An empirical estimation of the economic effects of a bilateral free trade area agreement between Israel and Jordan in the context of the Euro-Mediterranean partnership

Abstract

The paper deals with the quantitative trade impact by sectors and at a very disaggregated level of the implementation of the free trade area agreement between the European Union and Jordan signed in 1997 and which entered into force after a long ratification process on May 1 2002. For the investigation, a partial equilibrium model is adopted, allowing for the separate evaluation of different static effects. The paper deals also with the likely comparative static effects of concluding a Free Trade Area Agreement between Jordan and Israel. Estimations also extend to agriculture even if free trade in this domain remains only a purely theoretical possibility. The focus is mainly on static integration effects although the paper tries to say something about the likely impact of the non-static (e.g. dynamic) effects of the two integration schemes. The main result is that the EU-Jordan FTA will deepen the asymmetric trade interdependence between the two partners and that Jordan's overall trade deficit will increase and even more so with the EU (by more than 30%). The static welfare effects on Jordan appear to be negative, since trade diversion losses are significant. On the other hand an Israel-Jordan FTA seems to be more attractive for Jordan, in view of its immediate positive although reduced impact on Jordanian's exports and on its negligible impact on Jordan's overall trade balance.