Reengaging Egypt : Options for US-Egypt Economic Relations [1 ed.] 9780881325058, 9780881324396

Citation preview

J a n u a r y

2 0 1 0

90

Polic y Analyses in International Economics

Reengaging egypt: Options for US-Egypt Economic Relations

Barbara Kotschwar and Jeffrey J. Schott

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

Reengaging egypt: Options for US-Egypt Economic Relations

© Peterson Institute for International Economics | www.piie.com

© Peterson Institute for International Economics | www.piie.com

Reengaging egypt: Options for US-Egypt Economic Relations Barbara Kotschwar and Jeffrey J. Schott

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS Washington, DC January 2010

© Peterson Institute for International Economics | www.piie.com

Barbara Kotschwar, research associate, is also an adjunct professor of Latin American Studies and Economics at Georgetown University (1998–present). She was the chief of the Foreign Trade Information System (2000– 07) and senior trade specialist at the Organization of American States (1996–2007). She was a research assistant at the Institute (1995–96) and the North American Studies Project at the Johns Hopkins University Foreign Policy Institute (1994–95) and analyst in the Caribbean and Latin American division of the Rendon Group (1994–95). She is coeditor of Trade Rules in the Making: Multilateral and Regional Trade Arrangements (1999) and The Andean Community and the United States: Trade and Investment Relations in the 1990s (1998). Jeffrey J. Schott, senior fellow, joined the Peterson Institute in 1983. During his tenure at the Institute, he was also a visiting lecturer at Princeton University (1994) and an adjunct professor at Georgetown University (1986–88). He was a senior associate at the Carnegie Endowment for International Peace (1982–83) and an official of the US Treasury Department (1974–82) in international trade and energy policy. His publications include NAFTA Revisited: Achievements and Challenges (2005), Free Trade Agreements: US Strategies and Priorities (2004), and Prospects for Free Trade in the Americas (2001). PETER G. PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

Copyright © 2010 by the Peter G. Peterson Institute for International Economics. All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without permission from the Institute. For reprints/permission to photocopy please contact the APS customer service department at Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923; or email requests to: [email protected] Printed in the United States of America 12

11

10

5

4

3

2

1

Library of Congress Cataloging-inPublication Data Kotschwar, Barbara. Reengaging Egypt : options for US-Egypt economic relations / Barbara Kotschwar and Jeffrey J. Schott. p. cm. Includes bibliographical references and index. ISBN 978-0-88132-439-6 1. United States--Foreign economic relations—Egypt. 2. Egypt—Foreign economic relations—United States. I. Schott, Jeffrey J., 1949– II. Peterson Institute for International Economics. III. Title. HF1456.5.E3K68 2010 337.73062—dc22 2009049061

1750 Massachusetts Avenue, NW Washington, DC 20036-1903 (202) 328-9000 FAX: (202) 659-3225 www.piie.com C. Fred Bergsten, Director Edward A. Tureen, Director of Publications, Marketing, and Web Development Typesetting by BMWW Printing by Edwards Brothers, Inc.

The views expressed in this publication are those of the authors. This publication is part of the overall program of the Institute, as endorsed by its Board of Directors, but does not necessarily reflect the views of individual members of the Board or the Advisory Committee.

© Peterson Institute for International Economics | www.piie.com

Contents

Preface

ix

Acknowledgments

xiii

1 Introduction

1

2 Current State of Trade and Investment Relations

9



Evolution of US-Egypt Trade Initiatives: From Aid to Trade? Egypt’s Market Reforms: Enhancing Access and Bolstering Competitiveness Remaining Challenges: The Future Agenda

10 23 38

3 Moving Forward: Options to Enhance Economic Relations

45



46 58

Enhancing Market Access in Goods: Expanding the QIZ Stimulating Services Trade through a US-Egypt Services Trade Agreement Modernizing the Bilateral Investment Treaty Cooperation on Trade Facilitation Measures Cooperation to Enhance Egypt’s Trade Capacity: Infrastructure, Education, and Beyond

4 Summing Up

67 72 82

97

 © Peterson Institute for International Economics | www.piie.com

Appendix A Comparison of US Bilateral Investment Treaties with Uruguay and Egypt Appendix B Do Bilateral Investment Treaties Increase Foreign Direct Investment?

105

References

117

Timeline of Key Events in US-Egypt Economic Relations

123

Index

131

111

Tables 1.1 Selected indicators for countries in the Middle East 4 and North Africa 2.1 US trade and investment with MENA countries, 2008 11 2.2 US and Egyptian trade relations with MENA countries 14 2.3 Top 25 US imports from Egypt entering under the GSP 16 program in 2008 2.4 US imports from Egypt: QIZ and total imports, 2005–08 21 2.5 Top 20 US imports from Egypt, 2000–08 24 2.6 US exports to Egypt, 2000–08 28 2.7 Egypt’s top export destinations, 2000–08 32 2.8 Egypt’s top sources of imports, 2000–08 33 2.9 Doing Business rankings for MENA countries, 2009 39 2.10 A. T. Kearney Global Services Location Index, 2007 40 3.1 Top 20 developing-country US apparel suppliers: Labor 48 costs and market access, 2008 3.2 Egypt’s revealed comparative advantage (RCA) index 52 by HS section, 1996­–2007 3.3 Top 20 US imports from Egypt produced under qualifying 56 industrial zones, 2005­–08 3.4 US imports of men’s or boys’ trousers, bib and brace 57 overalls, breeches and shorts of cotton, not knitted or crocheted, 2004­–08 3.5 Reliability and availability of infrastructure services: 63 Electricity 3.6 Reliability and availability of infrastructure services: 64 Telecommunications and water 3.7 US direct investment position abroad (historical-cost basis), 68 2008 3.8 Greenfield investment in Egypt from the European Union 70 and the United States, 2003–08 3.9 Logistics Performance Index (LPI), 2007 74 3.10 Customs constraints 76 vi © Peterson Institute for International Economics | www.piie.com

3.11 3.12 3.13 3.14 3.15 3.16

Transparency indicators Egypt’s scores on MCC indicators, 2005–08 Millennium Challenge Compact countries and projects Infrastructure indicators, 2009 Education indicators, 2009 Gender equity in education indicators, 2009

81 85 87 89 92 93

Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 3.1 3.2

US exports to and imports from Egypt, 1998–2008 US economic assistance to Egypt, FY2000–FY2009 US imports from Egypt: Role of GSP and QIZs, 1989–2008 US textile and apparel imports from Egypt, 2000–08 Egypt: Foreign direct investment stock and flows, 2000–07 Egypt: Foreign direct investment flows in the petroleum versus nonpetroleum sectors, 2004–­08 US foreign direct investment position in Egypt (historical-cost basis), 1994–2007 Egypt’s trade as a percent of GDP, 1990–2007 Egypt: Annual GDP growth, 1990–2009 Inflation in Egypt, 1990–2009 US imports from Egypt, 2000–08 Intellectual property protection in MENA countries, 2009

10 12 18 22 35 35 36 37 37 42 47 79

Box 2.1 The qualifying industrial zones (QIZ) program: Jordan’s experience

19

vii © Peterson Institute for International Economics | www.piie.com

© Peterson Institute for International Economics | www.piie.com

Preface

The Peterson Institute for International Economics has long recognized the importance of the US-Egypt economic relationship. The Institute has hosted numerous events focused on this relationship including a lunch for Foreign Trade Minister Dr. Youssef Boutros-Ghali in December 2003; a presentation by Egypt’s Minister of Finance, Dr. Medhat Hassanein, on the Second Wave of Fiscal Reforms in Egypt, in June 2004; a luncheon speech with the Minister of Foreign Trade, Rachid Mohamed Rachid in November 2004; and a dinner meeting in honor of Prime Minister Ahmed Nazif in May 2005. An earlier Institute study by Ahmed Galal and Robert Lawrence, Anchoring Reform with a US-Egypt Free Trade Agreement (2005), assessed the quantitative and qualitative benefits of a US-Egypt free trade agreement. That study was published shortly after the George W. Bush administration announced its intention to build a US-Middle East Free Trade Area (MEFTA) through launching bilateral free trade agreements (FTAs) with Middle East and North Africa (MENA) countries. In The Arab Economies in a Changing World (2007), Marcus Noland and Howard Pack analyzed the historical performance of the Arab countries and assessed their future prospects in light of the major challenges confronting them. Several other Institute studies explore existing or potential free trade agreements with MENA countries: Maghreb Regional and Global Integration (2008) and Capitalizing on the Morocco-US Free Trade Agreement: A Road Map for Success (2009), both edited by Gary Hufbauer and Claire Brunel; A US–Middle East Trade Agreement: A Circle of Opportunity? (2006) by Robert Z. Lawrence; and “Free Trade Agreements as Foreign Policy Tools: The US-Israel and US-Jordan FTAs” by Howard Rosen and “Egypt, Morocco, ix © Peterson Institute for International Economics | www.piie.com

and the United States” by Ahmed Galal and Robert Z. Lawrence, both chapters in the Institute’s major publication on US FTA policy, Free Trade Agreements: US Strategies and Priorities (2004), edited by Jeffrey J. Schott. This Policy Analysis is part of the wider body of the Institute’s work on the MENA countries, reflecting the Institute’s recognition of the importance of the region. The United States and Egypt have pledged to boost their trade and investment ties through the new US-Egypt Plan for a Strategic Economic Partnership on Trade-Related and Investment Issues. This partnership was announced in May 2009 in advance of President Barack Obama’s speech at Cairo University and began to take shape in November 2009 when US Trade Representative Ron Kirk and Egyptian Minister of Trade and Industry Rachid Mohamed Rachid met to begin fleshing out the details of this plan. This initiative represents an important opportunity for the Obama administration. Enhancing economic ties with Egypt can pay both commercial and political dividends. As the administration hones its policy towards the Middle East, the time is ripe for a new bilateral economic strategy toward one of the United States’ most significant and longstanding allies in the region. Achieving stability in the MENA region has long been a driving force in US foreign and security policy. In this study, Barbara Kotschwar and Jeffrey J. Schott argue that the success of US Middle East strategy depends importantly on the future course of US-Egypt economic relations. They set out practical options for operationalizing the Strategic Economic Partnership in a way that will enhance the US-Egypt economic relationship. In addition to making suggestions for optimizing efforts in the areas under discussion in the Economic Partnership—trade facilitation, services, intellectual property rights, environment, and labor—Kotschwar and Schott identify several additional promising avenues for strengthening economic ties. They provide concrete suggestions for enhancing and expanding specific areas of the US-Egypt economic relationship, such as market access expansion and development cooperation designed to address fundamental competitiveness issues such as improving physical and human capital. The United States has a strong interest in helping Egypt through enhanced commercial ties to develop its economic potential and improve the living standard of its people. Revitalizing US-Egypt economic relations will spur innovation and productivity gains, open new development opportunities in Egypt through expanded trade and investment, and create important precedents for future regional initiatives. An expanded USEgypt partnership would encourage Egypt to continue to play a constructive role in the Middle East, strengthen its economic ties with regional partners, and help the United States pursue a more cohesive and sustainable policy in the Middle East. The Peter G. Peterson Institute for International Economics is a pri © Peterson Institute for International Economics | www.piie.com

vate, nonprofit institution for the study and discussion of international economic policy. Its purpose is to analyze important issues in that area and to develop and communicate practical new approaches for dealing with them. The Institute is completely nonpartisan. The Institute is funded by a highly diversified group of philanthropic foundations, private corporations and interested individuals. About 35 percent of the Institute’s resources in our latest fiscal year was provided by contributors outside the United States. The Institute received support for this study from the Trade Related Assistance Center (TRAC) of the American Chamber of Commerce in Egypt. The Institute’s Board of Directors bears overall responsibilities for the Institute and gives general guidance and approval to its research program, including the identification of topics that are likely to become important over the medium run (one to three years) and that should be addressed by the Institute. The director, working closely with the staff and outside Advisory Committee, is responsible for the development of particular projects and makes the final decision to publish an individual study. The Institute hopes that its studies and other activities will contribute to building a stronger foundation for international economic policy around the world. We invite readers of these publications to let us know how they think we can best accomplish this objective. C. Fred Bergsten Director January 2010

xi © Peterson Institute for International Economics | www.piie.com

PETER G. PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 1750 Massachusetts Avenue, NW, Washington, DC 20036-1903 (202) 328-9000 Fax: (202) 659-3225 C. Fred Bergsten, Director BOARD OF DIRECTORS * Peter G. Peterson, Chairman * George David, Vice Chairman * Reynold Levy, Chairman, Executive Committee Leszek Balcerowicz Ronnie C. Chan Chen Yuan Andreas C. Dracopoulos * Jessica Einhorn Mohamed A. El-Erian Stanley Fischer Jacob A. Frenkel Maurice R. Greenberg Herbjorn Hansson * Carla A. Hills Nobuyuki Idei Karen Katen W. M. Keck II Michael Klein * Caio Koch-Weser Alan G. Lafley Lee Kuan Yew Donald F. McHenry Mario Monti Paul O’Neill David J. O’Reilly Hutham Olayan * James W. Owens Samuel J. Palmisano Frank H. Pearl Victor M. Pinchuk * Joseph E. Robert, Jr. David Rockefeller Lynn Forester de Rothschild Renato Ruggiero * Richard E. Salomon Sheikh Hamad Al-Sayari Edward W. Scott, Jr. Frederick W. Smith Jean-Claude Trichet Laura D’Andrea Tyson Paul A. Volcker Jacob Wallenberg Edward E. Whitacre, Jr. Marina v.N. Whitman Ernesto Zedillo Ex officio * C. Fred Bergsten Nancy Birdsall Richard N. Cooper Barry Eichengreen

ADVISORY COMMITTEE Barry Eichengreen, Chairman Richard Baldwin, Vice Chairman Kristin Forbes, Vice Chairwoman Isher Judge Ahluwalia Robert E. Baldwin Steve Beckman Barry P. Bosworth Menzie Chinn Susan M. Collins Wendy Dobson Juergen B. Donges Jeffrey A. Frankel Daniel Gros Stephan Haggard David D. Hale Gordon H. Hanson Takatoshi Ito John Jackson Peter B. Kenen Anne O. Krueger Paul R. Krugman Roger M. Kubarych Justin Lin Jessica T. Mathews Rachel McCulloch Thierry de Montbrial Sylvia Ostry Jean Pisani-Ferry Eswar S. Prasad Raghuram Rajan Kenneth S. Rogoff Andrew K. Rose Fabrizio Saccomanni Jeffrey D. Sachs Nicholas H. Stern Joseph E. Stiglitz William White Alan Wm. Wolff Daniel Yergin Richard N. Cooper, Chairman Emeritus

* Member of the Executive Committee

Honorary Directors Alan Greenspan Frank E. Loy George P. Shultz

© Peterson Institute for International Economics | www.piie.com

Acknowledgments

We wish to thank Geza Feketekuty, Mohsin Khan, and Robert Lawrence for their comments, which greatly enriched this Policy Analysis. We owe a particular debt to Ambassador Dr. Magda Shahin for her thoughtful comments and tireless help throughout this process. We also benefited from the very able assistance of Matt Adler, who prepared the bulk of the appendices, as well as Agustin Cornejo and Saul Lustgarten. We are especially grateful to Madona Devasahayam, Susann Luetjen, and Edward A. Tureen for preparing this manuscript for publication.

xiii © Peterson Institute for International Economics | www.piie.com

© Peterson Institute for International Economics | www.piie.com

1 Introduction

One of President Barack Obama’s key foreign policy challenges is to craft a constructive new US strategy toward the Middle East and North Africa (MENA). Given the political fissures in the region caused by the Iraq war, US policy will likely shift focus from military intervention to economic engagement. In turn, this policy reorientation will require more attention to US-Egypt relations, for two broad reasons. First, Egypt holds a strategic position both economically and politically in the MENA region. It controls the Suez Canal, borders on both the Red and Mediterranean Seas, and is a land bridge between Africa and Asia. It has close ties to the economies of the Middle East and Europe. Egypt contributes substantially to UN peacekeeping missions, hosts climate change talks, serves as the location for the Arab League headquarters, and often provides the site for diplomatic talks on Middle Eastern issues, particularly Arab-Israeli peace talks. Second, the United States and Egypt already have a significant economic partnership dating back three decades. Enhancing that relationship could yield substantial dividends in terms of increased trade and investment and closer cooperation on strategic initiatives in the MENA region. Since the Camp David accords in the late 1970s, the United States has provided large sums of development assistance to Egypt as well as Israel. US economic and military aid was designed to foster economic opportunities in the region, promote economic cooperation among former regional adversaries, and offset the economic backlash against Egypt by its Arab partners in the wake of its peace agreement with Israel.1 Cumulatively, US financial and military assistance to Egypt has exceeded $50 bil1. Egypt was expelled from the Arab League, which it had helped found, in 1979. It was readmitted in 1989.

1

© Peterson Institute for International Economics | www.piie.com

lion. US support for Egypt has been considered a long-term investment toward peace in the region reflecting the view that economic development breeds stability. On balance, the strategy has worked to the benefit of all. Yet US-Egypt commercial relations remain underdeveloped. Bilateral merchandise trade in 2008 totaled $8.4 billion and represented only 5 percent of US trade with the entire MENA region. US foreign direct investment (FDI) in Egypt, valued at almost $8.8 billion at end 2008, is concentrated in the mining/petroleum sector; Egypt hosts less than 20 percent of all US placements in the MENA region. Long-anticipated free trade negotiations were stillborn in late 2005 due to US objections to political developments related to Egypt’s presidential election. Since then, US trade promotion authority (TPA) has expired, complicating the politics of launching new negotiations on a comprehensive bilateral free trade pact.2 More recently, US officials have been distracted by the global economic crisis, the continuing military action in Iraq and Afghanistan, tensions over Iran’s nuclear program, and domestic reforms on health care and climate change, which have pushed new trade initiatives to the backburner. In this Policy Analysis we argue that the success of a new Middle East strategy depends importantly on the future course of US-Egypt economic relations and that deepening bilateral ties could pay both commercial and political dividends. Such a conclusion may sound odd to those conditioned to think of the MENA region largely as a petroleum platform. But US interests in the region go well beyond oil and gas. Table 1.1 provides summary indicators of Egypt’s profile in the MENA region and highlights both its strengths and vulnerabilities. On the political front, Egypt maintains the largest armed forces in the MENA region, with more than 800,000 military personnel in 2007 (50 percent more than Iran). Like many Middle Eastern regimes, it scores relatively poorly on the Freedom House index of civil liberties and political rights, reflecting decades of autocratic rule. On the economic front, Egypt is the most populous country in the region with 75 million people and has the third largest economy (after Iran and Saudi Arabia). But it falls into the middle of the pack in several other categories: merchandise trade, economic freedom, and surplus energy (Egypt produces oil but not much more than it consumes). More worrisome, Egypt receives low scores for economic and social development (as rated by the UN Human Development Index) and 2. In the president’s trade policy agenda, issued in March 2009, reauthorization of TPA is mentioned as a priority but one that will be pursued only “after engaging in extensive consultation with Congress to establish the proper constraints on that authority and after we have assessed our priorities” (Office of the US Trade Representative, 2009 Trade Policy Agenda and 2008 Annual Report of the President of the United States on the Trade Agreements Program, Washington, available at www.ustr.gov). It is unclear whether TPA will be revived but if it is, the new authority likely would be subject to additional conditions regarding a partner’s policies toward labor, environment, and human rights.

2

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

for mitigating poverty—reflecting continuing strains in Egyptian society that are also illustrated by several political indicators. In a nutshell, table 1.1 shows Egypt as a regional power with untapped economic potential that if nurtured could yield new prosperity and if ignored could exacerbate tensions in Egyptian society with adverse implications for the region as a whole. Since 2004, economic reforms in Egypt have created new opportunities for trade and investment. However, these reforms have not been able to alleviate the entrenched poverty and unemployment in Egyptian society. The challenge for US policy is to pursue a commercial diplomacy that supports economic progress in Egypt by deepening trade and investment ties. The United States can enhance these ties and make them sustainable by supporting investments in physical infrastructure and by helping Egypt to improve its quality and supply of human capital. Such a policy would ensure that the United States has a strong and stable partner in the region and would enhance US-Egyptian economic relations to the benefit of both societies. The need to do so is evident. US economic policy in the Middle East is currently adrift. In 2003, President George W. Bush announced a new initiative to create a US-Middle East Free Trade Area (MEFTA) by 2013 that would promote freedom and economic prosperity in the region. The MEFTA was put forward in the flush of successful military operations in Iraq, in the expectation that “freedom and peace in the Middle East would . . . increase our own security” and that the MEFTA would be part of a broader US effort to promote “economic and political and social progress” in the region.3 The MEFTA would be constructed through an iterative process: The United States would first provide technical and financial assistance to spur economic reform in the Middle Eastern countries, while deepening trade and investment relations through bilateral investment treaties (BITs) and trade and investment framework agreements (TIFAs). Such efforts would encourage greater integration into the world trading system and help prepare countries to undertake the more comprehensive obligations contained in free trade agreements (FTAs). To date, the MEFTA initiative has fallen far short of its projected mark, even though the goals of such an initiative remain compelling. The United States has made only limited progress in its efforts to strengthen economic ties with Egypt and the broader MENA region. The United States has concluded FTAs with Jordan, Morocco, Bahrain, and Oman and BITs with Egypt, Bahrain, Jordan, and Morocco, but none of these pacts has promoted the type of broader intraregional associations that the MEFTA architects envisaged as critical to integrating a region that still ranks among the least globalized in the world (Noland and Pack 2007). None of 3. President Bush announced the trade initiative at a commencement address to the University of South Carolina, Columbia, May 9, 2003, available on the American Presidency Project website, www.presidency.ucsb.edu (accessed on November 11, 2009).

INTRODUCTION

© Peterson Institute for International Economics | www.piie.com

3

Table 1.1

Selected indicators for countries in the Middle East and North Africa

Population, 2008a

Country

GDP (PPP), 2008a

Merchandise trade, 2008b

Millions

Rank

Billions of current international dollars

35 1 1 75 73 7 6 3 4 6 3 31 3 1 25 38 20 10

4 20 19 1 2 10 12 15 14 11 16 5 17 18 6 3 8 9

241.1 26.5 1.9 443.1 816.8 200.9 30.3 141.0 45.8 90.6 6.4 138.2 67.7 95.1 600.5 89.0 92.8 83.1

4 18 20 3 1 5 17 7 16 11 19 8 14 9 2 12 10 13

78,233 18,865 69 25,483 116,350 60,825 7,790 93,180 4,454 63,050 1,750 20,065 37,670 63,830 328,930 12,450 14,300 19,319

5 13 20 10 3 8 17 4 18 7 19 11 9 6 1 15 14 12

39,156 12,530 580 48,382 57,230 67,410 16,888 25,125 16,754 11,500 1,750 41,699 23,095 26,850 111,870 9,200 18,320 24,612

7 15 20 5 4 3 13 9 14 16 19 6 11 8 2 18 12 10

5 23

13 7

186.2 55.2

6 15

231,550 9,270

2 16

158,900 9,300

1 17

Algeria Bahrain Djibouti Egypt Iran Israel Jordan Kuwait Lebanon Libya Mauritania Morocco Oman Qatar Saudi Arabia Sudan Syria Tunisia United Arab Emirates Yemen

Rank

Exports (millions of US dollars)

Rank

Imports (millions of US dollars)

Rank

n.a. = not available Sources: a = International Monetary Fund, World Economic Outlook Database; b = World Trade Organization, International Trade Statistics Database; c = United Nations Human Development Report 2008 Statistical Update; d = Heritage Foundation/Wall Street Journal 2009 Index of Economic Freedom; e = World Bank, World Development Indicators Database; f = Freedom House, 2008 Freedom in the World Index.

the FTA partners has significantly expanded economic ties with Egypt, despite hortatory pronouncements emanating from negotiations to establish a pan-Arab free trade area. The prospect for achieving a MEFTA by knitting together bilateral FTAs with MENA countries appears to be off the table. If the Obama administration wants to deepen economic ties with Egypt and other MENA countries, it will need to consider other options for economic engagement than the conventional FTAs pursued during the Bush

4

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

2008 Human 2008 Human Development Poverty Index Index (2006 data)c (2006 data)c

Value

Rank Value

2009 Economic Freedom Indexd

Surplus energy, 2006e

Military personnel, 2007e

2008 Freedom in the World Indexf

Rank

Value

Million tons of oil Rank equivalent Rank Thousands Rank Score Rank

0.748 0.902 0.513 0.716 0.777 0.930 0.769 0.912 0.796 0.840 0.557 0.646 0.839 0.899 0.835 0.526 0.736 0.762

13 4 20 15 10 1 11 2 9 6 18 16 7 5 8 19 14 12

18.1 8.3 26.5 20.0 12.0 n.a. 6.1 n.a. 8.5 13.6 35.9 31.8 15.0 7.2 12.5 34.3 13.0 16.1

12 4 14 13 6 n.a. 1 n.a. 5 9 17 15 10 2 7 16 8 11

56.6 74.8 51.3 58.0 44.6 67.6 65.4 65.6 58.1 43.5 53.9 57.7 67.0 65.8 64.3 n.a. 51.3 58.0

14 1 16 10 18 2 6 5 9 19 15 12 3 4 8 n.a. 17 11

136.5 7.6 n.a. 15.3 138.4 (18.6) (6.8) 125.3 (4.5) 84.2 n.a. (13.3) 45.1 76.8 424.6 13.0 7.6 (2.1)

3 12 n.a. 9 2 18 16 5 15 6 n.a. 17 8 7 1 10 13 14

334 19 12 866 563 185 111 23 76 76 21 246 47 12 238 127 401 48

4 18 19 1 2 7 10 16 11 12 17 5 15 20 6 9 3 14

5.5 5.0 5.0 5.5 6.0 1.5 4.5 4.0 4.5 7.0 4.0 4.5 5.5 5.5 6.5 7.0 6.5 6.0

10 7 7 10 15 1 4 2 4 19 2 4 10 10 17 19 17 15

0.903 0.567

3 17

7.8 36.6

3 18

64.7 56.9

7 13

130.4 11.6

4 11

51 138

13 8

5.5 5.0

10 7

era. In the case of the US-Egypt economic relationship, existing bilateral mechanisms—the long-standing BIT and TIFA as well as links through chambers of commerce and other business networks—could be enhanced so that US programs more directly support efforts to expand production and employment opportunities in Egypt. New initiatives that promote broader bilateral cooperation and enhanced commercial and investment ties could reinforce Egypt’s efforts to improve its international competitiveness. Sustaining and augmenting those policies, in turn, could help create a better environment for expanding economic opportunities and promoting democratic processes in Egypt. President Obama already has taken several important steps with respect to the MENA region: appointing George Mitchell, former Senate majority leader, to coordinate US Middle East policy; making a major pol-

INTRODUCTION

© Peterson Institute for International Economics | www.piie.com

5

icy address on US relations with the Muslim world from Cairo University in June 2009; and pushing for the resumption of peace talks between Israel and the Palestinian Authority. In May 2009 US Trade Representative Ron Kirk and Egyptian Minister of Trade and Industry Rachid Mohamed Rachid agreed to develop a US-Egypt Plan for a Strategic Economic Partnership on Trade-Related and Investment Issues, which would seek to “remove impediments to trade and investment between the two countries.” In announcing the plan, USTR Kirk noted that “priority areas for discussion and cooperation” should include intellectual property rights, agriculture, environment, labor, and investment issues.4 Minister Rachid noted, in a subsequent speech in Cairo, that he hoped that US-Egypt trade would double in the next four years as a result of the strategic partnership.5 The strategic economic partnership provides an opportunity to reinvigorate US-Egypt relations and bolster two-way trade. As Ahmed Galal and Robert Z. Lawrence (2005) argued several years ago, by helping anchor Egyptian reforms, deeper bilateral economic ties can create a strong foundation for Egyptian economic growth and broader opportunities for bilateral trade and investment. Similarly, a more stable and prosperous Egypt can provide a solid foundation for building a broader US economic partnership in the region. To that end, this Policy Analysis examines the current state of bilateral economic relations and channels for deepening bilateral engagement. In chapter 2 we assess steps taken to date to enhance the economic relationship and to replace aid with trade and investment through inter alia establishment of a BIT and new trade preferences under the qualifying industrial zones (QIZ) program. We also assess the progress to date of Egyptian economic reforms that are critically important both to enhance Egyptian competitiveness and to expand trade and investment opportunities in Egypt. In chapter 3 we set out specific policy initiatives that each country could pursue to propel Egyptian economic development and broaden bilateral trade and investment. The first tranche of measures aims to expand market access in goods and services. The second tranche of measures focuses on trade facilitation measures that could remove the obstacles in the trade logistics chain undercutting Egypt’s competitiveness. The third tranche addresses fundamental competitiveness issues that could yield substantial long-term benefits for the Egyptian economy such as improving phys4. Office of the US Trade Representative, United States–Egypt Plan for a Strategic Economic Partnership on Trade-Related and Investment Issues, May 27, 2009, Washington, available at www.ustr.gov. 5. Rachid Mohamed Rachid, A More Engaging US-Egypt Economic Relationship, speech at the American Chamber of Commerce, Cairo, May 31, 2009, available at www.amcham.org.eg (accessed on August 9, 2009).

6

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

ical infrastructure and human capital—including addressing the issue of gender inequity. Chapter 4 summarizes our policy recommendations and what each country needs to do—both unilaterally and jointly—to promote economic growth in Egypt and create new opportunities for bilateral trade and investment. Taken together, these initiatives could contribute importantly to the strategic economic partnership that both countries have committed to pursue.

INTRODUCTION

© Peterson Institute for International Economics | www.piie.com

7

© Peterson Institute for International Economics | www.piie.com

2 Current State of Trade and Investment Relations

US-Egypt merchandise trade totaled $8.4 billion in 2008. The value of US exports to Egypt has grown at an average annual rate of 8 percent per year since 2000. US imports from Egypt have grown by 12 percent per year over this period, increasing in value from under $1 billion in 2000 to $2.4 billion in 2008; however, the value of US imports from Egypt has not grown much since 2006. This is in direct contrast to US exports to Egypt, which have benefited from recent high commodity prices. Throughout the past decade, the United States has recorded a sizeable trade surplus with Egypt, which has significantly increased since 2006 (figure 2.1). US investors at end 2008 had placed $8.8 billion in Egypt, up from $7 billion in 2007, primarily in the petroleum sector. The United States and Egypt signed a bilateral investment treaty (BIT) back in 1982, which entered into force ten years later, but it has not yet fulfilled the promise of spurring substantial flows of FDI into Egypt. Chapter 3 offers recommendations for augmenting the BIT. In 2008 Egypt was the destination for 9 percent of US exports and almost a fifth of US foreign direct investment (FDI) to the Middle East and North Africa (MENA) region (table 2.1). It ranked third after Israel and Qatar as a destination of US FDI and fourth as an export market in the MENA region. Egypt’s share of US MENA imports was quite small (about 2 percent) due to large US oil purchases from Saudi Arabia, Algeria, Kuwait, and Libya; it ranked sixth as a source of imports in the MENA region in 2008. This chapter examines the evolution of the US-Egypt commercial relationship. We evaluate recent steps taken to enhance this relationship and

9

© Peterson Institute for International Economics | www.piie.com

Figure 2.1    US exports to and imports from Egypt, 1998–2008 millions of US dollars 7,000 Exports Imports

6,000 5,000 4,000 3,000 2,000 1,000 0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: US International Trade Commission (USITC) Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov.

assess the challenges and opportunities for expanding trade and investment ties going forward.

