Industries eye qiz option

Business Monthly

29 December 2005

Industries eye qiz option

By Rehab El-Bakry

When representatives of Egypt, Israel and the US met in Cairo last December, they signed a historic agreement that more or less linked Egypt’s Industrial success to its willingness to cooperate with its traditional foe, Israel. The one-year-old Qualifying Industrial Zones (QIZ) agreement, which gives Egyptian products duty- and quota-free access to the US market provided they contain 11.7-percent Israeli content, has helped boost Egyptian exports to its number one trade partner, the United States.

Egypt-US bilateral trade reached $4.53 billion in 2004 with the balance of trade heavily in favor of the US. Egyptian exports to the US totaled $1.43 billion in 2004, while imports reached $3.1 billion. The QIZ agreement is helping to reduce this gap by giving Egyptian products an edge in US markets. It has also been hailed as Egypt’s first step towards its dream of free trade with the us.

While negotiations for a Free Trade Agreement (FTA) are expected to take years to conclude and full implementation could take up to a decade, the qiz agreement offered immediate fulfillment. In April, just four months after the agreement was signed, the first QIZ products arrived at US ports. As expected, more than 90 percent of the consignment was textiles and ready-made garments.

Egypt’s $3 billion plus textile and garment industry was the biggest winner in the deal, securing competitive entry for its products into the US market. Free of the 18-34 percent tariffs traditionally levied by us customs on imported textiles and garments, Egyptian ready-made clothes manufactured in the country’s four QIZclusters are better able to compete with the flood of cheap asian goods on the market.

According to the Ministry of Foreign Trade & Industry (MFTI), Egyptian textile and garment exports to the US increased by 6.1 percent to reach nearly $4.9 million during the first nine months of 2005, compared to $4.6 million during the same period in 2004. "While the qiz has helped boost Egyptian exports to the US for the textile and garment sector, we have yet to exploit it to its full potential when it comes to other sectors," says Rachid Mohamed Rachid, Minister of Foreign Trade and Industry.

The textiles and garments sector is by far the largest sector represented in the QIZ program, accounting for some 77 percent of the 471 registered QIZ companies. Yet Rachid has gone to great length to point out that all industries are eligible to participate in the QIZ program. "Initially, much emphasis has been placed on the benefits to the textile industry; however, many others could benefit from this agreement. In fact, the Ministry’s QIZ unit conducted a detailed study to identify these sectors and will work closely with these industries to help them best utilize the agreement to improve their access to the US market," he said.

The study identified products that were subject to US import tariffs of more than 10 percent and in which the volume of bilateral trade exceeded $10 million. It concluded that 13 different sectors, present or not in Egypt, could significantly benefit from the reduced or duty-free status that the us offers its preferred trade partners through special trade programs such as NAFTA, GSP and QIZ. "Here in Egypt, sectors such as food and beverages, and leather products, both of which are on the list, could greatly expand their exports to the us by utilizing the agreement," an MFTI official said.

Tarek Tawfik, Vice Chairman of the Chamber of Food Industries, says the big question is whether local industry players are willing to undergo the necessary expansion needed to benefit from the QIZ agreement. this may involve injecting capital into r&d, streamlining distribution networks, upgrading production lines or, in some cases, relocating their factories to a QIZ. "Those who already have export activities will be among the first to seek out ways to expand their export volumes to the US," he says. "The real challenge is getting companies that cater predominantly to the local market to take the perceived risk in exporting to the US."

Tawfik says many companies have voiced concern about acquiring the 11.7-percent Israeli content. This is particularly true in the food industry, where production is geared for domestic consumption and exporting to the distant US market is an afterthought. Processed food - which is eligible for duty-free status under the agreement - accounts for just 1.5 percent of all Egypt’s $7.6 billion in food exports, destined mainly for markets in the MENA Region.

In the first nine months of the qiz agreement, egyptian factories shipped $539,000 worth of processed food to the US. Not a bad start, but the potential is enormous. According to MFTI, the hungry US market imports around $2.4 billion of food each year.

