NTM harmonization, profits, and productivity: Firm-level evidence from Morocco

We explore the effect of North-South harmonization on firm profits and productivity in the context of Morocco’s regulatory convergence with the E.U.. We formalize the intuition on harmonization’s effects in a Melitz model following Demidova and Rodriguez-Clare (2011) and show that it affects equilibrium outcomes through changes in domestic vs. international relative trade costs. The model highlights both trade-creation effects, through reduced trade costs with the preferential partner, and trade-diversion effects, through higher export costs for out-of-region exporters. Combining a novel dataset on harmonization measures at the product level with Morocco’s industrial survey, DID estimation with firm fixed effects suggests that the trade-diversion effect dominates, raising operating profits and labor productivity in particular in sectors exposed to Southern low-cost competition. This suggests that for the Southern country, “shutting the door to the low-cost producers” may be a political-economy motivation to accept harmonization on stiff Northern standards.