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Don’t hold your breath

Business Today, Egypt

Don’t Hold Your Breath

March 2005

Despite a list of reforms enacted in the last six months, Egypt seems no closer to a free-trade deal with the United States as the current ambassador heads back to Washington for a high-powered new post

By Joseph Krauss

When a high-profile delegation from the American Chamber of Commerce in Egypt (AmCham) embarks on its annual “Doorknock” mission to the United States this month the tenth such pilgrimage in the last decade it will once again lobby high-ranking officials to expand bilateral relations between Egypt and the United States, relations that American businesses operating here sincerely hope will lead to a coveted free-trade agreement with the US.

Not only has enough time passed for much of the wounds of recent years, including those inflicted by Egypt’s public criticism of the Iraq war, to heal, but the delegation this year will have some new bargaining chips to lay out on the table.

Over the last year, Egypt has continued to support the war on terror, volunteered to help maintain security in the Gaza Strip, helped to restart peace talks between Israelis and Palestinians, reformed its notoriously frustrating customs regime, signed a QIZ agreement with both Israel and the United States and put the finishing touches on liberalizing its foreign exchange regime.

All were key demands the Bush administration had put on the table for Egypt to satisfy before kick starting talks on further trade liberalization between the two regional partners.

Yet when the AmCham delegation arrives in the US capital, it is likely to receive the same lukewarm response it has been granted during past visits, with mild expressions of interest tempered with demands that Egypt do even more.

In the past, conventional wisdom always held that Egypt’s chances of securing an FTA would be improved with Republicans in both the White House and the Congress because of that party’s historic commitment to free markets and trade liberalization. But in the wake of the Iraq invasion, the Bush administration has increasingly called for broad democratic political reform in the Middle East, effectively upping the ante for Egypt and Saudi Arabia, close US allies perceived as trendsetters in the region.

For both countries, economic reform even the kind of steps taken in recent months by the Nazif government may no longer be sufficient to garner serious American interest.

“It’s not enough from the standpoint of the American administration,” says Magdy Sobhi, senior economist at the Al-Ahram Center for Strategic Studies. “They have pushed Egypt to enact reforms in the political arena, in the religious arena and to have warmer relations with Israel. Egypt and Saudi Arabia are the biggest two countries in the region and, to some extent, articulate movement in the region. So [the administration] is going to force these two countries to have a new policy towards the Israeli-Palestinian struggle and towards the other countries in the region.”

The White House and members of Congress are also likely to demand further democratic reforms in Egypt and are set to ask even tougher questions after the arrest last month of El-Ghad Party leader Ayman Nour on charges of forging signatures on party membership rolls. Nour’s case won wide attention in the US and other international media, with most outlets presenting him as a “leading Egyptian reformer.”

Sobhi points out that while refusing to begin FTA negotiations with Egypt, the US has been actively seeking similar agreements with smaller Arab nations. “Although the United States has hesitated to [begin FTA talks] with Egypt, they have very rapidly signed these sorts of agreements with Morocco and Bahrain, and they are negotiating now with the United Arab Emirates and Oman,” Sobhi says. “I think the plan of the United States administration is to have a shift of power from Saudi Arabia and Egypt to other countries in the region.”

US Ambassador C. David Welch, who declined bt’s requests for an interview, has in the past down played the politics of an FTA and insisted that the Egyptian government itself was holding up the process by refusing to exorcise its Nasser-era demons and fully embrace free market policies (See “One on One with Welch,” June 2004).

Citing the standard laundry list of complaints made by most multinationals and by his predecessors the slow pace of privatization, an inept customs bureaucracy, the protection and subsidization of key industries Welch and other US officials have maintained that Egypt, which has a free trade agreement with the European Union, still has a long way to go before it can be considered a serious candidate for a similar agreement with America.

Last fall, cabinet began directly addressing these complaints by, among other things, enacting a massive overhaul of the country’s bloated customs bureaucracy, which had been a bugbear of American multinationals for decades. In December the US embassy responded by penning a landmark agreement with Egypt that permits the establishment of several Qualified Industrial Zones (QIZs) from which goods partially manufactured in Israel can be exported to the US duty-free.

