EGYPTIAN GAS, TEXTILE EXPORTS NARROWING TRADE GAP

UNCLAS CAIRO 006894

SIPDIS

SENSITIVE
SIPDIS

NEA FOR ELA
USTR FOR SAUMS
USDA FOR FAA RHAGER

E.O. 12958: N/A
TAGS: EAGR EAID ECON ETRD FCSCEG EG
SUBJECT: EGYPTIAN GAS, TEXTILE EXPORTS NARROWING TRADE GAP
WITH U.S. OVER LONG TERM

REF: A. CAIRO 6347 B. CAIRO 4337 C. CAIRO 4167 D.
CAIRO 5792 E. CAIRO 5779 F. USDOC 5433 G.
CAIRO 6871


1. (U) SUMMARY: ALTHOUGH U.S. EXPORTS TO EGYPT ARE RISING
THIS YEAR, BARRIERS TO TRADE ARE LOWERING, AND NEW SECTORS
ARE OPENING TO U.S. PRODUCTS, THE U.S. TRADE SURPLUS WITH
EGYPT HAS BEEN SHRINKING SINCE 2000, PRIMARILY BECAUSE OF
RISING U.S. IMPORTS OF EGYPTIAN NATURAL GAS AND DECLINING
EGYPTIAN IMPORTS OF U.S. WHEAT. THESE TRENDS, BOLSTERED BY
SOARING EGYPTIAN EXPORTS FROM QUALIFIED INDUSTRIAL ZONE (QIZ)
FACTORIES, COULD TIP THE BALANCE OF TRADE TO EGYPT'S FAVOR
WITHIN SEVERAL YEARS. HOWEVER, SHIFTS IN THE VOLATILE GLOBAL
COMMODITIES MARKETS FOR WHEAT AND NATURAL GAS COULD REVERSE
THESE TRENDS IN THE SHORT TERM. THE U.S. TRADE SURPLUS WITH
EGYPT WILL LIKELY END 2006 HIGHER THAN IN 2005, ALTHOUGH THE
LONG-TERM TRENDS REMAIN IN EGYPT'S FAVOR. END SUMMARY.


2. (U) ANNUAL U.S. EXPORTS TO EGYPT FELL FIVE PERCENT FROM
2000 TO 2005, FROM $3.33 BILLION TO $3.17 BILLION, WHILE
EGYPTIAN EXPORTS TO THE UNITED STATES MORE THAN DOUBLED
DURING THAT PERIOD, SURPASSING $2 BILLION LAST YEAR. AS A
RESULT, THE U.S. TRADE SURPLUS FELL FROM $2.4 BILLION IN 2000
TO $1.1 BILLION IN 2005, MIRRORING THE TREND IN THE GLOBAL
U.S. BALANCE OF TRADE. TRADE IN BOTH DIRECTIONS IS GROWING
ROBUSTLY THIS YEAR. THROUGH SEPTEMBER 2006, U.S. EXPORTS TO
EGYPT ROSE 31 PERCENT COMPARED TO THE SAME PERIOD LAST YEAR
TO $2.9 BILLION, WHILE EGYPTIAN EXPORTS TO THE UNITED STATES
ROSE 40 PERCENT TO $1.8 BILLION.

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INCREASING SALES OF LIQUEFIED NATURAL GAS (LNG)
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3. (U) INCREASING EGYPTIAN LNG PRODUCTION, COMBINED WITH
RISING PRICES FOR OIL AND GAS, HAS DRIVEN THE SHARP INCREASE
IN OVERALL EGYPTIAN EXPORTS TO THE UNITED STATES. IN 2000,
BEFORE EGYPT'S LNG PRODUCTION CAME ON LINE, MINERAL FUELS
MADE UP ONLY 13 PERCENT OF EGYPTIAN EXPORTS TO THE UNITED
STATES WHILE IN 2005 THEY CONSTITUTED 51 PERCENT OF EGYPTIAN
EXPORTS; NATURAL GAS ALONE ACCOUNTED FOR 36 PERCENT OF
EGYPTIAN EXPORTS, AND OIL ANOTHER 15 PERCENT. OVERALL
MINERAL EXPORTS INCREASED NEARLY TENFOLD DURING THAT
FIVE-YEAR PERIOD.


