The Deep and Comprehensive Free Trade Agreement Area (DCFTA) agreement, which is still being negotiated with the European Union, has been so controversial that the European authorities have suggested a name change[1]. This is because the economic, social, health, environmental, and sovereignty problems the DCFTA poses have been exposed on multiple occasions[2].
The DCFTA, however, continues to be promoted by the European Union (EU), and by some Tunisians, as an essential and necessary political agreement that will have positive economic benefits for Tunisia. However, the agreement’s text reveals its economic focus and promotes the liberalization of trade and investment. It would also prevent Tunisia from having an economic policy that is independent of the EU.
This policy brief argues that the DCFTA will not provide significant economic improvements, and certainly not an economic miracle, because its irreversible political and social consequences will prevent development in Tunisia.
The trade balance will continue to deteriorate
Since 2005, Tunisia has been in deficit
The DCFTA is first and foremost a trade agreement, the raison d’être of which is to increase exports and imports. However, the agreement would cause social problems within Tunisia and negatively impact Tunisia’s current international position.
The loss of jobs, caused by new imports and the establishment of European companies, will cause both economic and social problems. This could affect sections of the population that are already in socio-economic difficulty, such as small business owners and small farmers, who will not necessarily be able to reintegrate into other sectors of activity[3].
Figure 1 identifies how Tunisia’s trade balance has deteriorated considerably since 2005. This decline is offset by remittances from Tunisians that live abroad (secondary income) and the balance of services (40% made up of tourism[4]). The deficit was produced by an increase in the external deficit of goods and of primary income. The deterioration in the balance of goods corresponds to the gradual lowering of customs duties on industrial products, under the Association Agreement with the EU, the end of the Multi Fibre Arrangement in 1994 which created greater international competition in the textile sector, the participation of Asian countries in the World Trade Organization (WTO), and an increase in oil prices which peaked in 2008 and from 2011 to 2014. The integration of Tunisia into the world trade system, accelerated by its entry into the WTO and the Association Agreement in 1995, is currently taking place to its detriment[5].
Figure 1. Author’s calculations based on IMF balance of payments data[6]
DCFTA would worsen the trade deficit, especially for services, and not improve growth
The advanced economic liberalization measures proposed by the DCFTA will not reduce the aforementioned deficit trend. Prospective studies estimate that the majority of sectors will experience little impact or a negative effect. A study of 37 economic sectors by Ecorys (2013), which uses a very optimistic model[7], estimates that in the long term, nine sectors would suffer losses of more than 5% in terms of added value, seven sectors could have gains of more than 5%, and for the remaining 21 would experience gains or losses of 5%. Based on these results, it is difficult to understand the 4% economic growth rate that the model predicts. The Ofse (2018) study measures a negative impact of -1.5% of GDP growth, a stable level of employment, and losses in the trade balance.
Overall, studies on the DCFTA indicate that it will have, at best, a neutral long-term impact. The DCFTA will mainly orient production towards certain sectors, such as fewer cereals, more olive oil, fewer textiles, and more machines, while the cost of making these adjustments and short-term losses, which Tunisia will have to bear, are not taken into account.
Furthermore, the Ecorys study indicates the DCFTA would negatively impact the service sector as exports would drop significantly in almost all service sub-sectors[8] and imports would increase significantly in all[9].
The liberalization of the services sector, DCFTA’s primary aim, would therefore come at Tunisia’s expense, even according to the long-term forecasts of an optimistic study. The balance of services, which has already been negatively affected by the drop in tourism since 2014 and again by the Covid-19 pandemic, will no longer be able to limit the trade deficit or even could become negative. Studies from Ecorys (2013) and Solidar (2018), point to opportunities for emerging service sectors in Tunisia. However, according to their predictions, these same sectors will be the most affected by European competition.
The projections given by these studies are uncertain, but they can give trends: an agricultural sector turned towards the production of oils and fruits for export to the detriment of strategic cereal productions, and a service sector that would become in deficit. The gains would therefore come from the industrial sector, which has already been liberalized by the Association Agreement, and from foreign investments, favored by the DCFTA. What can be expected from this?
