It was a cloudy overcast day with an uncharacteristic chill in the Egyptian airas a group of businessmen and industrialists from the Qalioubiya governorategathered in Shobra Al-Kheima municipal building. Around a long table in asparsely furnished room harshly lit with neon light, they sat down with

Qalioubiya governor Adly Husseinand Minister of Foreign Trade andIndustry Rachid Mohamed Rachid todiscuss their future.

COVER STORY

BUSINESS MONTHLY JANUARY 2005 | 4746 | BUSINESS MONTHLY JANUARY 2005

THE BIG THAWBY PA U L SC H E M M

PHOTOS: AFP, BUSINESS MONTHLY ARCHIVES

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the “most significant economic agree-ment between Egypt and Israel in 20years.” Hassan Nafaa, head of the polit-ical science department at CairoUniversity, said this could only haveoccurred in the context of broaderpolitical changes.

“I don’t think Egypt could havetaken such a decision [the QIZ] unlessthere had been some changes in thepolitical situation,” he said, citing thedeath of Palestinian leader YasserArafat, the re-election of the Bushadministration and glimmerings ofgreater Israeli flexibility. “[Theseevents] might create a new era whereEgypt could play a role to resume thenegotiations between the Palestiniansand the Israelis.”

IT’S THE ECONOMY, STUPIDOn the day of the signing, however, thetalk was less about the tortured negoti-ations in Palestine than about how theagreement would truly benefit Egypt.Journalists surged forward to witness

the three-way handshake and signingbetween Rachid, Zoellick and Israeliminister of industry and vice premierEhud Olmert during the official cere-mony in downtown Cairo.

In his opening comments, Rachidremarked on the significance of theagreement for the economy. “It is con-sistent with the government’s efforts toopen up the economy, increase growthrates, enhance job creation and pro-mote exports,” he said.

By Rachid’s estimates – the most con-servative of the numbers being thrownaround in the state press – the QIZagreement could create 150,000 jobs,mostly in the ailing textile industry. Itcould also triple Egypt’s textile and gar-ment exports to the US, currently valuedat over $550 million, in four years.

In his comments at the ceremony,Zoellick saw the agreement as not justhelping peace in the region, but a waythe US government could help the newteam of reformers that entered the gov-ernment in July. “We hope that byshowing the benefits of a more opentrading system and economic integra-tion, it will help this new economicreform team on some of the other

issues that have hindered investment,”he said.

The theme of the economic contribu-tion to peace was also picked up byOlmert, who said it was vital to showthe people themselves that peace hasbeneficial consequences. “I think it isvery important for the Egyptian peopleto understand that when there is peacewith Israel, and there are good relationswith Israel, there can also be businessbenefits and trade benefits to theEgyptian economy.”

Egyptian-Israeli trade in 2003 was amere $42 million. Taking Rachid’smodest estimate, the QIZ agreementshould increase Egypt-US trade in tex-tiles and clothing to $1.5 billion, from$550 million. An 11.7 percent cut of thedifference would suggest that tradewith Israel could increase by some$110 million, while Egypt’s direct ben-efit would top $840 million.

Yet for Olmert, the agreement is morethan just about Egyptian-Israeli eco-nomic relations and normalization, it isa stepping stone to the rest of the region.“Let’s face it, Egypt is the leader of theArab world and is the most importantcountry among the Arab countries.

PHOTO: PAUL SCHEMM

JUST DO IT: Many textile factory owners and workers want QIZs

48 | BUSINESS MONTHLY JANUARY 2005

PHOTO: PAUL SCHEMM

The main topic on their minds was thehistorical agreement signed just daysearlier on December 14 between Egypt,Israel and the US. The agreement creat-ed seven qualifying industrial zones(QIZs), whose products get duty- andquota-free access to the US market pro-vided they include Israeli input. One ofthese zones was allocated in Shobra Al-Kheima, on the outskirts of Cairo. Theothers will be located in 10th ofRamadan City, 15th of May IndustrialZone, Badrashein, Borg Al-Arab,Amareya and Port Said.

