DE RUEHEG #0364/01 0561426
ZNR UUUUU ZZH
P 251426Z FEB 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 8269
RUCPDOC/USDOC WASHDC PRIORITY 0386
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0194
UNCLAS SECTION 01 OF 03 CAIRO 000364
STATE FOR NEA/ELA, EEB/TPP/BTA/ANA/SAGURTON
USTR FOR MOWREY
COMMERCE FOR 4520/ITA/ANESA
E.O. 12958: N/A
TAGS: ECON ETRD PREL KTEX IS EG
SUBJECT: QIZ EXPORT DROP REINFORCES EGYPTIAN-ISRAELI EXPANSION
REF: A. 2007 CAIRO 2903
B. 2007 CAIRO 3023
C. 2007 CAIRO 3022
D. 2007 CAIRO 3305
Sensitive but unclassified, not for Internet distribution.
1. (SBU) SUMMARY: As we prepare for high-level visits to the
surrounding the 60th anniversary of Israel and the World Economic
Egypt, Post recommends strong consideration of a joint
to expand the Qualified Industrial Zone (QIZ) into Upper Egypt.
program would bring significant political and economic benefit to
boost Israeli-Egyptian economic cooperation, and have no significant
the American economy. END SUMMARY.
2. (U) Egyptian QIZ factories exported USD $152 million in goods to
States in the fourth quarter of 2007, a 19-percent drop from the
export of USD $188 million in the third quarter of 2007. While much
drop is attributable to annual market cycles, the figure was also 9
below QIZ exports in the fourth quarter of 2006, representing the
on-quarter decline in the three-year history of the agreement.
industrialists attribute the decline to the slowing US economy and
dollar relative to the euro, which is luring Egyptian exporters to
markets. While QIZ food exports showed a slight up-tick, they
represent less than 1 percent of QIZ exports, which are almost
pants, shirts, and other ready-made garments.
Explosive growth slows, reverses
3. (U) The GOE, GOI, and USG signed the QIZ agreement in 2004 to
Israeli-Egyptian economic cooperation by granting duty-free status
products that contain 11.7 percent Israeli content. The GOE also
hoped that the
agreement would allow Egypt to maintain its share of the US market
expiry of its export quota under the Multi-Fibre Agreement in 2004.
to Egyptian and Israeli concerns that the area initially designated
QIZ was too small, USTR agreed to expand it in 2005 to cover
factories in the Nile Delta and Suez Canal region. More than
now work in QIZ factories.
4. (U) QIZ exports had increased since the inception of the
program, but the
rate of growth declined, constrained by a tightening skilled labor
shortage of economical Israeli inputs, and competition from other
exporters to the United States (ref A). The quarter-on-quarter
rate fell steadily from 53 percent growth in the third quarter of
to the third quarter in 2005) to 6 percent growth in the third
quarter of 2007
(compared to the third quarter of 2006) before falling to a
9-percent decline in
the fourth quarter of 2007 (compared to the fourth quarter of
5. (U) Meanwhile, US exports to Egypt rose dramatically in 2007 to
CAIRO 00000364 002 OF 003
billion, a 30-percent increase over the USD $4.1 billion in US
exports in 2006.
Egyptian exports to the United States were flat in 2007, essentially
from the USD $2.4 billion in 2006. As a result, the US trade
73 percent in 2007 to just under USD $3 billion, according to
6. (U) The fall in the dollar relative to the euro, and the
decline of the Egyptian pound relative to the euro, has made exports
to the EU,
which has a preferential trade agreement with Egypt, more lucrative
exporters. During the first seven months of 2007, the dollar value
made garments exported to the United States hovered around $60
million USD a
month, while the dollar value of exports to Europe rose steadily
million in January to over $120 million in July.
Upper Egypt expansion?
7. (U) In response to these trends, GOE Minister of Trade and
Rachid and Israeli Minister of Industry, Trade and Labor Eliyahu
on Oct. 9, 2007, to reduce the required level of Israeli content to
(ref B) and to request that USTR expand the QIZ area to Upper Egypt
While both moves work in favor of the GOE, Israeli negotiators said
the expansion of markets into Upper Egypt as a benefit to offset
export income due to the content reduction agreement (ref D).
8. (U) The GOE argues in a brief on the expansion proposal (which
separately to the Department and USTR) that QIZ expansion would not
immediate or dramatic effect on QIZ exports to the United States.
governorates of Upper Egypt are underdeveloped, accounting for only
of investment in Egypt while representing 27 percent of the
According to GOE figures, Upper Egypt has a higher rate of poverty
percent, compared to 20 percent -- and a higher rate of illiteracy
percent, compared to 34 percent -- than the rest of Egypt.
9. (U) While the lack of existing infrastructure and industrial
prevent rapid growth of QIZ exports from Upper Egypt, the GOE and
industrialists hope that access to a relatively untapped labor
abundant land would allow for QIZ expansion, easing the pressure on
labor expenses in existing factories.
The GOE has provided land grants and financial incentives to
developers in the
region in keeping with President Mubarak's pledges to rectify
10. (U) The GOE expects industrial development in Upper Egypt could
higher employment, higher standards of living, and reduced migration
and other urban centers in Egypt. The GOE argues that expanding the
would expand its political benefits, demonstrating to another region
country the value of Egyptian-Israeli cooperation, while continued
underdevelopment would breed instability and extremism.
CAIRO 00000364 003 OF 003
11. (SBU) QIZ workers we meet have little or no appreciation of the
dynamics of the agreement. But they do know that QIZ means jobs,
of them took to the streets to demand inclusion in the agreement at
The GOE understands that logic, believing that expanding the QIZ
Egypt will ultimately mean expanding employment. As a result, it
closely with the GOI to develop this request. The political benefit
improving Israeli-Egyptian relations will be long-term through the
of enduring business ties.
12. (SBU) QIZ expansion into Upper Egypt will not significantly
base of QIZ exports beyond textiles. While some Egyptian food
considering QIZ development in Upper Egypt, we expect that the
economics of the
arrangement will continue to overwhelmingly favor exporters of
garments. Only products that normally face high tariffs in the
benefit enough from the QIZ duty-free status to compensate for the
of the Israeli inputs.
13. (SBU) However, that supports the GOE contention that QIZ
not affect any domestic US industry; Egypt would continue to compete
and other textile exporters for market share in the United States.
the economic constraints on QIZ exporters, as well as the business
in Upper Egypt, it is unlikely that the region would account for
single-digit increases in QIZ exports. QIZ expansion would,
however, help move
the US-Egyptian economic partnership from aid to trade at a time of
ESF assistance. It would also strengthen key reformers in the
notably Prime Minister Nazif and Trade Minister Rachid -- and
official GOE-GOI relations when other regional dynamics are