EGYPT, ISRAEL JOINTLY PRESS FOR QIZ EXPANSION

UNCLAS SECTION 01 OF 02 CAIRO 003305

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB, NEA/ELA
USTR FOR DONNELLY/MOWREY
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON ETRD KTEX EG IS
SUBJECT: EGYPT, ISRAEL JOINTLY PRESS FOR QIZ EXPANSION

REF: A. CAIRO 3022

B. CAIRO 3023

C. 2006 CAIRO 7219

Sensitive but unclassified, not for Internet distribution.


1. (U) SUMMARY: Egyptian and Israeli trade negotiators and
industrialists sought USG approval of their joint proposal to
expand the Qualified Industrial Zone (QIZ) into Upper Egypt
during the quarterly meeting of the QIZ joint committee Nov.
18 in Cairo. The committee also sought clarification of the
USG position on a GOE-GOI agreement to reduce the required
level of Israeli content in QIZ exports. We responded that
the USG does not need to approve the agreement but that a
formal response from USTR is expected. QIZ export growth
slowed in the third quarter of 2007, according to statistics
released at the meeting, while an Israeli official said
several Israeli exporters lost interest in the program as the
declining dollar made exports to Europe more lucrative. END
SUMMARY.

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QIZ Expansion
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2. (U) In the first meeting of the QIZ committee since the
GOE and GOI agreed to reduce the Israeli content requirement
and request USG approval for a QIZ expansion (refs A and B),
the committee pressed for speedy USG consideration of the
expansion proposal. GOI co-chairman Gabby Bar said that
Israeli businessmen sought QIZ expansion to compensate for an
expected loss in sales to Egypt following the agreement to
reduce the required level of Israeli content from 11.7 to
10.5 percent.


3. (U) Egyptian co-chair Sayed El-Bous argued that the
expansion could help Egyptian industrialists expand QIZ
production beyond ready-made garments into areas such as
furniture, leather, plastics, and chemicals, although the
economics of the arrangement make such an expansion
difficult. (Note: Unless Egyptian exporters are able to
purchase enough low-priced Israeli inputs, their increased
costs for the Israeli content will exceed their duty-free
savings. End note.) Ali Awni, director of the GOE's QIZ Unit,
noted that low US tariffs for many products further limit the
possibilities for QIZ exports because the tariff-free benefit
is less lucrative for such products.


4. (U) Even so, several Egyptian industrialists are
considering new investments in non-textile factories if the
QIZ expands to Upper Egypt. Ali Moussa, chairman of the
Cairo Chamber of Commerce and owner of a food-processing
company, told econoff before the meeting that he and other
investors had prodded the GOE to seek QIZ expansion to
facilitate food-processing investments in Upper Egypt. Anis
Aclimandos, president of TransCentury Associates, said he had
been approached by Israeli rubber manufacturers seeking to
export rubber seals for various new QIZ products. Dan
Catarivas, Director of the World Trade Center of Israel, told
the committee that Israeli and Egyptian businessmen should
jointly investigate possibilities for expanding QIZ
production beyond textiles.

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Israeli content requirement
--------------


5. (U) Bar and El-Bous also sought USG reaction to the
agreement on Israeli content. We noted to the committee that
USG approval of the content agreement is not necessary, but
that the USG welcomes the agreement in any case and that a
formal response from USTR is expected.

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QIZ growth slowing
--------------


6. (U) QIZ exports in the third quarter of 2007 reached USD
$188 million, a 2.9 percent increase from the second quarter
of 2007. However, that rate of growth was less than the 9.5
percent increase from the first to the second quarter, as
well as the 7.9 percent increase in the comparable period in

2006. With the exception of a nominal amount of food exports
-- USD $101,000, or far less than 1 percent of the total --
all of the exports were in ready-made garments and textiles,
including 57 percent for jeans and other pants.


CAIRO 00003305 002 OF 002



7. (U) Israeli exports under the program rose 5.6 percent to
USD $22 million in the third quarter of 2007. Catarivas said
that although overall Israeli exports rose, several Israeli
companies that had been participating in the program decided
to focus their efforts instead on Europe because of the
decline in value of the dollar relative to the euro. Awni
added after the meeting that Egyptian MoT statistics
indicated the declining dollar was diverting some Egyptian
exports from the United States to Europe, a partial
explanation for the slowing QIZ growth. Tight labor markets
in existing QIZ areas also appear to be a continuing
constraint on the growth of the program (ref C).
RICCIARDONE