VZCZCXYZ0000
PP RUEHWEB

DE RUEHEGA #6894 3230514
ZNR UUUUU ZZH ZUI RUEWCSE1663 3231105
P 190514Z NOV 06 ZDK DUE TO NUMEROUS SVCS
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHINGTON DC0000
INFO ARAB ISRAELI COLLECTIVE
RUEHAK/AMEMBASSY ANKARA
RUEHBJ/AMEMBASSY BEIJING
RUEHMO/AMEMBASSY MOSCOW
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS CAIRO 006894 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NEA FOR ELA 
USTR FOR SAUMS 
USDA FOR FAA RHAGER 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ECON ETRD FCSCEG EG
SUBJECT: EGYPTIAN GAS, TEXTILE EXPORTS NARROWING TRADE GAP 
WITH U.S. OVER LONG TERM 
 
REF: A. CAIRO 6347 B. CAIRO 4337 C. CAIRO 4167 D. 
     CAIRO 5792 E. CAIRO 5779 F. USDOC 5433 G. 
     CAIRO 6871 
 
¶1. (U) SUMMARY:  ALTHOUGH U.S. EXPORTS TO EGYPT ARE RISING 
THIS YEAR, BARRIERS TO TRADE ARE LOWERING, AND NEW SECTORS 
ARE OPENING TO U.S. PRODUCTS, THE U.S. TRADE SURPLUS WITH 
EGYPT HAS BEEN SHRINKING SINCE 2000, PRIMARILY BECAUSE OF 
RISING U.S. IMPORTS OF EGYPTIAN NATURAL GAS AND DECLINING 
EGYPTIAN IMPORTS OF U.S. WHEAT.  THESE TRENDS, BOLSTERED BY 
SOARING EGYPTIAN EXPORTS FROM QUALIFIED INDUSTRIAL ZONE (QIZ) 
FACTORIES, COULD TIP THE BALANCE OF TRADE TO EGYPT'S FAVOR 
WITHIN SEVERAL YEARS.  HOWEVER, SHIFTS IN THE VOLATILE GLOBAL 
COMMODITIES MARKETS FOR WHEAT AND NATURAL GAS COULD REVERSE 
THESE TRENDS IN THE SHORT TERM.  THE U.S. TRADE SURPLUS WITH 
EGYPT WILL LIKELY END 2006 HIGHER THAN IN 2005, ALTHOUGH THE 
LONG-TERM TRENDS REMAIN IN EGYPT'S FAVOR.  END SUMMARY. 
 
¶2. (U) ANNUAL U.S. EXPORTS TO EGYPT FELL FIVE PERCENT FROM 
2000 TO 2005, FROM $3.33 BILLION TO $3.17 BILLION, WHILE 
EGYPTIAN EXPORTS TO THE UNITED STATES MORE THAN DOUBLED 
DURING THAT PERIOD, SURPASSING $2 BILLION LAST YEAR.  AS A 
RESULT, THE U.S. TRADE SURPLUS FELL FROM $2.4 BILLION IN 2000 
TO $1.1 BILLION IN 2005, MIRRORING THE TREND IN THE GLOBAL 
U.S. BALANCE OF TRADE. TRADE IN BOTH DIRECTIONS IS GROWING 
ROBUSTLY THIS YEAR.  THROUGH SEPTEMBER 2006, U.S. EXPORTS TO 
EGYPT ROSE 31 PERCENT COMPARED TO THE SAME PERIOD LAST YEAR 
TO $2.9 BILLION, WHILE EGYPTIAN EXPORTS TO THE UNITED STATES 
ROSE 40 PERCENT TO $1.8 BILLION. 
 
--------------------------------------------- -- 
INCREASING SALES OF LIQUEFIED NATURAL GAS (LNG) 
--------------------------------------------- -- 
 
¶3. (U) INCREASING EGYPTIAN LNG PRODUCTION, COMBINED WITH 
RISING PRICES FOR OIL AND GAS, HAS DRIVEN THE SHARP INCREASE 
IN OVERALL EGYPTIAN EXPORTS TO THE UNITED STATES.  IN 2000, 
BEFORE EGYPT'S LNG PRODUCTION CAME ON LINE, MINERAL FUELS 
MADE UP ONLY 13 PERCENT OF EGYPTIAN EXPORTS TO THE UNITED 
STATES WHILE IN 2005 THEY CONSTITUTED 51 PERCENT OF EGYPTIAN 
EXPORTS; NATURAL GAS ALONE ACCOUNTED FOR 36 PERCENT OF 
EGYPTIAN EXPORTS, AND OIL ANOTHER 15 PERCENT.  OVERALL 
MINERAL EXPORTS INCREASED NEARLY TENFOLD DURING THAT 
FIVE-YEAR PERIOD. 
 
