VZCZCXYZ0000
PP RUEHWEB

DE RUEHEGA #7219 3551421
ZNR UUUUU ZZH ZUI RUEWMCF3199 3551408
P 211421Z DEC 06
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC0000
INFO ARAB ISRAELI COLLECTIVE
RUEHAK/AMEMBASSY ANKARA
RUEHIT/AMCONSUL ISTANBUL

UNCLAS CAIRO 007219 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NEA FOR ELA 
USTR FOR SAUMS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON ELAB EG
SUBJECT: EGYPTIAN QIZ EXPORTS CONTINUE TO RISE, LABOR 
MARKET TIGHTENS 
 
REF: A. CAIRO 6894 
     ¶B. AMMAN 8341 
     ¶C. 2005 CAIRO 1013 
     ¶D. CAIRO 6347 
 
¶1.  (SBU) SUMMARY: TWO YEARS AFTER THE SIGNING OF THE 
QUALIFIED INDUSTRIAL ZONE (QIZ) AGREEMENT BY EGYPT, ISRAEL 
AND THE UNITED STATES, EGYPTIAN QIZ EXPORTS ARE CONTINUING TO 
RISE SHARPLY.  FACTORY OWNERS ARE SCRAMBLING TO FIND ENOUGH 
WORKERS TO STAFF THEIR NEW PRODUCTION LINES, EVEN AS THEY 
MOVE AHEAD WITH PLANS FOR FURTHER EXPANSION AND WORK WITH 
BUYERS TO AVOID THE KINDS OF LABOR PROBLEMS HINDERING 
JORDANIAN QIZ PRODUCTION.  EGYPTIAN QIZ OFFICIALS FACE OTHER 
PROBLEMS, INCLUDING CONTINUED MURMURS OF RESISTANCE TO TRADE 
WITH ISRAEL AND THEIR FAILURE TO NEGOTIATE A LOWER ISRAELI 
CONTENT REQUIREMENT, BUT EVEN SO THE AGREEMENT IS ENTERING 
ITS THIRD YEAR ON SOLID FOOTING.  END SUMMARY. 
 
¶2.  (U) EGYPTIAN QIZ FACTORIES EXPORTED $178 MILLION IN GOODS 
TO THE UNITED STATES IN THE THIRD QUARTER OF 2006, A 
51-PERCENT INCREASE OVER THE THIRD QUARTER OF 2005.  THE 
NUMBER OF EXPORTING COMPANIES ROSE TO 139, EMPLOYING WELL 
OVER 100,000 EGYPTIANS. DURING THE LAST FOUR QUARTERS, 
EGYPTIAN QIZ EXPORTS TOTALED $571 MILLION, OR 22 PERCENT OF 
EGYPT'S $2.6 BILLION IN EXPORTS TO THE UNITED STATES DURING 
THAT PERIOD.  (NATURAL GAS CONTINUES TO BE EGYPT'S LEADING 
EXPORT, REF A). NEARLY ALL OF THE QIZ EXPORTS WERE IN 
TEXTILES, PREDOMINANTLY PANTS USING ISRAELI CHEMICALS, 
ZIPPERS, PACKAGING MATERIALS, AND OTHER INPUTS.  UNDER THE 
TERMS OF THE AGREEMENT, EGYPTIAN EXPORTS FROM QUALIFIED 
FACTORIES MUST INCLUDE 11.7-PERCENT ISRAELI CONTENT TO BE 
EXEMPT FROM U.S. CUSTOMS DUTIES. 
 