4. (U) IN THE ABSENCE OF NEW LNG PRODUCTION/EXPORTS
FACILITIES COMING ON LINE IN 2007, WE EXPECT A LEVELING-OFF
OF THE EFFECT OF LNG EXPORTS ON EGYPTS OVERALL EXPORTS IN
THE COMING YEAR. NEW PROJECTS ARE IN THE WORKS, HOWEVER,
INCLUDING A THIRD LNG TRAIN FACILITY ON EGYPT'S MEDITERRANEAN
COAST PROJECTED TO OPEN IN 2009. GROWING DOMESTIC DEMAND FOR
ELECTRIC POWER -- DEMAND INCREASED 10 PERCENT LAST YEAR -- IS
FUELING AN INTERNAL POLITICAL DEBATE OVER WHETHER EGYPT'S GAS
SUPPLIES SHOULD BE USED FOR EXPORT VERSUS SUPPLYING THE
COUNTRY'S GAS-FIRED, AND SUBSIDIZED, POWER GENERATION SECTOR.

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QIZ PRODUCTION SOARING
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5. (U) INCREASING EGYPTIAN TEXTILE EXPORTS ARE ALSO ADDING
MOMENTUM TO THE SHIFT IN THE BALANCE-OF-TRADE. IN THE FOUR
QUARTERS ENDING IN JUNE 2006, AS QIZ FACTORIES BEGAN TO GEAR
UP PRODUCTION, THEIR EXPORTS WERE VALUED AT $508 MILLION, OR
25 PERCENT OF EGYPTIAN EXPORTS TO THE UNITED STATES DURING
THAT PERIOD. QIZ FACTORIES CONTINUE TO EXPAND AS THEY
SCRAMBLE TO MEET INCREASING ORDERS (REF A),AND TEXTILE
EXPORTS WILL ASSUME A LARGER SHARE OF EGYPTIAN EXPORTS TO THE
UNITED STATES IN COMING YEARS. AS A RESULT, OVERALL EGYPTIAN
EXPORTS WILL BE MORE RESISTANT TO PRICE SHOCKS IN THE NATURAL
GAS MARKET, AND THE TRADE TREND IN EGYPT'S FAVOR WILL
SOLIDIFY.

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U.S. AGRICULTURAL EXPORTS DECLINING
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6. (U) WHEAT FARMERS HAVE BEEN LOSING SALES IN EGYPT TO
RUSSIA AND UKRAINE IN RECENT YEARS BECAUSE OF THE RELATIVELY
HIGH QUALITY, AND HIGH PRICE, OF U.S. GRAIN. OF THE 7
MILLION TONS OF WHEAT THAT EGYPT IS EXPECTED TO IMPORT THIS
YEAR, THE GOE'S GENERAL AUTHORITY FOR SUPPLY COMMODITIES
(GASC) WILL BUY AROUND 4 MILLION TONS. GASC WHEAT IS USED
EXCLUSIVELY FOR THE HIGHLY SUBSIDIZED "BALADI," OR LOCAL,
BREAD, A STAPLE ON TABLES ACROSS EGYPT. BECAUSE THE RETAIL
PRICE OF BALADI BREAD IS FIXED, AND THE GOE LOSES MONEY ON
EVERY PIECE OF PITA IT SELLS, GASC BUYS THE CHEAPEST GRAIN IT
CAN FIND, REGARDLESS OF QUALITY.


7. (U) AS A RESULT, FROM 2001 TO 2005 U.S. BULK WHEAT
EXPORTS TO EGYPT FELL BY 49 PERCENT TO $190 MILLION. THAT
DROP ACCOUNTS FOR ESSENTIALLY ALL OF THE DROP IN U.S.
AGRICULTURAL EXPORTS, WHICH FELL FROM $1 BILLION IN 2001 TO
$818 MILLION IN 2005. SHIFTS IN THE GLOBAL WHEAT MARKET COULD
REVERSE THESE TRENDS IN THE SHORT-TERM: A POOR HARVEST IN THE
BLACK SEA WOULD REDUCE GLOBAL SUPPLY AND DRIVE UP PRICES,
MAKING U.S. GRAIN MORE COMPETITIVE; OR A BUMPER CROP IN THE
UNITED STATES WOULD BRING THE PRICE OF U.S. WHEAT DOWN TO A
LEVEL MORE ATTRACTIVE TO GASC BUYERS. BUT THE HIGH U.S.
WHEAT PRICES AND RESULTING LOST SALES IN EGYPT REMAIN
SYMPTOMATIC OF AN OVERALL U.S. PRICE STRUCTURE THAT IS
FUELING THE NATIONAL TRADE DEFICIT.


