Regional integration and North-South industrial location: An application to the Euro-Mediterranean area

The process of integration in Europe began at the end of the fifties and has led in 2004 and 2007  to  the  enlargement  of  the  European  Union (EU) toward  central  and  eastern  European countries. In parallel, an historic partnership has been developed since 1995 between the EU and Mediterranean countries (the  so-called  Barcelona  process).  One  aim  of  the Barcelona   process   is   to   reinforce   the   economic   relationship   between   the   EU   and Mediterranean  countries  and  to  promote  trade  and  economic  growth  in  the  area  through  an economic and financial partnership and the gradual establishment of a free-trade area. Since the  latest  EU  enlargement,  the  Euro-Mediterranean  partnership  includes  37  members,  of which  there  are  27  EU  member  states¹  and  10  Mediterranean  partners². 
   
Regional integration agreements reduce trade barriers between member countries while maintaining barriers with the rest of the  world, which  can  have  important  consequences  on  the  geographic  distribution  of  activities. It  gives  an  incentive  for  firms  to  locate  in  the  integrated  area  as  the  market  access  of  the firms operating  within  the  area  is  improved.  Less clear-cut is the relationship between the process of economic integration and the location of firms within the integrated area. Following the regional integration, firms can be tended to concentrate in the country that has the best access to the other countries’ markets (Baldwin et al., 2003). However, as it becomes less costly to export within the integrated region, firms can then have a greater incentive to concentrate their production in the country with the lowest production costs (Chen, 2008). Promoting integration between all countries belonging to the area and not only between small countries and the largest market seems very important in order to obtain a relatively uniform distribution of firms in integrated areas (Altomonte, 2007).  The aim of our work is thus to investigate the spatial implication of increasing economic integration in the Euro-Mediterranean region. Does market accessibility largely differ between countries?  What  is  the  impact  of  differences  in  market  accessibility on  the  location  of  manufacturing  sectors?

The evaluation of trade barriers between countries belonging to the Euro-Mediterranean area³ reveals significant market segmentation in this area. Crossing the national border inside the Western European countries reduces trade by 4.5 times whereas it generates a decrease of trade by a factor of 7 in European new member states and more than 200 in the Mediterranean countries group. In addition, even if the market integration increased between 1990 and 2003, trade barriers remain very high especially within the “southern markets” (between  Mediterranean  countries  and  between new member states). This market segmentation could have a substantial impact on firms’ location choices.   

We thus address the issue of the impact of market accessibility on the location of manufacturing sectors⁴ in the Euro-Mediterranean area. Our research shows that firms locate in areas where labour costs are lower and where the market and supply accesses are easier. Production costs are far from being the only determinant of the location of firms. Being in a peripheral position can thus be a strong disadvantage for Mediterranean countries and new member states even if those countries benefit from lower labour costs. These results suggest that both better “North-South” and “South-South” integration are a necessity for firms to settle in new European member states and Mediterranean countries⁵.  

The issue of the impact of international openness on industries’ geographic distribution is also addressed. Due to international competition, industries (especially low-technology industries) have chosen to locate in countries with lower production costs. Thus, international trade openness can act as a dispersion force  in  an  integrated  “North-South”  area  as  it  could  generate  the  relocation  of  some manufacturing firms from Northern countries to Southern countries. Southern countries may  be  able  to  take  advantage  of  greater  international  integration, associated with a higher regional  integration one.

The  Euro-Mediterranean  area  has  raised  concerns  among  economists  and  policy makers  as  well.  It  was  thought  that  the  very  peripheral  position  of  new  member  states  and Mediterranean  countries,  not  only  with  respect  to  Western  Europe  but  also  within  their respective regions, would have represented a serious obstacle to their economic development. Our results seem to confirm this pessimistic picture.  Overall manufacturing activity is attracted by low wages and a good business environment, but access to large markets really matters.  A  deeper integration  in  the  Euro-Mediterranean  area  could  lead  to  the  location  of industries  in  Southern  countries  by  promoting  their  access  to  larger  markets.  However, a deeper “South-South” integration is also a condition for this experiment to succeed. At this time, new member states benefit from better market accesses than Mediterranean countries.
 
These results must be interpreted cautiously. Clearly, several refinements can be added to  the  current  setup.  First,  even  if  the  main  countries  in  the  Euro-Mediterranean  area  are introduced  in  the  database,  some  countries  are  missing  and  this  can  impact  the  results  on geographic concentration. In addition, because of the low level of sectoral disaggregation, we cannot account for the fragmentation of the manufacturing production in each sector. 

Notes:
1. Ten countries of Central and Eastern Europe (Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia) joined the EU in 2004. In January 2007, the addition of two more countries (Bulgaria and Romania) brought the number of EU member states to 27 countries. back to text
2. Algeria, Tunisia, Morocco, Turkey, Jordan, Israel, Egypt, the Palestinian territories, Lebanon and Syria. back to text
3. We evaluate the significance of trade barriers and their evolution within the area using a theoretical gravity equation to bilateral trade flows between 28 countries belonging to the Euro-Mediterranean area over the period 1994-2003. back to text
4. Considering 28 countries belonging to the Euro-Mediterranean area, we derive an estimating equation of industrial location from a standard New Economic Geography (NEG) model which considers production costs and both supply and market accesses as the main determinants of industrial location. back to text
5. These results are conformed to those of Altomonte (2007) and Resmini (2003). back to text