Relocation, local value chains, the Mediterranean momentum

The recent years have marked a major turning point in globalization. Re-industrialization, re-localization and local value chains now feature prominently in the discourse of economists and political decision-makers, expressing, if not a major trend, rather a desire to bring production closer to consumer basins. Foremost among these is the European market and its 450 million consumers.

The Covid-19 health crisis, followed by the war in Ukraine, have demonstrated the need to regain sovereignty in a number of areas - health, food, defence and energy. In many countries, this quest for sovereignty is reflected in more or less protectionist measures to support national companies weakened by the crises and deemed strategic for their sector or their position in supply chains, in order to prevent them from being taken over by foreign competitors.

At the same time, the environmental and climate imperatives, and the introduction of carbon taxes at the European Union's borders (CBAM), are also encouraging shorter value chains and more sustainable production methods.

New industrial technologies (IoT, robotics, AI) make it possible to gain competitiveness and make it less justifiable to relocate the production of many products and services to countries with very low labour costs. 

This new context is an opportunity for the countries of the southern shore of the Mediterranean. Most of the Med countries have free trade agreements with the European Union, which is not the case for their Asian competitors, and the North African countries are part of the new African Continental Free Trade Area (AfCFTA).

In addition, productivity and cost competitiveness in the southern Mediterranean compete equally and are often even more attractive than in China, Vietnam or Bangladesh[1]. The currency devaluations currently being experienced by some South Med countries are further strengthening this competitive edge. This is also the case if we compare the business climate: North Africa, the Middle East and South-East Asia all occupy comparable positions in the World Bank's Doing Business rankings.

Chinese manufacturers have clearly identified this opportunity. Already present in the region, they have been showing interests in intensifying their investments in North Africa for the last few years, according to the investment promotion agencies of the ANIMA network. Yet most of the European purchasing and investment decision-makers continue to look spontaneously to Asia for competitive advantage, largely ignoring southern Mediterranean supply and opportunities. This is also the case for southern Mediterranean companies, more likely to turn to Europe and Asia for their supplies before investigating what companies in their own country or in neighbouring countries have to offer.

The result is a trade balance within the Mediterranean basin that is very unfavourable to the south, combined with insufficient job creation to absorb the large number of well-trained graduates entering the labour market. The latter often choose to emigrate, contributing to a brain drain exacerbated by the monetary and economic crisis that some countries are experiencing.

The members of the ANIMA network share the conviction that clusters[2] are an excellent gateway to Euro-Mediterranean markets. There are over eighty of them in the southern Mediterranean, operating in most sectors - services, health, food, textiles, digital, green tech, automotive and aeronautics, mechanical and electronic industries, creative industries. These networks generally organise on a regional scale the technological upgrading of industry through cooperation and the development of innovation between companies, both large and small, and with research. They are also often linked to industrial zones or technology parks, which offer favorable infrastructure and regulatory environments for international exchanges.

The southern Mediterranean countries must seize this momentum with ambitious industrial strategies to move upmarket and support these clusters, as well as efforts to promote their products and services to European and South neighbouring markets. International donors must continue to support them in this direction. For their part, Europeans need to get out their calculators and make rational choices. If we consider the environmental and climate costs of purchasing and investment decisions, as well as the indirect benefits of supporting employment in neighbouring countries that consume mostly European products[3], the southern Mediterranean offer is a more than credible alternative.

The political dimension cannot be ignored, however. Friendshoring, which consists of working with countries with which we share common values and a common vision of international relations, now plays an important role in decisions relating to economic partnerships. Several recent events have given rise to distrust and mistrust, and the current dramatic situation in Gaza is further fueling a feeling of misunderstanding between the two shores of the Mediterranean.

Every political and economic decision-maker, every one of us on both sides of the Mediterranean, needs to think long-term, which means considering both past history and future aspirations. In this context of shortening economic circuits, which is both virtuous and desirable, Europe and the southern Mediterranean are linked not only by their geographical proximity, but even more so by their shared languages, populations, interbreeding and mutual interest - in short, by their shared cultural proximity.

[1] Global Value Chains in the Euro-Med area: Challenges and opportunities. EMNES paper, Feb. 2021. Rym Ayadi, Giorgia Giovanetti, Enrico Marvasi, Giulio Vannelli, Chahir Zaki.

[2] Together with the European Commission and three partners (Berytech, Economic Research Forum et Leaders International), the ANIMA Investment Network has launched the Euromed Clusters Forward initiative in 2022 to strengthen the development and cooperation between clusters in the Euromed space and the development of Euromed value chains.

[3] International Trade Center. Trademap.org