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Cablegate: Economic Study Sees Benefits to Fta

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 CAIRO 006488

SIPDIS

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT
COMMERCE FOR 4520/ITA/ANESA/TALAAT

SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON EINV EIND EG USTR
SUBJECT: ECONOMIC STUDY SEES BENEFITS TO FTA

This cable is sensitive but unclassified. Please handle
accordingly. Not for internet distribution.

-------
Summary
-------

1. (SBU) A U.S.-Egypt Free Trade Agreement (FTA) would be
politically and economically beneficial for both Egypt and
United States, according to a new study by the Washington-
based Institute for International Economics (IIE). The
authors assert that the timing is right for Egypt to
conclude an FTA modeled on the Central American Free Trade
Agreement(CAFTA) and other recently concluded FTAs. As an
FTA partner, Egypt would likely reap significant economic
gains and greater leverage for implementing its economic
reform policies. For the U.S., the gains would be primarily
political -- helping to anchor Egyptian reforms that could
have positive spillover effects in the region. While Egypt
would benefit from an FTA that covered trade in goods only,
IIE's simulation studies show that Egypt would benefit
substantially more from an agreement that also removed all
non-tariff barriers. IIE's conclusion that an FTA would
create significant economic benefits for Egypt lends
credibility and support to those inside of government who
are pushing hard for an FTA. End summary.

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---------------------------------------
Positive Environment for U.S.-Egypt FTA
---------------------------------------

2. (U) The May 2005 IIE study, "Anchoring Reform with A U.S.-
Egypt Free Trade Agreement," by prominent Egyptian economist
Ahmed Galal and Robert Z. Lawrence posited that the timing
and environment are ripe for a U.S.-Egypt FTA. Egypt
recently entered into two major free trade agreements: one
with the European Union, which has not yet shown a major
impact; and a second, Greater Arab Free Trade Agreement
(GAFTA), which is just now beginning to show results.
Moreover, the new government, under PM Nazif, is
implementing serious economic reforms, which are necessary
to ensure the success of comprehensive trade agreements.
The conclusion of these important trade agreements and the
government's economic reform program have created a
positive environment for the implementation of a future U.S.-
Egypt FTA.

3. (U) The authors note that a U.S.-Egypt FTA would likely
resemble recent U.S. trade agreements, such as CAFTA and the
FTAs with Morocco and Chile. The agreement with Egypt could
be relatively "shallow" if it addressed only trade in goods
or relatively "deep" if it sought a more comprehensive
integration, including provisions on non-tariff trade
barriers, administrative practices, services, investment,
intellectual property, and rules affecting domestic
regulatory practices and standards.

---------------------------
Economic Benefits for Egypt
---------------------------

4. (U) According to the IIE study, a deep integration would
be more beneficial for both the U.S. and Egypt. Bilateral
trade at its current level, however, is much more important
for Egypt. (Note: According to GOE statistics, Egypt's
exports to the U.S. were $4.39 billion in 2004, 35.7% of its
total exports. In comparison, U.S. exports to Egypt in 2004
amounted to $2.96 billion, only 0.37% of total U.S. exports.
End note.) Therefore, the greater access to the U.S. market
resulting from an FTA would likely create a much larger
economic gain for Egypt than for the U.S., according to the
authors.

5. (U) Beyond the economic gains from trade expansion that
Egypt would reap in a shallow FTA, a deeper FTA would
encourage greater foreign investment, help attract capital
at more favorable terms, and help boost reform. A deeper
integration would require harmonization of a number of
policies and standards, which also could help the Egyptian
government politically as it tried to encourage domestic
reforms in the economic sector. However, because of the
wide discrepancy in the levels of development between the
two nations, the authors believe that a phasing in of the
rules and standards of an FTA would be necessary to avoid
unfairly disadvantaging Egypt's local producers.

-------------------------------
Political Benefits for the U.S.
-------------------------------

6. (U) Unlike Egypt, which could reap significant economic
benefits from an FTA, the authors foresee primarily
political rather than economic benefits for the U.S. The
main economic gains would come from a diversion-avoidance
effect, which would help correct the diversion from U.S.
exports to EU exports that began when Egypt signed its trade
agreement with the EU. The real benefit to the U.S.,
however, would be the promotion of domestic reforms in Egypt
and, if successful, a demonstration effect with possible
spillover to other countries in the Middle East.