Evolution of US-Egypt Trade Initiatives: From Aid to Trade? In the late 20th century, US-Egypt economic relations were defined primarily by US bilateral aid to Egypt. The United States granted significant economic aid in recognition of Egypt’s prominent role in the Middle East peace process and to offset the economic effects of Egypt’s subsequent isolation by other Arab states. Since 1979, the United States has invested over $2 billion a year in economic and military aid to Egypt (USAID 2009). The relationship remains significant today: Until 1999 Egypt was second only to Israel in terms of US aid, with Egypt’s tranche of US assistance exceeding total aid to Latin America and the Caribbean, Sub-Saharan Africa, and Europe added together. While aid to Egypt has declined in both absolute and relative terms, in 2007 Egypt was still the third largest recipient of US Economic Support Fund (ESF) assistance, following Iraq and Afghanistan (USAID 2009). Over time, pressure has mounted in both countries to decrease the role of aid and to transition from economic assistance to economic partnership. Beginning in 1998, the United States initiated reductions in its annual allotments of economic aid to both Egypt and Israel, cutting Egyp10

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 2.1

US trade and investment with MENA countries, 2008 US exports

Country

Millions Percent of dollars of MENA

Algeria 1,243 Bahrain 830 Djibouti 141 Egypt 6,031 Iran 683 Israel 14,486 Jordan 940 Kuwait 2,719 Lebanon 1,463 Libya 721 Mauritania 107 Morocco 1,519 Oman 1,415 Qatar 3,077 Saudi Arabia 12,478 Sudan 143 Tunisia 503 United Arab Emirates 15,749 Yemen 401 MENA total 65,059 World total 1,300,136

US FDI stock (historical-cost basis)

US imports Millions Percent Rank of dollars of MENA

Millions Percent Rank of dollars of MENA Rank

2 1 0 9 1 22 1 4 2 1 0 2 2 5 19 0 1

10 12 19 4 14 2 11 6 8 13 20 7 9 5 3 18 15

19,355 539 7 2,371 102 22,334 1,139 7,093 99 4,179 46 879 852 484 54,786 5 644

17 0 0 2 0 19 1 6 0 4 0 1 1 0 47 0 1

3 12 19 6 15 2 8 4 16 5 17 9 10 13 1 20 11

5,207 18 (*) 8,771 1 10,153 121 1,459 211 (D) –3 252 (D) 9,158 5,382 n.a. 267

11 0 n.a. 19 0 22 0 3 0 (D) 0 1 (D) 20 12 n.a. 1

5 13 n.a. 3 14 1 12 7 11 n.a. 15 10 n.a. 2 4 n.a. 9

24 1

1 12

1,294 8 116,567 2,100,141

1 0

7 18

3,423 862 45,282 2,791,269

8 2

6 8

FDI = foreign direct investment MENA = Middle East and North Africa (D) = data have been suppressed to avoid disclosure of data of individual companies. n.a. = not available; (*) indicates a non-zero value between –$500,000 and +$500,000, or fewer than 50 employees. Sources: US International Trade Commission Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov; US Department of Commerce, Bureau of Economic Analysis, www.bea.gov.

tian aid by about $40 million per year. Figure 2.2 charts the significant decline of US economic aid to Egypt: In FY2003 Egypt received $911 million, nearly 20 percent of US economic assistance; the FY2009 commitment of $200 million represents only 7 percent of total ESF assistance. This has implications for the Egyptian economy: In 1998 aid per person totaled $30. The FY2009 US per capita aid allotment is less than $3 per Egyptian. Over the past decades, Egypt and the United States have embarked upon several initiatives designed to enhance their trade and investment ties. Early steps toward formalizing the US-Egypt commercial relationship came with the signing of a bilateral investment treaty in 1982. Egypt was the first country to sign a BIT under the US BIT program, which was CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

11

Figure 2.2    US economic assistance to Egypt, FY2000–FY2009 millions of US dollars 1,000 900 800 700 600 500 400 300 200 100 0 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

Source: US Department of State, International Affairs (Function 150) Budget Request documents, 1999–2009.

initiated in 1981 to encourage and protect US investment in developing countries.1 The BIT ultimately entered into force on June 27, 1992.2 In 1994 Egyptian President Hosni Mubarak and US Vice President Al Gore established the US-Egypt Partnership for Economic Growth and Development—a cooperative effort aimed at enhancing economic relations and encouraging Egypt’s incipient economic reforms. Each country established joint private-sector Presidents’ Councils. Participants on the US side were mainly from the oil, telecommunications, and pharmaceutical industries; Egyptian participants included representatives from the banking, food, and textile sectors. These councils were later restructured to become the US-Egypt Business Council. In June 1999 the two countries signed a trade and investment framework agreement (TIFA). The agreement established a TIFA Council to facilitate the discussion of bilateral trade and investment issues.3 US Trade 1. Investment Treaty with Egypt, Message from the President of the United States, Letter of Transmittal to the Senate of the United States, June 2, 1986, White House, available at www.state.gov (accessed on October 28, 2009). 2. The original BIT was subject to additional modifications that were included through an exchange of letters signed on March 11, 1985 and a supplemental protocol, signed March 11, 1986. 3. In addition to Egypt, the United States has signed TIFAs with a number of other Middle Eastern trading partners: Afghanistan (2004), Algeria (2001), Bahrain (2001), Jordan (2003), Kuwait (2004), Lebanon (2006), Morocco (1991), Qatar (2004), Saudi Arabia (2003), Tunisia (2002), United Arab Emirates (2004), and Yemen (2004). Egypt also participates in the

12

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Representative (USTR) Charlene Barshefsky stated later that year that “entering into a TIFA with Egypt marked the first step toward creating freer trade between our two countries, and established the basis for stronger economic ties to bolster our joint efforts at further peace in the region.”4 To date the TIFA Council has met only four times: once each in 1999 and 2002 and twice in 2005.5 Momentum toward a US-Egypt FTA seemed to pick up in May 2003 when the George W. Bush administration proposed the establishment of a US-Middle East Free Trade Area (MEFTA). As part of this initiative, the United States has implemented FTAs with Bahrain, Morocco, and Oman, and in March 2005 initiated negotiations with the United Arab Emirates. These pacts supplement FTAs already in force with Israel (1985) and Jordan (2001). Egypt already is a party to trade agreements with all potential MEFTA partners (table 2.2) and it would be difficult to conceive of a MEFTA without Egypt, the most populous country in the Arab world. The MEFTA initiative failed to galvanize US-Egypt trade talks: US reactions to haphazard progress on political and economic reforms in Egypt kept formal US-Egypt negotiations on a back burner. Differences regarding democracy and human rights undercut efforts to build political support for a bilateral FTA.6 Trade disputes also contributed to the sporadic progress in bilateral trade talks.7 In addition, the fractious US trade policy debate in the United States and the expiration of US trade promotion auUS-COMESA TIFA signed in October 2001. The US-Bahrain TIFA was superseded by the USBahrain FTA, signed in 2004. In the Middle East, the United States has signed FTAs with Israel (1985), Jordan (2000), and Morocco (2004). 4. Office of the United States Trade Representative, “US and Egypt Inaugural Trade and Investment Agreement,” press release 99-96, Washington, November 18, 1999. 5. See Egyptian Ministry of Trade and Industry, Egypt-USA Trade and Investment Framework Agreement (TIFA), www.mfti.gov.eg (accessed on August 9, 2009). 6. In September 2007 the United States raised concerns about a number of court cases against journalists and closures of human rights NGOs. Egypt’s foreign minister claimed “unacceptable interference” (Ian Pannell, “Egypt Angry at US Rights Comment,” BBC News, Cairo, September 26, 2007). 7. In May 2003 the bilateral relationship came under strain when Egypt, which had originally agreed to support the United States in a WTO case regarding GMOs against the European Union, reversed its position, reluctant to alienate its largest trading partner. In the wake of this development, USTR enthusiasm toward negotiating a free trade agreement with Egypt noticeably waned. In December 2003 the United States filed a formal WTO request for consultations with Egypt concerning import duties on certain apparel and textile products. Egypt lowered these tariffs in January 2004 and in May 2005 the United States notified the WTO that a mutually agreed solution had been reached. The United States alleged that Egypt’s per garment duty charges effectively created tariff rates ranging from 141 percent to over 51,000 percent, which significantly exceeded Egypt’s bound rates. In January 2004 Egypt lowered its tariffs to 40 percent on imports of apparel, 12 percent on yarns, 22 percent on all kinds of fabrics and 35 percent on imports of home textiles (USTR 2003 and World Trade Organization, August 20, 2007).

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

13

Table 2.2

US and Egyptian trade relations with MENA countries

Country

United States

Algeria Bahrain Djibouti Iran Iraq Israel Jordan Kuwait Lebanon Libya Mauritania Morocco Oman Palestinian Authority Qatar Saudi Arabia Sudan Syria Tunisia United Arab Emirates Yemen

Egypt

GSP FTA, TIFA, BIT GSP

GAFTA signatory GAFTA GAFTA signatory

GSP FTA, TIFA, BIT FTA, TIFA, BIT, GSP TIFA, GSP GSP

GAFTA QIZ FTA (Agadir), GAFTA GAFTA GAFTA GAFTA GAFTA signatory FTA (Agadir), GAFTA GAFTA GAFTA GAFTA GAFTA GAFTA GAFTA FTA (Agadir), GAFTA GAFTA GAFTA

GSP FTA, TIFA, BIT, GSP FTA, TIFA, BIT, GSP Participates in Israel FTA TIFA TIFA, BIT, GSP

TIFA, BIT, GSP TIFA TIFA, GSP

FTA = free trade agreement BIT = bilateral investment treaty TIFA = trade and investment framework agreement QIZ = qualifying industrial zone GSP = Generalized System of Preferences Note: The Greater Arab Free Trade Area (GAFTA) encompasses all members of the Arab League. Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestinian Authority, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, United Arab Emirates, and Yemen are members. Others are in the process of joining. Sources: Egypt Ministry of Trade and Industry, www.mfti.gov.eg; US Trade Representative, www.ustr.gov.

thority (TPA) at the end of June 2007 have made it increasingly difficult for the United States to negotiate new trade deals. In January 2009 the new administration of Barack Obama took office. The Obama administration has taken several positive steps toward reforming Middle East policy and enhancing ties with Egypt. In the week after taking office, President Obama appointed George Mitchell as special envoy to the Middle East and delivered a major policy speech at Cairo University in June 2009. With respect to Egypt, USTR Ron Kirk and Egyptian Minister of Trade and Industry Rachid Mohamed Rachid signed a US-Egypt Plan for a Strategic Partnership aimed at broadening and 14

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

deepening trade and investment relations. In November 2009 the two parties agreed to a one-year plan to put this partnership in motion.

Expanded Market Access: GSP and QIZ Programs Egypt has enjoyed some measure of preferential access to the US market since 1975, through the US Generalized System of Preferences (GSP) program. Table 2.3 lists the top 25 goods imported from Egypt under the GSP program in 2008. Total GSP goods were worth about $60 million out of $2.4 billion total exports to the United States and include foodstuffs, stone and marble works, lamps, and pens. Many of Egypt’s most important nonoil export goods, notably textiles, are excluded from the GSP program.8 The exclusion of important Egyptian exports such as apparel, leather goods, and ceramics limits Egypt’s GSP utilization as do some factors associated with business competitiveness.9 As seen in figure 2.3, GSP products constitute a low percentage of US imports from Egypt: an average of 2.7 percent in the 2000s (down from a high of 8.2 percent in 1997). This compares unfavorably with several of Egypt’s competitors: 14 percent of Indonesia’s exports to the United States enter under the GSP. The ratio is 18.5 percent for India and Turkey, and 40 percent for both Lebanon and the West Bank. Jordan, whose FTA with the United States went into effect in 2001, recorded a 14 percent GSP ratio the year before its FTA went into effect. 8. The US GSP program, which allows preferential trade treatment for about 3,400 products from developing countries, was instituted on January 1, 1976 and extended for ten years under the 1974 Trade Act. Since then, the program has been periodically renewed and is currently authorized through December 31, 2009. Egypt’s GSP coverage is enhanced by a certified handicraft textile arrangement, which covers certain textile items, including handloomed and folklore wall hangings (HTS 6304.99.10) and hand-loomed and folklore pillow covers (HTS 6304.99.40). The other beneficiaries of this agreement are Afghanistan, Argentina, Botswana, Cambodia, Colombia, Jordan, Nepal, Pakistan, Paraguay, Peru, Thailand, Tunisia, Turkey, and Uruguay (USTR 2008). The GSP excludes textiles produced with cotton, wool, man-made fiber, and other vegetable fiber, as well as watches, certain footwear and handbags, luggage, flat goods not made of silk, work gloves, and other leather items. 9. One official attributes the low level of GSP utilization to slow and inefficient data collection and exporters’ reluctance to provide information on production and labor costs and profitability as required in order to qualify for GSP treatment (Waleed El Nozahy, Opportunities Through GSP: Is Egypt Missing Out? Presentation at the TRAC Conference on Opportunities through the Generalized System of Preferences (GSP), November 3, 2008, available at www.egypttrade.org/trac). Marideth Sandler suggests that there is some room for improving awareness of the GSP program or improving administrative procedures, showing that some Egyptian exporters sell GSP-eligible goods in the US market without taking advantage of the duty-free access. In 2007, 10 percent of GSP-eligible exports were charged duty unnecessarily, resulting in excess import charges of about $250,000. See Marideth Sandler, Expanding Egypt’s Export Opportunities through GSP, presentation at the TRAC Conference on Opportunities through the Generalized System of Preferences (GSP), November 3, 2008, available at www.ustr.gov (accessed on August 9, 2009).

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

15

Table 2.3

Top 25 US imports from Egypt entering under the GSP program in 2008 US most favored nation duty rate Millions of (percent, unless dollars otherwise specified)

Rank

HS 8-digit code

1

7606.12.30

Aluminum alloy, plates/sheets/strip, with thickness over 0.2mm, rectangular (including square), not clad

16.3

3.0

2

6802.91.15

Monumental or building stone & articles thereof (other than slabs), of marble, further worked than simply cut/sawn, nesoi

4.3

4.9

3

2009.80.60

Juice of any other single fruit, nesoi (including cherries and berries), concentrated or not concentrated

3.3

2.2

4

2202.90.90

Nonalcoholic beverages, nesoi, not including fruit or vegetable juices of heading 2009

3.1

0.2¢/liter

5

9405.91.60

Parts of lamps, lighting fixtures, illuminated signs & the like, of glass nesoi

2.8

4.5

6

6802.92.00

Monumental or building stone & articles thereof, of calcareous stone, nesoi, further worked than simply cut/sawn, nesoi

2.6

4.9

7

3922.10.00

Baths, shower baths and washbasins, of plastics

2.2

6.3

8

6802.91.05

Marble slabs, further worked than simply cut/sawn

1.9

2.5

9

2005.70.25

Olives, green, in a saline solution, pitted or stuffed, not place packed

1.1

8.6¢/kg on drained weight

10

0712.90.65

Dried parsley nesoi, whole, cut, sliced, broken or in powder, but not further prepared

1.1

3.8

11

0710.80.70

Vegetables nesoi, uncooked or cooked by steaming or boiling in water, frozen, not reduced in size

0.9

11.3

12

2104.10.00

Soups and broths and preparations thereof

0.9

3.2

13

9608.10.00

Pens, with ball point

0.8

0.8¢ each + 5.4%

Description

(continued) 16

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 2.3

Rank

Top 25 US imports from Egypt entering under the GSP program in 2008 (continued)

HS 8-digit code

Description

14

1509.10.40

15

2005.70.75

16

7019.90.50

17 18 19

3925.90.00 2007.99.10 6802.21.50

20

2106.90.82

21

0712.90.85

22

2005.70.12

23

7113.19.50

24

8544.30.00

25

0710.80.93

Virgin olive oil and its fractions, whether or not refined, not chemically modified, weighing with the immediate container 18 kg or over Olives (not green), in a saline solution not canned, nesoi Glass fibers (including glass wool), nesoi, and articles thereof, nesoi Builders’ ware of plastics, nesoi Strawberry jam Monumental or building stone & articles thereof, of marble & alabaster, simply cut/sawn, with flat or even surface Food preparations, nesoi, other than 10 percent milk solids, nesoi Dried vegetables nesoi, and mixtures of dried vegetables, whole, cut, sliced, broken or in powder, but not further prepared Olives, green, not pitted, in saline, not ripe Precious metal (other than silver) articles of jewelry and parts thereof, whether or not plated or clad with precious metal, nesoi Insulated ignition wiring sets and other wiring sets of a kind used in vehicles, aircraft or ships Okra, reduced in size, frozen Subtotal of top 25 GSP items Subtotal of all GSP items Total imports from Egypt GSP items as a percent of total imports from Egypt

US most favored nation duty rate Millions of (percent, unless dollars otherwise specified)

0.8

3.4¢/kg

0.8 0.8

4.3¢/kg on drained weight 4.3

0.6 0.5 0.5

5.3 6.4 1.9

0.4

6.4

0.4

8.3

0.4 0.4

3.7¢/kg on drained weight 5.5

0.4

5.0

0.4

14.9

47.6 57.8 2,380.0 2.0

GSP = Generalized System of Preferences nesoi = not elsewhere specified or included Sources: US International Trade Commission Interactive Tariff and Trade Dataweb, http://dataweb.usitc. gov; Harmonized Tariff Schedule of the United States, 2008, Revision 2.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

17

Figure 2.3    US imports from Egypt: Role of GSP and QIZs, 1989–2008 millions of US dollars 2,500

2,000

Nonpreferential access Generalized System of Preferences (GSP) Qualifying industrial zone (QIZ)

1,500

1,000

500

19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

0

Source: US International Trade Commission (USITC) Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov.

Egypt’s access to the US market was expanded in December 2004 through the qualifying industrial zones (QIZ) program (box 2.1). Under the QIZ program Egyptian goods that are manufactured with Israeli content are allowed to enter duty free into the US market.10 The QIZ applies to all goods produced in specially designated industrial zones, thus expanding duty-free coverage to the textile sector. To qualify, goods must meet a minimum 35 percent content requirement, at least one-third (11.7 percent) of which must be sourced from Egypt and one-third from Israel. In 2007 the Israeli content requirement was lowered to 10.5 percent. Three initial QIZs were approved: the Greater Cairo QIZ, the Alexandria QIZ, and the Suez Canal Zone QIZ. The USTR approved another, the Central Delta QIZ, in 2005. Two new QIZs were added in January 2009: the Beni Suief Zone and Al Minya Zone in Upper Egypt.11

10. The QIZ agreement is the Protocol between the Government of the Arab Republic of Egypt and the Government of the State of Israel on Qualifying Industrial Zones. Egyptian goods made with Israeli content are allowed to enter the United States duty free through the 1996 West Bank and Gaza Strip Free Trade Benefits Act (PL 104-234), which amended and extended the US-Israel Free Trade Area Implementation Act to permit certain products— from designated QIZs in the Gaza Strip, Jordan, and Egypt—to enter the United States duty free (S. Rept. 104-270, 3). 11. Office of the US Trade Representative, Joint Statement of US Trade Representative Ron Kirk and Egyptian Minister of Trade and Industry Rachid Mohamed Rachid, May 27, 2009, www.ustr.gov.

18

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Box 2.1

The qualifying industrial zones (QIZ) program: Jordan’s experience

The QIZ program originated in the mid-1990s with the 1996 West Bank and Gaza Strip Free Trade Benefits Act (PL104-234), which amended and extended the USIsrael Free Trade Area Implementation Act to support the Middle East peace process, aiming to help stimulate and diversify the economies of Jordan and Egypt, the two Arab countries that had signed peace treaties with Israel.1 Under the QIZ program, goods produced in designated industrial parks in the West Bank, Gaza Strip, Jordan, and Egypt that meet specified content requirements (including Israeli inputs) are allowed to enter into the United States duty free. To qualify for these preferences, the good must be “substantially transformed” and must have at least 35 percent of its value added in the QIZ factories. Jordan negotiated a QIZ agreement in 1998; the US trade representative (USTR) designated the first QIZ, the Al-Hassan Industrial Estate in the city of Irbid, on March 6, 1998. Subsequently, 13 QIZs were added. To qualify, products were required to contain 11.7 percent Jordanian content and 8 percent Israeli content, with the remainder of the 35 percent value to be added by content from a Jordanian QIZ, Israel, the West Bank/Gaza, or the United States. Jordanian QIZs concentrated mostly on textiles and apparel and luggage production. Shortly after the QIZ agreement was implemented, in 2000, the United States and Jordan signed a free trade agreement (FTA), which entered into force in December 2001. US imports from Jordan increased from about $26 million in 1996 to over $1.3 billion in 2007, an average annual rate of growth of 63 percent. The Jordanian ambassador to the United States estimates that the US-Jordan QIZ, followed by the FTA, created 40,000 new jobs, many of them held by women.2 Various foreign investors, including from China, Pakistan, and other Arab countries, have invested in QIZs. By 2002, 90 percent of all Jordanian shipments to the United States entered under the QIZ program, and QIZ imports grew over 100 percent per year, compared with the 63 percent growth rate of overall Jordanian imports. 1. “Proclamation 6955—To Provide Duty-Free Treatment to Products of the West Bank and the Gaza Strip and Qualifying Industrial Zones,” Federal Register 61, no. 223 (November 18, 2006): 58761–65. 2. Phillip Kurata, “Egypt, US Consider Opening Free Trade Talks in 2005: Egypt’s Envoy to the United States Says Reforms Needed to Raise Growth,” Washington File, January 14, 2005.

In addition to ensuring duty-free access for previously excluded textile goods, the QIZ was seen as a step toward broader free trade with the United States. A similar program between Jordan and Israel preceded the US-Jordan FTA (box 2.1).12 In his remarks at the signing ceremony for 12. Jordan signed a QIZ with Israel in 1999, and Jordan and the United States subsequently negotiated an FTA that was approved in 2001.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

19

the QIZ agreement with the United States, Egypt’s Minister of Foreign Trade and Industry Rachid Mohamed Rachid stated that “We have high hopes that this arrangement will contribute to economic prosperity in the region. Indicators for success are very promising. No less important is the fact that the signing of this protocol today will help us start negotiating with our U.S. counterparts for a free trade agreement.”13 The QIZ program significantly extends Egypt’s preferential access to the US market. Figure 2.3 illustrates the relative magnitude of the GSP and the QIZ in total US imports from Egypt. Egypt’s QIZ export growth has far outpaced growth of Egypt’s total exports to the United States, with QIZ exports growing at an average annual rate of 58 percent from 2005 to 2008—more than ten times the growth rate of total exports to the United States. In the first year of the program, QIZ exports made up 13 percent of total Egyptian exports to the United States but grew to represent over 30 percent of exports in 2008. Combining goods entering the United States under the GSP and under the QIZ, 15 percent of Egyptian goods entered the US market duty free in 2005 and nearly 40 percent were exempt from tariffs in 2008. As seen in table 2.4, textiles and apparel is Egypt’s main export under the QIZ. The duty-free treatment of this sector has added to the growth of Egypt’s exports to the United States. In 2007 this category represented 99 percent of all US imports from Egyptian QIZs; in 2008 this share had fallen to 89 percent, largely due to a rise in the value of mineral fuels. Companies located in QIZs can produce any good, provided they use the specified amount of Israeli and Egyptian content. In practice, Egyptian QIZs were established to expand the low-capital and high-labor intensive textile and apparel industry, with an aim to absorb some of Egypt’s young and plentiful workforce. Egypt’s low-cost labor and geographical proximity to the European Union provide an advantage in exporting textiles— even over lower-cost producers such as China and other Asian countries.14 However, the expiration of Multi-Fiber Arrangement (MFA) quotas at the end of 2004, which allowed for greatly increased competition from countries such as China, India, and Bangladesh—as well as Jordan’s implementation of its QIZ program in 1999—challenged Egypt’s competitive position.15 The QIZ has helped Egypt maintain a relatively competitive 13. Remarks After Signing of the Qualified Industrial Zone Agreement by Rachid Mohamed Rachid, Minister of Foreign Trade and Industry, Egypt; Ehud Olmert, Deputy Prime Minister and Minister of Trade, Israel; and Robert B. Zoellick, United States Trade Representative, December 14, 2004, available at www.ustr.gov. 14. Dan Magder (2005) explores this point in depth. 15. The Multi-Fiber Arrangement, also known as the Agreement on Textile and Clothing (ATC), governed world trade in textiles and apparel from 1974 through the end of 2004. Under the MFA, quotas were imposed on developing-country exports to developed countries. It expired on January 1, 2005.

20

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 2.4

US imports from Egypt: QIZ and total imports, 2005–08 (millions of US dollars)

HTS 2-digit code

Imports Commodity

2005

2006

2007

2008

62

Articles of apparel and clothing accessories, not knitted or crocheted

134

339

393

420

61

Articles of apparel and clothing accessories, knitted or crocheted

105

251

285

302

27

Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes

12

0

0

90

63

Made-up textile articles nesoi; needlecraft sets; worn clothing and worn textile articles; rags

12

34

42

43

57

Carpets and other textile floor coverings

0

1

3

5

52

Cotton, including yarns and woven fabrics thereof

1

3

5

4

7

Edible vegetables and certain roots and tubers

1

2

3

3

54

Man-made filaments, including yarns and woven fabrics thereof

0

2

2

1

60

Knitted or crocheted fabrics

0

0

1

1

20

Preparations of vegetables, fruit, nuts or other parts of plants

0

0

0

1

94

Furniture; bedding, cushions etc.; lamps and lighting fittings nesoi; illuminated signs, nameplates and the like; prefabricated buildings

0

0

1

1

252

628

729

775

266 95

643 98

740 99

874 89

2,076 13

2,404 27

2,380 31

2,380 37

Subtotal: Textiles Subtotal QIZ Textiles as a percent of QIZ imports Total QIZ as a percent of total imports QIZ = qualifying industrial zone

Source: US International Trade Commission Interactive Tariff and Trade Dataweb, http://dataweb. usitc.gov.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

21

Figure 2.4    US textile and apparel imports from Egypt, 2000–08 millions of US dollars 1,000 Harmonized Tariff Schedule categories 61 to 63 Harmonized Tariff Schedule categories 52 to 60

900 800 700 600 500 400 300 200 100 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Note: HTS 52 to 60 comprise yarns and woven fabrics of silk, cotton, wool, vegetable fibers, man-made fibers and filaments, carpets and floor coverings, etc.; HTS 61 to 63 comprise articles of apparel and clothing accessories, knitted or crocheted or not, and various textile products. Source: US International Trade Commission (USITC) Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov.

position in the international textile and apparel market. A member of the Egyptian textile industry estimates that without the QIZ agreement, more than half of Egypt’s textile factories would have had to close down after 2005.16 Instead, in 2005, 406 new textile companies were created.17 Exports of textiles and apparel grew by an average of 1.9 percent per year from 2000 to 2004. The average annual growth rate jumped to 13.5 percent from 2005 to 2008, with goods in ready-made garments (HS categories 61 and 62) driving this growth. This evolution is shown in figure 2.4. In addition to Egyptian producers, foreign clothing and textile firms from Turkey, India, China, and Taiwan with investments in Egypt are operating under the QIZ, taking advantage of Egypt’s access to the US market. Anecdotal evidence indicates that this access to the US market has spurred firms to upgrade technology and to become more competitive. Employment has grown, though some bottlenecks remain—particularly due to the lack of sufficient high-skilled labor. 16. Magdi Tolba, chairman of the Readymade Garments Exports Council, quoted in Andrew England, “Trade Deal with the US and Israel Boosts Textiles,” Financial Times, December 10, 2007, 6. 17. World Bank Social and Economic Development Sector Unit, Middle East and North Africa Region, Morocco, Tunisia, Egypt and Jordan after the End of the Multi-Fiber Arrangement, December 2006.

22

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

The growth of QIZ exports, particularly apparel, outperforms otherwise sluggish export growth. US imports of Egyptian goods have grown by only 4 percent per year since 2005. These (shown in table 2.5) are dominated by oil, natural gas, and clothing. Liquefied natural gas (LNG)— which has constituted between 20 and 35 percent of Egypt’s sales to the United States since the country’s first LNG export terminal began operation in January 2005—and other petroleum products accounted for more than half of US imports of Egyptian goods (except in 2008 due to the sharp drop in oil prices in the second half of the year). Table 2.5, which lists the top 20 US imports from Egypt (at the 8-digit HS level), shows that, with the QIZ, Egyptian exporters face relatively few tariff barriers in the US market. Of the top exports, a bundle that comprises 81 percent of total Egyptian exports to the United States, 53 percent enter under zero MFN tariffs. Most items that face high MFN tariffs are in the textile and apparel sector (tariffs range from 6 to 32 percent), but these products can enter duty free under the QIZ program (and largely did so: the last column in table 2.5 indicates that between 94 and 98 percent of items in high–MFN tariff, QIZ-eligible categories entered under the QIZ in 2008). Including the goods entering under the QIZ program, 63 percent of Egypt’s goods entered the US market duty free in 2008. Goods that would otherwise face tariffs of 16 percent or higher were overwhelmingly exported under the QIZ program. Table 2.5 also points out a correlation between goods that make intensive use of the QIZ preferences (95 percent or more of goods exported entering under the QIZ program) and those that show high rates of growth for the period 2005–08.

Egypt’s Market Reforms: Enhancing Access and Bolstering Competitiveness One factor cited as an impediment to launching a US-Egypt FTA—Egypt’s slow progress on trade reforms—has largely been overcome. Since 2004, Egypt’s economic cabinet has initiated a series of far-reaching economic reforms that opened the economy to trade and investment. The 2004 reforms represent a significant shift for Egypt: Shortly after they were enacted, Minister of Foreign Trade and Industry Rachid contrasted them with past policy: “[f]or many years, Egypt has been following an approach and a policy of protection, and one of the difficult and immediate decisions that this government has taken is that we have announced very explicitly that we are reducing protection for our markets and our industry.”18 18. Speech by Egyptian Minister of Trade and Industry Rachid Mohamed Rachid at the Institute for International Economics, Washington, November 15, 2004, quoted in David Shelby, “Egyptian Trade Minister Rashid says Egypt Intent on Opening Trade,” Washington File, November 15, 2004, available at www.america.gov.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

23

Table 2.5

Top 20 US imports from Egypt, 2000–08 (ranked by 2008 values)

HS 8-digit Rank code 1 2

27111100 27090010

3

62034240

4

27101115

5

62046240

6 7

31021000 98010010

8

31028000

9

61102020

10

61091000

11

61103030

12 13

61051000 27090020

14

57024210

15

27101125

16

27040000

17

57033080

18

63026000

20

62052020

Imports (millions of US dollars) Description Natural gas, liquefied Petroleum oils and oils from bituminous minerals, crude, testing under 25 degrees API Men’s or boys’ trousers and shorts, not bibs, not knitted/crocheted, of cotton Light oil motor fuel 70 percent+ by weight from petroleum oils Women’s or girls’ trousers, breeches and shorts, not knitted/crocheted, of cotton, nesoi Urea, whether or not in aqueous solution US goods returned without improved condition or greater value Mixtures of urea and ammonium nitrate in aqueous or ammoniacal solution Sweaters, pullovers and similar articles, knitted or crocheted, of cotton, nesoi T-shirts, singlets, tank tops and similar garments, knitted or crocheted, of cotton Sweaters, pullovers and similar articles, knitted/crocheted, of man-made fibers, nesoi Men’s or boys’ shirts, knitted or crocheted, of cotton Petroleum oils and oils from bituminous minerals, crude, testing 25 degrees API or more Wilton and like floor coverings of pile construction, of man-made textile materials Naphthas (excluding motor fuel/motor fuel blend stock) from petroleum oils & bitumin minerals (other than crude) or preparations 70 percent+ by weight from petroleum oils Coke and semicoke of coal, lignite or peat, whether or not agglomerated; retort carbon Carpets & other textile floor coverings, tufted, whether or not made up, of man-made textile materials (not nylon/other polyamides), nesoi Toilet linen and kitchen linen, of terry toweling or similar terry fabrics, of cotton Men’s or boys’ shirts, not knitted or crocheted, of cotton, nesoi Subtotal Total

2000 2001 2002 2003 2004 0 0

0 0

0 0

0 0

0 0

75

72

70

95

97

0

0

129

90

55

102

107

87

98

112

20 93

52 31

12 35

49 137

14 96

0

0

0

0

0

50

42

48

48

53

20

15

15

20

17

7

7

4

4

13

16 0

16 54

13 0

17 23

21 0

28

18

25

31

38

0

0

34

36

155

0

0

6

5

19

0

0

0

0

0

8

11

11

18

11

22

17

19

16

11

441 888

442 508 687 712 879 1,352 1,144 1,330

nesoi = not elsewhere specified or included n.a. = not available Sources: US International Trade Commission Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov; Harmonized Tariff Schedule of the United States, 2007, Revision 2.

24

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Share of total (percent) 2005 2006 2007 2008

2000 2008

Growth of imports 2000–08

2005–08

US 2008 MFN duty rate

Percent of 2008 imports entering under QIZ

752 20

829 0

783 0

482 194

0 0

20 8

n.a. n.a.

–14 113

free 52.5¢/barrel

9 94

117

158

167

179

8

8

11

15

16.6 percent

98

143

83

286

166

0

7

n.a.

5

52.5¢/barrel

0

103

120

144

157

11

7

6

15

16.6 percent

99

20 76

20 34

127 22

139 107

2 10

6 5

27 2

91 12

free free

0 0

0

0

39

70

0

3

n.a.

n.a.

free

0

46

61

70

70

6

3

4

15

16.5 percent

99

16

30

31

40

2

2

9

36

16.5 percent

99

12

30

28

37

1

2

23

46

32.0 percent

98

20 44

40 10

43 31

36 35

2 0

2 1

11 n.a.

22 –7

19.7 percent 10.5¢/barrel

96 0

50

38

36

34

3

1

2

–12

free

0

81

44

0

27

0

1

n.a.

–31

10.5¢/barrel

0

20

0

5

24

0

1

n.a.

6

free

0

1

9

18

23

0

1

n.a.

184

6.0 percent

1

17

21

21

23

1

1

14

11

9.1 percent

97

12

17

15

21

2

1

–1

21

19.7 percent

98

1,550 1,544 1,866 1,864 2,091 2,393 2,380 2,371

78

79

20 13

6 4

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

25

Increasing Access to the Egyptian Market As part of the reform package, the government significantly cut the tradeweighted average MFN tariff rate from 14.6 to 9.1 percent and reduced the number of tariff bands from 28 to 6 (IMF 2005). Tariffs on most automobiles fell from 104 to 40 percent and tariffs on auto components were cut from 20 percent to between 7 and 10 percent.19 The government slashed an additional 1,000 tariffs in February 2007, bringing the average MFN tariff down to 6.9 percent, with more than 90 percent of items facing duties of less than 15 percent.20 Unlike Egypt’s exports to the United States, US exports to Egypt have grown much more rapidly in the latter part of the decade than in the former, increasing by 24 percent per year in the period 2005–08. This is largely due to increases in the prices of the main US exports to Egypt. Egypt mostly buys food from the United States, particularly wheat and corn, which together have accounted for between 15 and 30 percent of US exports to Egypt since 2000 (table 2.6). Egypt, one of the world’s largest wheat importers, is a key purchaser of US wheat.21 US corn exports to Egypt have doubled in value from 2000 to 2008, and US sales of soybeans, which started at a relatively low base in 2000 of $25 million, have grown by over 1,000 percent, from 1 percent of the US export bundle to 6 percent. Trade has also been boosted by the significant trade liberalization under Egypt’s economic reform program. For example, tariffs on the top two US exports, wheat and corn, which were 2 percent in 2005, are now free. As table 2.6 illustrates, Egypt’s 2007 tariffs on the top 20 US exports to Egypt (representing about 65 percent of total US exports to Egypt) generally range from 0 to 5 percent, with a few tariff lines subject to peaks of 30 percent (for war munitions and parts thereof) or 10 percent (parts for radar apparatus, radio navigational aids, and TVs). More than one-third of 2007 US exports to Egypt, including wheat and corn, entered duty free under the 2007 revised tariff, about two and a half times the exports that entered duty free under the 2005 tariff.

Egypt’s Network of Trade Agreements To complement its unilateral reforms, and to extend its export reach, Egypt has embarked on a series of bilateral and regional trade agreements with 19. Economist Intelligence Unit, Country Commerce: Egypt, 2007. This applied to cars with an engine up to 1,600cc. 20. Economist Intelligence Unit, Country Commerce: Egypt, 2007, 89. Import tariffs on some goods remain high, such as a 40 percent tariff on imported automobiles and 30 percent tariffs on imported clothing. 21. In 2008 and 2006 Egypt bought 6 percent of US wheat; in 2007 Egypt was the second largest purchaser of US wheat (9 percent).

