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Qualified industrial zones: Trade deal with the US and Israel boosts textiles

Financial TImes | December 10 2007

Qualified industrial zones: Trade deal with the US and Israel boosts textiles

By Andrew England

In a new two-storey building, scores of computerised machines cut reams of denim into different shapes as women in headscarves bend over new sewing machines. Other women scrub jean shorts with sandpaper to obtain that special, distressed, look.

The Lotus Garments Company factory is a hive of industry, one of many companies taking advantage of an Egyptian-US-Israeli trade agreement that has thrown a lifeline to the textile industry.

The qualified industrial zones (Qiz) agreement came into effect in 2005. In 2006, Egyptian garment exports to the US rose 41 per cent, from $444m (E£2.5bn) to $625m, officials say.

The deal allows Egyptians to export to the US tariff-free as long as they use a certain percentage of Israeli goods.

The US initiative is intended to foster peace through trade.

Egypt is one of two countries in the Middle East with a peace agreement with the Jewish state, but relations are often described as being in a state of “cold peace”.

Qiz’s impact on thawing the political relations is questionable. But, for Egyptian garment producers, the trade deal has meant a chance to stand up to the competition posed by Asian producers.

That threat grew after the World Trade Organisation’s long-standing restrictions on textile exports were lifted in January 2005.

“I tell you honestly if we didn’t have at that time a free trade agreement with the United States, either Qiz or an FDA, we would have closed down more than 50 per cent of our textile factories,” says Magdi Tolba, chairman of the Readymade Garments Exports council and owner of the Cairo Cotton Centre.

Around 204 companies are taking advantage of Qiz, including 15 foreign firms from Turkey, India, China and Taiwan.

Mr Tolba says the deal has not only led to increased production, but has also encouraged companies to upgrade technology and expand vertically.

This year, Egypt’s total garment exports are hoped to reach $1.5bn, with a goal of $3bn by 2010 and $5bn for textiles in general.

The figures are still small compared with the leading textile exporters, but the result is that some buyers, such as Liz Claiborne, have returned to Egypt and others have entered the market from Europe.

The US consumes about 60 per cent of Egyptian garments’ exports, up from 45 per cent before Qiz was introduced.

“It’s a positive environment,” says Mr Tolba, “I’ll tell you my example here. While we were signing Qiz, I had 1,650 employees, now I have 3,000. If we didn’t have Qiz I wouldn’t do it.”

The Lotus factory in Port Said, which produces for US designers such as Levis and Calvin Klein, as well as Marks & Spencer in the UK, is another example of the expansion.

In 2004, it employed 2,700 workers and its exports totalled $19m. Today, it boasts more than 6,000 staff and new production lines. Up to mid-October its exports had reached more than $50m, with $62m forecast for the year, 95 per cent of which is headed to the US market, says Hossam Eldin Gabr, the firm’s chairman.

Not surprisingly, he also hails Qiz’s benefits, pointing out there are about 30 textile factories in Port Said providing jobs for some 30,000 people.

Yet he also says there could be improvements.

When the agreement first came into effect Egyptian companies had to use a minimum of 11.7 per cent of Israeli goods to produce their products. The difficulty for producers is that Israeli items such as zippers and pocket linings are more expensive than those available from Asian countries.

There have also been bottlenecks in the availability of Israeli inputs, Mr Gabr says.

In October, the required amount was reduced to 10.5 per cent. While welcoming the reduction, Mr Gabr says it should still be lower.

“It’s still high but it is better than before and it means the people start to understand us, which is more important for us, the responsible people in Israel and Egypt,” he says, adding that as volumes increase, the percentage of Israeli input should decrease.

He and others say the Israeli input should be around 8 per cent - the same as for companies operating under Qiz in Jordan - but that will depend on future negotiations between Israeli and Egyptian officials.

Israeli imports to Egypt totalled $126m in 2006, up from $30m in 2004.

There is also acknowledgement from Egyptian and US officials that Qiz has not yet had the desired impact on other sectors beyond textiles. Food exports - the only other significant export using taking advantage of the agreement - to the US under Qiz in the first three quarters of 2007 totalled $262,000.

Ali Awni, an official at the ministry of trade and industry, says the creation of a zone in Upper Egypt could help increase food exports, while a future export could be athletic shoes. Yet, as with many other industries with Egypt, there is a problem of skilled labour, which, Mr Awni says, is the leading bottleneck to growth under Qiz.

Even in the textiles industry, where the skill requirements are minimal, producers are facing a shortage.

Mr Tolba says there is a current worker shortage of more than 200,000 people in spite of Egypt’s high unemployment level, with a need for another 300,000 over the next three years.

He says it is partly a cultural issue, with young Egyptians preferring government jobs to factory work. Wages in the textile sector have increased in recent years, but are still low. Mr Tolba says the average monthly salary is between $100 and $120, up from around $60 to $90, but productivity is also a problem.

“We are trying to improve it, especially in the big factories, we have training centres to upgrade our workers, but if you talk generally we still have a productivity problem,” he says. “We still have a culture problem of getting people to work in industry, despite the country having unemployment close to 10 per cent, so this is a bit strange.”

 source: FT