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Sunday, 12 July 2020

Time to renew our vows with the EU

Negotiating a deeper and more comprehensive free-trade agreement with the European Union is the logical next step from the current Association Agreement

Magda Shaheen , Friday 8 May 2020
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Views: 2797

In this seemingly unending era of lockdown and staying at home, many questions come to mind. Some of them are pertinent and deserve pursuing, while others can easily be discharged. 

Having followed closely the historic cooperation between Egypt and the European Union as our prime economic and trading partner at different stages of my career as a diplomat, a professor and lastly as an adviser to the minister of trade and industry, I am now wondering whether the time has come to renew our vows. 

It has been more than 15 years since Egypt and the EU negotiated their Association Agreement (AA), which after the massive evolutions of free-trade agreements (FTAs) now appears to be a shallow one focusing only on trade in goods and tariff reductions. If Egypt decides to renew the framework of its cooperation with the EU today, it will have to venture into a deeper and more comprehensive free-trade agreement (DCFTA) known as a “new generation” FTA.

The AA, also referred to as the Partnership Agreement with the EU that has been in force since 2004, binds Egypt to certain obligations and establishes a free-trade area over a 12-year transitional period. But this is confined to trade in goods, whereas negotiating a new generation FTA with the EU would encompass trade in services as well, including telecommunications, e-commerce and digitisation, investment and competition policies, sustainable development and intellectual property rights. 

This article will look into whether such a new and broader agreement would be worth pursuing and whether Egypt is ready for it. This will help to provide recommendations on policy implications, highlighting the potential value-added preferences of a new generation FTA as well as revealing its possible downsides.

Attempting to negotiate a DCFTA is the natural course of action to take by two partners whose history of trade agreements and cooperation dates back to the early 1970s. The EU has granted preferential access to Egypt since 1973 under the so-called Generalised System of Preferences (GSP), which provides tariff reductions across the board. Yet, even so Egypt has lagged behind other developing countries such as India, Malaysia and Singapore, as well as Morocco and Tunisia, in making the best use of the GSP system.

In the aftermath of the 1973 War between Egypt, Syria and Israel, Egypt signed an upgraded Cooperation Agreement with the EU in 1977 when the EU did not withhold aid to Egypt at that time. EU assistance to Egypt accounted for the lion’s share of more than 30 per cent of the total aid to the Mediterranean countries, amounting to hundreds of millions in the then European currencies. 

In the late 1990s, as a replacement for the Cooperation Agreement Egypt and the EU moved to the Association Agreement based on exchanging preferences. Once again, the EU did not fail to provide grants and soft loans to Egypt to upgrade its exports with a view to readying them for international competition. But the agreement has come well short of expectations, as Egypt’s economy has undergone only limited diversification and there has been insufficient growth in its exports to the EU. This is what makes many in Egypt doubtful about negotiating a new agreement with the EU with additional obligations at a time when they feel Egypt is not yet ready for it. 

The Association Agreement has come under heavy scrutiny and criticism as Egypt has continuously suffered a chronic deficit in its trade balance with the EU, reaching five billion euros in 2019. However, this deficit should come as no surprise as our exports to the EU consist of mainly agricultural exports alongside oil and gas, while we import industrial inputs, machinery, medical materials, cars, auto parts and so on from the EU. 

Without going into an in-depth discussion of advantages and disadvantages, we must acknowledge that in the absence of the agreement our agricultural exports would have hardly been able to penetrate European markets. Financial and technical assistance were generally disbursed to Egypt after signing the agreement to help the country to upgrade its industrial sector and promote its exports.  

Despite the criticisms the AA has elicited, a new generation of trade agreements that are deeper and more comprehensive than the current ones are becoming more compelling than ever for the two partners. Cognisant of Egypt’s strength and its strategic position, the EU is convinced of the stabilising role played by Egypt in the region and its effective role in combating illegal immigration. The EU also recognises Egypt’s influence in Africa and its war against terrorism nationally and regionally, and it is keen to nurture strong and steady relations with Egypt that are essential to the Mediterranean Basin as a whole. 

A DCFTA is also certainly worth the costs for Egypt to help to elevate its economy to the next level. A new generation FTA would not deal with tariffs as they have already reached their lowest point, but it would address issues of trade in services, the digital economy, and the promotion and facilitation of investment, which are of interest to Egypt. 

Upgrading the services sector is key for the Egyptian economy. Services are the speedy highways of trade. From telephones and faxes to telecommunications and the Internet, no economy can prosper without an efficient services infrastructure, high-quality broadband connectivity, and an efficient and competitive financial system. Though Egypt is better off than some others in this domain, it still has a long way to go to reach a more comfortable level of digitising its economy. 

It is important after the coronavirus pandemic has abated, ending the current lockdowns, to contemplate how best to embark on giant steps to reach full digitisation. Tighter cooperation with the EU to enable Egypt to advance in this respect represents a potential trajectory. Any costs Egypt will have to bear will look trivial when compared to the benefits it will reap in availing itself of the opportunity to bridge the digital divide. Negotiating a DCFTA with the EU is no longer a luxury but a necessity.  

Although there are no upfront guarantees that European investment will be forthcoming in the wake of a DCFTA, the ensuing conducive and predictable environment, as well as a more transparent regulatory framework, will certainly help Egypt better integrate into the European supply and value chains and thus incentivise its private sector. This is yet another enticement for Egypt not to shy away from negotiating a new generation FTA with the EU. 

There are certainly also other incentives and motivations, which due to a lack of space are omitted here. However, let me venture into answering the equally important second question of readiness. Yes, Egypt is ready to negotiate a more complex follow-up agreement with the EU, as it has matured thanks to its stringent and recent economic adjustment programme that has attracted much praise by donors and multilateral financial institutions alike. Though the coronavirus pandemic has led to setbacks for the economy, the readiness of Egypt to undergo more reforms remains intact. It is also ready to deal with “behind the border” impediments to trade and upend its weaknesses to derive all the benefits it can from a DCFTA.

Based on past practice, Egypt should not fail to get aid for trade to prepare itself for some long and tedious negotiations. By modernising its services sector and establishing its competitive edge, an agreement with the EU would also raise Egypt’s profile in its dealings with the African continent within the framework of the African Continental Free Trade Agreement. 

We should not shy away from such negotiations, as the Egyptian negotiator with all his accumulated and extensive experience over the years can easily excel and achieve the maximum interests of Egypt and its people. Concluding a DCFTA with the EU will signal confidence in Egypt in its dealings with its partners and give it additional credibility at the international level and with EU member states.

*The writer is former assistant foreign minister for international economic affairs.

*A version of this article appears in print in the  7 May, 2020 edition of Al-Ahram Weekly 

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