26

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

its main trading partners. Egypt’s most important trade agreement is the Egypt-EU FTA, which entered into force in 2004. Economic relations between Egypt and the European Union are governed by the 1995 Barcelona Process, which aims to establish a cooperation framework between the European and Mediterranean countries that will advance members’ economic and social development while stimulating regional integration in the Middle East.22 The aim is to forge a Euro-Mediterranean free trade area by 2010, built upon bilateral FTAs between Europe and the Mediterranean partners as well as free trade among the Mediterranean countries. In addition to the trade component, the process includes a political dialogue, which emphasizes the principles of democracy and fundamental human rights, as well as cultural, scientific, and technological cooperation. The European Union lifted tariffs on Egyptian industrial goods and certain agricultural goods immediately upon entry into force of the FTA (exceptions include wool, cotton, hides and skins, and various oils).23 Egypt will phase out tariffs on EU imports over a period of 15 years, following four schedules: Raw materials and industrial equipment were phased out over three years (in 2007); tariffs on semi-finished goods will be removed after nine years (in 2013); tariffs on finished products and consumer goods after 12 years (in 2016); and tariffs on automobiles after 15 years (in 2019).24 The agreement uses the Euro-Mediterranean model of diagonal cumulation for obtaining preferential access to the EU market—that is, products that have obtained originating status in one partner country may be further processed or added to products originating in another member as though originating in that partner country. The FTA currently mostly covers industrial goods but establishes mechanisms for liberalizing other areas, particularly agriculture and services. In February 2007 the European Union and Egypt began talks on further liberalizing trade in agriculture, including processed agricultural goods and fisheries products, and in March 2007 adopted the Neighborhood Policy Action Plan, designed to boost bilateral trade over the next three to five years and to increase cooperation between the two partners. This was supported by an assistance package of €558 million.25 22. Full members of the Barcelona Process include the 27 EU member countries and the EU Commission and 16 Mediterranean countries: Albania, Algeria, Bosnia and Herzegovina, Croatia, Egypt, Israel, Jordan, Lebanon, Libya, Mauritania, Monaco, Montenegro, Morocco, occupied Palestinian territories, Syria, Tunisia, and Turkey. 23. A protocol amends the agreement to accommodate the enlargement of the Union to 27 member states in 2007. 24. In addition to Egypt, EU Association Agreements are in force with Tunisia (since 1998), Israel (2000), Morocco (2000), Jordan (2002), and Syria (2004) and, on an interim basis, the Palestinian Authority (since 1997). 25. See EU Delegation to Egypt, EU-Egypt Association Agreement and EU Delegation, “European Neighborhood Policy: Implications for Business,” www.eu-delegation.org.eg.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

27

Table 2.6

US exports to Egypt, 2000–08

HTS code

100190

Commodity description

Wheat (other than durum wheat) and meslin

100590

Corn (maize), other than seed corn

720449

Ferrous waste and scrap, nesoi

120100

Soybeans, whether or not broken

270112

Bituminous coal, whether or not pulverized, but not agglomerated

843143

Parts for boring or sinking machinery, nesoi

270799

Oils and products of the distillation of high temperature coal tar, nesoi; similar products that have a predominate (weight) aromatic constituent, nesoi

871000

Tanks and other armored fighting vehicles, motorized, whether or not fitted with weapons, and parts of such vehicles

880330

Parts of airplanes or helicopters, nesoi

390410

Polyvinyl chloride, not mixed with any other substances, in primary forms

930690

Bombs, grenades, torpedoes, mines, missiles and similar munitions of war and parts thereof; other ammunition and projectiles and parts thereof, nesoi

880240

Airplanes and other aircraft nesoi, of an unladen weight exceeding 15,000 kg

980110

Value of repairs or alterations of previously imported articles, repaired or altered prior to exportation from United States

20622

Livers of bovine animals, edible, frozen

230310

Residues of starch manufacture and similar residues, whether or not in the form of pellets

40210

Milk and cream, concentrated, whether or not sweetened, in powder, granules or other solid forms, of a fat content, by weight, not exceeding 1.5 percent

841480

Air pumps and air or other gas compressors, nesoi; ventilating or recycling hoods incorporating a fan, nesoi

271019

Petroleum oils & oils (not light) from bituminous minerals or preps nesoi 70 percent+ by weight from petroleum oils or bitumin minerals

151521

Corn (maize) oil and its fractions, crude, not chemically modified Subtotal (top 20 commodities) Total

MFN = most favored nation nesoi = not elsewhere specified or included n.a. = not available Source: US International Trade Commission Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov; Egyptian Customs Tariff (2007 tariff includes amendments from Presidential Decree No. 39/2007); authors’ calculations.

28

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Share of total (percent)

Exports (millions of dollars)

Average annual growth (percent)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2000 2008 2000–08

496

387

252

419

452

190

227

345

398

385

363

350

363

450

0

0

0

0

12

52

94

25

43

33

29

41

93

94

33

23

17

40

42

19

70

63

72

99

101

145

155

10

18

20

24

32

133

188

169

181

160

156

163

699

Egypt’s MFN tariff (percent)

2005–08

2005

2007

50

2

free

635

15

11

3

613

606

10

10

7

19

2

free

144

400

0

7

n.a.

97

5

5

166

385

1

6

41

61

free

free

138

284

1

5

31

146

2

2

203

254

219

2

4

17

12

free

free

55

78

116

172

0

3

43

46

free

free

160

250

203

261

139

4

2

1

–18

5

5

131

202

168

166

139

102

5

2

–5

–15

2

2

4

2

4

10

17

15

29

65

99

0

2

49

88

12

2

189

79

126

17

25

42

77

80

91

6

2

–9

29

n.a.

n.a.

0

344

40

3

1

0

276

275

75

0

1

n.a.

n.a.

0 or 32

0 or 30

4

6

7

18

18

103

251

113

65

0

1

42

–14

0, 2, or 12

0, 2, or 10

21

19

14

19

0

39

81

68

63

1

1

15

17

5

5

17

18

14

29

14

26

25

48

58

1

1

17

31

2

free

5

4

0

0

7

7

32

26

53

0

1

34

96

5

5

8

6

10

13

10

11

15

2

48

0

1

25

63

2

2

0

0

3

2

1

1

3

5

47

0

1

n.a.

261

5

5

0

1

6

13

8

9

6

17

41

0

1

2

2

n.a.

66

1,513 1,764 1,362 1,412 1,537 1,598 2,380 3,229 3,582

11

31

3,329 3,778 2,866 2,660 3,105 3,169 4,104 5,347 6,031

8

24

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

29

Talks on services are also advancing: A bilateral working group on services liberalization was established in 2001 with specific meetings on transport, telecommunications, tourism, and financial services. In 2004 the parties adopted the Istanbul Framework Protocol on the Liberalization of Services and the Right of Establishment. The parties have also discussed “regulatory alignment” of laws and regulations between the Euro-Mediterranean countries within certain services sectors (computer services, postal and courier services, financial services, international maritime transport services, and telecommunication services). Egypt-EU services negotiations have used the Istanbul Protocol as a basis but have gone further, also considering the right of establishment and, in an Egyptian proposal, the temporary movement of natural persons. Investment is addressed at the bilateral level—Egypt has bilateral investment treaties with all but two (Estonia and Ireland) EU members. Egypt has also forged a recent agreement with non-EU European countries. The free trade agreement between Egypt and the European Free Trade Association (EFTA) was signed in January 2007 and entered into force on August 1, 2007. The agreement includes trade in goods, including technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) provisions; provisions on trade in services and investment; intellectual property rights; competition; and procurement. Tariffs on nearly all industrial products from EFTA to Egypt will be eliminated by January 1, 2020; Egyptian goods enter EFTA duty free since entry into force of the agreement. Rules of origin follow the Euro-Mediterranean model of diagonal cumulation. Duty-free access is granted to all fish and marine products but basic agricultural goods are covered in bilateral agreements negotiated separately with each of the EFTA states, which offer less than full liberalization, and processed agricultural products are covered in a protocol that grants Egypt treatment no less favorable than that accorded to the European Community and is subject to review in five years. An Egypt-Turkey FTA was signed on December 27, 2005 and entered into force on March 1, 2007. The FTA is to liberalize trade within a period of 12 years. It covers most industrial and agricultural goods, with a small number of exceptions. Within the Middle East region, Egypt is a member of the Greater Arab Free Trade Area (GAFTA), which incorporates 18 of the 22 Arab League members.26 GAFTA covers merchandise trade only: Tariffs on industrial goods were eliminated as of January 1, 2005. Agricultural products are largely exempted from the agreement during the harvest season and many nontariff barriers remain. Rules of origin require that over 40 per-

26. GAFTA includes the 17 members that signed on in 1997—Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestinian Authority, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, United Arab Emirates, and Yemen—plus Algeria, which signed on in 2005.

30

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

cent of value added originate in a GAFTA member country.27 Egypt is also a member of the Agadir process, which seeks to link Egypt, Jordan, Morocco, and Tunisia in a regional free trade pact. The Agadir Agreement was signed in February 2004 and began to be implemented in 2007. In strengthening ties with its African neighbors, Egypt also became a member of the Common Market for Eastern and Southern Africa (COMESA) in 1998 and eliminated duties on COMESA imports in 2000.28 COMESA had aimed to implement a common external tariff, the free movement of capital and labor, and common trade disciplines by 2004, but these objectives were deferred and as of September 2009 had not been implemented.29 Tables 2.7 and 2.8 list Egypt’s main trading partners. For the period 2000–08, Egypt’s overall exports have grown by over 20 percent per year, slightly more (24 percent) during the latter half of this period. The European Union is Egypt’s main trading partner. It absorbed 39 percent of Egyptian exports and was a source of nearly a third of Egypt’s imports in 2008. As seen in table 2.7, this share is down from 2000, when the European Union purchased nearly half of Egypt’s exports. Other trading partners have grown more dynamically. GAFTA’s share of Egypt’s exports has increased substantially, from 12 percent in 2000 to 20 percent in 2008, growing at an average annual rate of 29 percent. COMESA, Turkey, and Jordan have also increased in relative share as export destinations. Egyptian exports, particularly of LNG, to other, non-FTA partners have exhibited strong growth. Japan’s purchases of Egyptian goods increased by a factor of ten during 2000–08, and Mexico’s purchases of Egyptian exports grew by nearly 80 percent per year. The US share of Egypt’s exports fell from 13 percent in 2000 to 7 percent in 2008, with US purchases of Egypt’s exports growing by 12 percent per year. Table 2.8 shows similar dynamics for Egypt’s imports. Imports from the European Union have grown by 12 percent per year since 2000 (19 percent per year since the implementation of the trade agreement), but the European Union’s role as a source of imports has fallen from 38 percent in 2000 to 32 percent in 2008. GAFTA has increased its relative share of Egypt’s market, growing from 6 to 10 percent at a rate of 23 percent per year in the period 2000 to 2008. Imports from China have grown significantly, at a rate of 28 percent per year since 2000; China’s import share has increased from 4 to 10 percent. The US share has declined from 17 percent in 2000 to 11 percent in 2008. 27. For a more thorough description of the GAFTA and Agadir processes, see Brunel (2008). 28. COMESA members are Burundi, Comoros, Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe. 29. World Trade Organization, Trade Policy Review: Report by Egypt (WT/TPR/G/150), Geneva, June 28, 2005.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

31

Table 2.7

Egypt’s top export destinations, 2000–08 Percent of total

32

Exports (millions of dollars) Destination

2000

2001

2002

2003

2004

2005

World

6,354

4,141

7,049

8,500 12,188 15,594

2006

2007

2008a

2000

2008

20,760 23,859 29,165

Average annual growth (percent) 2000–08

2004–08

21

24

© Peterson Institute for International Economics | www.piie.com

FTA partners European Union Greater Arab Free Trade Area (GAFTA) Agadir process countries Other GAFTA COMESA European Free Trade Association Turkey Qualifying industrial zones Israel Jordan

3,036 735 115 620 129 12 128

1,339 581 73 509 112 20 77

2,860 854 163 691 155 22 107

3,453 1,175 264 911 257 30 172

4,817 2,285 420 1,865 402 44 232

5,881 3,058 543 2,515 603 50 243

8,721 3,856 721 3,135 720 46 357

8,619 11,308 4,870 5,792 880 1,000 3,989 4,792 858 1,035 73 59 618 967

19 40

190 25

18 69

20 107

26 275

45 335

70 444

85 537

2,340 412 409 197 76 140 120 80 44 123 15 77

2,314 766 558 216 340 174 157 115 78 153 6.4 60

48 12 2 10 2 0 2

39 20 3 16 4 0 3

18 29 31 29 30 23 29

24 26 24 27 27 8 43

47 609

0 1

0 2

12 41

16 22

2,104 1,059 610 446 376 219 212 188 108 100 80 79

13 2 2 1 0 0 0 0 0 0 0 2

7 4 2 2 1 1 1 1 0 0 0 0

13 30 22 22 78 30 62 31 29 19 27 –7

13 112 19 27 206 45 43 34 40 –10 1 –23

Top non-FTA partners United States Japan Korea China Mexico Pakistan Russia Hong Kong Malaysia Canada Thailand Singapore

813 130 126 93 4 27 4 22 14 25 12 139

345 67 51 40 0 21 8 8 10 10 9 86

1,288 63 122 84 3 36 19 29 15 37 10 77

1,108 60 177 138 3 32 35 36 21 83 48 113

1,308 52 306 173 4 50 51 58 28 153 76 230

2,019 107 183 192 134 113 75 123 34 118 59 261

FTA = free trade agreement COMESA = Common Market for Eastern and Southern Africa a. 2008 figures are estimates based on the first three quarters of the year. Source: International Monetary Fund, Direction of Trade Statistics; authors’ calculations.

Table 2.8

Egypt’s top sources of imports, 2000–08 Percent of total

Imports (millions of dollars) Source World total

2000

2001

2002

2003

2004

2005

2006

2007

2008a

2000

Average annual growth (percent)

2008

22,040 12,720 19,888 21,351 27,936 33,181 40,038 50,496 62,652

2000–08 2004–08 14

22

© Peterson Institute for International Economics | www.piie.com

FTA partners European Union Greater Arab Free Trade Area (GAFTA) Agadir process Other GAFTA COMESA Turkey European Free Trade Association Qualifying industrial zones Israel Jordan

8,277 1,244 79 1,165 249 413 390

3,952 1,054 58 996 275 244 249

6,895 1,584 70 1,514 246 359 377

65 26

19 21

29 21

7,739 10,095 11,336 12,290 15,376 20,240 1,605 2,488 3,282 4,069 4,946 6,308 87 93 128 147 187 203 1,518 2,395 3,155 3,921 4,759 6,105 244 346 453 618 739 883 380 520 756 780 993 1,548 370 378 405 414 497 552 29 30

32 33

103 50

38 6 0 5 1 2 2

32 10 0 10 1 2 1

12 23 13 23 17 18 4

19 26 21 26 26 31 10

138 62

169 80

175 85

0 0

0 0

13 16

53 27

4,514 3,274 1,363 1254 1484 939 828 511 418 376 357 411 321

5,882 4,876 2,147 1419 1362 1283 1028 649 527 525 635 360 364

7,023 6,539 2,185 1578 1505 1410 1171 821 733 707 679 548 425

17 4 2 4 1 3 2 1 1 1 2 1 1

11 10 3 3 2 2 2 1 1 1 1 1 1

8 28 20 9 24 12 16 18 22 14 7 22 14

20 44 26 17 22 24 27 39 32 15 1 35 32

Top non-FTA partners United States China Russia Japan Brazil Korea India Indonesia Thailand Malaysia Argentina Canada Singapore

3,729 886 494 806 264 568 360 220 153 247 384 112 152

1,832 513 291 366 252 269 284 158 106 112 257 115 40

3,153 938 538 559 425 353 373 198 138 325 446 123 140

2,926 1,032 412 804 508 468 385 187 191 500 491 180 121

3,415 1,519 854 840 686 592 450 217 239 402 657 164 142

33

FTA = free trade agreement COMESA = Common Market for Eastern and Southern Africa a. 2008 figures are estimates based on the first three quarters of the year. Source: International Monetary Fund, Direction of Trade Statistics; authors’ calculations.

3,486 2,129 1,155 867 955 777 670 320 292 503 615 286 168

Improving the Climate for Business and Investment In addition to liberalizing trade, Egypt has worked to improve the climate for foreign investors. A core element of Egypt’s 2004 economic reforms was the liberalization of the foreign investment regime with a view to attracting FDI into sectors such as manufacturing and services—sectors that are more labor intensive than the petroleum/mining sector, where much of the foreign investment in Egypt has occurred. As part of this endeavor, Egypt has signed more than 80 bilateral investment treaties.30 In July 2007, Egypt became both the first Arab and the first African country to sign on to the Organization for Economic Cooperation and Development’s Declaration on International Investment and Multinational Enterprises.31 As part of its reforms, Egypt established a ministry for investment policy, reduced and streamlined administrative procedures, and initiated a program for the privatization of state-owned industries as well as tax reform (OECD 2007, 24). Since the 2004 economic reforms, FDI inflows have increased, growing from $200 million in 2003 to $11.6 billion in 2007, with the overall FDI stock increasing from $21.3 billion to $50.5 billion (figure 2.5). Privatization and liberalization have increased investment in industries other than petroleum, particularly cement, telecommunications, and tourism. Figure 2.6 shows that the share of investment in manufacturing and services sectors (grouped together as “nonpetroleum”) grew from about 35 percent in 2004–05 to over 60 percent in 2007–08, with petroleum’s share declining from 65 to 40 percent. According to Egypt’s central bank (2008), the financial sector was the dominant nonpetroleum recipient of FDI flows (17 percent), followed by construction, real estate, and other services (13 percent), manufacturing (11 percent), and agriculture (1 percent). During this period FDI flows to the tourism industry grew twelve-fold and those to the financial sector by a factor of five (OECD 2007, 14–15). The US-Egypt bilateral investment relationship has also improved in the past decade, albeit from a modest base. The stock of US FDI in Egypt grew from about $1.1 billion in 2003 to about $7.5 billion in 2007 30. Egypt is one of the developing countries with the most BITs—84—surpassed only by China (94) and Romania (90). Among developed countries, Germany has the largest number of concluded BITs (124), followed by Switzerland (95), and France and the United Kingdom with 92 BITs each (Henisz, Jandhyala, and Mansfield 2007). 31. The OECD Declaration on International Investment and Multinational Enterprises constitutes a policy commitment to improve the investment climate, encourage the positive contribution multinational enterprises can make to economic and social progress, and minimize and resolve difficulties that may arise from their operations. It consists of four parts: the Guidelines for Multinational Enterprises; the Principle of National Treatment; the commitment to cooperate so as to avoid or minimize the imposition of conflicting requirements on multinational enterprises; and the commitment to endeavor to make incentive and disincentive measures as transparent as possible.

34

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Figure 2.5    Egypt: Foreign direct investment stock and flows, 2000–07 stock (billions of US dollars) 50

flow (billions of US dollars) 14

Stock Flow

12

40

10 8

30

6 20 4 10

2 0

0 2000

2001

2002

2003

2004

2005

2006

2007

Source: UNCTAD FDIStat Database, www.unctad.org.

Figure 2.6    Egypt: Foreign direct investment flows in the petroleum versus nonpetroleum sectors, 2004–08 (Q1&Q2) percent of total 100 90 80 70 60 50 40 30 20 10 0 2004–05

2005–06

2006–07

Petroleum

Nonpetroleum

2007–08 (Q1&Q2)

Source: Central Bank of Egypt, Annual Report 2007/2008, www.cbe.eg.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

35

Figure 2.7    US foreign direct investment position in Egypt (historical-cost basis), 1994–2007 billions of US dollars 8 7 6 5 4 3 2 1 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: US Department of Commerce, Bureau of Economic Analysis, www.bea.gov.

(figure 2.7).32 Mining (which includes petroleum) continues to be the dominant sector, accounting for nearly 90 percent of US FDI in Egypt. The economic reforms are showing signs of success. Openness to trade, measured as the sum of exports and imports as a percentage of GDP, which had fallen to below 40 percent at the end of the 1990s, has grown to over 60 percent in 2007 (figure 2.8). Economic growth, driven in part by high natural gas and petroleum prices, has been relatively strong in the past decade, at an average of 5 percent per year from 2000 to 2008 and over 6 percent from 2004 to 2008 versus an average of 4 percent in the 1990s (figure 2.9). The Economist Intelligence Unit estimates 2008–09 growth at about 4.5 percent. Since 2004, Egypt has set up a one-stop shop for investors to cut down the cost and time to register new investments, centralizing up to 30 government entities under one roof and cutting down the time it takes to register a company from about a year to a few days. A number of entities in various sectors have been privatized to increase competition and reduce the state’s role in the economy. As part of its economic reforms, Egypt has also taken steps to facilitate business and boost its competitiveness. In addition to lowering tariffs, the government of Egypt abolished surcharges and service fees (such as in32. The year 1994 is used as a starting point because consistent data for US investment position abroad on a historical-cost basis exist from 1994 to 2006.

36

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Figure 2.8    Egypt’s trade as a percent of GDP, 1990–2007 percent 70 60 50 40 30 20 10

19

90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

0

Source: World Bank, World Development Indicators, 2008.

Figure 2.9    Egypt: Annual GDP growth, 1990–2009 percent change 8 7 6 5 4 3 2 1

98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

97

19

96

19

95

19

94

19

93

19

92

19

19

91

19

19

90

0

Source: International Monetary Fund, World Economic Outlook, April 2009.

spection fines for food), the value of which could reach up to 5 percent of imported goods (OECD 2007) and reduced the number of customs procedures and approvals from 26 to 5. Nontariff measures, including administrative and bureaucratic procedures, logistical issues, and other causes for border delay, had been cited as serious impediments to trade and inCURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

37

vestment. Marcus Noland and Howard Pack (2007) have noted the trade deterrent effect of Egypt’s inadequate transportation infrastructure and unreliable air cargo service. Dan Magder (2005) cites delays in export and import clearance, which can severely limit the effectiveness of liberal economic policies and prevent the country from reaping network and agglomeration gains from regional integration. Egypt’s indicators related to competitiveness have improved. The World Bank’s Doing Business 2008: Egypt report cites Egypt as making the greatest strides in terms of economic reforms, moving up 26 places from its 2007 rank to 126 in the world in 2008.33 In the 2009 Doing Business rankings, Egypt continued to improve modestly, moving up to 116th in the world (table 2.9). Egypt scores relatively well in starting a business, where its world rank places it fourth in the region after Israel, Saudi Arabia, and Tunisia, in “trading across borders,” where it places fifth in the region, and in “protecting investors,” where its world rank of 70 places it sixth in the region. Egypt also ranks 13th overall and first in the MENA region in A. T. Kearney’s Global Services Location Index for 2007 (table 2.10), where it places strongly in “financial attractiveness” and “business environment.” Egypt ranks 14th among the top 20 emerging markets in 2009 A. T. Kearney’s Global Retail Development Index (GRDI). The results of these surveys suggest that Egypt should be relatively well positioned to serve as a regional services hub.34

Remaining Challenges: The Future Agenda Egypt’s economy grew at an average annual rate of just under 5 percent during the last decade, with growth rates exceeding 7 percent in 2007 and 2008. This period saw a boost in export competitiveness following a sharp devaluation of the Egyptian pound in 2003–04, the implementation of economic reforms in 2004, and rising LNG exports after 2005.35 Egypt’s economy has been vulnerable to the global downturn, however. Egypt’s main sources of foreign exchange earnings—tourism, the Suez 33. Improvements of more than 60 places were noted in the categories “Starting a Business” and “Trading Across Borders” and more than 20 slots in “Protecting Investors,” “Getting Credit,” and “Registering Property.” Slippages occurred in “Employing Workers” (–2) and “Closing a Business” (–1). Key reforms cited by the report included cutting the minimum capital required to start a business from 50,000 to 1,000 Egyptian pounds, reducing the cost of registering property from 3 percent of the property value to a low fixed fee, launching one-stop shops for traders at the ports, and cutting the time taken to import by seven days and to export by five. Overall, Egypt ranks 12th out of the 17 Middle East and North African economies. 34. See also Miriam Fam, “Middle East Beckons as Outsourcing Hotspot,” Wall Street Journal, August 22, 2007, A6. 35. By 2008 Egypt was the world’s eighth largest LNG exporter.

38

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 2.9

Economy © Peterson Institute for International Economics | www.piie.com

Israel Saudi Arabia Kuwait West Bank and Gaza Bahrain Egypt Algeria Qatar Lebanon Oman United Arab Emirates Jordan Syria Iraq Yemen Tunisia Sudan Morocco Iran Djibouti

Doing Business rankings for MENA countries, 2009 Ease of Dealing doing with business Starting construction rank a business permits

Employing Registering Getting Protecting workers property credit investors

Trading Paying across taxes borders

Enforcing Closing a contracts business

29 15 52

28 31 134

120 39 83

88 70 27

146 1 83

4 59 84

5 15 25

77 7 9

9 18 107

100 138 114

41 60 69

137 18 116 134 37 101 60

167 50 43 141 57 99 78

149 17 165 113 27 119 134

132 13 119 117 64 60 24

80 18 84 166 53 107 19

165 84 84 131 131 84 125

38 53 70 70 88 88 88

26 14 142 168 2 46 8

92 26 27 120 38 87 121

123 113 154 125 97 120 103

183 26 130 51 33 123 66

47 104 138 150 103 73 149 130 142 157

118 119 125 177 53 38 111 59 73 175

54 116 131 108 46 102 135 92 162 95

45 48 89 51 66 106 155 176 137 151

7 105 72 43 47 56 35 118 152 138

68 125 180 165 174 84 131 131 109 174

114 114 114 114 127 143 151 164 164 178

4 22 101 50 141 110 90 120 107 62

13 77 114 180 127 42 142 68 132 30

135 129 175 148 36 74 146 112 54 161

143 96 87 183 90 34 183 67 109 134

MENA = Middle East and North Africa

39

Source: World Bank, Doing Business 2009 Report, www.doingbusiness.org (accessed on December 3, 2009). The data are updated to reflect changes to the Doing Business methodology and the addition of two new countries.

Table 2.10

A. T. Kearney Global Services Location Index, 2007

Country Egypt Jordan United States United Arab Emirates Tunisia Morocco Israel

Financial attractiveness

People and skills availability

Business environment

Total score

3.20 0.33 0.48 2.70 3.03 2.92 2.00

1.10 0.98 2.74 0.86 0.90 0.90 1.30

1.30 1.54 2.29 1.90 1.50 1.33 1.80

5.61 5.60 5.51 5.50 5.43 5.14 5.10

Source: A. T. Kearney, Offshoring for Long-Term Advantage: The 2007 A. T. Kearney Global Services Location Index, www.atkearney.com.

Canal, and workers’ remittances—have suffered as a result of waning economic activity in major world markets.36 Predictions for 2008–09 see a decline in GDP growth to around 4.5 percent, with even lower rates, about 3.9 percent, projected for 2009–10.37 Compared with many other countries where negative or no growth is expected, Egypt’s plight does not seem so bad. However, despite the success of its economic reforms, Egypt continues to face serious problems of unemployment, poverty, and inequality, which are set to worsen as economic conditions deteriorate in the wake of the global economic crisis. Unemployment remains relatively high, at close to 10 percent. Youth unemployment—significant in a country in which nearly one-third of the population is under 15—exceeds 25 percent.38 This latter figure underscores an important medium-term challenge. Egypt has a relatively young population, with one-third of the population under the age of 15 and 62 percent between 15 and 64.39 The lack of job opportunities for young people has social as well as economic effects. Delayed marriage has already

36. Services represent 49 percent of Egypt’s output and 50 percent of employment; industry represents 35 percent of output (of which 17 percent is manufacturing) and employs 20 percent of the labor force; and agriculture makes up 14 percent of output and employs 30 percent of labor. 37. Economist Intelligence Unit, Regional Profile 2009: Middle East, New York, 2009. 38. In 2003 the unemployment rate was 10 percent, with female unemployment at 24 percent and male unemployment at 6 percent. When looking just at youth unemployment (ages 15–24), these numbers roughly double: 27 percent total, 40 percent female, and 21 percent male (World Bank, World Development Indicators, 2007). 39. In the United States, 21 percent of the population is under 15, and 67 percent is between the ages of 15 and 64.

40

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

emerged as a rising frustration for young Egyptian men: 76 percent of urban men ages 25–29 are unmarried and a third of men 30–34 are still unmarried. Young unmarried and unemployed men represent a potentially volatile sector of society. Poverty also continues to be a big problem, with 17 percent of Egyptians at the national poverty line, according to the World Bank’s World Development Indicators, and about 44 percent of the population living on $2 per day or less.40 Income inequality, which moderated somewhat in the mid-1990s, is increasing in the 2000s, with the poorest 20 percent of Egyptians holding only 9 percent of total income. Poverty considerations remain compelling and complicate reform implementation. Food and fuel have long been subsidized, helping Egyptian consumers, particularly the poor, who tend to spend a larger proportion of their income on these necessities, as well as energy-intensive industries. High and rising energy and food prices during the 2000s—particularly of wheat, a major staple of the Egyptian diet—led to growing social tension, increasing pressure to maintain these subsidies.41 Egypt has pledged, as part of its IMF Article IV consultations, to reduce its fiscal deficit, which is running at about 8 percent of GDP in 2008, to 3 percent of GDP by 2010–11. However, such a shift would require sharp cuts in consumer subsidies, which in turn could fuel social unrest. Instead, the government has reduced energy subsidies but retains subsidies on bread, sugar, and cooking oil.42 A related challenge is managing the resultant inflation. Inflation is down compared with the high levels of the 1990s but climbed into double digits in 2007 with high commodity prices and has continued to rise during the 2008–09 global economic downturn (figure 2.10). The government lifted import tariffs on several food items, including rice, dairy products, and 40. With a per capita GDP of $1,700 (constant 2000 US dollars) in 2006, Egypt qualifies as a lower-middle-income country. 41. In 2008 Egypt experienced large consumer protests against rising food prices. Shortages of subsidized bread have added to the unrest. The growing pressure on the budget arose at a time of social unrest and perceptions that gains from economic reforms have not trickled down to the average Egyptian. In a February 2008 BBC World Service poll, 77 percent of Egyptians favored globalization in principle but found that it was happening too quickly (BBC World Service, Widespread Unease about Economy and Globalization—Global Poll, February 7, 2008, www.worldpublicopinion.org). For examples of this tension, see David J. Lynch, “Egypt’s Economy Soars; So Does Misery,” USA Today, May 14, 2008; Manal el-Jesri, “A Portrait of Poverty,” Egypt Today, March 2008; BBC News, “Clashes in Egypt Strike Standoff,” April 6, 2008; Joel Beinin and Hossam el-Hamalawy, “Strikes in Egypt Spread from Center of Gravity,” Middle East Report Online, May 9, 2007; Egypt News, “Egypt Moves on Political, Economic Reforms to Reach Social Justice,” December 19, 2007. 42. In August 2007, as part of its strategy to create pricing predictability for investors and to increase energy-sector efficiency, Egypt began to phase out gas and electricity subsidies for energy-intensive industries (Andrew England, “Egypt to Phase Out Energy Subsidies,” Financial Times, August 14, 2007, www.ft.com). This new pricing policy will initially affect 40 companies.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

41

Figure 2.10    Inflation in Egypt, 1990–2009 percent change in consumer price index 25

20

15

10

5

06 20 07 20 08 20 09

05

20

20

03

04

20

02

20

01

20

00

20

99

20

98

19

19

96

97

19

95

19

94

19

93

19

92

19

91

19

19

19

90

0

Source: International Monetary Fund, World Economic Outlook, April 2009.

cooking oils. However, duties on fuel, diesel, and cigarettes were increased to finance its promise to increase public-sector salaries.43 The government’s effort to assuage frustrated consumers points to the tension between the need to continue the reform process and pressures to maintain domestic stability in the wake of difficult international conditions.44 Although Egypt is home to highly educated and skilled workers, education and training remain challenges, particularly for certain segments of the population. According to A. T. Kearney,45 “Egypt has the largest talent base of any country in the Middle East, and is home to an increasing number of outsourcing centers operated by multinationals.”46 The Oxford Business Group (2009) also cites Egypt as an up-and-coming call center 43. Public-sector employment as a percent of total employment fell from 70 percent in 1995 to 25 percent in 2004 (International Labor Organization, LABORSTA Database, http://laborsta.ilo.org). Until 1998, the government was employing over half of Egyptians who obtained secondary education or higher. Public-sector salaries and wages make up about 7 percent of GDP. 44. Fuel is under priced in Egypt, and in 2007 the government undertook a program to phase out most industrial energy subsidies. 45. A.T. Kearney, Offshoring for Long-Term Advantage: The 2007 A.T. Kearney Global Services Location Index, available at www.atkearney.com. 46. Examples include French auto components manufacturer Valeo and Indian vendors such as Satyam and Wipro, which have set up centers in Egypt. VeriSign has installed a regional internet resolution server in Cairo. Teleperformance, a French company, set up a new regional contact center in Cairo in October 2007.