¶4. (U)  IN THE ABSENCE OF NEW LNG PRODUCTION/EXPORTS 
FACILITIES COMING ON LINE IN 2007, WE EXPECT A LEVELING-OFF 
OF THE EFFECT OF LNG EXPORTS ON EGYPTS OVERALL EXPORTS IN 
THE COMING YEAR.  NEW PROJECTS ARE IN THE WORKS, HOWEVER, 
INCLUDING A THIRD LNG TRAIN FACILITY ON EGYPT'S MEDITERRANEAN 
COAST PROJECTED TO OPEN IN 2009.  GROWING DOMESTIC DEMAND FOR 
ELECTRIC POWER -- DEMAND INCREASED 10 PERCENT LAST YEAR -- IS 
FUELING AN INTERNAL POLITICAL DEBATE OVER WHETHER EGYPT'S GAS 
SUPPLIES SHOULD BE USED FOR EXPORT VERSUS SUPPLYING THE 
COUNTRY'S GAS-FIRED, AND SUBSIDIZED, POWER GENERATION SECTOR. 
 
---------------------- 
QIZ PRODUCTION SOARING 
---------------------- 
 
¶5.  (U) INCREASING EGYPTIAN TEXTILE EXPORTS ARE ALSO ADDING 
MOMENTUM TO THE SHIFT IN THE BALANCE-OF-TRADE.  IN THE FOUR 
QUARTERS ENDING IN JUNE 2006, AS QIZ FACTORIES BEGAN TO GEAR 
UP PRODUCTION, THEIR EXPORTS WERE VALUED AT $508 MILLION, OR 
25 PERCENT OF EGYPTIAN EXPORTS TO THE UNITED STATES DURING 
THAT PERIOD.  QIZ FACTORIES CONTINUE TO EXPAND AS THEY 
SCRAMBLE TO MEET INCREASING ORDERS (REF A), AND TEXTILE 
EXPORTS WILL ASSUME A LARGER SHARE OF EGYPTIAN EXPORTS TO THE 
UNITED STATES IN COMING YEARS.  AS A RESULT, OVERALL EGYPTIAN 
EXPORTS WILL BE MORE RESISTANT TO PRICE SHOCKS IN THE NATURAL 
GAS MARKET, AND THE TRADE TREND IN EGYPT'S FAVOR WILL 
SOLIDIFY. 
 
----------------------------------- 
U.S. AGRICULTURAL EXPORTS DECLINING 
----------------------------------- 
 
¶6.  (U) WHEAT FARMERS HAVE BEEN LOSING SALES IN EGYPT TO 
RUSSIA AND UKRAINE IN RECENT YEARS BECAUSE OF THE RELATIVELY 
HIGH QUALITY, AND HIGH PRICE, OF U.S. GRAIN.  OF THE 7 
MILLION TONS OF WHEAT THAT EGYPT IS EXPECTED TO IMPORT THIS 
YEAR, THE GOE'S GENERAL AUTHORITY FOR SUPPLY COMMODITIES 
(GASC) WILL BUY AROUND 4 MILLION TONS.  GASC WHEAT IS USED 
EXCLUSIVELY FOR THE HIGHLY SUBSIDIZED "BALADI," OR LOCAL, 
BREAD, A STAPLE ON TABLES ACROSS EGYPT.  BECAUSE THE RETAIL 
PRICE OF BALADI BREAD IS FIXED, AND THE GOE LOSES MONEY ON 
EVERY PIECE OF PITA IT SELLS, GASC BUYS THE CHEAPEST GRAIN IT 
CAN FIND, REGARDLESS OF QUALITY. 
 
¶7.  (U) AS A RESULT, FROM 2001 TO 2005 U.S. BULK WHEAT 
EXPORTS TO EGYPT FELL BY 49 PERCENT TO $190 MILLION.  THAT 
DROP ACCOUNTS FOR ESSENTIALLY ALL OF THE DROP IN U.S. 
AGRICULTURAL EXPORTS, WHICH FELL FROM $1 BILLION IN 2001 TO 
$818 MILLION IN 2005. SHIFTS IN THE GLOBAL WHEAT MARKET COULD 
REVERSE THESE TRENDS IN THE SHORT-TERM: A POOR HARVEST IN THE 
BLACK SEA WOULD REDUCE GLOBAL SUPPLY AND DRIVE UP PRICES, 
MAKING U.S. GRAIN MORE COMPETITIVE; OR A BUMPER CROP IN THE 
UNITED STATES WOULD BRING THE PRICE OF U.S. WHEAT DOWN TO A 
LEVEL MORE ATTRACTIVE TO GASC BUYERS.  BUT THE HIGH U.S. 
WHEAT PRICES AND RESULTING LOST SALES IN EGYPT REMAIN 
SYMPTOMATIC OF AN OVERALL U.S. PRICE STRUCTURE THAT IS 
FUELING THE NATIONAL TRADE DEFICIT. 
 
