Impact of Qualifying Industrial Zones on Egypt: A Critical Analysis

Ahmed Farouk GhoneimCairo University

Email address: aghoneim@gmx.de

Research Aim and QuestionsThe study aims at evaluating the impact of QIZ on Egypt from an economic perspective by addressing a number of questions.

• What would have been a better option for Egypt? A QIZ or Free Trade Area (FTA) with the United States of America (US )

• Is QIZ benefiting the two main non-oil exports in Egypt (ready made garments and textiles, and processed food) equally?

• What are the main pros and cons of QIZ Egypt when compared to QIZ Jordan?

Methodology

• The study applies two main methodologies, namely, an analytical approach utilizing data and information analysis;

and analysis of structured interviews' results carried out with 15 QIZ stakeholders in Egypt (exporting firms, government officials, and business associations).

Contents

• Introduction• Section One: An Overview on QIZ• Section Two: Literature Review• Section Three: Analysis of the Questionnaire• Conclusion and Policy Implications

Section One: What is the QIZ?

• QIZ extends the preferential duty free treatment in the US market for products of Egyptian origin provided that they meet specific rules of origin requirements by including an Israeli component.

• QIZ is an American trade initiative to promote political goals, namely effective normalization between Israel and its Arab neighbours, Egypt and Jordan.

• QIZ was signed as a response to the expiration of the Multi-Fiber Agreement (MFA), but it is not confined to textiles and ready made garments.

Section One: What is the QIZ?

• QIZ is important for Egypt for several reasons:

a) US is the largest export market for Egyptb) Egypt does not enjoy a duty free access in

the US marketc) Textiles and ready made garments are

among the largest Egyptian exports to US

Section Two: How has QIZ Performed?

• Literature (Sallam, 2008; Refaat, 2006; and Ghoneim, 2008) emphasizes that there is a general agreement that QIZ is of benefit to Egypt from an economic point of view.

• The extent of benefit differs among the two major non-oil exports of Egypt. Textiles and ready made garments seem to be the main beneficiary from concluding the QIZ, which is not the case for processed food.

Section Two: How has QIZ Performed?

• Exports following QIZ have been on an rising trend.

• Exports in the third quarter of 2008 have almost increased three times when compared to exports in the second quarter of 2005.

• 95% of Egyptian exports to the US of ready made garments with its different detailed items starting 2005 took place through QIZ.

Egyptian Exports of T&C to the US (million US $)

01002003004005006007008009001000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Section Three: Analysis of the Structured Interviews

• Did QIZ benefit textiles and ready made garments industry?

- QIZ saved the textiles and ready made garments exports to US (MFA, China).

- QIZ increased investments (domestic and foreign) and just started to enhance vertical integration

- QIZ increased exports of textiles and ready made garments, however….

Potential is still unreaped (high cost of Israeli inputs, supply side problems, concentration of exports in low tariff products)

• Did QIZ benefit processed food industry?Limited effect because (low tariffs in US; scarcity

of inputs from Israel; and geographical complexity of exporters)

• Is FTA better than the QIZ?Difficult to answer, however:QIZ provided immediate access with lax rules of

origin (when compared to FTA), however it suffers from political vulnerability

Egypt versus Jordan QIZ

• Differences between Jordan and Egypt QIZs:- Egypt QIZ involves a higher Israeli percentage

than Jordan QIZ (10.5 compared to 8), however, Egypt QIZ is much more flexible.

- Jordan early start of QIZ helped her to have higher volume of exports, but Egypt is catching up.

- Jordan’s business environment is more conducive than that of Egypt.

Conclusion and Policy Implications

• QIZ has had a role that cannot be played by FTA in the short and medium terms. FTA could be better in the long run provided that rules of origin are not complicated especially that FTA does not suffer from political vulnerability as QIZ.

• QIZ developmental impact is difficult to ascertain due to employment, vertical integration, small and medium enterprises, and political vulnerability.

• QIZ has a large potential to be reaped, but needs a number of fixes (lower Israeli component; political vulnerability).