8. (U) OTHER AGRICULTURAL TRENDS ARE WORKING IN FAVOR OF
U.S. EXPORTS TO EGYPT, HOWEVER. THE UNITED STATES REMAINS
EGYPTS TOP SUPPLIER OF CORN, WHILE SALES OF MILK POWDER AND
BEEF OFFALS (INTERNAL ORGANS) ARE INCREASING. CONTINUED
ECONOMIC GROWTH IN EGYPT COULD ALSO INCREASE DEMAND FOR HIGH
VALUE-ADDED AMERICAN AGRICULTURAL PRODUCTS.

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U.S. ASSISTANCE CHANGING
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9. (U) CHANGES IN ECONOMIC CONDITIONS AND THEIR RESULTING
IMPACT ON USAID PROGRAMS ARE ALSO TIPPING THE BALANCE OF
TRADE TOWARD EGYPT. IN PARTICULAR, THE COMMODITY IMPORT
PROGRAM, WHICH PROVIDED EGYPTIAN COMPANIES ACCESS TO HARD
CURRENCY TO IMPORT U.S. MACHINERY AND RAW MATERIALS, HAS BEEN
LESS IN DEMAND AS FINANCIAL REFORMS GIVE EGYPTIAN IMPORTERS
EASIER ACCESS TO PRIVATE-SECTOR FINANCING (REF B). THE
PROGRAM PROVIDED $270 MILLION IN LOANS TO EGYPTIAN COMPANIES
TO PURCHASE U.S. GOODS IN 2002, BUT ONLY $90 MILLION DURING
THE LAST 12 MONTHS.


10. (U) WHILE SOME BORROWERS CONTINUED TO IMPORT U.S. GOODS
USING PRIVATE-SECTOR FINANCING, OTHERS SHOPPED ELSEWHERE.
U.S. MACHINERY AND TRANSPORT EXPORTS TO EGYPT FELL FROM $1.4
BILLION IN 2000 TO $1.1 BILLION IN 2005. FURTHER REDUCTIONS
IN THE U.S. ASSISTANCE PROGRAM, WHICH HAS BEEN REDUCED $40
MILLION A YEAR SINCE 1998, WILL HAVE A CONTINUING NEGATIVE
IMPACT ON U.S. EXPORTS TO EGYPT.


11. (U) EVOLUTION IN THE $1.3-BILLION ANNUAL SECURITY
ASSISTANCE PROGRAM COULD ALSO REDUCE U.S. EXPORTS TO EGYPT.
CURRENTLY 73 PERCENT OF MILITARY ASSISTANCE GOES TO UPGRADES
AND MAINTENANCE OF EXISTING U.S SYSTEMS, DIRECTLY BENEFITING
U.S. COMPANIES SELLING MILITARY EQUIPMENT (REF C). IN
ADDITION TO THE $1.3 BILLION ANNUAL MILITARY ASSISTANCE
ALLOCATION, EGYPT RECEIVED AN ADDITIONAL $1.7 BILLION FROM
FISCAL YEARS 2001-2005 IN ASSISTANCE PREVIOUSLY ALLOCATED BUT
NOT DISPERSED, BOOSTING U.S. EXPORTS DURING THAT PERIOD. NO
SUCH ALLOCATIONS ARE EXPECTED IN COMING YEARS.

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EGYPTIANS SHOPPING AROUND
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12. (U) WHEN US AND EGYPT DID NOT LAUNCH FREE TRADE
NEGOTIATIONS IN THE SPRING AS THE GOE HAD ANTICIPATED, TRADE
MINISTER RACHID RACHID MADE A NUMBER OF PUBLIC COMMENTS ABOUT
EGYPT'S INTEREST IN DEVELOPING BUSINESS TIES WITH CHINA,
RUSSIA, AND OTHER TRADING PARTNERS. FOLLOWING RACHID'S
VISITS TO CHINA AND RUSSIA THIS FALL (REF D),HIS STATEMENTS
THAT HE EXPECTED CHINA TO BECOME EGYPT'S LARGEST BILATERAL
TRADING PARTNER (VICE THE UNITED STATES) AND THAT HE EXPECTED
TO DRAMATICALLY EXPAND EGYPTIAN-RUSSIAN TRADE RECEIVED
WIDESPREAD ATTENTION. EGYPT HAS A SIGNIFICANT TRADE DEFICIT


WITH BOTH COUNTRIES, HOWEVER. WHILE EGYPT MAY BE ABLE TO
INCREASE NATURAL GAS EXPORTS TO CHINA, IT HAS LITTLE TO OFFER
RUSSIA, AND APPEARS TO HOPE PRIMARILY FOR AN INCREASE IN
DIRECT FOREIGN INVESTMENT.


