MEDPOLICIES INITIATIVEMEDITERRANEAN ENVIRONMENTAL TECHNICAL ASSISTANCE

PROGRAM(METAP)

TRADE AND ENVIRONMENT ANDINTERNATIONAL COMPETITIVENESSIN THE MEDITERRANEAN REGION:

SELECTED CASE STUDIES

A METAP Project Implemented by theHarvard Institute for International Development

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NOTE

The views and interpretations reflected in this document are those of the authors and the individual project teams. They do not necessarily reflect the opinion of the Mediterranean Environmental Technical Assistance Program, the World Bank, the Harvard Institute for International Development, or Harvard University.

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MEDITERRANEAN ENVIRONMENTAL TECHNICAL ASSISTANCE PROGRAM

MEDPOLICIES INITIATIVE

The MedPolicies Initiative assists non-European Union Mediterranean countries gain the skills and understanding needed to develop sustainable environmental and economic policies. The project is funded by the World Bank under the auspices of the Mediterranean Environmental Technical Assistance Program (METAP) and implemented by the Harvard Institute for International Development (HIID) at Harvard University since its inception in 1997.The MedPolicies Initiative focuses on three pressing issues affecting environmental and economic policy-making in the Mediterranean region:

Trade and environment; Privatization and the environment; and the Social and economic aspects of air quality.

MedPolicies addresses these themes through a work program that espouses a cross-sectoral, analytical, and empirical approach to environmental and economic policy-making. Specifically, the themes are examined and discussed through a series of case studies, technical workshops, national roundtables, and regional policy seminars designed to engage both public and private sector stakeholders in the policy development process. The project targets three groups of stakeholders in the beneficiary countries: decision-makers and parliamentarians; the public, private, and financial sectors; and the NGO community.MedPolicies has conducted its activities within the context of METAP’s operating principles by: (1) giving METAP National Focal Points and local policy groups ownership over the choice and development of case studies; (2) managing the project through country-based lead analysts and a MedPolicies office in Beirut; (3) consulting with public and private stakeholders on case study findings and coordinating project activities with regional organizations focusing on similar themes; (4) organizing regional policy seminars, national roundtables, and technical workshops to discuss case study findings; and (5) conducting site visits and assessments of project effectiveness through meetings with local counterparts. This country-based approach emphasizes both the process and product of identifying sustainable environmental policy measures for the Peoples of the Mediterranean region.

* * * * * * *The MedPolicies Initiative is a project of the Mediterranean Environmental Technical Assistance Program (METAP). METAP was established in 1990 to assist beneficiary countries (Albania, Algeria, Croatia, Cyprus, Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia, Turkey, Slovenia, and the West Bank and Gaza) respond to increasingly complicated environmental challenges. The program focuses on capacity building and human development; arresting and controlling emerging pollution hot spots; and integrated water resource management.In addressing these issues, METAP channels technical assistance and grant funding to the Mediterranean region through a process that seeks country ownership and management decentralization of projects. Consultation with local stakeholders and donors on resource mobilization is integral to the program, as are the monitoring and evaluation of activities to ensure maximum impact on the ground.

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METAP is jointly sponsored by the European Commission, the European Investment Bank, the United Nations Development Program Bureau for Arab States, the United Nations Development Program Capacity 21 Unit, the Swiss Development Agency, the World Bank.For more information on METAP activities, please contact:Sherif Arif Regional Environmental Coordinator/METAP CoordinatorRural Development, Water & Environment Department/Middle East & North Africa RegionThe World Bank 1818 H Street NW, Room H8-133Washington, DC 20433 USATel: (1-202) 473-7315; Fax: (1-202) 477-1374E-mail: sarif@worldbank.org

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TABLE OF CONTENTS

Forward………………………………………………………………………………………..Acknowledgements…………..………………………………………………………………...Abbreviations……………….…………………………………………….…………………...

PART I: INTRODUCTIONIntroduction to Environment and Trade Competitiveness in the Mediterranean Region.Theodore PanayotouThe Impact of Environmental Regulations on Exports: An Overview and Synthesis of the MedPolicies Case Studies……………………………………………………………….Bruce A. Larson

PART II: CASE STUDIES ON TEXTILE AND LEATHER BASED INDUSTRIES

The Effect of Environmental Legislation in the EU on Syria's Export of Raw Cotton and Cotton Based Textile Products to the EUPolicy Brief – English………………………………………………………………………………….Policy Brief – French……………………………………………………………………….………….Case Study – English…………………………………………………………………………...

Interactions between Moroccan Textile Exports and Environmental Regulations:A Case Study on Water PollutionPolicy Brief – English……………………………………………...…………………………………...Policy Brief – French……………………………………...…………………………………………...Case Study – French…………………………………………………………………………

Environment and Trade Relationships affecting the Tanned Leather Industry in CairoPolicy Brief – English………………………………...………………………………………………...Policy Brief – French………………………..…………………………………………………………Case Study – English…...………………………………………………………………………

The International Competitiveness of Turkish Leather ExportsPolicy Brief – English………………………………………………………………….………………Policy Brief – French…………………………………………………………………………...……...Case Study – English …...………………………………………………………….…………..

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PART III: CASE STUDIES ON FERTILIZERS AND AGRICULTURAL EXPORTS

The Effect of Environmental Legislation on Fertilizer Exports: The Case of JordanPolicy Brief – English……………………………………………………….…………………………Policy Brief – French……………………………………….………………………………………….Case Study – English……………...……………………………………………………………

The Effect of Environmental Regulation on Potato Production in CyprusPolicy Brief – English…………………………….……………………………………………………Policy Brief – French…………………………………………….…………………………………….Case Study – English…………………………………………………………………………

Estimation of the Impact of Environmental Regulations on Agricultural Exports in Tunisia: The Case of Increasing Water Prices and PackagingPolicy Brief – English……………………………………………………….………………………Policy Brief – French………………………………………………………………………….……….Case Study – French…………...………………………………………………………………

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FORWARD

Carol Chouchani CherfaneRegional CoordinatorMETAP III MedPolicies InitiativeHarvard Institute for International DevelopmentBeirut Office

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ACKNOWLEDGEMENTS

This volume, based on case study reports completed during the first phase of the MedPolicies Initiative, was made possible by the support and assistance of several committed individuals.

METAP National Focal Points in each beneficiary country served as the project’s government counterparts and helped to identify case study topic to be addressed, as well as review the final reports. The National Focal Points also served as a liaison between projects staff and government officials in ministries involved in environmental and economic affairs. They also helped to coordinate national roundtables organized during the case study development to discuss the case study findings and recommendations with public and private stakeholders. These public and private sector representatives are also thanked for their input in finalizing the case study reports.

MedPolicies Lead Analysts in each beneficiary country, representing non-governmental organizations, universities, and private institutions, comprised national lead analyst teams. Each team consisted of one to three national experts in the field of environmental and/or economic affairs. The lead analyst teams compiled the information for the analysis through in-country consultations with local stakeholders and access to national data sources. They also served as the principle authors of the case studies reports, which form the basis for the chapters presented in this volume.

HIID Theme Leaders served as the coordinators for case studies completed within each project theme. Bruce Larson served as the Theme Leader for Trade and Environment, Randy Bluffstone was the Team Leader for Privatization and Environment; and Peter Rogers served as the Theme Leader for the Social and Economic Aspects of Air Quality. The theme leaders provided National Focal Points and Lead Analysts with the methodological framework and analytical tools needed to complete the case studies. They also provided technical assistance to the lead analyst teams and provided critical reviews the draft and final reports. Their experience and expertise were invaluable components of the case study development process.

The MedPolicies Project Team based at HIID allowed to this regional, multi-disciplinary project to work. Theodore Panayatou served as Project Director providing guidance and technical insight during case study development and regional policy seminars. Jordan Kimball’s tireless efforts during the first phase of the project facilitated the administrative and logistical aspects of coordinating studies and roundtables in thirteen countries, as well as regional policy seminars in Slovenia and Tunisia. The effective organizational and administrative support of Leticia Orti and Catherine Tims subsequently helped to wrap-up the case study reports and prepare for follow-up activities. The HIID Contracts and Finance Offices are also thanked for their assistance.

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It must be recognized that the MedPolicies Initiative would not have been made possible without the assistance and financial support of the World Bank and METAP. The guidance and advise of Sherif Arif throughout the case study development process helped to direct the project towards objectives that would best serve the Mediterranean region and to keep the project focused on METAP goals. J.B. Collier’s assistance in coordinating activities in the region via the World Bank METAP Secretariat also served as an ever-helpful resource for the HIID Project Team.

Finally, the completion of this publication was facilitated by the dependable translation services of Marie Goubran Chouchani and publication experience of Fady Jabre, both of whom greatly assisted the Regional Coordinator to edit and finalized this volume.

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ENGLISH ABBREVIATIONS

AAC Annualized average costAPC Arab Potash CompanyBq BecquerelBOD Biological Oxygen DemandBOD5 Biological Oxygen Demand (after 5 days of sampling)CAP Compliance action plan (Egypt)CN$ Canadian dollarsCd CadmiumCEO Chief Executive OfficerCOD Chemical Oxygen DemandCPI Consumer Price IndexDAP Di-ammonium phosphateEEAA Egyptian Environmental Affairs AgencyEEIF Egyptian Environmental Initiatives FundEFMA European Fertilizer Manufacturers’ AssociationEMS Environmental Management SystemEPAP Egyptian Pollution Abatement ProjectFAO Food and Agriculture OrganizationFINNIDA Finnish International Development Agencygm GramGATS General Agreement on Trade in ServicesGATT General Agreement on Tariffs and TradeGDP Gross Domestic ProductGNP Gross National ProductGOGMC General Organization for Ginning and Marketing of Cotton

(Syria)GOE Government of Egyptha HectareHS Harmonized Tariff SystemIAEA International Atomic Energy AgencyIMF International Monetary FundIPPC Integrated Pollution Prevention ControlISIC International Standard Industrial ClassificationISO International Standards OrganizationIUCN International Union for the Conservation of NatureJPMC Jordanian Phosphate Mines CompanyK PotassiumKg KilogramsKfW Kreditanstalt für Wiederaufbau (Germany) KCL Potassium chloridel LiterL.E. Egyptian poundm MeterMAP Mono-ammonium phosphateMETAP Mediterranean Environmental Technical Assistance Programmg milligramNH3 Ammonia

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NORM Naturally Occurring Radioactive MaterialsNPK Nitrogen-phosphorus-potassium O&M Operation and maintenanceOECD Organization for Economic Cooperation and DevelopmentPCB Polychlorinated biphenylPCP PentacholorophenolP2O5 Phosphoric acidPPM process and production methodsppm Parts per millionPRDEI World Bank Policy Research Department/Environment and

Infrastructure DivisionR&D Research and developmentSFD Social Fund for Development (Egypt)SiF4 Silicon florideSIS State Institute of Statistics (Turkey)SITC Standard International Trade ClassificationSO2 Sulfur dioxideSO3 Sulfur trioxideSP Syrian poundsT ThoriumTCP Tri-calcium phosphateTL Turkish LiraTRIPS Trade Related Intellectual Property Rights AgreementTSS Total suspended solidsWDD Water Development Department (Cyprus)WTO World Trade OrganizationU Uraniumg MicrogramUK United KingdomUNEP United Nations Environment ProgrammeUNIDO United Nations Industrial Development OrganizationU3O3 Tri-uranium tri-oxideUS United States of AmericaUS$ United States dollarsUSEPA United States Environmental Protection AgencyVOC Volatile Organic Compounds

FRENCH ABBREVIATIONS – ABRÉVIATIONS FRANÇAISE

AMITH Association marocaine des industries du textile et de l’habillement

APC Arab Potash CompanyDBO5 Demande biologique d’oxygène (après 5 jours

d’échantillonnage)g grammeJPMC Jordanian Phosphate Mines CompanyMD Millions de dinars tunisiensPIB Produit intérieur brut

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DT Dinar tunisienUE Union européenne

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INTRODUCTION TO ENVIRONMENT AND TRADE COMPETITIVENESS

IN THE MEDITERRANEAN REGION

Theodore PanayatouMedPolicies Initiative Project Director

The simmering tension between the world’s pursuits of free trade and a cleaner environment became an open clash in the WTO meetings in Seattle in December 1999. The global negotiations on whether and how to link the two would continue for many years to come, hopefully leading to some “great bargain” whereby the North would agree to eliminate all its barriers to imports from the South in exchange for the South doing more to protect the local and global environments. In the meanwhile, developing countries in general, and those in the Mediterranean region in particular, face some rather stark choices today. Pressures at home to improve the domestic environment by reducing pollution and conserving scarce natural resources are bringing about the tightening of environmental regulations and the introduction of new ones, which – if enforced – may have significant impacts on the main production and export sectors of these countries. Such adverse effects may manifest themselves primarily through increases in production cost and corresponding reductions in profitability and competitiveness of the few export commodities of these countries. From a static zero-sum game perspective, this is viewed as an environment versus competitiveness trade-off that developing countries can ill afford.

A second set of pressures on developing countries to improve environmental performance comes from international efforts to engage them in global environmental agreements to prevent climate change and protect the world’s global commons, biodiversity, ozone layer, among others. Ratification and enforcement of such agreements may have cost implications and effects on trade and competitiveness. Yet the most direct and immediate set of pressures facing the export sectors of developing countries comes from their own trading partners, who are setting increasingly stringent product standards for safety, health and environmental protection. Exports from developing countries that do not meet these standards could be refused entry into traditional markets, which may prove catastrophic for countries such as those in the Mediterranean region that depend on a limited number of export commodities. While importing countries are allowed under WTO rules to impose such standards as long as they are non-discriminatory (i.e., they apply equally to domestic and imported ‘like’ products regardless of origin), there is sufficient ambiguity to allow importing countries to use environmental standards as non-trade barriers to protect domestic industry.

Furthermore, while border adjustments for non-product related process and production methods (PPMs) are not allowed under WTO rules, developing country exports often face consumer preference

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“discrimination” in the importing countries stemming from concerns about the overall characteristics of products, including their source and the methods by which they are produced. More often than not, these concerns find expressions in official trade policy, as exemplified by the tuna restrictions in the U.S. due to dolphin concerns and shrimp restrictions due to turtle concerns, or the European debate regarding British beef. Even when developing country products are not explicitly barred by a trading partner due to negative product or process characteristics, their lack of “positive” environmental characteristics precludes access to increasingly lucrative markets for environmentally friendly or “green” products. For all the above reasons developing countries can ill afford to ignore the effects of increasingly stringent and more tightly enforced environmental regulations at home and abroad.

On the other hand, compliance with foreign regulations and adjustment responses to foreign preferences involve costs that may alter the profitability and competitiveness of these products, and ultimately, have the same or even more adverse effect on exports. It is ultimately an empirical question whether compliance (supply shifts) or non-compliance (loss of market share) would have the largest impact on exports. However, in a dynamic context, efforts to comply with environmental regulations may also be offset by efficiency gains brought about through innovation (Porter Hypothesis).

The non-EU Mediterranean region is an ideal testing ground of how more stringent environmental regulations might affect exports of key sectors in the future. The developing countries of North Africa and the Middle East are dependent on a few export commodities, while there are traditional markets in the developed countries of the European Union. Environmental regulations in Europe are among the strictest in the world, while the non-EU Mediterranean region has had a generally lax environmental regime. The ready access of Mediterranean exports to the EU markets is thus being endangered by the enforcement of environmental product standards in the European Union, which these products may not be able to meet. Their competitive advantage is also being challenged by the enforcement and strengthening of environmental regulations at home.

Understanding and responding to these challenges is key to maintaining and expanding these export markets while protecting the environment in the region. To improve understanding of the links between environmental policies and international competitiveness, the MedPolicies Initiative of the Mediterranean Environmental Technical Assistance Program (METAP) sponsored a number of case studies that analyzed the effects of actual and potential changes in environmental regulations on key exports from the southern Mediterranean region. This volume brings together seven case studies along with their common analytical framework developed by Bruce Larson, the team leader for trade and environment in the MedPolicies Initiative. The analytical approach – which can best be described as supply shift decomposition – is prospective rather than retrospective in the sense that the case studies do not analyze past effects of environmental

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regulation on trade, but rather identify the range of likely future outcomes based on a concrete set of technological and market parameters and behavioral assumptions. The advantage of this approach is that it is parsimonious in data requirements, transparent in its assumptions, and user-friendly as a policy analysis tool for policy makers and private sector stakeholders alike. Each country case study uses a variant of this framework to estimate the impact of potential change in environmental regulations on exports from a key export sector. The seven countries covered are Cyprus, Egypt, Jordan, Morocco, Syria, Tunisia and Turkey.

Since the findings of these studies are summarized and synthesized in the overview paper by Larson, they need not be repeated here. What warrants repeating and highlighting is that no generalizations can be made about the effects of environmental regulations on exports. They critically depend on the magnitude of the policy change, the share of the regulated input in production cost, supply response, and demand elasticities, and the possibility for efficiency improvements. Small policy changes effecting exports that account for a small portion of overall costs of products that have relatively inelastic export demand are not likely to have significant effect on exports. The reverse is true when policy changes, affected input cost shares, and export demand elasticities are large. For example, increased irrigation costs would have a small effect on potato exports from Cyprus, but a much larger impact on citrus exports from Tunisia.

The usefulness of these case studies can be seen in three dimensions: the increased awareness of the issues that lie in the interface between the trade and environment; the enhancement of the analytical capacity in the region for dealing with these issues; and the development of a versatile policy analysis tool for assessing the effects of policy changes on exports based on rather parsimonious and easily obtainable information. All these contributions facilitate communication and coordination among environmental and trade policy makers so as to improve policy formulation and advance both trade expansion and environmental protection. It is hoped that these case studies and the policy debate that they have encouraged will stimulate further work in the emerging research and policy area of environment and trade interactions.

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THE IMPACT OF ENVIRONMENTAL REGULATIONS ON EXPORTS:

AN OVERVIEW AND SYNTHESIS OF THE MEDPOLICIES CASE STUDIES1

Bruce A. LarsonMedPolicies Initiative Theme Leader for Trade and Environment

Abstract

Concern about the effects of environmental policies on trade competitiveness continues to grow in the non-EU Mediterranean regions (e.g., North Africa, the Middle East, Turkey, Cyprus) as ‘partnership’ agreements with the EU are negotiated and completed and discussions continue based on the meeting of the World Trade Organization in Seattle during December 1999. While the impacts of environmental regulations on export competitiveness are widely discussed in the region, there has been little empirical analysis of how more stringent environmental regulations might affect exports of key sectors in the future. To begin to fill this gap in analysis, this paper summarizes the results of seven case studies that estimate the impact of potential changes in environmental regulations on exports from a key sector in each country (Cyprus, Egypt, Jordan, Morocco, Syria, Tunisia, and Turkey). These case studies, which are based on a theoretically consistent yet empirically tractable modeling approach, suggest that a range of outcomes is likely and depend on a fairly small set of specific information. For some of the cases, expected regulatory changes would probably have little impact on exports (e.g. water effluent policies and textile exports in Morocco and irrigation costs and potato exports in Cyprus), while in other cases the impacts could be substantially larger (e.g., irrigation costs and citrus exports from Tunisia, and effluent policies and leather exports from Turkey). In some countries, the range of potential outcomes is largely due to the magnitude of the policy change, the importance of the regulated input in the production process, and the lack of information on international market conditions (e.g. dye restrictions and textile exports from Syria and cadmium control and fertilizer exports from Jordan).

1. INTRODUCTION

Concerns about the effects of environmental policies on exports continues to grow in non-EU Mediterranean regions (e.g., North Africa, the Middle East, Turkey, Cyprus) as ‘partnership’ agreements with the EU are negotiated and completed and discussions continue based on the meeting of the World Trade Organization in Seattle during December 1999. The Arab League held meetings on the topic in Cairo, Egypt during September 1999, while the United National Economic and Social Commission for West Asia (ESCWA) held meetings on the topic in November 1999 in Beirut, Lebanon. It is not uncommon for ad hoc ‘trade and environment’ 1 Address for correspondence: Bruce Larson, Department of Agricultural and Resource Economics, University of Connecticut, WBY 318, U-21, Storrs, CT 06269-4021, USA. Email: blarson@canr.uconn.edu. Tel: 1-860-486-1923. The analysis in this paper was initiated as part of the MedPolicies Initiative implemented by the Harvard Institute for International Development with funding from the World Bank under METAP. The author thanks the MedPolicies Trade and Environment Case Study Teams and the METAP National Focal Point Coordinators in Cyprus, Egypt, Jordan, Morocco, Syria, Tunisia, and Turkey. The author also thanks Carol Chouchani Cherfane, Jordan Kimball, Theo Panayotou, and Sherif Arif for continued guidance and support during the completion of this research. The individual case study documents are listed explicitly in the references.

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committees to exist at the national level (e.g., in Egypt and Morocco) and for members of environmental authorities to assign staff to be responsible for ‘trade and environment’ (e.g., in Lebanon, Tunisia, Egypt, and Morocco).

One fundamental question remains. Do environmental regulations – whether domestic regulations or regulations in export markets – affect a country’s exports? While a seemingly simple question, the ‘conventional wisdom’ found in the economics literature and ‘real world’ examples seem to be at odds. For example, concerning the conventional wisdom, Jaffe et al. conclude that: “[o]verall, there is relatively little evidence to support the hypothesis that environmental regulations have had a measurably adverse effect on competitiveness.”2

In the real world, however, examples of health and/or environmental regulations affecting trade in extreme ways are commonly observed. The EU ban on US beef imports is one obvious example, as is the history of tuna import restrictions in the US due to dolphin concerns (and sea turtles and shrimp). A number of international trade disputes have been generated due to the impact on exports from product standards created in the name of environmental protection (which includes the physical health of domestic consumers) or as attempted non-tariff trade barriers to protect domestic industry (EU restrictions on imported Egyptian potatoes).3

To improve awareness and understanding of the links between environmental policies and international competitiveness, the MedPolicies Initiative of the Mediterranean Environmental Technical Assistance Program (METAP) supported the completion of case studies that analyzed the impact of specific changes in environmental regulations (actual and proposed) on exports of specific sectors in Cyprus, Egypt, Jordan, Morocco, Syria, Tunisia, and Turkey. While the main purpose of the case studies was to increase awareness of potential “trade and environment” issues within the countries and to build capacity to support further analysis of such issues, the completed case studies provide practical experience on: (1) the types of environmental policy issues that are likely to impact exports in the future in the non-EU Mediterranean region; (2) the basic information that is needed to empirically analyze such issues; and (3) the range of impacts that could be expected in the future as proposed policies are adopted and implemented.

The main purpose of this chapter is to summarize the analytical approach used in the case studies, summarize the key results of each case study, and to synthesize key lessons for the analysis and understanding of such topics

2 Jaffee et al. (1995), p. 157.3 Besides such ‘real world’ examples noted above, there is some newer evidence based on historical data that the relationship between environmental policy and a country’s international trade is not necessary as benign as implied by Jaffee et al. (1995) for all sectors of the economy. For example Van Beers and Van den Bergh (1997) show that there is no significant relationship between environmental regulatory strictness and trade flows for “resource based” sectors, while there is a significant and negative relationship for “non-resource based” sectors.

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in the future. The full case study reports are then provided in the following chapters. The remainder of this chapter is thus organized as follows. Since the case studies (except Turkey) use a common methodological approach developed in Larson (2000), Section 2 provides a brief non-technical introduction to the theoretical and empirical approach used in the case studies.4 Annex A subsequently provides a detailed summary of the empirical models. Section 3 provides an overview of the individual case study topics, and Section 4 summarizes and discusses the main results. In Section 4, Tables 1-6 provide the detailed assumptions and base-case results for each of the six case studies, while Table 7 provides a summary of the key results for all six case studies. Section 5 concludes.

2. BRIEF METHODOLOGICAL OVERVIEW

For environmental regulations (either domestic or foreign) to affect exports or imports, it must be the case that such regulatory changes affect production and/or consumption decisions (technological possibilities, input prices, output prices, etc.), which in turn directly or indirectly affect costs and/or revenues. Such potential impacts can be discussed quite easily in a simple demand and supply context. For example, consider the simple market situation in Figure 1, where S0S0 is an initial supply schedule representing marginal production costs, pw is a constant world price for the commodity, D0D0 represents domestic demand, and y0 - c0 is the existing level of exports (the equivalent figure for imports could also be used). In Figure 1, domestic regulatory changes that affect production costs shift the domestic market supply from the original level S0S0 to a new level S1S1. Given a fixed output price at pw, production falls from y0 to y1 and exports fall from y0 - c0 to y1 - c0. See Krutilla (1991), Anderson (1992), and Smith and Espinosa (1996) for additional simple graphical overviews of this topic. Also see Van Beers and Van den Bergh (1996) for a more complete introduction to the topic.

