Iman Al-Ayouty* suggests some guidelines to help Egypt's textile and apparel industry go global Mobilising exports and investments in our employment-intensive industries has gained increasing importance in the wake of our renowned 25 January Revolution. To do so, Egypt would be well advised to seek deeper integration in the global export arena and to capitalise on the strong and long-standing relations with the EU. However, Egypt faces two critical challenges. First, the ability to adapt to the changing rules of the "export game" in the era of globalisation. Second, the need to maximise the potential benefits from the EU-Egypt Association Agreement. The changing rules of the "export game" entail nations moving from exporting whole manufactured goods to exporting through engagement in "global value chains". These chains involve all activities from raw material purchases, moving through all processes of transformation, ending with the distribution and after-sale service of the finished product. Exporting, thus, entails pitching in with only one (or a few) of these activities. Many textile and apparel exporting nations, one of which is Mexico, made their way to such chains through simple low value added activities (for example, assembly of pre-cut fabric). Gaining efficiency, they undertook more sophisticated ones like cutting, assembling fabric and adding trimmings (known as "cut, make and trim" arrangements). They ultimately moved to "full-package orders" where they produced according to the specifications spelled out by global buyers. These buyers were often either large department stores, such as Macy's, or brand name owners such as Calvin Klein. It was imperative for them that the firms engaged in their chains deliver high quality products under very short lead times. But the devil lies in the details of the specifications which ranged from "where to add trims and hangtags" up to "how to fold-up and package". Shipped overseas, the finished product was ready for display on the shop floor. Deeper integration of local firms in global value chains can best be achieved through a nation's membership in a free trading agreement. Providing preferential tariff treatment, such an agreement facilitates market access and buffers exporting firms against fluctuating external demand. It also relies on rules of origin to trace the product back to member nations, thereby ensuring its true eligibility for such treatment. The North America Free Trade Agreement is a good example of North-South integration along these lines; EU-Egypt Association Agreement is a parallel example. Two pressing questions need to be addressed in relation to the aforementioned challenges: can we anticipate some development prospects for local textile and apparel firms engaged in global value chains? And how can the terms of the EU-Egypt Association Agreement be exploited so as to maximise the benefit accruing to these firms? Although there is no set formula for what prospects to anticipate, international experience points to various developments to local firms, including increased association with global buyers, directly or indirectly (through brokers who match buyers with local firms), allows firms to deepen their "organisational knowledge", to enhance workforce skill acquisition, and to remain abreast of fashion trends and consumer tastes. This may, in turn, allow them to better position themselves within the chain. Buyers place international labour standards at the top of their criteria for selecting local firms, thereby prompting the latter to adopt such standards. In consequence, workers may experience a host of betterments ranging from a healthier and productivity-conducive environment to the provision of pension, benefits and basic rights (freedom of association) to the enrichment of social dialogue. In their eagerness to meet demanding buyer specifications and short lead times, firms harness existing production and worker capacity, as well as relations with their local input suppliers, thus coming to identify their own weaknesses and to address them via continuous improvement. They may further adopt production and administration-related technological innovations so as to raise their efficiency (broadly defined as their ability to produce the same output using fewer inputs); they may move from low- to high-value-added activities along the chain until more and more of its links fall under the firm's own job responsibility (a process known as "functional industrial upgrading"). Egyptian firms are generally more heavily integrated in the apparel chains than in those of textiles. Egypt's main European apparel markets are Germany, the United Kingdom, France and the Netherlands, with Italy mainly importing Egyptian yarns and fabrics. Exploring how the terms of the EU-Egypt Association Agreement may allow apparel firms to advance to higher value added activities, and to give textile firms a stronger foothold in global value chains, we note the following: First, given that the agreement has permitted Egypt's industrial exports tariff-free entry into European markets (with the respective markets retaining tariffs levied on parallel imports from the rest of the world), this has created what is known as a "preference margin". Such a margin is wider for the activity of "apparel manufacturing" compared to textile manufacturing and its related activities, which may well have fostered greater engagement of apparel firms in global chains compared to those of textiles. Also, given that Egyptian firms mostly undertake "full-package orders" for European buyers, they stand to realise knowledge and skill enhancement benefits, and may be able to better position themselves in the chains so as to take part in some of the buyer well-guarded activities like "design". Full package orders pull along many feeding activities (yarns and fabric, for example) creating important trickle-down effects. Second, with regard to rules of origin, the agreement spelled out particular processing/manufacturing operations that must be completed for origin to be conferred on a product. It considered "assembly" an insufficient processing operation for origin conference, thereby fostering engagement in various apparel and textile chains through activities that entail higher value added than mere assembly. Third, to satisfy the value added requirement that permits preferential treatment, the agreement allowed for bilateral and diagonal cumulation of origin. Bilaterally, Egypt is permitted to cumulate origin with EU member nations. Diagonally, with other nations that are themselves party to similar agreements with the EU, as well as having formed preferential trading agreements among themselves, and that they also apply the same rules of origin. Thus, Egypt may cumulate origin with Turkey (partner in a free trade agreement as of May 2007), and with Jordan, Tunisia and Morocco (partners in the Aghadir Agreement as of March 2004). This may foster access to additional links of the chains and, perhaps, undertaking more full-package orders. Finally, to prevent non-members from using Egypt as an export base to access the EU markets and enjoy preferential treatment, the agreement prohibited duty drawback on imports of non-originating components that go into producing export goods destined for EU markets. However, extending a leeway until 2010, it permitted duty drawback on imports of non- originating components. In hindsight, Egyptian firms should have been able to use non-originating imported intermediates in the hope that this may have allowed access to additional links of the various chains, paving the way for them to assume some of the benefits highlighted earlier. However, benefits need not accrue to Egypt alone. It is well established that the process of subcontracting out to developing country firms allows global buyers to focus on their own core competencies. It is to these competencies (for instance design and distribution) that they heavily channel their research and development spending. Furthermore, it may allow Europe to foster our post-revolution revival through the build-up of stronger capacities with higher value added, as opposed to availing direct aid. Finally, to prevent non-members from using Egypt as an export base to access the EU markets and enjoy preferential treatment, the agreement prohibited duty drawback on imports of non-originating components that go into producing export goods destined for EU markets. However, extending a leeway till 2010, it permitted duty drawback on imports of non- originating components. In hindsight, Egyptian firms should have been able to use non-originating imported intermediates in the hope that this may have allowed for access of additional links of the various chains, paving the way for them to assume some of the other highlighted benefits. * The writer is senior economist at the Egyptian Centre for Economic Studies.
