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Cablegate: Qiz Export Drop Reinforces Egyptian-Israeli

VZCZCXRO6409
PP RUEHROV
DE RUEHEG #0361/01 0561131
ZNR UUUUU ZZH
P 251131Z FEB 08 //ZFR//
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 8265
INFO RUEHXK/ARAB ISRAELI COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0192
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 CAIRO 000361

SIPDIS

SENSITIVE
SIPDIS

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 REQUEST

CAIRO 00000361 001.2 OF 002


ZFR ZFR ZFR ZFR ZFR

KINDLY ZFR CAIRO 361.

CABLE WILL BE RETRANSMITTED UNDER NEW NUMBERS.


CAIRO 00000361 002 OF 002


Trade and Labor Eliyahu Yishai agreed on Oct. 9, 2007, to
reduce the required level of Israeli content to 10.5 percent
(ref B) and to request that USTR expand the QIZ area to Upper
Egypt (ref C). While both moves work in favor of the GOE,
Israeli negotiators said they viewed the expansion of markets
into Upper Egypt as a benefit to offset their reduced export
income due to the content reduction agreement (ref D).

8. (U) The GOE argues in a brief on the expansion proposal
(which we submitted separately to the Department and USTR)
that QIZ expansion would not have an immediate or dramatic
effect on QIZ exports to the United States. The eight
governorates of Upper Egypt are underdeveloped, accounting
for only 13 percent of investment in Egypt while representing
27 percent of the population. According to GOE figures,
Upper Egypt has a higher rate of poverty -- 34 percent,
compared to 20 percent -- and a higher rate of illiteracy --
43 percent, compared to 34 percent -- than the rest of Egypt.

9. (U) While the lack of existing infrastructure and
industrial capacity would prevent rapid growth of QIZ exports
from Upper Egypt, the GOE and Egyptian industrialists hope
that access to a relatively untapped labor market and
abundant land would allow for QIZ expansion, easing the
pressure on capital and 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 underdevelopment there.

10. (U) The GOE expects industrial development in Upper
Egypt could lead to higher employment, higher standards of
living, and reduced migration to Cairo and other urban
centers in Egypt. The GOE argues that expanding the program
would expand its political benefits, demonstrating to another
region of the country the value of Egyptian-Israeli
cooperation, while continued underdevelopment would breed
instability and extremism.

-------
COMMENT
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11. (SBU) QIZ workers we meet have little or no appreciation
of the political dynamics of the agreement. But they do know
that QIZ means jobs, and thousands of them took to the
streets to demand inclusion in the agreement at its onset.
The GOE understands that logic, believing that expanding the
QIZ into Upper Egypt will ultimately mean expanding
employment. As a result, it has worked closely with the GOI
to develop this request. The political benefit of improving
Israeli-Egyptian relations will be long-term through the
development of enduring business ties.

12. (SBU) QIZ expansion into Upper Egypt will not
significantly broaden the base of QIZ exports beyond
textiles. While some Egyptian food processors are
considering QIZ development in Upper Egypt, we expect that
the economics of the arrangement will continue to
overwhelmingly favor exporters of ready-made garments. Only
products that normally face high tariffs in the United States
benefit enough from the QIZ duty-free status to compensate
for the extra expense of the Israeli inputs.

13. (SBU) However, that supports the GOE contention that QIZ
expansion would not affect any domestic US industry; Egypt
would continue to compete with China and other textile
exporters for market share in the United States. Considering
the economic constraints on QIZ exporters, as well as the
business environment in Upper Egypt, it is unlikely that the
region would account for more than 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 declining ESF assistance. It would also strengthen key
reformers in the cabinet -- notably Prime Minister Nazif and
Trade Minister Rachid -- and strengthen official GOE-GOI
relations when other regional dynamics are stressing them.
RICCIARDONE

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