VZCZCXRO6411
PP RUEHROV
DE RUEHEG #0364/01 0561426
ZNR UUUUU ZZH
P 251426Z FEB 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 8269
RUCPDOC/USDOC WASHDC PRIORITY 0386
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0194

UNCLAS SECTION 01 OF 03 CAIRO 000364 
 
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 
 
REF: A. 2007 CAIRO 2903 
     ¶B. 2007 CAIRO 3023 
     ¶C. 2007 CAIRO 3022 
     ¶D. 2007 CAIRO 3305 
 
Sensitive but unclassified, not for Internet distribution. 
 
¶1.  (SBU) SUMMARY:  As we prepare for high-level visits to the 
region 
surrounding the 60th anniversary of Israel and the World Economic 
Forum in 
Egypt, Post recommends strong consideration of a joint 
Egyptian-Israeli request 
to expand the Qualified Industrial Zone (QIZ) into Upper Egypt. 
Expanding the 
program would bring significant political and economic benefit to 
the Egyptians, 
boost Israeli-Egyptian economic cooperation, and have no significant 
impact on 
the American economy.  END SUMMARY. 
 
¶2.  (U) Egyptian QIZ factories exported USD $152 million in goods to 
the United 
States in the fourth quarter of 2007, a 19-percent drop from the 
peak quarterly 
export of USD $188 million in the third quarter of 2007.  While much 
of that 
drop is attributable to annual market cycles, the figure was also 9 
percent 
below QIZ exports in the fourth quarter of 2006, representing the 
first quarter- 
on-quarter decline in the three-year history of the agreement. 
Egyptian 
industrialists attribute the decline to the slowing US economy and 
the falling 
dollar relative to the euro, which is luring Egyptian exporters to 
European 
markets. While QIZ food exports showed a slight up-tick, they 
continue to 
represent less than 1 percent of QIZ exports, which are almost 
exclusively 
pants, shirts, and other ready-made garments. 
 
-------------------------------- 
Explosive growth slows, reverses 
-------------------------------- 
 
¶3.  (U) The GOE, GOI, and USG signed the QIZ agreement in 2004 to 
encourage 
Israeli-Egyptian economic cooperation by granting duty-free status 
to Egyptian 
products that contain 11.7 percent Israeli content.  The GOE also 
hoped that the 
agreement would allow Egypt to maintain its share of the US market 
following the 
expiry of its export quota under the Multi-Fibre Agreement in 2004. 
In response 
to Egyptian and Israeli concerns that the area initially designated 
for the 
QIZ was too small, USTR agreed to expand it in 2005 to cover 
additional 
factories in the Nile Delta and Suez Canal region.  More than 
100,000 Egyptians 
now work in QIZ factories. 
 
¶4.  (U) QIZ exports had increased since the inception of the 
program, but the 
rate of growth declined, constrained by a tightening skilled labor 
market, a 
shortage of economical Israeli inputs, and competition from other 
garment 
exporters to the United States (ref A).  The quarter-on-quarter 
export growth 
rate fell steadily from 53 percent growth in the third quarter of 
2006 (compared 
to the third quarter in 2005) to 6 percent growth in the third 
quarter of 2007 
(compared to the third quarter of 2006) before falling to a 
9-percent decline in 
the fourth quarter of 2007 (compared to the fourth quarter of 
2006). 
 
¶5.  (U) Meanwhile, US exports to Egypt rose dramatically in 2007 to 
USD $5.3 
 
CAIRO 00000364  002 OF 003 
 
 
billion, a 30-percent increase over the USD $4.1 billion in US 
exports in 2006. 
Egyptian exports to the United States were flat in 2007, essentially 
unchanged 
from the USD $2.4 billion in 2006.  As a result, the US trade 
surplus increased 
73 percent in 2007 to just under USD $3 billion, according to 
Department of 
Commerce statistics. 
 
¶6.  (U) The fall in the dollar relative to the euro, and the 
accompanying 
decline of the Egyptian pound relative to the euro, has made exports 
to the EU, 
which has a preferential trade agreement with Egypt, more lucrative 
for Egyptian 
exporters.  During the first seven months of 2007, the dollar value 
of ready- 
made garments exported to the United States hovered around $60 
million USD a 
month, while the dollar value of exports to Europe rose steadily 
from $99 
million in January to over $120 million in July. 
 
---------------------- 
Upper Egypt expansion? 
---------------------- 
 
¶7.  (U) In response to these trends, GOE Minister of Trade and 
Industry Rachid 
Rachid and Israeli Minister of Industry, 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. 
 
 
CAIRO 00000364  003 OF 003 
 
 
------- 
COMMENT 
------- 
 
¶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