While in principle it could be possible to estimate directly a reduction in past production and/or exports due to past changes in some environmental regulation, the data needed to estimate such relationships are difficult to obtain in many developing and transition economies. As Larson (2000) shows, however, it is possible to rely on some basic microeconomic foundations to decompose such supply shifts into separate components that may be easier to understand, calculate and/or estimate, and discuss. This approach can then be easily used to discuss likely impacts on future production and exports from environmental regulatory changes under discussion or in the process of being adopted. Thus, rather than looking at past effects, the methodological approach used in the MedPolicies case studies is one useful tool for applied empirical analysis to provide additional information in a timely fashion to on-going environmental and trade policy debates.

4 Due to the nature of the topic chosen for the Egypt case study, a detailed empirical analysis of specific policy changes on exports was not completed.

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ABC

Co

C

S1

S0

S1

S0

C0 y1 y0

pwD

S2

S2 0

y2

Figure 1 - The Base Model with Efficiency Improvementsand Export Price Changes

pw1

y3C3

F E

While the details of this methodological approach can be found in Larson (2000), it may be useful here to summarize first the key results on how to estimate the supply shift as noted in Figure 1. The Larson (2000) approach begins by assuming that firms try to minimize costs and maximize profits within the context of competitive markets. As a result, if some input (call it “X”) becomes more costly due to a new regulation, some basic economic results that link profit and costs functions can be used to estimate the shift in the supply schedule from S0S0 and the original output level y0 to a new schedule S1S1 and the new output level y1.

The basic idea is that the shift in supply due to higher input costs (due to more stringent regulations) can be decomposed into two effects: (1) the effect of higher output prices on production levels (i.e., the slope of the supply schedule S0S0 in Figure 1); and (2) how much more of the regulated input is needed to produce an extra unit of output (see Larson 2000 and Annex A for details). Following some basic algebraic manipulations, it is then possible to transform this shift in supply into a percentage change in supply (denoted %Y) based on the product of five terms. In sum, as shown in Annex A, these five terms are:

%Y = - (wX/C) * (C/pY) * yp * cxy * (%w)

where the term - (wX/C) = the negative of the regulated input cost as a share of total production costs; the term (C/pY) = the total production costs as a share of total revenues; the term yp = the elasticity of supply with respect to output price; the term c

xy = the percentage increase in the input needed to produce an additional percent of output; and the term %w = the percentage increase in the cost of the regulated input due to some regulatory change. This expression is provided in more detailed mathematical form in Table A, Annex A (for Case 1, Model 1). As the final step, the percentage change in exports (%E) from the regulatory cost increase (%w above) can be estimated as:

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%E = %Y * (E0/Y0)

where E0/Y0 represents initial exports as a share of total production from Figure 1.

Given these percentage changes, the absolute change in production and exports can be estimated as:

Y = %Y * Y0

E = %E * E0

where Y0 is the initial level of production from Figure 1 and E0 = Y0 - C0 is the initial level of exports from Figure 1.

The two main benefits of this simple decomposition approach to estimating the impacts of environmental regulations on trade are that: (1) a logical estimate of the change in exports can be made with minimal data needs; and (2) the assumptions and calculations can be very transparent and can be relatively easy for policy makers and industry interest groups to evaluate and discuss.5

In some situations, such as end-of-pipe pollution control technologies, it may be difficult to attribute environmental regulatory cost changes to specific inputs. In such circumstances, it may be best to think of environmental regulations affecting average production costs rather than the costs of a specific input. Annex A, Table 1, Model 2 shows how to adjust the analysis to include such average cost changes. While Model 1 and Model 2 assume decreasing returns to scale, Model 3 in Annex A shows how to adapt the framework to constant returns to scale.

Two extensions of the basic model developed in Larson (2000) are used in the country case studies: firm-level efficiency improvements in the use of the regulated input; and export price adjustments due to downward sloping export demands. In other words, if environmental regulations increase an input price, companies may have an incentive to increase the efficiency with which the input is used.6 In general, such efficiency improvements act to offset some of the impacts on the sector of the input price increase due to environmental regulations. Regarding export price adjustments, supply shifts may cause export prices to adjust when export demand is not perfectly elastic (i.e., the sector faces a “downward sloping” export

5 Note that the formulation outlined here and presented in detail is slightly different from, but completely consistent with, that outlined in Larson (2000).6 Holding all other inputs fixed, an efficiency improvement means that the firm can produce a fixed level of output for less of the regulated input.

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demand).7 Annex A shows how to include such extensions into the basic model.

For reference, the efficiency effect can be described as a simple shift in supply functions as outlined in Figure 1. As a first effect, the direct impact of higher input prices on production and export is a shift back in the supply function from SoSo to S1S1. As a second impact, efficiency improvements associated with the input price increase act to shift out the supply function to S2S2 with new production levels y2 with exports e2 = y2 - co. Thus, efficiency improvements act to mitigate some of the potentially adverse impacts on exports of some environmental policy change. The export price effect can be describe as simple movements along demand and supply schedules. In Figure 1, if the international price increases from pw topw1, then output increases along the supply function S2S2 from y2 to y3, domestic demand falls from Co to C3, and exports change from y2 - Co to y3 - C3. Based on simply export demand and supply relationships, it is possible to thus estimate the export price change directly as shown in Annex A, Table 1, Model 1, Case 3.

3. CASE STUDY TOPICS

This section summarizes the case study topic for each country and provides some additional background on the specific issues.8 The group of case study topics indicates the type of detailed environmental policy issues that are likely to affect export competitiveness now and in the future.

3.1 Cyprus

The case study for Cyprus estimates the impact of higher irrigation water costs on production and exports of fresh potatoes. As background, agriculture is an important sector in the economy of Cyprus. Agricultural commodities and various processed food products account for 35-40% of total exports. Potatoes are the most important export crop. Since the early 1990s, they have accounted for half or more of the total value of agricultural exports. The principal foreign markets are member countries of the European Union (EU). Potatoes from Cyprus are high quality and command an above-average price, but they face increasing competition from potatoes exported by lower-cost Mediterranean producers.

Cyprus applied for EU membership in 1990 and negotiations began in 1998. Full accession will involve, among other things, adopting EU environmental legislation. This could be problematic, especially in the case of water pricing policies. Cyprus has suffered chronic water shortages for 7 There are two simply reasons why export prices may adjustment as supply shifts. First, by definition, changes in export levels from a ‘large country’ influence world prices for that product (Van Beers and Van den Bergh 1996). And second, it is commonly assumed in trade models that products are differentiated by country of origin (e.g., Armington 1969). In either case, the international price of a country’s exports will change as quantities exported change (see, Dervis, de Melo, and Robinson 1982, p. 225).8 Unless otherwise noted, all information contained in this section comes directly from the relevant case study reports from the relevant country, which are presented in the following chapters.

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decades, and agriculture – and potato farming in particular – has probably added to the stress on water supplies.

Essentially all of Cypriot potato farmers rely on irrigation, with irrigation accounting for 70-75% of water use on the island. Farmers receive irrigation water at a highly subsidized rate. The average charge for irrigation water (US$0.13/ m3) is 34% of the estimated full-cost recovery level. This stands in contrast to the EU’s proposed framework directive on water policy, which calls for full-cost recovery for water supplied to all users, including farmers. The proposed policy also directs that the price of irrigation water should be high enough to cover all of the following: operation and maintenance costs (O&M); repair costs; loan payments; and a fund for improvements and extensions.

Higher water charges could create an incentive for more efficient water use by potato farmers, but most farmers already employ advanced irrigation technologies. Although irrigation charges are only one of many costs involved in potato farming, farmers fear that the limited scope for improved water use efficiency implies that higher water charges would inevitably push up their production costs and cause them to lose customers in the European market.

3.2 Jordan

The case study for Jordan estimates the impact of removing cadmium in phosphoric acid (P2O5) on exports of fertilizers. As background, the mining sector – mainly phosphate and potash – is a key sector of the Jordanian economy, which accounted for 7.5% of the GDP, about 7% of the industrial labor force, and about 36% of total exports as of 1996. While there are currently four main phosphate mines in Jordan, the large and relatively new Shidiya mine has known reserves of 1.5 billion tons (annual mined output is less than 9 million tons). As of 1996, about 97% of total fertilizer output (phosphate, potash, and manufactured fertilizers using these materials) were exported with a value of about US$542 million. The Jordanian Phosphate Mining Company, which holds monopoly mining rights for phosphate that are renewed every 30 years, exported almost US$359 million in 1996, split roughly equally between phosphate rock and manufactured fertilizers, namely di-amonimum phosphate (DAP).9 Main export markets are in the EU, Asia, and eastern Africa.

There are two potential environmental concerns facing Jordanian fertilizer exports in the future due to the natural characteristics of phosphate reserves, namely cadmium content and radioactivity content in the mined phosphate rock. Both of these potentially hazardous materials are passed along in the production of P2O5 and then DAP.10 European countries and

9 Rock phosphate is used in the production of phosphoric acid (P2O5), which in turn is a key input in the chemical fertilizer industry (DAP). By products of P2O5 production include various types of air pollution in the evaporation process as well as solid waste known as phosphor gypsum, which contains some levels of radioactivity.10 Cadmium is a rare metal that has no known separate ore deposits but is usually explored as a byproduct of certain zinc, lead or copper ores. It is basically non-essential to humans,

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other locations have lowered the allowable cadmium content in fertilizer products over the past years, with the most stringent requirements found in Norway, Finland, Sweden, and Switzerland.

The phosphate that is currently extracted from the Shidiya mine and to be extracted in the future has high enough cadmium levels to be of potential concern for the JPMC. Since the current strategy of the JPMC is to focus production of the phosphate rock in the Shidiya mine, the removal of cadmium will probably become a management concern in not-too-distant future.

The total removal of cadmium from rock phosphate directly is considered technically impractical and uneconomic. However, there are several processes being developed for the complete or total removal of cadmium from phosphoric acid (P2O5), including: cocrystalization of cadmium with anhydrite (estimated cost is US$8 per ton), precipitation of cadmium with sulfides (estimated cost is US$15 per ton), ion-change resins (estimated cost is US$35 per ton), and solvent extraction (estimated cost is US$26 per ton). These costs do not include any domestic disposal cost associated with managing the solid waste (e.g., the cadmium). With P2O5 prices in the range of US$219 per ton in 1997, these additional cadmium removal costs represent between 2.5-10% of P2O5 prices. Given that P2O5 is a key input into the production of DAP, the Jordanian case study investigates the likely impact of a P2O5 price increase (range 2.5-10%) on the production and exports of DAP.

3.3 Morocco

The case study for Morocco estimates the impact on production and exports of textile products if new water effluent standards for the sector were developed and enforced. As background, textiles are a key sector of the Moroccan economy, accounting for almost 30% of all industrial enterprises located mainly in Casablanca, Fez, Rabat, Settat, and Marrakech. The sector of almost 1,400 facilities involves four related production segments (spinning, weaving, dying, and garment assembly). As of 1996, total textile exports were about 13 billion dirhams, with almost 70% of total exports destined for Europe. Garments accounted for over 55% of the value of total production and almost 81% of total textile exports (about 10.4 billion dirhams as of 1996).

The government of Morocco is currently in the process of developing water effluent standards for various industries in the country, with biological oxygen demand (BOD) being identified as a likely pollutant to be regulated in the textile sector (mainly due to effluents in the dying stage). Existing estimates in Morocco of total BOD5 levels in water effluent could be between 26,000 - 58,000 tons per year, with the textile sector accounting for perhaps 3,900-8,700 tons per year. Based on existing estimates of BOD5 control costs per ton, the Moroccan case study considers the impact

animals and plants, and may present significant environmental risks. Anemia, bone pain, deformities and renal failure may result from high cadmium content in the environment.

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on production and exports of textiles of creating and enforcing modest BOD5 effluent standards on the textile sector.

3.4 Syria

The case study for Syria estimates the impact of the existing Syrian ban on the use of carcinogenic azo dyes on the production and export of textile products. Syria produces and exports cotton, cotton yarns, cotton fabrics, and garments. The dying process in the production of yarns and fabrics is one of the more pollution-intensive components of the textile industry, mainly in terms of water effluents. In 1996, Syria banned the importation (and de facto use) of carcinogenic azo dyes. While the ban has been enforced, the original motive for the ban is not clear. The government could have taken the action to maintain continued access for the country’s exports to the German market, which banned the use of azo dyes in about 1994, although there was no EU-wide azo dye ban in either 1994 or 1996. If Syrian policy changed to maintain market access for exports to Germany, this case study provides a good example of how a product standard in an export market (azo free textiles products) effectively becomes a process standard in the producing country. Of course, the government may also have banned imports (and domestic production) due to concerns for the health of citizens in the country.

While dyes can be applied to either yarn or fabric, the Syrian case study focused its analysis on the dying process in the production of fabrics (considered relatively more important in Syria). In this case, the azo dye ban forced domestic fabric producers to use substitute (and more expensive) dyes. Since more domestic fabric is consumed within the country, mainly as an input in the garment industry, the impact of azo dye ban on garment exports is evaluated.

3.5 Tunisia

The case study for Tunisia primarily estimates the impact of higher irrigation water costs on exports of dates and citrus. Agriculture in Tunisia accounts for about 14% of total GDP. As with other countries in North Africa, the management of critical and limited water resources remains a key issue for economic growth and development of the economy. The cost of water to various sectors in the economy will surely rise in the future, either due to deterioration of supplies leading to increased access costs or policy induced increases in water resource costs.

Not surprisingly, however, the Ministries of Economy, Finance, and Commerce, as well as different producer associations basically oppose water cost increases to industry. The main concern is that any water cost increases will hurt their competitiveness, with a resulting reduction in exports and employment and an increase in imports.

To evaluate this relationship between water costs and key exports, the Tunisian case study focused on the impact of higher water costs on fruit

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production and exports, and specifically, dates and citrus. For reference, fruit exports were about 73.2 million dinars in 1995,11 which represented about 13.2% of total agricultural and food exports. Of total fruit exports, dates (fresh and dried) accounted for about 70% and citrus (mainly oranges) accounted for about 22%.

3.6 Turkey

The case study for Turkey estimates the impact on production and export of leather products if existing water effluent standards were actually enforced on the sector. Turkey is one of the world’s larger producers of leather. The sector, which contains about 1,200 facilities, is divided between formal sector enterprises in organized industrial zones (about 80%) and small-scale facilities (20%). As of 1995, the sector accounted for about 1.8% of manufacturing output, almost 4% of total exports, and about 5% of employees covered by the country’s social security system. About 75% of Turkish leather exports are to the EU, with 44% of total exports going to Germany alone.

Leather production is pollution intensive. From raw hide and skin preservation, to soaking, unhairing, liming, and tanning, a range of water pollutants are generated including: total suspended solids (TSS), biological oxygen demand (BOD5), chemical oxygen demand (COD), pH, phosphorus (PO4-P), total chromium (Cr-tot), chromium +6 (Cr+6), nitrogen (NH4-N), oil and grease, and phenol.

While Turkish has water effluent standards for tanneries on paper that were modeled in part from German effluent standards, existing available data suggest that actual effluent levels substantially exceed standards. The basic implication is producers in organize industrial zones have waste water treatment facilities, such facilities either are not used or are not capable of handling the effluent load form the tanneries. Such a situation in principle is not consistent with the customs agreement between the EU and Turkey.

3.7 Egypt

While the Egyptian case study focused on tanned leather, the complicated situation in the sector precluded the case study from focusing on one specific, and relevant, environmental policy change. In short, the current state of the Egyptian tanneries is a classic example of negative environmental impacts and the lack of incentives for modernization resulting from past protectionist trade. In this case, it is safe to say that the lack of more open trade helped to cause and perpetuate environmental damages in the country.

Most tanneries in Egypt are located in a run down, densely populated section of Misr Al Kadima in southern Cairo, also know as the “Tanners’ District.” The district supplies 85% of Egyptian tanned leather. Drainage

11 1 Tunisian dinar equals approximately US$1.1.13

systems in the district have mostly collapsed leaving tanning effluent to run through the streets, although some tanners have built above ground channels that carry effluents to municipal sewers. Decayed infrastructure makes it difficult to establish individual treatment units or centralized units in the Tanners’ District. Given that no Egyptian tanneries have on-site waste treatment facilities, it can be safely said that the tanning industry is in violation of all applicable environmental articles and laws.

Rather than investing in improvements in the existing tanning district in Cairo, the government has tried for the past 40 years to relocate the tanneries to Badr City, located 50 km outside of Cairo. The policy was strengthened in 1995 when the government allocated land in Badr City for a new tannery district and pledged to provide the area with necessary infrastructure. Since Badr City is classified as a “new urban community,” tanners that move there would enjoy a ten-year tax holiday – although this is an incentive only for tanneries that are registered and profitable, i.e., paying taxes. Nonetheless, existing firms remain reluctant to move.12

While there are a multitude of environmental concerns with the sector, chemical use is one concern that effects both the domestic environment and the competitiveness of Egyptian products in the international market place. The Egypt case study reports that switching to the use of safe chemicals (i.e., chemicals that are not banned in foreign countries) could raise the cost of chemical inputs for each tannery by approximately 5%. Given that chemicals account for 10-15% of the total cost of production, this implies that the total costs would increase by 0.5-0.75%.

4. CASE STUDY RESULTS

Tables 1-6 provide detailed information for each country for representative scenarios, while Table 7 summarizes the basic empirical results obtained for all the case studies. Given that each case study may have had several scenarios included in the analysis based on a range of assumption of key parameters and policy changes, the individual country tables (Tables 1-6) and the summary table (Table 7) are intended to illustrate a range outcomes based on available information in the case studies. The individual country tables are provided so that the interested reader can replicate the results (e.g., use a spreadsheet program) and perform sensitivity analysis of the reported results based on different assumptions and opinions on relevant pieces of information (a summary of all needed equations is provide in the table in Annex A).

The summary results in Table 7 are organized roughly by country according to the magnitudes of estimated impacts and the range of

12 Despite these efforts, negotiations regarding the relocation are at an impasse for three reasons. First, infrastructure for the new district has yet to materialize. Second, tanners are reluctant to leave a central and convenient location. Third, and most importantly, the current Tanners’ District occupies government-owned land for which the tanners pay no rent since they effectively “own” the land due to their length of stay there. Under the government’s plan, moving to Badr City would require tanners to purchase the new land, while giving up the current land and buildings without receiving compensation.

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potential outcomes. For Morocco, for example, the proposed increase in BOD control costs would have a minor impact on textile production and exports, and there is little variation in the outcomes. As shown in the country table for Morocco (Table 4) and based on the method summarized in equation (2), the logic of this outcome is clear. BOD control costs are currently almost zero, perhaps between 0.09% to 0.15% of production costs. At the same time, the proposed BOD effluent standard policy would involve minor increases in BOD control costs. As a result, minor increases in water control costs, due to the initiation of modest water effluent control policies in the textile sector, would probably have minor impacts on overall production levels and exports.

Caution is needed, however, in the interpretation of the Moroccan case study because the study assumes that capital costs for BOD control would be subsidized by the government, while the industry would only pay operating and maintenance costs. If the relevant policy option was more stringent BOD effluent standards along with the private sector paying both investment and operating costs, it would be easy to envision a future where effluent control costs reached 2-5% of total production costs. Using the average cost model (see equation (3)), such cost increases could reduce exports by about 5-11%. Thus, this Moroccan study emphasizes that environmental policies per se are not the issue; rather it is necessary to be clear on both the stringency of the policy and the allocation of financial responsibility for complying with the policy.

For Cyprus, as detailed in Table 1 and reported in Table 7, the analysis focuses on a 60% increase in irrigated water costs, which is considered to be a reasonable policy change based on discussions with the Ministry of Agriculture. In short, such a water price change would involve relatively minor impacts on production and exports. With rather limited supply response, exports would be estimated to fall by about 0.5%, while in the longer run exports could fall by 2% due to larger supply response. Note, however, that estimates in Cyprus suggest that water prices would have to rise by over 200% to begin to approach ‘full-cost’ pricing levels.

Table 1 for Cyprus also shows that higher fertilizer costs (due to EU nitrate policy for groundwater protection) would have minor impacts on potato production and exports. The main reason is that the existing irrigation technology would allow for the easy adoption of fertilizer application through the drip irrigation systems (fertigation). This technology switch involves substantial efficiency improvements in the use of fertilizers, which from Table 1 could imply almost no impact on production and exports. For this case, it could easily be possible to observe efficiency improvements in the use of fertilizers due to fertigation large enough to off set completely the fertilizer price increase, thereby leading to minor production increases (an empirical example that is consistent with the so-called “Porter hypothesis”13).

13 See M.E. Porter, The Competitive Advantage of Nations. New York, NY: Free Press, 1990.

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For Jordan, from Table 2 and Table 7, fertilizer exports of DAP could be affected by the additional costs of removing cadmium, depending on actual removal costs in the future. Since phosphoric acid (P2O5) accounts for about 25% of the costs of producing DAP, higher P2O5 costs are important. If low cost approaches are viable, so that P2O5 production costs only rise by about 2.5%, and if such costs are passed along to the DAP production stage, the impact on production and exports of DAP fertilizer would be minor (perhaps an export decline of 0.3%). If removal costs are actually higher, so that P2O5 price rises by perhaps 10%, then the fall in production and exports could be about 1.3%. There is substantially uncertainty, however, about supply response in the fertilizer industry. Table 2 shows that exports could fall by about 6.5% with high-cost cadmium removal, higher supply response, and decreasing returns to scale due to capacity constraints.

Tunisia, Turkey, and Syria show that, for some countries, a rather wide range of potentially substantial impacts could occur depending on specific pieces of information and proposed policy changes. For example, from Table 5 and Table 7, higher water costs for irrigation in Tunisia could have some important impact on production and exports. For a 50% increase in water costs, the analysis suggests that exports could fall between 2-4% for citrus and 14-26% for dates. This difference depends on the fact that water has a higher cost share for dates as compared to citrus and the case study suggests that supply response is less for citrus as compared to dates.

The large range of negative impacts on leather exports for Turkey is driven by the rather large cost change associated with the proposed policy change (equivalent to 2-6% of total production costs), the minor share of production that is exported (25% of production exported), and the rather large supply response used in the analysis based on previous studies. The Turkish study also emphasizes the importance of being able to pass along some of the production cost increase through higher output prices. For example, the high cost policy scenario (water cost equal to 6% of total costs) is estimated to reduce exports by 45% if export price is fixed. With international price adjustments, based on elasticities reported previously in the literature, this result falls from 45% to 7%. While 7% is still rather large in absolute terms, it is substantially smaller than in the case with no price adjustments. With the lower-end cost increase of 2% of total production costs, this impact with international price adjustments is 2.3%.14

(See Table 6 for more detail.)

The Syria case study shows how to use the methodology in vertically related industries. The azo-dye ban in Syria raised dye costs by about 35% (price differential for azo-free substitutes). With dyes accounting for about 20% of fabric production costs, the case study estimates that the domestic fabric price would rise between 4-9% depending on supply response, domestic fabric demand (as an input into garment production) and returns 14 Note that the original Turkish case study used a somewhat different modeling approach. For comparison purposes with the other case studies, the basic information from the Turkish case study was used to estimate the impacts reported in Table 7. The results are essentially the same here as reported in the Turkish study.

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to scale in fabric production. Given that fabrics represent about 75% of garment costs in Syria, this fabric price increase is estimated to reduce garment production by 4-10% (see Table 3). Given that about 30% of garment production is exports, the percentage fall in exports is substantially larger (9-22%).

5. CONCLUSIONS

The impact of environmental regulations on exports depends on the details of the situation and, as a result, it makes little sense to make sweeping generalizations that ‘environmental regulations have no impact on competitiveness’ on the one hand or that ‘more stringent regulations will hurt competitiveness.’ As the MedPolicies case studies show, the impacts of environmental policy changes on exports depends on several clearly identified pieces of information, including: input cost changes due to the regulatory change; the share of the regulated inputs in total costs; profit rates in the sector; supply response and returns to scale in the sector; domestic and export demand elasticities; and possibilities for efficiency improvements. It is the combination of these factors that determine the impact of environmental policy changes on exports.

