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Cablegate: Qiz Export Drop Reinforces Egyptian-Israeli Expansion

VZCZCXRO6411
PP RUEHROV
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

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

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
region
surrounding the 60th anniversary of Israel and the World Economic
Forum in
Egypt, Post recommends strong consideration of a joint
Egyptian-Israeli request
to expand the Qualified Industrial Zone (QIZ) into Upper Egypt.
Expanding the
program would bring significant political and economic benefit to
the Egyptians,
boost Israeli-Egyptian economic cooperation, and have no significant
impact on
the American economy. END SUMMARY.

2. (U) Egyptian QIZ factories exported USD $152 million in goods to
the United
States in the fourth quarter of 2007, a 19-percent drop from the
peak quarterly
export of USD $188 million in the third quarter of 2007. While much
of that
drop is attributable to annual market cycles, the figure was also 9
percent
below QIZ exports in the fourth quarter of 2006, representing the
first quarter-
on-quarter decline in the three-year history of the agreement.
Egyptian
industrialists attribute the decline to the slowing US economy and
the falling
dollar relative to the euro, which is luring Egyptian exporters to
European
markets. While QIZ food exports showed a slight up-tick, they
continue to
represent less than 1 percent of QIZ exports, which are almost
exclusively
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
encourage
Israeli-Egyptian economic cooperation by granting duty-free status
to Egyptian
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
following the
expiry of its export quota under the Multi-Fibre Agreement in 2004.
In response
to Egyptian and Israeli concerns that the area initially designated
for the
QIZ was too small, USTR agreed to expand it in 2005 to cover
additional
factories in the Nile Delta and Suez Canal region. More than
100,000 Egyptians
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
market, a
shortage of economical Israeli inputs, and competition from other
garment
exporters to the United States (ref A). The quarter-on-quarter
export growth
rate fell steadily from 53 percent growth in the third quarter of
2006 (compared
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
2006).

5. (U) Meanwhile, US exports to Egypt rose dramatically in 2007 to
USD $5.3

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
unchanged
from the USD $2.4 billion in 2006. As a result, the US trade
surplus increased
73 percent in 2007 to just under USD $3 billion, according to
Department of
Commerce statistics.

6. (U) The fall in the dollar relative to the euro, and the
accompanying
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
for Egyptian
exporters. During the first seven months of 2007, the dollar value
of ready-
made garments exported to the United States hovered around $60
million USD a
month, while the dollar value of exports to Europe rose steadily
from $99
million in January to over $120 million in July.

----------------------
Upper Egypt expansion?
----------------------

7. (U) In response to these trends, GOE Minister of Trade and
Industry Rachid
Rachid and Israeli Minister of Industry, 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.


CAIRO 00000364 003 OF 003


-------
COMMENT
-------

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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