Regional groupings, discrimination, and erosion of preferences: Effects of EU enlargement on the Mediterranean Basin

With the spread of regional and bilateral trade arrangements, there is always concern about the discriminatory impact on non-members. For example, the establishment of NAFTA deprived the Caribbean Basin of its preferential status vis-a-vis Mexico in the US market. Or alternatively, the enlargement of the EU from 15 to 25 countries may have adverse discriminatory effects on outsiders. This paper develops a method for assessing the effect of regional integration on non-member (non-integrating) countries that sustain trade diversion and/or lose preferential status in the integrating area. It then applies this methodology to gauge the impact of the 2004 EU Enlargement from 15 to 25 countries on the Mediterranean Basin. The method consists of three sequential steps: (1) determine the commodity overlap in the exports to the EU-15 between the acceding 10 and the Mediterranean countries. This is done by use of correlation coefficients and a specially-devised 'export-similarity index'; (2) to the extent that significant overlap is found, identify the product groups in which it exists; and (3) determine the degree of protection in the EU-15 in those products and, hence, the erosion of competitive position of outsiders. Textiles and clothing are the sectors hit hardest in the Mediterranean countries by the EU enlargement.