Generally, however, smaller impacts on output and exports can be expected when environmental policy changes:

lead to small cost changes; affect inputs that are a small portion of overall costs; induce firm-level efficiency improvements; affect sectors with limited supply response; and affect sectors that have relatively less elastic export demands in

terms of own price.15

Impacts of new policy changes on exports will be larger when the opposite is true: policy changes lead to large cost change for inputs that are a larger share to total costs; the sector exhibits higher supply response and ‘more’ decreasing returns to scale; and export demand is very elastic in terms of own price.

For all country case studies, much of the needed information on supply and demand elasticities (with respect to output price) for various sectors is essentially missing. This lack of understanding of the basic workings of these economies is symptomatic of the lack of data and resources and perhaps understanding of the creation of such information. Even for potatoes in Cyprus, which are the key agricultural export for the country, information on such elasticities are absent. Fortunately, while precise estimates may not be available, reasonable initial estimates of all the individual pieces of information for the partial equilibrium approaches used here can be based on common sense, available information (especially for

15 Of course in the extreme, if there is no supply response to output price changes (fixed output levels for some reason), then environmental policies would just raise costs and reduce profits. If profits became negative, the firm would shut down.

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cost shares and profit rates), and existing estimates in the literature for related sectors or similar sectors in other countries. The model shows that sensitivity analysis can then be used to discuss how the estimated impacts can change depending on the detailed assumptions used.

While perhaps the most difficult to estimate, the ability to make improvements in the efficiency with which regulated inputs are used will probably be one of the key factors that can improve international competitiveness in the future. Indeed, where firms are able to innovate and become more efficient in low cost ways, the impacts of more stringent environmental policies on output and exports should be minor, while providing likely benefits to the natural environment..

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ANNEX A

METHODOLOGICAL DETAILS

1. The Basic Model (No efficiency adjustments and fixed export prices)

While the details of this method can be found in Larson (2000), it may be useful here to summarize first the key results on how to estimate the supply shift as noted in Figure 1 of the previous chapter.

For reference, the following notation is used:

x = the regulated input used by some industry (e.g. water in the above discussion)w = the initial regulated input pricek = other production inputsr = prices of other inputsy = output (e.g., textiles, leather)f(x,k) = a decreasing returns to scale production function relating

inputs to output, with y=f(x,k)p = the price of output.

The Larson (2000) approach simply assumes that firms minimize costs and maximize profits within the context of competitive markets. As a result, standard duality relationships between a profit function π = π(p,w,r) and a cost function C = C(w,r,Y), and the symmetry of the Hessian π, and the envelope theorem (Hotelling’s Lemma and Sheppard’s Lemma) can be used to show that

Equation (1)

where Y is the profit-maximizing supply function, X is the profit-maximizing input demand function, Xc is the cost-minimizing input demand function, and y is a reference level of output in a cost function.

The result in Equation (1) can be rewritten as:

Equation (2)

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where ηyp = (Y/p)(p/Y) is the output own-price elasticity, ηcxy = ( Xc/y)(X/Y)

is the elasticity of the cost-minimizing input demand with respect to the reference output level, and %ΔY denotes the percentage change in the variable Y, defined as ΔY/Y.

The relationship in equation (2) shows that the impact of higher prices for the regulated input on output and exports depends on four specific components: the regulated inputs cost as a share of total costs, wX/C; total costs as a share of total revenues, C/pY (which is essentially an inverse profit rate); the output supply elasticity with respect to output price, ηyp ; and the input demand elasticity (cost-minimizing) with respect to output level, ηc

xy. For reference, wX/C and C/pY are both between zero and one, and 1 < ηc

xy , recalling that ηcxy = 1 implies constant returns to scale (in

which case the profit function is not defined). One benefit of the simple decomposition in (2) developed in Larson (2000) is that the assumptions and calculations are very transparent and relatively easy for policy makers and industry interest groups to evaluate and discuss.16

In some situations, such as end-of-pipe pollution control technologies, it may be difficult to attribute environmental regulatory cost changes to specific inputs. In such circumstances, there may be data or information available on how some regulatory change is likely to affect average production costs, in which case the cost function can be written as C = C(w,r,y) + My, where M represents an increase in average production costs due to the regulation. For example, consider the case where with initial environmental regulations r, M(r) = 0 represents the additional average production costs due to the initial regulations. With some regulatory change from r to r@, average costs increase to M(r@) = m. In this case, the regulatory change in average production costs is dM = M(r@) - M(r) = m. In this case, the supply function just shifts from Y = Y(p,w,r) without the regulation to Y(p-m,w,r) with the regulation. For this case, a similar process as above can be used to show that:

Equation 3

In this increasing average cost increase case, it is just necessary to know the basic supply elasticity and an estimate of the existing production cost increase (m) to evaluate the impact of higher regulatory costs on production and exports.17

16 Although not reported here, the author has also developed the equivalent framework assuming constant returns to scale production technology.17 Note that this formulation is slightly different from, but completely consistent with, that outlined in Larson (2000).

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1.1 Extensions of the Basic Model (efficiency improvements and export price adjustments)

Two extensions of the basic model developed in Larson (2000) are used in the country case studies: firm-level efficiency improvements in the use of the regulated input; and export price adjustments due to downward sloping export demands. To include such extensions into the basic model, the following additional notation is needed:

f(qx,k) = the technical production function relating inputs to output so that y=f(qx,k)q = input efficiency parameterz = qx= ‘effective’ input usedD(p) = export demand as a function of priceB(p) = domestic demand as a function of price.

If environmental regulations increase an input price, companies may have an incentive to increase the efficiency with which the input is used. In general, such efficiency improvements act to offset some of the impacts on the sector of the input price increase due to environmental regulations. Regarding export price adjustments, supply shifts may cause export prices to adjust when export demand is not perfectly elastic (i.e., the sector faces a “downward sloping” export demand).

With the new form of the production function y = f(qx, k), the profit function becomes π = π(p,w/q,r), where the term w/q is the effective price of the regulated input. Using essentially the same process as outlined with the basic model, the final effect of any regulatory change that increases w depends on how this effective input price changes. As shown in Larson (2000), can be written simply as:

Equation 4where the output supply elasticity with respect to the input price holding q and the export price fixed, denoted as ηqp

yw, is just the cross price elasticity defined in equation (2) above. In general, when environmental policy has a ‘good’ impact on either input quality or incentives to use the input more efficiently, it is possible that ηqw is positive.18

18 It is also possible to interpret the results in (2) as the short-run impact on supply and exports from the regulatory change, and (4) as a longer-run elasticity after some fixed factor q has adjusted (i.e., Le Chatelier effects).

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The elasticities developed in equations (2) and (4) can be described as simple shifts in supply functions as outlined in Figure 1. As a first effect, from equation (2), the direct impact of higher input prices on production and export is a shift back in the supply function from SoSo to S1S1. As a second impact in equation (4), efficiency improvements associated with the input price increase act to shift out the supply function to S2S2 with new production levels y2 with exports e2 = y2 - co.

As a final step, export prices can adjust to export supply shifts due to either large country or Armington assumptions. With D = D(p) representing export demand as a function of price, B(p) representing domestic demand, and assuming market clearing where D(p) = Y(p,w/q,r) - B(p) at the equilibrium price p = p(w/q,r). After taking the total differential of the equilibrium condition with respect to p and w, the impacts of higher input costs due to more stringent environmental regulations on the market price p can be written as:

Equation 5

where ηDp is the elasticity of export demand with respect to the product’s price, and ηBp is the elasticity of domestic demand with respect to price. Thus, equation (5) shows how much of the input price increase is passed along to consumers in the export market.

Writing the expanded form of the export supply function as E = Y(p(w), w/q, r ) - B(p), the implications of all three models are nested as:19

Equation 6

where the elasticity ηpyw in equation (6) can be the cross price elasticity

defined from equations (2) or (4) depending on if efficiency improvements are included.

19 It is also possible that environmental regulations on one input, say energy, may also induce adjustments in other inputs, in which case r = r(w) could be considered as well.

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The relationship in equation (6) can be understood quite simply in terms of simple supply shifts and price changes summarized in Figure 1. First, when environmental regulations increase an input cost (w increases), the term ηq

yw represents the initial ‘shift back’ in the profit-maximizing supply function in price-output space as in Figure 1. Second, if efficiency improvements are induced by the higher input cost, then ηqw > 0 represents a ‘shift forward’ in the supply function as in Figure 1. And third, if the international price increases as defined in equation (5), then output increases along the supply function S2S2 from y2 to y3, domestic demand falls from Co to C3, and exports change from y2-Co to y3-C3.

2. Summary of Basic Notation and Results

2.1 Basic Notation:

Y = productionp = output price (domestic price equal to world price for

producersand domestic consumers)

B = domestic consumptionE = export supplyD = export demand, with Y-B = E and E = DC = production costsX = regulated inputw = price of regulated inputq = efficiency parameter related to regulated input, where

qX is the effectiveinput level

K = other inputsr = other input pricesY = f(qX,K) is the decreasing returns to scale production

technologyC = wX+rK+ F are production costs, where F are fixed costs.

Export Model 1: Regulatory Change Affecting a Variable Input

In Model 1, the initial regulatory situation is R= implies an initial price w= = w(R=) for the regulated input. If regulations change to R@, then the new price is w@ = w(R@). As a result, the regulatory change from R= to R@ implies a price change dw = w@ - w=, which in percentage terms can be written as dw/w= = (w@ - w=)/w=.

Export Model 2: Regulatory Change Affects Average Production Costs

In Model 2, it is assumed that environmental regulation affect average production costs by some amount m (e.g., US$8 per unit of output). In this case, let M(R=) = 0 be the initial situation and let M(R") = m represent the regulatory cost increase. As a result, dM = m.

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2.2 Summary of Elasticities in Export Models (* = calculated result)

ηyp = profit-maximizing output supply elasticity with respect to the output price

ηcxy = cost-minimizing input demand elasticity with respect to

output level* ηqp

yw = output supply elasticity with respect to the regulated input holding the export price fixed and no efficiency improvements in the use of the regulated input

ηqw = elasticity of input efficiency q with respect to the regulated input price

* ηpyw = output supply elasticity with respect to the regulated

input holding the export price fixed and allowing efficiency improvements in the use of the regulated input

* ηyw = output supply elasticity with respect to the regulated input allowing export price adjustments and efficiency improvements in the use of the regulated input

ηDp = export demand elasticity with respect to export price (i.e., foreign demand for export product from producing country of focus – either consumer demand if product is a consumer product or a derived input demand if the item is an input into some production process)

ηBp = domestic demand elasticity with respect to product price (either domestic consumers if product is a ‘consumer’ item or a derived input demand if the item is an input into some production process)

* ηpw = for Case 3, the elasticity of export price with respect to a change in the regulated input price

* ηEw = export supply elasticity with respect to the regulated input price for all export models

*p/M = change in export price for marginal change in average cost increase.

3. Additional Notes for Annex A, Table 1.

Model 1 summarizes the basic results in Larson (2000), although some of the equations are written in slightly different form to allow for easier spreadsheet calculations.

Model 2 is a slightly expanded version of the average cost increasing case outlined in Larson (2000).

Since all percentage changes identified are multiplied by 100, the final numbers are the nominal percentage. For example, a final result of 25 for

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the percentage change in Y for Case 1 of Model 1 is interpreted as 25% from the initial level.

It is a simple exercise to adjust these basic models to allow for constant returns to scale technology.

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Table 1: Summary Table for Export ModelsAssuming Decreasing Returns to ScaleProduction Technology for both Models

Model 1. Environmental Regulations Affect the Cost of a Single Regulated Variable Input

Model 2. Environmental Regulations Increase Average Costs by Fixed Amount m.

Case 1.Export Price Fixed and No Efficiency Improvements.

Case 2. Export Price Fixed and Efficiency Improvements

Not Included.

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Case 3. Export Price Adjusts andEfficiency Improvements

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References

The Case Studies

“Trade and Environment: The Case of Potato Production in Cyprus,” MedPolicies Case Study, mimeo (1999).

“The Effect of Environmental Legislation on Fertilizer Exports: The Case of Jordan,” MedPolicies Case Study, mimeo (1999).

“Interactions between Moroccan Textile Exports and Environmental Regulations: The Case of Water Pollution,” MedPolicies, mimeo (1999).

“The Effect of Environmental Legislation in the EU on Syria's Export of Raw Cotton and Cotton Based Textile Products to the EU,” MedPolicies Case Study, mimeo (1999).

“An Estimate of the Impact of Environmental Regulations on Agricultural Exports:

The Case of Increasing Water Prices and Packaging,” MedPolicies Case Study, mimeo (1999).

“International Competitiveness of Turkish Leather Exports,” MedPolicies Case Study, mimeo (1999).

Additional References

Anderson, K. 1992. “The Standard Welfare Economics of Policies Affecting Trade and the Environment,” in The Greening of World Trade Issues, ed. K. Anderson and R. Blackhurst. Ann Arbor, MI: University of Michigan Press, p. 25-48.

Armington, P.S.. 1969. “The Geographic Pattern of Trade and the Effects of Price Changes.” IMF Staff Papers 16 (1): 176-99.

Bergman, L. 1991. “General Equilibrium Effects of Environmental Policy: A CGE-Modeling Approach.” Environmental and Resource Economics 1 (1): 43-61.

Conrad, K. 1993. “Taxes and Subsidies for Pollution-Intensive Industries as Trade Policy.” Journal of Environmental and Resource Economics 25 (2): 121-35.

Dean, J. M. 1992. "Trade and the Environment A survey of the Literature," in International Trade and the Environment, ed. P. Low. World Bank Discussion Paper 159, The World Bank, p. 15-28.

Dervis, K., de Melo, J. and S. Robinson. 1989. General Equilibrium Models for Development Policy. Washington, DC: IBRD/World Bank (World Bank Paper Back Edition, August, 1989).

Esty, D. C. and D. Geradin. 1998. “Environmental Protection and International Competitiveness.” Journal of World Trade 32: 5-46.

Gardner, B. L.. 1996. “Environmental Regulation and the Competitiveness of U.S. Agriculture,” in Agriculture, Trade, and the Environment, ed. M. E. Bredahl, N. Ballenger, J. C. Dunmore and T.L. Roe. Boulder, CO: Westview Press, 215-30.

Jaffe, A. B., Peterson, S. R., Portney, P. R., and R. N. Stavins. 1995. "Environmental Regulation and the Competitiveness of US

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Manufacturing: What Does the Evidence Tell Us?" Journal of Economic Literature 33 (1): 132-63.

Jorgenson, D. W. and P. J. Wilcoxen. 1993. “Reducing US Carbon Emissions: An Econometric General Equilibrium Assessment.” Resource and Energy Economics 15 (1): 7-25.

Kalt, J. P. 1988. “The Impact of Domestic Environmental Regulatory Policies on U.S. International Competitiveness,” in International Competitiveness, ed. A. M. Spence and H. A. Hazard. Cambridge, MA: Harper and Row, Ballinger, 221-62.

Krutilla, K. 1991. “Environmental Regulation in an Open Economy.” Journal of Environmental Economics and Management 20 (2) :127-42.

Larson, forthcoming, 2000. “Evaluating the Impact of Specific Environmental Regulations on Exports,” Land Economics.

Low, P., ed., 1992. International Trade and the Environment, World Bank Discussion Paper 159, Washington, D.C.: World Bank.

Porter, M. E. 1990. The Competitive Advantage of Nations. New York, NY: Free Press.

Smith, V. K. and J. A. Espinosa. 1996. “Environmental and Trade Policies: Some Methodological Lessons.” Environment and Development Economics 1 (1) :19-40.

Tobey, J.A. 1990. “The Effects of Domestic Environmental Policies on Patterns of World Trade: An Empirical Test.” Kyklos 43 (2): 191-209.

Ulph, A. 1998. “International Trade and the Environment: A Survey of Recent Economic Analysis.” in The International Yearbook of Environmental and Resource Economics 1997/1998, ed. H. Folmer and T. Tietenberg. Cheltenham, U.K.: Edward Elgar, 205-42.

U.S. Congress, Office of Technology Assessment (U.S.O.T.A.). 1992. “Trade and Environment: Conflicts and Opportunities.” OTA-BP-ITE-94. Washington, DC: U.S. Printing Office. May.

Van Beers, C. and J. C. J. M. Van den Bergh. 1996. “An Overview of Methodological Approaches in the Analysis of Trade and Environment.” Journal of World Trade 30 (1): 143-67.

Van Beers, C. and J. C. J. M. Van den Bergh. 1997. “An Empirical Multi-Country Analysis of the Impact of Environmental Regulations on Foreign Trade Flows.” Kyklos 50 (1): 29-46.

Whalley, J.. 1996. “Quantifying Trade and Environmental Linkages Through Economy Wide Modeling”, in Agriculture, Trade, and the Environment, ed. M.E. Bredahl, N. Ballenger, J. C. Dunmore, and T.L. Roe. Boulder, CO: Westview Press, 137-50.

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THE EFFECT OF ENVIRONMENTAL LEGISLATION IN THE EU ON

SYRIA'S EXPORT OF RAW COTTON AND COTTON BASED TEXTILE PRODUCTS TO THE EU

POLICY BRIEF

Problematic

Syria’s products currently enter EU markets duty free and quota free by virtue of the Cooperation Agreement signed between Syria and the European Community in 1977. The EU, however, is obliged to terminate this privilege by 2005, in accordance with Uruguay Round agreements, unless Syria joins the new free trade area proposed under the Euro-Mediterranean Partnership. The EU will also be lifting all quota restrictions on all textile imports by 2005. This will subject Syrian textile imports in the EU to intense competition from low-cost Asian textile markets, which until now have been subjected to high quota restrictions in the EU.

On the positive side, Syria banned the use and import of carcinogenic azo dyes in 1996, an input used in the production of fabric. The presence of azo dyes in textiles is already prohibited in Germany and Holland, and likely will also be banned throughout the EU. The question is whether Syria has an advantage over its international competitors because it has already banned and adjusted to the non-use of azo dyes and how Syria can maintain this comparative advantage when EU markets opens to more foreign competition.

Economic Baseline

Raw cotton and cotton based products (yarns, fabrics, garments, linen, furnishing materials and waste) accounted for 7.7% of total Syrian exports and 16.6% of total non-oil exports from 1995-1997. Raw cotton accounts for 80% of exports and cotton based products account for the remaining 20%. The textile sector in Syria, of which 40% is cotton based, accounts for about 6% of GDP and 14% of value-added in industry. The sector employs around 20% of the Syrian workforce. Approximately 70% of Syrian ginned cotton is exported before being transformed into cotton yarn. About 50% of Syrian raw cotton exports and 75% of garment exports went to EU countries in 1996. Germany is the largest importer of Syrian garments, followed by France, the United Kingdom and Italy.

The price paid to farmers for raw cotton has been 10% to 15% above world market prices since 1995. This sector distortion reduces incentives to increase efficiency. The cotton yarn industry is predominantly owned by the public sector. It has been plagued by low quality outputs, which are the result of antiquated plants, old machinery, and low wages. As a result, only 40% of the cloth produced in Syria is cotton based. The high price of

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raw cotton and the low quality of the monopoly public sector spinning mills have thus significantly eroded the incentive to produce value-added cotton products with Syrian cotton. This has stifled the growth potential of Syrian cotton based industries. In spite of this, cotton garments is the fastest growing sector in Syria. Private manufacturers dominate the sub-sector and have greatly increased the quality and value of output in recent years. Cotton T-shirts are by far the largest item within the garments, with underwear following as a distant second and men’s dress shirts in third.

Environmental Regulations – Azo Dyes

Syria prohibited the import and use of azo dyes that may split off into carcinogenic amines in 1996. The Syrian legislation is based on the German legislation and thus their lists of banned carcinogenic amines are the same. While there is no EU-wide ban on azo dyes at this time, Holland also banned the use of azo dyes and it is likely that the EU will approve a ban in the near future. The Syrian ban on azo dyes increased the cost of using dyes in the process of manufacturing fabrics between 30-40%.

Findings

Because Syria has already banned the use of azo dyes, any initiative at the EU level to restrict the use of azo dyes would not adversely impact Syrian exports. Indeed, such a ban may even improve the competitiveness of Syrian cotton products and increase output and exports since Syrian producers would have already adjusted to the ban. However, an improvement in competitiveness would require Syria to better match its products to market preferences.

Because the ban on azo dyes affects the cost of intermediate products in the production of garments, to assess the impact of an EU-wide ban of azo dyes one must: (1) consider the impact of the Syrian ban on the price of cotton fabric; (2) estimate of the affect of higher domestic fabric prices on the production and export of Syrian cotton garments; and (3) assesses the potential impact of an EU-wide ban on azo dyes on the production and export of Syrian cotton garments. As such we found that:

The increased in the cost of dyes in Syria lead to an estimated 7-11.2% decline in the output of fabrics and increased the cost of domestic fabric prices between 3.9-5.6%; and

The increased price of fabrics in Syria lead to a 1.6-3.1% decrease in Syrian cotton garment output and a 0.6-4.3% decrease in Syrian cotton garment exports (taking into account minor efficiency improvements, price adjustments, and the limited size of the current azo-free sub-market).

However, if the entire EU moves to ban azo dyes, the azo-free market would be greatly expanded. Accordingly, Syrian firms could compete fairly,

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or even at an advantage over firms who are still currently using azo dyes. Accordingly,

An EU-wide ban would mitigate the 1.6-3.1% reduction in output caused by the ban, reducing it to between 1.1% and 2.4%.

An EU-wide ban would mitigate the 0.6-4.3% reduction in exports caused by the ban, reducing it to between 0.0-2.5%.

The ban on carcinogenic azo dyes led Syrian manufacturers to produce azo-safe garments. There are markets for azo-safe garments in which individuals or importers are willing to pay a premium for the product (e.g., Germany and Holland). This higher market price could help to defray the increased cost of fabric caused by the ban on azo dyes.

However, there is likely to be some product differentiation in international markets based on country of origin, perceived quality, imperfect information, etc.. Furthermore, in international markets that have not regulated the use of azo dyes, the higher-priced Syrian products would have to compete against less expensive products that do contain azo dyes. Syrian products in those markets would be at a competitive disadvantage. The difference between Syrian garment manufacturers and those in other counties is that the higher costs to Syrian manufacturers are binding whereas manufacturers in other countries incur higher costs only when they find buyers who are willing to pay a higher price.

The negative impact of the ban, however, could be reduced if steps are taken to inform differentiating consumers about the lack of carcinogenic azo dye content in markets that have not yet banned the use of azo dyes. For instance, products not containing azo dyes may obtain “azo-free” certification making them more attractive to importers and buyers interested in paying a higher price for non-carcinogenic, azo-free garments. This is analogous to consumers and importers being willing to pay a higher price for a higher quality product. Syrian products could thus compete in the “azo-free” sub-sector of the European garment market allowing them to mitigate some of the cost of the regulation.

Recommendations

1. Eliminate direct subsidies to cotton farmers, which provide higher than market value prices for raw cotton. The Government should instead expand R&D at agricultural research stations to increase the efficiency of cotton production. Lower raw cotton prices could provide cotton yarn producers with savings so as to improve the quality of cotton yarn used for garment making.

2. Improve the quality of Syrian cotton yarn by possibly encouraging private sector entry into the sector. Higher quality “azo-free” cotton yarn would assist Syrian garment manufacturers to create higher

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value-added products that can better penetrate azo-free sub-sector markets.

3. Help the Syrian cotton-based garment industry produce higher value-added products allowing the impact of more stringent environmental regulations on output and exports to be smaller than in the case of lower value-added products. Increasing value added in the industry reduces the sensitivity of the sector to changes in input costs caused by environmental regulation.

4. Encourage garment exports to Germany and Holland where Syrian azo-free garment exports may be able to compete more effectively against Asian competitors who may be still using azo dyes in 2005 when EU quotas on Asian imports are lifted.

5. Identify and facilitate private sector access to lower-cost substitutes for azo dyes that are environmental-friendly.

6. Provide incentives and support measures to assist producers make the necessary adjustments. To achieve this, public agencies and ministries should seek external financial and technical assistance to design new polices and to help producers make the necessary technical changes.

7. After achieving compliance with environmental regulations, Syrian producers and exporters should seek to qualify for textile eco-label use and to become ISO 14001 certified. This will help to increase their sales and pay off their environmental investments. Government can prepare itself by:

Establishing an information network on international standards for environmental management system and product eco-labels. Producers and exporters should be able to know what the standards are and how to comply with them.

Providing technical support and training on relevant standards.

Simplifying the process of adopting product eco-labels and environmental management systems by upgrading existing standardization bodies (or creating new ones) to conduct testing and certification.

