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Regulatory harmonization with the European Union: opportunity or threat to Moroccan firms?

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Abstract

This paper combines a database on non-tariff measures (NTMs) with Morocco’s firm-level census to explore the effect of regulatory harmonization with the E.U. on firms’ outcomes. Exploiting cross-sectoral variation in the timing and extent of regulatory harmonization, we find that harmonization waves correlate with rises in productivity, with higher markups and with greater numbers of exporting firms. These effects were reinforced by an induced market-structure change: harmonization temporarily protected the Moroccan market from competition from low-end producers in other developing countries, who took time to adapt. We identify these effects through changes in both trade patterns and firm-level outcomes.

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Fig. 1

Source: Author's compilation using multilateral NTM database

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Notes

  1. The first paper mapping RTAs contents is Piermartini and Budetta (2009), which covers 70 RTAs. Lesser (2007) also reviews 28 North–South and South–South agreements, Orefice and Rocha (2014) mapped 96 RTAs and Hoffman et al. (2017) mapped more than 300 RTAs.

  2. Morocco’s regulations prior to harmonization were largely outdated and unevenly enforced. It can reasonably be presumed that the new (harmonized) regulations were stricter, de jure or de facto, than the ones they replaced.

  3. “[t]he Parties shall cooperate in developing: (a) the use of Community rules in standardization, metrology, quality control and conformity assessment; (b) the updating of Moroccan laboratories, leading eventually to the conclusion of mutual recognition agreements for conformity assessment; (c) the bodies responsible for intellectual, industrial and commercial property and for standardization and quality in Morocco.”

  4. The 2009 MAST nomenclature was revised in 2012 as part of an effort to harmonize codes between the new data and the WTO’s notifications system, but Morocco’s data uses the 2009 codes.

  5. Since some firms already comply with the standard, the likelihood that compliance with the new standards will result in a significant increase in imported inputs and/or a change in the origin of these inputs is relatively limited.

  6. As Singh and Chanda (2021) point out, in models such as Melitz et Ottaviano (2008), markups increase with a decreasing numbers of firms. In oligopolistic models of trade such as Edmond et al. (2015), markups increase with an increase in a firm’s market share.

  7. Disdier et al. (2015) found that harmonization as part of North–South RIAs could reinforce hub-and-spoke trade structures at the expense of South-South trade. Harmonization at stringent Northern levels raised costs for Southern producers and could price them out of other Southern markets where strict standards would not confer any competitive edge. Chen et Mattoo (2008) showed that harmonization under the EU’s directives increased intra-regional trade but not necessarily with the rest of the world. Harmonization on regional standards improved market access for out-of-bloc exporters if they were from industrial countries but reduced it if they were from developing countries. Also under RIA, Cheong et al. (2018) found that non-tariff changes due to FTAs between industrial and developing countries increased exports from the former to the latter more than the other way around. Mangelsdorf et al. (2012) showed that the harmonization of Chinese food standards with international ones had a positive impact on agriculture exports by helping Chinese products overcome reputation problems in foreign markets. Concerning the implications of standardization in the destination markets, Melo et al. (2014) showed that the perception of stringency in the SPS and quality-related regulations and standards had a negative impact on Chilean fresh fruit exports. Moreover, exported volumes are further reduced if stringency increases in developed countries. Clougherty et Grajek (2014) investigated the impact of one particular international standard (ISO 9000) and found that its adoption by host nations led countries’ exports to decrease. They identified the countries experiencing negative export elasticities under host-nation ISO adoption as either developing or transition countries. The negative effect of food safety standards imposed by importing countries on export of agriculture products was also confirmed by Chen et al. (2008) in China and by Ferro et al. (2015) for 61 countries.

  8. The international standards certification data used by Godehuys and Sleuwagen was from the World Bank’s Investment Climate Surveys, i.e. based on survey responses showing firms’ perceptions, and included non-governmental certifications like ISO.

  9. After consistency checks by UNCTAD specialists, the data is published as part of UNCTAD’s TRAINS database, publicly accessible through the World Bank’s WITS portal.

  10. Our data is based on the 2009 MAST classification, which includes, in its most detailed form, 121 categories of measures. It was updated in 2012 to be used in the WTO’s SPS/TBT notification system.

  11. Typically a law or decree.

  12. Except for measures adopted within the framework of international conventions (FAO, GATT, WTO), most harmonizations have been implemented with the aim of gradually converging towards the acquis communautaire.

  13. There is data on NTMs in the 2001 TRAINS database but it is not as precise as the new wave, making comparison difficult.

  14. To merge information from the NTM database with the Moroccan census, we aggregated the harmonizations at the HS 4-digit level and used the UNSTATS correspondence tables between the HS and SITC classifications, and then between the SITC and ISIC classifications.

  15. Firstly, we excluded firms that have never reported any value added or intermediate consumptions, as well as those that have reported more exports than their turnover. Secondly, we removed outliers in both levels and growth rates. We excluded the top and bottom 1% of the sample in terms of value added per employee, output per employee, and capital per employee. We also excluded observations where value added or output grew by more than 300% or dropped by more than 90% over one year, as well as those where employment grew by more than 200% or dropped by more than 50%. This cleaning procedure prevents outliers from influencing the results and excludes potential biases related to mergers or acquisitions during the study period.

