This week's QIZ deal between Egypt, Israel and the US moves Egyptian-Israeli economic relations into a new dimension, writes Niveen Wahish The inevitable has happened -- the agreement allowing Egypt to establish Qualified Industrial Zones (QIZ) was signed on Tuesday. While many of its opponents hoped this day would never come, others, particularly clothing and textiles exporters who work primarily with the US, said the deal was sealed in the nick of time. After all, they argue, the quota system on textiles and garments is being lifted worldwide in just a few weeks time. That means that starting 1 January 2005, Egypt's exporters will be up against tough competition from Indian and Chinese companies aiming to capture larger shares of the US market. That's where the QIZ agreement comes in. It allows Egypt to export products to the US duty free, as long as these products contain inputs from Israel. A QIZ extends the benefits of Israel's 19-year old Free Trade Area (FTA) agreement with the US to industrial parks inside Egypt and Jordan. It would give Egypt a competitive edge in the US market, which currently absorbs around eight per cent of its total exports and 40 per cent of its textiles and garments exports. The QIZ scheme is part of an initiative launched in 1996 by the US Congress to encourage regional cooperation. Not only will the agreement mean increased Israeli exports to Egypt, it may also encourage joint Egyptian- Israeli investment projects to be set up. In order for a QIZ commodity to gain duty-free entry, QIZ factories must add at least 35 per cent to the commodity's value. This 35 per cent minimum content figure can include value added in Israel, Egypt, or the United States. Moreover, as a statement by the office of the United States Trade Representative Robert Zoellick said, "QIZs must encompass portions of Egypt and Israel, though the areas do not have to be contiguous." The signing of the agreement took place at a high level, with US trade representative, coming to Cairo for the event, only his third visit to Egypt. Egyptian Foreign Trade and Industry Minister Rasheed Mohamed Rasheed and Israeli Vice Prime Minister Ehud Olmert also inked the deal. The signing of the agreement -- which flies in the face of all the recent, popular calls to boycott Israeli products -- is probably as historic as the signing of the Camp David Accords 25 years ago. It moves economic cooperation with Israel into a more public dimension. While cooperation with Israel has always taken place behind closed doors, this is the first economic agreement to be broadcast loud and clear by the government. Such cooperation is controversial due to its political sensitivity, and particularly because of the never-ending Israeli- Palestinian conflict. The recent Taba blasts made it clear that Egypt hosts a tremendous number of Israeli tourists, more than most Egyptians had ever imagined. According to Central Agency for Public Mobilisation and Statistics figures, Israel is among the top ten exporters of tourism to Egypt. On a different front, a deal to export $1.5 billion worth of natural gas to Israel over a 15-year period has been in the works for years, but has never been publicised. Agricultural cooperation with Israel was also common at one point. The terms of the QIZ agreement stipulate that a minimum of 11.7 per cent of Israeli content is required in the manufacturing process. That may include items that go directly in the process, as well as indirect components such as the design, marketing, or packaging material. The US has agreed on three QIZs in Egypt: one in Greater Cairo; another in Alexandria; and a third in the Suez Canal Zone. All the industrial areas within these three zones will be able to make use of the agreement. In the Suez Canal Zone, only the industrial area of Port Said has been approved. Egyptian negotiators had a rough time getting approval for that number of zones. Although their aim was to also include other important areas with major textiles and clothing industries, such as Al-Mehalla, Sixth of October City and Ismailia, well-informed sources described the agreement in its current form as "excellent". The number of zones, these sources said, could be increased in one-year's time. In the meantime, factories producing goods for export to the US market, but not included in these zones, have been promised increased support by the industrial modernisation programme and the export support fund. While Egypt appears to be getting a free ride, in that it does not need to reciprocate economically in order to benefit from the duty free entry to the US, the real price of the QIZ will be Egypt's greater normalisation of relations and the subsequent increase in Israeli exports, which are expected to rise to a size equivalent to 11.7 per cent of Egypt's exports to the US. Considering industry and foreign trade figures indicating that an estimated $4 billion in Egyptian exports will reach the US in the coming five years, annual Israeli exports to Egypt will certainly go way above their 2003 level of $26.5 million. The agreement's backers often use Jordan as an example of how much difference a QIZ can make. Jordan boosted its exports to the US from $2 million in 1999 to $567 million in 2003 as a direct result of its QIZ deal. Proponents also claim that the deal will result in increased Foreign Direct Investments to the tune of some $5 billion, and the addition of 250,000 jobs in the textiles and clothing industry. It had been estimated that some 150,000 people in those industries would lose their jobs because of the lifting of the quota system in 2005. While all of these numbers may, in the end, be estimates, the extent to which Egyptian manufacturers benefit from the agreement will depend on how they take advantage of it, since, as informed sources said, "the doors are wide open." That means that once the signing and the ceremonials are over, both the Egyptian and Israeli sides need to move on to the implementation phase. Once factories wishing to produce within the QIZ framework declare their intention to do so, a joint committee will then inspect them. That inspection will then take place every three months to make sure everything is in order. The joint committee will be made up of an Egyptian appointed by the Egyptian government and an Israeli appointed by the Israeli government, as well as a representative of the US, who may attend the meeting as an observer. The committee will be in charge of, among other things, supervising the implementation, verifying full compliance with requirements of the agreement and determining the list of companies. The joint committee will also provide both the US and Egyptian customs authorities, on a quarterly basis, with a list of the companies entitled to duty free treatment for the following quarter only. While the agreement was originally a US suggestion to promote regional cooperation, and fits with the 2003 proposal to set up a Middle East Free Trade Area (MEFTA) by 2013, it has faced tough opposition within the US market itself. In fact, according to informed sources, the US industrial community has received news of the signing very negatively. At the same time, however, those industries have been struggling for years. While the agreement may catalyse more pressure as a result of increased Egyptian exports, Chinese efforts in the field are much more worrisome. In any case, the sources said, this was the price the US seemed willing to pay to stir more regional cooperation. In Egypt, while the textiles industry will see immediate benefits, other industries that pay between 10 and 30 per cent customs are also set to gain. These include food products, furniture, leather, chemical industries, and the engineering and metallurgical sector. The QIZ has also been promoted as a step towards reaching an FTA. The US currently has FTAs with Israel, Jordan, and Morocco. While an FTA with Bahrain is pending Congressional approval, FTA negotiations with the United Arab Emirates and Oman are scheduled to begin early next year. With the QIZ in place, is Egypt's turn finally on the horizon as well?