¶8.  (U) OTHER AGRICULTURAL TRENDS ARE WORKING IN FAVOR OF 
U.S. EXPORTS TO EGYPT, HOWEVER.  THE UNITED STATES REMAINS 
EGYPTS TOP SUPPLIER OF CORN, WHILE SALES OF MILK POWDER AND 
BEEF OFFALS (INTERNAL ORGANS) ARE INCREASING.  CONTINUED 
ECONOMIC GROWTH IN EGYPT COULD ALSO INCREASE DEMAND FOR HIGH 
VALUE-ADDED AMERICAN AGRICULTURAL PRODUCTS. 
 
------------------------ 
U.S. ASSISTANCE CHANGING 
------------------------ 
 
¶9.  (U) CHANGES IN ECONOMIC CONDITIONS AND THEIR RESULTING 
IMPACT ON USAID PROGRAMS ARE ALSO TIPPING THE BALANCE OF 
TRADE TOWARD EGYPT.  IN PARTICULAR, THE COMMODITY IMPORT 
PROGRAM, WHICH PROVIDED EGYPTIAN COMPANIES ACCESS TO HARD 
CURRENCY TO IMPORT U.S. MACHINERY AND RAW MATERIALS, HAS BEEN 
LESS IN DEMAND AS FINANCIAL REFORMS GIVE EGYPTIAN IMPORTERS 
EASIER ACCESS TO PRIVATE-SECTOR FINANCING (REF B).  THE 
PROGRAM PROVIDED $270 MILLION IN LOANS TO EGYPTIAN COMPANIES 
TO PURCHASE U.S. GOODS IN 2002, BUT ONLY $90 MILLION DURING 
THE LAST 12 MONTHS. 
 
¶10.  (U) WHILE SOME BORROWERS CONTINUED TO IMPORT U.S. GOODS 
USING PRIVATE-SECTOR FINANCING, OTHERS SHOPPED ELSEWHERE. 
U.S. MACHINERY AND TRANSPORT EXPORTS TO EGYPT FELL FROM $1.4 
BILLION IN 2000 TO $1.1 BILLION IN 2005.  FURTHER REDUCTIONS 
IN THE U.S. ASSISTANCE PROGRAM, WHICH HAS BEEN REDUCED $40 
MILLION A YEAR SINCE 1998, WILL HAVE A CONTINUING NEGATIVE 
IMPACT ON U.S. EXPORTS TO EGYPT. 
 
¶11.  (U) EVOLUTION IN THE $1.3-BILLION ANNUAL SECURITY 
ASSISTANCE PROGRAM COULD ALSO REDUCE U.S. EXPORTS TO EGYPT. 
CURRENTLY 73 PERCENT OF MILITARY ASSISTANCE GOES TO UPGRADES 
AND MAINTENANCE OF EXISTING U.S SYSTEMS, DIRECTLY BENEFITING 
U.S. COMPANIES SELLING MILITARY EQUIPMENT (REF C). IN 
ADDITION TO THE $1.3 BILLION ANNUAL MILITARY ASSISTANCE 
ALLOCATION, EGYPT RECEIVED AN ADDITIONAL $1.7 BILLION FROM 
FISCAL YEARS 2001-2005 IN ASSISTANCE PREVIOUSLY ALLOCATED BUT 
NOT DISPERSED, BOOSTING U.S. EXPORTS DURING THAT PERIOD.  NO 
SUCH ALLOCATIONS ARE EXPECTED IN COMING YEARS. 
 
------------------------- 
EGYPTIANS SHOPPING AROUND 
------------------------- 
 
¶12.  (U) WHEN US AND EGYPT DID NOT LAUNCH FREE TRADE 
NEGOTIATIONS IN THE SPRING AS THE GOE HAD ANTICIPATED, TRADE 
MINISTER RACHID RACHID MADE A NUMBER OF PUBLIC COMMENTS ABOUT 
EGYPT'S INTEREST IN DEVELOPING BUSINESS TIES WITH CHINA, 
RUSSIA, AND OTHER TRADING PARTNERS.  FOLLOWING RACHID'S 
VISITS TO CHINA AND RUSSIA THIS FALL (REF D), HIS STATEMENTS 
THAT HE EXPECTED CHINA TO BECOME EGYPT'S LARGEST BILATERAL 
TRADING PARTNER (VICE THE UNITED STATES) AND THAT HE EXPECTED 
TO DRAMATICALLY EXPAND EGYPTIAN-RUSSIAN TRADE RECEIVED 
WIDESPREAD ATTENTION. EGYPT HAS A SIGNIFICANT TRADE DEFICIT 
 
 
WITH BOTH COUNTRIES, HOWEVER.  WHILE EGYPT MAY BE ABLE TO 
INCREASE NATURAL GAS EXPORTS TO CHINA, IT HAS LITTLE TO OFFER 
RUSSIA, AND APPEARS TO HOPE PRIMARILY FOR AN INCREASE IN 
DIRECT FOREIGN INVESTMENT. 
 