Foreign investments are costly and unprofitable debt
A second major argument used by proponents of the DCFTA is that its adoption would attract foreign direct investment from Europe. These investments would have a positive economic impact, in terms of growth and job creation, that would justify new privileges granted to investors.
Agreements and privileges for investors are costly and nonessential to investments
The link between the presence of investment facilitation agreements and the amount of foreign investment is, however, unproven. On the contrary, the majority of studies identify no relationship or only a very slight impact. The latter would be more relevant in industrialized countries but Tunisia is not in the category[10]. Furthermore, Brazil was the world’s third-largest recipient of Foreign Direct Investments (FDI) between 1990 and 2010[11] yet it did not have investment facilitation agreements.
At the heart of this debate is the question of the privileges that are granted to foreign investors, in particular through the systems of arbitration between investors and states. Tunisia already has 31 bilateral investment treaties (BITs), which include this system, out of a total of 38 BITs currently in force[12]. But DCFTA would extend this system to all EU member states. Furthermore, since the treaty would not include a deadline, it would be difficult to question any clauses and difficult to renegotiate[13].
These treaties allow foreign investors to seek reparations from the state if they believe that regulation, even in the public interest, has harmed their expected profits. Two frequently cited cases are the example of the Swedish energy company Vattenfall, which tried to sue Germany for 6 billion euros after it decided to phase out nuclear power production, or the utilities company Veolia which requested 175 million euros from Egypt following its decision to increase the minimum wage[14]. Foreign companies can also use the threat of arbitration to change laws, as in France regarding a law on hydrocarbons[15]. South Africa, the first recipient of FDI in Africa, decided not to renew its BITs, which include arbitration, due to the costs and after noticing investments were coming from countries with which South Africa did not have BITs. However, the FDI inflows it receives have not declined[16]. Tunisia should follow a similar path to protect itself from the risk of Investor-state dispute settlement cases.
The main policy to attract FDI to Tunisia has been through the offshore business system, the results of which are controversial. This regime has given great advantages to investors who want to take advantage of the Tunisian workforce to re-export their products. DCFTA would give them more[17]. However, when looking at FDI flows, there has not been a significant influence. There is no surge in investments following Law 72 or following the Association Agreement of 1995. On average, FDI has been between 1 and 4% of GDP since 1970 with a slight upward trend (Figure 2)[18].
Figure 2 – Net inflow of inward FDI, as a percentage of GDP. Source: https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=TN
Investments must be controlled and directed to enable development
Foreign investment does not automatically lead to increased welfare and employment levels of the recipient country. If they exist, the additional investments that could be made with the DCFTA would target the Tunisian market more directly, since the offshore regime already makes it possible to target exports very freely. For example, investments in the retail sectors would strengthen supermarkets, to the detriment of small businesses, leading to greater concentration. This would probably lead to a net loss of jobs in this sector[19].
Thus, FDI would lead to more competition with Tunisian companies (in addition to additional imports), but above all, the DCFTA will not accompany these investments as guarantees to improve the Tunisian economic fabric itself. The agreement prohibits Tunisia from setting conditions for foreign investment, such as technology transfer, the employment of national executives, having recourse to a minimum of Tunisian suppliers, etc. However, to be truly useful in building a more prosperous economy, FDI must be directed towards sectors for which it is useful and beneficial to local businesses, as part of a government strategy to develop and improve the productivity of some sectors. It is particularly thanks to this type of strategy that the newly industrialized Asian countries have successfully “caught up”. This implies that using diffusing and integrating the technologies acquired through investments and to other areas of the economy is an essential process (Rodrick, 2018).
FDI: primarily a debt
FDI cannot be seen as a sustainable solution, especially under these conditions. FDI represents a debt; it is an inflow of foreign capital that must be repaid. If we look at the primary income, we notice that Tunisia must pay a significant sum to foreign investors for FDI payments, especially between 2009 and 2013 (with a deficit of more than 1.5 billion dollars each year), due to the significant FDI which was recorded between 2005 and 2010. With the fall in FDI, this deficit has also fallen. For countries like South Africa, FDI payments have become a major part of their trade deficit. This means because of FDI, the country owes a debt to the rest of the world.