Arranging long-term credit facilities to assist firms comply with environmental measures. The government can make use of the future Environmental Fund, which will be created when the new Environmental Law is adopted, as a major source of credit.

8. Syria should also try to participate in the development of international environmental standards with other developing countries. Syrian involvement in the development and negotiation of

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such environmental standards is necessary to avoid their being used as non-tariff barriers to trade by developed countries.

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LES EFFETS DE LA LÉGISLATION EU RELATIVE À L’ENVIRONNEMENT SUR L’EXPORTATION SYRIENNE DU

COTON BRUT ET DES PRODUITS TEXTILES À BASE DE COTON VERS L’EU

NOTE POLITIQUE

Problématique

Les produits syriens sont actuellement admis dans les marchés de l’EU hors-taxes et hors contingent, en vertu de l’Accord de Coopération signé entre la Syrie et la Communauté européenne en 1977. En conformité aux accords de l’Uruguay, l’EU est, néanmoins, obligée de terminer ce privilège d’ici l’an 2005, à moins que la Syrie ne se joigne à la nouvelle région de libre-échange proposée sous le Partenariat Euro-Mediterranéen. L’EU lèvera aussi toutes restrictions relatives au contingentement pour toutes les importations de textiles d’ici l’an 2005. Ceci imposera une compétition intense aux importations de textiles syriennes, par des marchés asiatiques à faible coût qui, jusqu’à présent, avaient été sujets à de hautes restrictions de contingentement en EU.

Sur un plan plus positif, la Syrie a interdit l’usage et l’importation des colorants azoïques carcinogènes en 1996, une substance utilisée dans la fabrication du tissu. La présence de colorants azoïques dans les textiles est déjà interdite en Allemagne et en Hollande, et il est fort possible qu’elle soit aussi interdite à travers l’EU. Les questions suivantes se posent : celle de savoir si la Syrie a un avantage sur ses compétiteurs internationaux puisqu’elle a déjà interdit l’usage, et s’est accommodée au non-usage des colorants azoïques ; et celle de savoir comment la Syrie pourrait maintenir cet avantage relatif quand les marchés européens s’ouvriront à plus de compétition étrangère.

Point de référence économique

Des années 1995 à 1997, le coton brut, et les produits à base de coton (fils, tissus, vêtements, lin, matériel d’ameublement, et déchets) ont constitué 7,7% de l’exportation totale de la Syrie, et 16,6% de l’exportation de produits non-pétroliers. Le coton brut constitue 80% de l’exportation, et les produits à base de coton constituent les 20% restants. En Syrie, le secteur du textile, dont 40% est à base de coton, constitue à peu près 6% du PIB et 14% de la valeur ajoutée dans l’industrie. Le secteur emploie 20% de la main d’œuvre syrienne. Près de 70% du coton égrené syrien est exporté avant d’être transformé en fil de coton. En 1996, près de 50% du coton syrien brut a été exporté et 75% des exportations de vêtement se sont faîtes vers l’EU. L’Allemagne est le plus grand importateur du vêtement syrien, suivi par la France, le Royaume Uni et l’Italie.

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Depuis 1995, le prix payé aux agriculteurs pour le coton brut a été de 10% à 15% au-delà des prix du marché mondial. Cette distorsion du secteur réduit la motivation d’augmenter l’efficience. L’industrie de la filature de coton appartient, et est gérée, en majeur partie par le secteur public. Elle produit un rendement de qualité inférieure, en raison d’usines désuètes, d’anciennes machines et de salaires bas. Conséquemment, seul 40% du tissu produit par la Syrie est à base de coton. Le prix élevé du coton brut, et la qualité inférieure des filatures de coton, sous monopole public, ont ainsi sensiblement réduit la motivation de produire des produits à valeur ajoutée avec le coton syrien. Ceci a étouffé le potentiel de croissance des industries syriennes à base de coton. En dépit de cela, le secteur des vêtements en coton est le secteur à croissance la plus rapide en Syrie. Des fabricants du secteur privé dominent le sous-secteur, et ont largement amélioré la qualité et la valeur de la production dans les années récentes. Les T-shirts en coton constituent la majeure partie de la production du vêtement, suivis, en bien moindre quantité, par les sous-vêtements et par les chemises d’hommes, venant en troisième place.Réglementations relatives à l’environnement – Colorants azoïques

En 1996, la Syrie a interdit l’importation et l’usage de colorants azoïques qui pourraient se séparer en amines carcinogènes. La loi syrienne est basée sur la loi allemande, faisant ainsi que leurs listes de produits aminés carcinogènes interdits sont les mêmes. Alors qu’il n’existe pas encore aujourd’hui, à l’échelle de l’EU, un interdit unifié relatif aux colorants azoïques, la Hollande a aussi interdit l’usage de colorants azoïques, et il est fort probable que l’EU approuve prochainement un interdit. L’interdit syrien sur les colorants azoïques a augmenté de 30-40% le coût de l’usage des colorants dans le processus de la fabrication.

Résultats

En raison de l’interdit syrien déjà imposé sur l’usage des colorants azoïques, une initiative de restriction d’usage de ces colorants à l’échelle EU ne va pas avoir d’impact négatif sur les exportations syriennes. En fait, un tel interdit pourrait même améliorer la compétitivité des produits syriens de coton et augmenter la production et l’exportation, puisque les producteurs syriens seraient déjà accommodés à l’interdit. Néanmoins, une amélioration de la compétitivité nécessiterait que la Syrie adapte mieux ses produits aux préférences du marché.

En raison du fait que l’interdit sur les colorants azoïques affecte le coût des produits intermédiaires dans la fabrication du vêtement, il demeure nécessaire, pour une évaluation de l’ impacte de l’interdit européen des colorants azoïques, (1) de considérer l’impact de l’interdit syrien sur le prix du tissu en coton; (2) d’évaluer l’impact de la hausse du prix du tissu local sur la production, et sur l’exportation syrienne du vêtement en coton; (3) d’évaluer l’impacte potentiel d’un interdit à l’échelle EU des colorants azoïques sur la production et l’exportation du vêtement syrien en coton. Dans ce contexte, nos conclusions sont les suivantes:

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L’augmentation du coût des colorants en Syrie a produit un déclin estimé à 7-11,2% de la production de tissu, et une augmentation du coût du tissu local de 3,9-5,6%; et

L’augmentation du prix du tissu en Syrie a produit un déclin de 1,6-3,1% de la production syrienne du vêtement, et 0,6-4,3% de déclin de l’exportation du vêtement de coton syrien (en tenant compte des améliorations mineures d’efficience, de l’ajustement des prix, et des limites de l’envergure du sous-marché pour la production sans colorants azoïques).

Néanmoins, si toute l’EU passe à l’interdit des colorants azoïques, le marché des produits ne contenant pas ces substances s’élargirait considérablement. Conséquemment, les entreprises syriennes pourraient entrer en concurrence équitable ou même avantageuse, avec les entreprises qui utilisent encore les colorants azoïques. Conséquemment,

Un interdit à l’échelle EU pourrait mitiger la réduction de 1,6-3,1% de production causée par l’interdit, l’amenant à 1,1-2,4%; et

Un interdit à l’échelle EU pourrait mitiger la réduction de 0,6-4,3% en exportation causée par l’interdit, le réduisant à 0,0-2,5%.

L’interdit sur les colorants azoïques carcinogènes a amené les fabricants syriens à produire des vêtements sécuritaires, sans contenu azoïque. Il existe des marchés pour ces vêtements sans contenu azoïque dans lesquels les individus ou les importateurs sont prêts à payer le prix fort pour le produit (comme l’Allemagne, et la Hollande). Ce prix de marché plus élevé pourrait aider à défrayer l’augmentation du coût du tissu causé par l’interdit des colorants azoïques.

Néanmoins, il est probable qu‘une différentiation de produit va se produire dans le marché international, sur la base du pays d’origine, de la perception de qualité, de l’information imparfaite, etc.. De plus, dans les marchés internationaux n’ayant pas passé de réglementations relatives à l’usage des colorants azoïques, les produits syriens aux prix plus élevés, devront entrer en compétition avec les produits moins coûteux contenant des colorants azoïques. Les produits syriens seraient désavantagés sur le plan de la compétition dans ces marchés. La différence entre les fabricants syriens du vêtement et ceux des autres pays est que le coût supérieur des fabricants syriens sont des coûts obligatoires, alors que les fabricants d’autres pays n’encourent des coûts plus élevés que lorsqu’ils trouvent des acheteurs prêts à payer le prix plus élevé.

L’impacte négatif de l’interdit pourrait, néanmoins, être réduit si des mesures sont prises pour informer le consommateur qui distingue la différence, de l’absence de colorants azoïques carcinogènes, dans les marchés n’ayant pas encore interdit l’usage de ces colorants. Les produits ne contenant pas de colorants azoïques pourraient, par exemple, obtenir une certification «sans colorant azoïque» les rendant plus intéressant pour

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les importateurs et les acheteurs intéressés à payer un prix plus élevé pour des vêtements non-carcinogènes, sans colorants azoïques. Ceci serait analogue au fait que le consommateur et l’importateur seraient prêts à payer un prix plus élevé pour un produit de meilleure qualité. Les produits syriens pourraient donc entrer en compétition dans le sous-secteur du «sans colorant azoïque» du marché européen du vêtement, leur permettant ainsi de mitiger une partie des coûts de la réglementation.

Recommandations et conclusions

1. Éliminer les subventions directes aux agriculteurs de coton, qui assurent un prix plus élevé que celui du marché pour le coton brut. Le gouvernement devrait plutôt étendre le domaine de la recherche et du développement dans les centres de recherche sur l’agriculture, pour augmenter l’efficience de la production du coton. Des prix inférieurs pour le coton brut offriraient aux fabricants de fils en coton des économies qui pourraient être investies dans l’amélioration de la qualité du fil de coton utilisé pour la manufacture des vêtements.

2. Améliorer la qualité du fil de coton syrien en encourageant, dans la mesure du possible, la pénétration du secteur privé dans le secteur. Un fil de coton de meilleure qualité, et «sans contenu d’azoïque» aiderait l’industrie syrienne du vêtement à créer des produits de valeur ajoutée, qui pourraient pénétrer davantage le sous-secteur des produits sans contenu azoïque.

3. Aider l’industrie syrienne du vêtement à base de coton à produire des produits supérieurs de valeur ajoutée, de sorte que l’impact de plus strictes réglementations environnementales sur les produits et l’exportation soit inférieur à ce qu’il aurait été dans le cas d’une production à moindre valeur ajoutée. L’augmentation de la valeur ajoutée de l’industrie réduit la sensibilité du secteur au changement du prix des intrants causé par la réglementation environnementale.

4. Encourager l’exportation du vêtement vers l’Allemagne et la Hollande, là où le vêtement syrien sans contenu azoïque pourrait faire plus efficacement concurrence aux compétiteurs asiatiques qui pourraient être encore en train d’utiliser les colorants azoïques en 2005, date à laquelle les contingents EU sur les importations asiatiques seraient levés.

5. Identifier et faciliter l’accès du secteur privé aux substitutions pour les colorants azoïques à coûts réduits qui ne sont pas nuisibles à l’environnement.

6. Offrir des mesures incitatives et des mesures de soutient pour assister les producteurs à faire les accommodations nécessaires. Pour atteindre ce but, les organismes publics et les ministères devraient rechercher de l’assistance financière et technique pour

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concevoir de nouvelles politiques, et pour aider les producteurs à faire les changements techniques nécessaires.

7. Après avoir réalisé la conformité avec les réglementations environnementales, les producteurs et exportateurs syriens devraient chercher à se faire agréer pour l’usage d’une eco-étiquette et à être certifiés ISO 14001. Ceci aiderait à augmenter leurs taux de ventes et à s’acquitter de leurs investissements relatifs à l’environnement. Le gouvernement peut se préparer de la façon suivante:

En établissant un réseau d’information sur les standards internationaux pour les systèmes de gestion de l’environnement et les eco-étiquettes des produits. Les producteurs et les exportateurs devraient pouvoir être informés au sujet des standards appliqués, et de ce qu’il faudrait faire de s’y conformer.

Offrir un soutient technique et une formation sur les standards pertinents.

Simplifier le processus d’adoption d’une eco-étiquette pour les produits, ainsi que celle des systèmes de gestion de l’environnement, en améliorant la qualité des organismes de standardisation (ou en créant de nouveaux) pour entreprendre l’examen et la certification.

Organiser des sources de crédit à long terme pour aider les entreprises à se conformer aux mesures relatives à l’environnement. Le gouvernement peut faire usage, comme source majeure de crédit, du Fonds de l’Environnement qui sera crée quand la nouvelle Loi sur l’environnement sera adoptée.

8. La Syrie devrait aussi essayer de participer, avec d’autres pays en voie de développement, à l’élaboration de standards internationaux sur l’environnement. La participation syrienne dans le développement, et dans les négociations relatives à ces standards environnementaux, est nécessaire pour éviter que ceux-ci ne soient employés comme barrières non tarifaires au commerce par les pays développés.

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Summary ofTHE EFFECT OF ENVIRONMENTAL LEGISLATION IN THE EU

ON SYRIA'S EXPORT OF RAW COTTON AND COTTON BASED

TEXTILE PRODUCTS TO THE EU1

1. INTRODUCTION

The relationship between trade and the environment is emerging as a major issue in international trade. There is concern in the environment community that the increase in economic growth as a result of trade liberalization will add to environmental pressures, which in turn requires a strengthening of environmental protection measures. At the same time, there is concern in the trade community about the impact that environmental protection measures will have on trade.

The objective of this study is to examine the extent to which environmental regulations in the European Union (EU) affect cotton and cotton textile exports from Syria to the EU. Syria is an eastern Mediterranean country and the EU is Syria’s number one trading partner, both in terms of exports and imports. Syrian exports to the EU consist mainly of crude oil, which accounted for 63.5% of total exports in 1996. Raw cotton was a distant second representing 6.5% of total export, while textiles and clothing comprised 3.5%. Syria’s other main exports to the EU are phosphates, agricultural products, and leather goods.

Syria’s agricultural and industrial products currently enter EU markets duty free and quota free by virtue of the Cooperation Agreement signed between Syria and the European Community in 1977. The EU, however, is obliged to terminate this privilege by the year 2005 in accordance with Uruguay Round agreements unless Syria joins the new free trade area proposed under the Euro-Mediterranean Partnership. In accordance with Uruguay Round agreements, the EU will also lift all quota restrictions on all textile imports by 2005. This will subject Syria’s textile exports to the EU to intense competition from low cost Asian textile markets, which until now have been subjected to high quota restrictions in the EU.

This study focuses on the impact of EU environmental regulations on Syrian raw cotton and cotton based textile exports to the EU. It consists of six parts. Part 1 underlines the importance of raw cotton and cotton based textile products to the Syrian economy; Part 2 analyzes Syrian cotton and cotton based exports worldwide; Part 3 highlights the role of Syrian environmental institutions and legislation; Part 4 reviews the new EU

1 The MedPolicies Initiative thanks Yehia Awaida, the METAP National Focal Point for Syria, for his support for the case study and Nabil Sukkar of the Syrican Consulting Bureau for Development and Investment who served as the case study Lead Analyst and author. The report summary provided was completed by Khaled El-Mattrawy and Carol Chouchani Cherfane.

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environmental standards that are effecting cotton and cotton based imports; Part 5 presents the impact that EU regulations may have on the market price of Syrian cotton products; and Part 6 offers conclusions and recommendations. Annex A provides the interested reader with the details of the model used to estimate the changes in production cost and export cost caused by EU environmental standards and Annex B provides a listing of banned azo dyes and their alternatives.

2. COTTON AND COTTON BASED TEXTILE PRODUCTS IN THE SYRIAN ECONOMY

2.1. The Cotton Industry in Syria

Cotton is grown on 4.6% of total farmland in Syria and on 67% of farmland devoted to industrial crops. Raw cotton represents 12% of the market value of all Syrian farm products and 81% of the market value of all industrial farm products.2 The textile sector in Syria, of which 40% is cotton based (the rest is wool, silk or synthetic fibers based), accounts for about 6% of GDP and 14% of value-added in industry. The sector employs around 20% of the Syrian workforce.3 About 70% of Syria’s ginned cotton is exported; in other words, only 30% is processed locally.4

2.1.1 The Production of Raw Cotton

From 1992-1995, an average of 600,000 tons of raw cotton was produced annually. Production increased to 760,000 tons in 1996 and to over one million tons in 1997.5 The increase in production was caused by two factors: an increase in farmland devoted to cotton growing due to responsiveness to new price incentives and increased yield.

In impetus for price incentive came in 1988 when Syria faced a serious foreign exchange shortage. The Government started to increase cotton prices paid to farmers and subsequently undertook a policy decision to increase the country’s cotton production because of cotton’s export potential. In response, the area cultivated by cotton increased from around 156.4 thousand hectares in 1990 to 196,500 hectares in 1993 and to 250,000 hectares in 1997 – an increase of 60% in seven years. The price paid to farmers increased three-fold rising from SP 10/kg in 1989 to SP 19/kg in 1990, to SP 30 per kg in 1997. The price paid to farmers for raw cotton has been since been 10% to 15% above world market prices.

2 Syrian Central Bureau of Statistics, Statistical Abstract, 1997, pp. 109, 121, 122, 155.3 Ibid , 1997, pp. 187, 537.4 The government is not expanding ginning or spinning capacity, and is setting up restrictions on private sector entry into both ginning and spinning.5 Sources: Syrian Central Bureau of Statistics, Statistical Abstract, 1997, pp. 109, 121, 122, 155, and Ministry of Agriculture, The Cotton Bureau Report on the State of Cotton Cultivation for the 1997 Season.

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Cotton yield also increased substantially rising from 2,800 kg/ha in 1990 to 4,200 kg/ha in 1997, one of the highest increases in the world.6 The increase in yield resulted from improvements in cultivation methods and the development of more productive seed varieties (Aleppo 40 and Aleppo 90).

2.1.2 The Production of Ginned Cotton

Syrian ginning capacity has lagged behind the amount of raw cotton produced. Present ginning mills can handle 665,000 tons of raw cotton if operated in accordance with the proscribed yearly operational cycle (180 days). The actual ginned capacity in 1997 was 354,000 tons.7 A substantial part of ginned cotton (70%) is exported along with surplus unginned cotton.

2.1.3 The Production of Cotton Yarn

Cotton yarn production in Syria has risen steadily. Thirteen spinning mills produced approximately 64 thousand tons in 1997.8 However, the industry has the capacity to handle only around 30% of the country’s production of ginned cotton, requiring the remaining 70% to be exported. The yarn industry is predominantly owned by the public sector. It has been plagued by low quality outputs, which are the result of antiquated plants, old machinery, and low wages. Factories turn out thick, course thread instead of the fine thin thread preferred by the market. Furthermore, yarn mills have difficulty selling their yarn both domestically and abroad because of their high market price (caused by higher cotton prices). Much of the unsold yarn is stored in warehouses. In June 1998, government warehouses were storing SP 3.1 billion (US$62 million) worth of yarn.9

The low quality of locally produced yarn and the government prohibition on the import of cotton yarn has prompted Syrian manufacturers to turn to non-expensive synthetic fibers and composite threads, both of which may be legally imported. Around 70 thousand tons of synthetic and composite yarns are imported annually into Syria. Private sector garment manufacturers have also been importing cotton based fabrics as an alternative to the locally produced fabric. The result is that in Syria – a cotton producing country – only 40% of the cloth produced is cotton based. The high price of raw cotton and the low quality of the monopoly public sector spinning mills have significantly eroded the incentive to produce

6 FAO Production Yearbook. Vol. 51, 1997. 7 Syrian Central Bureau of Statistics. Statistical Abstract, 1997, pp. 109, 121, 122, 155.8 Measures have been taken to increase spinning production and to improve spinning productivity. Four new projects are being set up in Jableh, Idleb, and Lattakia, which will add 66,000 tons of capacity. Some have already begun production and all four will be functioning by the year 2000. With these projects, the potential spinning capacity will rise to 146 thousand tons of yarn per year (which requires 180 thousand tons of ginned cotton) as opposed to 80 thousand tons (the sector’s current capacity). With a current production of 395 thousand tons of ginned cotton (1997) per annum, more capacity is needed.9 Tishreen (daily newspaper), 22(4), 1998.

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value-added cotton products. This has stifled the growth potential of the Syrian cotton based industries.

2.1.4 The Production of Cotton Fabrics and Garments

Poor quality and fiscal problems caused public sector fabric production to decline by 16% from 1992 to 1997. At the same time, private sector production witnessed a sharp increase between 1992 and 1994, but dropped again in 1995 and 1996. The drop in production is most probably due to sharp increase in raw cotton prices, which was reflected in cotton yarn prices (see Table 1).

2.1.5 Cotton and Cotton Products Pricing and its impact on the production of textiles

The High Council on Agriculture fixes the price of raw cotton to be paid to farmers for the season. Based on these prices, the General Organization for Ginning and Marketing of Cotton (GOGMC) estimates the cost of producing ginned cotton and cotton seeds for the coming season. The Economic Committee uses these cost estimates to set the prices at which ginned cotton is to be sold to spinning and weaving companies, and at which price cotton seeds are to be sold to oil presses. The proposed prices are then forwarded to the Ministry of Economy and Foreign Trade for final approval. They are sent at the same time to the Ministries of Industry and of Internal Trade and to the General Organization for Textile Industries.

The elevated price the government pays to farmers for raw cotton has increased cotton production, but has been disruptive to the cotton industry. Since the government has a monopoly on the purchase of raw cotton and on the sale of cotton fibers, it has been charging public sector spinning mills and private sector spinning mills a price for cotton substantially higher than the price it is able to charge exporters. (In fact, the GOGMC has been exporting cotton at a loss. GOGMC’s deficit amounted to SP 0.2 billion in 1996 and increased to SP 2.3 billion in 1997). This has caused domestic yarn prices to remain 10% above world prices, resulting in large stock of unsold yarn in the public sector.10

Table 1: The Production of Fabrics and of Selected Garments11

1992 1993 1994 1995 1996Cotton Fabrics (tons)PublicPrivate

25866185297337

280591680411255

269241514611768

23192165976595

23446153348112

Underwear (thousand dozens)Public

1800859941

204510321013

2018867

1151

284910531796

327311002173

10 In June 1998, the Ministries of Finance and Agriculture concluded a study of the public sector’s production costs of ginned cotton. The study found that 1 kg of ginned cotton costs the Government SP 0.845 to produce, whereas the world price for ginned cotton was SP 0.515 per kg in 1997.11 Figures for garments include both cotton products and products made of other fibers.

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PrivateStocking (thousand dozens)PublicPrivate

3248192

3056

3391151

3240

3709169

3540

4340155

4185

5153215

4938

Ready made clothesPublic Private Tricot (thousand pieces)Public Private

1189N/A

13481-

13481

1142N/A

15313-

15313

1042N/A

15438-

15438

27077847

2623015563

-15563

27659643

2701615719

-15719

Bed sheets (thousand pieces)PublicPrivateTowels (thousand pieces)PublicPrivateBlankets (thousand pieces)Public Private

1675-

16757893

-7893408

-408

2229-

22298248

-8248328

35293

2966-

29668809

-8809358

33325

2266-

22668050

-8050399

41358

2432-

24328289

-8289449

55394

Source: Syrian Central Bureau of Statistics, Statistical Abstract, 1998, No. 5/3 and 5/4.

3. SYRIAN EXPORTS OF COTTON AND COTTON BASED PRODUCTS WORLDWIDE

Syria’s merchandise exports averaged SP 44.4 billion between 1995 and 1997, of which oil accounted for an average of SP 28.8 billion a year (65%), and non-oil exports accounted for an average of SP 15.6 billion (35 %) of the total per year.

Raw cotton and cotton based products, which include yarns, fabrics, garments, linen, furnishing materials and waste, averaged SP 3.1 billion per year from 1995 to 1997. This accounts for 7.7% of total exports and 16.6% of total non-oil exports. Raw cotton accounts for 80% of exports and cotton based products account for the remaining 20% (see Table 2).

Raw cotton and cotton based exports increased at an average annual rate of 12% between 1993-1997. Growth would have been faster had it not been for the Government’s raw cotton pricing policy and shortage of ginning and spinning capacities. About 50% of Syrian raw cotton is exported to EU countries.

Cotton garments is the fastest growing sector and the largest cotton product export item in Syria outside raw cotton (14.5% of total cotton exports in 1996). Exports of cotton garments consist mostly of T-shirts, shirts, woven cotton, and underwear. This sub-sector is dominated by the private sector and private manufactures have greatly increased the quality and value of the sub-sector in recent years.