----------------------- 
COMPETITION FOR WORKERS 
----------------------- 
 
¶3.  (SBU) QIZ FACTORY OWNERS REPORT THAT THEY HAVE TO COMPETE 
FIERCELY FOR WORKERS, OFFERING HIGHER PAY, FREE LUNCHES, FREE 
TRANSPORTATION, TRAINING AND OTHER INCENTIVES, OFTEN LURING 
WORKERS AWAY FROM THEIR COMPETITORS.  EGYPTIAN QIZ LABOR 
COSTS RUN ABOUT $100 USD PER MONTH PER WORKER, WHICH IS 
COMPETITIVE INTERNATIONALLY, ALTHOUGH FACTORY OWNERS WORRY 
THAT IF LABOR COSTS CONTINUE TO RISE, SUB-SAHARAN AFRICAN 
COUNTRIES WITH DRAMATICALLY LOWER LABOR COSTS COULD UNDERCUT 
THEM ON PRICE AND NEGATE THE BENEFITS OF THE QIZ. 
 
¶4.  (SBU) LOW WORKER PRODUCTIVITY, FUELED IN PART BY HIGH 
TURNOVER AND ABSENTEEISM, IS ALSO A PROBLEM, SAID MAN MOHAN, 
OWNER OF VELOCITY APPARELZ IN ISMAILIA. MOHAN APPLIED TO THE 
MINISTRY OF LABOR FOR WORK PERMITS FOR 350 SRI LANKANS, WHO 
ARE ON AVERAGE TWICE AS PRODUCTIVE AS EGYPTIAN WORKERS, HE 
SAID.  THE MINISTRY DENIED THE PERMITS IN KEEPING WITH GOE 
STRATEGY TO GENERATE EMPLOYMENT FOR EGYPTIANS. 
 
¶5.  (SBU) U.S. IMPORTERS ARE WORRIED THAT PRESSURE ON THE 
EGYPTIAN LABOR MARKET COULD RESULT IN AN INCREASE IN FOREIGN 
WORKERS, A PHENOMENON THAT RESULTED IN POOR LABOR PRACTICES 
IN JORDAN (REF B), SAID KESAVA MURALI, A COMPLIANCE OFFICER 
FOR THE BUYER JONES INTERNATIONAL.  JONES AND LEVI STRAUSS 
HOSTED A MEETING OF FACTORY REPRESENTATIVES IN CAIRO ON DEC. 
19 TO DISCUSS FAIR LABOR PRACTICES AND DEVISE STRATEGIES FOR 
PREVENTING ANY FUTURE LABOR VIOLATIONS.  (NOTE: POST 
PARTICIPATED IN THE MEETING AS AN OBSERVER AND WILL CONTINUE 
TO EXPLORE WAYS TO SUPPORT THIS EFFORT. END NOTE.) 
 
--------------------- 
AND AN EXPANSION BOOM 
--------------------- 
 
¶6.  (SBU) JAMAL SALAM, OWNER OF SUNSHINE READY-MADE GARMENTS, 
LED ECONOFFS ON A TOUR OF THE CONSTRUCTION SITE OF HIS NEXT 
PLANNED EXPANSION IN ISMAILIA, EXPECTED TO OPEN NEXT YEAR. 
THE 16,000 SQUARE-FOOT FACILITY WILL SIT ADJACENT TO HIS 
MOST-RECENT EXPANSION, A 26,000 SQUARE-FOOT FACILITY THAT 
OPENED THIS YEAR.  HE RECEIVED GOE APPROVAL FOR THE EXPANSION 
IN MARCH, BROKE GROUND IN APRIL, AND WAS EXPORTING BY 
NOVEMBER, PICKING UP ORDERS FOR LEVIS FROM IDLE JORDANIAN 
FACTORIES.  (NOTE: WHILE NEW QIZ FACTORIES REQUIRE USTR 
APPROVAL, ALI AWNI, HEAD OF THE MINISTRY OF TRADE AND 
INDUSTRY'S QIZ UNIT, SAID THAT ALL EXPANSION TO DATE HAS BEEN 
OF EXISTING FACTORIES, ARGUING THAT DOES NOT REQUIRE USG 
APPROVAL.  POST INTENDS TO FOLLOW UP ON THIS ISSUE IN 
COOPERATION WITH USTR TO ENSURE THAT QIZ EXPANSION IS IN 
ACCORDANCE WITH THE AGREEMENT. END NOTE.) 
 
