports to Morocco, a similar list provides for preferential maximum import duties ranging between 2.5 to 215 percent on products listed (mainly edible oils and fats, cereal and dairy products, and meat products), but in most cases the tariff reductions also apply only for specified amounts, essentially consolidating existing access conditions. These tariffs are to be lowered if necessary to ensure that quotas are folly used up.

Rules of origin

The rules of origin contained in the AAEU are designed to encourage south-south integration. A minimum transformation of imported inputs is required to qualify a product as of Moroccan or European origin, respectively. For components imported from Algeria or Tunisia, such requirements for minimum transformation are less stringent. In a separate statement attached to the AAEU, the EU states its willingness to allow cumulation of origin in its trade with any other Mediterranean countries with which Morocco concludes free trade agreements.

Services

A general provision calls on the AC to make recommendations towards establishing a legal framework that would allow firms from each partner to set up business in the other country, and to establish free trade in services, with progress to be reviewed after five years. Work on recommendations for the liberalization of maritime transport services will begin with the entry into force of the AAEU. Both parties confirm their commitments made (as well as any exemptions they registered) under the service agreement (GATS) of the WTO.

Movement of capital

Subject to a safeguard clause in case of balance of payments difficulties, both parties have undertaken to ensure convertibility for current transactions and for capital transactions related to foreign direct investment, including the repatriation of profits or sales proceeds, while working toward full convertibility for all capital transactions between them.

Trade-related policies

Monopolistic practices and public subsidies distorting competition, to the extent they affect trade between Morocco and the EU, are considered incompatible with the agreement. The general criteria and definitions of such practices to be used are those of the agreement establishing the WTO, pending the adoption by the AC of appropriate guidelines based on EU law within five years after the entry into effect of the AAEU. Government subsidies to enterprises in Morocco will have to conform to the standards applied for less developed regions in the EU, with a few exceptions including special rules for public support for steel-producing enterprises. Public support has to be transparent, and either party is to provide upon request detailed information on such aid in individual cases. Trading monopolies or other special privileges for certain enterprises, affecting trade between the partners, will be gradually phased out within five years. Both parties are to adhere to the highest international standards of intellectual property protection, and promote the use by Morocco of EU technical rules, standards, and certification procedures, and mutual recognition of certification. Both parties have undertaken to work toward progressively and reciprocally liberalizing public procurement.

Economic and financial cooperation

The AAEU specifies cooperation in a large number of areas, with special emphasis on: (i) EU support for sectors that will face difficulties to adjust to the process of liberalization and in particular the envisaged trade liberalization; (ii) cooperation in areas likely to foster enhanced integration between the two economies and to generate growth and employment; (iii) support for intra-Maghreb regional integration; and (iv) environmental issues. In many areas the agreement calls for harmonization of the regulatory environment, especially as regards norms and standards (including in transport and telecommunications), accounting and financial services regulations and rules, statistics, and customs regulations. Cooperation in the area of crime prevention and detection is to cover money-laundering and drug trafficking. Financial support is to be provided from EU resources in support of structural reforms in the Mediterranean countries, in collaboration with other contributors, in particular the international financial institutions.

Labor and cooperation on social issues

The agreement provides essentially for the same regulations on the rights and obligations of expatriate workers as the 1976 trade and cooperation agreement, i.e., national treatment as regards working conditions, remuneration and dismissal, and social security. With regard to the latter, Moroccan workers can add periods spent in different member states of the EU for the calculation of pension and medical care claims. In addition, the AAEU calls for a dialogue on social questions and identifies priority areas for active cooperation. These include reducing immigration through regionally targeted development support, efforts to reintegrate illegal immigrants in the country of origin, promotion of the role of women in development, bolstering Morocco’s family planning and mother and child protection programs, and strengthening social protection and the health cover system.

Monitoring of agreement and dispute settlement

The AC would meet whenever necessary to deal with issues arising from the agreement or of bilateral or international interest. If disputes cannot be settled by the AC, each side—with the community and its member states considered as one party for this purpose—may nominate an arbiter, and the AC will nominate a third arbiter; arbiters will then decide on a dispute by majority decision that is binding on both sides. A party may take countervailing measures only after having notified the AC and provided detailed information on the dispute; any measures should be taken in such a way as to minimize their impact on the functioning of the agreement. The agreement is concluded for an unlimited period; it ceases to apply six months after notification by any one party that renounces the agreement.

A declaration attached to the agreement indicates that if application of the agreement results in serious balance of payments difficulties for Morocco, consultations on appropriate measures will be conducted in conjunction with the International Monetary Fund.

Static growth gains

The AAEU is likely to impact on the Moroccan economy through a number of channels. The liberalization of trade envisaged under the agreement should in principle result in static gains over the long run, both from the reallocation of factors of production toward sectors where Morocco has comparative advantage, and from economics of scale owing to the integration into larger markets. The ability to benefit from the agreement and keep transitional costs low will depend inter alia on the accompanying macroeconomic and structural policies.⁵⁸

Recent studies allow a first rough assessment of the impact of the agreement. A World Bank-sponsored study⁵⁹ concludes that the AAEU provides the potential for expanded output in certain sectors, particularly the phosphate and leather industries, citrus fruits, and the transport services sector. The gains from this resource reallocation are difficult to quantify and will depend also on the extent of trade creation vs. trade diversion, and thus the extent of liberalization vis-à-vis imports from non-EU countries. Nevertheless, the aforementioned study finds permanent gains of 2 percent of GDP in the long-run—with 3 percent of the labor force having to change jobs—and gains of 1 percent of GDP in the short run. If liberalization were extended to non-EU imports, gains would increase to 3.4 percent in the long run and to 2.3 percent of GDP in the short run. Another recent study⁶⁰ points to similar welfare gains, provided macroeconomic equilibria are preserved by appropriate fiscal measures and a real depreciation.