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Table 2: Syrian Raw Cotton Exports by Country (1993/94 - 1996/97) (tons)

Countries 1993/94 1994/95 1995/96 1996/97EU Countries 69777 52583 49984 83421Arab Countries 21823 30426 24827 21956Far East 68837 24084 24348 27186America 1022 715 - 3040Brazil 20 - - 1536Columbia - - - 1504Mexico 1002 715 - -Czech 294 571 49 610Switzerland - 20 197 4870Turkey 11562 13765 7442 29082Others 2176 1330 6754 7316Total 175491 123494 113601 177481Source: Central Bank of Syria, Quarterly Bulletin 1997, Vol. 35, No. 1-2.

Cotton yarn is the third largest cotton export item and accounts for a small 3% of the total cotton exports. Most locally produced yarns (about 93%) are consumed in domestic industries (see Table 3).

Table 3: Value of Syrian Exports of Cotton Products Worldwide (million SP)

Product 1993 1994 1995 1996% Value % Value % Value % Value

Raw Cotton 70.4 1955.8 68.0 2181 76.2 1912 78.2 1912Cotton Yarn 0.8 23.5 3.5 113.5 1.3 33.8 1.4 33.8Cotton fabrics 3.3 90.5 1.6 51.2 1.1 28.7 1.2 28.7Clothing 8.1 224.5 10.4 332.5 6.7 167 6.8 167Underwear 11.0 305.3 8.3 265.7 9.6 241.7 7.3 179.5Linen & furnishing materials

2.7 74.2 4.2 134.8 1.1 28.2 1.2 28.2

Rags and tapestries 1.0 26.6 1.9 59.6 0.4 8.9 0.4 8.9Linter 1.8 51.1 1.2 39.7 2.5 63.7 2.6 63.7Cotton waste 0.1 3.8 0.5 14.6 0.7 17.4 0.7 17.4Other 0.8 22.3 0.5 15.1 0.3 6.7 0.3 6.7Total 100.0 2777.6 100.0 3207.7 100.0 2508.1 100.0 2445.9Source: Central Bureau of Statistics, Statistics of Foreign Trade 1992-96.

3.1 Syrian Cotton Based Exports to the EU

Syria’s total cotton exports to the EU amounted to ECU 122.9 million, absorbing 49% of Syria’s worldwide exports of raw cotton in 1996 and 75% of its garment exports in 1996. This consisted mainly of raw cotton (61%), garments (31%), linens (5%), waste (2%), and yarns (1%). Cotton T-shirts are by far the largest item within the garments, with underwear following as a distant second, followed by men’s dress shirts. The third largest export item to the EU, as shown below, is cotton linen (ECU 5.7 million in 1996). The forth largest is cotton yarn.

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Italy is the largest importer of Syrian raw cotton, followed by Turkey (a non-EU member). The other major EU importers of Syrian raw cotton are Spain, France, Germany and Portugal (see Table 4). Germany is the largest importer of Syrian garments, followed by France, the United Kingdom, and Italy.

Table 4: Cotton Products Exports from Syrian to the EU by countries 1996-1997 ( 1000 ECU)EU Country

Raw Cotton Cotton yarn Cotton fabric Cotton garments1996 1997 1996 1997 1996 1997 1996 1997

Italy 39661.8 52.8% 58031 46.0% 1102.9 78.9% 1551.4 77.7% 0.0 0.0 2646.7 6.2% 3758.9 8.2%

France 3646.5 4.9% 14946 11.9% 0.0 0.0% 0.0 0.0% 0.0 0.0 7220.1 17.0% 8286.1 18.1%

Germany 2359.8 3.1% 8653 6.9% 0.0 0.0% 45.0 2.3% 0.0 0.0 22230.5 52.5% 22199.0 48.5%

Spain 20878.8 27.8% 16654 13.2% 0.0 0.0% 0.0 0.0% 0.0 0.0 178.3 0.4% 982.9 2.1%

Belgium-Lux 622.4 0.8% 12728 10.1% 294.7 21.1% 382.7 19.2% 0.0 0.0 499.9 1.2% 452.6 1.0%

Greece 0.0 0.0% 1155 0.9% 0.0 0.0% 0.0 0.0% 0.0 0.0 2600.0 6.1% 2781.6 6.1%

UK 355.2 0.5% 134 0.1% 0.0 0.0% 0.0 0.0% 0.0 0.0 5067.2 12.0% 5757.0 12.6%

Netherlands 0.0 0.0% 0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0 1226.7 2.9% 1035.8 2.3%

Ireland 284.4 0.4% 462 0.4% 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0%

Denmark 0.0 0.0% 71 0.1% 0.0 0.0% 0.0 0.0% 0.0 0.0 7.9 0.0% 101.5 0.2%

Portugal 7276.9 9.7% 8987 7.1% 0.0 0.0% 17.7 0.9% 0.0 0.0 1.3 0.0% 75.9 0.2%

Sweden 0.0 0.0% 0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0 16.0 0.0% 35.8 0.1%

Finland 0.0 0.0% 0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 1.4 0.0%

Austria 0.0 0.0% 4305 3.4% 0.0 0.0% 0.0 0.0% 0.0 0.0 684.0 1.6% 263.8 0.6%

Total 75085.7 100.0% 126126 100.0% 1397.6 100.0% 1996.8 100.0% 0.0 0.0 42378.5 100.0% 45732.2 100.0%

3.2.1 An Overview of the Market for Cotton and Cotton Based Products in the EU

The EU consumed an estimated 2.5 million tons of cotton in 1995, constituting over 13% of total world output. In per capita terms, consumption amounted to over 7 kg, which is more than double the world average of 3.5 kg. This is surpassed only the USA and Japan, where per capita cotton consumption exceeds 10 kg.

The four largest cotton markets in the EU are France, Germany, Italy, and the United Kingdom. They account for about 75% of the total cotton market, with Italy and Germany being the most important. In recent years, the EU has imported less raw cotton (6% of world consumption of raw cotton) and more cotton clothing and garments. This is because the EU is becoming less competitive in the labor intensive spinning and weaving industries. Italy is by far the largest importer of raw cotton, importing just over 300,000 tons a year. Germany came second in 1996 with 124,900 imported tons (compared to 226,000 tons in the early 1990’s). The UK, once the world’s largest importer of cotton, imported around 30,000 tons in 1996.

EU imports of cotton clothing have risen dramatically. Between 1990 and 1996, net imports of clothing increased 55% from 528,000 tons to an estimated 820,000 tons. Germany experienced the largest expansion by

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volume, with net imports of cotton clothing rising from 308,200 tons in 1990 to an estimated 413,600 tons in 1996 – an annual average growth rate of 5%. Net imports into France expanded more rapidly in percentage terms – although from a much lower base – rising from 131,800 tons in 1990 to an estimated 200,100 tons in 1996. Italy, which in 1990 was a net exporter of clothing, became a net importer in 1996 to the tune of 26,100 tons.

4. ENVIRONMENTAL INSTITUTIONS AND LEGISLATION

Syria, like many other developing countries, has been late in introducing environmental legislation. The Ministry of Environment was established in 1991 and has been making efforts to create environmental awareness and to put in place necessary environmental regulations. Principal areas of concern have been air pollution, water pollution, and deterioration of agricultural land.

A number of environmental laws and regulations have been passed in recent years. A comprehensive Law for the Protection of the Environment is currently being prepared that defines standards, rules, and conditions for dealing with the environment. The proposed law has been revised and reviewed several times and is awaiting approval.

4.1 National Environment Strategy

A national environmental strategy has been drafted with financial support from the United Nations Development Programme (UNDP) and technical support from the World Bank.12 The strategy addresses six priority environmental problems: “degradation of water resources, degradation of air quality, depletion of fresh water resources, land degradation, poor management of solid wastes, and degradation of urban environment.”13

The draft national environmental strategy estimated the total cost of environmental degradation to be between SP 29 and SP 32 billion in 1997. It estimated this cost to rise to SP 46-54 billion by the year 2005 if no action is taken. The draft strategy also estimates the cumulative total pollution control expenditure needed for the 13 year period from 1998 to 2010 to be SP 223 billion (US$4.5 billion). Such expenditures would amount to an average of about 1% of GNP per annum.

4.2 Syrian Environmental Legislation Affecting the Production of Raw Cotton and Cotton Products

Syrian environmental regulations affecting the production of cotton and cotton based products (yarn, fabric, and garments) cover three areas:

12 A project entitled “Strengthening National Capacity for Environmental Affairs in Syria” involves the preparation of a National Environmental Strategy and the enhancement of Syrian environmental institutional and human capacities. 13 Other environmental problems include “poor planning and management of industrial areas, pollution by chemicals used in agriculture, degradation of coasts, and deforestation.”

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product standards, production process requirements and emission standards, and health and safety standards.

4.2.1 Product Standards: Restrictions on the Use of Certain Chemicals

There are restriction in Syria on the use of certain chemicals that affects raw cotton cultivation as well as yarn and fabric-making in their finishing stages.

4.2.1.1 Restrictions affecting Raw Cotton

Pesticides are subject to certain restrictions in Syria. Syria does not produce PCP, which is considered dangerous to human and animals, and bans its import (Decision no. 10/T (1990) issued by the Ministry of Agriculture). PCP is also regulated by the EU, which sets limits on its presence in raw cotton and cotton based products.

The Cotton Bureau14 in Syria launched a policy in 1988 aiming at reducing the use of chemicals to protect crops. The percentage of chemically protected land has thus dropped from 29% in 1987 to 7.75% in 1989 and to 1.27% in 199815. Furthermore, in 1995, research began on the production of naturally colored cotton, organic cotton, and use of biological plant protection schemes. Experiments are carried out in Aleppo, Al-Ghab and Deirezor.

It should also be noted that cotton is picked mostly by hand in Syria, which is more environmentally friendly than mechanical picking. 4.2.1.2 Restrictions affecting Textiles

Since 1996, Syria has prohibited the import and de facto use of azo dyes that may split off into carcinogenic amines (Circular No. 2349/4/9 of March 27, 1996 issued by the Ministry of Economy and Foreign Trade). The Syrian legislation is based on the German legislation and therefore their lists of banned carcinogenic amines are the same. The ban is also applicable to pigments based on the banned amines. A list of the 20 amines and of prohibited dyes and pigments is provided in Annex B. The circular made the import of all dyes subject to the prior approval of the Syrian Arab Standardization and Metrology Organization, which determines which azo dyes include and exclude the banned amines.

There is indication that the public sector observes the above prohibition and looks for environmentally friendly substitutes for the restricted azo dyes since price does not represent a major concern for them. The private sector, however, tends to look for cheaper substitutes.

4.2.2 Production Process Requirements and Emission Standards

14 The Cotton Bureau, Ministry of Agriculture.15 Althawra, No. 10644, 31/7/1998.

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The use of antiquated machinery in both the public and private sectors is an important source of pollution arising from textile industries. Very few mills operate new machines, although some of the new machines being used feature water and chemical recycling systems.

The most dangerous pollution risks from textile industries in Syria are cause by effluent from textile bleaching, dyeing and printing operations. It is observed that the only measure taken by textile plants before discharging effluents in sewers or streams is to leave them to settle for a little while after adding aluminum sulfate. The discharging waters still contain a great deal of polluting chemicals and colors. Some mills operate chemical treatment plants, but, this treatment is usually inefficient due to the lack of appropriate knowledge about the required monitoring equipment.

Smoke from plant boilers is another concern in the Syrian textile industry. In general, textile plant stacks are never equipped with filters. Some textile companies are raising the height of their stacks as a temporary and partial measure. However, the problem is not solved because the solid particles in the smoke ultimately settle and pollute neighboring areas.

Recent legislation issued on June 1, 1998 (Decision no. 1701/s/4/3) requires industrialists to put in place a filtration system (scrubbers) in their plants to control the emissions of carbon and sulfur gases. The second part of the Decision addresses the operation of wastewater treatment plants and the recycling of water after treatment.

Syrian standards for industrial liquid effluents discharged into the public sewage network are already drafted. They will come in force with the official adoption of the Environmental Law. A standard for concentrations of industrial effluent in rivers and streams is under preparation. Water is cheap in Syria and hence large amounts of water are wasted resulting in increased effluent volumes.

Syrian standards for industrial gas emissions into the atmosphere have been also drafted and will be implemented with the coming into force of the Environment Law.16

4.2.2.1 Packaging Requirements

Paperboard, plastic materials and the combination of these are used for packaging cotton and cotton products. Thus far, Syrian manufacturers have not been faced with specific packaging requirements from domestic or foreign customers. The only requirement is by certain German importers who asked for a reduction in the content of plastic materials used as ligament in the outer packaging of products.

16 An industrial area is especially being prepared for small artisan textile plants, spread in old Damascus, at Zablatani quarter, Damascus. It will be connected to the sanitary drainage system of Damascus.

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The collection of packaging material for reuse or recycling is a common practice in Syria as it is a money-generating process. Although the motivation behind it is not environmentally based, it yields positive environmental results for the country.

4.3 Health and Safety Requirements

Health and safety conditions at work are established by the Labor Code (Legislative Decree no. 91 of 1959). Article 107 of the decree states that the employer should clarify to the employee the risks of the profession and the precautions to be taken. Article 108 states that each employer should provide all necessary measures to protect workers against any potential health risk and hazard from work itself or from the equipment used. Although some occupational health and safety standards exist, they are not applied (e.g., wearing protective clothing) due to a lack of concern and understanding of the risks by both workers and management.

One of the important negative effects of textile production on the environment is the generation of suspended cotton particles in spinning halls and their effect on workers health. Safety measures are not adequately applied, particularly since environmental pollution outside production halls is very limited. This is due to the fact that such particles remain in the air exhaust and/or recirculation systems that are generally included in suitable filtration systems.

5. THE IMPACT OF EU ENVIRONMENTAL LEGISLATION ON SYRIAN EXPORTS OF COTTON AND COTTON BASED PRODUCTS

5.1 Effect on Raw Cotton Exports

Several inputs are regulated in cotton cultivation and the manufacturing of cotton based products.

5.1.1 The Use of PCP

The only regulated pesticide of importance to Syrian exporters to the EU regulation on the use of pentacholorophenol (PCP). The EU restricts PCP’s presence in cotton products (raw cotton, yarn, fabric and garments) to 0.1% of the weight of the product. Since PCP is banned from imports and from use in Syria, there is no concern about PCP residues in Syrian goods exported to the EU.

5.1.2 Organic Cotton

EU legislation defines the conditions that need to be fulfilled for cotton to be considered “organically cultivated.” There are no restrictions on import of non-organic cotton in the EU, so it is up to Syria and other exporting countries to sell their raw cotton to the EU as an organic or non-organic good. The EU market accepts both.

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5.2 Effect on Cotton Yarn and Fabric Exports

5.2.1 The Use of Azo Dyes

There is no ban at the EU level relating to azo dyes, but products containing traces of carcinogenic azo dyes are banned from markets in Germany and Holland. Syria prohibits the importation of carcinogenic azo dyes and does not produce it locally. Since unregulated substitute dyes are less effective and cost more, Syria’s own regulations on the use of azo dyes has increased the cost of using dyes in the process of manufacturing fabrics between 30-40%.

As such, this restriction on dyes is currently enforced through Syrian, not European, regulation. It is thus estimated that the impact of proposed European Union regulations on azo dyes on the Syrian cotton industry is effectively nil, although it could yield a positive impact on Syrian exports since Syrian produces would have “adjusted” to such a regulatory change earlier than their competitors.

5.2.2 The Use of Flame Retardant

EU regulations set maximum limits on the process of traces of TEPA, TRIS, and PCB, three flame retardants in products sold in EU markets. Manufacturers in Syria whom we met did not seem concerned about regulations regarding these substances that are mostly used in manufacturing curtain fabrics. Their market is very small and, when necessary, alternatives such as inorganic salts and phosphates are available. Fabric manufacturers in Syria rarely use flame retardants except to fill specific orders.

5.2.3 Use of Softeners

EU regulations set maximum limit of 0.005% by weight on PCB, a softener used in textile finishing. This small amount effectively prohibits the presence of PCB. Substitutes such as silicone are available to Syrian manufacturers and do not add much cost to production.

5.2.4 Use of Formaldehyde

Formaldehyde has several functions and is used as an anti-creasing agent, an anti-shrinking agent, and to improve the color-fastness of the fabric. Formaldehyde is not heavily regulated at the EU level, but individual EU countries do regulate it. Germany for instance requires that any products containing more than 0.15% of formaldehyde by weight attach a label to that effect. There are many alternatives to formaldehyde including

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mechanical compression and chemical alternatives. Syrian manufacturers do not seem to find the regulation a burden.

5.3 Effect on Cotton Garments

5.3.1 Heavy Metals: Nickel and Cadmium

EU legislation prohibits the use of nickel (used sometimes in clothing accessories such as: buttons, zippers), and nickel compounds if more than 0,5 g/cm2/week of nickel is released from parts which are in direct contact with the skin. This restriction is not a burden on Syrian garment makers as substitutes such as titanium, which does not add much cost to production, are available for manufacturers.

Also the restriction concerning the ceiling on the presence of cadmium in paints and plastics used in clothing finishing does not seem to be a burden on Syrian manufacturers as alternatives are available.

5.3.2 Effect of Packaging Legislation

EU packaging legislation is far less precise than product standard legislation. The main objective of the EU legislation is to reduce the amount of packaging material used. Syrian manufacturers do not seem to be worried about EU packaging legislation since the legislation dose not include a prohibitions on specific materials. The burden of the EU legislation on packaging and packaging waste is on the importer and thus there is no need for Syrian manufacturers to make major changes to comply with EU legislation.

Nevertheless, since the legislation will lead to a reduction in packaging material used, the legislation may eventually reduce the cost for Syrian exports. Also to comply most effectively with the EU packaging regulations, good coordination and communication with the importer is needed. Since the directive requires importers to dispose of any packaging material put on the market, this extra cost placed on them may be partially shifted to the exporter.

5.3.3 Effect of Health and Safety Legislation

Health and safety legislation at the EU level only covers protective clothing. At the level of the EU member states, health and safety legislation in the UK and Ireland requires fire safety standards for upholstered furniture and children’s and women’s nightwear. The present export of the above mentioned garments from Syria to the EU is very small. However, Syrian exporters must keep the issue of health and safety in mind if exports of such products are to expand. This is particularly true given that the EU is preparing to introduce directives on safety requirements for all household textiles.

5.4 Effect of Obtaining Certification

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Syrian manufacturers are faced with having to decide on whether or not to obtain environmental certification, such as eco-labeling, ISO 14000, and organic product certification. While certification is not compulsory at present, more and more European importers are requiring exporters to meet international standards such as ISO 14000 as a condition of doing business. Syrian exporters have no trouble finding importers for their uncertified products at present. Nevertheless, obtaining certification increases the attractiveness of the product to consumers who are willing to pay a premium for them. The premium in specialty stores can be as high as 100%, while in conventional outlets it tends to range between 10-30%. Manufacturers are not likely to undertake certification unless they believe that the premium price they can charge for their products will offset the costs of becoming certified. Certification decisions are therefore analogous to a quality/price tradeoff analysis, whereby manufacturers must decide the level of product quality they wish to produce/export in return for a given price per level of quality.

5.5 ASSESSMENT

Accordingly, at present, environmental legislation in the EU is not hindering Syria’s exports of raw cotton and cotton textiles for the following reasons:

Substances affected by legislation on product standards are either already banned in Syria (PCP, certain azo dyes) or Syrian producers have been able to find substitutes for them (flame retardants, softeners, etc.).

With regard to legislation on packaging and packaging waste, the burden of the European Directive is on the importer not the exporter, although some of the cost of packaging waste management is likely to be shifted to the exporter.

The main result of the legislation might be to reduce the amount of packaging material used, which is to the exporter’s advantage.

Environmental instruments in the EU (eco-labels for products and standards for environmental management systems) are still voluntary practices. Although they are increasingly becoming market requirements, they are not hindering Syria’s export of cotton and cotton based products for the present time. Nevertheless, given increasing opinions in international trade and the fact that environmental instruments might become mandatory in the future, Syrian exporters have to take environmental instruments into consideration to maintain their market share.

5.6 The Adjustments needed

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From the above, it seems obvious that no adjustments are needed for the time being for Syrian manufacturers/exporters to meet with the environmental legislation in the EU. However, attempts to qualify for environmental certification, once it is believed that the premium price would justify it, would require considerable amount of adjustments particularly for emissions, waste water treatment, and energy consumption of textile manufacturing plants.

The environmental performance of the Syrian textile industry is poor. This is exemplified by:

an almost complete absence of waste management facilities; an uncontrolled and thus inefficient consumption of water and

energy; the use of antiquated machinery resulting in increased water

consumption, waste generation and health endangerment of workers; and

the lack of occupational health and safety standards.

In view of these conditions, plant adjustments are imperative in the long run to meet consumer demand and increasing competition in the EU markets.

Nevertheless, the acquisition of an eco-label or the certification of an environmental management system (EMS) may be an unachievable objective for most Syrian textile companies at the present time. However, companies and manufacturing entities are not the only ones deficient in their environmental performance. Advisory agencies and privately accessible certification institutes are not available in Syria. More importantly, there is still no environmental law in Syria and no environmental policy or strategy in effect (although work is underway to prepare both). What does exist are miscellaneous environmental laws, decrees and regulations scattered in an imprecise legal framework. The State Ministry of the Environment has been able to deal with certain environmental matters through existing legislation (as a legal framework) and through the different ministries (as implementing authorities). Nonetheless, this fragmented legislation remains ineffective for improving environmental performance, particularly since the Ministry is unable to effectively penalize activities harmful to the environment.

5.7 The Cost of Adjusting to Syrian and Proposed EU Environmental Regulation on the Use of Azo Dyes

It will not be possible to estimate the cost of plant or process adjustment needed in the Syrian textile industry in this paper. However, we have attempted to estimate numerically the impact of EU environmental legislation on the production and export of Syrian cotton products in the context of existing plants and machinery.We infer that it does not appear that existing EU regulations of cotton products have a significant impact on the costs of production in the Syrian

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cotton industry. The major exception is the restriction of some EU member states on importing cotton products that contain carcinogenic azo dyes. The entire EU may soon restrict the importation of such products. However, this regulation is not binding on Syrian garment producers because Syrian environmental regulations exist that ban the importation of azo dyes, which supersedes EU member states regulations. Thus, any initiative at the EU level to restrict the use of azo dyes would likely improve the competitiveness of Syrian cotton products and increase output and exports.

To estimate the benefit we first estimated numerically the impact of the Syrian ban on output and exports of cotton products and then estimated how a possible EU-wide ban on azo dyes could potentially benefit the Syrian cotton industry. Empirical estimates were obtained by referring to an economic model developed by Larson (1998) specifically for such an analysis. The full analysis and model are presented in Annex A. The results are reviewed below.

As previously noted, 95% to 99% of fabric produced in Syria is consumed locally. This fabric is then manufactured into garments, of which about 30% are exported.1 Since Syrian exports of cotton garments are substantially higher than exports of cotton fabric, we will focus our analysis on the impact of the azo dye ban on the Syrian garment industry.

Dyes are only applied to fabric or to yarn that is woven into fabric. Accordingly, the ban initially affected the local market for fabrics by compelling Syrian fabric manufacturers to use more expensive dyes as substitutes, which resulted in higher fabric production costs. Higher production costs in the fabric industry would have induced an increase in the market price of cotton fabrics. Since cotton fabric is the basic input in producing cotton garments, higher fabric prices would have resulted in higher production cost of cotton garments. This, in turn, may have led to reductions in output and exports of cotton garments. Accordingly, in order to estimate the impact of the azo dye ban on the output and export of Syrian cotton garments, we must:

1. Consider the impact of the ban on the price of cotton fabric;2. Estimate of the affect of higher fabric prices on the production

and export of Syrian cotton garments; and3. Assesses the potential impact of an EU-wide ban on azo dyes on

the production and export of Syrian cotton garments.

5.7.1 Impact of Higher Dye Costs on the Price of Syrian Cotton Fabric

The ban of azo dyes compelled Syrian fabric manufacturers to use more expensive dyes as substitutes, which resulted in higher fabric production costs. Based on discussions with Syrian manufacturers and simple

1 This figure is a good approximation, but it does need to be more accurate. Source: Statistical Abstract of Foreign Commerce, 1996.

