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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. 
 
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Summary 
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¶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. 
 
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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. 
 
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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. 
 
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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 
 
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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. 
 
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Comment 
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¶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.