----------------------------
The Elements of a Likely FTA
----------------------------

7. (U) Referring to FTAs already concluded with the U.S.,
IIE speculates on the elements of a likely FTA with Egypt.
These would likely include:

- Immediate elimination of tariffs on a majority of
products, with the remaining tariffs eliminated within 10 to
15 years.
- Phase-out of all agricultural tariffs within 15 years,
with carve outs for particularly sensitive products.
- A "negative list' approach to services whereby all
service sectors are opened up unless specifically excluded
in the agreement.
- Investment rules guaranteeing equal treatment for U.S.
investors.
- Requirements for transparency and public comment in
lawmaking and regulation pertaining to trade and investment.
- Criminal penalties for corruption and bribery.
- Laws regulating government procurement.
- Provisions for technical standards and sanitary and
phyto-sanitary standards.
- Protection and enforcement of trademarks, copyrights
and patents with criminalization of end-user piracy.

--------------------------------------------- -
Economic Impact of Shallow and Deep Agreements
--------------------------------------------- -

8. (U) Based on a "static competitive applied general
equilibrium" model of the Egyptian economy, IIE simulated
the effects of a "shallow integration" agreement and a "deep
integration" agreement. Both simulations assumed full
implementation of the EU and GAFTA agreements. The results
show economic gains in both scenarios, with significantly
larger gains in a deep integration scenario:

Macroeconomic Indicators Shallow Deep
------------------------ ------- ----
(% Change)
Household Welfare 0.16 1.63
Real GDP 1.79 2.82
Consumer Price Index -0.16 -1.60
Real Exchange Rate 2.62 3.21
Returns to Capital -0.42 0.84
Returns to Labor 1.99 3.00

------------------------------------
Negotiation Strategies and Synergies
------------------------------------

9. (U) The authors note that the findings of their study
have important implications for each side's negotiating
strategy and dealings with domestic opponents to an FTA.
For Egypt, an FTA could result in improved market access,
increased foreign direct investment, enhanced consumer
choice, better regional integration, and further reform.
But to gain all these benefits, the GOE would have to be
willing to make more, rather than fewer, commitments. The
authors suggest that Egypt should seek to diverge from the
standard commitments required under a U.S.-style FTA only
when the demands diverge from Egypt's development or reform
needs.

10. (U) For the U.S., the authors argue that it should not
link the announcement of FTA negotiations to an unspecified
level of reform undertaken by Egypt prior to negotiations.
They argue that reform might be better advanced by anchoring
it to the requirements of an FTA. Additionally, the authors
warn that focusing on the narrow interests of particular
U.S. companies that have large stakes in the Egyptian market
(they cite pharmaceutical firms) may prove to be a pitfall.
They argue that where these narrow interests conflict with
Egypt's economic development needs, the USG should be
prepared to be flexible and look at the broader interests of
both countries.

11. (U) The authors suggest that for Egypt, agriculture,
not manufacturing, would face the greatest adjustment
pressures from an FTA. To gain the support of potential
opponents in the agricultural and other sectors, they
recommend the use of phase-ins and special safeguards to
cushion the impact of an FTA on those most adversely
affected. They also suggest that the U.S. might provide
financial assistance to ease the transition process. As for
political opposition in the U.S., the authors contend it
should not be significant. They note that a projected
increase in exports of $2 billion under an FTA would
increase garment exports only $155 million. This increase
would have a negligible impact on the U.S. labor market,
even on the textiles industry, which would be most adversely
affected by an FTA with Egypt.

-------
Comment
-------

12. (SBU) Trade agreements have traditionally been viewed
with suspicion in Egypt. Major opponents include those in
state-run and protected industries who fear that such
agreements will reduce protective tariffs and lead to
ruinous competition and increased unemployment. As the
possibility of an FTA grows more real, we can expect the
opponents of freer trade and greater economic reform to play
on the public's fears and ignorance. This study by IIE, a
prominent international think tank, will inject some
economic reality into the debate. Its conclusion that an
FTA with the U.S. would create significant economic benefits
for Egypt lends credibility and support to those inside of
government who are pushing hard for an FTA. End comment.

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