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Trade agreement holds key economic, security benefits for Tunisia and the EU

Tunisia and the EU are currently negotiating an extension of the existing free trade agreement. The agreement would, if prudently negotiated, offer benefits for both sides of the Mediterranean and could help strengthening political ties. However, before the champagne bottles can be opened, two fiddly subjects remain for the negotiators: services and agricultural goods.

Next round of negotiations

In April 2018, the next round of negotiations between the European Union and Tunisia about a deep and comprehensive free trade agreement known as ALECA (Accord de Libre Échange Complet et Approfondi) will begin. Although it is unlikely that the upcoming talks end with a breakthrough, in the long term it is almost certain that the agreement will be put in place. It offers great economic opportunities for both sides if negotiated carefully.

Economic integration between Tunisia and Europe

Tunisia and the EU have a long history of cooperation dating back to a 1995 Association Agreement. Such Association Agreements are a tool that the EU uses to create a framework for cooperation to begin the integration of a state into European political, trade and security policies. The agreement was ratified by Tunisia in 1996 and lowered tariffs on imports of Tunisian industrial goods into the EU, establishing a 12-year timeline for the liberalization of the export of industrial goods from the EU into Tunisia.

The subsequent free trade agreement (FTA) that entered into force in 2008 greatly increased EU exports into Tunisia, resulting in a growing Tunisian current account deficit. Unemployment remained constant during these years and only soared following the revolution as a result of a temporary breakdown for tourism and foreign investments.

As of 2015, the European Union is Tunisia’s most important trade partner – arguably to the extent that Tunisia is over-dependent on the EU. Almost two thirds (63.4%) of Tunisia’s international trade operations are with the EU, 74.5% of the total Tunisian exports were destined to the EU, and 55.7% of its total imports were from the block. FDI remained constant between 1995 and 2017 except for a slump right after the revolution, with France, Italy and Germany as the country’s most important economic partners.

Controversies for Tunisia

Opening agricultural goods to free trade remains one of the most hotly disputed points of contention. Tunisia fears opening because its agricultural sector is seven times less productive. Its European counterpart is heavily subsidised, and many Tunisians fear that it would either render Tunisian productive capacities bankrupt or simply buy them up. While these fears are certainly justified, Tunisians should not forget the advantage of their weak currency, the wide existing range of bio-products in Tunisia, and potential benefits for consumers. It is likely that both sides come to a deal sooner or later that retains some protective measures to alleviate the flood of cheap European imports, while likely granting Tunisian agricultural products access to the European market.

Services are another area of concern. In particular, advocates dread the more experienced and disciplined European competition. However, it is likely that an agreement will break through Tunisian resistance. Besides, the Tunisian service companies likely to get access to the biggest single market in the world are, unlike other service companies from emerging markets, able to operate competitively.

Equal benefits for the European and the Tunisian economies

Tunisia is in dire need of foreign investment that could help bring down stubbornly high unemployment rates sitting around 15%. European manufacturing companies are looking for cheap and reliable production sites, and Tunisia offers all that is necessary for this; geographical proximity to Europe, a weak currency, and the ongoing harmonisation of trade standards.

In March 2018, German manufacturer Dräxlmaier announced the creation of a new production site that will employ around 4,000 people. Once an ALECA deal is on the horizon, European manufacturing companies are likely to further increase their investments since the dinar is unlikely to appreciate and harmonised standards greatly facilitate intra-enterprise trade.

Additionally, more investments of this kind will result in higher tax revenue, which the Tunisian state desperately needs. The free exchange of services is unlikely to result in financial losses compared to those that occurred when the exchange of industrial goods was liberalised.

Added business for Tunisian service firms is also likely to increase the country’s foreign exchange reserves, which are currently at an historical low due to slump in tourist arrivals and low levels of phosphate production.

Political aspects of economic integration

More European investment and closer ties with European partners are likely to strengthen pro-European and liberal powers, as opposed to religious forces such as Turkey or Qatar seeking stronger cooperation with Tunisia.

These reinforced economic ties are highly likely to underpin wider cooperation for migration and security from which again both parties are certain to benefit. While Tunisia is already en route to more deeply integrate into European security policy, its border forces, in particular at the Libyan border, are likely to receive more support and funds once another milestone in the cooperation had been signed. European countries would be able to better staunch the flow of migrants coming from and through North Africa, resulting in better border controls for migration within the EU.

It is highly likely that ALECA will be signed in the future and include a deal for the free exchange of services, whereas the exchange of agricultural goods is less certain to be part of the agreement. The next round of negotiations will set the pace of talks and remains a crucial factor for companies considering investments in Tunisia.

TunisianMonitorOnline (Global Risk Insights)

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