42

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

hub, particularly as a result of linguistic advantage. A major challenge for Egypt is to build on and expand this talent base. Although Egypt’s talent pool is large, it is relatively shallow in terms of skills, and the potential talent pool may be in trouble: Youth literacy is only 61 percent (an improvement over 48 percent in 1990). The education deficit is a serious issue for Egypt’s competitiveness: The World Economic Forum’s 2007–08 Executive Opinion Survey listed an inadequately trained workforce as one of the three main impediments to doing business in Egypt. In order to compete successfully internationally, Egypt needs to significantly ramp up the skills of its workforce. Increasing the quality of its workforce is made more compelling by the current global environment: Unlike East Asian economies that could propel themselves toward growth by concentrating on high labor-intensive manufacturing, Egypt is faced with competition from low-wage labor from China in manufactures and from India in services and an uncertain economic environment in which demand from industrialized countries is likely to decline. A related factor potentially limiting Egypt’s competitiveness is gender inequality. Although half of the population is female, women represent only 25 percent of the labor force (18 percent of the nonagricultural labor force). Bill Gates famously stated about Saudi Arabia that “If you’re not fully utilizing half the talent in the country, you’re not going to get too close to the top 10.”47 While Egypt provides a less restrictive climate for women, its performance on the Millennium Development Goals gender indicators, in which Egypt consistently ranks in the bottom half within the MENA region, indicates that there is much room for improvement. Political instability and bureaucratic inefficiencies also continue to pose challenges. Egypt ranked eighth in the region on the Economist Intelligence Unit’s 2008 business environment score, after Israel, the United Arab Emirates, Qatar, Bahrain, Kuwait, Saudi Arabia, and Jordan. It ranked sixth in the region on the Economist Intelligence Unit’s 2008 democracy index, with high marks for political culture. On Transparency International’s 2008 corruption perceptions index, Egypt ranked 115th out of 180 countries, suggesting the need for institutional and legal reform. Egypt is seeking to attract trade and investment that will help create jobs and increase domestic entrepreneurial activity with a view to reducing poverty and increasing the well-being of its people. This will require building upon some important factors working in its favor, such as a favorable time zone with respect to Europe and North America, geographical proximity to Europe, and a cheap, multilingual workforce. It will also require deepening the economic reforms already in play as well as improving the conditions for business, including upgrading infrastructure, lessening administrative burdens, increasing access to capital for small 47. Bill Gates, quoted in “Gates: Women Key to Saudi Arabia Economy,” Associated Press, January 27, 2007, available at www.washingtonpost.com.

CURRENT STATE OF TRADE AND INVESTMENT RELATIONS

© Peterson Institute for International Economics | www.piie.com

43

firms, and, importantly, increasing education and training of the workforce. Egypt needs more vibrant economic growth to maintain its reform trajectory and to generate revenues for needed investments in infrastructure and domestic social programs to improve the standard of living of the poorer segments of Egyptian society. The next chapter puts forward suggestions for how enhanced commercial relations with the United States, for example through the new Strategic Economic Partnership, can help Egypt address these compelling needs.

44

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

3 Moving Forward: Options to Enhance Economic Relations

The United States has a strong stake in Egypt’s prosperity and with continuance of its economic reforms. New bilateral economic initiatives could build on and help “lock in” nascent Egyptian reforms.1 US companies would benefit from Egypt’s enhancing its business friendliness to US firms. They would also benefit from equalizing their access to the Egyptian market with that currently enjoyed by European and Arab firms under existing preferential trade pacts. For Egypt, deeper trade and investment ties with the United States mean not only expanded markets for its exports but also access to financial and technical resources that could help improve its economic infrastructure and create jobs for its young workforce. For reasons set out in the previous chapter, a free trade agreement (FTA) between Egypt and the United States is unlikely, at least in the short term. However, the goal of enhancing trade and investment ties remains compelling and should be kept on the bilateral agenda. This chapter sets out some steps that the two countries can take, outside of a formal FTA, to bolster their economic relations. We start with recom-

1. Prime Minister Ahmed Nazif underscored this latter point in a speech in May 2005, saying that an FTA with the United States would set a high standard for economic policy and push Egypt to do better. He said the FTA would help set the context for fruitful economic relations for the governments and business community as well as for other civil society actors. See his remarks at the launch of the book Anchoring Reform with a US-Egypt Free Trade Agreement at the Institute for International Economics, Washington, May 17, 2005.

45

© Peterson Institute for International Economics | www.piie.com

mendations to improve market access in goods both to enhance textile and apparel exports and to stimulate export activity in other sectors such as processed foods and stoneware. We also recommend directed opening in the services sector, partly through a targeted services trade agreement but also through modernization of the bilateral investment treaty (BIT) with a view to attracting US foreign direct investment (FDI) in the services sector. Steps to enhance market access are important, and the above measures could serve as steps toward a future comprehensive free trade agreement. However, we consider as even more important to the US-Egypt economic partnership supplementary steps to help Egypt become more competitive. The second tranche of measures we recommend is in the area of trade facilitation. The US-Egypt partnership should identify the obstacles in the trade logistics chain that undercut Egypt’s competitiveness. We focus on three main areas: customs procedures, intellectual property rights (recognizing that this has long been an active issue on the US agenda), and transparency. We look at how Egypt ranks in related indicators compared with other countries in the Middle East and North Africa (MENA) region as well as with an important set of challengers—its main competitors in the US textile and apparel market—and set out some suggestions. Improving physical infrastructure and, especially, human capital— including addressing the issue of gender inequity—will lay the foundations for Egypt to enhance its international competitiveness and allow it to move into higher value-added activities. This will allow Egypt to have a more stable and sustainable economy and to play a reliable and robust regional role. These measures will enhance the US-Egypt business relationship regardless of whether a free trade agreement ever comes to fruition. Finally, we set out some ideas for how the US-Egypt partnership can help tackle the new issue of climate change.

Enhancing Market Access in Goods: Expanding the QIZ The United States is Egypt’s second largest market after the European Union. Expanded access to US customers could help Egypt offer jobs to its young and plentiful labor force and develop sustainable export industries. Increasing access to the US market could guard against a backlash to the economic reforms that could overturn these important policies.2 2. Several studies suggest that countries that have increased their openness to trade have, on balance, experienced higher annual growth rates. See, for example, Wacziarg and Welch (2003); Wacziarg (1998); Alesina, Spolaore, and Wacziarg (2000); Ades and Glaeser (1999); Frankel and Romer (1999); Sachs and Warner (1995); Edwards (1992, 1993); Ben-David (1993); and Dollar (1992). Analysts who caution against attributing a causal relationship between openness and growth include Rodriguez and Rodrik (2000); Harrison and Hanson (1999); and Levine and Renelt (1992).

46

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Figure 3.1    US imports from Egypt, 2000–08 millions of US dollars

3,000 Textiles and apparel Natural gas and petroleum Other

2,500 2,000 1,500 1,000 500 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: US International Trade Commission (USITC) Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov.

The qualifying industrial zones (QIZ) agreement allows Egypt to export goods to the United States duty free provided that at least 35 percent of their value is added through processing in a designated QIZ. Of that 35 percent, a specified percentage must be Israeli content. The agreement significantly improves upon the duty-free access Egypt already enjoyed through the Generalized System of Preferences (GSP), allowing textiles and apparel, an important export sector for Egypt, to be imported duty free. The United States and Egypt can take a constructive step toward enhancing their commercial relations by improving the reach of the QIZ program to expand opportunities for additional textile and apparel firms and to encourage other sectors to participate. As figure 3.1 shows, US imports of Egyptian goods jumped significantly from 2004 to 2005. In the first year of the QIZ, imports increased by 56 percent, largely as a result of purchases of liquefied natural gas (LNG), which grew by 400 percent. Non-LNG imports increased by 10 percent, with textiles and apparel growing by 8 percent. Textile and apparel imports grew significantly the following year, however, increasing by over 30 percent from 2005 to 2006. Since then, growth has flattened out to 8 percent in 2007 and 5 percent in 2008. Egypt is one of the top 20 US suppliers of textiles and apparel.3 Table 3.1 shows how Egypt compares with the 19 other developing-country top 3. According to USITC data, in 2008 Egypt was the 16th main foreign supplier to the United States of items in HS chapter 62 (articles of apparel and clothing accessories, not knitted or crocheted), the 26th main US supplier of HS 61 (articles of apparel and clothing accessories, knitted or crocheted), and 16th in HS 63 (made-up textile articles, not elsewhere specified or included).

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

47

Table 3.1

Top 20 developing-country US apparel suppliers: Labor costs and market access, 2008

Supplier China (Inland) China (Coastal 2) China (Coastal 1) Vietnam Indonesia Mexico Bangladesh India Honduras Cambodia Thailand El Salvador Pakistan Sri Lanka Guatemala Philippines Jordan Nicaragua Dominican Republic Peru Egypt

Labor costs (US dollars/hour)

Labor costs compared with Egypt’s labor cost (US dollars/hour, Egypt = 1.00)

Rank as US supplier of textiles and apparel

Preferential access to US market?

0.55 to 0.80 0.86 to 0.94 1.08 0.38 0.44 2.54 0.22 0.51 1.72 to 1.82 0.33 1.29 to 1.36 1.79 0.37 0.43 1.65 1.07 1.01 0.97 to 1.03

0.81 1.08 1.30 0.46 0.53 3.06 0.27 0.61 2.13 0.40 1.60 2.16 0.45 0.52 1.99 1.29 1.22 1.20

1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 16 17

No No No No No NAFTA No No CAFTA-DR No No CAFTA-DR No No CAFTA-DR No QIZ and FTA CAFTA-DR

1.55 to 1.95 1.78 0.83

1.75 2.14 1.00

18 19 20

CAFTA-DR FTA QIZ

CAFTA-DR = Central American Free Trade Ageement-Dominican Republic QIZ = qualifying industrial zone FTA = free trade agreement Note: The table shows the developing countries in the top 20 grouping; Italy, the only advanced country, is excluded. Sources: Jassin O’Rourke Group (2008); US Department of Commerce, Office of Textiles and Apparel, for data by category for all countries, total apparel imports.

suppliers of apparel.4 In 2008 Egypt was ranked 18th out of the 20, but was one of only seven of these top countries whose US imports grew from 2007 to 2008. Many of Egypt’s competitors in apparel, listed in table 3.1, are in the top 20 without enjoying preferential access to the US apparel market. Column 4. Italy and Canada are also top suppliers of apparel to the United States, but the tables in this chapter focus on comparing the top developing-country suppliers.

48

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

4 of the table lists preferential trade programs enjoyed by importers. These include the North American Free Trade Agreement (NAFTA), the Central American Free Trade Agreement–Dominican Republic (CAFTADR), the US-Jordan Free Trade Agreement and QIZ, and the Egypt QIZ. Of the top six importers, five—China, Vietnam, Indonesia, Bangladesh, and India—enjoy no preferential access. Although Egypt’s labor costs are five times the costs in the lowest-cost producer, in general they are low compared with the other countries in the table. Table 3.1 also shows the hourly labor costs in each country and how they compare with Egypt’s labor costs (column 3). Egypt’s labor costs make it the eighth lowest-cost supplier on the list. Egypt’s preferential access to the US market should offer an additional cost advantage over the others on the list. Expansion of the QIZ could help Egypt gain advantage over some of the lower-labor cost countries in this table and increase its position in the US market. The QIZ program has been expanded since the original agreement was implemented. In October 2007 Egypt and Israel agreed to reduce the minimum percentage of Israeli components necessary for certain Egyptian products to gain duty-free access into the United States from 11.7 to 10.5 percent. Further reducing the required Israeli content to a level commensurate with that of the Jordan agreement, which requires only 8 percent Israeli content, could help to bolster the competitiveness of Egyptian QIZ products. Jordan, whose labor costs are 20 percent higher than Egypt’s, ranks higher as a US supplier of textiles and apparel. Egypt has also requested the establishment of eight additional QIZs, mostly in the southern part of the country. Israel indicated support for this request, and both countries signed a letter requesting US approval. On January 26, 2009, the USTR announced the designation of two additional QIZs. As of November 2009, approval from the USTR on the other zones was pending. Approving additional QIZs would allow more firms to participate and generate more Egyptian jobs. Increased geographic coverage would be beneficial. A US Agency for International Development (USAID) study of Egypt’s ready-made garment sector (Marello, O’Dell, and Salinger 2009) cited the location of factories far from sources of appropriate labor supply as one reason why Egypt has not fulfilled its competitive potential in this sector. Additional QIZs could enable other firms to join the program, particularly in industries where transportation costs factor significantly in the cost of production. Another positive step would be to encourage firms that produce goods other than textiles, particularly those producing higher value-added goods, to locate in QIZs. Our assessment of Egypt’s revealed comparative advantage (RCA), a measure of relative export performance, indicates a number of industries that could benefit from expanded market access. RCA is calculated by taking the country’s percentage share of a given sector in national exports divided by the percentage share of a given sector MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

49

in world exports, thus comparing the national export structure with the world’s export structure.5 When the RCA equals 1 for a given sector in a given country, that country’s share of the given sector is identical to the world average. The country has neither an advantage nor a disadvantage. Scores higher than 1 indicate that the country is specialized in that sector, with a strength in that sector, and scores lower than 1 indicate sectors of relative weakness or sectors in which the country is not specialized. Egypt started off the decade with an RCA of nearly 3.5 in textiles and textile articles. This advantage dropped steeply in 2005. Egypt’s textiles score remains over 1 in 2007, but only slightly, indicating that while textiles remain an area of potential comparative advantage, this advantage is very weak. Additional cost reductions, in the form of greater preferential access to the US market, could help this sector remain competitive. In addition to textiles, whose RCA has been eroding, Egypt currently exhibits an RCA in vegetable products, mineral products, articles of stone and similar materials, precious and semiprecious stones, and food and beverages (table 3.2). While textile exports to the United States have grown, other industries have not benefited the same way from the implementation of the QIZ agreement. Exports of food—an industry also identified in table 3.2 as an RCA sector—have actually contracted since the QIZ was put in place. Its RCA value fell from a high of 2.59 in 2004 to 0.59 in 2007. Within this category, frozen vegetable mixtures show the greatest dynamism, growing to a million dollars worth of exports in 2007. In addition to enhancing Egypt’s access to the US market, a principal goal of the QIZ program is to foster regional integration. The QIZ aims to increase cooperation between Egyptian and Israeli companies, with Israel providing inputs such as buttons, zippers, and patterns for clothes manufactured by lower-cost Egyptian labor, then sent duty-free to the United States. In fostering greater regional integration, the United States could consider, as part of an overall MENA trade strategy, revising the rules of origin to determine qualification for tariff preferences so that goods originating in other MENA partners are also covered. A MENA-wide QIZ, built upon the Egypt QIZ, could benefit Egypt by allowing Egyptian firms to source from potentially lower-cost suppliers. Of the small sample of MENA countries with data on manufacturing wages—Bahrain, Egypt, Israel, Jordan, and Qatar—Israel’s costs are by far the highest, with the next most expensive, Qatar, at only 40 percent of Israel’s costs.6 Such an initiative could help boost regional integration in the MENA by encouraging enhanced private-sector ties among these countries.

5. The RCA was first calculated in Balassa (1965). 6. Data are from the International Labor Organization’s LABORSTA Database, http://laborsta.ilo.org.

50

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Some might raise a concern about the compatibility of such an arrangement with rules of the World Trade Organization (WTO).7 Under the WTO’s most favored nation (MFN) principle, countries must extend the most favorable trade treatment granted to any WTO member to all other WTO members. However, there are numerous exceptions for preferential trade programs for developing countries. Some preferential schemes must be endorsed by the WTO as legal exceptions to the MFN principle through a time-limited waiver (the GSP as well as the SPARTECA programs are permanent exceptions under the 1979 Enabling Clause). Others qualify under the terms of GATT Article XXIV on FTAs and customs unions. The United States could present a MENA-wide preferential program, similar to the African Growth and Opportunity Act (AGOA).8 However, such waivers have been increasingly difficult to obtain—particularly if the beneficiaries are not least developed countries (LDCs). A second route to obtaining WTO compatibility would be to see a MENA-wide QIZ as part of a transition toward a US-MENA free trade agreement. In this case the agreement would be subject to the conditions of Article XXIV: It would need to cover “substantially all” trade; be enacted within a “reasonable” period of time, generally about ten years; and not raise barriers to other WTO members. A US-Egypt FTA may seem an unlikely prospect in the short run. Chapter 2 details the steps taken earlier toward such an agreement, which did not materialize, and the current political difficulties of initiating FTA negotiations. The economic benefits of an FTA remain compelling, however. A US-Egypt FTA would increase Egypt’s real GDP by between 1.8 and 2.8 percent (Hoekman and Konan 2005), raising the return to labor in Egypt by between 2 and 3 percent. The magnitude of the gains depends upon whether the agreement eliminated only border barriers (the low estimates) or also reciprocally removed all nontariff barriers to trade in goods and services (the high estimates).9 For that reason alone, this option should remain open on the bilateral agenda, at least in the medium term. In addition to the political difficulties of initiating new FTAs, it is likely that the bar on any new FTAs will be higher than for previous partners. 7. See, for example, International Centre for Trade and Sustainable Development (ICTSD), “US, Egypt, Israel Sign 3-Way Trade Pact; May Fall Foul of WTO,” Bridges Weekly Trade News Digest 8, no. 43 (December 15, 2004). 8. In March 2009, the WTO Council for Trade in Goods approved a request to extend the waiver for AGOA (as well as for other US preference programs, the Caribbean Basin Economic Recovery Act and the Andean Trade Preference Act). AGOA was extended to 2015. 9. Dean DeRosa (2003) predicts even larger gains in terms of Egypt’s exports. Ahmed Galal and Robert Z. Lawrence (2004) find Egypt to be a strong FTA partner in terms of relative political importance and the potential of boosting reforms in partner countries. Bernard Hoekman, Denise Konan, and Keith Maskus (1998) find that in the absence of an FTA with the United States, EU and Arab country FTAs would result in trade diversion, to the tune of about $1.5 billion.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

51

Table 3.2

Egypt’s revealed comparative advantage (RCA) index by HS section, 1996–2007 (index value)

HS section

HS section description

1996

1997

I

Live animals; animal products

0.25

0.17

II

Vegetable products

3.26

2.35

III

Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes

0.35

0.01

IV

Prepared foodstuffs; beverages, spirits, and vinegar; tobacco and manufactured tobacco substitutes

0.38

0.62

V

Mineral products

5.91

6.45

VI

Products of the chemical or allied industries

0.59

0.66

VII

Plastics and articles thereof; rubber and articles thereof

0.27

0.16

VII

Raw hides and skins, leather, furskins and articles thereof; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut (other than silkworm gut)

0.32

0.25

IX

Wood and articles of wood; wood charcoal; cork and articles of cork; manufactures of straw, of esparto or of other plaiting materials; basketware and wickerwork

0.15

0.03

X

Pulp of wood or of other fibrous cellulosic material, waste and scrap of paper or paperboard; paper and paperboard and articles thereof

0.20

0.17

XI

Textiles and textile articles

3.36

3.42

XII

Footwear, headgear, umbrellas, sun umbrellas, walking sticks, seatsticks, whips, riding crops and parts thereof; prepared feathers and articles made therewith; artificial flowers; articles of human hair

0.34

0.11

XIII

Articles of stone, plaster, cement, asbestos, mica or similar materials; ceramic products; glass and glassware

0.87

2.88

XIV

Natural or cultured pearls, precious and semiprecious stones, precious metals, metals clad with precious metals, and articles thereof; imitation jewelry; coins

0.90

1.37

XV

Base metal and articles of base metal

0.96

0.80

XVI

Machinery and mechanical appliances; electrical equipment; parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, and parts and accessories of such articles

0.01

0.01

XVII

Vehicles, aircraft, vessels and associated transport equipment

0.01

0.06

XVIII

Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; clocks and watches; musical instruments; parts and accessories thereof

0.14

0.00

XIX

Arms and ammunition; parts and accessories thereof

0.00

5.10

XXI

Works of art, collectors’ pieces and antiques

1.95

1.15

HS = Harmonized Schedule Note: Figures in bold are comparative advantage and in italics are comparative disadvantage. Source: Authors’ calculations based on UNComtrade Database via World Integrated Trade Solution; US International Trade Commission (USITC) Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov.

52

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0.17

0.31

0.14

0.14

0.23

0.30

0.27

0.30

0.22

0.23

4.30

3.38

3.41

4.06

3.61

3.13

4.08

3.92

3.30

3.62

0.01

0.02

0.02

0.01

0.01

0.02

0.01

0.02

0.01

0.19

0.66

0.63

0.81

0.99

1.52

2.07

2.59

2.37

1.86

0.59

5.30

5.48

4.18

4.54

4.10

4.74

4.32

4.68

5.17

5.15

0.87

0.94

0.77

0.81

0.62

0.67

0.61

0.59

0.62

0.28

0.19

0.24

0.22

0.38

0.31

0.16

0.18

0.15

0.06

0.78

0.25

0.20

0.23

0.24

0.14

0.10

0.13

0.15

0.20

0.46

0.03

0.02

0.02

0.02

0.04

0.02

0.02

0.02

0.01

0.13

0.32

0.27

0.23

0.39

0.29

0.26

0.16

0.28

0.20

0.21

4.57

4.21

3.47

3.14

3.16

2.63

2.49

1.37

0.98

1.06

0.44

0.80

0.36

0.48

4.24

0.49

1.79

0.63

0.75

0.02

1.65

1.94

7.48

2.07

4.24

2.78

1.89

1.07

2.84

1.61

1.74

1.08

1.53

1.86

2.89

3.36

3.65

3.16

3.53

0.35

0.88

0.83

0.67

0.81

0.77

0.46

0.52

0.48

0.31

0.96

0.01

0.01

0.02

0.02

0.01

0.01

0.01

0.01

0.01

0.01

0.02

0.02

0.01

0.00

0.01

0.01

0.04

0.04

0.01

0.01

0.00

0.00

0.11

0.12

0.00

0.11

0.00

0.14

0.00

0.01

5.11

5.67

0.00

0.00

5.73

0.00

5.81

0.00

10.06

0.00

0.88

0.88

0.75

0.81

1.37

1.71

0.92

0.33

0.00

0.01

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

53

The Obama administration will almost certainly subject any new version of trade promotion authority or future trade agreements to higher standards on labor and the environment than those in existing FTAs. President Obama has clearly indicated support for including environment, labor, and other conditions in trade agreements, pledging to find ways in which trade can help advance “a cleaner environment, a stronger response to the challenge of climate change and more sustainable natural resources and energy supplies.”10 The FTAs will likely also include additional conditions in areas such as democracy and human rights.11 The US-Peru Free Trade Agreement is likely to set the stage for labor and environmental provisions. Congress ratified the pact in December 2007 after Peru agreed to modify the agreement to incorporate provisions contained in the bipartisan agreement on trade in May 2007 between congressional leaders and the Bush administration.12 The Peru agreement contains all of the provisions on labor rights found in previous trade agreements plus additional obligations to implement the International Labor Organization’s (ILO) core labor standards and augment enforcement of domestic labor laws. It also incorporates a cooperation and capacity building mechanism and ramps up transparency by tasking its Labor Affairs Council to develop guidelines for public submissions on labor issues.13 Most importantly, these obligations are now subject to monitoring and enforcement under the agreement’s dispute settlement mechanism.

10. Office of the US Trade Representative, 2009 Trade Policy Agenda and 2008 Annual Report of the President of the United States on the Trade Agreements Program, February 2009, available at www.ustr.gov. 11. On the former two issues, all recent US FTAs include provisions on labor and the environment. The North American Free Trade Agreement (NAFTA) incorporated such provisions through two additional side agreements negotiated after the original agreement had already been finalized. The first US FTA to include labor and environment as part of the agreement’s core text was the 2000 US-Jordan FTA, which mandated both parties to uphold their existing laws and not relax those laws in order to encourage trade. Negotiators learn by doing, and subsequent FTAs (US-Singapore 2003, US-Chile 2003, US-Australia 2004, USMorocco 2004, CAFTA-DR 2004, and US-Bahrain 2004) have built upon and improved the original NAFTA model. The US-Chile FTA and CAFTA-DR both contain language stating that domestic laws should not be weakened in order to attract trade and investment. CAFTA-DR established new institutional mechanisms—a Labor Affairs Council and an Environmental Affairs Council—to facilitate consultations and a capacity-building initiative. The agreement set up rosters of experts who could serve as panelists for disputes in the areas of labor or environment. The US-Bahrain agreement establishes the possibility of setting up a Subcommittee on Labor Affairs as well as a Subcommittee on Environmental Affairs and a Labor Cooperation Mechanism. 12. For an analysis of this agreement, see Destler (2007). 13. In an October speech, then-senator Obama stated that “The Peruvian agreement contains the very labor agreements that labor and our allies have been asking for. . . . What I’m

54

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Like most developing countries, Egypt has traditionally opposed including labor standards on the multilateral trade agenda, individually and as a member of the Group of Fifteen (G-15) developing countries.14 However, in a poll commissioned by the Chicago Council on Global Affairs in August 2008, 93 percent of Egyptians polled agreed that trade agreements should include minimum standards for the protection of the environment and 77 percent felt that trade agreements should include minimum standards for working conditions.15 Egypt has ratified the ILO’s conventions on the four fundamental principles and rights at work. However, critics claim that implementation of these conventions has been less than complete.16 Such data suggest that US and Egyptian officials could find common ground for pursuing initiatives to improve working conditions in both countries. Finally, before granting any extension of US trade preferences to Egypt, the USTR would need to consider the impact on other beneficiaries of development-oriented preference schemes, particularly the LDCs. Table 3.3 disaggregates the top 20 goods imported by the United States from Egypt under the QIZ program. The first three, all apparel, comprise over half of the total QIZ imports. The most significant item, in terms of value, that Egypt exports under the QIZ is men’s or boys’ trousers, bib and brace overalls, breeches and shorts of cotton, not knitted or crocheted (HS 620342). Egypt’s exports of this item to the United States have grown by over 42 percent per year since 2005, and Egypt’s share of US imports has grown from 1.2 percent in 2005 to 3.4 percent in 2008. At the same time, imports from AGOA recipients declined by 16 percent and imports from the Caribbean Basin Trade and Partnership Act saying is that the same provisions that we fought for—and that the AFL-CIO and other labor organizations had been asking for and that weren’t contained in NAFTA—they are in this agreement” (Philip Elliott, “Obama says only outsider can bring changes that rivals have failed to enact,” Associated Press, October 9, 2007, available at www.barackobama.com). 14. In response to President Clinton’s suggestion at the 1999 Seattle trade ministerial that sanctions should be used to enforce labor standards, Egyptian Trade Minister Youssef Boutros Ghali was famously quoted as saying, “If you start using trade as a lever to implement nontrade related issues . . . that will be the end of the multilateral trading system— maybe not this year, but in 10 to 15 years” (Boutros Ghali quoted in Steven Greenhouse and Joseph Kahn, “US Efforts to Add Labor Standards to Agenda Fail,” New York Times, December 3, 1999). 15. Muslims Positive About Globalization, Trade, WorldPublicOpinion.org, August 2008. The poll was conducted by WorldPublicOpinion.org in six nations with predominantly Muslim populations in different regions of the world including Egypt, Turkey, Azerbaijan, Iran, Indonesia, and the Palestinian Territories, plus the Muslim population of Nigeria. 16. One study found that 16 percent of 83 textiles and ready-made garments firms employ child labor and that firms with child labor export more than half of their output (Ghoneim and Grote 2006).

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

55

Table 3.3 56

HTS code 620342

© Peterson Institute for International Economics | www.piie.com

620462 611020 270900 271111 610910 611030 610510 630260 620520 610462 630231 610711 620341 620343 620463 611120 610610 620530 620920

Top 20 US imports from Egypt produced under qualifying industrial zones, 2005–08

Commodity description Men’s or boys’ trousers, bib and brace overalls, breeches and shorts of cotton, not knitted or crocheted Women’s or girls’ trousers, bib and brace overalls, breeches and shorts of cotton, not knitted or crocheted Sweaters, pullovers, sweatshirts, vests and similar articles of cotton, knitted or crocheted Petroleum oils and oils from bituminous minerals, crude Natural gas, liquefied T-shirts, singlets, tank tops and similar garments of cotton, knitted or crocheted Sweaters, pullovers, sweatshirts, vests and similar articles of man-made fibers, knitted or crocheted Men’s or boys’ shirts of cotton, knitted or crocheted Toilet and kitchen linen of cotton terry toweling or similar cotton terry fabrics Men’s or boys’ shirts of cotton, not knitted or crocheted Women’s or girls’ trousers, bib and brace overalls, breeches and shorts of cotton, knitted or crocheted Bed linen (other than printed) of cotton, not knitted or crocheted Men’s or boys’ underpants and briefs of cotton, knitted or crocheted Men’s or boys’ trousers, bib and brace overalls, breeches and shorts of wool or fine animal hair, not knitted or crocheted Men’s or boys’ trousers, bib and brace overalls, breeches and shorts of synthetic fibers, not knitted or crocheted Women’s or girls’ trousers, bib and brace overalls, breeches and shorts of synthetic fibers, not knitted or crocheted Babies’ garments and clothing accessories of cotton, knitted or crocheted Women’s or girls’ blouses and shirts of cotton, knitted or crocheted Men’s or boys’ shirts of man-made fibers, not knitted or crocheted Babies’ garments and clothing accessories of cotton, not knitted or crocheted Total West Bank, Gaza, and qualifying industrial zones

Imports (millions of US dollars) 2005 2006 2007 2008

Growth 2007–08 (percent)

Percent of total, 2008 (percent)

61

151

165

176

6.9

20

51

117

143

155

8.2

18

30 0 0 7 8

58 0 0 29 29

68 0 0 31 27

69 47 43 39 37

1.5 n.a. n.a. 26.9 35.6

8 5 5 4 4

12 0 3 3

36 10 16 16

38 20 14 20

34 22 21 20

–8.9 10.7 49.9 1.9

4 3 2 2

11 2 0

18 6 0

17 10 2

16 12 12

–3.4 20.8 464.1

2 1 1

0

4

15

10

–32.4

1

2

6

10

10

–4.5

1

3 2 4 5 266

8 4 10 16 643

9 8 14 10 740

8 8 7 7 874

–3.7 –6.1 –49.0 12.0 18.0

1 1 1 1

Source: US International Trade Commission (USITC) Interactive Tariff and Trade Dataweb, http://dataweb.usitc.gov.

Table 3.4

US imports of men’s or boys’ trousers, bib and brace overalls, breeches and shorts of cotton, not knitted or crocheted, 2004–08 (thousands of US dollars) 2005

2006

2007

2008

2005–08 (percent)

254,572 156,473

227,000 140,815

201,337 98,714

153,103 85,918

–16 –18

733,569

452,189

128,281

50,914

–59

61,337 46,139 0 0 107,476

150,881 27,401 0 0 178,282

164,673 4,214 1,283 0 170,170

176,092 2,253 2,180 0 180,526

42 –63 n.a. n.a. 19

149 0 2,839 392 18,129 0 2

120 1,909 2,109 161 23,716 2,287 61

66 14,960 316 114 26,603 1,871 2

51 12,478 0 44 25,188 1,359 24

–30 n.a. –100 –52 12 n.a. 129

Regional free trade agreements NAFTA CAFTA-DR

1,412,559 1,427,581 1,322,107 1,210,211 1,175,379 0 0 145,526 343,848 328,449

–6 n.a.

No program claimed Bangladesh China India Pakistan Vietnam Subtotal Total

185,535 307,149 529,870 625,832 817,419 115,478 390,104 420,186 559,391 590,372 88,256 131,430 183,360 226,111 216,339 90,391 115,094 134,372 201,690 221,081 135,794 135,742 201,983 233,082 254,135 2,172,885 2,408,717 2,847,764 3,076,809 2,099,347 4,820,029 5,109,898 5,344,046 5,273,300 5,188,296

39 15 18 24 23 –4 1

Import program

2004

Preference programs African Growth and Opportunity Act (excluding Generalized System of Preferences) 278,061 Andean Trade Preference Act 97,165 Caribbean Basin Trade and Partnership Act 800,350 West Bank, Gaza, and qualifying industrial zones (QIZs) Egypt 0 Jordan 47,839 Gaza Strip 63 West Bank 0 Subtotal 47,902 US bilateral free trade agreements Australia Bahrain Chile Israel Jordan Morocco Singapore

0 0 4,018 4,629 2,295 0 165

NAFTA = North American Free Trade Agreement CAFTA-DR = Central American Free Trade Agreement-Dominican Republic n.a. = not available Source: US International Trade Commission (USITC) Interactive Tariff and Trade Dataweb, http://dataweb. usitc.gov.

(CBTPA) countries fell by 59 percent (table 3.4). While some of this decline may be linked to Egypt’s extended preferences, AGOA and CBTPA countries are more likely to have been affected by the increase in imports from non-preference-receiving Asian countries. Bangladesh sells 4.6 times MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

57

more and China 3.4 times more than Egypt does to the United States; US imports from these countries grew by 39 and 15 percent per year, respectively. Another likely source of AGOA and CBTPA competition is CAFTADR, which largely took effect in 2006.17 US imports from CAFTA-DR in 2008 were nearly twice those from Egypt, growing over 125 percent from 2006 to 2008. A more likely competitor for Egypt’s share of the US market would be Jordan, whose exports under the QIZ program dropped 91 percent from 2005 to 2007. This was partially offset by an increase in US imports under the US-Jordan FTA, but in total, US imports of Jordanian clothing of this type fell by 52 percent. To complement the increased market access gained through an expanded QIZ or GSP, Egypt and the United States should work together to stimulate trade in areas other than textiles. Given Egypt’s low labor costs relative to many of its textile and apparel competitors, plus its enhanced market access through the QIZ, it is notable that Egypt occupies such a low spot in table 3.1. It is clear that market access is not the only issue to be considered in stimulating Egypt’s exports to the United States. Increasing market access can certainly help Egypt get more of a leg up on other competitors and can, if coupled with appropriate complementary policies, help create sustainably competitive firms and thus more jobs. However, additional measures are needed to bolster Egypt’s competitiveness in textiles and apparel and to stimulate its export reach into other areas. These will be examined in the next sections.

Stimulating Services Trade through a US-Egypt Services Trade Agreement Services comprise about 45 percent of Egypt’s GDP and account for more than half of the country’s formal-sector jobs. Developments in the services sector have a significant impact on the overall economy. Firms’ competitiveness is determined in part by their access to high-quality and low-cost services. Services are also fundamental to successful international integration. Particularly in a global economy, the access to and quality of producer services such as telecommunications, transport, distribution, and financial intermediation can have a profound effect on the competitiveness of domestic firms. Bernard Hoekman (2006) surveys the literature on services liberalization and concludes that liberalization of services can yield significant gains for the economy, potentially more than goods liberalization. Hoekman finds that greater competition in services markets 17. The dates of implementation of CAFTA-DR are March 1, 2006 (El Salvador); April 1, 2006 (Honduras and Nicaragua); July 1, 2006 (Guatemala); and March 1, 2007 (Dominican Republic). Costa Rica implemented the agreement in January 2009.