Dynamic gains

Dynamic gains may be obtained through higher levels of investment and accelerated productivity growth. The latter should result from increased competitive pressures that will reduce monopolistic rents and strengthen incentives for increased efficiency. The increased openness of the economy may raise the rate at which best practices and technologies from abroad are absorbed in the economy—although this rate, in turn, will also be importantly determined by the level of human capital and thus education achievements.

Investment flows, and thus capacity growth, will also be important channels through which the AAEU will impact on the Moroccan economy. Judging from the experience of Portugal and Spain, foreign investment may be boosted by the reduction in uncertainty implied by the adoption of EU standards and regulations, the perceived “locking in” of reforms through the agreement, and more generally the acceleration of the move to a fully market-based and open economy that the agreement is expected to support. The agreement would thus add to the incentives that already exist, such as a relative abundance of labor and the proximity to European markets. However, there are also factors that may weaken capital inflows. First, the economy’s reallocation toward relatively labor-intensive activities in line with its comparative advantage may reduce the need for capital. Second, the agreement by itself might tilt incentives away from investing in Morocco and toward investing in Europe through the “hub-and-spokes” effect as producers in Europe gain additional export access to the Moroccan market, while the agreement does not improve access to non-Moroccan markets for producers in Morocco.

Other gains

Beyond trade liberalization, the envisaged harmonization of trade-related regulations is also likely to have an important impact on the Moroccan economy. For example, the adoption of common standards and the upgrading of telecommunication and transport facilities envisaged under the agreement should result in better access and prices for Moroccan exports.

Transitional costs

The transitional costs of the agreement will depend on the actual phasing of the agreement as well as the speed of reallocation of production factors. For example, the proposed phasing, with tariffs on capital goods (and to a lesser extent intermediary goods) to be phased out faster than tariffs on consumer products produced locally, may initially increase distortions and thus transitional costs by raising effective protection rates in sectors producing finished goods for the domestic market. The extent of transitional unemployment will be influenced, inter alia, by the degree of labor market flexibility; thus making a liberalization of the currently rigid labor code even more urgent. Other improvements in the regulatory framework—such as land market regulations, implementation of the new commercial code, strengthening of the efficient judiciary system in addressing excessive “red tape”—will also be important in determining the response of private investment. Finally, addressing weaknesses in the education system will be crucial to speed absorption of know-how from abroad, and thus maximize the dynamic gains for the AAEU.

Fiscal impact

The implementation of the AAEU will have a number of fiscal implications. On the revenue side, it is expected to result in a gradual loss of tariff revenue from EU-imports, estimated by the Moroccan Customs Office to reach cumulatively up to 3.2 percent of 1995 GDP after 12 years; the increase loss of tariff revenue will ultimately depend on the extent to which imports from non-EU countries will be replaced by imports from the EU (Table 8). In addition, the removal of protection may result in transitory difficulties for the domestic industrial sector, thereby eroding the domestic tax base. To the extent that the agreement will result in higher economic growth, these losses may be partially offset by higher revenues from domestic taxes. However, given that import duties and taxes represent about one-fifth of total tax revenue on average, new revenue or expenditure measures will be necessary to avoid a deterioration of the overall fiscal position. On the expenditure side, the government may have to meet some of the transitional costs, in order to contain any adverse social impact. Also, the government is currently preparing a program (“mise à niveau”) centered on improving Moroccan industry’s adaptation to modern technology; training; and information on export markets. The program is expected to be largely financed with financial support from the EU.

Impact on savings, investment, and the balance of payments

The AAEU, other things equal, is likely to result at least initially in a widening of the savings-investment balance and thus a higher external current account deficit. Whether this actually will occur will, of course, depend on the stance of economic policies and the pace of implementation of structural reforms.

Assuming that trade taxes lost are fully compensated by revenue or expenditure measures, public savings should not be adversely affected by the agreement. By contrast, private savings may weaken as the gradual opening of the economy will make a new range of products available and affordable for private consumption as a result of dismantling quantitative restrictions and tariffs, which may stimulate overall consumption levels in addition to inducing substitution of domestic consumer goods by imports. At the same time, the AAEU is also likely to lead to higher levels of investment, as the Moroccan economy expands or upgrades production capacity in its areas of comparative advantage. With appropriate policy mix and improved regulatory framework, increases in the current account deficits should be financed by higher capital inflows, notably in the form of foreign direct investment.

An initial deterioration of the current account would reflect an acceleration of import growth, owing to both substitution effects induced by the gradual decline in the relative price of importables and to increased overall investment that will stimulate additional equipment imports. Since Morocco gains no additional access for exports under the agreement, except for some agricultural items, the expected growth of overall exports will result mostly from a reallocation of resources from import-substituting production into export industries, as well as higher investment levels in these industries. The acceleration of export growth is therefore likely to occur with some delay. In the event, to contain the possible deterioration of the trade balance, a more active exchange rate policy, productivity enhancing structural reforms, and continued fiscal consolidation will be needed.