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calculations, we estimate the increase in the total cost of producing fabric resulting from the ban to be 8.4%. If domestic fabric demand were fixed regardless of price, the entire cost increase could be passed on to the consumers of cotton fabric in the form of higher market prices. Allowing for returns to capital, the increase in the domestic market price of cotton fabric resulting from the ban is thus estimated to be 7.4%.

In reality, not all of the cost increase can be passed along to consumers. Fabric producers will have to bear some of the cost increase so higher prices of cotton fabric will be accompanied by a reduction in output.

We conducted a two-stage analysis to estimate this reduction in output. First, we measured the reduction in output holding constant the domestic market price of fabrics. A reasonable lower and upper bound of the impact of higher input prices on output was found to be 17% and 20% respectively. This overestimated the impact of the ban on the quantity of fabric supplied because market prices were held constant. The second stage of the analysis allowed market prices to adjust. Here we found that some of the impact on output was mitigated by an increase in market price of fabrics. The increase in the cost of the dying process led to an estimated 7 – 11.2% reduction in the output of fabrics. We then estimated the change in the market price of fabrics due to a change in the cost of dyes. Here we found that fabric prices increased between 3.9% and 5.6%.

5.7.2 Impact of Higher Fabric Prices on Output and Export of Garments

Cotton garments vary widely in the amount of value they add to fabric. Manufacturing T-shirts does not add as much value as manufacturing trousers and dresses. The proportional cost of the cotton fabric and dyed cotton thread used in the production process can therefore vary widely depending on the type of garment.2 Consequently, we believe 40-70% of total revenue is a reasonable range to estimate cost of cotton fabric and thread used to manufacture garments. This range can encompass most types of garments produced for export markets. We narrow this range by using the average cost of fabric used to manufacture garments. This allows us to use an average cost of cotton fabric with respect to total revenue to be around 60%. We must, however, keep in mind that the ban will have a smaller impact than our final estimate would suggest on high value-added garments. The ban will also have a larger than estimated impact on low value-added products. We should also keep in mind that the higher fabric prices caused by the ban should induce manufacturers to shift production to garments that have a higher value-added than the ones they were manufacturing before the ban. This shift would allow manufacturers to dilute the effect of the higher fabric prices by making those costs a smaller portion of total revenue.

2 We assume that thread is a minor input in the production of garments compared to fabric, and therefore we take the price increase of fabrics to be dominant.

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We estimated the effect of higher fabric prices on the output and export of garments using a similar analytical framework to the one we used to study the fabric industry. Holding constant the market price of garments, we estimated that a 3.9% to 5.6% increase in the price of fabrics would lead to a 4.9% to 7.3% decline in production of garments. Assuming that local demand for garments is satisfied before any product is exported, the export market would carry the full weight of the reduction in output. If 30% of garment production was exported before the ban, a 4.9% to 7.3% decline in output would lead to a 16% to 24% decline in exports.

Thus far in the analysis, the price of garments has been held constant. In reality, this is unlikely. In the domestic market, a larger portion of the cost of the ban can be passed on to consumers in the form of higher prices. The higher prices will help mitigate the impact of the ban on the output of garments. After domestic demand is satisfied, the remaining output can be exported. Furthermore, by including market price adjustments and minimal efficiency improvements, our estimates of the impact of higher fabric prices falls significantly whereby a 3.9 – 5.6% increase in the cost of fabric would lead to only a 5.1% to 7.3% decrease in quantity of cotton garment exports. This can also be examined by considering that a 1% increase in the price of cotton fabric would result in a 1.3% decrease in the quantity cotton garments exported.

5.7.3 Considering the Azo-Free Sub-sector of the Export Market for Garments

The ban on carcinogenic azo dyes led Syrian manufacturers to produce azo-safe garments. There are likely to be markets for azo-safe garments in which individuals or importers are willing to pay a premium for the product (e.g., Germany and Holland who already have azo dye regulations). This higher market price could help to defray the increased cost of fabric caused by the ban on azo dyes. However, there is also likely to be some product differentiation in international markets based on country of origin, perceived quality, and imperfect information among other factors. Furthermore, in international markets that have not regulated the use of azo dyes, the higher-priced Syrian products would have to compete against less expensive products which do contain azo dyes. Syrian products in those markets would be at a competitive disadvantage. The negative impact could be reduced, however, if steps are taken to inform differentiating consumers about the lack of carcinogenic azo dye content. For instance, products not containing azo dyes may obtain “azo-free” certification making them more attractive to importers and buyers interested in paying a higher price for the non-carcinogenic azo-free garment. This is analogous to consumers and importers being willing to pay a higher price for a higher quality product. Syrian products could thus compete in the “azo-free” sub-sector of the European garment market allowing them to mitigate some of the adverse impacts of the regulation.

Nevertheless, the difference between Syrian garment manufacturers and those from other counties is that the higher costs to Syrian manufacturers

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are binding whereas manufacturers in other countries incur higher costs only when they find buyers who are willing to fully compensate them. In addition, Syrian manufacturers may not have a competitive advantage in the azo-free sectors. Consumers who buy azo-free garments may be also interested in styles of garments that Syrian manufacturers are not apt at producing. Furthermore, the higher price that can be charged will be less or equal to the higher costs of the fabric, otherwise Syrian garment manufacturers would have moved to using azo-free dyes before the ban. Therefore Syrian manufacturers will not likely be able to recoup the full cost of the ban. Output and exports will still decline if the ban on azo dyes remains only in selected markets.

In face of international competition, our analysis finds that a 1% increase in the average price of competitors’ products in the export market increases the output of Syrian garment manufacturers by around 1.25%. Syria’s competitors in the garments export market will include those producing for the azo-free sub-sector (who have to pay higher dying costs) as well as those who compete in the traditional garment markets. Since these competitors in the export markets are not bound to produce azo-free garments, they will only produce azo-fee orders when it covers their extra costs. Assuming that competitors in the azo-free sub-sector experience similar fabric cost increases to what Syrian manufacturers experienced and that the proportional cost of fabric in the average garment is 60%, then the price of their garments should be 2-3% higher than garments that use azo dyes.

Let us assume that after the ban, 50% of Syrian exports are directed to azo-free markets. Thus, the price of Syria’s post-ban set of competitors is on average 1.0-1.5% higher than the pre-ban set of competitors. If a 1% increase in the average price of competitors in the export market increases Syrian output by around 1.25%, a increase of 1.0-1.5% in their price would increase Syrian output by between 1.25 and 1.9%. This would partially mitigate the estimated 2.7% to 3.9% decrease in output caused by the ban.

Allowing for price adjustments and efficiency improvement, and assuming that 50% of Syrian exports are directed to azo-fee markets and that the average increase in the price of competitors’ goods is thus taken to be 1.0-1.5%, this increase in competitors’ price would likely increase Syrian output by 0.75-1.1%. This would mitigate the 2.7% to 3.9% decrease in the output of cotton garments caused by the ban. Accordingly, our final estimate of the decline in output of cotton garments due to higher fabric costs is between 1.6% and 3.1%.Thus, a 1% increase in the price of garments in the export market will result in a 3% or so increase in the quantity of Syrian cotton garments exported. A 1.0-1.5% increase in the price of garments in the export market should lead to a 3.0-4.5 % increase in quantity of Syrian garments exported. This increase would mitigate the previous estimate of the decline in exports of 5.1-7.3%. Our final estimate is that the decline in exports of cotton garments as a result of the ban would be between 0.6-4.3%

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In sum, we have thus far estimated the impact on output and exports of cotton garments as a result of higher fabric prices caused by the Syrian ban on azo dyes. The impact was initially estimated by holding the market price of garments constant and ignoring efficiency and quality improvements. The negative impact of higher fabric prices on output and exports was initially estimated to be between 4.9-7.3% and 16-24% respectively. After taking minor efficiency improvements into account, the negative impact of higher fabric prices on output and exports was estimated to be between 4.3-6.6% and 14-22% respectively (see Annex A). After including market price adjustments in the model, the impact of higher fabric prices on output and exports was estimated to be between 2.1-3.7% and 5.1-7.3% respectively. Finally, allowing for changes in export market demand for Syrian cotton garments, resulting from the azo-free quality of Syrian garments, the final negative impact of higher fabric prices on output and exports was estimated to be between 1.6% and 3.1% and 0.6-4.3% respectively.

5.7.4 The Impact of an EU-wide Ban on Azo Dyes on the Production and Export of Syrian Cotton Garments

In the previous section we assumed that because of the small size of the current azo-free market, only 50% of exported Syrian garments would go to consumers in that azo-free market. The remaining 50% would go to consumers in traditional markets where Syrian manufacturers would be at a price disadvantage – they produce higher quality azo-free garments, but are unable to recoup much of the cost. Thus only 50% of Syria’s competitors are in the azo-free market.

If the entire EU moves to ban azo dyes, the azo-free market would be greatly expanded. Syrian firms would have an expanded client base in the azo-free market. The mix of competitors would thus change. Instead of 50% of exports going to the azo-free market, the proportion will be closer to 80%. The price charged by the average competitor will therefore increase from 1-1.5% to 1.6-2.4%.

In the previous section, output was estimated to have declined between 1.6-3.1% as a result of the ban. Accordingly, we found that a 1% increase in the price of garments in the export market increased Syrian garment output by around 0.75%. If the average increase in the price of competitors is taken to be between 1.6-2.4%, instead of 1-1.5% in the case of an EU-wide ban on azo dyes, output would increase by between 1.2-1.8% instead of only 0.75-1.1%, which amounts to an increase of 0.5-0.7%. An EU-wide ban would thus mitigate the 1.6-3.1% reduction in output caused by the ban, reducing it to between 1.1% and 2.4%.

Exports were estimated to have declined between 0.6-4.3% as a result of the ban. We estimated that a 1% increase in the price of garments in the export market will result in an increase in the quantity of Syrian cotton garments exported of around 3%. If the average increase in the price of

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competitors is taken to be between 1.6% and 2.4%, instead of 1.0-1.5%, exports would increase by 4.8-7.2% instead of only 3.0-4.2%, a increase of between 1.8% and 3%. The EU-wide ban would thus mitigate the reduction in exports caused by the ban, reducing it from 0.6-4.3% to between 0.0-2.5%.

In sum, it would appear as though an EU-wide ban would benefit Syrian garment manufacturers by mitigating part of the adverse impact of the ban. Since Syrian cotton garment manufacturers were among the first to stop using azo dyes, they may find themselves at a competitive advantage if the EU were to ban azo dyes. This is because they would have been the first to improve efficiency induced by the ban and would thus, initially, have relatively lower costs of production than their competitors. Syrian manufacturers may therefore retain much of their market while less efficient manufacturers exit.

6. CONCLUSION AND RECOMMENDATIONS

Cotton and cotton based textiles are major Syrian exports to the EU and elsewhere in the world. Increased awareness of environmental requirements in external markets paves the ground for Syrian producers to make the necessary plant and process adjustments and enhances the ability of Syrian decision-makers to initiate the process of introducing effective environmental and economic policies. Protecting the domestic environment and enhancing exports are essential for Syria’s long term sustainable development, particularly in view of the cotton and cotton based textile industry. However, there are also other products and export goods that need to satisfy environmental requirements, and these requirements are expected to increase on a large scale in an increasingly globalized world.

A major concern of Syrian producers and exporters is thus the impact of expected domestic and international environmental policy on production cost and export competitiveness. The concern is mostly due to a lack of technological expertise, which could turn compliance into an expensive process of trial and error. However, it should be made clear to produces that although complying with new environmental standards may involve additional cost in short run, it may also offer them higher prices or the premium of expanded markets in the long run.

Accordingly, the following recommendations are offered to improve the competitiveness of Syrian cotton and cotton based textile industry:

1. Eliminate direct subsidies to cotton farmers in terms of higher than market value prices for raw cotton. The Government should instead expand R&D at agricultural research stations to increase the efficiency of cotton production. Lower raw cotton prices could provide cotton yarn producers with savings so as to improve the quality of cotton yarn used for garment making.

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2. Improve the quality of Syrian cotton yarn by possibly encouraging private sector entry into the sector. Higher quality “azo-free” cotton yarn would assist Syrian garment manufacturers to create higher value-added products that can better penetrate azo-free sub-sector markets.

3. Help the Syrian cotton-based garment industry produce higher value-added products allowing the impact of more stringent environmental regulations on output and exports to be smaller than in the case of lower value-added products. Increasing value added in the industry reduces the sensitivity of the sector to changes in environmental regulation affecting its inputs.

4. Encourage garment exports to Germany and Holland where Syrian azo-free garment exports may be able to compete more effectively against Asian competitors who may be still using azo dyes in 2005 when EU quotas on Asian imports are lifted.

5. Identify and facilitate private sector access to lower-cost substitutes for azo dyes that are environmental-friendly.

6. Provide incentives and support measures to assist producers make the necessary adjustments. To achieve this, public agencies and ministries should seek external financial and technical assistance to design new polices and to help producers make the necessary technical changes.

7. After achieving compliance with environmental regulations, Syrian producers and exporters should seek to qualify for textile eco-label use and to become ISO 14001 certified. This will help to increase their sales and pay off their environmental investments. Government can prepare itself by:

Establishing an information network on international standards for environmental management system and product eco-labels. Producers and exporters should be able to know what the standards are and how to comply with them.

Providing technical support and training on relevant standards.

Simplifying the process of adopting product eco-labels and environmental management systems by upgrading existing standardization bodies (or creating new ones) to conduct testing and certification.

Arranging long-term credit facilities to assist firms comply with environmental measures. The government can make use of the future Environmental Fund, which will be created when the new Environmental Law is adopted, as a major source of credit.

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8. Syria should also try to participate in the development of international environmental standards with other developing countries. Syrian involvement in the development and negotiation of such standards is necessary to avoid their being used as non-tariff barriers to trade by developed countries.

Finally, it is hoped that disseminating this study will create greater awareness of the issue of trade and environment in Syria and that it will serve as an example for other studies covering other national industrial sectors.

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ANNEX A

Estimating the Impact of Stricter EU Environmental Regulations on the

Output and Export of Syrian Cotton Garments

1. Impact of Higher Dye Costs on the Price of Syrian Cotton Fabric

We begin our analysis by considering the effects of the azo dye ban on the domestic market price of cotton fabric. We are interested in estimating how a change in the price of an input (dyes) can effect the price of a product (cotton fabric). The ban on azo dyes compelled Syrian fabric manufacturers to use more expensive dyes as substitutes and resulted in higher fabric production costs.

Based on discussions with Syrian manufacturers, we estimate that the dying process currently costs on average 35% more than what the process cost before the ban. Furthermore, before the ban, costs incurred during the dying process represented around 24% of the total cost of production3. From this information we can calculate the increase in the total cost of producing fabric resulting from the ban. This would be 35% of 24%, or 8.4%.

Before the ban, dye costs represented around 24% of total production costs. Allowing for returns to capital and other incidental costs, total revenue should be higher than total cost of production. Thus, pre-ban dye costs would have been around 19-23% of total revenue. We take the pre-ban cost of dyes as a share of total revenue to have been 21%. If demand were perfectly inelastic and the higher costs are all passed along to the consumers of cotton fabric, then the estimated increase in the domestic market price of cotton fabric resulting from the ban would be 35% of 21%, or 7.4%.

3 Our interviews with fabric producers suggest that the dying process currently represents on average 30% of the total cost of producing dyed fabric. Furthermore, the dyes currently being used cost on average 35% more than the banned dyes. Let C1 represent the current cost of the dying process, C0 represents the pre-ban cost of the dying process, T1 is the current total cost of producing fabric, and T0 is the pre-ban total cost of producing fabric. Then, the two pieces of information above yield the following two relationships:(1) P1 = (1.35) * P0(2) P1 = (0.30) * T1Using the total pre-ban production cost as the frame of reference, we set T0 = 1. Finally, we assume that there is no change in other production costs between the two periods:(3) T1 - P1 = T0 - P0 T1 -1 = P1 - P0We have three equations with three unknowns. Making the appropriate substitutions and calculations and using T0 as a reference, we find: P0 = 0.24 Pre-ban dying costs represented 24% of total production costs.

T1 = 1.084 Total production cost increased by 8.4%.64

In reality, the demand for cotton fabric will not be perfectly inelastic,4 so not all of the cost increase can be passed along to consumers. Fabric producers will have to bear some of the cost increase and higher prices of cotton fabric will be accompanied by a reduction in output.

1.1 Impact of the Ban Holding Constant the Domestic Market Price for Fabrics

We begin our numerical estimation of the impact of the azo dye ban by restricting our attention to the change in output of cotton fabric holding constant the domestic market price of fabric.5

What we are interested in estimating is the impact of a change in the price of an input on the quantity of output. Temporarily holding the market price of fabrics constant, this can be estimated using the following equation:

(1) yw =-w X / p Y * xp

Where: (y) is output; (p) is output price; (x) refers to the regulated input; (w) is input price; (AB) is the elasticity of A with respect to B (that is to say, the percentage change in A brought about by a percentage change in the value of B). So, yw is the elasticity of output supply (y) with respect to input price (w). It represents the percentage change in the level of output (cotton fabric) resulting from a corresponding change in the price of an input (dyes). Equation (1) indicates that yw is equal to xp (the change in the quantity demanded of input (x) due to a change in the output price) adjusted by the ratio of input costs (w * x) to total revenue (y * p).

This equation can be further broken down into:

(2) yw = - w X / p Y * cxy * yp

Where cxy represents the cost-minimizing elasticity of input demand (x)

with respect to output (y), and yp represents the own-price elasticity of supply. All three figures on the right hand side of equation (2) can obtained more easily than yw. Estimates of the own-price elasticity of supply for fabrics (yp) can be obtained from observing how output changes in response to demand-induced price fluctuations. While estimates of yp

for the Syrian fabric market are not currently available, we know that in neighboring Turkey it was estimated to be around 2.1 during the 1970’s.6

This means that when the market price of fabric increased by 1%, fabric manufacturers increased output by around 2%. For lack of a better

4 Let us begin our analysis by assuming that fabric producers face demand which is perfectly inelastic5 It would be difficult to directly estimate the impact of higher input costs on output. The production process is complex and such an estimate would be little more than a guess. It would therefore be beneficial to decompose the relationship between input costs and output supplied into several more measurable components.6 Dervis, K., de Melo, J. and S. Robinson, General Equilibrium Models for Development Policy, Washington, DC: IBRD/The World Bank, 1982, pp. 263.

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estimate, we will use this figure as an estimate for the Syrian fabric industry.7

The cost-minimizing elasticity of input demand with respect to output (cxy)

will be very close to one, and possibly slightly more. If output increases by 1% then the quantity of dyes demanded by manufacturers will increase by roughly the same proportion. We estimate it to be 1.1. Previously we estimated the ratio of the pre-ban cost of dyes to total revenue (w X / p Y) to be around 21%. Temporarily ignoring market price effects and holding all else constant, we can use equation (2) to calculate the impact of an increase in the price (w) of dyes on the output of cotton fabric:

yw = -w X / p Y * cxy * yp

= -0.21 * 1.1 * 2.1 = -0.49

This means that a 1% increase in the price of dyes will lead to an approximate 0.5 % decrease in the output of fabric. With the banning of azo dyes in Syria, the cost of dyes increased by 35%, not 1%. This means that output is likely to have decreased by around 0.49 * 35% = 17%. The 17% decrease is not an accurate estimate of the true impact for two reasons. First, yw (=-0.49) is a point elasticity and is valid for small changes in (w). However, yw may change as the size of the change in (w) increases. In such cases, yw is referred to as an “arc elasticity.” The relevant arc elasticity depends on the relationship between output and input price. If the relationship is one of constant elasticity, then output does indeed decrease by 17% as a result of a 35% increase in dye prices. If the relationship is somewhat more linear, the elasticity will increase as the price of the input increases. For example, if the relationship between output and input price were perfectly linear, then a 35% increase in the price of the input would result in an arc elasticity of -0.64, leading to a decrease of 0.64 * 35% = 22% in output, not 17%. We will take the arc elasticity to be between-0.49 and -0.58. Thus, a reasonable lower and upper bound on the impact of higher input prices on output would be 17% and 20% respectively.

The second reason why our initial estimate of yw is not accurate is that by holding output price constant, what we are essentially measuring is the output quantities. This would overestimate the impact of the ban on output. However, it is useful as a first step in the analysis. We will incorporate output price effects in the next section.

1.2 The Impact of the Ban in the Face of Market Price Adjustments

The numerical analysis has thus far held the market price of cotton fabrics constant. By not taking market price adjustments into account we overestimated the impact of the azo dye ban on output. We now introduce market price adjustments into the model. The impact of the ban on output

7 Estimates of own-price elasticities of supply are important pieces of information and should be investigated in future research.

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would thus be given by (Q2 - Q1) where Q2, and Q1 refer to the supply quantities and Q2<Q1. The impact on price would be given by (P2 - P1), where P2<P1.

Let us first consider the impact on output. This can be done by adding a local market price adjustment term to equation (2) from Larson (1998):

(3) yw = -w X / p Y * cxy * yp * [ 1 / ( 1 - yp / Dp )]

(4) = pyw * [ 1 / ( 1 - yp / Dp )]

pyw is the elasticity of output with respect to input price, holding constant

the market price (p). Taking pyw to be the arc elasticity estimated above:

yw = -0.49 * [ 1 / ( 1 - yp / Dp )]

We have already taken yp to be equal to 2.1. Dp is the elasticity of demand in the market for fabrics. A precise estimate of this figure is not available, but we believe it to be between -1.5 and -2.5. The lower and upper bounds on yw are thus given by:

yw = -0.49 * [ 1 / ( 1 - 2.1 / (-1.5) )] = -0.49 * (1 / 2.4) = -0.20yw = -0.49 * [ 1 / ( 1 - 2.1 / (-2.5) )] = -0.49 * (1 / 1.8) = -0.26yw = -0.58 * [ 1 / ( 1 - 2.1 / (-2.5) )] = -0.58 * (1 / 1.8) = -0.32

If the arc elasticity (pyw) were constant at -0.49, yw will be between -0.20

and -0.26. A 35% increase in the cost of the dying process will lead to a 7.0-9.5% reduction in output supplied. If we take the arc elasticity of p

yw

to be between -0.49 and -0.58, then yw will be between -0.20 and -0.32. A 35% increase in the cost of the dying process will thus lead to a 7.0-11.2% reduction in output. This is far less than the estimated impact on output of 17-20% that we obtained while holding market prices constant. It illustrates the importance of taking domestic price adjustments into account. Without the adjustments, the impact of the ban on output would have been overstated.

1.3 The Impact of the Ban on the Domestic Market Price of Cotton Fabrics

In order to determine increase in the costs to the garment industry of the azo dye ban, we need to estimate the increase in the local market price of cotton fabrics. We therefore need to estimate the change in the market price of fabrics due to a change in the cost of dyes. If we take D = D (p) to be local market demand as a function of price, and if we assume that markets clear when D (p) = y (p, w, r), then the elasticity of output price with respect to input price can be given (according to Larson, 1998) by:

(5) pw = pyw / (Dp - yp)

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pw = -0.49 / (- 2.5 - 2.1) = 0.11 (lower bound of point and arc elasticity)

pw = -0.49 / (- 1.5 - 2.1) = 0.14 (upper bound of point elasticity)

pw = -0.58 / (- 1.5 - 2.1) = 0.16 (upper bound of arc elasticity)

A 1% increase in the price of the dying process increases the market price of fabrics by between 0.11% and 0.14%. If p

yw were constant, then a 35% increase in the cost of dyes would increase fabric prices by 3.9 to 4.9%. If p

yw falls between -0.49 and -0.58, then a 35% increase in the cost of the dying process would increase the price of fabrics by between 3.9 and 5.6%. This higher price helped mitigate the impact of the ban on output.

In sum, as a result of the ban on azo dyes, fabric prices increased between 3.9% and 5.6%. This is the estimate that we need to take forward to the next stage of the analysis that estimates the impact of the higher fabric prices, brought about by the ban, on the output and exports of cotton garments.

2. The Impact of Higher Fabric Prices on Output and Exports of Syrian Garments

Cotton garments vary widely in the amount of value they add to fabric. Manufacturing T-shirts does not add as much value as manufacturing trousers and dresses. The proportional cost of the cotton fabric and thread used in the production process can vary widely depending on the type of garment.8 Consequently, we believe 40-80 % is a reasonable range of the cost of cotton fabric and thread used to manufacture garments with respect to total revenue. This range can encompass most types of garments produced for the export markets. We can narrow this range by using instead the average cost of fabric used to manufacture garments. We take the average cost of cotton fabric with respect to total revenue to be 60%. We must, however, keep in mind that the ban will have a smaller impact, than our final estimate would suggest, on high value-added garments and a larger impact on low value-added products. We should also keep in mind that the higher fabric prices caused by the ban will induce manufacturers to shift production to garments that have more value added than those they were manufacturing before the ban. This shift would allow manufacturers to dilute the effect of the higher fabric prices by making those costs a smaller portion of total revenue.

