Egypt's long-publicized hopes to expand the Qualifying Industrial Zones (QIZ) Agreement to include eight regions of Upper Egypt, namely Fayoum, Beni Suef, Minya, Assiut, Sohag, Qena, Luxor and Aswan, are gradually being realized. On January 26, the United States Trade Authority, pursuant to authority delegated by the president, designated Beni Suef and Minya as qualifying industrial zones under the United States-Israel Free Trade Area Implementation (IFTA) Act. The decision is expected to bring industrial and economic progress to Upper Egypt and increase Egypt's overall exports.
The origins of Egypt's qualifying industrial zones lie in a 1996 legislative amendment to the US-Israel Free Trade Implementation Act. This amendment allowed goods produced in the West Bank, Gaza Strip or a qualified industrial zone to have the same duty-free access to the US as all Israeli exports. In an attempt to ease Israel's economic and political isolation from its neighbors, the US looked to establish QIZs in Arab countries, which would allow them to boost their exports to the US provided they involve Israel in the process by using a minimum percentage of Israeli inputs.
The Clinton administration offered a QIZ agreement to Egypt in the mid-1990s, but it was not met with significant interest. The US looked to Jordan instead, and in March 1998 an agreement was formally announced. The Jordanian QIZ agreement built upon the strong trade relationships that already existed between Jordan and Israel within the textile industry. In less than 10 years, Jordan's exports through the QIZ passed the $1 billion mark. Investment skyrocketed, and almost 50,000 people were employed in the zones in 2007.
QIZs have been a great economic success for Jordan; it can be said that they paved the way for Jordan's bilateral Preferential Trade Agreement (PTA) with the US, which was signed at the end of 2000. The PTA will gradually remove almost all tariff barriers between the two countries by 2010, thereby making Jordan's QIZ agreement superfluous. As a reflection of this upcoming redundancy, Jordan's trade with Israel has declined in recent years, and the number of Israeli exporters operating in Jordan fell by one quarter in 2006.
As was the case with Jordan, the private sector played a key behind-the-scenes role in negotiating the QIZ agreement for Egypt. At the time, Egypt was phasing out its involvement in the General Agreement on Trade and Tariffs/World Trade Organization textile quota regime and set to face 35-percent duties on textiles. In the private sector textile industry, 150,000 jobs were at stake, along with hundreds of millions of dollars in exports from previous bilateral agreements with industrialized countries, all of which were about to become moot.
Egypt saw the QIZ agreement as an opportunity to protect Egyptian exports, and one that could pave the way towards a preferential trade agreement with the US. For Israel, whose trade with Egypt and Jordan combined stands at less than one percent of overall trade, the Egyptian QIZ agreement represented a chance to normalize business relations between the two countries. Hence, Israeli negotiators were keen that the agreement be published and publicized in Egypt.
The agreement guarantees duty-free access to the US market for products manufactured in geographically designated industrial zones within Egypt. Originally, it required that Israeli components make up at least 11.7 percent of each product, significantly higher than the 8 percent required in the Jordanian QIZ agreement. This is partially a reflection of Egypt's weaker bargaining position, primarily due to the well-known threats to its textile industry, as well as certain differences between the US and Egyptian governments at the time of negotiations. The Israeli input requirement has since been decreased to 10.5 percent at the request of the Egyptian government. Ali Awni, director of the QIZ Unit at the Ministry of Trade & Industry (MTI), says that 8 percent is being targeted specifically to mirror the minimum requirement for the Jordanian QIZ. "Any reduction helps," Awni stresses; "it was always on the agenda to bring it down to 8 percent."
The Egyptian QIZs started out strong; two years after the agreement was signed in December 2004, Egyptian exports to the US had grown by 31 percent, reaching $819 million. Of the country's 2006 exports, 77 percent came from QIZ products. The textiles sector has taken the lead among QIZ exports, comprising 90 percent of them. US clothing giant Gap Inc. is the top buyer of Egyptian QIZ exports.
According to Awni, last quarter's figures for export of Egyptian ready-made garments to the US under the QIZ agreement were 15 percent higher compared to the previous year. Despite a global economic slowdown that resulted in a dip in exports at the end of 2008, it appears that the QIZs are thriving. "Six months ago, I would not have been able to say that [they're succeeding], but the numbers have gone up. This is because of an increase in investors, and it also says something about the exports themselves... that they are somehow resilient," Awni says.
There have been a number of challenges, not least of which were the devaluation of the US dollar and the American recession. Awni cites three factors limiting the growth of the QIZs: a lack of skilled labor, the unavailability of suitable facilities for operation, especially given that most foreign investors prefer to rent production structures that are already in place, and high levels of bureaucracy, which impact the ease of doing business in the country.
The MTI supports companies by providing capacity building services, as well as vocational training programs, and helping to provide ready-to-rent production units. One of the ministry's current activities involves improving companies' documentation practices in order to comply with US customs regulations.
The expansion of the QIZ system to include regions in Upper Egypt is a priority goal for the MTI. The ministry is urging companies to take advantage of the full scope of the agreement to establish industries other than textiles and apparel in the zones, including cement, synthetic fibers, food and beverages, and handicrafts. Employment opportunities are expected to increase in these regions, and standards of living to improve, with these expansions.
Comparing the progress of the QIZ sytem in Egypt to that in Jordan, Awni stresses the role of labor. In Jordan, investors typically bring in skilled labor from abroad, particularly Asian countries where the textile industry is a massive employer. In this way, the time and cost of starting up an operation is less than in Egypt, where they train local labor. "This means that in the short term the Jordanian approach will result in quicker growth. But if you look at it from a long-term perspective, I think the Egyptian way will be the winner," says Awni. He also believes that the continuing growth in the export of ready-made garments can help alleviate unemployment, since the industry is labor-intensive and requires skills that can be acquired with only a few months of training.
"Improving Labor Productivity in Egypt's Ready-Made Garments Sector," a May 2009 report by the Trade-Related Assistance Center (TRAC) at the American Chamber of Commerce in Egypt, states that addressing the problems affecting labor productivity in Egypt is one of the keys to safeguarding levels of QIZ exports amid the global economic slowdown. Poor working conditions, unprofessional hiring, firing and accountancy practices, and failure to provide worker-development opportunities all contribute to high levels of absenteeism among workers and affect overall productivity, according to the report.
Magda Shahin, director of TRAC, believes that a holistic approach based on training and education is needed in order to improve worker satisfaction. "Hewitt consultants recently launched their first ever Best Employer in the Middle East study. The results of this study indicate that best practices, [such as] investing in people, lead to higher financial returns."
Shahin also recommends better diversification of the sectors taking advantage of the QIZs. "Attracting more US investment and diversifying it through upgrading the investment agreement between Egypt and the US, and negotiating free trade agreements on the basis of sectors, are all important strategies," she asserts.
"Reform has followed only in the qualifying zones and has not encompassed the entire [textile] industry, thus creating a dual economy to the disadvantage of the industry outside the zones," says Shahin. While achieving high levels of growth in exports, it is clear that more needs to be done in order for the QIZ system to transition from providing short-term solutions for the textile industry to positively impacting Egypt's economic and industrial development in a sustainable manner.
By Yasmin El-Rifae
© Business Monthly 2009
