FTA inches forward
The US may have political motives for an FTA, but for Egypt, it would be an economic pat on the back. Sherine Abdel-Razek looks into the aims on both sides
It's in the news once again: an FTA with the US. Whenever Egyptian and US officials met over the past years, the issue was brought up. It also figured on the agendas of the US Egyptian Business Council meetings, the American Chamber of Commerce in Egypt's annual US mission and meetings between various trade officials. Are we closer this time, though, to realising such an agreement?
US Trade Representative Robert Zoellick recently announced that both Egypt and Morocco are strong candidates for negotiating an FTA agreement in January 2004. The US concluded FTA agreements with Israel in the 1970s and Jordan in 2000. After a series of false starts, there are strong indications that the US is now shifting towards concluding a similar deal with Egypt.
"I feel that the US is serious about negotiating an FTA with Egypt this time," said Galal El-Zorba, chairman of Nile Clothing, a major garments exporter to the US, during a seminar held last week.
Participants at the seminar, hosted in Alexandria by the Egyptian Centre for Economic Studies (ECES), questioned the motives behind the US bid to hold trade negotiations with Egypt, whose exports are marginal compared to the size of the US market. The reasons, participants argued, might not all be commercial.
Even if one of the drives was to guarantee normalisation with Israel, El-Zorba said, this does not imply military or political interference, as proven by the agreement with Jordan.
"We have to look at it this way: the US is a powerful country and what we can do is guarantee its neutrality through trade," El-Zorba said.
While the free trade area may be negotiated next year, it will probably be more than 10 years before it comes into force. Until this takes place, El-Zorba said, Egypt could benefit from the Qualified Industrial Zones (QUIZ) schemes with the US, of which Jordan is presently a beneficiary.
According to QUIZ, Jordanian exports can now freely enter US markets, provided they contain an eight per cent Israeli component. Since signing an FTA with the US, Jordan has witnessed an increase worth $500 million in its textile exports to the US.
"We will not be betraying the Palestinian cause this way," El-Zorba said. "Quite the contrary, actually, since the Palestinian economy is part of the Israeli one."
The economic drive behind the US plans is also strong. According to ECES's Ahmed Galal, the US urge to conclude such a deal now is part of the overall "competitive liberalisation" trade policy that the US is currently adopting.
The US is negotiating and entering into trade arrangements on the bilateral level, such as its agreement with Jordan; on the regional level, such as the North American Free Trade Area (NAFTA) agreement; and on a global level, such as the WTO pacts. However, he said, its trade relations with Middle Eastern countries remain weak -- a situation the US is now trying to remedy.
"America has discovered after 11 September that guaranteeing economic and political stability in the region is to its own benefit," Galal said.
The US also fears that its exports to Egypt will be disadvantaged compared to European exports, now that Egypt has concluded an association agreement with the EU. The EU and the US are Egypt's most important trading partners, accounting for an average of 62.1 per cent of Egypt's total imports and 63.3 of its exports over the period from 1991 to 2001. They are both subjected to the same Egyptian tariff rates.
With the EU association agreement set to eliminate tariffs on EU exports within 12 years, American exports will face tough competition in the Egyptian market if a similar agreement is not concluded with Egypt. The opportunity cost is estimated at $1.5 billion, as 31 per cent of Egypt's imports come from the US.
Participants at the seminar highlighted the fact that Egypt is not an important trading partner for the US, as its exports are marginal and non-strategic. However, they also agreed that its current bilateral agreements with other Arab countries and the EU represent a point of strength: if an FTA is signed with the US, American products would automatically gain access to these markets through Egypt.
For Egypt, the list of gains is long. According to Galal, studies indicate that the minimum increase in Egyptian trade if an FTA with the US is concluded would be worth $145 million. That is, "if the agreement was a shallow one, stipulating only the lifting of trade barriers, without demanding internal economic reforms in Egypt," Galal said. "However, if other reforms took place, such as increasing efficiency, improving the allocation of resources and lowering the cost of services, Egyptian exports to the US may increase by $1 billion."
As an added bonus, an FTA would encourage foreign direct investments in Egypt. Galal pointed out that research in 80 countries with FTAs has proven that concluding such agreements with capital-exporting countries result in a high increase in FDI levels from these countries to their trade partners.
Moreover, FTAs usually encourage investors to put their money in the countries signing such agreements.
"Japanese investments in Mexico increased after the latter signed the NAFTA with the US and Canada," Galal said.