¶7.  (SBU) SALAM RECENTLY RETURNED FROM A TRIP TO TURKEY, 
WHERE HE WAS NEGOTIATING A PARTNERSHIP WITH TURKISH TEXTILE 
MANUFACTURERS ANXIOUS TO TAKE ADVANTAGE OF THE QIZ AGREEMENT 
AND EGYPT'S LOW OVERHEAD TO PROVIDE UPSTREAM SERVICES TO 
EXISTING QIZ EXPORTERS.  NATURAL GAS IN EGYPT COSTS A QUARTER 
OF THE RATE IN TURKEY, AND WATER IS NEARLY HALF AS CHEAP, HE 
SAID.  LABOR COSTS IN EGYPT ARE ALSO A FRACTION OF THE COST 
IN TURKEY.  SEPARATELY, THREE TURKISH FACTORY REPRESENTATIVES 
DISCUSSED PLANS FOR INVESTMENTS OF 300 MILLION EGYPTIAN 
POUNDS (USD 52 MILLION) WITH MINISTER OF TRADE AND INDUSTRY 
RACHID RACHID EARLIER IN DECEMBER, ACCORDING TO PRESS REPORTS. 
 
¶8.  (SBU) ANOTHER EXAMPLE OF THE RAPID QIZ EXPANSION IS LOTUS 
GARMENTS, A PORT SAID FACTORY PRODUCING JEANS FOR LEVIS AND 
CALVIN KLIEN, WHICH HAS DOUBLED ITS CAPACITY FROM 18 TO 36 
PRODUCTION LINES SINCE THE START OF THE QIZ AGREEMENT. 
EXPORTS TO THE UNITED STATES ARE RISING FROM $18 MILLION IN 
2004 TO $38 MILLION IN 2006 TO A PROJECTED $50 MILLION IN 
2007, SAID FACTORY OWNER HOSSAM GABR. 
 
--------------------------------- 
ISRAELI-EGYPTIAN MEETING AMICABLE 
--------------------------------- 
 
¶9.  (SBU) IN THE QUARTERLY MEETING BETWEEN EGYPTIAN AND 
ISRAELI QIZ OFFICIALS DEC. 11 IN CAIRO, THE TWO SIDES 
AMICABLY RESOLVED TECHNICAL QUESTIONS REGARDING CERTIFICATION 
OF QIZ FACTORIES AND ISRAELI SUPPLIERS.  HOWEVER, THEY MADE 
NO HEADWAY ON THE EGYPTIAN PROPOSAL TO LOWER THE ISRAELI 
CONTENT REQUIREMENT TO 8 PERCENT TO BRING IT IN LINE WITH THE 
JORDANIAN QIZ AGREEMENT.  EGYPTIAN QIZ FACTORY OWNERS IN 
ISMAILIA AND PORT SAID RAISED THIS ISSUE REPEATEDLY WITH 
ECONOFF DURING FACTORY VISITS, COMPLAINING THAT THE ISRAELIS 
DO NOT OFFER ENOUGH REASONABLY PRICED INPUTS TO MEET THE 
REQUIREMENT.  BUT GABBY BAR, HEAD OF THE ISRAELI DELEGATION, 
SAID ON THE SIDELINES OF THE MEETING THAT THE ISRAELIS WERE 
NOT CONVINCED, NOTING THAT EGYPTIAN PRODUCERS WOULD NOT BE 
EXPANDING THEIR OPERATIONS IF THE CURRENT RULES WERE NOT 
LUCRATIVE. 
 