"In order for companies to export to the US successfully, they have to be willing to do the necessary legwork to understand the market, its demands and consumption habits," advises Tawfik. "They also have to be willing to make the needed expansion and changes to their processes in order to export sufficient volumes to make exporting worth their while."

In fact, the reason Egypt’s textile and garment sector was able to capitalize on the agreement was because it had the critical mass to expand its export production. The textile and garment sector accounted for nearly a quarter of all Egyptian exports in 2004, and since the sector has a long history of exporting, including to the US, the only leap of faith they had to take was to find an Israeli supplier.

"The textile sector benefited from the QIZ agreement because it was geared to exporting from the get go," explained the MFTI official. "These companies didn’t have to gain insight into the US market, they already had it. The agreement removed the tariffs and quotas, which was their biggest [hurdle]."

Other industries, however, do not have the necessary export production and experience to jump in head first. The leather industry is a prime example. most egyptian producers of leather products are smes catering solely to the domestic market. Leather exports amounted to $40 million in 2004, with Spain, Portugal and India among the top buyers of raw leather. The US market, on the other hand, is seeking finished leather products such as luggage.

Leather exports to the US were paltry - too low to appear on MFTI’s comprehensive report of QIZ activity, which tracks trade by sector in units of thousands. The MFTI official said that by producing leather goods in QIZ-compliant factories, Egyptian producers could shave 10-20 percent off the price of their finished products in duty exemption. This would give them a competitive edge in the US market. "There is potential for this industry to blossom; the question is whether or not the players are ready to seize the day," he added.

Before signing on to the qiz program, Egyptian factory owners must first carefully study the US market, explains the MFTI official. Assuming there is demand for their products, they must determine whether their production lines can produce the high-quality goods that American consumers desire. If so, they must identify suppliers to distribute their products - and at prices below those of their competitors. "The key is for [Egyptian manufacturers] to find mass suppliers as opposed to niche market outlets - otherwise the process might not be worth their while," he says.

Then comes the tricky part: finding cheap, readily available israeli content to meet the 11.7-percent Israeli input requirement. Egyptian companies have complained that Israeli components such as buttons, bottles and plastic handles are more expensive than similar components from SouthEast Asia, and that Israeli suppliers cannot meet their demand or have raised prices to gouge Egyptian factories. Qiz authorities, however, point out that any additional costs incurred should easily be offset by the reduced tariffs upon entry into the US market.

Finding Israeli content is not overly difficult, insists the MFTI official. "The Israeli content is probably the easiest part of what exporters have to worry about. For one thing, if these [Egyptian] companies simply import the packaging for their products, they would more than meet the minimum requirement. Besides, we have stated more than once that we would help them with finding the right partners. so, honestly, this is nothing more than a simple excuse."

Another sector that could benefit from the qiz agreement is dried herbs and spices. since the majority of the producers are in upper Egypt, the only part of egypt that has no qizs, producers will simply have to wait until a new set of zones are allocated. The alternative - to relocate their factories further North near Cairo and the Delta - is just too costly and would involve additional logistics.

Meanwhile, Egypt’s Furniture Industry, whose exports hover around the $200 million mark, is eyeing the added value the QIZ agreement could give its products. US tariffs on furniture are already less than 10 percent, but duty-free status quickly adds up on furniture products, which often cost hundreds, or even thousands of dollars. To date, only four furniture companies have joined the QIZ program, though exports have so far been insignificant.

While the QIZ agreement has the potential to give factories duty-free access to the lucrative US market, it requires a substantial commitment up front. The MFTI official explains: "As far as the big companies to which exporting is a major revenue generator are concerned, their knowledge of the sector, the resources available to them and their experience in exporting should will help them tap into the market... and we will be here to help them out should they need the support. As for the smaller companies, we will always be there to provide them with the support, but the initiative has to come from within the sector."

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