The EU enlargement offers both challenges and opportunities for the Egyptian economy, writes Niveen Wahish Once again, the EU has set a target for increased integration and expansion and is making that target happen. After the successful introduction of a common currency, and the countdown has started for the integration of 10 new member states. The enlargement of the European Union is just a day away. On 1 May, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia will be part and parcel of the EU. The new EU of 25 countries will boast a combined population of 450 million and a GDP of around 10 trillion euros. This requires that adjustments be made to accommodate the new members, not only by the original 15 members, but by countries dealing extensively with the EU, such as Egypt. The inclusion of the new members means that they will meet the same obligations and enjoy the same privileges of the 15 EU countries in their agreements with the outside world. As such, the Association Agreement with Egypt is also applicable within these 10 new countries. Although the full agreement still awaits some procedures, the commercial aspect of the agreement went into force earlier this year. Accordingly, Egyptian exports are guaranteed tariff-free access for the markets of these 10 countries, whereas previously they were subject to customs duties. In the meantime, customs duties charged by Egypt on these countries' exports will be gradually phased out. Over a transitional period of 12 to 15 years, customs duties will be steadily lowered on raw materials, production inputs, and semi-manufactured and end products. Thus, the European market, which receives 40 per cent of Egypt's exports, is ostensibly getting bigger. However, this does not necessarily mean better, at least in the short term. For one thing, Egypt's trade with these 10 countries is currently minimal. Ministry of Foreign Trade (MFT) figures show that Egyptian exports in 2002 to the 10 countries in question did not exceed $30.2 million in 2002, while imports were $222.4 million. Of those transactions, most were with Poland, Slovenia and the Czech Republic. However, according to Peter Goepfrich, executive director of the German Arab Chamber of Industry and Commerce, as the living standards of these countries gradually approaches that of the rest of the EU members, their markets will be able to absorb more imports. However, the issue is not only about Egypt's trade links with these 10 countries -- the new members are also rivals for the lucrative EU market, particularly since some of them, like Poland, have production structures similar to that of Egypt. Nagui El-Fayoumi, executive director of the Egyptian Exporters Association, has studied how agricultural produce, which represents 12 per cent of Egypt's exports to the EU, will be affected. He said that the modest exports of Poland, Hungary and the Czech Republic in particular into the EU do not pose any immediate threat. However, as these exports grow they threaten to push Egyptian exports out of the market. Being part of the EU, the new members' products enjoy national treatment, granting them an advantage over Egyptian exporters. El-Fayoumi pointed out that products coming into the EU have to meet strict safety regulations. Moreover, the new members will be at an advantage because of the technical and financial support they will receive from the EU to improve their export capabilities. Also working in their favour is lower transportation costs and the tendency of European consumers to trust EU-made products. Aly Barada, head of the EU department in the Egyptian Commercial Service, also pointed out that the relocation of some industries from Western Europe to the new members will mean improved production, quality and competitiveness, making life harder for exporters trying to penetrate the EU. "Our imports from these countries could also increase," he added. Egypt's main agricultural exports to the EU include potatoes, oranges, green beans, onions, grapes and strawberries. Manufactured agricultural products include frozen vegetables, various fruits, juices and jams and dried onions. Moreover, El-Fayoumi said, the exports of these countries are not subject to any quota restrictions, unlike Egyptian exports. Anticipating this objection, the agricultural quotas Egypt is allowed within the Association Agreement have been expanded to account for the new members, according to an EU source. This is in keeping with the Association Agreement's provision for the regular revision of agricultural quotas to allow for expansion. The weather is also working in Egypt's favour, with many Egyptian export crops harvested during the winter. Goepfrich adds another point. The integration of these countries may mean that the EU will have to tackle the issue of its Common Agricultural Policy, since farm subsidies already amount to some 44 billion euros. Since the EU can not afford to have this kind of growing agricultural subsidy, they will be pressured to cut or abolish farm subsidies, providing a chance for Egyptian exporters to enter the market. Another area where Egypt may be competing with the new entrants to the EU is in attracting investment. Goepfrich said that there is an increasing tendency, especially in Germany, to look towards the East to relocate factories or invest. Central and Eastern Europe offers proximity, relatively low labour costs, few language barriers and competitive quality. However, not everyone thinks that the new countries will pull investments away from the Mediterranean region. "Those who invest in the new countries would not have relocated in Egypt anyway," said the EU source. Moreover, investment in Egypt may be a more desirable option for entrepreneurs intending to export to the Middle East or Africa. Barada also argued that the 10 new members could eventually become sources of investment themselves as they develop economically. Another issue to be considered is how the huge money transfer from the West to the East to rehabilitate the new members economically may affect the EU's financial assistance structure to the Mediterranean region. The total direct expenditures of the EU on enlargement for the period of 1990- 2006 is some 69.5 billion euros. But any effect on financial assistance remains to be seen particularly since the EU is eager that the expansion not adversely affect its relationship with its neighbours. It seeks to strengthen its ties both with its old neighbours on the Mediterranean as well as its new neighbours, mostly former Soviet republics. The EU seeks to do that through what has been called the European Neighbourhood Policy, which has yet to be thoroughly discussed and outlined. In the end, whether Egypt stands to benefit or not from the enlargement is only an academic issue. "There is nothing we can do about it," said Barada, "we are only a third party and we have to shape up to the challenge." He stressed that Egypt's exports need to meet the required standards and specifications, not just to enter the EU market, but to compete globally. "The fact that, within the framework of the Association Agreement, machinery and raw materials from the EU will be the first to enjoy tariff cuts should help the local industry become more competitive," said Barada. "We have to be ready for globalisation, not just the enlargement. It's a challenge that we have to face, otherwise we will be left behind."
