3rd January 2005

Egypt, Israel and the US came together in December to sign their first new agreement since the Camp David accords of 1977. But this time the agreement was not about peace, but trade.

The new deal, which was signed in Cairo by US Trade Representative Robert Zoellick, Egyptian Minister of Industry and Foreign Trade Rachid Mohamed Rachid and Israeli Deputy Prime Minister Ehud Olmert, allows for the creation of seven Qualified Industrial Zones (QIZs). From these, Egyptian companies will be able to export duty free to the US as long as their products contain a minimum of Israeli content. The deal is similar to the one signed in 1996 with Jordan that substantially contributed to increased exports from that country to the US.

Under the Egyptian QIZ agreement, at least 35% of the products' content must originate locally and 11.7% must consist of Israeli input. At first, seven QIZs in different regions of Egypt will be created, with the possibility for more later on. The idea behind the deal, a brainchild of the US government, is to encourage a more positive regional environment by bringing businessmen from both sides together.

A company might make shirts from Egyptian cotton and Israeli buttons, Rachid told reporters after the signing. There are no restrictions on the type of materials that will come from one country or the other, but it is widely thought that Israel's contribution is likely to be in the form of accessories and packaging rather than raw materials.

Textiles and garments, which account for 27% of Egypt's industrial production, are crucial to the local economy, with the US a major export destination. It accounted for $558.4m of Egyptian textile exports in 2003 - about half of the sector's overseas shipments. Without the agreement, Cairo stood to lose massively from new world trade regulations on textiles that came into effect at the beginning of 2005, as the Multi-Fibre Agreement, an international treaty that set textile quotas, expired.

Although important, the Egyptian textile industry has suffered from a lack of investment and is facing stiff international competition, notably from China. The QIZ agreement, Egypt hopes, will help attract new investment to the sector, as local and foreign entrepreneurs use it to access the lucrative American market duty-free. Rachid said the deal could save 1m jobs in the textile industry, while local business leaders claim that it could create an additional 250,000 jobs within a year.

I expect the QIZs will bring a lot of investment to Egypt, says Magdi Tolba, the Chairman of the Cairo Cotton Centre, a large textile firm that caters to several major US brands such as Nike and exports to American department stores.

Tolba adds that he and his partner, the Lebanese businessman Camille Chamoun, have decided to invest in a new factory to increase their production - a decision motivated by the prospects the QIZs offer as well as renewed confidence in Prime Minister Ahmed Nazif's government. This has begun to address issues industrialists have long complained about, such as bureaucracy in the customs administration.

In the long run, sectors other than textiles also stand to gain from the agreement. Trade Minister Rachid said he would like the QIZ deal to encourage Egyptian industry to diversify its exports to the US, with other sectors well poised to take advantage of the deal, including furniture manufacturers and construction material providers.

As such, the QIZ agreement is one of the most important Egypt has signed in recent years, particularly as it has political as well as economic implications. Although Egypt has been at peace with Israel for a quarter-century, that peace has been fraught with difficulties. Both sides have accused each other of straying from the spirit of Camp David, if not the letter, and recent regional tensions have made bilateral ties difficult.

Public outrage in Egypt over Israel's heavy-handed repression of the second Palestinian Intifada has made Israel deeply unpopular, and the Egyptian government has echoed this attitude by recalling its ambassador from Tel Aviv and downgrading existing collaboration.

Bilateral trade, while never very high, also took a hit as businessmen became loath to do business with Israel for fear of a growing consumer boycott campaign. In 2003, bilateral trade amounted to a mere $11m.

But while Egypt has publicly reprimanded Israel for its actions, in private, Egyptian diplomacy has continued to work on reducing the fallout from the Palestinian Intifada and towards bringing Palestinians and Israelis back to the negotiating table. Israeli Prime Minister Ariel Sharon's vow to pull out from the Gaza Strip, which borders Egypt, also drew Cairo further in the nearby conflict, with pledges to help the Palestinian Authority police Gaza.

Since the death of Yasser Arafat, there has been a notable warming of relations. Egyptian President Hosni Mubarak has been touring the region to gather Arab support for an Israeli-Palestinian peace treaty, and even recently said that Israel's hawkish prime minister, Ariel Sharon, was the best hope for peace that the Palestinians have.

In early December, Egypt and Israel also brokered a prisoner exchange whereby Azzam Azzam, an Israeli Druze convicted of spying for Israel while working in Egypt, was released to secure the return of six Egyptian students that Israel said it had caught infiltrating the country. Several dozen Palestinian political prisoners were also released as a goodwill gesture towards Egypt. There have even been rumours that Mubarak could send a new ambassador to the Jewish state, although he has officially denied that this is being considered.

This flurry of bilateral activity has been met with a certain level of indignation among some Egyptians who have protested the QIZ agreement, seeing it - in the words of one columnist - as a Trojan horse that will bring Israeli economic influence to bear on Egypt. Some businessmen who welcome the deal worry that their products could be boycotted on the local market if they work under the QIZ system.

What people have been calling a 'cold peace' reflected largely the feeling of the people, Rachid said after the signing, hoping that Egyptians will think benefits such as job creation will outweigh historical animosity towards Israel and its policies. But I think we can sell the agreement because at the end of the day, we are seeking economic developments.

© Oxford Business Group 2005