As is well known in the literature, the overall welfare impact of any process of regional integration will depend on the extent and nature of both shallow integration and deep integration. Shallow integration, sometimes also referred to as negative integration, typically involves the removal of border barriers to trade, such as tariffs and quotas with respect to one’s regional partners. The net benefits from lowering such trade barriers preferentially are inherently ambiguous, because they involve both trade creation and trade diversion. Trade creation arises whenever more efficiently produced imported goods replace less efficient domestically produced goods. Trade is “created” and yields welfare gains. Trade diversion occurs when sources of supply switch away from more efficient non-partner countries to less efficient partner countries. Trade diversion reduces welfare, and the net welfare impact of a Regional Trade Agreement (RTA) will depend on the relative size of the two effects[2].

Deep integration involves policies and institutions that facilitate trade by reducing or eliminating regulatory and behind-the-border impediments to trade, where those impediments may or may not be intentional. Welfare gains from a successful process of deeper integration may be considerably higher than losses from shallow integration. It is for this reason that this report is concerned with the process of deep integration in the context of the Association Agreement (AA) between the EU and Egypt, and the context of the Egyptian Action Plan, signed under the EU’s European Neighbourhood Policy (ENP).

The report’s main objective is to understand better what is deep integration, and how to achieve it, and to analyze the possibilities of deep integration in the between Egypt and the EU, whether in the context of the AA or in the context of the Action Plan of the ENP. As stressed by the European Commission in its last communication to the Council and European parliament in December 2006 “Deeper economic integration with our ENP partners will be central to the success and credibility of the policy”. But what is meant by deep integration, and how to achieve it are issues that the Commission did not address in a direct meaner. In this regard, we start in Chapter One of the report by providing a conceptual framework for what do we mean by deep integration in the context of regional trade agreements (RTAs) and apply it to the AA and the ENP. We identify the means of achieving deep integration, and differentiate between types of deep integration. In fact, as Chapter One discusses some kinds of deep integration do not result in discriminatory effects against non-partners, where they are more of Most Favoured Nation (MFN) type, whereas other measures are discriminatory. Chapter One points out as well that there are different means of achieving deep integration starting with MFN type of measures and reaching harmonization. The main features of the Association Agreement (AA) and the European Neighbourhood Policy (ENP) with its Action Plan are discussed in details, while providing a comparison between the AA and the Action Plan in enhancing deep integration and assessing the ENP Action Plan.

Chapter Two provides a thorough quantitative assessment of the Egyptian trade with the EU, while comparing it with the rest of the world (ROW). Several statistical indicators are applied including the Finger-Kreinin and the Intra-Industry Trade (IIT) indices. Moreover, the analysis focuses on both the geographical as well as the product dimensions.

Chapters Three, Four, and Five provide detailed analysis of deep integration aspects in three areas, namely; agricultural related standards, competition law and policy, and state aid. The choice of the three areas stems from the need to differentiate the main aim of the deep integration. Hence, the agricultural related standards represent the case of deep integration where the final aim is enhancing market access, whereas competition law and policy case represents the case where deep integration aims at upgrading the domestic business environment. Finally, state aid is highly related to competition law and policy, but we rather thought that this field is rather understudied and suffer from scarce resources and literature.

Chapter Three deals with the case of agriculture and standards. It analyses the performance of the Egyptian agricultural exports to the EU. It reviews the provisions related to standards in the context of the AA and the ENP Action Plan.

Chapter Four deals with the gap existing between Egypt’s competition law and EU’s legislations concerning competition. The chapter provides a brief review on the case of harmonizing competition laws in the context of RTAs while focusing on the EU’s approach in its RTAs. The chapter then discusses in the details the differences in the two bodies of legislation dealing with dominant position, safe harbour rule, merger control, etc. Finally the chapter identifies the problems that could result from the existing gap and identifies whether deep integration is needed to overcome this problem or other form of cooperation might be appropriate in this case.

Chapter Five addresses the issue of State Aid. The Chapter compares the formally defined State Aid in the EU with what can be considered State Aid in Egypt. It points out the differences between the AA and the ENP Action Plan on issues dealing with State Aid. It suggests how the gap between Egypt and the EU in terms of dealing with State Aid can be narrowed down.

