Are controversial Qualified Industrial Zones -- which involve cooperation with Israel in exchange for preferred export status to the US -- about to become a reality? Yasser Sobhi and Niveen Wahish report Foreign Trade and Industry Minister Rasheed Mohamed Rasheed is leading the first official Egyptian delegation to Washington in the aftermath of the US elections earlier this month. Accompanied by members of the Egypt-US Business Council, the visit's main focus will be establishing Qualified Industrial Zones (QIZ) in Egypt and trying to initiate Free Trade Area (FTA) negotiations with the US. Only a year ago, no one would have predicted that the Egyptian government would actively pursue a QIZ agreement. QIZs are industrial parks that can be set up in Egypt, Israel or Jordan, from which goods can be exported duty-free to the US. Because the goods produced in these zones would contain a minimum percentage of Israeli content, they would thus be eligible for the same treatment as Israeli products -- which, according to the US- Israeli Free Trade Agreement (FTA), would allow them duty-free entry to the US. The US Congress launched the QIZ initiative in 1996 to support the Middle East peace process. Egypt had rejected the idea for years, arguing that it was too politically sensitive. Today, it looks like Egypt has no choice but to go along with the plan. For one thing, its negotiations with the US to establish an Egyptian- American FTA (which would give Egyptian exports the same benefits) seem to have ground to a halt. The US has established FTAs with Israel and Morocco, and is in the final stage of negotiations with Bahrain. A QIZ agreement has already been implemented with Jordan. At times, the US has dangled the possibility of an FTA with Egypt, while at others it has demanded that Egypt carry out certain measures, such as customs and tax reform, before it could even consider qualifying. Although Egypt is finally actively addressing some of the reform measures stipulated by the US, talk of the FTA has almost entirely been replaced with talk of the QIZ. For one thing, FTA negotiations could take time. Egypt's FTA agreement with the EU, in the framework of the Egypt-EU Association agreement, took eight years. And time is not something Egypt can currently afford. The Agreement on Textiles and Clothing (ATC) -- part of the General Agreement on Tariffs and Trade (GATT) -- comes into force in less than two months, on 1 January 2005. That agreement was designed to phase out the protectionism enjoyed by the textiles and clothing industry. By 1 January 2005, all quotas and quantitative restrictions on imports from developing countries should be lifted. Although, in theory, this should be a boon for textile exporters like Egypt, which sends out 42 per cent of its textile and clothing exports to the US market, it may actually be a disaster in disguise. A study by Samiha Fawzi, senior assistant to the foreign trade and industry minister (prepared when she was deputy director and chief economist for the Egyptian Centre for Economic Studies (ECES)), paints a gloomy future for Egyptian textiles exports to the US market. While Jordanian ready-made garment exports to the US went up 175 per cent from May 2001 to May 2002, Egyptian exports fell by 15 per cent during the same period. Foreign investments, including Egyptian, have also shifted to Jordan to benefit from the QIZ agreement in place there. Lifting quotas would mean that Egypt would lose its niche in the US market. It would also mean that unlimited exports from cheaper destinations such as China or India could enter the US market, providing competition that Egyptian producers would probably not stand a chance against. A World Trade Organisation study on the global textile and clothing industry in the post-ATC era shows that China and India would gobble 65 per cent of clothing exports to the US, up from their current 20 per cent share. All other exporters would lose market share, with the largest losses incurred by African countries and Mexico, whose market shares would decline by close to 70 per cent. But even before the agreement comes into force, said garment manufacturer and major Egyptian exporter to the US Mohamed Qassem, Egyptian textiles and clothing exports to the US have been facing tough competition from both the Jordanian QIZ, as well as the preferential treatment granted by the US to African countries. That is the key to the change in attitude vis-�- vis the QIZ. The study penned by Fawzi asked, "Would we allow this industry to disappear, and therefore waste investments of around $13 billion and expose around 3,000 firms and more than a million workers?" Rasheed 's high-profile visit to Washington this week is the result of Egyptian policy makers, pushed by Egyptian private sector producers, attempting to save the day. Egyptian businessmen are looking to emulate the way Jordan managed to boost its export to the US after adopting the QIZ scheme in 1998. The size of Jordanian QIZ business grew from zero to close to $600 million. The US is now Jordan's main trade partner, importing $673 million worth of goods, or 28 per cent of Jordan's total exports. QIZ exports accounted for $587 of US-Jordanian trade. Taher Helmy, president of the American Chamber of Commerce in Cairo (Amcham), predicted that increased exports to the world's largest market would mean more job opportunities, economic growth and improved living standards. William