# **1** . **Introduction**

Tunisia has been one of the best performers in the Middle East and North Africa region since the mid-1990s, when it accelerated market-oriented reforms. Economic growth reached an average 5 percent in 1996-2007, despite many external shocks. As a result, the poverty incidence dropped to about 7 percent in 2007 (World Bank Global Poverty numbers 2008). Nevertheless, because of its strong trade ties with Europe, Tunisia’s real sector was affected by the global financial crisis through Europe’s 2009 recession. As a result of a sharp decline in exports (-12 percent in real terms), GDP growth was only half of what was predicted (3 percent against an expected 6 percent).

Tunisia’s global integration policies can be traced back to 1971, when the country decided to create an offshore sector in order to reduce the anti-export bias inherent in the heavy protection of the economy. The offshore sector provided generous fiscal and financial incentives to exporters and triggered a rapid rise in foreign direct investment (FDI) and the birth of a large labour-intensive textile industry integrated vertically with the EU’s production networks. This heterodox trade policy stance — similar to the ones also applied at different points in time by Japan, Korea, Malaysia, and Mauritius — led to the first wave of diversification away from hydrocarbons. However, overall productivity growth was heavily constrained by the high level of protection of the economy.

A decisive step toward liberalizing trade occurred in the middle of the 1990s. As part of the Tunisia-EU Association Agreement (AA), trade protection vis-à-vis the EU was scheduled for gradual and systematic dismantling, starting in 1996. As a result, tariffs on industrial goods imported from the EU (the source of 65 percent of Tunisia’s imports), went from about 100 percent in 1996 to 0 percent in January 2008. World Bank (2008) shows that Tunisia’s industrial sectors that are highly integrated to the global market have been able to attract investment, converge to EU’s labor productivity standards, and boost job creation. In sharp contrast, in the services sector where many entry and competition barriers remain, convergence to EU labor productivity standards is slow.

Tunisia is now preparing to embark on bolder services liberalization. The sector currently provides 59 percent of GDP and absorbs 55 percent of employment. So far, the country has no free trade agreement (FTA) that includes services. Its multilateral liberalization of services under WTO’s General Agreement on Trade in Services (GATS) has been very limited. Tunisia included only three sectors (tourism, telecommunications and financial services) in its GATS Uruguay Round commitments. While some of its sectors not included are quite open (e.g. maritime transport), entry into many other services sectors is restricted. Under the Uruguay Round, Tunisia bound without limitation many crossborder (mode 1) transactions (e.g. in the financial sector), but in reality, those GATS measures overlap with strict foreign exchange controls, making them partly ineffective. Apart from the financing of current operations, opportunities for cross-border (mode 1) trade are sharply restricted, and foreign competition is mostly possible through commercial presence (mode 3) or through the presence of natural persons (mode 4). But the measures affecting the presence of natural persons (mode 4) remain unbound, with 2