Different methodologies are adopted in the different chapters of the reports and within each chapter. While the institutional approach is the most common approach adopted in analyzing different issues, we complement it when necessary by quantitative assessment and anecdotal evidence.

The study pointed out that deep integration is not a panacea. The report identified that deep integration is much more complex than what is commonly thought. Chapter One showed that there are certain aspects that need to be carefully examined when applying deep integration if specific results are to be expected from it. For example, some kinds of deep integration could lead to MFN type of results whereas others could lead to discriminatory effects. When applying such deep integration concept in general to the Association Agreement (AA) and the European Neighbourhood Policy (ENP) Action Plan we observe that the Action Plan has not gone so far beyond the AA. However, the ENP Action Plan includes new mechanisms which could foster deep integration if properly utilized (namely the committees and sub-committees overseeing the implementation of the Action Plan). Chapter One pinpointed that the aims of deep integration should be clear, whether enhancement of market access or rather improving the domestic business environment. Such distinction is of paramount importance as it could result in adoption of different means to achieve deep integration.

Chapter Two revealed that dismantling of tariff barriers still did not boost Egyptian exports to the EU, when compared to the rest of the world. This implies that shallow integration is not enough, and something extra needs to be undertaken to reap the benefits of duty free market access to the EU. Reaping such benefit could be some sort of deep integration that enhances the market access, especially that intra industry trade (IIT) is low, which could be a symptom of lack of deep integration.

Chapter Three showed that deep integration if adopted to enhance market access then it should opt for harmonization. The case of standards related to agriculture and how they act as a barrier to Egyptian exports to the EU showed that harmonization is the first best to overcome this impediment facing Egyptian exports. Even though several efforts have been undertaken to ensure mutual recognition of conformity assessment procedures, they remained short of securing the market access of the Egyptian exports in the EU. This could be a result of neglect of the infrastructure pillar of deep integration, while focusing only on the regulatory/policy pillar of deep integration in the context of the AA and the ENP Action Plan. The modest role played so far by mutual recognition can be a result of the relatively new system in Egypt which could be a concern for EU authorities and hence the trust is still weak and might be enhanced by time.

Chapter Four showed that deep integration is not always the first best given the developmental gap between Egypt and the EU. The analysis identified that there is a clear gap between Egypt and the EU in the area of competition, and that there is a de facto harmonization of EU competition rules and regulations in Egypt whenever trade between Egypt and the EU is concerned. The analysis pointed out that given the developmental gap, and the huge policy/regulatory and infrastructure gaps, coordination and cooperation might seem to be a better alternative than full harmonization.

Chapter Five showed that the gap between Egypt and the EU in terms of dealing with State Aid is wide. In fact, Egypt does not have a formal definition of what constitutes Sate Aid. Moreover, most of the Egyptian Sate Aid is eligible under the criteria set by the EU. The analysis point out that harmonization is not needed in this regard, and that the implementation so far on what has been mentioned in the AA and the Action Plan has been modest.

The general conclusions that can be reached from this report are that deep integration has several means and shapes, which is an issue that policy makers need to consider. The means of deep integration that should be adopted should be based on the aim of deep integration required. If the aim of deep integration is enhancing market access then harmonization, though costly for Egypt is a must and that it pays off in the future. However, if the aim of deep integration is upgrading the domestic business environment in Egypt then harmonization, given the developmental gap, might be very costly, and the pay off is not clearly identified in trade relations between Egypt and the EU. Soft deep integration in the form of coordination and cooperation might be a better option within the context of Egypt-EU trade relations. Such conclusion is in line with what Islam and Reshef (2006) reached where they argue using empirical evidence that the quality of institutions (i.e. having efficient and well implemented laws and regulations) is more important than just harmonizing them if the main target is to enhance trade. Policy makers should be aware of the fact that some forms of deep integration can result in discrimination against non-EU members which could have determinal effects on Egypt-non-EU members’ trade relations. This is an important policy implication when negotiating deep integration means. Finally, the study pointed out that deep integration is hard to achieve if the focus is always on the regulatory/policy aspect while neglecting the infrastructure aspect of deep integration.