Thomas, chairman of the US Congress's ways and means committee, told members of Amcham in Cairo last week that Egypt was to blame for the delay in concluding the agreement. "It's one of the sad stories about an available opportunity and potential not realised. What was lacking is the willingness from the Egyptian government to take risk," Williams said. "The QIZ opportunity was there, but it was a failure on the part of the Egyptians to make the choice. Is it us who should ask Egypt when it wants the QIZ? We're ready when Egypt is." The QIZ negotiations between Israel and Egypt have actually been going on informally, and now formally, for at least a year. Now that an agreement has been concluded, only US approval remains. According to an Egyptian source involved in the negotiations, "it is the US administration that has lately delayed reaching an agreement. They thought that bringing up the subject would affect Republicans in the elections, as it could mean lost jobs for Americans." The source, who asked for anonymity, added that the US is also blocking a potential FTA, by adding new requirements to the "check list" whenever Egypt fulfils one of the prior requirements that would have made it eligible to begin the negotiation process. The crux of the current negotiations seems to be on how many zones there will be. While Egypt wants a lot, the US wants to start out with just one or two. It has been reported that the US fears that a large number of QIZs may harm the US economy. Gregg Sullivan, press spokesman at the US State Department's near eastern affairs bureau, denied that the US was stalling. "We are eager to conclude an agreement to advance this important economic initiative," he told Al-Ahram Weekly. Discussions between the US and Egypt are very much ongoing and productive, he said. While he would not comment on the status of the discussion vis-�--vis the number of zones, he said that the US is interested in beginning the QIZ process in a manageable and sustainable fashion, and was eager to hear Egyptian views on an appropriate number. One of Rasheed 's first appointments in Washington was with US Trade Representative Robert Zoellick. As Sullivan explained, while the Office of the US Trade Representative was not formally a party to the agreement, it must agree to the number of QIZs Sullivan said the QIZ programme in Jordan includes 10 designated zones. When the arrangement began, following the signing of an Israeli- Jordanian peace agreement, only two QIZs were established. These later grew to 10. "So it has been our established practice to start in a sustainable way, and grow the arrangements as time progresses," he said. Other details have already been agreed upon. The Israeli component is expected to reach 11.6 per cent. While Jordan started out with this same ratio, said businessman Qassem, they are now down to eight per cent Israeli components, which is the minimum allowed. Rasheed will be the first Egyptian official to meet Zoellick in the aftermath of the row over Genetic Modified Organisms (GMOs) in foods last year. Egypt had rescinded its support for the US on this issue (thus weakening America's position against the European Union within the WTO), and Zoellick was very angry with the Egyptian government as a result, questioning its credibility as well as its capability to keep its promises. He also ruled out that Egypt would be eligible for FTA negotiations any time soon, even though it had previously been first on a list of countries in the region awaiting those negotiations. According to Qassem, other sectors would also benefit from the QIZ agreement. Anyone exporting to the US at a tariff of more than 10 per cent stands to gain. "This agreement will increase our competitiveness for the sheer fact that it exempts products manufactured in these zones from paying customs. Egypt and many other developing countries must compete with India and China in the labour-intensive clothing industry for exports to the US and Europe once the quotas come off in January 2005. Exporting via production in QIZs will give Egyptian exports an edge over Chinese and Indian products," he said. Sullivan stressed that QIZs alone are not a panacea, and would not "save" Egyptian industry. The duty-free exemption -- versus 20 or 30 per cent duties for Indian or Chinese products -- would allow it, however, to compete better and thus save some of its market share, he said. In any case, he suggested that Egypt should also focus on other industry-reform efforts to promote international competitiveness as a supplement to the QIZ process. The final format of Egypt's QIZs remains to be seen. Whether factories would have to relocate within specific areas is one major issue, and is one of the reasons, Qassem said, "why we want a large number of zones". An American economist agreed with many Egyptian businessmen about the QIZ being the best alternative to an FTA. University of Southern California economics professor Jeffrey Nugent said the QIZ would cost less than the FTA, and have "a direct positive impact on Egyptian exports". Nugent -- an Economic Research Forum board member -- said that within an FTA, there would be additional conditions and measures required by the US, within the realm of environmental and labour issues, among others. "An FTA will impose more regulations on the Egyptian economy, but what Egypt needs is more deregulation and an opening of the economy to help increase investments and exports."
