Identifier
Created
Classification
Origin
05TELAVIV5077
2005-08-16 15:01:00
CONFIDENTIAL
Embassy Tel Aviv
Cable title:  

SECOND MEETING OF THE EGYPT-ISRAEL QIZ COMMITTEE

Tags:  ECON ETRD IS ECONOMY AND FINANCE 
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161501Z Aug 05
C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 005077 

SIPDIS

DEPARTMENT PLEASE PASS TO USTR: ESAUMS

E.O. 12958: DECL: 08/15/2015
TAGS: ECON ETRD IS ECONOMY AND FINANCE
SUBJECT: SECOND MEETING OF THE EGYPT-ISRAEL QIZ COMMITTEE


Classified By: Deputy Chief of Mission Gene A. Cretz for reasons 1.4 (b
) and (d)

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 005077

SIPDIS

DEPARTMENT PLEASE PASS TO USTR: ESAUMS

E.O. 12958: DECL: 08/15/2015
TAGS: ECON ETRD IS ECONOMY AND FINANCE
SUBJECT: SECOND MEETING OF THE EGYPT-ISRAEL QIZ COMMITTEE


Classified By: Deputy Chief of Mission Gene A. Cretz for reasons 1.4 (b
) and (d)


1. (C) Summary: The second meeting of the Egypt-Israel
Qualifying Industrial Zones (QIZ) committee met on August 14
in Jerusalem. The GOE claimed that more than USD 61 million
worth of QIZ products have been sent to the U.S. during the
period under review, consisting of at least USD 8.6 million
worth of Israeli inputs. The committee certified that 50 of
54 companies that exported to the U.S. during the first
quarter of operation met the content requirements for QIZ
qualification. In addition to the routine certification
work, the Egyptians encouraged the GOI to approve a joint
request to USTR for expansion of the zones. Finally, Israel
noted a systemic problem with the Israeli input purchases by
Egyptian manufacturers, and proposed the adoption of a table
that would outline the acceptable percentage of inputs for
QIZ textile products; the GOE did not agree with the request.
End summary.

--------------
The numbers
--------------


2. (C) The Egypt-Israel QIZ committee met in Jerusalem on
August 14. The meeting was co-chaired by Gabby Bar (GOI) and
Sayed Elbous (GOE),and attended by members of the Egyptian
and Israeli Ministries of Trade, Foreign Affairs, Finance and
Departments of Customs. EconOff attended as an observer.
The six-hour meeting began with the certification of
companies that sent exports to the U.S. during the period
February 22-June 30, 2005. The committee noted:

--54 total factories sending QIZ products to the US (total
value of over USD 61 million)
--50 companies in compliance (approximately a 93% success
rate for the first period of review)
--4 companies not in compliance with the minimum Israeli
content requirements
--19 new companies approved to participate in existing QIZs

The committee approved 19 new companies located within
existing QIZs for export to the U.S. from August 14,
2005-Feburary 15, 2006; bringing the total number of Egyptian
companies eligible for export to 464. (Note: Only 12% of the
companies that were approved for QIZ production during the
March 22, 2005 meeting in Cairo actually exported QIZ
products to the U.S. during the first review period. End

note.) Based on their failure to meet the 11.7% minimum
Israeli content requirements, four companies, Cotton Belt
Egypt (#33),American Group Bitotex International (#75),
Eurotextile Co (#286),and Nazmy for Clothing & Tricot (#334)
were disqualified from exporting to the U.S. under the QIZ
rules from August 15-November 14, 2005. Copies of all
official joint committee documents have been faxed to USTR
and NEA/IPA, originals will follow.

--------------
Transshipped QIZ inputs
--------------


3. (C) The GOI Department of Customs, Senior Chief
Coordinator for rules of origin, David Houry raised the issue
of Politsur, an Israeli company that was found transshipping
Turkish inputs to the Egyptian QIZ companies. The GOI noted
that Politsur is under legal investigation by the Department
of Customs' prosecutors office. There is no evidence of
malfeasance on the part of the Egyptian companies that
purchased inputs from Politsur - believing them to be of
Israeli origin - and the GOI has not concluded what
percentage of the merchandise sent by Politsur to Egypt as
QIZ input was actually transshipped. The committee decided
not to disqualify companies that had purchased from Politsur
during this quarter. The Egyptian delegation stated that
they would "blacklist" Politsur to make sure that during the
next quarter there would not be a similar problem.