Almost all the cotton fabric produced in Syria is consumed domestically. Each year only between 1-5% was exported. By comparison, around one third of cotton garments produced were exported. In order to estimate the effect of higher fabric prices on the output and export of garments, we use a similar analytical framework to the one used in the previous section adding variables that take into account export market demand.

8 We assume that thread is a minor input in the production of garments compared to fabric, and therefore we take the price increase of fabrics to be dominant.

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2.1 The Impact of Higher Fabric Prices, Holding Constant the Export Price of Garments

The first step in our analysis is to numerically estimate the impact of higher input (fabric) prices on the output of cotton garments holding constant the market price of garments, this would be reflected by (Q'- Q1), where Q' refers to the supplied quantity before the price increase. Temporarily ignoring market price effects, we can calculate the impact of an increase in the price of fabrics (w) on the output of garments (y) using equation (2):

yw = -w X / p Y * cxy * yp

The own-price elasticity of supply for fabrics (yp) was taken to be 2.1. From the same source (Dervis et al., 1982) we take the own-price elasticity of supply for garments (yp) to be 1.9. The cost-minimizing elasticity of input demand with respect to output (c

xy) will again be very close to one. We take it to be 1.1. Recalling that the average ratio of fabric costs to total revenue was taken to be 60%, yw can be estimated as follows:

yw = -w X / p Y * cxy * yp

= -0.60 * 1.1 * 1.9 = -1.25

A 1% increase in the cost of fabric will lead to a 1.25% estimated decrease in the output of garments. Assuming a constant elasticity of output with respect to input price, a 3.9-5.6% increase in the cost of fabric should lead to a 4.9% to 7.0% decrease in output. The relevant arc elasticity for yw

may be between -1.25 and -1.30. So a 3.9% to 5.6% increase in the price of fabrics would lead to a 4.9% to 7.3% decline in output.

Assuming that local demand for garments is satisfied before any product is exported then, given that market prices do not adjust, the export market carries the full weight of the reduction in output. If 30% of garment production was exported before the ban, a 4.9-7.3% decline in output would lead to a 16–24% decline in exports.

The estimates of the impact of higher fabric prices on output and exports overstate the true impact because price effects and potential efficiency improvements have not yet been taken into account. We will first consider the role of efficiency improvements.

2.2 Efficiency Improvements Due to Higher Fabric Costs

Higher fabric prices may have provided enough incentive for manufacturers to improve the efficiency of input use by taking steps to reduce the amount of fabric wasted during the production of garments. Such efficiency improving measures must be costly otherwise garment manufacturers would have improved efficiency before the ban. The ban increased the cost of wasting fabric by raising its price. If producers were able to improve the efficiency of input use, our estimates of the impact of the ban on the output of garments would be slightly overstated. Let us

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suppose that the ban did provide incentives to improve the efficiency of input use. Such improvements can be captured in our analysis through the addition of an efficiency parameter to equation (2):9

(6) yw = -w X / p Y * cxy * yp * (1 - qw)

= qyw * (1 - qw)

Where (q) is an efficiency parameter that enters into the production function and indicates how well an input is being used (Larson, 1998). q

yw

is simply yw holding constant changes in efficiency. If qw = 0, higher input prices do not induce improvements in the efficiency of input use, and yw

would remain between -1.25 and -1.30. If qw > 0, then there are efficiency gains. Those gains would result in an outward shift of the supply curve. This shift would partially offset the initial inward shift of the supply curve caused by the increase in the price of fabric. If qw = 1, then the increase in the price of fabric would be completely offset by increases in efficiency. The supply curve would thus remain in its original position. Efficiency improvements of this magnitude are unlikely in the Syrian garment industry. However some degree of improved efficiency is likely. In this study, we take qw = 0.1. So that a 1% increase in the price of fabric would induce a 0.1% increase in the efficiency parameter (q).

yw = -w X / p Y * cxy * yp * (1 - qw)

= -1.25 * (1 - 0.1)= -1.1

Thus an increase in the price of fabric of 1% would lead to an estimated 1.1% decrease in the output of garments. Assuming a constant elasticity of output with respect to input price, a 3.9-5.6% increase in the cost of fabric should lead to a 4.3-6.2% decrease in the output of cotton garments. If we take the arc elasticity of p

yw to be between -1.25 and -1.30 then a 3.9-5.6% increase in the cost of fabrics would lead to a 4.3-6.6% reduction in output.

Assuming that 30% of garments were exported before the ban, and assuming that local market demand is satisfied before export can take place, then the ban would lead to a reduction in exports of between 14-22%. These estimates still overstate the true impact because market price adjustments have not yet been taken into account.

3. Output and Exports of Cotton Garments in the Presence of Market Price Adjustments10

9 An efficiency parameter was not added to the analysis of the ban’s impact on cotton fabrics for two reasons. First, fabric manufacturers indicated that the ban did not prompt them to improve efficiency. Second, the ban resulted in fabric manufacturers using substitutes for azo dyes. Azo dyes differ from substitutes in price as well as other characteristics, such as absorbability. It was difficult to determine whether the ban increased efficiency (due to the price increase) or reduced it (as a result of lower absorbency rates and other characteristics). In the case of cotton garments, an efficiency-inducing increase in the price of fabrics is the only change facing garment manufacturers.10 The sections from this point forward are works in progress.

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So far in the analysis the price of garments has been held constant. This would be the case if export demand were perfectly elastic. In fact, there is likely to be some product differentiation in the export market based on country of origin, perceived quality, and imperfect information among other factors. There is also an export market for garments that do not contain the carcinogenic azo dyes in which importers would be willing to pay a premium. We will consider the effect of the azo-free quality of Syrian garments in the next section. In this section we want to hold constant for changes in product quality resulting from the use of azo-free dyes and simply consider the effect of an increase in the price of Syrian garments on the quantity produced. That is to say, we want to consider how much of the cost increase can be passed along to consumers. Allowing the market price for cotton garments to adjust, demand can be modeled as: D = D (p, pe), where D represents aggregate demand for cotton garments, p is the price of Syrian garments, and pe is the price of garments from other countries. Higher domestic fabric prices will cause importers to substitute away from Syrian garments to less expensive alternatives. In our interviews, Syrian garment manufacturers complained that the export market was extremely competitive. A market price adjustment term can be incorporated into equation (6):

(7) yw = qyw * (1 - qw) * A

Where:

(8) A = 1 + yp / [Cp (C / Y) - yp + Ep (E / Y ) ]

Where: C refers to the quantity of cotton garments demanded in the domestic market, so that Cp is the elasticity of domestic demand with respect to output price and (C / Y) is the domestic share of total output. E refers to the quantity of cotton garments demanded in the export market, so that Ep is the elasticity of export demand with respect to price and (E / Y) is the export share of total output. Around 30% of cotton garments were exported annually before the ban, and 70% were consumed locally.

Export demand for garments is likely to be highly elastic and export prices for garments will remain close to constant. The elasticity of export demand for garments in neighboring Turkey was estimated to be (- 6) during the 1970’s.11 That is to say that a 1% increase in the price of garments reduced export demand by 6%. However, the elasticity may be even higher. If the elasticity of export demand for cotton garments is -, the problem simply reduces the case of fixed prices in the export market. We take Cp to be -2.1. Recalling that the own-price elasticity of supply for garments (yp) was taken to be 1.9, we can solve for A in equation (8):

A = 1 + yp / [Cp (C / Y) - yp + Ep (E / Y ) ]= 1 + 1.9 / [(- 2.1) * (0.7) - 1.9 + (- 6) * (0.3)] = 0.63

Substituting A into equation (7) we obtain:

11 Dervis, K., de Melo, J. and S. Robinson, 1982.71

yw = qyw * (1 - qw) * A

= -1.1 * 0.63 = -0.70

Thus a 1% increase in the price of cotton fabric will lead to an estimated 0.7% decrease in the quantity of cotton garments produced. A 3.9-5.6% increase in the cost of fabric should lead to a 2.7% to 3.9% decrease in the output of cotton garments. The impact on output is less than previously estimated because part of the increase in fabric cost is passed on to consumers in the domestic and export markets. The impact of higher fabric prices on the price of garments is given by:

(9) pw = [qyw * (1 - qw)] / [Cp (C / Y) - yp + Ep (E / Y ) ]

= -1.1 / [(- 2.1) * (0.7) - 1.9 + (-6) * (0.3)] = 0.21

Therefore, a 1% increase in the price of fabric would lead to a 0.21% increase in the price of garments. A 3.9-5.6% increase in the cost of fabric should lead to a 0.8% to 1.2 % increase in the price of cotton garments. The impact on exports can be determined from:

(10) Ew = (Y / E) * yw - (C / E) * Cp * pw

= (10/3) * (- 0.7) - (7/3) * (- 2.1) * (0.21) = -1.3

Thus, a 1% increase in the price of cotton fabric will result in a 1.3% decrease in the quantity exported of cotton garments. A 3.9-5.6% increase in the cost of fabric should lead to a 5.1-7.3% decrease in quantity of cotton garment exports. By including market price adjustments and minimal efficiency improvements our estimates of the impact of higher fabric prices on the output and export of cotton garments declined significantly.

3.1 Considering the Azo-Free Sub-sector of the Export Market for Garments

So far we have held constant the quality of the cotton garments produced. After the ban on azo dyes, Syrian garment manufacturers would be more likely to export to markets that have azo dye regulations in place, such as Germany or Holland. In international markets which have not regulated the use of azo dyes, the higher-priced Syrian products would have to compete against less expensive products which do contain azo dyes. Syrian products in those markets would be at a competitive disadvantage. Export markets, however, do differentiate somewhat between garments that contain azo dyes and those that do not. Products not containing azo dyes may obtain “azo-free” certification making them more attractive to importers and buyers. Syrian products can thus compete in the “azo-free” sub-sector of the European garment market, allowing them to mitigate some of the adverse impacts of the regulation.

Since the ban caused Syrian garment manufacturers to compete in a specific sub-sector of the garments industry (the azo-free sub-sector), the aggregate export demand faced by Syrian garment manufacturers will be

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different from the aggregate export demand they faced before the ban. To see this, consider the export demand for Syrian garments, which was taken to be D (p, pe). Let us hold the domestic market price for Syrian garments (p) constant at the new post-ban level. Manufacturers from other countries that wish to compete in the azo-free sub-sector must pay higher prices for substitute dyes. This means that after the ban, Syrian manufacturers face a slightly different set of international competitors whose average production cost is higher than that of pre-ban competitors. Higher production costs would translate into a higher market price (pe), which in turn would result in changes in the aggregate export demand faced by Syrian garment manufacturers.

The difference between Syrian garment manufacturers and those from other counties is that the higher costs to Syrian manufacturers are binding whereas manufacturers in other countries incur higher costs only when they find buyers who are willing to fully compensate them. In addition, Syrian manufacturers may not have a competitive advantage in the azo-free sectors. Consumers who buy azo-free garments may be also interested in styles of garments that Syrian manufacturers are not apt at producing. Therefore Syrian manufacturers will not likely be able to recoup the full cost of the ban. Output and exports will still decline.

The ban on azo dyes would have two effects on the export market for Syrian garments. High input (fabric) prices would result in a shift back in the supply curve. However, by producing azo-free garments, Syrian garment manufacturers would able to compete in the azo-free sub-sectors of the garment industry. Syrian manufacturers would thus face a different export demand curve than they did before the ban. Some consumers in the export markets may be willing to pay a higher price for the non-carcinogenic azo-free garments at every level of output. This is analogous to consumers and importers being willing to pay a higher price for a higher quality product. We assume that domestic demand remains unchanged. Thus, part of the higher costs of manufacturing azo-free garments can be passed along to consumers in the export markets not because of price adjustment effects, but because of the higher price commanded by producing higher “quality” garments. The higher price that can be charged will be less or equal to the higher costs of the fabric, otherwise Syrian garment manufacturers would have moved to using azo-free dyes before the ban. So, the azo dye ban would lead to a demand-induced increase in price that may partially offset the higher costs. In addition, because the higher price was a result of a shift in demand, it is accompanied by an increase in output. This increase will mitigate the reduction in output, and exports of Syrian garments do not declined by as much as they were estimated to have decline when international prices were held fixed.

Since only export demand is expected to change, aggregate demand (which includes export and domestic demand) will only partially adjust.12 Holding

12 Aggregate demand is given by: Y (p, pe, w/q, r) = E (p, pe) - C (p), where (p) is the price of cotton garments in Syria, and (pe) is the aggregate export market price.

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Syrian prices constant, the change in output resulting from a change in the export market price of cotton garments (ype) is given by:

(11) ype = E / Y * Epe

The price change in Epe refers to the average worldwide prices of Syria’s competitors in the cotton garment industry. We take Epe to be between 4 and 6. That is to say, that as the average price of export market competitors increases by 1%, export demand for Syrian cotton garments increases by between 4% and 6%. We take it to be 5%.

After the ban, the proportion of exports to total output went down. Output decreased by an estimated 2.7-3.9%, whereas exports decreased by 5.1-7.3 %. So while before the ban exports made up an estimated 30% of total output, after then ban exports made up around 25% of total output. Holding Syrian garment prices constant:

ype = E / Y * Dpe

= 0.25 * 5 = 1.25

A 1% increase in the average price of competitors in the export market, increases the output of Syrian garment manufacturers by around 1.25%. Syria’s competitors in the export market for garments will include those producing for the azo-free sub-sector who have to pay higher dying costs and those who compete in the traditional garment markets. Competitors in the export markets are not bound to produce azo-free garments. They will produce orders only when it covers their extra costs. Assuming that competitors in the azo-free sub-sector experience similar fabric cost increases to what Syrian manufacturers experienced and that the proportional cost of fabric in the average garment is 60%, then the price of their garments would be 2-3% higher than garments that use azo dyes.

Let us assume that after the ban, 50% of Syrian exports are directed to azo-free markets. Thus, the price of Syria’s post-ban set of competitors is on average 1.0-1.5% higher than the pre-ban set of competitors. If a 1% increase in the average price of competitors in the export market increases Syrian output by around 1.25%, a increase of 1.0-1.5% in their price would increase Syrian output by between 1.25% and 1.9%. This would partially mitigate the estimated 2.7% to 3.9% decrease in output caused by the ban.

So far in this section we have taken the price of Syrian cotton garments to be fixed. Syrian cotton garment producers would likely raise their prices a little in response to the higher price of the average post-ban competitor. Allowing for price adjustments, the change in output of Syrian garments can be given by:

(12) ype = E/Y * Epe + ppe * [Cp (C / Y) - yp + Ep (E / Y ) ]

We have estimates of all the variables except for ppe, the change in the price of Syrian garments that would result from a change in the export price of garments. Since Syrian garment manufacturers already raised

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prices and passed along part of the cost increase to consumers, they will not raise prices much higher. We take ppe to be around 0.1. Thus,

ype = E/Y * Epe + ppe * [Cp (C / Y) - yp + Ep (E / Y ) ]= 0.25 * 5 - 0.1 * 5 = 0.75

A 1% increase in the price of garments in the export market increases Syrian garment output by around 0.75%. The average increase in the price of competitors was taken to be between 1.0% and 1.5%. This increase would lead to an increase output of between 0.75% and 1.1%. This would mitigate the 2.7% to 3.9% decrease in the output of cotton garments cause by the ban. Our final estimate of the decline in output of cotton garments due to higher fabric costs is between 1.6% and 3.1%.

The change in exports is given by:

Epe = (Y / E) * ype - (C / E) * Cp * ppe

= 4 * 0.75 - 3 * (-2.1) * 0.1 = 3

Thus, a 1% increase in the price of garments in the export market will result in an increase in the quantity of Syrian cotton garments exported of around 3%. A 1.0-1.5% increase in the price of garments in the export market should lead to a 3.0-4.5% increase in quantity of Syrian garments exported. This increase would mitigate the previous estimate of the decline in exports of 5.1-7.3 %. Our final estimate is that the decline in exports of cotton garments as a result of the ban would be between 0.6-4.3%

In sum, in this section we estimated the impact on output and exports of cotton garments as a result of higher fabric prices caused by the Syrian ban on azo dyes. The impact was initially estimated by holding the market price of garments constant and ignoring efficiency and quality improvements. The impact of higher fabric prices on output and exports was initially estimated to be between 4.9-7.3% and 16-24% respectively. After taking minor efficiency improvements into account, the impact of higher fabric prices on output and exports was estimated to be between 4.3-6.6% and 14-22% respectively. After including market price adjustments in the model, the impact of higher fabric prices on output and exports was estimated to be between 2.1-3.7% and 5.1-7.3% respectively. Finally, allowing for changes in export market demand for Syrian cotton garments, resulting from the azo-free quality of Syrian garments, the final impact of higher fabric prices on output and exports was estimated to be between 1.6-3.1% and 0.6-4.3% respectively.

4. The Impact of an EU-wide Ban on Azo Dyes on the Production and Export of Syrian Cotton Garments

In the previous section we assumed that because of the small size of the current azo-free market, only 50% of exported Syrian garments would go to consumers in that azo-free market. The remaining 50% would go to

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consumers in traditional markets where Syrian manufacturers would be at a price disadvantage – they produce higher quality azo-free garments but are unable to recoup much of the cost. Thus only 50% of Syria’s competitors are in the azo-free market. The higher prices charged by competitors in the azo-free market was estimated to be between 2-3% higher than competitors in traditional markets. So the average post-ban competitor charges a price that is between 1.0-1.5% higher than the price charged by the pre-ban set of competitors.

If the entire EU moves to ban azo dyes, the azo-free market would be greatly expanded. Syrian firms would have an expanded client base in the azo-free market. The mix of competitors would thus change. Instead of 50% of exports going to the azo-free market, the proportion will be closer to 80%. The price charged by the average competitor will therefore increase from 1.0-1.5% to 1.6-2.4%. Recalling that aggregate demand was a function of the price of Syrian garments and the price of their competitors: D = D (p, pe), and increase in (pe) would result in a further shift out of aggregate demand.

In the previous section, output was estimated to have declined between 1.6-3.1% as a result of the ban. Applying equation (12), we found that a 1% increase in the price of garments in the export market increased Syrian garment output by around 0.75%. If the average increase in the price of competitors is taken to be between 1.6-2.4% instead of 0.01-1.5%, output would increase by between 1.2-1.8% instead of 0.75-1.1%, which amounts to an increase of 0.5-0.7%. The EU-wide ban would thus mitigate the 1.6-3.1% reduction in output caused by the ban, reducing it to between 1.1% and 2.4%.

Exports were estimated to have declined between 0.6-4.3% as a result of the ban. We estimated that a 1% increase in the price of garments in the export market will result in an increase in the quantity of Syrian cotton garments exported of around 3%. If the average increase in the price of competitors is taken to be between 1.6% and 2.4% instead of 1.0-1.5%, exports would increase by 4.8-7.2% instead of 3.0-4.2%, a increase of between 1.8% and 3%. The EU-wide ban would thus mitigate the reduction in exports caused by the ban, reducing it from 0.6-4.3% to between 0.0-2.5%.

In sum, it would appear as though an EU-wide ban would benefit Syrian garment manufacturers by mitigating part of the adverse impact of the ban. As a final point, it is worth noting that since Syrian cotton garment manufacturers were among the first to stop using azo dyes, they may find themselves at a competitive advantage if the EU were to ban azo dyes. This is because they would have been the first to improve efficiency induced by the ban and would thus, initially, have relatively lower costs of production than their competitors. Syrian manufacturers may therefore retain much of their market while less efficient manufacturers exit.

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ANNEX B

Azo Dye Tables

Azo dyes, through breakdown, may form one of the following amines that are banned in Germany, Holland and Syria.

Table 1: List of Carcinogenic Amines 1) Be (Cnr. 92-87-5) 2) 4-Aminodiphenyl (CAS nr. 92-67-1) 3) 4-Chloro-o-toluidine (CAS nr. 95-69-2) 4) 2-Naphthylamine (CAS nr. 91-59-8) 5) o-Aminoazotoluene (CAS nr. 97-56-3) 6) 2-Amino-4-nitrotoluene (CAS nr. 99-55-8) 7) p-Chloroaniline (CAS nr. 106-47-8) 8) 2,4-Diaminoanisole (CAS nr. 615-05-4) 9) 4,4’-Diaminodiphenylmethane (CAS nr. 101-77-9)10) 3,3’-Dichlorobenzidine (CAS nr. 91-94-1)11) 3,3’-Dimethoxybenzidine (CAS nr. 119-90-4)12) 3,3’-Dimethylbenzidine (CAS nr. 119-93-7)13) 3,3’-Dimethyl-4,4’diaminodiphenylmethane (CAS nr. 838-88-0)14) p-Cresidine (CAS nr. 120-71-8)15) 4,4’-Methylene-bis-(2-chloraniline) (CAS nr. 101-14-4)16) 4,4’-Oxydianiline (CAS nr. 101-80-4)17) 4,4’-Thiodianiline (CAS nr. 139-65-1)18) o-Toluidine (CAS nr. 95-53-4)19) 2,4-Toluenediamine (CAS nr. 95-80-7)바) 2,4,5-Trimethylaniline (CAS nr. 137-17-7)

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Below are several tables that provide lists of the dyes that may release one of the banned amines.