58

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

removes cost inefficiencies and produces welfare gains in the range of 6 to 8 percent of GDP.18 Services sector liberalization generally involves the elimination of monopolies, privatization of state-held firms, elimination of regulatory barriers to market entry, and development of regulations appropriate to allowing new domestic and foreign firms to compete. In liberalizing services, policymakers aim to increase the number and type of services and enhance the quality of services provided. Given the limited tradability of services, expansion of the services sector can significantly stimulate the demand for domestic jobs. The limited tradability of services also makes attracting foreign investment key to bringing new technology and management practices into the host country. Table 3.1 shows Egypt lagging behind its competitors in the US apparel market. While market access in goods is an important element in Egypt’s competitiveness in this sector, it is clearly not enough. Nor is Egypt’s low cost of labor. Countries with higher labor costs and with no preferential access to the US apparel market outperform Egypt. Egypt must find ways to lower its costs, improve its quality, and increase its efficiency. One sector to target is the services sector. Gains from liberalization in Egypt’s services sector are potentially significant. Denise Konan and Karl Kim (2004) found that if Egypt liberalized the services sector related to cross-border trade, welfare would improve by 0.78 percent and real output would increase by 1.07 percent. Improvement of the climate for foreign investment would net welfare gains of 6.90 percent and output gains of 11.85 percent. This study was conducted when Egypt was just beginning to undertake significant economic reforms, so current gains would likely be less dramatic. However, given the importance of the services sector to the Egyptian economy and the continued existence of barriers in key sectors, gains could be expected to be significant. At the multilateral level, Egypt has made commitments in 4 of the 12 sectors covered by the General Agreement on Trade in Services (GATS)—

18. Hoekman (2006) cites Mattoo, Rathindran, and Subramanian (2006), who find that, controlling for other growth factors, countries with open financial and telecommunications sectors grew on average 1 percentage point faster than other countries; Eschenback and Hoekman (2006), who find that liberalization in financial and infrastructure services, including telecommunications, power, and transport are highly positively correlated with foreign direct investment; Arnold, Javorcik, and Mattoo (2007), who show that allowing foreign providers into the domestic services market has a positive impact on the performance of domestic manufacturing firms; and Arnold, Mattoo, and Narciso (2006), who find a statistically significant positive relationship between total factor productivity and the performance of three services input industries. Konan and Maskus (2006) and Rutherford, Tarr, and Shepotylo (2006) both find, through separate country studies, that gains from services liberalization far exceed gains from trade liberalization.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

59

namely construction, finance, tourism, and transportation. Since 2004, it has also unilaterally opened many sectors to foreign investment. With the exception of defense-related industries, the manufacturing sector is generally open to foreign investors. Limitations on certain types of foreign investment remain, including sectoral exceptions to national treatment in particular areas. These include construction, maritime and air transportation, courier services, foreign trading intermediation, and government purchases (in which there is preferential treatment for domestic bidders). Some public monopolies, such as in fixed-line telecommunications and electricity production and distribution, remain in place.19 Egypt is currently negotiating services liberalization with the European Union under the auspices of the Egypt-EU FTA. Negotiations on liberalizing trade in services and the right of establishment were initiated in February 2008. Topics under discussion include regulatory alignment in international maritime transportation services, postal and courier services, financial services, computer services, and telecommunications services. They have also included facilitating the temporary movement of natural persons. It makes sense for Egypt to follow a similar path with the United States so that it can access knowledge and capital from both major industrial regions. A US-Egypt services trade agreement should place priority on sectors that would help Egypt gain international competitiveness. Sectors where modernization is necessary and in which the presence of US firms could either introduce necessary competition or bring new technology and management practices should be given priority. We identify transportation, construction, electricity, and information and communications as priority areas, but others could be included. Progress in these areas could help Egypt better profit from its strategic geographic position and become a more dominant player in regional transportation, communications, and outsourcing. We also recommend inclusion of professional services so that professionals in each country can more easily bring their ideas and talent to the other country.

Transportation Egypt serves as an important regional maritime transportation hub, with the Suez Canal a main artery of global transport and trade. Egypt has three major ports, at Alexandria, Damietta, and Port Said.20 These rank 37, 19. These are listed in Annex E of OECD (2007). 20. Alexandria handles over 55 percent of Egypt’s foreign trade; Damietta is the leading container handling port, and Port Said is strategically located between the Middle East and Europe near the entrance of the Suez Canal.

60

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

93, and 100 in terms of container traffic in the 2007 World Port Rankings.21 In total, Egypt has 15 commercial and 30 specialized ports—six for tourism, fourteen dedicated to petroleum, seven for mining, and three for fishing. The number of containers handled through Egyptian ports increased significantly over recent years, more than doubling between 2003 and 2007, reaching an average of 5 million twenty-foot equivalent units. Egypt currently retains certain limits on foreign ownership in maritime transportation. There is a joint-venture equity limit of 49 percent, although greater foreign investment, up to 75 percent, can be made in ancillary services, such as port services. Private-sector participation is not allowed in the operation of the lucrative Suez Canal.22 Egypt also has regional potential in the air transportation sector. Foreign investment in international and domestic airlines is limited to 49 percent, and an economic needs test is required for foreign establishment in courier services. National carrier Egypt Air’s domestic monopoly has been progressively curtailed, but international airlines are still prohibited from operating charter flights to and from Cairo. Egypt and the United States have an Air Transport Agreement dating back to 1964, which was modified in 1991 with the addition of a security article and a limited cooperative marketing agreement in 1997. US and Egyptian officials have discussed the possibility of an Open Skies air services agreement to replace the Air Transport Agreement but talks have not yet begun. Commercial links are proceeding, however: In 2008 Egypt Air became a member of the Star Alliance, with United Airlines, Air Canada, Lufthansa, and others.

Construction Foreign participation in the construction sector remains limited by explicit equity restrictions: FDI is allowed only in the form of joint venture companies with foreign equity limited to 49 percent. In some subsectors, such as electrical wiring and other finishing work, foreign participation is limited to contracts exceeding $10 million. The construction industry makes up about 7 percent of Egyptian GDP and supports 8 percent of Egypt’s employment. The housing sector is governed by Land/Real Estate Law 15 of 1963 modified by Decree No. 548 of 2005 to remove restrictions on foreign property ownership in various areas, but foreign individuals are still

21. American Association of Port Authorities, World Port Rankings—2007, www.aapaports.org (accessed on November 8, 2009). 22. Private-sector participation does not seem likely any time soon: The head of the Suez Canal Authority is quoted as saying that this would be “like privatizing the pyramids” (Financial Times, December 17, 2008).

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

61

limited to ownership of two residences in Egypt (although citizens of other Arab countries are generally granted national treatment).

Electricity The state-owned Egyptian Electrical Holding Company (EEHC) is responsible for the generation, transmission, and distribution of electrical energy. It also owns and operates Egypt’s electricity grid. Electricity generation was liberalized through Law 100/1996, which allows private firms to build, own, operate, and transfer electrical power generation plants. Egyptian firms see the electricity sector as a bottleneck. Egypt experiences on average 8.6 power outages in a month—far more than regional competitors, as seen in table 3.5. Algeria experiences just over 5 and Jordan about 2.6. Firms estimate that these power outages result in a loss of nearly 5 percent of sales. Obtaining an electrical connection in Egypt takes considerable time. An Egyptian factory owner could wait 143 days to obtain electricity, compared with 37 days for firms in the West Bank and Gaza (table 3.5). This is high compared not only with MENA countries, where Egypt has by far the worst performance, but also with the top competitors in the US apparel market. For example, the average wait is 50 days in Bangladesh and 15 or fewer in Indonesia, the Philippines, and Vietnam. This situation is not expected to improve if changes are not made. Demand for power is rising as a result of population and economic growth. Enhanced competition, including from US firms, could help provide the infrastructure needed for firms to operate.

Information and Communications A second promising sector in which the two countries could cooperate to help boost Egypt’s competitiveness is the information and communications technologies (ICT) sector. Egypt is already a world leader in providing wireless technology, with Egyptian company Orascom Telecom’s operations extending throughout the Middle East, Africa, and South Asia—reaching markets as remote as North Korea.23 This world class quality is not reflected in Egypt’s own domestic access to telecom services. Table 3.6 sets out a number of basic communications infrastructure indicators, comparing Egypt with the MENA region and with its competitors in the US textile and apparel market. The comparison with the region is important if Egypt is to position itself as a regional out23. Orascom’s North Korea license is valid for 25 years with an exclusive period of four years. See Jung-a Song, “Orascom Scores N. Korean Mobile First,” Financial Times, February 1, 2008.

62

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 3.5

Country

Reliability and availability of infrastructure services: Electricity Number of power outages in a typical month

All countries MENA countries Algeria (2007) Egypt (2007) Jordan (2006) Lebanon (2006) Mauritania (2006) Morocco (2007) Oman (2003) West Bank and Gaza (2006)

9.17 4.44 5.11 8.65 2.61 n.a. 3.71 2.50 n.a. 3.34

Value lost due to power outages (percent of sales)

Delay in obtaining an electrical connection (days)

4.95 4.38 4.02 4.71 1.69 5.97 1.57 1.27 4.18 4.60

38 55 49 143 47 72 8 19 15 37

Top 20 developing-country US apparel suppliers Bangladesh (2007) Cambodia (2007) China (2003) Dominican Republic (2005) Egypt (2007) El Salvador (2006) Guatemala (2006) Honduras (2006) India (2006) Indonesia (2003) Jordan (2006) Mexico (2006) Nicaragua (2006) Pakistan (2007) Peru (2006) Philippines (2003) Sri Lanka (2004) Thailand (2006) Vietnam (2005)

101.56 26.95 n.a. n.a. 8.65 2.84 3.08 2.99 n.a. n.a. 2.61 2.62 13.17 34.09 1.14 n.a. n.a. 1.53 n.a.

10.56 2.44 1.31 15.17 4.71 2.85 4.51 3.83 6.62 3.30 1.69 2.36 8.74 9.92 3.24 5.93 n.a. 1.53 n.a.

50 15 28 30 143 22 35 28 29 15 47 12 63 106 82 13 83 28 12

MENA = Middle East and North Africa n.a. = not available Note: Data are for year in parentheses. The table shows the developing countries in the top 20 grouping; Italy, the only advanced country, is excluded. Source: World Bank Enterprise Surveys, www.enterprisesurveys.org.

sourcing hub. While telecommunications plays less of a role in textiles and apparel than in the ICT sector, having access to effective communications technology to communicate with clients and with other parts of the supply chain can certainly help improve the position of a textile firm. MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

63

64

© Peterson Institute for International Economics | www.piie.com

Table 3.6

Reliability and availability of infrastructure services: Telecommunications and water Infrastructurea

Country

East Asia and Pacific Eastern Europe and Central Asia Latin America and Caribbean South Asia Sub-Saharan Africa MENA countries Algeria (2007) Egypt (2007) Jordan (2006) Lebanon (2006) Mauritania (2006) Morocco (2007) Oman (2003) West Bank and Gaza (2006)

Average number of incidents of water insufficiency in a typical monthb

1.53 6.64 4.12 n.a. 21.04 7.17 9.45 4.00 14.30 n.a. 7.70 0.90 n.a. 7.20

Delay in obtaining a water connection (days)

34.13 31.40 34.12 n.a. 56.83 56.25 84.62 117.10 31.10 96.30 22.60 13.10 16.20 16.90

Coveragec Delay in obtaining a mainline telephone connection (days)

Fixed broadband subscribers (per 100 people)

Internet users (per 100 people)

18.99 17.41 35.31 31.63 40.38 27.98 40.77 85.50 3.30 9.80 14.50 6.40 7.80 11.90

3.70 4.10 5.40 0.40 0.00e 0.80 0.85 0.60 2.20 4.90 0.10 1.50 0.70 1.50

15.0 23.0 27.0 7.0 4.0 24.0 10.0 13.2 25.4 38.3 n.a. 21.4 9.1 9.6

Population covered by mobile cellular Telephone network mainlines (per (percent) 100 people)

93.0 92.0 91.0 61.0 55.6e 93.0 82.0 93.5 99.0 n.a. 51.0 n.a. 96.0 95.0

23.0 26.0 19.0 3.0 2.0 18.0 9.0 14.2 8.8 17.0 1.3 7.8 9.8 9.4

Top 20 developing-country US apparel suppliers

© Peterson Institute for International Economics | www.piie.com

Bangladesh (2007) Cambodia (2007) China (2003) Dominican Republic (2005) Egypt (2007) Guatemala (2006) Honduras (2006) India (2006) Indonesia (2003) Jordan (2006) Mexico (2006) Nicaragua (2006) Pakistan (2007) Peru (2006) Philippines (2003) Sri Lanka (2004) Thailand (2006) Vietnam (2005)

31.0 n.a. n.a. n.a. 4.0 5.8 5.8 n.a. n.a. 14.3 4.1 13.6 25.7 0.7 n.a. n.a. 0.4 n.a.

36.3 7.9 n.a. 17.0 117.1 76.4 47.7 23.1 13.1 31.1 13.7 44.5 234.0 98.1 n.a. 27.1 43.1 n.a.

75.0 4.5 6.8 8.8 85.5 28.2 169.5 13.3 26.9 3.3 7.8 80.8 23.7 10.8 19.5 89.9 29.8 10.8

0.0 0.1 5.0 1.6 0.6 n.a. n.a. 0.5 0.1 2.2 7.2 0.3d 0.1 2.5 0.6 0.5 1.4 1.5

0.3 0.5 16.1 17.2 13.2 10.1d 6.0 7.2 5.8 25.4 21.9 2.8d 11.1 24.7 6.0 5.7 20.0 21.0

MENA = Middle East and North Africa n.a. = not available a. Year of survey in parentheses next to country. b. For survey data collected in 2006 and 2007, this indicator is computed for the manufacturing module only. c. Data are for 2007 unless otherwise indicated. d. Data are for 2006. e. Data are for 2005. Note: The table shows the developing countries in the top 20 grouping; Italy, the only advanced country, is excluded.

65

Sources: World Bank Enterprise Surveys, www.enterprisesurveys.org; World Bank, World Development Indicators Database, 2008.

90.0 87.0 97.0 90.0 93.5 76.0d 89.9 61.0 90.0 99.0 n.a. 70.0d 90.0 99.0 99.0 90.0 37.8 70.0

0.8 0.3 27.7 9.3 14.2 10.4d 11.6 3.3 13.3 8.8 19.3 4.5d 2.7 10.0 4.4 17.1 11.0 33.5

Egypt just tops MENA standards in mobile telephony coverage, with 94 percent of the population covered by a mobile cellular network, compared with 93 percent regionwide. In all other indicators, however, Egypt falls short of the regional standard. As in electricity, the delay in obtaining a phone line is much higher than in any of the countries in the MENA region. This indicator is even worse than Nicaragua’s, where the wait time is 81 days, and is twice that of the next worst country in the MENA region, Algeria, where a small business needs to wait only 41 days to get a phone line. In regional competitor Jordan it takes only three. If Egypt is serious about becoming an ICT center of excellence, this chronic delay in obtaining a phone line needs to be addressed. Also notable is the low level of internet usage. Only 13 out of every 100 people are internet users, compared with a MENA average of 24. Less than 1 percent of the population has access to broadband. The telecommunications sector was largely deregulated in 2005, opening up competition for equipment and service providers, and privately operated telecommunications services are permitted up to 100 percent. However, Telecom Egypt continues to hold a monopoly on landlines. In February 2008 the National Telecom Regulatory Authority (NTRA) announced that it would break this monopoly and issue a second operator license, but this auction was postponed indefinitely as a result of the global financial crisis. As mentioned in the previous section, several surveys rank Egypt as an attractive potential outsourcing location. Enhanced US investment and technical cooperation in ICT infrastructure could help Egypt boost its burgeoning ICT sector. This could lead to additional jobs in related industries such as call centers and back office operations in the Middle East. Since the 1980s, Egypt has been working to capitalize on its history as a regional literary force to become a hub for Arab-language software for the Middle East, a potential market with some 175 million Arab speakers. Software exports were estimated at US $15 million in 2001. Egypt is classified among the fourth tier “infant” software exporting nations (nations with less than five years exporting experience, fewer than 10 exporting organizations, and annual revenue less than $25 million—criteria set out in Carmel 2003).

Professional Services Another area in which the United States and Egypt could negotiate significant liberalization is in increasing access to each other’s professional services since both countries retain restrictions on foreign professionals. Access to each other’s markets would allow Egyptian and US professionals to access cutting edge technology and business practices that could then be brought back home. 66

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Difficulties in finding employment in the United States by foreign-born workers are well known. The allotment of H1-B visas, which allow temporary employment of high-skilled workers, is generally filled soon after the quota opens. Egypt also holds restrictions on its foreign workforce. For most companies, the number of foreign employees is limited to 10 percent of staff. For shareholder companies, at least 75 percent of professional and administrative employees must be Egyptian. To obtain a work permit for a foreigner, the employer must demonstrate that no qualified Egyptian is available for the job and commit to appointing Egyptian assistants who will be trained to take over the foreigner’s job.24 In sum, liberalizing trade in services would benefit both countries. Egyptian businesses and consumers as well as foreign investors in Egypt would have access to better quality and variety of services. Egypt could see significant employment gains if the services sector expands as a result of increased efficiency and competition. Such ventures would transfer valuable resources—technology, management skills, and finance—that would help boost productivity of domestic services firms, which in turn would yield welfare gains across the Egyptian economy.25 US firms would benefit as well through increased services exports and new investment opportunities.

Modernizing the Bilateral Investment Treaty Services and investment are inextricably linked. Foreign businesses establish a commercial presence in the territory of their partner markets to provide services. Attracting foreign investment in key sectors of the economy—in addition to petroleum—is essential to meeting Egypt’s development goals and to sustaining the significant economic achievements of recent years. While foreign investment has increased in the nonpetroleum sector over the past years, the bulk of investment continues to be attracted to mining and oil. Table 3.7 compares 2008 US FDI by sector in Egypt to US FDI in the countries with which the United States has negotiated FTAs. Currently, Egypt represents about 4 percent of total US investment in mining and oil, which comprises more than 90 percent of US investment in Egypt. One of Egypt’s stated goals, in addition to enhancing investment, is to diversify investment into higher-value-added industries. Greenfield investment—that is, new investment in the country as opposed to investment through mergers or acquisitions—from the United 24. Economist Intelligence Unit, Country Commerce—Egypt 2009, New York. 25. A 2007 World Bank study (Arnold, Javorcik, and Mattoo 2007), using data from the Czech Republic, found empirical evidence of a positive relationship between liberalization in the services sector and productivity in manufacturing firms that rely on services inputs.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

67

Table 3.7

US direct investment position abroad (historical-cost basis), 2008

68

© Peterson Institute for International Economics | www.piie.com

Position

Country

40

All countries total Egypt

All industries (millions of US dollars)

Percent of total US FDI

Mining (millions of US dollars)

Percent of total US FDI

Manufacturing (millions of Percent of US dollars) total US FDI

3,162,021 8,771

0.3

151,859 5,159

3.4

512,293 299

0.1

23,778 589 4,865 20,342 1058 0 6,276 n.a. (*) 0 n.a. 0 n.a. n.a. n.a. n.a. n.a.

15.7 0.4 3.2 13.4 0.7 0.0 4.1 n.a. n.a. 0.0 n.a. 0.0 n.a. n.a. n.a. n.a. n.a.

72,543 16,544 21,821 12,743 2,238 6,411 580 n.a. 989 599 n.a. (D) n.a. n.a. n.a. n.a. n.a.

14.2 3.2 4.3 2.5 0.4 1.3 0.1 n.a. 0.2 0.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a.

0.0 0.0 2.1

9,165 40 1,333

1.8 0.0 0.3

FTAs in force 3 9 10 11 32 36 41 59 62 72 73 79 90 98 100 117 182

Canada Singapore Mexico Australia Chile Israel Peru El Salvador Costa Rica Dominican Republic Guatemala Honduras Morocco Nicaragua Jordan Bahrain Oman

227,298 106,529 95,618 88,549 12,613 10,153 8,458 3,215 2,525 960 915 700 252 162 121 18 (D)

7.2 3.4 3.0 2.8 0.4 0.3 0.3 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 n.a.

FTAs pending approval (as of December 2009) 21 42 45

Korea Panama Colombia

27,673 7,243 6,263

0.9 0.2 0.2

–1 63 3,234

n.a. = not available; (*) = indicates a non-zero value between –$500,000 and +$500,000, or fewer than 50 employees, as appropriate. (D) = Data suppressed to avoid disclosure of data of individual companies; FTA = free trade agreement Source: BEA (2009).

States for the period 2003–08 totaled $3.88 billion, with 5,500 jobs created (table 3.8). Of this investment, 55 percent was in the coal, oil, and natural gas industry and 14 percent in hotels and tourism. Eight percent is invested in chemicals, 5 percent in software and IT services, and 3 percent in semiconductors. This latter investment generated nearly 1,400 jobs, 13 percent of the jobs created. Financial services and business machines each received 4 percent of total investment. The textile sector, with an investment of $17.3 million, represented less than 1 percent of total US investment but created 2 percent of the jobs generated through US new investment. New investment in Egypt originating in the EU countries was substantially higher than that originating in the United States, at $11.6 billion. Europeans also invested mostly in the coal, oil, and natural gas sector (44 percent), followed by financial services (11 percent), hotels and tourism and building and construction (10 and 9 percent, respectively), and metals and alternative energy, 4 percent each. Since 1992, when the US-Egypt BIT came into effect, significant changes have taken place in international provisions on investment, both through changes in the texts of BITs and through innovations in the investment provisions of FTAs. The United States has recently completed reformulating the model text it has used in BIT negotiations over the past two decades. Former Assistant Secretary of State for Economic and Business Affairs Daniel Sullivan noted that the new BIT text is “similar to the investment provisions of the North American Free Trade Agreement (NAFTA) and, in keeping with our policy of maintaining consistency across our agreements, is very similar to the investment chapters of our recently concluded free trade agreements, including those with Chile, Singapore, five Central American countries and the Dominican Republic (CAFTA-DR), Morocco, Australia, Oman, Peru, and Colombia.”26 The US-Uruguay BIT, signed in October 2004, was the first to be based on this new US model text and is substantively similar to the investment chapter of the FTAs the United States has concluded over the past few years (see appendix A for a comparison of the US-Egypt BIT and the recent US-Uruguay BIT). The new model BIT contains provisions on national treatment and most favored nation treatment both before and after the establishment of an investment; a minimum standard of treatment based on customary international law; international law principles governing expropriation; limitations on performance requirements, such as local content requirements; the right to hire senior managers without regard to nationality; improved transparency with respect to investment-related laws and regulations; a guarantee of free transfers of investment-related funds; and binding

26. Daniel S. Sullivan, The US-Uruguay Bilateral Investment Treaty, testimony before the Senate Committee on Foreign Relations, Washington, June 16, 2006.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

69

70

Table 3.8

Greenfield investment in Egypt from the European Union and the United States, 2003–08 Investment (millions of US dollars)

© Peterson Institute for International Economics | www.piie.com

Industry Aerospace Alternative/renewable energy Automotive original equipment manufacturer Building & construction materials Business machines & equipment Business services Ceramics & glass Chemicals Coal, oil, & natural gas Communications Consumer products Electronic components Engines & turbines Financial services Food & tobacco Hotels & tourism Leisure & entertainment Metals Pharmaceuticals Real estate Rubber Semiconductors Software & IT services Textiles Transportation Warehousing & storage Total

European Union

United States

Jobs (percent of total)

Jobs European Union

United States

European Union

Investment (percent of total)

United States

European Union

United States

15 421

n.a. n.a.

30 89

n.a. n.a.

0 1

0 0

0 4

0 0

75 1,036 n.a. 33 176 288 5,052 103 130 20 17 1,318 116 1,149 36 463 258 216 65 n.a. 40 168 68 4 11,583

32 n.a. 172 32 n.a. 309 2,149 12 n.a. 31 n.a. 145 n.a. 534 73 49 33 n.a. n.a. 100 185 17 n.a. n.a. 3,878

626 1,163 n.a. 765 1,131 155 1,879 618 690 156 22 1,686 1,218 1,899 99 931 673 569 186 n.a. 235 1,108 80 279 17,359

300 n.a. 517 128 n.a. 172 601 22 n.a. 173 n.a. 117 n.a. 1,011 198 389 51 n.a. n.a. 284 1,391 101 n.a. n.a. 5,546

4 7 0 4 7 1 11 4 4 1 0 10 7 11 1 5 4 3 1 0 1 6 0 2 100

5 0 9 2 0 3 11 0 0 3 0 2 0 18 4 7 1 0 0 5 25 2 0 0 100

1 9 0 0 2 2 44 1 1 0 0 11 1 10 0 4 2 2 1 0 0 1 1 0 100

1 0 4 1 0 8 55 0 0 1 0 4 0 14 2 1 1 0 0 3 5 0 0 0 100

n.a. = not available Source: fDi Intelligence Database; authors’ calculations.

international arbitration of investment disputes that can be invoked either by investors or by the parties to the agreement. If the current US-Egypt BIT were to be updated, a number of issues should be subject to review. One is coverage. Whereas the US-Egypt BIT currently excludes entire sectors, more modern investment provisions, such as the model BIT or investment provisions in current US FTAs, allow the exclusion of particular measures, but these must be specifically listed. The current US-Egypt BIT includes a list of sectors exempted from national treatment obligations by both Egypt and the United States. Egypt’s exceptions are extensive: air and sea transportation; maritime agencies; land transportation other than that of tourism; mail, telecommunications, telegraph services and other public services that are state monopolies; banking and insurance; commercial activity such as distribution, wholesaling, retailing, import and export activities; commercial agency and broker activities; ownership of real estate; use of land; natural resources; national loans; and radio, television, and the issuance of newspapers and magazines, though several have opened up to foreign investment with the 2004 reforms in Egypt. US exceptions under the US-Uruguay BIT are more limited than under the US-Egypt BIT; for example, ocean and coastal shipping; government grants; government insurance and loan programs; and ownership of real estate are no longer fully exempted. The definition of investment has also expanded to explicitly include bonds and other debt instruments. The new BITs and FTA investment provisions also reflect changes in trade-related intellectual property rights. The US-Uruguay BIT, as well as the investment chapters in CAFTA-type agreements, explicitly include intellectual property rights as a form of investment, reference the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and demand TRIPS consistency. They also include specific provisions on the use of intellectual property rights: Article 6 (5) of the new BIT restricts the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS and to the revocation, limitation, or creation of intellectual property rights. Language in a renegotiated US-Egypt BIT on intellectual property rights also would need to reflect the May 10, 2007 agreement reached between Congress and the Bush administration, which adds flexibility for developing countries with respect to pharmaceutical-related intellectual property rights provisions.27 Another important area in which US BITs have evolved is dispute settlement. All US BITs include negotiation and arbitration provisions that allow investor and state claims, but the 1992 US-Egypt BIT provides for the submission of the dispute to the International Centre for Settlement of Investment Disputes (ICSID), while the new provisions provide for the establishment of an arbitral tribunal comprising arbitrators selected by each 27. A summary of the intellectual property rights provisions can be found in the USTR Fact Sheet, Bipartisan Trade Deal, May 2007, available at www.ustr.gov.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

71

party and one, who will preside, selected by agreement of both parties. Both the US-Uruguay BIT and the investment chapter of the CAFTA-DR include provisions on transparency in the arbitration process that include publishing key documents and holding open hearings of the tribunal. Both the US-Uruguay BIT and the CAFTA-type FTAs include provisions on labor and the environment. The US-Uruguay BIT provides that neither environmental nor labor laws shall be weakened or avoided in order to promote investment. Such provisions will likely be strengthened in subsequent BITs, following the provisions in the May 10 agreement, as already incorporated into the Colombia, Korea, and Peru FTAs. Updating the legal framework of the US-Egypt investment relationship could serve three purposes. First, modernizing the provisions guiding this relationship could increase business confidence and “give credit” to Egypt for the vast changes that have been made to the Egyptian investment regime, particularly since 2004. Second, signing such an instrument could serve, as did NAFTA for Mexico, to “lock in” these hard-fought reforms. Third, the updated BIT could serve as a model for an investment chapter in an eventual US-Egypt FTA. Modernizing the BIT would address a number of the investment concerns raised by US companies, including in the field of intellectual property protection and in labor and environmental standards. Technically, this would upgrade the investment provisions to standards comparable to those in most recent US FTAs. Would an updated BIT yield new inflows of FDI to Egypt? There is little robust evidence that an enhanced BIT would do so in the absence of complementary policy and regulatory reforms (see appendix B). However, several authors find a positive relationship between BITs and foreign investment, and others see greater results when the investment provisions are part of a greater set of trade and investment initiatives, such as in an FTA. An updated BIT, as part of a package of measures to enhance the US-Egypt economic relationship, as proposed in this chapter, could set a basis for greater predictability and stability for foreign investors. Put another way, an updated BIT may provide a positive but not sufficient inducement to foreign investors. With or without a renegotiation of the BIT, room exists for cooperation in the area of investment. Restrictions exist in a number of the areas not covered by the BIT. Particular priority should be given to eliminating barriers to investment in economic infrastructure, which could in turn have a multiplier effect, by facilitating FDI flows into manufacturing and services.

Cooperation on Trade Facilitation Measures Trade facilitation measures involve improving procedures related to the movement of goods across borders with a view to reducing associated 72

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

costs and improving efficiency. This includes the improvement of transportation infrastructure, modernization of ports and customs administration, cooperation in enforcing intellectual property rights, and the elimination of government corruption and enhancement of transparency. It also includes assistance in confronting security challenges as Egypt works to have its ports meet Container Security Initiative (CSI) standards. Table 3.9 shows how Egypt compares with other MENA countries and with its main competitors in the US textile and apparel market in seven dimensions of trade facilitation, as measured by the World Bank’s Logistics Performance Index (LPI). The LPI compares countries according to feedback from international firms (particularly freight forwarders and express carriers) as well as data on the performance of components of the logistics chain in each country.28 Egypt ranks 97th out of 150 countries on the aggregate LPI, and 14th out of 18 MENA countries, with its lowest scores in infrastructure (2.00 out of 7.00) and customs (2.08). Among its textiles and apparel competitors it also ranks second to last, topping only Nicaragua. This indicates that market opening measures need to be complemented by policy reforms that address the many and varied obstacles to doing business in Egypt.

Increasing Customs Efficiency and Port Security One important component of international trade is having well-functioning ports and efficient and effective customs systems. As part of the 2004 reforms, Egypt modernized its port facilities, including deepening quays to receive larger vessels; redesigning storage areas and associated infrastructure; installing new fiber optic cables for data transmission and a more automated cargo management system; and renovating the passenger/ cruise ship terminal. These have reportedly cut customs clearance times significantly. Egypt’s Ministry of Finance also committed to a comprehensive program to reform the customs system, including implementing the WTO Customs Valuation Agreement. In January 2008 Egypt acceded to the International Convention on the Simplification and Harmonization of Customs Procedures (revised Kyoto Convention). There remains much room for improvement. The World Bank’s Enterprise Surveys indicate that 24 percent of firms in Egypt identify customs and trade regulations as a major constraint (table 3.10) compared with 17 percent worldwide. In the MENA region, Egypt performs relatively well in this aspect, ranking fourth, after Jordan, Morocco, and Oman. Among its textile and apparel competitors, however, Egypt ranks third to last. 28. World Bank, Logistics Performance Index, 2007, www.worldbank.org (accessed on November 8, 2009).

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

73

74

© Peterson Institute for International Economics | www.piie.com

Table 3.9

Logistics Performance Index (LPI), 2007

Rank

Country

LPI

Customs

Infrastructure

4 33 36 41 44 46 48 52 60 64 67 78 94 97 98 112 140 145

Middle East and North Africa Israel Bahrain Saudi Arabia Kuwait Qatar Oman Jordan Tunisia Sudan Mauritania Iran Morocco Egypt Lebanon Yemen Algeria Djibouti

2.42 3.21 3.15 3.02 2.99 2.98 2.92 2.89 2.76 2.71 2.63 2.51 2.38 2.37 2.37 2.29 2.06 1.94

2.24 2.73 3.40 2.72 2.50 2.44 2.71 2.62 2.83 2.36 2.40 2.50 2.20 2.08 2.17 2.18 1.60 1.64

2.27 3.00 3.40 2.95 2.83 2.63 2.86 2.62 2.83 2.36 2.20 2.44 2.33 2.00 2.14 2.08 1.83 1.92

International Logistics Tracking Domestic shipments competence and tracing logistics costs Timeliness

2.44 3.27 3.33 2.93 2.60 3.00 2.57 3.08 2.86 2.67 2.60 2.59 2.75 2.33 2.50 2.20 2.00 2.00

2.33 3.23 2.75 2.88 3.00 3.00 2.67 3.00 2.43 2.83 2.70 2.69 2.13 2.38 2.40 2.22 1.92 2.00

2.35 3.46 3.00 3.02 3.33 3.17 2.80 2.85 2.83 2.92 2.80 2.00 2.00 2.62 2.33 2.30 2.27 1.82

2.95 2.17 2.25 2.76 2.40 3.00 3.25 2.92 3.20 3.00 3.11 2.93 2.38 2.83 3.40 2.67 3.17 2.80

2.88 3.58 3.00 3.65 3.75 3.67 4.00 3.17 2.80 3.17 3.10 2.80 2.86 2.85 2.67 2.78 2.82 2.30

Top 20 developing-country US apparel suppliers

© Peterson Institute for International Economics | www.piie.com

30 31 39 43 52 53 56 59 65 66 68 75 80 81 87 92 96 97 122

China Thailand India Indonesia Jordan Vietnam Mexico Peru Philippines El Salvador Pakistan Guatemala Honduras Cambodia Bangladesh Sri Lanka Dominican Republic Egypt Nicaragua

3.32 3.31 3.07 3.01 2.89 2.89 2.87 2.77 2.69 2.66 2.62 2.53 2.50 2.50 2.47 2.40 2.38 2.37 2.21

2.99 3.03 2.69 2.73 2.62 2.89 2.50 2.68 2.64 2.38 2.41 2.27 2.48 2.19 2.00 2.25 2.33 2.08 2.14

3.20 3.16 2.90 2.83 2.62 2.50 2.68 2.57 2.26 2.42 2.37 2.13 2.32 2.30 2.29 2.13 2.18 2.00 1.86

3.31 3.24 3.08 3.05 3.08 3.00 2.91 2.91 2.77 2.78 2.72 2.62 2.48 2.47 2.46 2.31 2.34 2.33 2.18

3.40 3.31 3.27 2.90 3.00 2.80 2.80 2.73 2.65 2.53 2.71 2.50 2.41 2.47 2.33 2.45 2.25 2.38 2.41

Note: The table shows the developing countries in the top 20 grouping; Italy, the only advanced country, is excluded. Source: World Bank, Trade Logistics and Facilitation, www.worldbank.org/lpi.