¶13.  (U) RACHID ALSO SAID THIS SUMMER THAT IN VIEW OF THE 
SUSPENSION OF THE WTO DOHA ROUND OF NEGOTIATIONS, EGYPT WILL 
FOCUS ON ITS ARAB AND EUROPEAN PARTNERS WITHIN THE FRAMEWORK 
OF THE ARAB FREE TRADE AREA AND THE EURO-MEDITERRANEAN 
PARTNERSHIP (REF E). 
 
¶14.  (SBU) THESE STATEMENTS HAVE CONTRIBUTED TO A SENSE OF 
LACK OF MOMENTUM AMONG U.S. BUSINESSES IN EGYPT.  THE U.S. 
CHAIR OF THE U.S.-EGYPT BUSINESS COUNCIL TOLD USDOC OFFICIALS 
RECENTLY THAT BILATERAL ACTIVITY IS AT A TEN-YEAR LOW (REF 
F).  CAIRO AMERICAN CHAMBER OF COMMERCE OFFICIALS HAVE ALSO 
BEEN DISPIRITED BY THE LACK OF PROGRESS TOWARD AN FTA.  AND 
DURING A RECENT TRIP TO THE UNITED STATES WITH OTHER NEA 
CHIEFS-OF-MISSION TO PROMOTE U.S. TRADE WITH THE MIDDLE EAST, 
THE AMBASSADOR FOUND WIDESPREAD INTEREST IN THE REGION AMONG 
U.S. BUSINESSES, BUT A PAUCITY OF INFORMATION ABOUT ECONOMIC 
CONDITIONS HERE. 
 
------------------------------- 
U.S. EXPORTS INCREASING IN 2006 
------------------------------- 
 
¶15.  (U) EVEN SO, 2006 HAS BEEN A GOOD YEAR FOR U.S. 
EXPORTERS TO EGYPT.  THROUGH SEPTEMBER, EXPORTS WERE UP 31 
PERCENT OVER THE SAME PERIOD LAST YEAR.  DRIVING THAT 
INCREASE IS A 35-PERCENT INCREASE IN MACHINERY AND TRANSPORT 
EQUIPMENT AS WELL AS A 19-PERCENT INCREASE IN AGRICULTURAL 
EXPORTS, ALTHOUGH EGYPTIAN EXPORTS INCREASED EVEN FASTER 
DURING THE SAME PERIOD. 
 
¶16.  (SBU) COMMENT: THE NARROWING U.S. TRADE SURPLUS IN EGYPT 
IS AN UNINTENDED CONSEQUENCE OF A NUMBER OF AMERICAN 
SUCCESSES: ECONOMIC REFORM SUPPORTED BY THE USG HAS MADE 
EGYPTIAN IMPORTERS LESS RELIANT ON USG CREDIT; HIGH-QUALITY 
AMERICAN WHEAT IS TOO EXPENSIVE FOR EGYPTIAN BUYERS; THE 
EGYPTIAN NATURAL GAS INDUSTRY IS DEVELOPING QUICKLY WITH THE 
PARTICIPATION OF AMERICAN AND MULTINATIONAL COMPANIES; AND 
EGYPTIAN EXPORTERS ARE TAKING EAGER ADVANTAGE OF THE QIZ 
AGREEMENT TO SELL TEXTILES TO THE UNITED STATES.  THEIR 
SUCCESS IN QIZ EXPORTS MAY PARTLY EXPLAIN A RECENT LACK OF 
ENTHUSIASM FOR REVIVING THE FTA (REF G). REGARDLESS, THE 
SURGE IN BIDIRECTIONAL TRADE THIS YEAR INDICATES THAT EGYPT 
REMAINS A LUCRATIVE MARKET FOR AMERICAN PRODUCTS AND THAT 
TRADE CONTINUES TO CONSTITUTE A GROWING PART OF OUR BILATERAL 
RELATIONSHIP.  THE CHALLENGE OF U.S. EXPORTERS WILL BE TO 
RIDE EGYPT'S ECONOMIC EXPANSION WITH SALES OF CAPITAL GOODS. 
NEW STATE INVESTMENT IN ENERGY AND TRANSPORTATION OFFERS 
ATTRACTIVE OPPORTUNITIES. 
RICCIARDONE