Table 2: List of prohibited acid dyesC.I.-Nr Acid Dye Trade Name22195 Acid Orange 45 (Reddish Orange) Orange R14710 Acid Red 4 (Bright Red) Eosine G/GC Pink B14905 Acid Red 5 (Red) Rhodine GR Red R/RR16140 C.I.Acid Red 24 (Yellowish Red) Ponceau G/RT27290 Acid Red 73 (Yellowish Red) Croceine MOO/3B/3BA22245 Acid Red 85 (Yellowish Red) Red G23635 Acid Red 114 (Bright) Red 2R/RS/BE27200 Acid Red 115 (Blueish) Red 2B26660 Acid Red 116 (Red) Cloth Red G2B24125 Acid Red 128 (Yellowish Red) Red 3B/Bordeaux R26665 Acid Red 148 (Blueish Red) Red BC27190 Acid Red 150 (Bright Red) Cloth Red 2R Scarlet20530 Acid Red 158 (Red) Red 3BL/ER18133 Acid Red 264 Brill Red 3BL26420 Acid Red 104 - Acid Red 119:1 - Acid Red 16718065 Acid Red 3522245 Acid Red 8518075 Acid Violet 12 (Bright Reddish Violet) Red 2B/BB/BBA/A2B42640 Acid Violet 49 (Bright Blueish Violet) Violet 3B/4B/6B30334 Acid Black 23230336 Acid Black 94 (Blueish Black) Black B/BV18129 Acid Red 265 Red BL - Acid Red 167 Red B - Acid Red 420 Scarlet Y-LFW - Acid Brown 415 Brown S-GL - Acid Black 29 Black B/BS - Acid Black 131 Black GBL/BGL - Acid Black 132 Black BRL/RBL - Acid Black 209 Black FC26501 Acid Orange 156 Orange 3G28632 Acid Orange 165 Orange 3RE16155 Acid Dye Ponceau 3R/3RN42650 Acid Violet 17 Violet 4B/4BS/R

Table 3: List of prohibited azoic dyesC.I.-Nr Azoic Dye Trade Name37085 Azoic Diazo Component 11 Fast Red TR Base or Salt37105 Azoic Diazo Component 12 Fast Scarlet G Base or Salt - Azoic Blue 03737255 Azoic Diazo Component 29 Fast Red GTR Base or Salt37235 Azoic Diazo Component 48 Fast Blue B Base or Salt37225 Azoic Diazo Component 112 Fast Blue Cornith B Base or

Salt37230 Azoic Diazo Component 113 Fast Dark Blue R Base or Salt 37270 Azoic Diazo Component 7 Fast Orange R Base or Salt37175 Azoic Diazo Component 20 Fast Blue RR Base or Salt

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37155 Azoic Diazo Component 24 Fast Blue RR Base or Salt37165 Azoic Diazo Component 41 Fast Violet B Base or Salt

Table 4: List of prohibited disperse dyesC.I-Nr Disperse Dye Trade Name64500 Disperse Blue 1 (Blue) Blue 2Gs; Blue Extra61505 Disperse Blue 3 Blue B/BN/RBl; Blue 3B62500 Disperse Blue 7 Blue 7G; Blue Green B/CB/PE63305 Disperse Blue 26 Navy B-G/2G/2GL; Blue GL11030 Disperse Orange 1 Orange 5R; Scarlet 2G11005 Disperse Orange 3 Orange G/GR; Orange 2R - Disperse Orange 76 Yellow Brown 2RL - Disperse Orange 6011110 Disperse Red 1 Scarlet B/2B/BG62015 Disperse 11 Red 3B; Pink 4B/5B60710 Disperse 15 Red 2B/3B; Pink B11210 Disperse 17 Red 2G/GG26130 Disperse 151 (Bright Red) Red 4G - Disperse Red 22126090 Disperse Yellow 7 (Reddish Yellow)26070 Disperse Yellow 23 (Reddish Yellow) - Disperse Yellow 56 - Disperse Yellow 218 - Disperse Orange 149

Table 5: List of prohibited basic dyesC.I.-Nr Basic Dye Trade Name - Basic Red 9 Fuchsine, Rosaniline; Magenta

N41000 Basic Yellow 2 Auramine O51004 Basic Blue 3 Blue BG/3G; Blue Green 5G42595 Basic Blue 7 Blue BO42595 Basic Blue 81 Blue FGA48070 Basic Red 12 Phloxine G; Pink AS/Red BG48013 Basic Violet 16 Violet 3R; Red BG/6B48060 Basic Yellow 21 Yellow 6G/7G - Basic Yellow 10321020 Basic Brown 4 (Solvent Brown 12) Bismark Brown R; Vesuvine B - Basic Red 42 Red BJ - Basic Red 111 Red K-B/K-2BN

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Table 6: List of prohibited direct dyesC.I-Nr Direct Dye Trade Name22580 Direct Black 29 (Blueish Grey) Black RO30235 Direct Black 38 (Black) Black E/2E/EC/EG/ER/RT30245 Direct Black 4 (Black) Black W/RW/R/RX/D - Direct Black 154 Deep Black XA/AXN30400 Direct Black 91 (Reddish Black) Copper Black R/RL/RLW24410 Direct Blue 1 (Bright Greenish Blue) Sky Blue FB/FF6B22590 Direct Blue 2 (Dull Blue) Black BT/BH/ABC24340 Direct Blue 10 (Blue) Blue G/GS/DG23850 Direct Blue 14 (Blue) Blue 3B/3BX/NB-2BG24400 Direct Blue 15 (Blue) Sky Blue; Pure Blue FB23710 Direct Blue 2124175 Direct Blue 151 (Reddish Blue) Copper Blue B/BB/A - Direct Blue 201 Blue BRL24145 Direct Blue 215 Cooper Blue GR24280 Direct Blue 22 (Blue) Blue RW/Blue 5G23790 Direct Blue 25 (Blue) Blue/Brill, New Blue 5B23820 Direct Blue 295 Blue 2B-NB23705 Direct Blue 3 (Dull Reddish Blue) Azurine 3R; Violet 2B24203 Direct Blue 30624145 Direct Blue 35 (Blue) Brill, Blue 3B/3BN22610 Direct Blue 6 (Blue) Blue 2B/BB/2BX24411 Direct Blue 76 Blue 2G/4G/6G24140 Direct Blue 8 (Blue) Azurine G; Blue X, Blue G24155 Direct Blue 9 (Blue) Blue BW/BN23860 Direct Blue 53 Pure Blue BF; Evans Blue30045 Direct Brown 1 (Brown) Brown 3G/3GR/CG30110 Direct Brown 1:2 (Brown) Brown CN/CGN/5C31740 Direct Brown 101 (Brown) Chrome Brown LG/GL36300 Direct Brown 74 - Direct Brown 22330120 Direct Brown 154 (Brown) Brown 3G/3GC/3GN22311 Direct Brown 2 (Reddish Brown) Brown M/MR/MH/MY30368 Direct Brown 222 Brown 3GA36030 Direct Brown 25 (Reddish Brown) Catechine; G/GS/GR31725 Direct Brown 27 (Dull Reddish Brown) Chrome Brown B/B3G35660 Direct Brown 31 (Reddish Brown) Brown B/BP/TB/BCW35520 Direct Brown 33 (Dull Reddish Brown) Catechine B/3B/BN31710 Direct Brown 51 (Brownish Olive) Bronze SH/G22345 Direct Brown 59 (Brown) Brown B/CB/BN/BM30140 Direct Brown 6 (Brown) Congo Brown G/GR30056 Direct Brown 79 (Brown) Brown/Orange 3G30145 Direct Brown 95 (Reddish Brown) Brown BR/BRL/BRLL30295 Direct Green 6 (Dull Green) Green B/BN30315 Direct Green 8 (Dull Green) Green G/GN/GC - Direct Green 8:1 Green G30387 Direct Green 85 Dark Green BA30280 Direct Green 1 (Dull Green) Green/Black Green B/EG22370 Direct Orange 1 (Yellowish Orange) Orange G/2G/GL/GR/R23370 Direct Orange 10 (Bright Orange) Orange/Coupling Orange

R29173 Direct Orange 108 Viscose Orange A23375 Direct Orange 6 (Yellowish Orange) Orange G/Gg/GR23380 Direct Orange 7 (Yellowish Orange) Orange G/TG

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22130 Direct Orange 8 (Reddish Orange) Orange R/RR/3R22310 Direct Red 1 (Bluish Red) Red F/FC/FR/FN/FE

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Table 7: List of prohibited direct dyes (continued)C.I-Nr Direct Dye Trade Name21450 Direct Red 10 (Bordeaux) Garnet H/B/BY22155 Direct Red 13 (Bordeaux) Bordeaux B/BR/BN/BW22150 Direct Red 17 (Bluish Red) Congo Rubine23500 Direct Red 2 Red 4B Purpurine23560 Direct Red 21 (Yellowish Red) Red B; Benzopurpurine B23565 Direct Red 22 (Bluish Red) Red 5B, Purpurine 5B29185 Direct Red 24 (Red) Scarlet 4BA/4BAS/4BSL29190 Direct Red 26 (Bluish Red) Scarlet 8B/8BS/8BA22120 Direct Red 28 Congo Red22240 Direct Red 37 (Red) Red B; Scarlet B/BL23630 Direct Red 39 Scarlet 3B22500 Direct Red 44 (Bright Red) Rubine B; Bordeaux

Extra23050 Direct Red 46 (Bright Bluish Red) Red 8B; Purpurine 8B29175 Direct Red 62 (Bright Yellowish Red) Orange R/RS/F3R23505 Direct Red 67 (Bright Yellowish Red) Purpurine 4B24100 Direct Red 7 (Bluish Red) Red 10B; Purpurine29200 Direct Red 72 (Bright Red) Scarlet 4BN/4SW22570 Direct Violet 1 (Violet) Violet N/MN/NN/R/3R22550 Direct Violet 12 (Violet) Violet R/O/OC/ON23520 Direct Violet 21 (Dull Reddish Violet) Corinth B22555 Direct Violet 424080 Direct Violet 1322480 Direct Violet 22 (Bluish Violet) Violet LN22250 Direct Yellow 1 (Dull Yellow) Yellow G; Chrysamine G22010 Direct Yellow 24 Golden Yellow N23660 Direct Yellow 48 (Reddish Yellow) Yellow TC22595 Direct Blue 64 (Dull Blue)24115 Direct Black 86 (Bluish Black)23820 Direct Dye30230 Direct Dye21060 Direct Dye29173 Direct Orange24411 Direct Blue 75

Table 8: List of other prohibited dyesC.I-Nr Other Dye Trade Name76035 Developer 14 (oxidation base 20)

MetatoluylenediamineDeveloper B/H/MTD

74160 Ingrain Blue 2/2 Phtalogen Brill22310 Mordant Red 57 - Mordant Yellow 16 - Solvent Red 1926105 Solvent Red 2426120 Solvent Red 26 - Solvent Red 164 - Solvent Red 215

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Table 9: List of suspected pigmentsC.I-Nr Pigment20045 Pigment Yellow 77 (Bright Yellow)20040 Pigment Yellow 16 (Greenish Yellow)21092 Pigment Yellow 114 (Reddish Yellow)21101 Pigment Yellow 126 Bright Greenish Yellow)21102 Pigment Yellow 127 (Bright Greenish Yellow)21103 Pigment Yellow 176 (Bright Yellow)21070 Pigment Orange 50 (Reddish Orange) 21080 Pigment Orange 39 (Blueish Red)21090 Pigment Yellow 12 (Yellow)21091 Pigment Yellow 63 (Greenish Yellow)21095 Pigment Yellow 14 (Pigment Yellow 55)21096 Pigment Yellow 55 (Reddish Yellow)21100 Pigment Yellow 13 (Yellow)21104 Pigment Yellow 170 (Reddish Yellow)21105 Pigment Yellow 17 (Bright Greenish Yellow)21106 Pigment Yellow 171 (Bright Yellow)21107 Pigment Yellow 124 (Yellow)21110 Pigment Orange 13 (Reddish Orange)21115 Pigment Orange 34 (Orange)21120 Pigment Red 38 (Red)21130 Pigment Orange (Yellowish Orange)21135 Pigment (Yellowish Orange)21160 Pigment Orange 16 (Bright-Orange-Red

Orange)21165 Pigment Orange 14 (Yellowish Orange)21180 Pigment Blue 25 (Reddish Navy)21185 Pigment Blue 26 (Reddish Navy)21200 Pigment Red 41 (Red)21205 Pigment Red 37 (Yellowish Red)21210 Pigment Red 42 (Bordeaux)21220 Pigment Yellow 15 (Greenish Yellow) 23295 Pigment Red 62 (Red)10407 Pigment Brown 22 (Reddish Brown)20050 Pigment Orange 31 (Orange)21094 Pigment Yellow 186 (Bright Greenish Yellow)21098 Pigment Yellow 174 (Bright Yellow)21107:1 Pigment Yellow 87 (Reddish Yellow)21111 Pigment Yellow 152 21162 Pigment Orange 44

Table 10: Safer alternatives for suspected pigmentsC.I-Nr Suspected pigment C.I.-Nr Alternative20170 Pigment Orange 50 12367 Pigment Orange 3821090 Pigment Yellow 12 60645 Pigment Yellow 14721100 Pigment Yellow 13 -21095 Pigment Yellow 14 -21107 Pigment Yellow 124 -21091 Pigment Yellow 63 50600 Pigment Yellow 14821101 Pigment Yellow 126 11660 Pigment Yellow 521102 Pigment Yellow 127 -21105 Pigment Yellow 17 -21080 Pigment Red 39 73310 Pigment Red 87

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21103 Pigment Yellow 176 48052 Pigment Yellow 10121106 Pigment Yellow 171 -21092 Pigment Yellow 114 12710 Pigment Yellow 1021104 Pigment Yellow 170 -Table 11: Safer alternatives for banned acid dyesC.I-Nr Banned Acid Dye C.I-Nr Alternatives22195 Acid Orange 45 14690 Acid Orange 1914710 Acid Red 4 17990 Acid Red 157 - Acid Red 150 - - Acid Red 114 -14905 Acid Red 5 14730 Acid Red 10220530 Acid Red 158 -16140 Acid Red 24 17900 Acid Red 19127290 Acid Red 73 -24125 Acid Red 128 -22245 Acid Red 85 -16150 Acid Red 26 24785 Acid Red27200 Acid Red 115 17045 Acid Red 3726665 Acid Violet 148 -42640 Acid Violet 49 42665 Acid Violet 7218075 Acid Violet 12 16640 Acid Violet 1330336 Acid Black 94 26370 Acid Black 24

Table 12: Safer alternatives for banned direct dyesC.I-Nr Banned Direct Dye C.I-Nr Alternative23660 Direct Yellow 48 - Direct Yellow 1522130 Direct Orange 8 29156 Direct Orange 10223900 Direct Red 2 28160 Direct Red 8129200 Direct Red 72 -22145 Direct Red 10 25275 Direct Red 12022155 Direct Red 13 -29185 Direct Red 24 29160 Direct Red 2322240 Direct Red 37 -23050 Direct Red 46 29100 Direct Red 3129175 Direct Red 62 29165 Direct Red 422570 Direct Violet 1 29120 Direct Violet 6622311 Direct Brown 2 29166 Direct Brown 11235660 Direct Brown 31 -30145 Direct Brown 95 -22580 Direct Black 29 27720 Direct Black 51

Table 13: Safer alternatives for banned disperse dyesC.I-Nr Banned Disperse Dye C.I-Nr Alternative26090 Disperse Yellow 7 10348 Disperse Yellow 2626070 Disperse Yellow 23 -64500 Disperse Blue 1 61510 Disperse Blue 3426130 Disperse Red 151 12225 Disperse Red 334

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INTERACTIONS BETWEEN MOROCCAN TEXTILE EXPORTS AND ENVIRONMENTAL REGULATIONS:A CASE STUDY ON WATER POLLUTION

POLICY BRIEF

Problematic

There is a need to increase the production and market share of Moroccan textile exports at the international level. There is also a need to protect the environment from increasing pressure on natural resources. The Moroccan government is thus currently preparing laws for the adoption of environmental standards by different industrial sectors. A strengthening of environmental standards is also occurring in foreign markets where Moroccan products are sent. It should thus be expected that industry would ask for financial compensation and/or a staggering over time for implementing standards that the government hopes to put in place. International trade negotiations will also address this issue. However, neither government nor industry will be able to adequately respond to this challenge unless the economic impacts of new environmental regulations are estimated in an empirically rigorous fashion. This is particularly important for ensuring the competitiveness of Moroccan textile exports.

Economic Baseline

The textile sector occupies a major place the Moroccan economy. Nearly 30% of industrial enterprises are in the sector, representing 15% of employment and 44% of exports. Within the context of economic globalization, these firms have to prepare themselves for increased competition in international markets, particularly in Europe, which receives 70% of Moroccan exports.

Environmental Baseline and Environmental Policy

Neither the Water Law of 1995, nor the free trade agreement with the European Union allow the standards that the sector will need to adopt in the future to be fixed. The law on water only includes general objectives. Specific texts for each industrial sector are still in the process of being developed by the Moroccan government and the agreement with the European Union does not include any statement with regard to the environment.

Furthermore, little information is available on the pollution caused by the textile industry. Nevertheless, given the production process and the outputs of each sub-sector, water use does not occur until the finishing stage and during the making of ready-to-wear garments. However, many production units integrate at least two production sub-sectors. Therefore, this study deals with the textile industry in its entirety. The findings should

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therefore be interpreted like averages that provide an idea based on a sensitivity analysis and specific comments on each sub-sector.

The average investment for treating a ton of DBO5 is in the order of 13,000 dirhams. This cost necessary for the treatment of DBO5 represents 0.08% to 0.17% of the value of annual textile exports.

Findings

The study is based on theoretical concepts and methods of estimation offered to show that once the data is available, estimates regarding the interaction between the environment and international competitiveness do no pose a serious problem.

An analysis of available literature on the textile sector allowed the development of some hypotheses and the estimation, thanks to a partial equilibrium model, of the impact of the adopting DBO5 standards on the Moroccan textile exports. These hypotheses show that the effect on the textile sector in the short term is very negligible. Indeed, the short-term effect on total exports would not surpass - 0.15%.

0.30%

Pessimistic 0.25%

Scenario

0.15%

Optimistic

0.10%

Scenario

0.05%

0.00%

Finishing Weaving Total

Percentage Reduction in Exports following the Adoption of DBOe Standards

(Short Term Effects)

The fabrication of ready-made garments represents over 80% of the textile sector’s exports. Nevertheless, the sub-sector would be the least affected by the adoption of strong environmental standards because of the limited use of water in the fabrication process. Therefore, the portion of operating costs to treat DBO5 relative to exports the estimated to be 0.11%.

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With regards to the spinning and finishing sector, it was not possible to calculate with accuracy the effect of more stringent environmental standards. Nevertheless, because these two sub-sectors only represent 5% of total exports, it is estimated that the actual portion of the treatment costs for DBO5 represent only 0.01% of the total.

Finally, the weaving sub-sector would be the most affected textile sub-sector because it suffers from the lack of technological progress. The weaving sub-sector would thus experience a reduction in exports of 0.27%. But, since this sub-sector only represent 10% of total exports, the effect on the entire textile sector would be negligible, with exports falling from 13,016 million dirhams to between 12,997 and 13 million dirhams per year.

In the medium to long term, the firms in the sector would react by adopting administrative practices and more productive production processes. This would allow them to achieve efficiency gains that would compensate for the negative effects in the short term.

Therefore, the effect of an increase in water treatment costs is significant in the short term (an increase of 1% of this cost could cause a decrease in exports that could surpass 3%), but would become relatively week in the long term once the effect of efficiency gain are taken into consideration (in this case, the largest reduction would be -0.13%). The fall in exports would mostly come from the ready-to-wear garment sub-sector.

Recommendations

1. There is very little information on the environmental characteristics of the sector (water treatment costs, the number of firms that conduct water treatment, the distribution of firms by region, the type of activity, the actual and the level of business totals, etc.). Therefore it is urgent to put into place a system of collecting environmental data on the textile sector.

2. Once the information is available, the methodological instruments needed to evaluate the impact of adopting environmental norms on the competitiveness of firms is easy to establish, and therefore studies of this kind could be performed on other sectors.

3. If the hypotheses used in the framework of the study are accurate, it would seem that the impact of adopting DBO5 standards on the competitiveness of Moroccan textile firms would be relatively modest in the short term and could even become zero on the medium and long terms. It is therefore possible to consider the revision of standards without impacting the competitiveness of the textile sector. This is more evident for companies that are currently practice water treatment. For the others, the adoption of environmental norms would be accompanied by incentives allowing

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the realization of these investments that would also increase their competitiveness.

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INTERACTIONS ENTRE EXPORTATIONS MAROCAINES DE PRODUITS TEXTILES ET REGULATIONS

ENVIRONNEMENTALES: ETUDE DU CAS DE LA POLLUTION DES EAUX

NOTE POLITIQUE

Problématique

Il est nécessaire d’augmenter la production et la portion de produits de textiles marocains qui se vend sur la marche internationale. Il est aussi nécessaire de protéger l’environnement d’une augmentation de pression sur les ressources naturelles. Le gouvernement marocain donc prépare actuellement des textes de loi pour l’adoption de normes environnementales par différents secteurs industriels. Il y a aussi un renforcement de normes environnementales qui s’établissent dans les marchés extérieurs où les produits marocains se dirigent. Il faut s’attendre à ce que les industriels demandent des compensations financières et/ou un étalement dans le temps des normes que le gouvernement souhaiterait mettre en place. Les négociations internationales de commerce porteront sur ces points. Néanmoins, le gouvernement ni l’industrie pourront bien répondre à ce défi sans que les impacts économiques de nouvelles normes environnementales soient estimées d’une manière rigoureuse et empirique. Celui ci sera particulièrement important pour assurer la compétitivité des exports de textiles marocains.

Point de référence économique

Le secteur des textiles occupe une place prépondérante dans l’économie marocaine. Près de 30% des entreprises industrielles agissent dans le secteur et représentent 15% de l’emploi et 44% des exportations. Dans un contexte de globalisation des économies, ces entreprises doivent se préparer à une concurrence accrue sur les marchés internationaux, en particulier en Europe qui accapare 70% des exportations marocaines.

Point de référence environnemental et la politique environnementale

Ni la loi de 1995 sur l’Eau, ni le texte sur l’accord de libre échange avec l’Union européenne ne permettent de fixer les normes que devra adopter le secteur dans l’avenir. La loi sur l’eau ne présente que des objectifs d’ordre général. Des textes spécifiques à chaque secteur industriels sont encore en cours d’élaboration par le gouvernement marocain et l’accord avec l’Union européenne ne contient aucune disposition relative à l’environnement.

De plus, peu d’informations sont disponibles sur la pollution causée par l’industrie textile. Néanmoins, étant donné le processus de production et

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les outputs de chaque filière, l’usage de l’eau n’intervient qu’aux niveaux du finissage et de la confection. Cependant, plusieurs unités de production intègrent au moins deux filières de production. Par conséquent, l’étude traite l’industrie textile dans son ensemble. Les résultats obtenus donc devront être interprétés comme des moyennes quitte à ce qu’ils soient nuancés par une analyse de sensitivité et des commentaires spécifiques à chaque filière.

L’investissement moyen pour traiter une tonne de DBO5 est de l’ordre de 13 000 dirhams. Ce coût nécessaire au traitement de la DBO5

représenterait 0,08% à 0,17% de la valeur des exportations annuelles de textile.

Résultats

Les concepts théoriques et les méthodes d’estimations présentés dans ce rapport montrent que lorsque les informations existent, l’estimation des interactions entre environnement et compétitivité internationale ne pose pas de problèmes particuliers.

Une analyse de la bibliographie disponible sur le secteur de textile a permis de faire quelques hypothèses et d’estimer, grâce à un modèle d’équilibre partiel, l’impact de l’adoption de normes relatives à la DBO5 sur les exportations textiles au Maroc. Ces hypothèses montrent que l’effet sur le secteur de textile dans le court terme serait très négligeable. En faite, dans le court terme, l’effet sur les exportations totales ne dépasserait pas les -0,15%.

0,30%

Scénario 0,25%

Pessimiste

0,15%

Scénario

0,10%

Optimiste

0,05%

0,00%

Confection Tissage Total

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Baisse en pourcentage des exportations suite à l’adoption des normes sur la DBO5(effets de court terme)

La filière de la confection représente plus de 80% des exportations du secteur de textile. Néanmoins, la filière confection serait la moins touchée du fait de son exposition déjà assez importante aux marchés internationaux qui exigent l’adoption rigoureuse de normes environnementales. Donc, en ce qui concerne la part des frais de fonctionnement du traitement de la DBO5 dans ses exportations, l’hypothèse retenue est de 0,11%.

En ce qui affecte les filières filature et finissage, il n’a pas été possible de bien calculer l’effet de standards environnementaux plus vigoureux. Néanmoins, puisque ces deux filatures ne représentent chacune que 5% du total des exportations, il est supposé que la part actuelle du coût du traitement de la DBO5 ne représente que 0,01% de ce total.

Finalement, la filière tissage serait la plus touchée du fait de son retard dans le domaine. Donc, la filière tissage éprouvera une diminution des exportations de l’ordre de 0,27%. Mais comme cette filière ne représente que 10% des exportations totales, l’effet sur l’ensemble du secteur de textile serait négligeable, les exportations chuteraient de 13.016 milliards de dirhams à un niveau se situant entre 12.997 et 13 milliards de dirhams par an.

Dans le moyen à long terme, les entreprises du secteur réagiraient par l’adoption de pratiques gestions et de processus de production plus performants. Celui ci leurs permettrait de réaliser des gains d’efficience qui leurs compenserait pour les effets négatifs du court terme.

Donc, l’effet d’une augmentation du coût du traitement de l’eau est significatif dans le court terme (une augmentation de 1% de ce coût peut entraîner une diminution des exportations pouvant dépasser les 3%), mais reste relativement faible dans le long terme lorsque l’effet du gain d’efficience est pris en considération (dans ce cas, la diminution la plus forte est de -0,13%). La chute des exportations provient principalement de la filière confection.

Recommandations

1. Il y a très peu d’informations sur les caractéristiques environnementales du secteur (coût du traitement de l’eau, nombre d’entreprises qui font du traitement, répartition de ces entreprises par région, type d’activité, effectif et niveau du chiffre d’affaires, etc.). Donc il est urgent de mettre en place un dispositif de collectes de données environnementales sur le secteur textile.

2. Lorsque ces informations sont disponibles, les outils méthodologiques nécessaires à l’évaluation de l’impact de l’adoption de normes environnementales sur la compétitivité des entreprises

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sont faciles à mettre en place, et donc études de ce genre pourraient être menées sur d’autres secteurs.

3. Si les hypothèses utilisées dans le cadre de l’étude sont correctes, il semblerait que l’impact de l’adoption de normes relatives à la DBO5

sur la compétitivité des entreprises textiles au Maroc soit relativement modeste dans le court terme et peut être même nul dans le moyen à long terme. Il est donc possible de considérer des révisions aux normes sans affecter la compétitivité du secteur des textiles. Celui-ci est le plus évident pour les sociétés qui pratiquent actuellement un traitement de l’eau. Pour les autres, l’adoption de normes environnementales serait accompagnée d’incitations permettant de réaliser ces investissements qui augmenteront leur compétitivité aussi.

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