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PP RUEHROV
DE RUEHEG #0361/01 0561131
ZNR UUUUU ZZH
P 251131Z FEB 08 //ZFR//
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 8265
INFO RUEHXK/ARAB ISRAELI COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0192
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 CAIRO 000361 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, EEB/TPP/BTA/ANA/SAGURTON 
USTR FOR MOWREY 
COMMERCE FOR 4520/ITA/ANESA 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PREL KTEX IS EG
SUBJECT: QIZ EXPORT DROP REINFORCES EGYPTIAN-ISRAELI 
EXPANSION REQUEST 
 
CAIRO 00000361  001.2 OF 002 
 
 
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KINDLY ZFR CAIRO 361. 
 
CABLE WILL BE RETRANSMITTED UNDER NEW NUMBERS. 
 
 
CAIRO 00000361  002 OF 002 
 
 
Trade and Labor Eliyahu Yishai agreed on Oct. 9, 2007, to 
reduce the required level of Israeli content to 10.5 percent 
(ref B) and to request that USTR expand the QIZ area to Upper 
Egypt (ref C).  While both moves work in favor of the GOE, 
Israeli negotiators said they viewed the expansion of markets 
into Upper Egypt as a benefit to offset their reduced export 
income due to the content reduction agreement (ref D). 
 
¶8.  (U) The GOE argues in a brief on the expansion proposal 
(which we submitted separately to the Department and USTR) 
that QIZ expansion would not have an immediate or dramatic 
effect on QIZ exports to the United States.  The eight 
governorates of Upper Egypt are underdeveloped, accounting 
for only 13 percent of investment in Egypt while representing 
27 percent of the population.  According to GOE figures, 
Upper Egypt has a higher rate of poverty -- 34 percent, 
compared to 20 percent -- and a higher rate of illiteracy -- 
43 percent, compared to 34 percent -- than the rest of Egypt. 
 
¶9.  (U) While the lack of existing infrastructure and 
industrial capacity would prevent rapid growth of QIZ exports 
from Upper Egypt, the GOE and Egyptian industrialists hope 
that access to a relatively untapped labor market and 
abundant land would allow for QIZ expansion, easing the 
pressure on capital and labor expenses in existing factories. 
 The GOE has provided land grants and financial incentives to 
developers in the region in keeping with President Mubarak's 
pledges to rectify underdevelopment there. 
 
¶10.  (U) The GOE expects industrial development in Upper 
Egypt could lead to higher employment, higher standards of 
living, and reduced migration to Cairo and other urban 
centers in Egypt.  The GOE argues that expanding the program 
would expand its political benefits, demonstrating to another 
region of the country the value of Egyptian-Israeli 
cooperation, while continued underdevelopment would breed 
instability and extremism. 
 
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COMMENT 
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¶11.  (SBU) QIZ workers we meet have little or no appreciation 
of the political dynamics of the agreement.  But they do know 
that QIZ means jobs, and thousands of them took to the 
streets to demand inclusion in the agreement at its onset. 
The GOE understands that logic, believing that expanding the 
QIZ into Upper Egypt will ultimately mean expanding 
employment.  As a result, it has worked closely with the GOI 
to develop this request.  The political benefit of improving 
Israeli-Egyptian relations will be long-term through the 
development of enduring business ties. 
 
¶12.  (SBU) QIZ expansion into Upper Egypt will not 
significantly broaden the base of QIZ exports beyond 
textiles.  While some Egyptian food processors are 
considering QIZ development in Upper Egypt, we expect that 
the economics of the arrangement will continue to 
overwhelmingly favor exporters of ready-made garments.  Only 
products that normally face high tariffs in the United States 
benefit enough from the QIZ duty-free status to compensate 
for the extra expense of the Israeli inputs. 
 
¶13.  (SBU) However, that supports the GOE contention that QIZ 
expansion would not affect any domestic US industry; Egypt 
would continue to compete with China and other textile 
exporters for market share in the United States.  Considering 
the economic constraints on QIZ exporters, as well as the 
business environment in Upper Egypt, it is unlikely that the 
region would account for more than single-digit increases in 
QIZ exports.  QIZ expansion would, however, help move the 
US-Egyptian economic partnership from aid to trade at a time 
of declining ESF assistance.  It would also strengthen key 
reformers in the cabinet -- notably Prime Minister Nazif and 
Trade Minister Rachid -- and strengthen official GOE-GOI 
relations when other regional dynamics are stressing them. 
RICCIARDONE