Commercial Diplomacy in the Middle East

During his recent campaign, U.S. President-elect Donald Trump revealed little fondness for free trade agreements. But in the Middle East, there is at least one that deserves a second look: the Qualifying Industrial Zones (QIZs) protocol between Egypt and Israel, which, guided by U.S. commercial diplomacy, enhanced cooperation between the two countries beyond traditional security matters and into economic ties. It also helped save the Egyptian textile industry, benefited thousands of companies, and created hundreds of thousands of jobs.

The QIZs were meant as extension of the U.S.-Israeli free trade agreement of 1985. The first round of talks began in July 2003, and the negotiations aimed to extend preferential treatment in U.S. markets to exports from designated areas in Egypt. For their part, the Egyptians wanted to avoid future setbacks from the changes in the WTO textile quota regimes. They were also trying to mimic Jordan’s own QIZs and to secure a free trade agreement with the United States. As for the Israelis, they were keen on giving legitimacy to the business relations that had existed between the two partners for years without public recognition.

Both sides continued to rally behind the QIZs until, in December 2004, Rashid Mohamed Rashid, then Egyptian minister of commerce and external industry, and Ehud Olmert, then a cabinet minister, finally signed the deal under the observance of the American representative, Robert Zoellick. At the time, Washington was pursuing a broader long-term strategy in the Middle East that aimed to promote political and economic stability by increasing regional countries’ trade and investment with the United States. Washington thus viewed the QIZ protocol as an effective tool for encouraging Egypt to liberalize its economy and engage its neighbors and the world.

Today, QIZ locations include Alexandria, the greater Cairo area, the central Delta region, the Suez Canal area, and upper Egypt. Israeli and Egyptian authorities both have to agree to a location becoming a QIZ, and the decision is supposed to be based on actual export statistics, export potential, and number of potential workers.

These zones are monitored by joint committees from both countries that determine whether the companies inside are living up to the agreement’s rule-of-origin requirements: that 35 percent of input come from Egypt, Israel, and the United States. The remaining 65 percent can come from any part of the world. After the protocol was signed, the Israeli input was reduced from 11.7 percent to 10.5 percent; however, since then, Egypt has sought to drop it down two percent.

WORTH IT

Time and again, the QIZs have proved their worth. For its part, Israeli gained a small boost in exports to Egypt. And the public signing of the deal was a step toward removing the taboo on Arab countries doing business with the Jewish state. 

On the Egyptian side, in 2004, it was critical for saving the country’s textile industry. The upcoming expiration of the Multi-Fiber Agreement, which governed world textile trade, meant that tariffs would soon be imposed on Egyptian exports. In turn, Egypt would find it very hard to compete with Bangladesh, China, India, and Pakistan in the U.S. market. After the QIZ’s inception, Egyptian ready-made garment exports jumped from $288.3 million in 2005 to $636.2 million in 2006, reaching $842.4 million in 2015.

The QIZs were also a life raft during the recent global economic meltdown. In 2008, Egyptian exports began tapering off as oil prices fell, but QIZ trade remained strong. According to the Federation of Egyptian Industries in 2009, in the first ten months of 2008 exports of textile and ready-made garments to the United States increased by 15 percent compared to the first ten months in 2007. Overall Egyptian exports declined an estimated 7.5 percent in the same period.

As of 2015, the QIZs had helped create 280,000 new jobs in the textile and apparel sector. The initial list of 397 QIZ-approved companies has expanded to more than 700. Further, since the QIZs’ initial inception, Egyptian textile and clothing exports to the United States have jumped from $288.3 million in 2005 to $842.4 million in 2015 (those exports account for 45 percent of all Egyptian exports to the United States). Thanks to this booming market, investors from Asian countries have started to look to Egypt’s garment industry as a way to avoid high U.S. tariffs on ready-made garments. For instance, Egyptian businesses are currently in the early stages of promoting an initiative to develop textile parks within the current QIZs.  

The QIZ agreement has not yet reached its full potential.

Understanding the tremendous importance of QIZs, in early November 2016, the U.S. ambassador to Egypt, Stephen Beecroft, stressed the United States’ commitment to the program as a way to ensure “a successful and prosperous Egyptian economy.” Egyptian officials likewise continue to back the zones as a way to increase economic ties with the United States and combat the country’s long-standing economic issues. In 2015, Egypt’s minister of industry and foreign trade, Munir Fakhry Abdel Nour, reaffirmed the importance of the QIZs during a meeting with David Thorne, senior adviser to the secretary of state, by announcing Egypt’s intentions to include more geographical zones in the agreement, particularly in upper Egypt.

And for Israel’s part, Gabi Bar, the head of the Middle East desk at Israel’s Economy Ministry, stated after meeting with Egyptian counterparts that the two sides would explore expanding the QIZs, “so that the agreement would contribute more to the Egyptian economy, to Israeli industry, and peaceful relations between Israel and Egypt.” 

NEW OPPORTUNITIES 

To be sure, the QIZ agreement has not yet reached its full potential. In an interview last December, one prominent Egyptian businessman said, “If we utilized the QIZs right, instead of having exports worth $900 million, it could be in the range of $5 billion to $10 billion.” He explained, “Because of the QIZ, Egypt gets customs duty free—but still, there are other nations in the world that do not have this privilege, and their exports to America are ten times higher.”

Another problem is labor. Most workers find it economically unattractive to take jobs in the garment sector in the QIZs. They prefer higher-paying manufacturing, administrative, trading, or government jobs, or traveling abroad for work opportunities. Female workers could play a role in the industry through internal migration, but that could be difficult given dominant cultural norms. Employers face high absenteeism and high turnover rates among workers in the special zones. This is a particularly big issue in northern areas such as Alexandria, Ismailia, and Port Said, where the majority of exporting companies are located.

The exporting companies considered employing foreigners, but according to Egyptian Law 12 of 2003, companies’ work forces can be no more than ten percent foreign. There are no reliable data on the exact number of foreign workers in Egypt, since much of that force works informally. However, some officials from the Ministry of Labor and Industry estimate that between 8,000 and 10,000 foreigners work in QIZ industries. They mostly come from Bangladesh, India, and Sri Lanka. 

The labor issue is, in part, why negotiators prefer to expand the agreement to upper Egypt, since that area enjoys greater labor stability. For its part, in 2013, the U.S. Department of Commerce agreed to make industrial zones in Beni Suef and Menya eligible to export goods duty-free to the American market. 

At any rate, the QIZs have been beneficial to all sides. From Israel’s standpoint, the QIZs made it easier to do business with Arab states. And for Egypt, the QIZs saved the textile industry and offered enhanced access to U.S. markets. At the same time, Washington successfully leveraged its economic influence to bolster regional peace.  

The Trump administration should keep this example in mind. It should use such economic diplomacy to continue to promote long-term peace between the Jewish state and the most populous Arab nation, which could serve as an anchor for stability in the chaotic region.