QIZ TALKS: GETTING CLOSER, BUT ISRAELI, EGYPTIAN

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 001676

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E.O. 12958: DECL: 03/17/2014
TAGS: ETRD PREL ECON EG IS ECONOMY AND FINANCE GOI EXTERNAL LABOR AND COMMERCE
SUBJECT: QIZ TALKS: GETTING CLOSER, BUT ISRAELI, EGYPTIAN
NEGOTIATORS DEFER CONTENTIOUS INPUT ISSUE TO THEIR MINISTERS

REF: CAIRO 2024 AND PREVIOUS

Classified By: Economic Counselor Ted Mann, Reasons 1.4(B) and (D)


1. (U) This is a joint cable from Embassies Tel Aviv and
Cairo.

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Summary
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2. (C) The third round of Israeli/Egyptian QIZ talks ended
without an agreement on March 17 in Jerusalem. As in the
previous discussions in Jerusalem and Cairo, the stumbling
block remained the minimum Israeli content requirement for
any goods produced in future Egyptian QIZs. Each side made a
single additional improvement over its final offer from the
second round of talks on March 11 in Cairo (reftel),but it
was not enough to bridge the gap. They two sides agreed
that, after three rounds of talks, they had achieved all they
could on the content issue. They agreed to defer the issue
to their respective ministers, Israeli Vice Premier Ehud
Olmert and Egyptian Minister of Foreign Trade Youssef Boutros
Ghali. No date was set for the ministers' dialogue, which
the negotiators agreed could take place either by phone or in
a face-to-face meeting sometime between March 25 and April 3.
The two delegations also failed to reach agreement on
whether the two governments should submit their QIZ proposal
to the USG jointly or separately. As in the previous
meeting, the atmosphere was cordial, and the two delegations
expressed satisfaction with the day's progress. End summary.


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The Newest Offers
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3. (C) Egyptian negotiator Sayed Elbous said the GOE would
now accept 10.5 percent minimum Israeli content for the first
two years. Thereafter the minimum content should drop to 8
percent. In the previous meeting, Elbous said Egypt would
accept 9 percent for the first two years and 8 percent
thereafter. GOI negotiators Gabby Bar and Yair Shiran
offered two options. In the first, Israeli content would
remain at 12.5 percent permanently. In the second, Israeli
content would be 13 percent for the first two years and 12
percent thereafter. During the previous week's talks in
Cairo, the GOI had suggested starting at 14.5 percent with a
reduction to 11.7 percent over the course of four years. The
Israeli content requirement remains the most contentious
issue because Israeli inputs are considered more expensive
than those available from other sources.

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The QIZ's Impact on Israel
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4. (C) The issue of input percentages, and the brief exchange
of offers, came near the end of a day dominated by a drawn
out discussion over the negative impact that Egyptian QIZs
would have on some parts of the Israeli textile industry. As
in the second round of talks in Cairo, the discussion,
attended in full by EconOffs from Embassies Cairo and Tel
Aviv, was cordial, although the GOE's Elbous expressed some
impatience over the fact that the Israelis did not broach the
content issue until late in the day. Bar and Shiran
explained at length that Israel recognized the political and
economic benefits stemming from QIZ cooperation with Egypt.
However, they also said that Egyptian QIZs would create
competition for Israeli firms, and that "thousands" of jobs
would probably be lost because large Israeli textile
companies were looking to move production to Egypt if the two
countries signed a QIZ agreement. (Note: Our discussions
with Israeli industry sources suggest that the losses would
be more in the neighborhood of hundreds of jobs, but
particularly painful as they would be in economically
hard-hit developments towns like Kiryat Gat. End note.)
Elbous encouraged the GOI to recognize that traditional
textile manufacturing had no future in a high-cost country
like Israel, and that competition on the world's markets
would force the industry's demise with or without Egyptian
QIZs. The GOI should see the opportunities for Israeli
suppliers, and recognize the political benefits that
increased business and governmental contacts between the two
countries would bring to Israel.
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Negotiators Finally Broach Other Issues
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5. (C) After agreeing that they could not reach a consensus
on the minimum Israeli input requirement, the two sides
touched upon, for the first time since direct negotiations
began in January, other issues related to the establishment
of Israeli/Egyptian QIZs. Another sticking point dating back
to last year's informal discussions between the two
governments -- the manner in which the two governments should
formally submit their QIZ proposal to the USG -- was
discussed but not solved. Elbous suggested that each side
send separate letters to the USG requesting recognition of
certain industrial zones as QIZs. The GOI's Bar insisted
that the two trade ministers write a joint letter. Bar
received strong support from MFA Director for Middle East
Economic Affairs Ilan Baruch, who was also present at the
meeting. Baruch said the issue was of critical importance
for Israel, since it would demonstrate the two governments'
intention of closer relations. Elbous agreed to discuss the
Israeli proposal with his political leadership.

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GOI Suggests New Model for Calculating Input Requirement
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6. (C) Bar also proposed a new model for calculating how
future Egyptian QIZ factories met the minimum Israeli input
requirement. In Jordanian QIZ factories, Bar explained, each
piece of produced apparel had to contain the minimum level of
Israeli inputs. This system was inflexible for the factories
and created administrative headaches for the government
officials administering the program, he told Elbous. Bar
said the GOI would be satisfied if QIZ companies or
individual factories purchased the minimum level of Israeli
inputs on a quarterly basis. Missing the minimum requirement
on individual production batches would be acceptable to the
GOI if this were balanced out by other batches containing
more than the minimum input percentage. Elbous said the GOE
would be open to such suggestions. Both sides told EconOffs
that they might ask USG Customs experts to participate in
future meetings where technical issues are discussed. Bar
and Elbous agreed, however, that another face-to-face meeting
made little sense until their respective political leaders
had found a compromise on the Israeli content issue.

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Comment
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7. (C) After a long day of negotiations, all participants
showed visible relief after both sides had made their sole
offer on minimum Israeli content and decided to refer the
contentious issue to their superiors. Both the Israeli and
Egyptian industry representatives who were on hand to act as
informal consultants also seemed relieved and happy with this
result. They denied there was some pre-arranged Ministerial
fix in the offing, but seemed to believe that once the
Ministers got directly involved, larger political imperatives
would prevail and yield a result acceptable to both sides.
End comment.

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