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On track for an FTA

Al-Ahram Weekly, Egypt

On track for an FTA

21-27 July 2005

The prospects for an Egypt-US free trade agreement came into question last week with US Deputy Secretary of State Robert Zoellick’s visit to Cairo, writes Niveen Wahish

Although visiting Egypt to talk about democratic reform, Robert Zoellick, US deputy secretary of state, could not shrug off his former position as US trade representative. He was asked several questions regarding when Egypt-US free trade agreement negotiations would begin. And although the questions were neither new nor unexpected he did not offer any fresh insight. He said that various committees are discussing the myriad of issues that would need to be tackled in FTA negotiations. While this does not offer any indication of when such negotiations might be launched, it is a far cry from the position Zoellick held back in the summer of 2003 when, speaking at a World Trade Organisation mini-ministerial meeting in Sharm El-Sheikh, he stated that "Egypt has some work to do." This time however, he offered encouragingly that "Egypt is a high priority relationship for the US."

Overall, Zoellick’s words and statements from the Ministry of Foreign Trade and industry (MFTI), indicate that the process of preparation for the start of negotiations is "well on track," as informed sources told Al-Ahram Weekly. Speaking at a press conference this week, Minister of Foreign Trade and Industry Rachid Mohamed Rachid, clarified that what is taking place at the moment are unofficial negotiations where working groups discuss all the elements that form an FTA such as investment, customs or intellectual property rights. "It is a stage of getting to know the requirements of each side," the minister said.

The informed sources added that during this stage, Egypt is clarifying its position and assessing the economic impact of the agreement. This stage is needed so that once formal negotiations start, they can be fast tracked.

The pace and degree of economic reform, which had been sluggish during the period 1998-2004, was often cited by US officials as a deterrent to the start of FTA negotiations. However, a recent study entitled "Anchoring reform with a US-Egypt Free Trade Agreement" argues that US insistence that Egypt undertake "enough" reforms before negotiations begin may prove counterproductive. The authors of the report, Ahmed Galal, executive director of the Egyptian Centre for Economic Studies and Robert Lawrence, senior fellow and professor of trade and investment at Harvard University, contend that such an attitude by the US government is "problematic because it leaves open the question of how much reform is ’enough’ for the process to move forward". In fact, they elaborate in their study that a comprehensive and deep agreement, as US FTAs often are, covering not only merchandise trade but also services, agriculture, and investment as well as dealing with both border barriers and domestic regulatory policies, could actually anchor Egyptian reforms. They point out that economic reform in Egypt was most intense from 1991-97 when Egypt had committed itself to binding agreements with the International Monetary Fund and the World Bank. According to them, reform during the period of 1998- 2004 was slower because there was no such commitment. Therefore, a US-Egypt FTA conditioned on a domestic reform measure would stimulate additional reforms and improve the environment for domestic and foreign investment.

It is noted in the report that, "a US-Egypt FTA that goes considerably deeper than Egypt’s Association Agreement with the EU is likely to benefit both parties more than one that simply replicates the EU agreement."

The authors suggest that the agreement could involve conditionalilty and monitoring mechanisms to ensure compliance and that "implementation could be phased over time to enhance the feasibility of reform".

The study shows that both parties stand to benefit from the agreement. For Egypt, anchoring reform would be an essential step to "create sufficient jobs for new entrants into the labour market and improve the standard of living for all Egyptians". Moreover, the study said that it could boost Egypt’s merchandise exports to the US which averaged a meagre $946.6 million between 1996 and 2004, as well as make Egypt more attractive to investment as additional reforms are implemented. However, the authors stressed that Egypt needs to apply complementary measures to enhance the competitiveness of its exports such as reducing transaction costs, reforming the judicial system to provide better conflict resolution, and reforming the financial sector to improve the process of resource mobilisation and allocation.

Among the factors that would make an FTA important for the US is that it could help prevent US exporters from being at a disadvantage in the Egyptian market. The study shows that the elimination of tariffs on EU imports as a result of Egypt’s Association Agreement with the EU, but not US imports, will substantially reduce US exports to Egypt, especially with the ongoing reduction of US economic aid to Egypt which is often tied to imports from the US. The US congress agreed to reduce US assistance to Egypt by five per cent annually (around $40 million) over the 10-year period of 2000-2009. By the end of that period, the annual US economic assistance will have dropped to approximately $400 million.

A deep agreement would also enable the US to deal with the problems faced by investors in Egypt such as national treatment and freedom of establishment for foreign investors, customs and quality inspections, increased protection of IPR and substantial liberalisation of services and government procurement. Although the agreement would involve details of domestic policy and a binding commitment which may be considered alarming by opponents, the authors believe it necessary to spur on reform.

"It might be easier for Egypt to sign a shallow agreement, however, that would highlight Egypt’s reluctance to make more binding agreements in other areas and thus actually erode the credibility of policy pronouncements about liberalisation," the study says.

They suggested that the negotiator’s skills are important to make the agreement consistent with Egypt’s reform strategy and to rectify the fact that policy adjustments need to be made in areas such as intellectual property, labour and environment where they might not otherwise be welcome.

The prospective FTA with Egypt falls in the broader framework of US trade policy goals to create a US-Middle East free trade area by 2013. With that in mind, the study argues that given Egypt’s role in the region, a successful Egypt-US FTA "could have a positive spillover effect throughout the region, boosting reforms across the Middle East".

While neither Zoellick, nor MFTI officials, would give a time frame, Catherine Novelli, assistant US trade representative for Europe and the Mediterranean said back in March 2005 that "Under our law, before we can sit down at a negotiating table we need to notify our Congress that we intend to do that, then there is a 90-day waiting period in which we undertake public consultations."

In 1999, Egypt signed a Trade and Investment Framework Agreement (TIFA) with the US, and although it was regarded as a stepping stone to the FTA, the TIFA agreement has been stagnant since 2002 when the first meeting between the two sides was held. However, the TIFA process was revived following the coming into office of Ahmed Nazif’s cabinet. Earlier this year, the second TIFA meeting was held in Cairo.

An FTA is viewed as an opportunity to enter the US market tariff-free. This was partially accomplished through the signature of the Qualified Industrial Zones (QIZ) protocol last year. The protocol enables Egyptian manufacturers in three specified zones to export tariff-free to the US provided that 11.7 per cent of their input is Israeli. However, the study shows that QIZ is not a substitute for an FTA. "It operates in isolation from the rest of the economy, making it far less likely to trigger complementary reform policies that would have widespread effects."