The businessmen and industrialistsquizzed Rachid about the nature ofQIZs. Many feared the industrial zonesimplied a free trade agreement withIsrael. Rachid assuaged their fears,stressing that QIZs were free tradeareas with the US, not Israel, thoughthe agreement requires that a minimum

of 11.7 percent of product input beIsraeli. The minister put the agreementin the context of international tradeagreements and ministry efforts to cre-ate opportunities for local companies.People need to lose their sensitivity tothe word “Israel,” he said.

It was a remarkable scene and anunprecedented one for Egypt as sud-denly the long-taboo topic of Israel hadcome to the forefront. December wit-nessed a remarkable thaw in relationsbetween Egypt and Israel that sawprogress on both the economic front,with the signing of the QIZ agreement,as well as the political front, with pris-oner releases and renewed efforts onthe peace process.

On December 5, Egypt released con-victed Israeli spy (and textile worker)Azzam Azzam after he had servedabout half of his 15-year sentence. At

the same time, Israel released sixEgyptian youths caught crossing theborder on August 25. Two weeks later,Israel released 170 Palestinians fromprison, once again thanking PresidentHosni Mubarak for resolving theAzzam situation.

Egyptian authorities deny any con-nection between the events, sayingonly that the judicial procedures onAzzam’s case had been completed.Meanwhile, though, negotiations overthe future Egyptian security role inGaza have picked up speed and there isspeculation that the on-again-off-againnatural gas deal with Israel will finallygo ahead now that the QIZ agreementhas been signed.

Analysts maintain that these eventsmust be viewed as part of the sameprocess. US trade representative RobertZoellick described the QIZ signing as

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When Egypt signs an agreement withIsrael it sends a green light for manyother countries to follow suit.”

QUEASY ABOUT QIZsIt’s precisely that sort of language thatraises the hackles of those who opposethe agreement. During the signing cer-emony, there was a small protest at theJournalists’ Syndicate by a few dozenpeople. They saw the agreement as anexample of the dreaded normalizationthat many sectors of Egypt’s civil soci-ety have avoided for the past quartercentury.

“The signing of this agreement is asurrender we don’t accept,” said YehiaFekry, a member of the SocialistStudies Center, attending the protest

rally. “It is a jump towards normaliza-tion with Israel,” as well as an attemptby Arab regimes to subvert thePalestinian intifida. He added that theQIZ agreement is not in the interests ofEgyptian labor.

Egyptian labor, however, does notappear to agree. On the day of the sign-ing, workers in the industrial towns ofIsmailiya and Mahalla Al-Kobra werehaving their own protest rally. Theirgripe? That they were not included in

the agreement.In fact, there is widespread fear in the

Egyptian textile and garment industrythat the expiration of the Multi-FiberAgreement on January 1 will severelythreaten the economy. Factory owners,and apparently workers as well, viewthe QIZ agreement as a way of preserv-ing the industry’s US market, worth$558.4 million in 2003. Losing thismarket would be a devastating blow tocertain areas of manufacture. In thecase of knitted apparel, for instance,US markets account for 72 percent ofexport production.

The most visible opposition to theagreement and the warming trend withIsrael, however, seems to come fromEgypt’s intelligentsia. While oppositionpapers have predictably blasted the gov-ernment’s decision, there has also been

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fierce criticism, somewhat paradoxical-ly, in the opinion of the state press.

Respected Islamist writer FahmiHoweidi attacked the agreement in hiscolumn in state-owned daily Al-Ahram,questioning how it could be signedamid the daily parade of atrocities car-

ried out by Israeli forces in the occu-pied territories.

In parliament, meanwhile, an angrydebate over the QIZ agreement dominat-ed activity on December 18, though itwas not actually on the agenda. The gov-ernment maintains that the agreement

does not need to be ratified by the parlia-ment because it is merely a trade “proto-col,” which benefits Egypt without anyobligation from the Egyptian side.

Opposition members in particulardenounced the idea that an agreementinvolving Israel would not be subject to

Rachid said the new QIZ agreement,signed on December 14, 2004, willgive Egyptian exports a competitiveedge in the US market. “[Under a QIZagreement], the US grants free marketaccess to its market without any quotasor trade barriers,” he said. Accordingly,Egyptian exports to the US could growto $4 billion in four years, a three-foldincrease.