FDI can also lead to considerable direct losses. For example, between 2000 and 2012, Tunisia received 3.547 billion TND of FDI from the United Kingdom, but 7.08 billion TND was repatriated, leading to a net loss of 3.533 billion TND[20]. It is necessary to control this debt and its impact on the country’s development.
Chart 3 – Author’s calculations based on IMF data. “Income from other investments” refers exclusively to interest paid on government loans abroad.
European standards promote the interests of dominant players and aggravate existing problems
A third consequence of the DCFTA would be the adoption of European standards. Defenders of the agreement say it would bring Tunisia to better standards, force it to carry out stalled reforms, and fight corruption, all of which would make the market more efficient.
Intensified competition, corruption, and the social crisis still there
The majority of European standards mainly focus on what the EU considers to be good competition. However, this is not always favorable to consumers or the economy, as the Tunisian Observatory of the Economy reminds us about the energy sector. There is a fear that this could lead to Tunisian resources being monopolized and energy distribution privatized for the benefit of European operators but with negative consequences for Tunisian consumers and job losses in STEG[21]. Competition in public procurement would threaten all Tunisian companies that benefit from Tunisian markets (15 to 20% of GDP), especially small businesses, by putting them in direct competition with European companies[22]. Competition standards are underpinned by the neo-liberal economic ideology, which is partly responsible for the lasting social crisis in Europe – the yellow vests movement in France is one of its manifestations. The competition-based neoliberal system and the domination of large companies have led to the precariousness of a large part of the population and to a social crisis that persists in Europe. European standards do not prevent agreements between actors nor do they prevent corruption scandals, including in public procurement[23]. Corruption must be addressed directly and systematically. Market rules could just as easily be circumvented as current rules.
Standards for the benefit of large European and Tunisian companies and lead to a larger informal market
The standards also concern production standards such as product grading. This would lead to a standardization of products and production methods, especially in the agricultural sector. While some would improve safety and compliance with environmental standards, it is not known whether they will fit the Tunisian context. European standards will favor large Tunisian companies, which will know how to apply them easily or already apply them for exporting, or European companies which will be able to enter the market more easily. Europeans will remain better at applying their own standards since they will not have to adjust. Therefore, it will lead to losses for Tunisian companies, some of which will have to close, as well as an increase in the informal market, which is unable to apply the required standards.
Imposing external led reforms that are against the people is not a solution
On the other hand, defenders of the DCFTA argue that the deal would help advance stalled reforms in Tunisia. However, this would involve adopting a series of reforms that many Tunisians oppose. The application of European standards provokes strong resentment against the European Union in many states of the EU itself. In Tunisia, the unpopular reforms imposed by the IMF also provoked strong resistance movements among the population. DCFTA takes the logic of IMF reforms one step further by establishing the rule of competition and the privatization of many sectors. From a political perspective, reforms must be the result of the democratic process, not come from an international agreement on which citizens will not have had the opportunity to express themselves, or in a form where elected representatives only have the choice to accept or reject. From an economic perspective, the effectiveness of these reforms for economic development is highly questionable and frequently contested by economists and the population.
Restricted and limited development opportunities by DCFTA, a frozen role in global value chains
Alternatives exist but agreements like the DCFTA restrict them
According to its supporters, the standards and reforms that accompany the DCFTA would be necessary to modernize Tunisia and make it internationally competitive, arguing that this would be the only way to grow the economy. This claim, however, is absurd because it disregards the complexity of human behavior and is based on the belief that economics is a “science” that produces the truth, whereas economics is fundamentally a social phenomenon because it arises from human interactions. Alternative approaches exist and a few countries have been able to develop without following the measures prescribed by the IMF or the World Bank. China and South Korea have experienced expansions without following them. These countries imposed capital controls and provided certain industries with protection and investment. Such policies would be made completely impossible by the DCFTA. In a recent study, Dühnaupt and Herr (2020) show how a DCFTA style agreement makes it very difficult, if not impossible, to implement an industrial policy that can benefit a country in the Global South. In addition, by being integrated into world trade and its value chains, many countries are restricted to certain tasks and do not benefit from either economic or social improvements[24].