  16. One limitation of our study is that it focuses solely on the main product. We do not differentiate between firms that produce a single good and those that produce multiple goods. However, during the period under study, only a minority of firms produce multiple goods. In a restricted sample of 859 firms in 1998, including the largest Moroccan companies (Database: FACS-MAROC, World Bank), 63% report producing a single good.

  17. As mentioned by Bas and Paunov (2021), when markups increases firms are able to increase their profit margins.

  18. The tariffs represent the simple 4-digit average of the effectively applied rates. The sample average is calculated as the ratio of the sum of tariffs for each tariff line to the number of tariff lines. The effectively applied rates correspond to the lowest available tariff between the most-favored nation (MFN) tariff and various preferential tariffs. If a preferential tariff exists, it is used as the effectively applied tariff. Otherwise, the MFN applied tariff is used.

  19. Results are not affected (not shown here but available upon request).

  20. We are grateful to Alistair Irvine, Manager, Food Contact Compliance, Smithers Pira, for useful clarifications on this point.

  21. However, we perform a robustness exercise using a propensity-score matching method to ensure that firms in the control group (i.e. sectors where no harmonization took place) have similar characteristics to those in the treatment group (sectors that were harmonized), including levels of productivity and markups, before the harmonization and baseline regressions are carried out on this new sample.

  22. It should be reminded that harmonization means the introduction, by the Moroccan authorities, of regulations aligned with European standards. All companies (domestic and foreign) selling in the Moroccan market must comply with these new regulations.

  23. While the impact on high-income import shares is significant, the effect restricted to E.U. import shares is not.

  24. Developing countries are defined here as all but high-income (OECD and non-OECD), using the World Bank’s classification.

  25. Information about the origin of imports is available only from 1993 forward on Comtrade. Thus, what we call “inital year” is 1993, which is not a problem as the first harmonization started that year.

  26. Throughout the period, this refers to the EU of the 15 (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom).

  27. According to the models of Chaney (2008) and Bernard et al. (2011), a decrease in variable export costs has a positive effect on both extensive and intensive margins. A decrease in fixed export costs increases the extensive margin but the effect on the intensive margin is ambiguous. When exporting firms have already paid the fixed costs, the amount they export may be insensitive to a change in these fixed costs. On the other hand, more firms entering strengthens competition in the destination market and could decrease existing firms’ exports.

  28. Since we do not have firm-level data on the destination of exports, we cannot determine whether this positive effect on the extensive margin concerns all destinations or mainly harmonized markets.

  29. As has already been mentioned, Mangelsdorf et al. (2012) showed how the adoption of international standards by Chinese authorities seems to correlate with better export performance at the sector level.

  30. TFP is estimated on the basis of Olley and Pakes (1996) approach (see Appendix, Table 16).

  31. Capital stock is not available in the Moroccan annual manufacturing census. To estimate firms’ TFP, we retrieved the capital stock from two detailed surveys conducted by the World Bank for a sub-sample of Moroccan firms (FACS and ICA databases).

  32. In the first step, we calculate production function coefficients. In the second step, we use these coefficients plus cost shares to estimate firm-level markups. Table 17 (in the Appendix) shows the production function coefficients.

  33. The initial firm size corresponds to the number of permanent employees at the time the firm enters the census.

  34. We use Kernel matching.

  35. It is important to note that a propensity score-matching method assumes that the selection bias is based only on observed characteristics. Results need to be treated with some caution.

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Authors and Affiliations

  1. Aix-Marseille Univ., CNRS, AMSE, Marseille, France

    Patricia Augier & Marion Dovis

  2. University of Lausanne, CEPR, FERDI, Lausanne, Switzerland

    Olivier Cadot

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  1. Patricia Augier
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  2. Olivier Cadot
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Correspondence to Marion Dovis.

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The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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Olivier passed away in March 2019. Olivier was an extraordinary researcher, always full of ideas, with a ready smile. Working with Olivier was a pleasure and a privilege, and he was above all our friend. He was remarkably kind and caring.

We are grateful to seminar participants at AMSE, CERDI, the JMA, the ERF Ninth Annual Conference, the LAGV conference, the ETSG conference and ISGEP conference for useful discussions. Special thanks to Lionel Fontagné, Nicolas Berman, Caroline Freund, Lorenzo Rotunno, March Schiffbauer and Christian Schluter for invaluable advice. The project leading to this paper has received funding from the French government under the “France 2030” investment plan managed by the French National Research Agency (reference: ANR-17-EURE-0020) and from Excellence Initiative of Aix-Marseille University - A*MIDEX and Switzerland’s NCCR WP6 “Impact Assessment”.

Appendix A

Appendix A

See Tables 16, 17, 18 and 19.

Table 16 Production function parameter estimates
Full size table
Table 17 Production function parameter estimates and markups
Full size table
Table 18 First-stage probit results for harmonization treatment status
Full size table
Table 19 Balancing test results, before and after kernel matching
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Augier, P., Cadot, O. & Dovis, M. Regulatory harmonization with the European Union: opportunity or threat to Moroccan firms?. Rev World Econ (2023). https://doi.org/10.1007/s10290-023-00515-3

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