3.37 3.25 3.03 3.30 2.85 2.90 2.96 2.70 2.65 2.82 2.57 2.43 2.41 2.53 2.46 2.58 2.28 2.62 2.19

2.97 3.21 3.08 2.84 2.92 3.30 2.79 3.00 3.27 2.94 2.86 3.00 2.88 3.21 3.08 3.08 3.05 2.83 3.04

3.68 3.91 3.47 3.28 3.17 3.22 3.40 3.00 3.14 3.06 2.93 3.23 2.88 3.05 3.33 2.69 2.89 2.85 2.50

75

Table 3.10

Customs constraints

Country World MENA countries Jordan (2006) Morocco (2007) Oman (2003) Egypt (2007) Mauritania (2006) Syria (2003) West Bank and Gaza (2006) Algeria (2007) Lebanon (2006)

Average time to clear direct exports through customs (days)

Average time to clear imports from customs (days)

Percent of firms that use material inputs and/or supplies of foreign origin

Percent of firms that identify customs & trade regulations as a major constraint

6.1 6.3 3.8 1.8 4.2 6.4 3.9 6.3

10.1 11.4 8.5 3.8 8.0 8.7 6.8 15.8

60.8 67.3 63.1 92.4 51.6 49.2 66.8 59.2

16.9 26.4 13.8 14.3 20.7 23.5 25.9 28.4

6.0 14.1 7.4

20.7 16.8 9.0

76.4 71.8 75.2

30.9 36.1 43.1

Top 20 developing-country US apparel suppliers Mexico (2006) Vietnam (2005) Honduras (2006) Pakistan (2007) Nicaragua (2006) Cambodia (2007) Peru (2006) Jordan (2006) Sri Lanka (2004) India (2006) Indonesia (2003) Guatemala (2006) China (2003) Dominican Republic (2005) Philippines (2003) Egypt (2007) El Salvador (2006) Thailand (2006)

5.4 4.9 6.0 4.8 5.0 1.5 5.6 3.8 7.6 15.6 4.1 4.5 6.7

9.3 5.5 10.3 7.3 11.2 n.a. 12.5 8.5 3.8 15.2 5.6 20.6 8.4

24.4 42.2 55.4 17.4 62.1 100.0 74.3 63.1 54.2 11.8 n.a. 65.3 n.a.

0.4 4.2 4.4 5.9 12.4 12.9 12.9 13.8 14.7 14.9 15.7 17.7 19.3

11.4 6.6 6.4 2.6 1.5

12.4 9.1 8.7 12.9 5.3

37.1 53.3 49.2 75.0 40.1

19.6 21.7 23.5 23.6 32.3

MENA = Middle East and North Africa n.a. = not available Note: Data are for year in parentheses. Data have been sorted by the percent of firms identifying customs complaints as a major trade restraint. The bottom part of the table shows the developing countries in the top 20 grouping; Italy, the only advanced country, is excluded. Source: World Bank Enterprise Surveys, www.enterprisesurveys.org.

76

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Egypt’s ports perform relatively well in clearing imports through customs, at a reported 8.7 days, compared with the world average of 10.1 days (table 3.10) and a MENA average of 11.4 days. However, export clearance times are relatively high: 6.4 days compared with 3.8 days in Jordan or 1.8 days in Morocco. Among its textile and apparel competitors, Egypt falls in the lower third, between Honduras (6.0) and the Philippines (6.6). This time delay in sending out exports could be a liability to Egypt’s textile and apparel industry, particularly in a just-in-time inventory environment. Handling services fees are also relatively high, reaching 20 percent of freight costs compared with the best practice rates of 8 to 10 percent (Ghoneim and Helmy 2007). In many cases, transportation costs of shipping goods from Egypt to the United States can be a greater barrier to the US market than are the relatively low US tariffs. Recent literature has emphasized the importance of transportation costs and infrastructure in export success. Some studies link improvements in this area to increases in per capita income. Ximena Clark, David Dollar, and Alejandro Micco (2004), for example, estimate that an inefficient port has the same effect as increasing geographical distance between markets by 60 percent. Improving port efficiency from the 25th to the 75th percentile reduces shipping costs by 12 percent.29 While geography presents a fixed cost, other elements of transportation costs can be mitigated. Helping Egypt overcome these barriers would greatly enhance its access to the US market and enable it to compete with other countries that have been gaining market share in goods such as textiles at Egypt’s expense. Technical cooperation aimed at further port modernization could help to decrease shipping time and cut transportation costs, allowing Egyptian industries to take better advantage of Egypt’s strategic geographic location. Increased port efficiency would also help Egypt further exploit its regional hub status and advance regional economic integration. These steps would make Egyptian and, by extension, Middle Eastern goods more competitive. Improving the efficiency of this sector would have significant positive spillover effects on trade and investment and thus would help boost productivity and job creation. Technical support from the United States to implement the Customs Valuation Agreement could help Egypt lower the cost of doing business and increase the flow of trade between Egypt and the United States. This could be carried out in parallel with the WTO’s trade facilitation program and as an initiative under Aid for Trade. Currently Egypt’s Ministry of Fi29. For example, Nuno Limão and Anthony J. Venables (1999) show that increasing transportation costs by 10 percent reduces trade volumes by 20 percent; Steven Radelet and Jeffrey Sachs (1998) show that shipping costs reduce the growth rate of manufactured exports and per capita GDP (doubling the shipping cost is associated with a reduction of more than one half of one percentage point per year).

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

77

nance is working with a six-year, $30 million customs reform project from USAID and with other donors, including the European Union, to begin work on customs reform issues. Additional assistance to continue and sustain these efforts would be a benefit to Egypt as well as US importers, exporters, and investors in Egypt. The US Trade and Development Agency (USTDA), for example, has a global customs initiative designed to help lower- and middle-income countries modernize and improve their customs facilities. In addition to efficiency challenges, Egypt faces increasing demands on its customs resources. Like many developing countries, Egypt needs to prepare its ports to meet the additional security requirements of the post9/11 world. In particular, new US security programs could make it more difficult and costly to ship goods from Egyptian ports to the US market. Since 2001, the United States has implemented a number of security measures: In addition to the tighter shipping security measures in the Trade Act of 2002, these include the 24-Hour Advance Manifest Rule, the Container Security Initiative (CSI), and the Customs-Trade Partnership against Terrorism (C-TPAT). The CSI was developed by the US Bureau of Customs and Border Protection (CBP) in the aftermath of the terrorist attacks of 2001. Through CSI, CBP officials work with host customs administrations to establish security criteria for identifying high-risk containers. Egypt is in the implementation phase, having signed a Declaration of Principles in June 2006. The Port of Alexandria became operational as a CSI port in September 2007. The CSI requires 100 percent scanning by 2012, though this requirement is likely to be modified and the deadline pushed back for practical reasons.30

Implementation of Intellectual Property Rights It is difficult to imagine a trade and investment package or partnership with the United States that does not address intellectual property rights, long a US trade policy priority.31 US companies have cited ineffective enforcement of intellectual property rights as a disincentive to doing business in the Egyptian market.32 The USTR Trade Policy Agenda for 2007 30. In her confirmation hearing, Secretary of Homeland Security Janet Napolitano recognized the difficulty of achieving that goal (Jorina Fontelera, “Homeland Security to Miss Cargo Scanning Deadline,” Industrial Market Trends, March 4, 2009). 31. In early 2005, for example, the Pharmaceutical Research and Manufacturers of America (PhRMA) sent a letter to Deputy Secretary of State Robert Zoellick demanding action in response to an announcement by Egyptian Minister of Health and Population Mohammed Awad Tagedin that the government was granting domestic market approval to several hundred generic versions of patented drugs. 32. For example, after the passage of a new, WTO-consistent intellectual property rights law, US pharmaceutical company Pfizer gained permission to market its drug Viagra in Egypt.

78

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Figure 3.2    Intellectual property protection in MENA countries, 2009 United Arab Emirates Bahrain Oman Jordan Saudi Arabia Qatar Tunisia Israel Kuwait Egypt Syria Libya Morocco Algeria Mauritania

5.57 5.08 5.04 4.74 4.64 4.52 4.04 4.03 4.01 3.67 3.67 3.18 3.10 2.63 2.40

MENA = Middle East and North Africa Note: 1 = very weak; 7 = very strong Source: World Economic Forum, Global Competitiveness Report 2009/2010, www.weforum.org.

praised Egypt for recent reforms in this area but mentioned ongoing US concerns with its intellectual property rights regime.33 Cooperation on intellectual property rights could be beneficial to both the United States and Egypt. The World Economic Forum’s Global Competitiveness Report 2009/2010 lists intellectual property protection as an area of competitive disadvantage for Egypt. Egypt ranks 58th out of 133 countries in intellectual property rights protection. In the MENA region, Egypt is in the bottom half in terms of its performance (see figure 3.2). Under the law, generic versions of the drug should have been prohibited from entering the market for five years. However, two months after Viagra was introduced, the Egyptian Ministry of Health authorized a dozen Egyptian companies to produce generic versions of the drug at a fraction of the cost of the patented Viagra. Stories such as this one, reported in the New York Times, may scare off investors who otherwise might be attracted to Egypt’s large consumer base and prime location as a springboard to other Middle Eastern consumers. 33. “Despite joint efforts to address issues affecting U.S. companies, Egypt’s intellectual property regime remained an area of concern for the United States in 2006. In April 2006, Egypt was maintained on the Special 301 Priority Watch List due to marketing approvals granted for locally produced copies of patented United States pharmaceutical products, as well as deficiencies in Egypt’s copyright enforcement regime, judicial system and trademark enforcement. The Egyptian Government in 2006 took the long-awaited step of expanding the enforcement role of the Ministry of Communications and Information Technology, a measure that has the potential to improve protection for U.S. copyrights. The United States will continue to look for Egypt to address intellectual property issues that are important for continued economic development and the expansion of the U.S.-Egypt trade relationship” (US Trade Representative, 2007 Trade Policy Agenda and 2006 Annual Report, www.ustr.gov).

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

79

Egypt undertook a reform of its intellectual property system in 2002, with new intellectual property legislation covering all major areas of the TRIPS agreement. Egypt’s 2002 Intellectual Property Law No. 82 provides protection for most forms of intellectual property. The final implementing regulations for this new law were issued on April 14, 2005. The law prohibits limiting local firms from modifying technology and more controversially stipulates that disputes in commercial contracts involving technology transfer between foreign and domestic firms may be heard only before Egyptian courts. Implementing legislation for this law was completed in 2005. The TRIPS agreement came into full effect in Egypt on January 1, 2005 at the end of a five-year transition period that was used to allow the nation to bring legislation and practice in line with international intellectual property norms. In 2004 Egypt was placed on the US Priority Watch List for “unauthorized marketing approvals granted for patent-infringing pharmaceutical products, deficiencies in Egypt’s IPR enforcement regimes for copyrights and trademarks and concerns about its judicial authority.” However, in 2008 Egypt was moved from the Priority Watch List to the Watch List in recognition of improvements in pharmaceutical intellectual property protection (USTR 2008).34 One can expect the situation to continue to improve: In its FTA with the European Union, Egypt is bound by a clause requiring accession to a number of international intellectual property rights agreements. This was done with a view to strengthening new domestic intellectual property legislation. Stronger intellectual property enforcement is critical for Egypt’s development of its IT sector and building up its software industry. US assistance in the difficult tasks of implementing and strengthening enforcement of Egypt’s new intellectual property laws and of training people to do so could be extremely significant. Within the context of its Border Measures for the Protection of Intellectual Property Rights Instructions No. 770 of 2005, Egypt has already initiated a program to train customs officials, working closely with the private sector (for example, Egyptian officials signed a memorandum of understanding with Nestlé in December 2006 to share expertise on identifying counterfeit goods).35 .

34. In April 2006 Egypt was maintained on the Special 301 Priority Watch List due to marketing approvals granted for locally produced copies of patented US pharmaceutical products, as well as deficiencies in Egypt’s copyright enforcement regime, judicial system, and trademark enforcement. The Egyptian government in 2006 expanded the enforcement role of the Ministry of Communications and Information Technology, a measure that was met with approval in the United States (US Trade Representative, 2007 Trade Policy Agenda and 2006 Annual Report, www.ustr.gov). 35. “Egyptian Customs Authority and Nestlé Sign MOU to Protect Intellectual Property Rights,” Business Intelligence—Middle East, December 11, 2006.

80

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 3.11

Transparency indicators Percent of firms Percent expected to of firms make informal expected payment to give gifts to public to get an officials (to get operating things done) license

Country

All countries MENA countries Oman (2003) Mauritania (2006) Morocco (2007) Jordan (2006) Syria (2003) Egypt (2007) Algeria (2007) West Bank and Gaza (2006) Lebanon (2006)

Percent of firms expected to give gifts in meetings with tax officials

Percent of firms expected to give gifts to secure a government contract

Percent of firms identifying corruption as a major constraint

30 29 33 82 13 18 n.a 7 65

16 16 n.a. 33 0 3 68 14 7

18 19 n.a. 48 11 1 69 14 15

31 31 n.a. 76 6 6 n.a. 92 41

37 49 12 17 27 41 58 59 64

13 51

2 17

3 24

7 33

67 67

MENA = Middle East and North Africa n.a. = not available Note: Data are for year in parentheses. Source: World Bank Enterprise Surveys, www.enterprisesurveys.org.

Enhancing Transparency and Addressing Corruption In the Global Competitiveness Report 2009/2010, Egypt ranks 57th in the world and 7th in the MENA region in terms of transparency in government policymaking. Matthias Helble, Ben Shepherd, and John Wilson (2007) cite a number of problems that need to be addressed to increase trade transparency, including reducing document requirements for import/export transactions; reducing the number of border agencies with which firms must interact; removing “hidden” trade barriers; and limiting unofficial payments. According to the World Bank’s Enterprise Surveys, 59 percent of Egyptian firms identify corruption as a major constraint to doing business, with 92 percent indicating that they expect to give gifts to secure a government contract (table 3.11). The news is not all bad: In some indicators, Egypt far outperforms the regional average. Only 14 percent of firms expect to give gifts to obtain a license and only 7 percent—far lower than the MENA average of 29 percent—state that they are expected to make an informal payment to public officials to get things done. Increasing trans-

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

81

parency reduces the opportunity for such abuses and therefore reduces the cost of doing business.

Cooperation to Enhance Egypt’s Trade Capacity: Infrastructure, Education, and Beyond Increasing Egypt’s preferential access to the US market and bolstering trade in services are both steps toward enhancing their economic relationship. Improvements in trade logistics can help Egyptian firms more efficiently sell their goods. For sustained results, however, these measures must be supplemented by regulatory reforms and improvements in Egyptian physical and human capital. By fostering a more efficient regulatory environment, a well-functioning infrastructure, and a trained workforce, the US-Egypt Strategic Economic Partnership can help Egypt create jobs, boost investment, and work toward sustainable development. Egypt has long been a recipient of US development assistance. In the 1970s aid was predominantly directed toward infrastructure, particularly restoring and reopening the Suez Canal, a main source of foreign exchange. Programs in the 1980s concentrated on helping Egypt’s market reform efforts, including supporting Egypt’s privatization efforts. Programs in the 1990s focused on increasing exports and expanding access to healthcare services, reducing air pollution, and strengthening Egypt’s nongovernmental organizations. In the 2000s, as trade and investment have increased in importance and aid has declined, development assistance programs have been aimed at promoting trade and attracting investment, as well as increasing the education level and productivity of the Egyptian workforce. The US-Egypt Strategic Economic Partnership should deploy economic assistance to strengthen the foundations of Egypt’s trade and investment environment. Cooperation in strengthening Egypt’s physical and legal infrastructure and improving the quality of Egypt’s workforce will benefit both partners. Tangible results would include enhanced productivity for Egyptian firms and opportunities for Egyptian workers. They would also include better business opportunities for US firms that invest in the Egyptian market. Strategically, a stronger and more stable economy can help Egypt enhance its regional role and become a stronger partner in the region. Finally, it will make Egypt a stronger partner in confronting the shared challenge of climate change. Infrastructure and human capital improvements require substantial resource commitments and a robust funding source. One potential source for such support is the Millennium Challenge Account (MCA). Established in 2002, the MCA is geared toward developing countries that have undertaken reforms that will lead to sound policies and institutions. The underlying assumption of MCA assistance is that aid is most effective in 82

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

countries that have already undertaken market-oriented policy reforms.36 Given its track record since 2004, Egypt meets this criterion. The MCA was approved by the US Congress in January 2004 (PL 108199, Division D), and a US government corporation, the Millennium Challenge Corporation (MCC), was formed to administer its funds.37 The participation of the secretary of state, the secretary of Treasury, and the US trade representative on the board signal the foreign policy and economic priorities accorded to this institution. In announcing the program, President Bush stated that “When nations refuse to enact sound policies, progress against poverty is nearly impossible. In these situations, more aid money can actually be counterproductive, because it subsidizes bad policies, delays reform, and crowds out private investment. . . . Sound economic policies unleash the enterprise and creativity necessary for development. So we will reward nations that have more open markets and sustainable budget policies, nations where people can start and operate a small business without running the gauntlets of bureaucracy and bribery.”38

Since 2004, the Egyptian government has implemented wide-reaching economic reforms that have improved Egypt’s performance on a wide range of business indicators. By granting Egypt MCC funds, the United States can help Egypt to not only prevent the erosion of those reforms but also build upon them. To be eligible for MCC funding, countries must qualify on the basis of annual per capita income level. There are two groups: low-income countries, with per capita income below $1,735, and lower-middle-income countries with per capita income between $1,736 and $3,595. Egypt, with a GNI per capita of $1,580, qualifies as a low-income country.39 Countries are then scored on 17 indicators. MCA funds are granted to countries that perform well in each of three baskets: “ruling justly,” “investing in their people,” and “encouraging economic freedom.”40 To qualify, countries 36. This assumption is largely based on the findings in Burnside and Dollar (2000), which finds that aid has a positive effect on economic growth in countries that have adopted good fiscal, monetary, and trade policies. Easterly (2003) and Easterly, Levine, and Roodman (2004) test this result by expanding the dataset and respecifying variables and find that the result does not always pertain. 37. The MCC’s Board of Directors is chaired by the secretary of state, with the Treasury secretary as the vice chair. Other board members include the US trade representative, the USAID administrator, the MCC CEO, and four public members appointed by the president. The president requested an initial commitment to increase aid by $5 billion over three budget cycles. 38. White House, President Proposes $5 Billion Plan to Help Developing Nations, remarks by President George W. Bush at the Inter-American Development Bank, March 14, 2002. 39. Millennium Challenge Corporation, Selection Criteria, available on the MCC website, www.mcc.gov (accessed on November 8, 2009). 40. White House, President Proposes $5 Billion Plan to Help Developing Nations.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

83

must score above the median on at least half of the indicators in each basket as well as in an indicator on “control of corruption.” The latter indicator is a pass/fail indicator: No country can qualify if it does not score above the median on “control of corruption.” A country can lose its eligibility by performing substantially below average on any indicator (i.e., the bottom 25th percentile) and not taking appropriate measures to improve this score or by falling below the median on the “control of corruption” indicator. According to the MCC, the 17 indicators are developed by third parties, using analytically rigorous methodologies and sound data that are consistent and comparable across a large set of countries. They also represent policies that can produce results within two to three years. The indicators used in 2009 are listed in table 3.12, along with Egypt’s scores on each. In the “ruling justly” category, Freedom House data are used to assess performance on political rights and civil liberties indicators. The remaining four indicators use World Bank Institute (WBI) Worldwide Governance Indicators data. In the “investing in people” category, health indicators are based on World Health Organization (WHO) data, education data come from UNESCO, and the environmental indicator uses information gathered by the Center for International Earth Science Information Network (CIESIN) and the Yale Center for Environmental Law and Policy (YCELP).41 The “economic freedom” category uses the World Bank and International Finance Corporation’s (IFC) Doing Business data for business startups, the International Monetary Fund’s (IMF) World Economic Outlook data for inflation, and the trade policy ranking from the Heritage Foundation. “Regulatory quality” data are from the WBI, fiscal policy from national sources, and land rights and access from the UN’s International Fund for Agricultural Development (IFAD). The “control of corruption” indicator is assessed using Transparency International data. While the indicators are a main means for determining which countries qualify for MCA funds, the board also considers information regarding anticorruption measures, commitment to enhancing democracy, and other factors affecting where MCC funds would be most likely to reduce poverty and generate economic growth.42 Availability of MCC funds is also taken into account. Egypt has consistently met the indicators test every year since 2006 (table 3.12), although it falls substantially below the median on three indicators (political rights, trade, and fiscal policy). In its 2008 evaluation,

41. Yale Center for Environmental Law and Policy and Columbia University, Center for International Earth Science Information Network, Environmental Performance Index, http://epi.yale.edu. 42. Millennium Challenge Corporation, Report on the Selection of Eligible Countries for Fiscal Year 2008, December 2007.

84

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 3.12

Egypt’s scores on MCC indicators, 2005–08 (percentile in parentheses)

Indicator Ruling justly Political rights (Freedom House) Civil liberties (Freedom House) Control of corruption (World Bank Institute) Government effectiveness (World Bank Institute) Rule of law (World Bank Institute) Voice and accountability (World Bank Institute) Investing in people Immunization rates (World Health Organization) Public expenditure on health (World Health Organization) Public expenditure on primary education (UNESCO) Girls’ primary education completion rate (UNESCO) Natural resource management (CIESIN/YCELP)a Encouraging economic freedom Regulatory quality (World Bank Institute) Land rights and access (IFAD/IFC)a Cost of starting a business (World Bank/IFC)b Business start-up (World Bank/IFC) Days to start a business (World Bank/IFC)b Inflation (IMF World Economic Outlook) Fiscal policy (IMF/national sources)

2005

2006

2007

2008

2009

6 (17–44) 6 (9–23)

6 (17–40) 5 (22–47)

8 (18) 22 (35)

7 (19) 20 (26)

7 (18) 18 (21)

0.53 (82)

0.64 (90)

0.40 (81)

0.36 (81)

0.20 (75)

0.45 (81) 0.87 (94)

0.61 (90) 0.83 (96)

0.54 (83) 0.86 (95)

0.45 (77) 0.88 (93)

0.38 (78) 0.72 (93)

–0.18 (43)

–.36 (40) –0.43 (37) –0.38 (35) –0.61 (22)

98 (93)

97 (88)

98 (91)

98 (95)

97.5 (93)

1.8 (55)

1.79 (49)

2.23 (51)

2.34 (53)

2.59 (57)

n.a.

n.a.

4.08 (89)

n.a.

n.a.

89.4 (77)

89.6 (77)

92.8 (82)

93.7 (80)

95.9 (79)

81.74 (92) 83.99 (94)

0.23 (70)

0.02 (53)

0.28 (73)

44.4 (95) 104.9 (44)

68.8 (58)

0.25 (70) 0.41 (87) 0.815 (94) 0.875 (100)

0.982 (93) 0.975 (93) 43 (57)

34 (78)

19 (93)

11.33 (21) 4.31 (74) 11.40 (28) –2.39 (67) –2.47 (63) –8.78 (5)

4.20 (77) –8.52 (4)

11.0 (24) –8.4 (6)

n.a. = not available. a. Natural resource management and land rights indicators were adopted in 2007 and first used in the 2008 scorecards. b. For FY2005 “cost of starting a business” was “credit rating.” After 2007 “cost of starting a business” and “days to start a business” were merged into “business start-up.” Note: For each category countries receive a score according to criteria set out by the source indicated in parentheses. For example, Freedom House awards each country a numerical rating—on a scale of 1 to 7—for political rights and an analogous rating for civil liberties; a rating of 1 indicates the highest degree of freedom and 7 the lowest level of freedom. The World Bank Institute’s Worldwide Governance Indicators are expressed as an index based upon surveys. The WHO data set out compliance and expenditure rates, etc. The countries are ranked, but their eligibility depends on their percentile ratings (which are consistent and comparable). Shaded areas indicate categories in which Egypt meets the MCC criteria. Source: Millennium Challenge Corporation, www.mcc.gov.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

85

Egypt qualified in 3 out of 6 of the “ruling justly” indicators, 4 out of 5 of the “investing in people” indicators, and 4 out of 6 of the “economic freedom” indicators. In terms of its “economic freedom” scores, Egypt’s low score on the trade indicator is surprising. The Heritage Foundation measures trade as a composite of tariff and nontariff barriers, with tariffs calculated as a function of the average trade-weighted tariff adjusted for the maximum and minimum tariff rates and a penalty for nontariff barriers, the size of which is determined according to qualitative and quantitative information. Given that Egypt has moved up 11 percentage points in just one year, it is unlikely that, given the trade reforms undertaken, Egypt will not also qualify on this indicator in the next round, thus having an even stronger case for being selected as an MCA country. However, despite qualifying in 2009, 2008, 2007, and 2006, Egypt has not been selected as an MCAeligible country. Of the initial countries that were selected for FY2004 funding (out of a list of 63 candidates), 10 met the stated criteria.43 For 10 other countries, the board used discretion in its decision. For example, if a country scored poorly in an indicator, the board would take into account recent progress if policy reforms had been put in place. Curt Tarnoff (2007) cites the example of Cape Verde, which scored low on trade policy but was selected anyway in FY2006 due to progress evidenced by joining the WTO and reducing reliance on trade taxes. Being selected as an MCC country would not only provide additional sources of funding but also send a signal that Egypt has satisfactorily implemented reforms in a manner that is conducive to growth and development. Table 3.13 lists the projects that have been approved in participating countries. Many of the MCC projects are in exactly the areas in which Egypt requires improvement: infrastructure, education, and private-sector development.

Shoring Up Egypt’s Physical Infrastructure Egypt currently ranks 56th out of 134 countries on the Global Competitiveness Report 2009/2010 infrastructure index and 88th in health and primary education. These figures are telling. An adequate supply of infrastructure services is increasingly recognized as an essential component of the “behind the border” trade facilitation agenda aimed at increasing productivity and enhancing economic growth.44 Adequate infrastructure services

43. As of December 2007, countries eligible for MCA funding are Armenia, Benin, Bolivia, Burkina Faso, El Salvador, Georgia, Ghana, Honduras, Jordan, Lesotho, Madagascar, Mali, Moldova, Mongolia, Morocco, Mozambique, Namibia, Nicaragua, Senegal, Tanzania, Timor-Leste, Ukraine, and Vanuatu.

86

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 3.13 Country

Millennium Challenge Compact countries and projects Project

Country

Armenia

Rural road rehabilitation Improved irrigation Engaging civil society Total: $236 million

Benin

Increasing access to land through more secure and Mali useful land tenure Expanding access to financial services through grants given to micro, small, and medium Mongolia enterprises Providing access to justice by bringing courts closer to rural populations Improving access to markets by eliminating physical and procedural constraints currently Morocco hindering the flow of goods through the Port of Cotonou. Total: $307 million

Cape Verde

El Salvador

Watershed management and agricultural support Infrastructure Private-sector development Total: $110 million Education Public services Agricultural production Rural business development Transportation infrastructure Total: $461 million

Georgia

Regional infrastructure rehabilitation Enterprise development Total: $295 million

Ghana

Raising farmer incomes through private sector-led agribusiness development Total: $547 million

Lesotho

Improving provision of water supplies for industrial and domestic use Improving health outcomes Private-sector development Total: $364 million

Project

Madagascar Raising incomes by bringing the rural population from subsistence agriculture to a market economy Total: $110 million Increasing the productivity of the agriculture sector and regional enterprises Total: $461 million Improving the efficiency and capacity of the rail network Securing and registering property land titles Vocational education Health Total: $285 million Fruit tree productivity Small-scale fisheries Artisan and Fez-Medina project Financial services Enterprise Support Fund Total: $698 million

Mozambique Water and sanitation Transportation Land tenure services Farmer income support Total: $507 million Nicaragua

Reducing transportation costs Improving access to markets Strengthening property rights Increasing investment Raising incomes for farms and rural businesses Total: $175 million

Vanuatu

Reconstruction of priority transport infrastructure Institutional strengthening Total: $66 million

Source: Millennium Challenge Corporation, www.mcc.gov.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

87

have been associated with helping reduce income inequality (Estache, Foster, and Wodon 2002; World Bank 2003). Improving Egypt’s performance in infrastructure and in human capital will not only assist the domestic economy but also create new trade and investment opportunities. In Egypt, as in many developing countries, fiscal pressures have limited public infrastructure investment, and the gap has not been closed by private-sector participation. Table 3.14 shows Egypt’s performance on a number of infrastructure-related indicators, as set out in the Global Competitiveness Report 2009/2010, relative to that of other MENA countries. In terms of overall infrastructure, Egypt ranks in the bottom half of the MENA countries. An indicator in which Egypt performs particularly poorly is the quality of roads, where it ranks 73rd overall, and 12th out of 15 MENA countries; its port infrastructure ranks in the bottom half. Compared with the countries that compete with Egypt in the US textile and apparel market, its relative position is somewhat stronger; here, Egypt places fourth in overall infrastructure. In terms of the quality of port infrastructure, Egypt performs relatively well against its textile competitors, coming in fifth. In road quality, Egypt ranks in the middle of this group. Egypt is served by a network of over 64,000 kilometers (39,800 miles) of primary and secondary roads, of which 76 percent are paved (compared with 70 percent for the MENA region as a whole). Egypt’s ground transportation sector was last overhauled in the 1980s. Strong population and urban growth has increased the demand on the transportation network. With growing numbers of licensed automobiles in the 1990s, the road system, especially in urban areas, has become highly congested.45 Cairo’s metro system, which opened in 1987, is one of the most heavily used systems in the world, carrying some 1.4 million passengers a day. The World Economic Forum’s Travel & Tourism Competitiveness Report 2007 finds that underdeveloped domestic air and land transportation networks are hindering the growth of the tourism and travel industry, as tourists tend to stay in one city for the duration of their visit, rather than visiting multiple cities. Tourism is an important sector for Egypt, one of only two Arab countries to rank in the UN World Tourism Organization’s 44. A number of studies illustrate the importance of infrastructure to development. Aschauer (1989) shows that the stock of public infrastructure capital is a significant determinant of total factor productivity; these results are reinforced by Canning (1998) and Demetriades and Mamuneas (2000). Röller and Waverman (2001) find significant positive effects on output of telecommunications infrastructure in industrial countries; Calderón and Servén (2003a, 2003b) find similar effects for Latin America. Calderón and Servén (2004) find, using a large panel dataset, that the stock of infrastructure assets positively affect growth and that income inequality declines with higher infrastructure quantity and quality. 45. According to the Economist Intelligence Unit, Country Profile 2006: Egypt, “Egypt reports the highest incidence of traffic fatalities in the world: 44.1 deaths per 100,000 kilometers driven in 1994.”

88

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 3.14

Infrastructure indicators, 2009

Quality of overall infrastructure Country

Quality of roads

Rank Score Country

Quality of port infrastructure

Rank Score Country

Rank Score

Middle East and North African countries United Arab Emirates 11 Oman 22 Bahrain 26 Jordan 29 Saudi Arabia 32 Tunisia 35 Kuwait 44 Qatar 47 Israel 50 Egypt 56 Morocco 73 Syria 77 Algeria 100 Libya 108 Mauritania 116

6.08 5.62 5.43 5.22 5.17 5.12 4.71 4.57 4.50 4.39 3.74 3.60 3.06 2.88 2.76

United Arab Emirates 7 Oman 10 Bahrain 23 Kuwait 36 Saudi Arabia 38 Tunisia 39 Jordan 42 Qatar 44 Israel 47 Syria 68 Morocco 69 Egypt 73 Libya 81 Algeria 82 Mauritania 114

6.19 5.95 5.60 5.01 4.98 4.96 4.93 4.46 4.29 3.60 3.57 3.52 3.28 3.25 2.54

United Arab Emirates 7 Bahrain 17 Oman 32 Qatar 37 Tunisia 41 Saudi Arabia 46 Israel 51 Jordan 52 Egypt 57 Morocco 62 Kuwait 68 Mauritania 91 Syria 102 Libya 104 Algeria 118

6.24 5.55 5.19 4.99 4.87 4.72 4.59 4.51 4.32 4.24 4.11 3.47 3.26 3.25 2.90

Top 20 developing-country US apparel suppliers Jordan El Salvador Thailand Egypt Guatemala Sri Lanka China Honduras Mexico Dominican Republic Cambodia Pakistan India Indonesia Philippines Peru Vietnam Nicaragua Bangladesh

29 40 41 56 59 63 66 75 71 80 82 87 89 96 98 102 111 119 125

5.22 4.85 4.77 4.39 4.32 4.14 3.99 3.65 3.77 3.45 3.42 3.21 3.21 3.15 3.12 3.00 2.83 2.71 2.52

El Salvador Thailand Jordan China Guatemala Mexico Sri Lanka Pakistan Dominican Republic Egypt Honduras Cambodia India Peru Indonesia Bangladesh Nicaragua Vietnam Philippines

27 35 42 50 55 57 60 65 70 73 74 77 89 93 94 95 96 102 104

5.25 5.01 4.93 4.18 4.03 3.97 3.89 3.73 3.56 3.52 3.52 3.34 3.09 2.93 2.93 2.91 2.90 2.79 2.78

Honduras Sri Lanka Thailand Jordan Egypt Dominican Republic Guatemala China El Salvador Pakistan Mexico Cambodia India Indonesia Vietnam Philippines Bangladesh Nicaragua Peru

35 43 47 52 57 58 59 61 64 73 82 89 90 95 99 112 113 124 126

5.12 4.79 4.69 4.51 4.32 4.30 4.30 4.28 4.17 3.96 3.67 3.50 3.47 3.40 3.28 3.00 2.98 2.69 2.66

Note: The table shows the developing countries in the top 20 grouping; Italy, the only advanced country, is excluded. Source: World Economic Forum, Global Competitiveness Report 2009/2010, www.weforum.org.

list of the world’s top 25 tourism destinations. Tourism makes up about 3.5 percent of Egypt’s GDP and close to a third of nonoil investment. Upgrading and modernizing transportation-sector infrastructure is essential to Egypt’s regional and international competitiveness.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

89

Egypt also ranks relatively low in the region on the “technological readiness” indicator in the Global Competitiveness Report 2009/2010, which takes into account the availability of the latest technologies, firm-level technology absorption, FDI and technology transfer, and government procurement of advanced technology products. Here, Egypt is outranked by all MENA countries save Libya, Mauritania, Syria, and Algeria. These proxy indicators signify a lack of accessible high-tech infrastructure, due to either cost or quality. This indicates a need to step up Egypt’s technology infrastructure, adopt more forward-looking policies, and adopt a friendlier foreign investment environment to attract firms that will bring technology to the country. A related area that is ripe for modernization is the housing sector. This sector combines physical and legal infrastructure needs. Egypt is facing a severe affordable housing shortage. A growing, young, low-income population indicates that this situation will continue to worsen. Egypt’s population density has grown to 75 people per square kilometer (2006 data), up from 55 people per square kilometer in 1990 (World Bank, World Development Indicators). This understates the actual crowding problem: In cities, population density can reach up to 1,900 people per square kilometer, or 4,900 people per square mile.46 According to the Oxford Business Group (2009), population growth and low levels of low-income housing construction have created the need for 59 new cities, all of which will need a considerable amount of real estate. Egypt’s housing shortage stems from multiple sources, ranging from infrastructure constraints to regulatory issues to a lack of appropriate financing mechanisms. One factor limiting the development of a robust housing sector is the existence of barriers to competition in the construction industry. Introducing competition through the services trade agreement mentioned earlier would help increase efficiency and minimize roadblocks to construction of affordable houses. An additional issue is weak property rights, particularly the lack of proper titles to houses. The US Overseas Private Investment Corporation (OPIC), an agency that provides US investors with political risk insurance and loan guarantees, conducted a study of the Egyptian housing market in 2005 and found that over 90 percent of urban housing is without a formal title.47 Substantial barriers to registering land and other forms of property also present problems. The World Bank calculates that it generally takes 193 46. Steven Stanek, “Egypt ‘Greens’ Deserts to Stem Housing, Food Shortages,” National Geographic News, January 8, 2008, available at http://news.nationalgeographic.com. 47. The importance of property rights to economic development has been widely studied. The seminal work of Hernando De Soto (1989) shows the important multiplier effects that a formal property system can have on a well-functioning market. Clear property rights offer, among other things, greater assurance of protection of the value of the asset and greater availability of loans, due to the existence of collateral.

