Trade agreements back up reforms

Daily News Egypt
12 Min Read

Since 2004, Egypt has been one of the Middle East’s fastest growing economies. The International Monetary Fund’s annual economic health check attributed the impressive economic growth to a winning combination of liberalization and a favorable external environment.

Also, the IMF’s most recent review of Egypt’s economy highlighted the fact that the effect of economic growth has extended from energy, construction, and telecommunications to include sectors like agriculture and manufacturing.

“Definitely, one of the factors in enhancing trade and increasing exports has been. [Egypt’s] trade agreements. It is not a coincidence. Most of these agreements were enacted somewhere around 2005, said Tariq Tawfiq, head of the Chamber of Food Industries and Managing Director of one of Egypt’s leading processed food manufacturers.

A phenomenal growth in Egyptian exports, Tawfiq argues, took place between 2005 and 2008. “You cannot solely attribute it to the trade agreements, but. [they] have been an important factor, he continued.

Egypt has a lucrative basket of preferential trade agreements, which offers Egyptian products a duty-free access to some of the largest markets in the world, and provides favorable and fixed framework conditions for economic cooperation.

Also, the preferential market access conditions have been an incentive for foreign investors to pour money into different industrial sectors, making Egypt the second largest market for foreign direct investment on the African continent.

Egypt has six major preferential trade agreements: 1) the Qualifying Industrial Zones (QIZ) with the United States and Israel; 2) the Association Agreement with the European Union; 3) the free trade agreement with the European Free Trade Association (EFTA); 4) the Greater Arab Free Trade Area (GAFTA); 5) the Common Market for Eastern and Southern Africa (COMESA); and 6) the Egyptian-Turkish free trade agreement.

The QIZ has been on the table since the 1990s, but it was signed only in December 2004.

The protocol specifies geographic areas within Egypt that enjoy a duty-free status with the United States, which is conditional on ensuring that components of QIZ products are 10.5 percent Israeli.

“The QIZ has helped in two destabilizing events: the end of the quota system and the [emergence of early signs of] a recession in the United States, said Dr. Ali Awni head of the QIZ unit in the Ministry of Trade and Industry.

According to Awni, if it was not for the QIZ, Egypt would have lost market share.

“One year after signing the QIZ, Egyptian exports increased by 5 percent. In 2006, the numbers increased around 30 percent, he told Daily News Egypt.

One of the advantages of the QIZ is that it has created new trade and foreign direct investment opportunities, giving investors the chance to benefit from the duty-free access to the US market.

“One of the major reasons behind our decision to invest in Egypt is the QIZ, said Mahmoud Sahin, Chief Executive Officer of Sahin Ler, one of the largest Turkish investors in Egypt.

The QIZ enables the company, which has a ranking of 14th among ready-made garments manufacturers worldwide, to compete with major exporters to the United States, such as China and India.

However, critics of the protocol argue that the increase in Egyptian exports to the United States for the year 2007 was insignificant.

“It takes you time to sort of digest when you grow, explained Awni, who believes that a further growth in ready-made garments exports requires installing more capacity. He also mentions the critical status of the US economy, which means that “the size of the pie is shrinking.

Significantly, the protocol has not served all industrial sectors equally.

Tawfiq believes that the ready-made garments sector has benefited more from the QIZ because a big number of Egyptian food products already have a duty-free access to the United States. Also, he pointed out to the fact that processed food manufacturers find it difficult to satisfy the agreed upon Israeli component.

Despite its economic advantages, the enactment of the QIZ protocol brought to the surface the thorny issue of normalizing Egyptian-Israeli relations. For many Egyptians, the protocol is a reflection of the US carrot-and-stick approach to normalization.

Awni, however, sees it differently: “For us, in the ministry, the major focus is trade. We see this as a market access, and market access means more exports and more incentives for foreign direct investment.

Opponents of normalizing Egyptian-Israeli relations accuse Egyptian policy makers of assisting Israel to avoid the Arab economic boycott.

“What is an Arab economic boycott? exclaims Awni.

He argues that, in the past, it was easy to label products on the basis of their country of origin, which is not the case today. “If you trace back . [any product], you can find lots of things made in different countries, he continued.

Awni, who refuses to confuse trade with politics, gives the example of Jordan, who managed to increase its trade with the United States from $60 million to $1.2 billion in 4-5 years.