DCFTA is not modern and will not allow Tunisia to follow its sovereign development
This agreement will restrict Tunisia’s ability to independently exercise sovereign decision-making. It will automatically have to follow European standards without having the opportunity to discuss them. Even if these standards could be positive, they must come from Tunisia itself in order to adapt them to the economic and social situation of the country. In terms of integration into international trade, the majority of companies wishing to export already meet international standards. During the discussions on the DCFTA, the problems that emerge are mostly internal issues such as the lack of visas and the non-convertibility of the dinar seem to be the main problems for exports of services[25].
Moreover, what type of modernization do the DCFTA supporters mean? The methods of modernizing agriculture used since the 1970s have largely destroyed the soil and the resistance of ecosystems and crops to shocks (climatic, epidemics, etc.). In Europe, competition and aid from the CAP (Common Agricultural Policy) [26] mean that farmers would not survive without European aid. Does it mean modernization of the economy through advanced technologies? As discussed above, the connection to investment is not automatic. It is therefore impossible to expect automatic benefits from such an agreement.
Alternatives:
Tunisia’s economic standards and choices must remain sovereign but this would be prevented by the DCFTA agreement. Tunisia would agree to apply a formula that the EU has prepared for (and intended for all Mediterranean countries), and on which the negotiating margins are minimal[27]. Thus, with the DCFTA, Tunisia could no longer choose its norms and standards: it would accept its status as a satellite of the European Union, automatically following its standards. The DCFTA is, therefore, a neocolonial agreement. The economic and social consequences are also to be feared, especially in the short term and in a situation where the Tunisian economy is unable to adapt to such a change[28]. There is empirical evidence that large short-term losses also have lasting consequences[29]. The agreement is neo-colonial because it would give more power and income to European firms, which already have great advantages under the offshore regime, and it would increase Tunisia’s debt and trade deficit. But above all, it is neo-colonial because it allows the EU to ensure that Tunisia, and the other Mediterranean countries which will sign similar DCFTA agreements, remain in its sphere of influence and control.
Far from saving Tunisia, DCFTA will mortgage its future at the goodwill of its external creditors. A serious economic analysis of the consequences of the DCFTA does not reveal a positive impact. On the contrary, the reductions in the possibilities of carrying out active and sovereign economic development policies, as well as the impacts on the economic and social rights of Tunisians, food sovereignty, access to medicine, and inequalities have been proven[30].
A real development strategy must be based on political and economic sovereignty, control and use of capital, and social, economic, and environmental justice.
Recommendations:
- Reject the DCFTA agreement offer from the European Union.
- Revise Bilateral Investment Treaties as they expire and remove the investor-state arbitration clause and unfair privileges granted to investors.
- Gradually challenge the offshore system through reintegration into the local economy.
- Pursue capital controls, demanding systematic technology transfers, and the employment of national executives from companies based in Tunisia.
- Develop a different mode of development for Tunisia that is based on social and environmental standards and choices concerning strategic and essential production sectors that require protection and development such as cereal and information technology.
- If it is considered necessary, propose a real partnership agreement to the EU, based on Tunisia’s identified needs; exchange knowledge, promote social programs, specific technology transfers, allow imports of products that Tunisia does not intend to produce, and promote selected exports.
