Scale Economies, Horizontal Product Differentiation and the FTA Between Tunisia and the EU: Some General Equilibrium Effects

Abstract

Tunisia was the first country south of the Mediterranean to conclude a free trade agreement with the European Union in 1995. The agreement is expected to promote growth and employment through efficient reallocation of resources and scale economies exploitation. The aim of this paper is to provide some general equilibrium estimates of the agreement impact on scale economies exploitation as well as on pro-competitive and varieties effects. Simulation results show that welfare gains under monopolistic competition would be greater than those that would be achieved under perfect competition. The expansion of firm’s average size and the increase of the number of available varieties are behind such results, despite the adverse terms of trade change. At the sectoral level, the models predict that mechanical and electrical machineries, chemicals and textiles, apparel and leather are the goods for which Tunisia has a comparative advantage.