13. (U) RACHID ALSO SAID THIS SUMMER THAT IN VIEW OF THE
SUSPENSION OF THE WTO DOHA ROUND OF NEGOTIATIONS, EGYPT WILL
FOCUS ON ITS ARAB AND EUROPEAN PARTNERS WITHIN THE FRAMEWORK
OF THE ARAB FREE TRADE AREA AND THE EURO-MEDITERRANEAN
PARTNERSHIP (REF E).


14. (SBU) THESE STATEMENTS HAVE CONTRIBUTED TO A SENSE OF
LACK OF MOMENTUM AMONG U.S. BUSINESSES IN EGYPT. THE U.S.
CHAIR OF THE U.S.-EGYPT BUSINESS COUNCIL TOLD USDOC OFFICIALS
RECENTLY THAT BILATERAL ACTIVITY IS AT A TEN-YEAR LOW (REF
F). CAIRO AMERICAN CHAMBER OF COMMERCE OFFICIALS HAVE ALSO
BEEN DISPIRITED BY THE LACK OF PROGRESS TOWARD AN FTA. AND
DURING A RECENT TRIP TO THE UNITED STATES WITH OTHER NEA
CHIEFS-OF-MISSION TO PROMOTE U.S. TRADE WITH THE MIDDLE EAST,
THE AMBASSADOR FOUND WIDESPREAD INTEREST IN THE REGION AMONG
U.S. BUSINESSES, BUT A PAUCITY OF INFORMATION ABOUT ECONOMIC
CONDITIONS HERE.

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U.S. EXPORTS INCREASING IN 2006
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15. (U) EVEN SO, 2006 HAS BEEN A GOOD YEAR FOR U.S.
EXPORTERS TO EGYPT. THROUGH SEPTEMBER, EXPORTS WERE UP 31
PERCENT OVER THE SAME PERIOD LAST YEAR. DRIVING THAT
INCREASE IS A 35-PERCENT INCREASE IN MACHINERY AND TRANSPORT
EQUIPMENT AS WELL AS A 19-PERCENT INCREASE IN AGRICULTURAL
EXPORTS, ALTHOUGH EGYPTIAN EXPORTS INCREASED EVEN FASTER
DURING THE SAME PERIOD.


16. (SBU) COMMENT: THE NARROWING U.S. TRADE SURPLUS IN EGYPT
IS AN UNINTENDED CONSEQUENCE OF A NUMBER OF AMERICAN
SUCCESSES: ECONOMIC REFORM SUPPORTED BY THE USG HAS MADE
EGYPTIAN IMPORTERS LESS RELIANT ON USG CREDIT; HIGH-QUALITY
AMERICAN WHEAT IS TOO EXPENSIVE FOR EGYPTIAN BUYERS; THE
EGYPTIAN NATURAL GAS INDUSTRY IS DEVELOPING QUICKLY WITH THE
PARTICIPATION OF AMERICAN AND MULTINATIONAL COMPANIES; AND
EGYPTIAN EXPORTERS ARE TAKING EAGER ADVANTAGE OF THE QIZ
AGREEMENT TO SELL TEXTILES TO THE UNITED STATES. THEIR
SUCCESS IN QIZ EXPORTS MAY PARTLY EXPLAIN A RECENT LACK OF
ENTHUSIASM FOR REVIVING THE FTA (REF G). REGARDLESS, THE
SURGE IN BIDIRECTIONAL TRADE THIS YEAR INDICATES THAT EGYPT
REMAINS A LUCRATIVE MARKET FOR AMERICAN PRODUCTS AND THAT
TRADE CONTINUES TO CONSTITUTE A GROWING PART OF OUR BILATERAL
RELATIONSHIP. THE CHALLENGE OF U.S. EXPORTERS WILL BE TO
RIDE EGYPT'S ECONOMIC EXPANSION WITH SALES OF CAPITAL GOODS.
NEW STATE INVESTMENT IN ENERGY AND TRANSPORTATION OFFERS
ATTRACTIVE OPPORTUNITIES.
RICCIARDONE