4. (C) The GOE asked the GOI for assistance in preventing
such cases of fraud in the future. Alaa Arafa, Chairman of
Arafa Group and owner of one of the largest companies
currently sending QIZ products to the U.S. market, stated
that Egyptian businessmen need a "whitelist" and a
"blacklist" so that they will know which companies to buy
from, since it was "impossible" to conduct independent
checks. The GOE also proposed issuance of "official" GOI
certificates of origin to help eliminate fraud. The GOI did
not agree to either option, but determined that better
information sharing could limit the influence of such
fraudulent businessmen in the future. The committee agreed
to discuss options to cut back on transshipment fraud, during
the next joint committee meeting.

--------------
Time to expand?
--------------


5. (C) Throughout the meeting Elbous raised the issue of
expanding the size and scope of the QIZs. He indicated that
the GOE is anxious to receive a reply from Israel regarding a
joint request to USTR for expansion. Bar noted that although
the GOI is reviewing the request, Minister of Industry,
Trade, and Labor (MOITL) Ehud Olmert wanted to study the
results of the August 14 meeting before making a decision to
move forward with expansion. (Note: Bar told EconOff that
there was no plan to file an expansion request until Olmert
had met USTR Portman. With Olmert's time now split between
MOITL and the Ministry of Finance, Bar was not able to
project a proposed meeting time. End note.)

--------------
Israeli Inputs
--------------


6. (C) After concluding the certification, the GOI passed a
proposed list of input guidelines to the GOE. The GOI
explained that they had noticed a significant number of
Egyptian companies that were importing a single input from
only one Israeli source. The GOI questioned if it was
proper, given the language in the QIZ protocol that states
that inputs must be "direct and relevant," to be included in
meeting the 11.7% minimum Israeli content requirement. One
example noted by Bar was of a company that had purchased
stone wash detergent powder from an Israeli manufacturer
which totaled 11.7% of the value of products shipped to the
U.S. While there was no question that the purchase was made
from an Israeli company, Bar indicated that analysis by the
Israeli Manufacturers' Association indicated that such a
quantity of stone wash detergent was enough to wash "millions
of jeans pants." Bar commented that although this powder
could be considered part of an Israeli input for the
production of jeans, it was unreasonable to believe that such
a single input (with the possible exception of fabric for
textile production) could really amount to 11.7% of the value
of a product. However, Bar noted that the GOI proposed the
inputs list as only a guideline for Egyptian factory owners
so they would know what was considered a reasonable input by
the committee. In addition, Bar noted that there were no
plans to apply the list retroactively to the 54 companies
that had already sent products to the U.S.


7. (C) Elbous replied that such an approach was never
discussed during the negotiations related to the QIZ and that
what was being proposed was a drastic change to the nature of
the agreement. He called into question the ability of Israel
to supply inputs for the Egyptian QIZ manufacturers, and
noted that there had been parliamentary inquiry over the cost
of Israeli inputs. Arafa told Bar that such a drastic change
in the agreement would, "kill the new baby that we have just
created" and urged the GOI to "give it time."

--------------
Prospects for the Future
--------------


8. (C) Comment: Both parties left the meeting dissatisfied by
the failure to reach agreement over the issues of expansion
of the zones and the definition of inputs. Additional
negotiating sessions, either in person or via phone, are
necessary to resolve these issues before the third joint
committee meeting on November 15. The undertone to the GOI
request for a maximum percentage list of acceptable inputs is
the possibility that the GOI team will not agree to certify
companies that purchase only one input from only one supplier
during the next committee meeting. The draft list only
includes textile inputs, but the GOI will include other
products, if applicable.

--------------
Impact on Jordan QIZs
--------------


9. (C) Comment continued: The Jordanian government has
requested that the certification for Jordanian QIZ products
be conducted on a quarterly basis parallel to the Egypt QIZ
process. (Note: Products are currently certified for minimum
Israeli content on an item-by-item basis for Jordanian QIZ
producers. End note.) The GOI has indicated that its
willingness to move towards this approach for Jordanian
producers will be based on successful implementation in the
Egyptian QIZs. Based on the GOI team's view of the results
of the meeting, it is doubtful that they will offer to employ
the quarterly certifications for Jordanian producers in the
near future. Finally, the GOE noted that it was aware of the
Jordanian request to lower Israeli content to 5% of QIZ
products, and that such a model seemed illogical if Egypt
would still be expected to meet the 11.7% Israeli content
requirement. Israeli negotiators appeared displeased that
the GOE was aware of what they deemed an "informal" Jordanian
request for lower Israeli content. End comment.

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