The Association Agreement with the European Union is also one of Egypt’s major preferential trade agreements, given that the EU is Egypt’s first trading partner.

The agreement, which, according to Dr. Ahmed Ghoneim, professor of economics at Cairo University, has created “a major institutional setup for trade between Egypt and European countries , entered into force in 2004.

The agreement has given the EU-Egyptian trade a considerable momentum; the annual average of trade between Egypt and the EU before 2004 was ?10 billion, but, in 2006, the number reached ?16.3 billion Euros.

“Last year witnessed a 60 percent increase in Egypt’s exports of processed food to Europe, said Tawfiq, adding that economic cooperation has broadened to include countries like the UK and Holland as well as Eastern European countries.

Increasing its European market share, in 2007, Egypt signed a free trade agreement with the four members of the European Free Trade Association: Iceland, Norway, Switzerland, and Lichtenstein.

The agreement is widely perceived as a complementary part of the Association Agreement.

“The trade with the EFTA countries constitutes only 2 percent of Egyptian trade, Ghoneim told Daily News Egypt.

Besides its interest in the US and European markets, Egypt has not ignored its traditional markets in the Arab region.

Egypt was one of the 17 Arab League members who signed the Greater Arab Free Trade Area (GAFTA) in Amman in 1997. The agreement, which came into force in 2005, aims at establishing an Arab free trade area for exports and imports.

“GAFTA has played a very significant role in fostering inter-Arab trade because it has been honored by most Arab countries to a great extent, Tawfiq said.

He elaborated on how the agreement has promoted economic relations between Arab countries, boosting Egypt’s bilateral trade with countries like Jordan, Syria, Iraq, and Gulf countries.

Under the GAFTA, Egyptian exports to Arab markets has increased by an average of 30 percent yearly, he said.

According to Ghoneim, though the GAFTA has created a better environment for inter-Arab trade, it is still a “handicapped treaty. There are still some obstacles in the way of full implementation of the treaty, such as the lack of obvious standards, or rules of origin details.

On the African level, Egypt is a signatory of the Common Market of Eastern and Southern Africa, which promotes regional economic integration through trade and investment.

The Preferential Trade Area for Eastern and Southern Africa (PTA) established in 1981 was converted to COMESA in 1994.

According to Tawfiq, at the beginning, the COMESA was taken lightly by many people. However, he pointed out that once logistical support was provided and supply lines were established, exports to countries like Kenya and Uganda increased phenomenally.

“Last year, exports to Kenya increased by 380 percent, he told Daily News Egypt, adding that So
uth Africa, for instance, though not a member of the COMESA, imports Egyptian products and resells them to the COMESA countries.

Ghoneim, however, is skeptical of the economic benefits of the COMESA, describing it as “a political move .

Turkey is one Egypt’s largest trade partners, which urged the two countries to take further steps towards more cooperation on the economic level.

Capitalizing on their outstanding economic relations, Egypt and Turkey entered into a free trade agreement in 2005, a move that has encouraged many Turkish companies, particularly textiles and ready-made garments manufacturers, to regard Egypt as an investment base.

Turkish direct investment in Egypt stood at $1 billion in 2006, one year before the enactment of the agreement. During a seminar on Turkish-Egyptian trade and economic cooperation in January 2007, Turkish State Minister Kursad Tuzmen stated that the number of Turkish entrepreneurs in Egypt was 200.

“We are witnessing a migration of industry from Turkey to Egypt because of the cost and labor utilities, said Awni, who thinks that the Turkish FTA fits very nicely with the QIZ. Under the Turkish-Egyptian FTA, Turkish companies in Egypt have a duty-free access to the US market.

Despite the apparent benefits of liberalization, some experts advise decision-makers to watch their steps.

Ghoneim thinks that economic liberalization itself has no disadvantages; however, he makes it clear that the actual challenge is managing it in a way that serves the economy.

“When a country liberalizes its economy, there should be domestic institutions that can monitor the market, otherwise local industries can be harmed, Ghoneim told the Daily News.

Egypt, according to Ghoneim, should not open its market to all countries, particularly those who are not major trade partners. He is critical of unplanned liberalization, and what he calls “the absence of a clear strategy for liberalization in Egypt.

Thus, steering a middle course between being overly protective of the domestic market and removing all barriers to trade can be the safest option.

In this context, controlling the pace of opening the market is a necessity.

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