--------------------------------------- 
SLIGHT, BUT STEADY, DOMESTIC OPPOSITION 
--------------------------------------- 
 
¶10. (SBU) THE ONLY PUBLIC PROTESTS AGAINST THE QIZ WERE 
STAGED BY WORKERS AND FACTORY OWNERS AT THE INCEPTION OF THE 
AGREEMENT CONCERNED THAT THEY WOULD BE LEFT OUT OF IT (REF 
C).  OPPOSITION POLITICIANS AND MEDIA ANALYSTS HAVE SNIPED AT 
THE AGREEMENT PERIODICALLY SINCE THEN, HOWEVER.  ISRAEL AND 
EGYPT ADOPTED A LOW PROFILE IN SUMMER 2006 DURING THE 
VIOLENCE IN GAZA, ISRAEL AND LEBANON, POSTPONING A QUARTERLY 
TECHNICAL MEETING (REF D).  AT THE TIME, AWNI REMOVED THE QIZ 
UNITS SIGN FROM THE ENTRANCE TO THE MINISTRY OF TRADE IN 
ORDER TO AVOID A PROVOCATION, BUT THE SIGN IS NOW BACK UP AND 
THE ATMOSPHERE IS CALMER, HE SAID. 
 
¶11. (SBU) EVEN SO, CRITICISM CONTINUES TO SURFACE.  EARLIER 
THIS MONTH, AL-AZHAR BANNED PUBLICATION OF A BOOK "QIZ FROM A 
LEGAL (RELIGIOUS) AND ECONOMIC PERSPECTIVE," WHICH ARGUED 
THAT THE QIZ AGREEMENT IS ILLEGITIMATE UNDER ISLAMIC LAW 
BECAUSE THE AGREEMENT INVOLVES DEALINGS WITH JEWS.  AZHAR 
CONTACTS WOULD NOT COMMENT ON THE REASON FOR THE BAN, 
ALTHOUGH AZHAR GENERALLY JUSTIFIES SUCH DECISIONS ON THE 
GROUNDS THAT THE WORK PROMOTES FAULTY VIEWS OF ISLAM.  ON 
DEC. 20, A FRONT-PAGE ARTICLE IN THE INDEPENDENT DAILY 
NEWSPAPER EGYPT TODAY DETAILED A PARLIAMENTARY GRILLING OF 
MINISTER OF TRADE AND INDUSTRY RACHID RACHID OVER A RISE IN 
ISRAELI EXPORTS TO EGYPT.  RACHID EXPLAINED THE INCREASE AS A 
CONSEQUENCE OF THE QIZ AGREEMENT, NOTING THAT EGYPT 
RE-EXPORTS THE PRODUCTS PRODUCED WITH ISRAELI INPUTS. 
 
¶12.  (SBU) COMMENT: IN ITS FIRST TWO YEARS, THE QIZ AGREEMENT 
HAS CONTRIBUTED SIGNIFICANTLY TO USG EFFORTS TO PROMOTE PEACE 
AND PROSPERITY IN THE REGION, CREATING NEW JOBS, 
STRENGTHENING ECONOMIC TIES BETWEEN ISRAEL AND EGYPT DURING 
PERIODS OF POLITICAL TURMOIL, AND DEMONSTRATING THE TANGIBLE 
BENEFITS OF A STRONG PARTNERSHIP WITH THE UNITED STATES. 
AMERICAN CONSUMERS ALSO BENEFITED FROM THE LOWER-COST APPAREL 
PRODUCED BY THE QIZ FACTORIES.  WHILE IT IS DIFFICULT FOR US 
TO JUDGE THE COST OF THE QIZ IN TERMS OF TRADE-DIVERSIONARY 
EFFECTS, WE BELIEVE THAT EGYPT'S INCREASE IN EXPORTS HAS COME 
AT THE EXPENSE OF EXPORTS FROM ELSEWHERE, MOST LIKELY FROM 
JORDAN BECAUSE OF ITS LABOR TROUBLES.  WE WILL CONTINUE TO 
WORK CLOSELY WITH THE GOE, FACTORIES, INDUSTRY 
REPRESENTATIVES, AND OUR COLLEAGUES IN THE REGION TO ENSURE 
THE CONTINUED SUCCESS OF THIS INITIATIVE. 
 
JONES