EU-Algeria trade relations: is EU-led liberalisation reinforcing economic stagnation?

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The weekly column from OEMR to better understand EU-MENA relations.

EU-Algeria trade relations: is EU-led liberalisation reinforcing economic stagnation?

Written by Vicente Alves

Part I: Trade

Since its independence in 1957, Algeria’s economic relationship with Europe has been an unequal one. EU-sponsored liberalisation efforts have favoured the bloc’s economic interests, contributing to Algeria’s increasing dependence on hydrocarbon revenues and stagnant economy. This has led to a more protectionist stance from Algeria on trade relations with the EU. In response, the EU has only recently started to shift its attention from tariff liberalisation, which mostly favoured its exports, towards greater technical and financial support to Algerian companies’ competitiveness and resilience.

This column provides a short overview of EU-Algeria trade relations, the main challenges and recent policy developments.

Overview

Algeria’s economy is characterised by high unemployment rates and lack of diversification, dominated by the state-led hydrocarbons sector. The North African country is the world’s largest gas exporter, raking 10^th in reserves of natural gas and 16^th in oil reserves (Caruso & Geneve, 2015, pp. 3–4). The country is dependent on a rentier state economic model, supported by hydrocarbon revenues that ensure the socioeconomic stability of a stagnant and incipient private sector.

Since the 1990s, the EU has supported trade liberalisation efforts in Algeria and the (limited) efforts of public authorities to reduce the country’s overdependence on hydrocarbon revenues. The Free Trade deal between the EU and Algeria entered into force in 2005, as a section of the Association Agreement signed by the two parties, providing for immediate non-reciprocal concessions on tariff liberalisation. While it dropped EU tariffs on most Algerian products, the agreement allowed Algeria to keep temporary custom duties to protect strategic national industries, namely electronics, steel, vehicles, and textiles (Sülun, 2021, p. 157). As of 2022, these duties are still in place, reflecting the reluctance of Algerian authorities in advancing towards a Free Trade Agreement (FTA).

Indeed, while these concessions may seem favourable to Algerians, the deal has led to a controversial solidification of the country’s economic composition. According to the Algerian Ministry of Trade, after the implementation of the Association Agreement, Algerian imports from the EU increased by 200%, rising from USD8.2 billion (annual average) to USD24.21 billion in 2011. Algerian exports to the EU, on the other hand, have increased by 140%, rising from USD 15 billion (annual average) to USD 36.3 billion, of which 97% were accounted for by hydrocarbons (Mestek-Yahia, 2021).

While the EU is Algeria’s number one trade partner, with half of the country’s foreign trade being made with the bloc, Algeria is ranked only 20th and 24th in the EU’s imports and exports, respectively. In 2019, Algeria exported 15 billion euros (mostly minerals), but it imported 320 billion euros of products from the EU (Sülun 2021, p. 160).

The unequal effects of EU-led trade liberalisation efforts in Algeria have led to a strong reluctance on implementing the Free Trade Agreement between both parties. On the one hand, public authorities fear that the decrease in customs revenues due to decreased import tariffs will lower state revenues, further accentuating its dependence on the hydrocarbon sector, which represents 60% of budget revenues (Sülün, 2021, p. 159). On the other hand, the competitiveness of European products in the Algerian market, drawn by reduced import tariffs, has led to strong stands against the FTA from the country’s incipient private sector (Debbihi & Mouhoub, 2016, p. 71).

Recent developments

Since 2015, in an attempt to fix its unequal balance of payments, Algeria has introduced protectionist measures on strategic sectors, suspending automatic importation licenses from certain products (such as vehicles and cement), prohibiting the import of others and increasing custom duties on some final products. The Commission estimates the overall impact of these measures to have reduced EU exports volumes in over 50% between 2015 and 2019 (HRVP, 2020, p. 8).

From 2018 onwards, high-level meetings have taken place to try and reduce these constraints and further trade cooperation between both parties. In 2021, the Commission requested an Ex-Post Evaluation Report on the Euro-Mediterranean Association Agreement, which has shed light on the unequal aspects and limits of the EU’s trade approach towards Algeria and the Southern Neighbourhood. The report emphasised the limited coverage of non-tariff measures (NTMs) in these agreements, stressing the need to go beyond reduced custom duties. Rather, economic growth can only be ensured with high quality technical standards, transparent regulations, capacity-building for local companies and open business environments (European Commission, 2021, p. 11).

Newer Free Trade Agreements (FTA), such as the ones signed with Japan or Georgia, are already more ambitious in regard to NTMs and structural constraints, taking a more holistic approach to trade barriers by aiming to reduce costs associated with modern global value chains and market liberalisation (European Commission, 2021, p. 21).

Drawing on the results of the ex-post evaluation report, the Commission is thus placing a strong emphasis on economic diversification through improved integration of partner countries in global value chains, by investing in technical-regulatory convergence, market integration and partnerships (HRVP, 2021a, p. 9) through the Economic and Investment Plan for the Southern Neighbours. In this non-exhaustive and politically dependent policy framework, the Commission has played special attention to connectivity and value chain integration through technical assistance and access-to-finance support for key sectors. Concretely, it puts a special emphasis on innovative sectors (such as digital ecosystems) support, through regulatory reform support and skills development in the Mediterranean region. (HRVP, 2021b, pp. 3–5).

Despite these new developments in the EU’s approach to trade, an effect on EU-Algeria trade relations remains to be seen, as settlements and negotiations between both parties are still underway (HRVP, 2020, p.8).

References

Caruso, D., & Geneve, J. (2015). Trade and History: The Case of EU-Algeria Relations. Boston University International Law Journal, 33(1), 1–17.

Debbihi, A., & Mouhoub, R. (2016). The Benefits and the drawbacks from the EU – Algeria Association Agreement. In C. Brătianu, A. Zbuchea, F. Pînzaru, R. Leon, & E. Vătămănescu (Eds.), Strategica: Opportunities and Risks in the Contemporary Business Environment (pp. 65–73).

European Commission. (2021). Ex-Post Evaluation of the impact of trade chapter of the Euro-Mediterranean Association Agreements with six partners: Algeria, Egypt, Jordan, Lebanon, Morocco and Tunisia. DG Trade. https://data.europa.eu/doi/10.2781/49561

HRVP. (2020). Rapport sur l’état des relations UE-Algérie dans le cadre de la PEV renouvelée: Avril 2018 – Août 2020. SWD (2020) 285 Final. European Commission.

HRVP. (2021a). Renewed Partnership with the Southern Neighbourhood: A new Agenda for the Mediterranean. SWD(2021) 23 Final. European Commission.

HRVP. (2021b). Renewed Partnership with the Southern Neighbourhood Economic and Investment Plan for the Southern Neighbours. JOIN (2021) 2 Final. European Commission.

Mestek-Yahia, M. (2021). Algerian-European relations: Between partnership and servitude. Manara Magazine. https://manaramagazine.org/2021/03/16/algerian-european-relations-between-partnership-and-servitude/

Sülün, D. (2021). How deep is the European Union’s Economic and Political Cooperation with Algeria? The Impact of the European Agreements. Journal of the Human and Social Science Researches, 10(1), 151–169.

Walsh, A. (2020). Algeria-Europe economic integration: Where are we now and where do we go? Middle East Institute. https://www.mei.edu/publications/algeria-europe-economic-integration-where-are-we-now-and-where-do-we-go