In November, Rachid led a high-profile mission to Washington fortalks with US trade representative(USTR) Robert Zoellick. The US siderejected Egypt’s initial request for 16zones, fearing a large number couldnegatively impact its own market.Zoellick reportedly pushed for justone or two, with more to follow if themodel proved successful. Rachid,however, played hardball, returning

home with a US commitment forseven QIZs in three geographic areas.

The historic December 14 signingestablished seven QIZs in the areas ofGreater Cairo, Greater Alexandria andthe Canal zone. The minister said theQIZ locations were selected based on anumber of criteria, but mostly their cur-rent and potential export volume to theUS. Industrial areas excluded from theagreement would not be left out in thecold, Rachid insisted. “In the next fewmonths, we can request more zones, andI am confident it will happen,” he said,adding that the government may alsooffer special support in the meantime.

Addressing the sticky topic of Egyptian-Israeli relations and the possibility thatIsrael could exploit the fixed portion ofinputs to exact higher prices, Rachid insist-ed that free market rules would prevail.

“At the end of the day, this is somethingthat business people will have to negoti-ate,” he said. “We are not worried becauseit will be an open market.”

The minister pointed to one of thestrengths of the agreement, in that –unlike an FTA – the agreement does notrequire Egypt to reciprocate the privi-leges it receives from the US. “There isnothing in the protocol that [implies]any specific requirements or liabilitiesfor Egypt,” he said. The agreement isalso not limited to textiles, and could beexpanded to other sectors as well.

Egypt may have landed a prizedQIZ deal, but an FTA with the US isstill on everyone’s mind. Officialsfrom both sides are scheduled to meetin mid-January to discuss the future oftrade relations.

CAM MCGRATH

PHOTOS: AFP (TOP), AMCHAM (BOTTOM) PHOTO: PAUL SCHEMM

Minister of Foreign Trade and IndustryRachid Mohamed Rachid has once

again taken the center stage. The reform-minded minister, a champion of free marketpolicy, has landed Egypt a potentially lucra-tive, if not controversial, trade deal.Speaking to AmCham members during aspecial panel discussion on December 22,Rachid explained the importance of thenew QIZ agreement.

Rachid noted that although Egypt hastrade agreements with a number ofcountries and economic blocs, its rela-tionship with the US – the biggest con-sumer market in the world – is of thehighest importance. “We have alwayshad a very special relationship with theUnited States,” he said, “The US hasFDI up to $3.5 billion in Egypt andwhen you look at the volume of ourexports, 40 percent at the moment is tar-

geted toward the US market.” The minister said the approaching

deadline for full implementation ofGATT on January 1, 2005 had givenEgypt a sense of urgency to solidify itstrade relationship with the US. Localexporters face fierce competition fromcheaper world producers now thatexport quotas have been eliminated.

The government attempted to restart

stalled negotiations with the US for afree trade agreement (FTA), Rachidsaid, but even if successful, an FTAwould take several years to implement.Instead, the government decided tofocus on establishing QIZs, whichextend the benefits of Israel’s 19-year-old FTA with the US to approved indus-trial parks in Jordan, Egypt or thePalestinian territories.

“The QIZ agreement was somethingthat was offered to Egypt in 1996 [as]part of President [Bill] Clinton’s effortsto promote peace in the region,” Rachidsaid. Egypt found the offer too politi-cally hot to handle at the time, whileJordan signed on in 1998. Since then,Jordan’s exports to the US have grownfrom $26 million in pre-QIZ 1998 to$950 million in 2004 and are expectedto surpass $1 billion in the coming year.

THE WIZARD OF QIZ

USTR Robert Zoellick

Rachid Mohamed Rachid

parliamentary approval, maintainingthat it was their constitutional right.

Meanwhile, economist Ahmed Al-Naggar in an article published in Al-Ahram newspaper dubbed QIZs“Trojan horses” that would bring aflood of Israeli products into the coun-try. His assertion is based on the notionthat QIZs create a free trade zonebetween Israel and Egypt, which theagreement’s authors maintain is not thecase. Jordan has had QIZs in operationsince 1998 but has yet to exhibit amajor influx of Israeli products.

