Tuesday,24 October, 2017
Current issue | Issue 1244, (30 April - 6 May 2015)
Tuesday,24 October, 2017
Issue 1244, (30 April - 6 May 2015)

Ahram Weekly

Evaluating QIZs

What have Egypt’s Qualified Industrial Zones achieved in their ten years of existence, asks Maye Kabil

Egyptian QIZ exports
Egyptian QIZ exports
Al-Ahram Weekly

Ten years have passed since the Qualified Industrial Zones (QIZ) agreement was signed between Egypt, the US and Israel. The agreement, which came into effect in 2005, allows Egypt customs free exports to the US on condition that these products contain 10.5 per cent Israeli inputs.

The agreement was the first economic agreement between Egypt and Israel to be announced after the signature of the Peace Treaty between the two countries in 1979. The agreement was also supported by the US in order to encourage regional cooperation.

“The QIZ agreement was very important for Egyptian industry. At the time it was signed the quota system on textiles and garments was about to come to an end, opening the door to global competition. We were beginning to lose the US market, which took almost 50 per cent of our readymade clothing exports,” said Mohamed Kassem, head of the Readymade Clothing Export Council.

The quota system was part of the Multi-Fibre Arrangement (MFA) that governed the global trade in textiles and garments from 1974 to 2004 and was meant to place a ceiling on exports from developing countries to the developed world.

While the quotas protected the markets of developed countries from being flooded by products from strong exporters such as China, they also represented a guaranteed spot in such markets for exporters like Egypt.

The end of the MFA would have meant Egypt’s losing its spot to tough competition from countries such as China and India that were aiming at and had the capacity to capture larger shares of the US market.

The end of the MFA was meant as a way of complying with World Trade Organisation (WTO) regulations, the trade in textiles and clothing having until that point been exempted from WTO rules.

The WTO wanted to liberalise international trade by reducing tariff and non-tariff barriers in order to ensure equal treatment for all trading countries and avoid discrimination in the terms and conditions of access to markets, meaning that the MFA was slated for abolition.

The QIZ agreement helped boost the export of Egyptian readymade clothing to the US in the wake of the MFA, with such exports growing at an average of 28 per cent between 2005 and 2011.

Textiles and clothing represented 83 per cent of QIZ exports in these years, followed by processed agricultural products at 6.2 per cent and chemical products at 1.7 per cent, according to statistics from the QIZ unit at the Ministry of Trade and Industry.

Hamada Al-Qalioubi, former chairman of the Textiles Chamber at the Federation of Egyptian Industries (FIE), said that the clothing industry had been the winner from the QIZ agreement because it had been able significantly to increase exports even if many factories had had to invest heavily in new machinery.

The government was also betting on the agreement to create jobs and boost investment, and the ministry projected the creation of some 300,000 new jobs as a result.

In early 2005, the QIZs started operating in seven industrial locations in Egypt, with an initial 397 qualified companies. They expanded over the next 10 years to include 15 currently designated industrial zones with 585 qualified companies and bringing in more than $1 billion in annual revenues, according to QIZ unit data.

203 out of the 585 companies listed in the QIZs have more than 300 workers, while 96 employ fewer than 50.

The Textiles Chamber at the (FIE) has asked the government to include more areas in the QIZ agreement, notably in Upper Egypt.  

“Expanding the areas working under the QIZ and reducing the Israeli components are two demands made by exporters,” Kassem said, adding that the government had responded last year to the first request but the latter would require a complex political decision.

The agreement started with an Israeli component of 11.7 per cent, with this later being reduced to 10.5 per cent. Investors are demanding a new reduction to eight per cent, but the ministry has said that the time is not suitable for further negotiations with the US or Israel.

Kassem said that the competitiveness of Egyptian exports had declined in recent years, due to cuts in government export subsidies to 2.5 per cent of export value. This had come at a time of rising wages and the rising costs of utilities such as water and electricity, while China, the strongest producer and exporter of garments in the world, was subsidising its export manufactures by 17 per cent.

According to ministry statistics, Egypt’s exports of cotton textiles and garments to the US fell from $1.105 billion in 2011 to $920 million the following year, seeing a further decline to $814 million last year. QIZ exports account for the bulk of that figure reaching an average of around $700 million annually between 2005 and 2013. However they remain marginal compared to total Egyptian exports of around $29 billion in 2013.

Foreign partner statistics say that the figures continued to be above $1 billion between 2011 and 2014, however, representing 72 per cent of Egyptian exports to the US.

“The export subsidies need to be increased, like what happened in 2008 when the government decided to raise them for six months to help the industry overcome the consequences of the international financial crisis,” Kassem said.

According to Al-Qalioubi, the agreement could have had deeper impacts on Egyptian industry, but the world financial crisis had hit the international markets and reduced opportunities for further growth.

Increasing export subsidies to five per cent had not been enough to make up for such losses, he said, when compared to the measures taken by India and Turkey which had both reduced the value of their currencies to support their exports.

For Egypt, which suffers from high rates of unemployment, the textiles and garment industries are very important because they are labour-intensive, he said. “The government needs to craft incentive packages for these industries that will include subsidies and tax exemptions as well as training for employees,” Al-Qalioubi said.

However, export subsidies for QIZ exporters have raised criticisms. Some observers believe that these exporters already enjoy favourable conditions, enabling them to enter US markets duty free compared to others working in more demanding markets.

Moreover, the QIZ agreement does not require the Egyptian component to be more than 35 per cent, which means that the government can find itself subsidising imported components, including Israeli ones, critics say.

Although the agreement boosted the growth of the clothing and textile industries as the data shows, many industry people have criticised the concentration of the benefits in the hands of a few big companies.

One study on “The Net Benefits of Trade Creation and Trade Diversion in the QIZs of Jordan and Egypt,” published by the Economic Research Forum in 2010, found that out of 17 industrial zones regulated by the agreement, only six produced 80 per cent of exports.

Among the big companies that benefit most from the agreement, “half of the exports are concentrated in companies employing more than 2,000 people,” the report said.

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