[1] Thanks to documents requested from the EU by the author, it is possible to trace from February 2019 the idea of a name change to deal with resistance from civil society and “poor communication”. At a meeting between the EU and the Euromed Rights association, in which the EU suggests that “a reflection on changing the acronym DCFTA by hidden part is also necessary”. Document n ° 4 of the dossier sent by the EU on September 19, 2019, available at: https://www.asktheeu.org/en/request/contacts_about_eu_tunisia_dcfta In September 2019, EU Ambassador Patrice Bergamini said the agreement was “misnamed” https://www.lemonde.fr/afrique/article/2019/07/09/face-aux-turbulences-regionales-l-europe-ne-veut-pas-perdre-le-soldat-tunisie_5487381_3212.html; then on June 24, 2020, Ghazi Ben Ahmed, former official of the European Commission and president of the think tank MDI, cousin of the former chief negotiator of the DCFTA and Tunisian Minister Hichem Ben Ahmed, told TAP that the DCFTA must change name to become RUTF but without suggesting a substantive change: https://www.webmanagercenter.com/2020/06/24/452657/les-negociations-sur-laleca-reprendront-sur-des-bases-nouvelles-selon-ghazi-ben-ahmed/ [2] (for a summary, see for example https://ftdes.net/note-politique-aleca-tunisie/) [3] Mahjoub and Saadaoui (2015); Jonville (2018) [4] In 2019, which corresponds to the average: between 1990 and 2019, the travel sector represents on average 41.3% of the services exchanged by Tunisia, which is largely in surplus unlike transport, which has been in deficit since 2009, and other services, surplus to a lesser extent since 2008 (author’s calculations based on IMF data). [5] It should be added that if the trade balance with Europe seems balanced (slight deficit), it is because it is artificially improved by the offshore regime, which does not bring gains to the country. Bedoui and Mokadem (2016) show the size of the real deficit with the EU, based on the onshore regime. [6] https://data.imf.org/regular.aspx?key=62805742 [7] The European Commission’s forecasting models have been criticized for their trade-biased results on numerous occasions, by both civil society and economists. [8] With the exception of maritime transport (+ 0.09%) and consumer services (+ 1.41%) where the effect is negligible. [9] The ITCEQ study (2016) estimates a globally neutral effect on the balance of services [10] See for example Brada et al. (2020), Poulsen (2010). [11] Morosini and Sanchez (2017). [12] Compiled by the author using data from UNCTAD. The list of treaties and their provisions is presented in the appendix. See https://investmentpolicy.unctad.org/international-investment-agreements/countries/213/tunisia?type=bits [13] For two reasons: it is easier to renegotiate with one country than with the EU as a whole and it would be complicated to renegotiate only the investment part of the DCFTA. [14] See https://www.cleanenergywire.org/news/costs-rise-vattenfall-lawsuit-over-german-governments-nuclear-phase-out; https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/458/veolia-v-egypt. In the case of Vattenfall, the case is still ongoing. Fortunately, Veolia was not successful. [15] See: https://www.ritimo.org/Decryptage-comment-les-lobbies-ont-detricote-la-loi-Hulot-via-le-Conseil-d-Etat [16] Raman (2012). [17] See for example: https://inkyfada.com/fr/2018/01/19/limites-systeme-offshore-tunisie/ [18] In 2006, the value of FDI was inflated by very significant investments from the United Arab Emirates (takeover of Tunisie Telecom). Outside of this year, the vast majority of FDI comes from the EU. See also: http://www.economie-tunisie.org/fr/observatoire/visualeconomics/couts-ide-tunisie [19] Bedoui et al. (à paraître) [20] Riahi (2014) [21] Louati (2019) [22] Bedoui et al (forthcoming) present these impacts in detail. [23] In a study by PwC (2013) for the European Commission, 13% of the budgets studied were monopolized by corruption: https://ec.europa.eu/anti-fraud/sites/antifraud/files/docs/body/pwc_olaf_study_en.pdf [24] Dünhaupt, P .; Herr, H .; Mehl, F. and Teipen, C. (2020): Opportunities for Development trough Integration in Global Value Chains? A Cross-sectoral and Cross-national Comparison, IPE Working Paper No. 140/2020. [25] Solidar (2018) and conference organized on April 18, 2018 in Tunis by Solidar Tunisie. [26] Ben Rouine and Chandoul (2019) show how this aid is also “dumping”, that is to say, allowing the EU to export agricultural products at low prices. [27] A study of the negotiating texts progressively adjusted over the negotiating sessions reveals that they have hardly been modified. They are published in French and English only, therefore written by Europeans, who in places indicate that “the European side reserves the right” to add or modify a particular passage. [28] And all the less since the economic and social consequences of the Covid-19 pandemic are far from being known and over. [29] Summers (2014) [30] See for example: Mahjoub and Saadaoui (2015); Robert et al. (2016); ITPC (2017); Bonnefoy and Jonville (2018); Ayeb (2018); Jonville (2018); FTDES et al. (2018); Ofse (2018); Ben Rouine and Chandoul (2019); Louati and Jegham (2020); Janne d’Othée (2020)