90

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

days and seven procedures to register a property, at a cost of nearly 6 percent of the property (World Bank 2007). Recent reforms—the creation of a “one-stop shop” for investment and a ceiling on property registration fees—have been put in place to mitigate this issue. Addressing it within the scope of the Strategic Economic Partnership would have positive effects for the Egyptian economy. A major additional obstacle in the housing market is the lack of efficient financing options. A mismatch currently exists in the middle class housing market: While there is a high demand for middle-class housing units, and units exist, many potential homeowners are unable to obtain financing to purchase the existing units. Improving the availability of housing finance would help influence savings, consumption, financial depth, employment, and government budgets (OPIC 2005, World Bank 2005). Thus, cooperation could take the form of various related initiatives: assistance in construction of new housing developments and of associated infrastructure, assistance in developing a legal framework that would strengthen the provision of property rights, and assistance in developing a system of financing to assist middle-class Egyptians to afford homes. Egypt currently derives about 6 percent of GDP from remittances, onethird of which originate in the United States. Cooperation between the United States and Egypt could include helping Egyptians use these remittances to begin to bolster the underdeveloped housing finance market.

Human Capital Development: Expanding Education and Gender Equality An educated workforce is an important source of productivity and an attractive inducement for foreign investment. Egypt scores poorly relative to other MENA countries in both primary and secondary education (table 3.15). In the quality of higher education indicator, Egypt scores very poorly, ranking 121 out of 134 countries worldwide and 12th out of 15 MENA countries. Compared with its top textile and apparel competitors, Egypt scores only seventh in primary education and third from bottom in higher education quality. Egypt fares much worse, however, in the indicator related to workforce quality. The World Bank’s 2007 Enterprise Surveys cited an “inadequately educated workforce” as the sixth main constraint to firm investment in Egypt, with a third of firms surveyed identifying labor skill level as a major constraint. In the indicator measuring the efficient use of talent, Egypt ranks fourth from bottom in the MENA region and dead last among the top textile and apparel exporters. Barriers to female employment are part of the problem. Egypt ranks third from the bottom among its textile and apparel competitors in the rate of female participation in the labor force (table 3.16) and sixth from MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

91

Table 3.15

Education indicators, 2009

Primary education Country

Quality of higher education

Rank Score Country

Efficient use of talent

Rank Score Country

Rank Score

Middle East and North African countries Qatar United Arab Emirates Tunisia Bahrain Israel Jordan Saudi Arabia Algeria Syria Egypt Morocco Kuwait Oman Mauritania Libya

5 16 21 38 50 54 76 78 80 86 89 102 115 122 127

China Sri Lanka Thailand Jordan Mexico Indonesia Vietnam Egypt Nicaragua Philippines Honduras India El Salvador Guatemala Peru Cambodia Bangladesh Dominican Republic Pakistan

42 44 53 54 68 74 81 86 90 91 95 100 101 104 107 113 119 125 128

5.93 5.49 5.38 5.01 4.73 4.66 4.34 4.29 4.23 4.15 4.09 3.91 3.54 3.10 2.74

Qatar United Arab Emirates Tunisia Bahrain Jordan Israel Oman Saudi Arabia Morocco Kuwait Syria Egypt Algeria Mauritania Libya

5 21 29 34 38 65 66 74 81 86 101 121 124 128 131

5.78 5.11 4.94 4.57 4.46 3.85 3.84 3.70 3.55 3.46 3.20 2.87 2.83 2.72 2.65

Israel Qatar United Arab Emirates Bahrain Kuwait Oman Saudi Arabia Mauritania Tunisia Morocco Jordan Egypt Algeria Syria Libya

17 23 38 78 81 86 102 111 113 127 128 130 131 132 133

4.98 4.85 4.60 4.05 3.96 3.89 3.67 3.58 3.54 2.99 2.95 2.79 2.77 2.58 2.49

13 27 31 46 54 70 71 82 88 89 94 97 106 115 123 124 128 129 130

5.10 4.80 4.74 4.50 4.37 4.17 4.16 3.95 3.88 3.87 3.81 3.74 3.61 3.48 3.27 3.22 2.95 2.88 2.79

Top 20 developing-country US apparel suppliers 4.97 4.88 4.66 4.66 4.48 4.35 4.21 4.15 4.04 4.03 4.01 3.95 3.94 3.89 3.82 3.60 3.32 2.97 2.48

India China Jordan Sri Lanka Indonesia Thailand Philippines Vietnam Pakistan Mexico El Salvador Guatemala Peru Honduras Nicaragua Cambodia Egypt Dominican Republic Bangladesh

33 37 38 48 49 51 62 69 87 97 100 104 107 114 117 118 121 126 127

4.58 4.52 4.46 4.20 4.18 4.12 3.87 3.77 3.44 3.30 3.22 3.09 3.07 2.95 2.94 2.92 2.87 2.81 2.75

China Vietnam Thailand Cambodia Indonesia Peru Dominican Republic Sri Lanka India El Salvador Guatemala Philippines Bangladesh Mexico Nicaragua Honduras Jordan Pakistan Egypt

Note: The table shows the developing countries in the top 20 grouping; Italy, the only advanced country, is excluded. Source: World Economic Forum, Global Competitiveness Report 2009/2010, www.weforum.org.

the bottom in the MENA region, which has the lowest female labor force participation rate in the world. Egypt clearly needs to boost women’s role in the workforce and improve their education opportunities. A number of empirical studies show that returns to women’s education are often greater than for men (Schultz 92

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Table 3.16

Gender equity in education indicators, 2009 Literacy rate for population age 15 and abovea (percent) Female participation in labor force

Country

Rank

Score

Female

Male

Gap between male and female

Middle East and North African countries Israel Mauritania Kuwait Algeria Qatar United Arab Emirates Bahrain Tunisia Oman Egypt Libya Morocco Syria Saudi Arabia Jordan

30 74 113 116 118 121 123 124 126 127 128 129 130 132 133

0.88 0.77 0.54 0.47 0.46 0.44 0.41 0.38 0.34 0.34 0.34 0.32 0.27 0.24 0.22

n.a. 48.0 93.1 66.4 90.4 n.a. 86.4 69.0 77.5 57.8 78.4 43.2 76.5 79.4 87.0

n.a. 63.0 95.2 84.3 93.8 n.a. 90.4 86.4 89.4 74.6 94.5 68.7 89.7 89.1 95.2

n.a. 15.0 2.0 17.8 3.4 n.a. 3.9 17.3 11.9 16.8 16.0 25.5 13.2 9.6 8.2

Top 20 developing-country US apparel suppliers Vietnam China Cambodia Thailand Dominican Republic Peru Bangladesh Philippines El Salvador Indonesia Sri Lanka Guatemala Mexico Honduras Nicaragua India Egypt Pakistan Jordan

14 20 28 53 63 73 95 99 101 104 105 112 114 119 120 122 127 131 133

0.92 0.91 0.88 0.82 0.80 0.77 0.69 0.62 0.61 0.58 0.58 0.54 0.53 0.46 0.45 0.42 0.34 0.25 0.22

n.a. 90.0 67.7 92.6 89.5 84.6 48.0 93.7 79.7 88.8 89.1 68.0 89.8 83.5 n.a. 54.5 57.8 39.6 87.0

n.a. 96.5 85.8 95.9 88.8 94.9 58.7 93.1 84.9 95.2 92.7 79.0 91.4 83.7 n.a. 76.9 74.6 67.7 95.2

n.a. 6.5 18.1 3.3 –0.7 10.2 10.6 –0.6 5.2 6.4 3.6 10.9 1.6 0.3 n.a. 22.4 16.8 28.0 8.2

n.a. = not available a. Data are for 2008 except Jordan, for which 2005 data are shown. Sources: World Economic Forum, Global Competitiveness Report 2009/2010, www.weforum.org; World Bank, World Development Indicators Database.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

93

2002, DFID 2007) and that increases in female education improve human development outcomes such as child survival, educational levels, and health. Andrew Morrison, Dhushyanth Raju, and Nistha Sinha (2007) show microeconomic evidence linking increases in gender equality to reductions in poverty and gains in productivity. The authors also find that economic growth appears to be positively correlated with gender equality. Developing countries with higher gender equality tend to have lower poverty rates.

Cooperation on Climate Change and the Environment An additional reason to include Egypt in the MCC is its strong performance on the natural resource management indicator—and its pressing needs in the areas of the environment and climate change. Egypt was one of the first Arab countries to participate in the multilateral efforts to address climate change, signing the UN Framework Convention on Climate Change in 1994 and the Kyoto Protocol in 1999. At the governmental level, Egypt formed an interministerial National Climate Change Committee in 1997 and the Egyptian Council on the Clean Development Mechanism. Both bodies are affiliated with the Ministry of State for Environmental Affairs and have representatives from other government agencies. Egypt has put into place a National Action Plan on Climate Change. Climate change poses challenges for both developed and developing countries. Egypt is highly vulnerable to global warming, with already scarce access to drinking water, high dependence on climate-sensitive agriculture, and a large proportion of its population and economic activity concentrated in the Nile delta. According to the World Bank, a 50 cm rise in the sea level—a predicted consequence of global warming—would displace more than 10 percent of Egypt’s population and cause $35 billion in losses of land, property, and infrastructure.48 Egypt is the third most vulnerable country in the world to climate change, surpassed only by Vietnam and Bangladesh. The United States and Egypt share common interests in securing a new global climate change pact that commits both developed and developing countries to long-term cooperation in substantially cutting greenhouse gas emissions. Similarly, Egypt and the United States should work together in the Doha Round of multilateral trade negotiations to eliminate duties on goods and services that can help reduce greenhouse gas emissions. As part of their economic partnership, Egypt and the United States could set up an investment fund related to climate change to assist Egyptians in meeting the costs of mitigation and adaptation measures. In that 48. World Bank, Adaptation to Climate Change in the Middle East and North Africa Region, available at http://web.worldbank.org (accessed on October 27, 2009).

94

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

regard, OPIC could play a useful role. OPIC has set up a Clean Energy Fund for the Middle East and Asia and provides $50 million in financing to the fund, which will invest in renewable energy projects. The fund invests in projects such as wind farms and geothermal production, as well as in companies that serve the renewable energy sectors. Since 1991, OPIC has committed nearly $3.2 billion to over 40 private equity funds, which have invested $4.2 billion on more than 300 private companies, mostly small and medium enterprises. In fall 2008, OPIC’s board of directors approved over $500 million in financing for new private equity funds designed to invest in clean and renewable energy (OPIC 2008). These funds could serve as a model for a US-Egypt clean energy fund, a component of the Strategic Economic Partnership.

MOVING FORWARD: OPTIONS TO ENHANCE ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

95

© Peterson Institute for International Economics | www.piie.com

4 Summing Up

The success of any US strategy in the Middle East and North Africa (MENA) region depends importantly on the future course of US-Egypt economic relations. Deepening bilateral ties now can pay both commercial and political dividends in the future. This is particularly important given the lingering effects of the global financial crisis and the ongoing unrest in the Middle East and Egypt’s pivotal role in promoting negotiations to resolve problems in Gaza and elsewhere in the region.1 President Obama has given high priority to launching a new Middle East initiative and reviving peace talks. Special envoy George Mitchell, former Senate majority leader, has been tasked with forging a new US policy that contributes to regional stability and economic development. The Obama administration is working with Egypt to define the shape of a new economic partnership between the two countries. The time is ripe for the United States to supplement its diplomatic strategy with a Middle East economic development strategy. As we have argued in this Policy Analysis, enhancing economic relations with Egypt is an essential component of such a strategy. US economic relations with Egypt need to be refocused and reenergized. US-Egypt economic ties are no longer defined by the large-scale US economic and military aid that was instituted to smooth the implementation of the peace accords and to counter the sanctions of countries opposed to that reconciliation. Nor is a bilateral trade pact adequate to address the myriad economic, political, 1. At a press conference at the end of her second trip as secretary of state, Hillary Clinton thanked the Egyptian government for its help in brokering the Israel-Palestinian ceasefire and more broadly for its “commitment to bridging the divides and ending the conflict”; see Hillary Clinton, press conference at the end of Gaza Reconstruction Conference, Sharm El Sheik, Egypt, March 2, 2009, available at www.state.gov (accessed on November 9, 2009).

97

© Peterson Institute for International Economics | www.piie.com

and social challenges facing Egyptian society. The approach needs to be more comprehensive. Three decades after the Camp David accords, the peace dividend from that visionary compact has yet to be fully realized. As economic reforms were picking up steam in the mid-2000s, US aid to Egypt continued to fall. Despite notable economic progress since 2004, poverty remains too high and investment too low. In the absence of a more comprehensive cooperation package to replace US aid, US support was greatly reduced. It is fair to ask whether greater US support in certain areas could have helped strengthen the reform process and allowed the reforms to deepen. The United States has a vested interest in helping Egypt through enhanced commercial ties to develop its economic potential and improve the living standard of its people. In so doing, the expanded US-Egypt partnership would encourage Egypt to continue to play a constructive role in the Middle East, strengthen its economic ties with regional partners, and help the United States pursue a more cohesive and sustainable policy in the Middle East. Currently, the United States and Egypt are not using their bilateral economic relationship to its full potential: 䡲 Bilateral trade is relatively small ($8.4 billion in 2008), though larger than other US free trade agreement (FTA) partners in the MENA region (Bahrain, Jordan, Morocco, and Oman). In recent years US exports have benefited from strong commodity prices and grown modestly; by contrast, the value of Egyptian shipments to the United States has been flat—even though exports from qualifying industrial zones (QIZs) are up markedly since 2005. Amid the current global economic crisis, bilateral trade is down about 5 percent so far in 2009 compared with 2008. 䡲 US direct investment in Egypt, valued at $8.8 billion at end 2008, is exceeded in the MENA region only by US investments in Israel and Qatar. However, US investment is highly concentrated with little activity outside of the petroleum sector. Prospective regulatory reforms could yield lucrative new opportunities for US investors in Egypt’s manufacturing and services industries. 䡲 The United States has provided around $50 billion in economic and military assistance to Egypt over the past three decades. However, the annual disbursements have been reduced sharply over the past five years and totaled $415 million in FY2008. This trend could be more than offset by financial and technical assistance from US firms supported by the enhanced US-Egypt economic partnership. In short, bilateral trade and investment, and US aid to Egypt, are significant but less than one would expect with such a populous and strategically located country. The United States and Egypt already have in place 98

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

numerous trade and investment accords that cover bilateral commerce. These pacts have value but need to be updated and augmented. Simply put, there is substantial room to grow or deepen the bilateral relationship for mutual benefit. What needs to be done? As we have argued in this Policy Analysis, reengaging Egypt will require an economic strategy that builds upon but goes beyond past initiatives. The “traditional” approach of negotiating an FTA—on the backburner since late 2005—is not a practical option, given the current economic crisis and the continuing divisions in US trade politics, even though it should remain on the medium-term bilateral agenda. In the interim, we suggest other actions—discussed more fully in the previous chapter—organized into three tranches that could be implemented sequentially or concurrently. The first tranche covers measures to liberalize trade. These include further expanding the QIZ program; modernizing the bilateral investment treaty; and negotiating a bilateral services trade agreement with an emphasis on key sectors such as transportation, construction, electricity, and communications. The second tranche includes measures to facilitate trade that can be implemented without legislative approval. Such measures can improve efficiency in key areas such as customs reform and modernization. Technical and administrative support is also needed to help Egypt implement and enforce intellectual property rights. The third tranche includes activities designed to improve Egypt’s business climate. The activities we have identified in this analysis include cooperation in investing in infrastructure and human capital, with a view to alleviating Egypt’s unemployment and poverty. What will the United States need to do to advance this agenda and deepen the partnership with Egypt? Several specific actions should be pursued to expand bilateral trade and investment and to broaden the scope of development assistance. First, the United States should approve additional QIZ sites with a view to expanding trade and investment opportunities beyond the traditional focus on textiles to sectors where Egypt has a revealed comparative advantage such as prepared foods and stoneware. Second, the United States should pursue specific trade facilitation measures in two areas: customs/ports and intellectual property rights. Technical assistance should be oriented toward helping Egypt implement the World Trade Organization Customs Agreement and meeting the new port safety standards mandated under US container security legislation. In the area of intellectual property rights, the United States should help Egypt implement its new intellectual property legislation and develop new disciplines to cover emerging technologies. Third, US officials should strongly consider the participation of Egypt for programs funded by the Millennium Challenge Corporation (MCC). SUMMING UP

© Peterson Institute for International Economics | www.piie.com

99

Egypt exceeds most of the requirements for MCC participation and has made great strides in the main criterion, market reform. MCC funds target the types of development activities needed for Egypt to encourage new investment in infrastructure and human capital/education. Overseas Private Investment Corporation (OPIC) programs to support residential investment could complement these initiatives. Egypt, for its part, will need to do some homework to take better advantage of expanded access to the US market and to consolidate its economic reforms. In particular, Egyptian officials should mount a largescale effort to disseminate information on the QIZ program and assist companies, including non–textile and apparel companies, to establish in these zones. Companies in industries in which Eygpt has a high revealed comparative advantage should be particularly targeted. Expanded market access is meaningful only if companies are ready, able, and willing to exploit this program. Egypt can also help its firms become more competitive—in the US market as well as in other markets—by reducing or eliminating some of the obstacles to trading. Chapter 3 examines several competitiveness indicators in which Egypt scores well below other MENA countries and below its competitors in the US apparel market. These factors can undermine the advantage offered by Egypt’s low labor costs and preferential access to its major markets. Increasing reliability and efficiency in sectors such as transportation, electricity (where the delay in obtaining an electrical connection is by far the longest of any of the MENA countries), and communications will require a combination of regulatory reform and attention to upgrading infrastructure. Finally, Egypt must focus on upgrading its human capital—including taking advantage of resources that have been underutilized as a result of gender inequity—by enhancing educational services and training and addressing the educational and employment needs of women. Egypt and the United States should work together to amplify two areas of commercial relations: trade in services and investment. First, the United States and Egypt should negotiate an FTA in services, supplemented by technical cooperation that could help enhance Egypt’s competitiveness and ability to serve as a regional services hub. For example, US assistance could help Egypt upgrade its maritime and land transportation infrastructure (which would have additional benefits for the tourism sector). Second, efforts should be made, as detailed in the previous chapter, to modernize the bilateral investment treaty. Particular attention should be given to expanding sectoral coverage, improving transparency of investment laws and regulations, and upgrading procedures to resolve disputes. While such improvements do not guarantee the attraction of new US investment in Egypt, they would send a positive signal to investors and complement the policy reforms under way or under consideration in Egypt. 100

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Revitalizing US-Egypt economic relations would open new development opportunities in Egypt through expanded trade and investment, spur innovation and productivity gains, and create important precedents for future regional initiatives. Reinforcing the important economic reforms being pursued by the Egyptian government helps Egypt and is good for the United States as well; the United States benefits when its trading partners and close allies prosper. As Ahmed Galal and Robert Z. Lawrence (2005) argued a few years ago, deeper bilateral economic ties can help anchor Egyptian reforms. Similarly, a more stable and prosperous Egypt can provide a solid foundation for building a broader US economic partnership in the MENA region.

SUMMING UP

© Peterson Institute for International Economics | www.piie.com

101

© Peterson Institute for International Economics | www.piie.com

Appendices

© Peterson Institute for International Economics | www.piie.com

© Peterson Institute for International Economics | www.piie.com

Appendix A Comparison of US Bilateral Investment Treaties with Uruguay and Egypt

This appendix outlines the differences and similarities in the major sections of the US-Uruguay BIT text (which is based on the US model BIT text finalized in 2004) and the US-Egypt BIT text (1982 and subsequent 1985 exchange of letters and 1986 supplementary protocol). Definition of Investment: The Uruguay BIT includes bonds and other debt instruments. The Egypt BIT could be interpreted as including bonds and debt, but it is not explicit.1 Intellectual Property Rights: Both treaties cover intellectual property rights. The Uruguay BIT is concrete (“forms that investment may take include: . . . intellectual property rights. . . .”). The Egypt BIT calls out specific types of intellectual property rights (“Investment means every kind of asset owned or controlled and includes but is not limited to: . . . valid intellectual and industrial property rights, including but not limited

This appendix was drafted by Matthew Adler, former research assistant at the Peterson Institute for International Economics. 1. The relevant US-Egypt BIT section states that investment may include “a claim to money or a claim to performance having economic value, and associated with an investment” (Article I, Paragraph 3).

APPENDIX A

© Peterson Institute for International Economics | www.piie.com

105

to rights with respect to copyrights and related patents, trademarks and trade names, industrial designs, trade secrets and know-how, and goodwill”). The Uruguay BIT contains several exceptions for the articles in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In other words, any exceptions to most favored nation (MFN) or national treatment under TRIPS are also exempt under the Uruguay BIT (Uruguay BIT Article 14, Paragraph 4). Scope and Coverage: The treaties are similar in this regard, covering all companies, persons, and government entities unless otherwise stated. Most Favored Nation and National Treatment: Both treaties stipulate that the more favorable treatment, either national or MFN, be provided to all parties unless otherwise stated. Expropriation and Compensation: The treaties are similar in this regard. They stipulate that expropriation must be done in a nondiscriminatory manner and compensation must be provided at fair market value. Transfers: The Uruguay BIT provides a means to prevent certain transfers while the Egypt BIT does not. Restriction of transfers under the Uruguay BIT must be done in a nondiscriminatory manner. Performance Requirements: The Uruguay BIT stipulates that neither country may impose requirements to satisfy certain criteria. The Egypt BIT stipulates that parties “should seek to avoid” performance requirements but does not explicitly forbid them (Egypt BIT Article II, Paragraph 6). Performance requirements under the Uruguay BIT include (Uruguay BIT Article 8, Paragraph 1): 䡲 to export a given level or percentage of goods and services; 䡲 to achieve a given level or percentage of domestic content; 䡲 to purchase, use, or accord a preference to goods produced in its territory or to purchase goods from persons in its territory; 䡲 to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; 䡲 to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings; 䡲 to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory; and 106

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

䡲 to supply exclusively from the territory of the Party the goods that such investment produces or the services that it supplies to a specific regional market or to the world market. Performance requirements under the Egypt BIT are: “conditions imposed which would require an investor to export a minimum percentage of final product or to source some inputs locally” (Egypt BIT Protocol, Paragraph 7). Senior Management: The Uruguay BIT prohibits countries from requiring companies to appoint senior management based on nationality (Uruguay BIT Article 9, Paragraph 1). The Egypt BIT does not mention senior management. Board of Directors: The Uruguay BIT allows a country to require the majority of the board of directors (or like committee) of a company to be one nationality as long as the requirement does not “materially impair the ability of the investor to exercise control over its investment” (Uruguay BIT Article 9, Paragraph 2). The Egypt BIT does not mention boards of directors or other committees. Transparency: The Uruguay BIT stipulates that all materials relevant to the treaty be published, that contacts be arranged, and that countries have “a reasonable opportunity” to “comment” on new proposals/laws by the other country that are relevant to the BIT. The Egypt BIT stipulates only that all relevant materials be available upon request. However, most relevant Egyptian materials are available today. Environment: The Uruguay BIT outlines protections for the environment—i.e., environmental laws should not be weakened or avoided in order to promote investment (Article 12). The Egypt BIT does not contain a section on the environment. Labor: The Uruguay BIT outlines that labor laws should not be weakened or avoided in order to promote investment (Article 13). The Egypt BIT does not contain a section on labor. Financial Services: The Uruguay BIT allows countries to adopt measures restricting the actions of financial services when necessary and provides a method for adjudication of disputes regarding restrictions placed on financial services. Financial services are to be given national treatment unless explicitly restricted. The Egypt BIT does not contain a section on financial services, but this statement is made: “Each Party accords to investments by nationals or companies of the other [country] in investment banks, merchant-banks and reinsurance companies whose activities are APPENDIX A

© Peterson Institute for International Economics | www.piie.com

107

confined to transactions in foreign currencies [national or MFN treatment]” (Egypt BIT Protocol, Paragraph 13). Additionally, Egypt has made three rounds of financial services liberalization commitments at the World Trade Organization (1994 [Uruguay Round Commitments], 1995, and 1998). Under the 1998 commitments, there are no restrictions on securities (underwriting, brokerage, and trading), clearing and settlement, marketing and market promotion, portfolio and investment management, establishment of collective investment funds, and venture capital activities. In the 1998 schedule, Egypt did not have any liberalization commitments on cross-border supply and consumption abroad in the banking sector. The 1998 schedule indicates that foreign insurance companies’ branches and agencies are not allowed anywhere but in “free zones.” The text of the three schedules can be found on the website of the World Trade Organization, www.wto.org. Taxation: The two BITs are similar on tax issues, stipulating MFN or national treatment as necessary. Dispute Settlement: While the Uruguay BIT is more detailed, both treaties outline a similar procedure for dispute settlement, negotiation, and then arbitration. Both treaties provide details on dispute settlement between people and a country, a company and a country, and the two countries.

Exceptions US-Egypt BIT Under the US-Egypt BIT, each country “consistent with Article II, Paragraph 3 . . . reserves the right to maintain limited exceptions in the [following] sectors”: United States: Air transportation, ocean and coastal shipping; banking; insurance; government grants; government insurance and loan programs; energy and power production; use of land and natural resources; custom house brokers; ownership of real estate; radio and television broadcasting; telephone and telegraph services; submarine cable services; and satellite communications. Egypt: Air and sea transportation; maritime agencies; land transportation other than that of tourism; mail, telecommunications, telegraph services, and other public services that are state monopolies; banking and insurance; commercial activity such as distribution, wholesaling, retailing, import and export activities; commercial agency and broker activities; own108

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

ership of real estate; use of land; natural resources; national loans; and radio, television, and issuance of newspapers and magazines. Article II, Paragraph 3 also says: Notwithstanding the preceding provisions of this Article, each Party reserves the right to maintain limited exceptions to the standard of national treatment otherwise required concerning investments or associated activities if exceptions fall within one of the sectors listed in the Annex to this Treaty. Both Parties hereby agree to maintain the number of such exceptions to a minimum. In addition, each Party shall notify the other Party of any specific measures which constitute exceptions to the standard of national treatment provided herein. In no event, however, shall the treatment to be accorded pursuant to any exception be less favorable than that accorded in like situations to investments and associated activities of nationals or companies of any third country. Moreover, no exception, within the sectors contained in the Annex, introduced after the date of entry into force of this Treaty shall apply to investments of nationals or companies of the other Party existing in that sector at the time the exception becomes effective.

In other words, sectors can be exempt from national treatment but not MFN treatment. This differs from the Uruguay BIT, where in certain instances for a few sectors national and MFN treatment need not be provided, as explained below.

US-Uruguay BIT Under the US-Uruguay BIT certain sectors in specific instances are exempt from national (Article 3)/MFN (Article 4) treatment; performance requirements (Article 8); and/or senior management stipulations and board of director stipulations (Article 9). The sectors and the requirements they are exempt from (but not the specific instances) are as follows:

Uruguay 䡲 Fisheries: Articles 3, 8, and 9 䡲 Print media: Article 9 䡲 Radio and television: Articles 3, 4, and 9 䡲 Railway transportation services: Articles 3, 4, and 9 䡲 Road transportation services: Articles 3 and 9 䡲 Maritime transportation services: Articles 3, 4, and 9 䡲 Air services: Articles 3, 8, and 9 䡲 Road, railway, airport, and port services and infrastructure: Articles 3, 8, and 9 䡲 Water and gas distribution services: Article 8 APPENDIX A

© Peterson Institute for International Economics | www.piie.com

109

䡲 Postal services: Article 3 䡲 Social services: Articles 3, 4, 8, and 9 䡲 Traditional events and festivities: Article 3 䡲 Financial intermediation: Articles 3 and 9

United States 䡲 Atomic energy: Article 3 䡲 Mining: Articles 3 and 4 䡲 Air transportation: Articles 3, 4, and 9 䡲 Customs brokers: Article 3 䡲 Radio communications: Article 3 䡲 Communications: Article 4 䡲 Cable television: Articles 3, 4, and 9 䡲 Banking: Article 3 䡲 Insurance: Article 3 As mentioned above the Uruguay BIT allows in certain instances for MFN provisions to be ignored. One example is in US communications (US-Uruguay BIT Annex II): The United States reserves the right to adopt or maintain any measure that accords differential treatment to persons of other countries due to application of reciprocity measures or through international agreements involving sharing of the radio spectrum, guaranteeing market access, or national treatment with respect to the one-way satellite transmission of direct-to-home (DTH) and direct broadcasting satellite (DBS) television services and digital audio services.

110

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Appendix B Do Bilateral Investment Treaties Increase Foreign Direct Investment?

Since European countries inked the first bilateral investment treaties (BITs) in the 1950s, BITs have been an important legal instrument to protect and facilitate foreign investment by providing greater predictability and stability in often uncertain regulatory and legal environments. Over the past two decades, more countries, particularly developing countries, have signed BITs, often as a means of signaling their attractiveness as a location for foreign investment. As a result, BITs began to incorporate elements of investment liberalization as well as protection. The content of BITs has increasingly become standardized over the past decade and a half—in part because two of the main parties, the United States and the European Union, use templates for their BITs to help shape their partner’s investment regime.1 But do countries that sign BITs attract more investment? Several recent empirical works have investigated the impact of BITs on foreign direct investment (FDI). The evidence so far is mixed. A few studies—including Neumeyer and Spess (2005) and Salacuse and Sullivan This appendix was drafted by Matthew Adler, former research assistant at the Peterson Institute for International Economics. 1. For example, the United States’ model BIT text was updated in 2004, available at www.ustr.gov. The first BIT using this model is the US-Uruguay BIT, which came into force in 2006.

111

© Peterson Institute for International Economics | www.piie.com

(2005)—find that BITs increased FDI flows. In contrast, HallwardDriemeier (2003), Aisbett (2007), and Yackee (2007) find that BITs have an insignificant effect on FDI. Tobin and Rose-Ackerman (2006) find a positive relationship between BITs and FDI flows but that the marginal benefit of new BITs is decreasing. Lesher and Miroudot (2006, 2008) find that BITs have an insignificant effect on FDI flows but that free trade agreements (FTAs) with substantive investment provisions have a large positive effect on FDI flows. Hufbauer and Schott (2007) investigate the impact of preferential trade agreements (PTAs) on FDI using a gravity model of investment and report positive results for most recent trade pacts but also worrisome signs of investment diversion. Dee, Ochiai, and Okamoto (2006) investigate the impact of investment provisions in PTAs on FDI flows. The authors find that investment provisions in PTAs have increased FDI flows into developed countries but have had little impact on FDI to developing countries. Most of these studies use data from the 1980s through the 1990s. This period saw a rapid proliferation of BITs but does not include more recent US BITs, which are generally more comprehensive than earlier BITs. Sachs and Sauvant (2009) survey recent developments in FDI and BITs, as well as much of the literature described in this appendix. Blonigen (2005) surveys a wider literature on the determinants of FDI.