Hailed as the beginning of a thaw in relations between Israel and Egypt, the QIZ agreement was soon followed by last month’s Sharm El-Sheikh summit between Israeli Prime Minister Ariel Sharon and Palestinian President Mahmoud Abbas.

While Egypt’s active role in the peace process will doubtless win it plaudits in Washington, it is not likely on its own to improve the country’s chances of securing an FTA. In fact, Sobhi and others predict the United States will prefer to offer a free-trade agreement to the Palestinian Authority.

“This will be the first step from the United States’ side, to sign an agreement with the Palestinians to have access to the American market,” Sobhi says. An FTA with the United States, or even the promise of one, would help “push the Palestinians to make peace with Sharon, and to negotiate with him the final issues, like refugees and Jerusalem.”

US officials have in the past insisted that they are more open to signing FTAs with smaller countries like Jordan or Morocco because their much simpler economies make it easier to iron out differences at the negotiating table. Egypt, on the other hand, presents potential negotiators with one of the largest and most diversified economies in the entire region and, worse, one that has not yet captured the interest of a substantial number of American companies.

Now, as in the past, Washington’s reticence with respect to Egypt reflects its own economic priorities.

“I think when we look at American companies, we have to look at the fact that a lot of other opportunities are commanding a lot more attention,” says Dr. James Joy, Commercial Counselor at the US Embassy in Cairo. Joy, who is charged with assisting US companies looking to do business in Egypt, says American firms are more interested in other emerging markets and admits that the Cairo embassy is “not besieged with hundreds of American companies that want us to help them find business partners here in Egypt.”

In large part due to the ongoing conflicts in Israel/Palestine and Iraq, American businesses continue to see the entire Middle East, including Egypt, as an unstable and dangerous region, Joy says, adding that “the bombing that happened in Lebanon is not going to do us any favors, because that’s going to strengthen the feeling that in the Middle East there is too much violence and too much instability, so it’s better to look elsewhere.”

While expressing strong support for the reforms enacted last fall, especially with regard to customs, Joy insists that the overall pace of reform has been too slow.

“I think a fair amount has been going on, and there’s so much in the way of tasks that had to be done, that one should not expect these things to happen overnight,” Joy says. And yet, “for American companies back in the United States, six months is not enough time for them to perceive that there have been changes here The American business community is a long ways away, and they are probably still thinking about the Middle East as a place of instability. They are not ready to focus on the kinds of changes that have taken place.”

At the same time, Joy insists that much more must be done, and that Egypt should not see a free-trade deal as a panacea.

“Even if there is a free-trade agreement, that’s not going to automatically bring a large number of American companies that would rather do business in Latin America or Europe or Asia,” Joy notes. Moreover, “even if there’s a free-trade agreement, that will not mean that large numbers of Egyptian companies will be able to use that agreement, because you still have to get your product from the field to the market and meet quality standards.”

American officials have long insisted that the textile sector in Egypt is woefully unprepared to compete in the United States, citing the sector’s apparent inability to compete with Chinese and Indian imports in its own backyard. Egyptian observers, on the other hand, have always insisted that free access to the US market the largest in the world would force local textile producers to get their acts together.

“If they had a free-trade agreement, they would have low tariffs to the United States, so they would have a competitive edge over countries that do not have these kinds of agreements, like China or India,” Sobhi says. “If you look at the cement industry, you had a 30% rise in the export of cement because [Egypt] has this kind of competitive edge over other countries. It has the lowest price in the world.”

It remains to be seen whether Egypt will move any closer to an FTA in the coming years. As the Bush administration adopts a slightly more diplomatic stance with respect to the Middle East already in evidence with its renewed commitment to the peace process it may grow more interested.

Both Welch, the US Ambassador, and Robert Zoellick, the United States Trade Representative, have been promoted within the administration to high-level posts within the State Department, with Welch having been tapped to become the next undersecretary of state for near eastern affairs. The administration has yet to appoint permanent replacements for either post, but both successors will likely toe the line of their predecessors, and the administration’s core trade policy objectives remain the same.

As those objectives have always included the unceasing expansion of free trade through bilateral agreements, those hoping for an FTA can remain cautiously optimistic as the Bush administration settles into its second four-year term. If Egypt continues to push ahead with reforms, it will find it has friends in high places; if not, it can expect the new diplomats to pick up where the old ones left off in this case, ground zero.