In a conversation with journalists theday of the signing, industry ministerRachid acknowledged that there werestill a lot of emotions about the wholeissue, but he said it was largely a mat-ter of educating people about the agree-ment. “We need to tell them what it is,”he said. “The reason why is becausepeople who are negative about this,emotionally, they keep putting in thingsthat are not true about it.”

INVESTMENT MAGNET One of the key points of the govern-ment is that demand for the QIZ cameout of the private sector, and that theagreement is a purely economic oneand not part of some political process.The government flatly refused the QIZmodel when it was first offered in1996, but in recent years the businesscommunity has urged it to put the coun-try’s economic interests ahead of polit-ical and moral concerns. “The reality ofcourse is that it has been influenced bythe business community feeling pres-sure with the Multi-Fiber Agreementcoming to an end at the beginning of2005,” said Rachid.

Industry analysts say that without thecompetitive edge offered by the QIZagreement, Egyptian textile and garmentexports would stand no chance againstsignificantly cheaper Asian products.China alone is expected to increase itsmarket share of clothing products to 50

percent in 2005, from 20 percent.Negotiations with the Israelis over

the QIZs only began in July 2003,shortly after Zoellick said theEgyptians had a long way to go beforethey would be granted a free tradeagreement (FTA) with the US. The tim-ing, however, is proof to some criticsthat the issue is one of pressure fromthe US. After all, if Egypt had receivedan FTA like Morocco and Bahrain thenit never would have needed a QIZ, Al-Naggar pointed out in his article.“America’s obstruction of an FTA wasa devastatingly effective way to forceEgypt to sign the QIZ deal,” he wrote.

Initially it will be just garment manu-facturers that take advantage of the deal,though there is nothing to stop otherindustries from utilizing it. US tariffs ontextiles and garments are among thehighest, reaching 35 percent on somegoods. The duty-free status of QIZ out-puts will make otherwise uncompetitiveproducts much more competitive in theUS market. Even with the removal ofexport quotas as of January 1, foreigncompanies will invest in Egypt’s QIZs togain this extra advantage in the highlycompetitive global garment market.

“We expect the QIZ to bring alot of new investment to Egypt,”said Magdy Tolba, chairman of CairoCotton Center in Qalioubiya, whichexports over two-thirds of its clothingproduction to the US. He added thatthere has already been interest in theQIZ from his clients. “All of them, forthe last couple of months, have been

contacting us to reserve capacity.”Left out for now, however, are the tex-

tile companies themselves, especiallythose that concentrate on spinning andweaving and creating fabric. Egypt’s tex-tile and garment industries remain uninte-grated, so that high-end garment exporterssuch as Cairo Cotton Center import theircotton yarn or woven fabric from abroad.

“There is a need to integrate andreform the industry,” confirmed HaniAl-Habibi, head of Sahara Group, atextile consulting firm. The way thingsstand now, he said, only apparel manu-facturers will benefit. “It depends ifapparel manufacturers coordinate withthe others in the supply chain, but untilnow this has not happened.”

For his part, Rachid acknowledgedthat industry, particularly the public sec-tor-dominated spinning and weavingsector, faces serious challenges. He saidthe government was forming a clear andtransparent strategy for the whole textileand apparel sector that would takeadvantage of its skilled labor pool andthe high quality of Egyptian cotton.

The future success of the QIZ andIsraeli-Egyptian relations may yet behostage to the future of the peaceprocess. Renewed violence in the terri-tories, many analysts worry, could stillhurt economic relations – though thathas yet to happen with Jordan.

Israeli officials say that as far as theyare concerned, the agreement has littleeconomic value for their country; ratherit is more important for building per-sonal ties between the two countries.

Oded Beit-Halachmi, head of DeltaTextile Egypt, an Israeli firm operating afactory in Cairo since 1995 with 4,500 localworkers, sees this as the agreement’sstrongest point. “I feel it will encourage rela-

tions just for the fact that people willhave to travel to meet each other,”

he said. “It will force peopleto talk to each other.”

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