Brief Review of the Literature Neumeyer and Spess (2005) use panel data across 119 countries from 1970 to 2001 and find a positive relationship between BITs and FDI. Their model uses absolute value of FDI inflows to developing countries as the dependent variable. Other studies on the determinants of FDI have used FDI as a share of GDP as the dependent variable, but Neumeyer and Spess (2005) contend this captures the change in relative importance of FDI rather than the absolute change. Their primary explanatory variable is each country’s cumulative number of BITs signed with OECD countries, weighted by the share of world FDI outflows from each OECD BIT partner. BITs between developing countries are excluded from their analysis. Neumeyer and Spess (2005) also consider a host of economic variables, including per capita income and market potential (as measured by the World Bank). Salacuse and Sullivan (2005) perform two separate analyses on the impact of BITs on FDI flows. They perform a cross-section analysis of more than 100 countries in 1998, 1999, and 2000 (each year individually). The authors also examine separately the role of US BITs, using data on US FDI outflows to 31 countries over a 10-year period. The US-Egypt BIT is included in their analysis. Based on both analyses the authors conclude that BITs have a positive impact on FDI flows and that US BITs are more likely 112

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

to induce FDI inflows to developing countries than BITs signed with other OECD countries. Salacuse and Sullivan (2005) also control for openness to trade (exports as a share of GDP), population, rule of law, inflation, and GDP as determinants of FDI. Hallward-Driemeier (2003) investigates the impact of BITs on FDI flows from 20 OECD countries into 31 developing countries—Egypt is included in the sample.2 The sample period is 1980 to 2000. The BIT dummy variable in this study receives a value of one in the year when a BIT is ratified. The author also uses similar economic controls as Neumeyer and Spess (2005) and Salacuse and Sullivan (2005), including, among others, the size of the host and source countries, GDP per capita of the host country, the host country’s inflation rate, and the host country’s openness ratio. Two dependent variables are used: the absolute value of FDI from an OECD country to a developing country and FDI flows from an OECD country as a share of the developing country’s GDP. BITs were found to have no significant impact on either dependent variable.3 Aisbett (2007) uses a similar methodology as earlier studies but also models and accounts for the endogeneity of BIT adoption. Endogeneity exists in the case of BITs because BIT negotiations may start due to increasing FDI flows between two countries, not the other way around, as earlier studies have suggested. Before accounting for this possible effect, Aisbett (2007) finds a positive relationship between BITs and FDI flows from OECD countries into developing countries, but after controlling for endogeneity the significance of the relationship disappears. Yackee (2007) responds directly to Neumeyer and Spess (2005) by slightly modifying their methodology and, as a result, finds that BITs have no significant impact on FDI attraction. At first, Yackee (2007) essentially replicates the Neumeyer and Spess (2005) model and finds similar results, a positive relationship between BITs and FDI flows. Yackee (2007) then goes further and tweaks the original model in four ways. All four changes reveal that the BIT and FDI relationship found in the original (i.e., Neumeyer and Spess 2005) model is no longer significant. Two of the notable new specifications entail using FDI flows in their absolute levels as the dependent variable (as opposed to FDI flows in their log form) and dropping BITs that lack an arbitration clause—i.e., weaker BITs—from consideration.4

2. The 31 developing countries used in Hallward-Driemeier (2003) are not the same 31 countries used in Salacuse and Sullivan (2005). However, there is considerable overlap between the groups of countries used in the two studies. 3. In one specification, with absolute FDI flows as the dependent variable, the coefficient on the BIT variable was actually negative but not significant. 4. The other two new specifications are more technical in nature: using country-clustered standard errors and using standard errors that correct for the use of panel data.

APPENDIX B

© Peterson Institute for International Economics | www.piie.com

113

Tobin and Rose-Ackerman (2006) find a positive impact of BITs between OECD countries and developing countries on FDI flows into developing countries. They control for political risk, market size, natural resources, and openness to trade of developing countries. Their sample includes 137 countries from 1980 to 2003; Egypt is included in their analysis. Tobin and Rose-Ackerman’s (2006) study differs from other studies because they also investigate the impact of the total number of BITs signed by developing countries. Their results indicate that individual BITs and the overall number of BITs increase FDI flows into developing countries. However, they also investigate the relationship between the two BIT variables and find that the marginal impact of a new BIT falls as the number of world BITs increases. Lesher and Miroudot (2007), like several other studies, find that BITs do not have a significant impact on FDI flows. However, their study does contain some interesting results. The authors find over the period 1990 to 2004 that FTAs with substantive investment provisions are associated with more than a 50 percent increase in FDI flows between the FTA partners. The Australia-US FTA, the Mexico-Japan FTA, and the Canada-Chile FTA are some of the more notable FTAs included in the sample. Hufbauer and Schott (2007) use a gravity model of FDI to investigate the impact of more than 560 PTAs on bilateral FDI stocks from 1976 to 2005. The PTAs are grouped into 11 categories; a few larger trade agreements, like the European Union and the Canada-US FTA, constitute their own category. The European Union was found to increase bilateral FDI stocks between its members by 62 percent. The Canada-US FTA, however, was found to decrease FDI stocks between the United States and Canada by 56 percent—perhaps a sign that FDI was used for “tariff-jumping” before the agreement. This estimate and a similar effect (in percentage terms) found for the South Asian FTA are the only significant negative estimates in the model. Most other agreements in the model—including Mercosur; FTAs signed by Chile, Mexico, Australia, or Singapore (grouped together); the Association of Southeast Asian Nations (ASEAN) FTA; and extra-EU FTAs—were estimated to have positive impacts on bilateral FDI stocks.5 Dee, Ochiai, and Okamoto’s (2006) work goes a step further than other studies on trade agreements and FDI by characterizing and indexing specific investment provisions within PTAs. Most other studies on the subject use a simple dummy variable to indicate a trade agreement with investment provisions. The authors find that PTAs with investment provisions are positively related to FDI flows into major developed countries (e.g., the United States) and small rich countries (e.g., Denmark). They also find 5. The estimated impact of these agreements on bilateral FDI stocks was: extra-EU FTAs by 16 percent; Mercosur by 257 percent; Chilean, Mexican, Australian, and Singaporean FTAs by 65 percent; and the ASEAN FTA by 142 percent (Hufbauer and Schott 2007).

114

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

some evidence of investment diversion in small developed countries, but no evidence among major developed countries. Among developing countries, including Egypt, the authors find that investment provisions have had little to no impact on FDI flows.6 They speculate that the divergent finding vis-à-vis developed and developing countries is likely because FDI is driven more by economic characteristics than by investment provisions. From the literature review it is unclear whether BITs have any significant impact on FDI flows. What is clear is that other factors, like political and macroeconomic stability, are imperative for attracting FDI. Most of the studies discussed here include many of the same control variables and in most cases find expected effects.

6. Dee, Ochiai, and Okamoto (2006) find that the form of some PTA investment provisions in Latin American agreements may actually have had a negative impact on FDI flows.

APPENDIX B

© Peterson Institute for International Economics | www.piie.com

115

© Peterson Institute for International Economics | www.piie.com

References

Ades, Alberto F., and Edward S. Glaeser. 1999. Evidence on Growth, Increasing Returns, and the Extent of the Market. Quarterly Journal of Economics 114, no. 3: 1025–45. Aisbett, Emma. 2007. Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation. Department of Agricultural and Resource Economics Working Paper Series 1032. University of California, Berkeley. Alesina, Alberto, Enrico Spolaore, and Romain Wacziarg. 2000. Economic Integration and Political Disintegration. American Economic Review 90, no. 5: 1276–96. Arnold, Jens, Beata S. Javorcik, and Aaditya Mattoo. 2007. Does Services Liberalization Benefit Manufacturing Firms? Evidence from the Czech Republic. World Bank Policy Research Working Paper no. 4109 (January). Washington: World Bank. Arnold, Jens, Aaditya Mattoo, and Gaia Narciso. 2006. Services Inputs and Firm Productivity in Sub-Saharan Africa: Evidence from Firm-Level Data. World Bank, Washington. Photocopy. Aschauer, D. A. 1989. Is Public Expenditure Productive? Journal of Monetary Economics 23: 177–200. Balassa, Bela. 1965. Trade Liberalization and ‘Revealed’ Comparative Advantage. Manchester School 33: 99–123. BEA (Bureau of Economic Analysis). 2009. Selected Data for Foreign Affiliates in All Countries in Which Investment Was Reported. International Economic Accounts: US Direct Investment Abroad, Financial and Operating Data for US Multinational Companies. Washington: US Department of Commerce. Available at www.bea.gov/international (accessed on December 16, 2009). Ben-David, Dan. 1993. Equalizing Exchange: Trade Liberalization and Income Convergence. Quarterly Journal of Economics 108: 653–79. Blonigen, Bruce A. 2005. A Review of the Empirical Literature on FDI Determinants. NBER Working Paper 11299. Cambridge, MA: National Bureau of Economic Research. Available at www.nber.org (accessed on April 4, 2008). Bolle, Mary Jane. 2001. U.S.-Jordan Free Trade Agreement (September 25). Washington: Congressional Research Service. Brunel, Claire. 2008. Mahgreb Regional Integration. In Maghreb Regional and Global Integration: A Dream to Be Fulfilled, ed. Gary Clyde Hufbauer and Claire Brunel. Policy Analyses in International Economics 86. Washington: Peterson Institute for International Economics.

117

© Peterson Institute for International Economics | www.piie.com

Burnside, Craig, and David Dollar. 2000. Aid, Policies, and Growth. American Economic Review 90, no. 4: 847–68. Calderón, Cesar, and Luis Servén. 2003a. Macroeconomic Dimensions of Infrastructure in Latin America. Paper presented at the Fourth Annual Stanford Conference on Latin American Economic Development, Stanford Center for International Development, Stanford University, Palo Alto, November 13–15. Calderón, Cesar, and Luis Servén. 2003b. The Output Cost of Latin America’s Infrastructure Gap. In The Limits of Stabilization: Infrastructure, Public Deficits, and Growth in Latin America, ed. W. Easterly and L. Servén. Palo Alto: Stanford University Press and the World Bank. Calderón, Cesar, and Luis Servén. 2004. Trends in Infrastructure in Latin America, 1980–2001. World Bank Policy Research Working Paper no. 3401. Washington: World Bank. Canning, D. 1998. The Contribution of Infrastructure to Aggregate Output. World Bank Policy Research Working Paper no. 2246. Washington: World Bank. Carmel, Eric. 2003. The New Software Exporting Nations: Success Factors. Electronic Journal on Information Systems in Developing Countries 13, no. 4: 1–12. Central Bank of Egypt. 2008. Annual Report 2007/2008. Available at www.cbe.eg (accessed on June 4, 2009). Clark, Ximena, David Dollar, and Alejandro Micco. 2004. Port Efficiency, Maritime Transport Costs, and Bilateral Trade. Journal of Development Economics 75, no. 2 (December): 417–50. De Soto, Hernando. 1989. The Other Path: Invisible Revolution in the Third World. London: I. B. Tauris & Co. Ltd. Dee, Philippa, Ryo Ochiai, and Jiro Okamoto. 2006. Measuring the Economic Effects of the Investment Provisions of Preferential Trade Agreements. Paper prepared for Expert Meeting on Regional Rules in the Global Trading System, IDB-WTO Joint Research Program, Inter-American Development Bank, Washington, July 26–27. Demetriades, P., and T. Mamuneas. 2000. Intertemporal Output and Employment Effects of Public Infrastructure Capital: Evidence from 12 OECD Economies. Economic Journal 110: 687–712. DeRosa, Dean. 2003. Gravity Model Calculations of the Trade Impact of US Free Trade Agreements. Background paper prepared for the Conference on Free Trade Agreements and US Trade Policy, sponsored by the Institute for International Economics, Washington, May 7–8. Destler, I. M. 2007. American Trade Politics in 2007: Building Bipartisan Compromise. Policy Briefs in International Economics 07-5. Washington: Peterson Institute for International Economics. DFID (UK Department for International Development). 2007. Women’s Economic Empowerment: Gender and Growth Literature Review and Synthesis. London. Dollar, David. 1992. Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976–1985. Economic Development and Cultural Change 40, no. 3: 523–44. Easterly, W. 2003. Can Foreign Aid Buy Growth? Journal of Economic Perspectives 17, no. 3 (Summer): 23–48. Easterly, W., R. Levine, and D. Roodman. 2004. Aid, Policies, and Growth. American Economic Review 94, no. 3: 774–80. Edwards, Sebastian. 1992. Trade Orientation, Distortions and Growth in Developing Countries. Journal of Development Economics 39, no. 1: 31–57. Edwards, Sebastian. 1993. Openness, Trade Liberalization and Growth in Developing Countries. Journal of Economic Literature 31: 1358–93. Eschenbach, Felix, and Bernard Hoekman. 2006. Services Policy Reform and Economic Growth in Transition Economies, 1990–2004. Review of World Economics 124, no. 4. Estache, A., V. Foster, and Q. Wodon. 2002. Accounting for Poverty in Infrastructure Reform: Learning from Latin America’s Experience. World Bank Institute Development Studies. Washington: World Bank.

118

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Frankel, Jeffrey A., and David Romer. 1999. Does Trade Cause Growth? American Economic Review 89, no. 3: 379–99. Galal, Ahmed, and Robert Z. Lawrence. 2004. Egypt, Morocco and the United States. In Free Trade Agreements: US Strategies and Priorities, ed. Jeffrey J. Schott. Washington: Institute for International Economics. Galal, Ahmed, and Robert Z. Lawrence. 2005. Anchoring Reform with a US-Egypt Free Trade Agreement. Washington: Institute for International Economics. Ghoneim, Ahmed Farouk, and Omneia A. Helmy. 2007. Maritime Transport and Related Logistics Services in Egypt. Geneva: International Centre for Trade and Sustainable Development. Ghoneim, Ahmed Farouk, and Ulrike Grote. 2006. Impact of Labor Standards on Egyptian Exports with Special Emphasis on Child Labor. Discussion Paper 7128. University of Bonn, Center for Development Research. Hallward-Driemeier, Mary. 2003. Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit . . . and They Could Bite. World Bank Policy Research Working Paper no. 3121. Washington: World Bank. Harrison, Ann, and Gordon Hanson. 1999. Who Gains from Trade Reform? Some Remaining Puzzles. Journal of Development Economics 59: 125–54. Henisz, W. J., S. Jandhyala, and E. D. Mansfield. 2007. A Bilateral Analysis of Bilateral Investment Treaties. Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Chicago, February 2. Helble, Matthias, Ben Shepherd, and John S. Wilson. 2007. Transparency and Trade Facilitation in the Asia-Pacific: Estimating the Gains from Reform (September). Washington: World Bank. Hoekman, Bernard. 2006. Liberalizing Trade in Services: A Survey. World Bank Policy Research Working Paper no. 4030 (October). Washington: World Bank. Hoekman, Bernard, and Denise Konan. 2005. Economic Implications of US-Egypt FTA. In Anchoring Reform with a US-Egypt Free Trade Agreement, ed. Ahmed Galal and Robert Z. Lawrence. Washington: Institute for International Economics. Hoekman, Bernard, Denise Konan, and Keith Maskus. 1998. An Egypt-U.S. Free Trade Agreement: Economic Incentives and Effects. Working Paper 199802. University of Hawaii at Manoa, Department of Economics. Hufbauer, Gary Clyde, and Jeffrey J. Schott. 2007. Fitting Asia-Pacific Agreements into the WTO System. Presentation at the Institut de Hautes Etudes (HEI), Swiss State Secretariat for Economic Affairs (SECO), and Swiss National Center of Competence in Research (NCCR) conference, Geneva, September 10–12. Jassin O’Rourke Group. 2008. Global Apparel Manufacturing Labor Cost Analysis 2008. Available at www.nctextileconnect.com (accessed on December 3, 2009). Konan, Denise Eby, and Karl E. Kim. 2004. Beyond Border Barriers: The Liberalization of Services Trade in Tunisia and Egypt. World Economy 27, no. 9 (September). Konan, Denise Eby, and Keith Maskus. 2006. Quantifying the Impact of Services Liberalization in a Developing Country. Journal of Development Economics 81: 142–62. Lesher, Molly, and Sébastien Miroudot. 2006. Analysis of the Economic Impact of Investment Provisions in Regional Trade Agreements. OECD Trade Policy Working Paper 36. Paris: OECD Trade Directorate. Lesher, Molly, and Sébastien Miroudot. 2008. FDI Spillovers and Their Interrelationships with Trade. OECD Trade Policy Working Paper 80. Paris: OECD Trade Directorate. Levine, Ross, and David Renelt. 1992. A Sensitivity Analysis of Cross-Country Growth Regressions. American Economic Review 82, no. 4: 942–63. Limão, Nuno, and Anthony J. Venables. 1999. Infrastructure, Geographical Disadvantage, and Transport Costs. World Bank Policy Research Working Paper no. 2257 (December). Washington: World Bank. Magder, Dan. 2005. Egypt after the Multi-Fiber Arrangement: Global Apparel and Textile Supply Chains as a Route for Industrial Upgrading. Working Paper 05-8 (August). Washington: Institute for International Economics.

REFERENCES

© Peterson Institute for International Economics | www.piie.com

119

Marello, Gino, Jane O’Dell, and Lynn Salinger. 2009. Improving Productivity in Egypt’s ReadyMade Garments Sector. Paper prepared for the Qualifying Industrial Zone Unit of Egypt’s Ministry of Trade and Industry, April. Available at www.amcham-egypt.org. Mattoo, Aaditya, Randeep Rathindran, and Arvind Subramanian. 2006. Measuring Services Trade Liberalization and its Impact on Economic Growth: An Illustration. Journal of Economic Integration 21: 64–98. Momani, Bessma. 2007. A Middle East Free Trade Area: Economic Interdependence and Peace Considered. World Economy (November): 1682–1700. Momani, Bessma. 2003. Promoting Economic Liberalization in Egypt: From US Foreign Aid to Trade and Investment. Middle East Review of International Affairs 7, no. 3 (September). Morrison, Andrew, Dhushyanth Raju, and Nistha Sinha. 2007. Gender Equality, Poverty and Economic Growth. World Bank Policy Research Working Paper no. 4349. Washington: World Bank. Neumeyer, Eric, and Laura Spess. 2005. Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries? World Development 33, no. 10 (October): 1567–85. Noland, Marcus, and Howard Pack. 2007. The Arab Economies in a Changing World. Washington: Peterson Institute for International Economics. OECD (Organization for Economic Cooperation and Development). 2007. OECD Investment Policy Reviews: Egypt. Paris. OPIC (Overseas Private Investment Corporation). 2005. Egypt: Overview of the Housing Sector. Issues Paper 1 (July). Washington. OPIC (Overseas Private Investment Corporation). 2008. OPIC Board Approves Over $500 Million for New Renewable Energy Funds. OPIC News (Fall). Washington. Oxford Business Group. 2009. Annual Business Economic and Political Review: Egypt. London. Radelet, S., and J. Sachs. 1998. Shipping Costs, Manufactured Exports, and Economic Growth. Harvard Institute for International Development, Harvard University. Photocopy. Rodriguez, Francisco, and Dani Rodrik. 2000. Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence. In NBER Macro Annual 2000, ed. Ben Bernanke and Kenneth Rogoff. Cambridge, MA: National Bureau of Economic Research. Röller, L-H., and L. Waverman. 2001. Telecommunications Infrastructure and Economic Development: A Simultaneous Approach. American Economic Review 91: 909–23. Rutherford, Thomas, David Tarr, and Oleksandr Shepotylo. 2006. The Impact of WTO Accession and the DDA: The Importance of Liberalization of Barriers Against FDI in Services for Growth and Poverty Reduction. In Poverty and the WTO, ed. Thomas Hertel and L. Alan Winters. New York and Washington: Palgrave and World Bank. Sachs, Jeffrey, and Andrew Warner. 1995. Economic Reform and the Process of Global Integration. Brookings Papers on Economic Activity 1, no. 1: 1–118. Sachs, Lisa, and Karl P. Sauvant. 2009. An Overview. In The Effect of Bilateral Investment Treaties and Double Taxation Treaties on Foreign Direct Investment Flows, ed. Lisa Sachs and Karl P. Sauvant. New York: Oxford University Press. Salacuse, Jeswald W., and Nicholas P. Sullivan. 2005. Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain. Harvard International Law Journal 46, no. 1 (Winter): 67–130. Schultz, T. Paul. 2002. Why Governments Should Invest More to Educate Girls. World Development 30, no. 2: 207–25. Tarnoff, Curt. 2007. Millennium Challenge Account. CRS Report for Congress (February 27). Washington: Congressional Research Service. Tobin, J., and S. Rose-Ackerman. 2006. Bilateral Investment Treaties: Do They Stimulate Foreign Direct Investment? Yale University, New Haven, CT. Photocopy (June). USAID (US Agency for International Development). 2009. US Overseas Loans and Grants: Obligations and Loan Authorizations (Greenbook). Available at http://gbk.eads.usaidall net.gov (accessed on June 18, 2009).

120

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

USTR (US Trade Representative). 2003. US Requests Consultations on Egypt’s Import Duties on Apparel and Textile Products. USTR press release 03-78, December. Available at www.america.gov (accessed on December 3, 2009). USTR (US Trade Representative). 2008. US Generalized System of Preferences Guidebook. Washington: Office of the US Trade Representative. USTR (US Trade Representative). 2009. United States-Israel Free Trade Area Implementation Act; Designation of Qualifying Industrial Zones. Federal Register 74, no. 15 (January 26). Wacziarg, Romain. 1998. Measuring the Dynamic Gains from Trade. World Bank Policy Research Working Paper no. 2001. Washington: World Bank. Wacziarg, Romain, and Karen Horn Welch. 2003. Trade Liberalization and Growth: New Evidence. NBER Working Paper 10152. Cambridge, MA: National Bureau of Economic Research. World Bank. 2003. Inequality in Latin America and the Caribbean. Washington. World Bank. 2005. The Macroeconomic and Sectoral Performance of Housing Supply Policies in Selected MENA Countries: A Comparative Analysis (April). Washington. World Bank. 2007. Connecting to Compete: Trade Logistics in the Global Economy. Washington. World Economic Forum. 2007. The Travel & Tourism Competitiveness Report 2007: Furthering the Process of Economic Development. Geneva. Yackee, Jason W. 2007. Do BITs Really Work? Revisiting the Empirical Link between Investment Treaties and Foreign Direct Investment. University of Wisconsin Legal Studies Research Paper no. 1054 (October). Madison: University of Wisconsin.

REFERENCES

© Peterson Institute for International Economics | www.piie.com

121

Timeline of Key Events in US-Egypt Economic Relations

Date

Event

September 29, 1982

Egypt is the first country to sign a bilateral investment treaty (BIT) under the US BIT program, which was initiated in 1981 to encourage and protect US investment in developing countries. Under this treaty, the parties agree to international law standards for expropriation and compensation, free financial transfers, and procedures, including international arbitration, for the settlement of investment disputes.

June 27, 1992

US-Egypt BIT enters into force. Additional modifications are added in an exchange of letters signed March 11, 1985 and in a supplemental protocol signed March 11, 1986.

September 1994

US-Egypt Partnership for Economic Growth and Development dialogue is initiated by Vice President Al Gore and Egyptian President Hosni Mubarak. This initiative includes a Joint Committee for Economic Growth, a forum for high-level dialogue on economic policy, and a Joint Science and Technology Board to implement a new bilateral science and technology cooperation agreement. (continued on next page) 123

© Peterson Institute for International Economics | www.piie.com

Date

Event

August 1995

The US-Egypt Science and Technology Agreement is signed for a duration of five years. It is renewed in 2001 and again in 2005.

July 1, 1999

US-Egypt trade and investment framework agreement (TIFA) is signed in Washington.

November 19, 1999

First meeting of the US-Egypt TIFA Council is held in Washington.

April 3, 2001

The United States and Egypt agree to strengthen bilateral economic cooperation, trade, and investment; issue joint US-Egypt paper on economics.

2002 June 10

In the first visit by a US trade representative to Egypt, USTR Robert Zoellick meets with President Mubarak and Minister of Foreign Trade Youssef Boutros Ghali and holds a press conference in Cairo, where he tells press that the United States seeks to expand and broaden economic relations with Egypt, stating: “We hope we can use the idea of a Free Trade Agreement to move forward the economic relationship between the United States and Egypt” (US Embassy in Israel, June 10, 2002).

September 21

Following the passage of trade promotion authority (formerly fast-track negotiating authority), Deputy Commerce Secretary Sam Bodman visits Egypt.

October 1

USTR Zoellick and Egyptian Foreign Trade Minister Boutros Ghali meet under the auspices of the second US-Egypt TIFA Council meeting to discuss how to expand economic ties and promote Egypt’s economic reform program; agree to form working groups on customs administration, government procurement, and sanitary and phytosanitary issues.

124

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Date

Event

2003 May 9

President George W. Bush proposes creation of a Middle East Free Trade Agreement (MEFTA) by 2013 in a commencement address at the University of South Carolina.

May 13

The United States files case against the European Union at the World Trade Organization (WTO) concerning genetically modified organisms. Egypt, along with Australia and Canada, are named as co-complainants and Argentina, Chile, Colombia, El Salvador, Honduras, Mexico, New Zealand, Peru, and Uruguay as third parties.

May 27

Egypt withdraws from the WTO complaint, stating that “The Government of Egypt took this decision in conscious emulation of the need to preserve adequate and effective consumer and environmental protection, and with the desire to reduce further distortions and impediments to international trade that may result due to the further pursuit of this matter within the WTO.”1

June 20–22

USTR Zoellick attends informal WTO meeting to discuss ongoing global trade negotiations in Sharm El Sheikh, Egypt.

December 23

The United States files formal request for consultations in the WTO with Egypt concerning import duties on certain apparel and textile products. US officials allege that Egypt’s per garment duty charges effectively establish tariff rates ranging from 141 percent to over 51,000 percent, significantly exceeding Egypt’s bound rates.

1. Letter from Egyptian ambassador to the European Union dated May 27, 2003, quoted in Edward Alden and Tobias Buck, “Blow to US as Egypt Pulls Out of Modified Crops Case,” Financial Times, May 29, 2003, 8.

(continued on next page) TIMELINE OF KEY EVENTS IN US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

125

Date

Event

2004 January 21

Egypt announces significant lowering of textile import tariffs: to 40 percent on imports of apparel, 12 percent on yarns, 22 percent on all kinds of fabrics, and 35 percent on imports of home textiles.

April 12

President Mubarak visits President Bush at his Crawford, Texas ranch.

July 12

Change in Egyptian Cabinet: 14 new ministers, widely seen to be probusiness.

September

Egypt announces a new tariff structure that brings its weighted average most favored nation (MFN) tariff down from 14.6 to 9.1 percent.

December 14

Qualifying industrial zone (QIZ) agreement (protocol and legal document) between Egypt and Israel is signed. USTR Zoellick is present at the meeting. The government of Egypt presents the QIZ agreement as a steppingstone to prospective FTA negotiations with the United States. Trade officials initiate a series of bilateral consultations to prepare for FTA negotiations and address some outstanding issues.

2005 January 29

Parliamentary opposition leader Ayman Nour is arrested.

February 23

Third TIFA Council meeting is held in Washington.

February 25

US Secretary of State Condoleezza Rice postpones trip to Egypt.

May 20

The United States notifies the WTO that a mutually agreed solution has been reached in its case against Egyptian textiles.

June 20

US Secretary of State Rice meets with President Mubarak and Foreign Minister Ahmed Ali Aboul Gheit in Sharm El Sheik, Egypt.

126

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Date

Event

July 13–14

Deputy Secretary of State Zoellick holds series of meetings with President Mubarak and cabinet members to discuss political and economic reforms. The language is more downplayed than before: Remarking on the factories that have located in the QIZs, he says, “We hope it will strengthen our trade relationship” (US Department of State, US Embassy in Egypt, July 13, 2005).

July 23

Tourist resort in Sharm El Sheik is bombed.

September

Presidential elections are held in Egypt. Mubarak is reelected with a vote of 88 percent.

October 31

USTR announces expansion of Egyptian QIZs including the designation of a new zone—the Central Delta Zone—and expansion of the existing Greater Cairo Zone and Suez Canal Zone.

November 2

US Trade Representative Rob Portman cites Egypt as a potential free trade partner in testimony to the US House Agriculture Committee.2

November 10

Egyptian Minister of Trade and Industry Rachid Mohamed Rachid mentions an important breakthrough in negotiations with the United States and hints that free trade talks are imminent.3

November 30

Deputy Commerce Secretary Bodman meets with Egyptian Minister of Trade and Industry Rachid.

2. “Bahrain would be another agreement to add to a Middle Eastern free trade area, which would include over time, we hope, not just Morocco and Jordan and Israel which we already have free trade agreements with, but also countries like the United Arab Emirates, Oman, which we’re close to completing, and even Egypt, which is a country we’re talking to now about future trade agreements” (testimony by Agriculture Secretary Mike Johanns and US Trade Representative Rob Portman before the US House Agriculture Committee regarding Agriculture Negotiations of the World Trade Organization’s Doha Development Round, Washington, November 2, 2005, 8). 3. Egypt State Information Service, “Rashid: Egypt-US Free Trade Agreement Talks Progressing,” November 10, 2005.

(continued on next page) TIMELINE OF KEY EVENTS IN US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

127

Date

Event

December

Fourth TIFA Council meeting is held in Washington.

December 24

Egyptian court sentences Ayman Nour, opposition figure who came in second in the September presidential elections, to five years hard labor.

2006 January

United States signs an FTA with Oman and announces that negotiations will begin with the United Arab Emirates.4

January 17

US Vice President Dick Cheney meets with President Mubarak in Cairo.

February 21–22

Secretary of State Rice meets with Foreign Minister Ahmed Ali Aboul Gheit in Cairo. During her visit she is quoted as stating that ‘‘the timing is not right just now, but we want to have an FTA with Egypt because we believe it will make a difference to economic reform and ultimately to the economy here in Egypt. . . . We believe that an FTA can make a positive difference to the economic reform process underway in Egypt and that it would ultimately benefit ordinary Egyptians as well as the United States.”5

4. USTR Portman is much less bullish on starting negotiations with Egypt: “They are beginning to reform and liberalize their economy . . . but we’re not quite there yet in terms of the economic or commercial side.” At a press roundtable, Portman cites “tremendous potential, economic opportunities in deepening our trade relationship with Egypt . . . we also think that a free trade agreement will help to support and encourage the economic reforms that are already ongoing in Egypt. . . . So we see advantages there but we still have both commercial and political concerns that do not enable us to launch a formal FTA discussion” (Office of the United States Trade Representative, Roundtable Discussion with USTR Rob Portman, January 20, 2006). 5. Quoted in the prepared statement of the Honorable C. David Welch, Assistant Secretary, Bureau of Near Eastern Affairs, US Department of State, Review of US Assistance Programs to Egypt, hearings before the Subcommittee on the Middle East and Central Asia of the Committee on International Relations, House of Representatives, May 17 and June 21, 2006.

128

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

Date

Event

March 2

Commerce Secretary Carlos M. Gutierrez visits Egypt.

October 3–4

Secretary of State Rice meets with President Mubarak and Foreign Minister Ahmed Ali Aboul Gheit in Cairo.

2007 January 15

Secretary of State Rice meets with President Mubarak in Luxor, Egypt.

January 30

Deputy Commerce Secretary David Sampson addresses the American Chambers of Commerce in the Middle East in Cairo.

March 15

Commerce Secretary Gutierrez addresses the American Chamber of Commerce in Egypt in Washington and argues that the two countries are destined to negotiate a free trade agreement and that “it really comes down to a matter of timing. . . . It’s not if, it’s when.”6

March 26

Secretary of State Rice holds 90-minute meeting with President Mubarak in Aswan, Egypt.

May 2–4

Secretary of State Rice is in Sharm El Sheik, Egypt, for launch of the International Compact with Iraq.

July 31

Secretary of State Rice and Secretary of Defense Robert Gates meet President Mubarak in Sharm El Sheik; announce initiation of discussions on a new 10-year, $13 billion military assistance agreement to strengthen Egypt’s ability to address shared strategic goals.

October 8

Egypt and Israel agree to expand the scope of QIZs and to decrease Israeli content requirement.

October 16

Secretary of State Rice meets with President Mubarak and Foreign Minister Ahmed Ali Aboul Gheit in Cairo.

6. Doug Palmer, “U.S. Stokes New Hope of Free Trade Deal with Egypt,” Reuters, March 15, 2007.

(continued on next page) TIMELINE OF KEY EVENTS IN US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

129

Date

Event

2009 January 26, 2009

USTR announces the designation of two new QIZs in Upper Egypt: the Beni Suief Zone and the Al Minya Zone.

February 18

Ayman Nour is released from prison.

March 2

Secretary of State Hillary Clinton and Special Envoy for Middle East Peace George Mitchell attend meeting in Egypt.

May 27

USTR Ron Kirk and Minister of Trade and Industry Rachid sign United States–Egypt Plan for Strategic Partnership.

June 4

President Barack Obama makes a major policy speech at Cairo University.

November 23

Minister Rachid and USTR Kirk agree to a oneyear action plan for the Strategic Economic Partnership on Trade-Related and Investment Issues. US-Egypt Business Leaders’ Forum to replace the Egypt-US Business Council.

130

REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS

© Peterson Institute for International Economics | www.piie.com

© Peterson Institute for International Economics | www.piie.com

Index

A. T. Kearney, 42 Global Retail Development Index, 38 Global Services Location Index, 38, 40t Afghanistan war, 2 Africa. See Middle East and North Africa; specific country African Growth and Opportunity Act (AGOA), 51, 51n, 55–58, 57t Agadir process, 31 Agreement on Textiles and Clothing (ATC), 20, 20n Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), 71, 80, 106 agriculture EU-Egypt FTA, 27, 30 GAFTA, 30 revealed comparative advantage, 50, 52t–53t Aid for Trade, 77 air pollution, 82 Air Transport Agreement, 61 air transportation, 61, 88–89 Alexandria (port), 60, 60n, 78 Alexandria QIZ, 18 Al-Hassan Industrial Estate, 19b Al Minya Zone (QIZ), 18 Andean Trade Preference Act, 51n apparel industry. See textile and apparel industry Arab language software, 66

Arab League, 1, 1n, 30 armed forces, 2 automobiles, 26, 88 Bahrain-US FTA, 13, 13n, 54n, 98 Barcelona Process, 27, 27n Barshefsky, Charlene, 13 Beni Suief Zone (QIZ), 18 bilateral investment treaties (BITs), 3, 5, 9, 11–12. See also specific agreement coverage, 71 dispute settlement, 71–72, 108 effectiveness of, 111–15 Egypt compared with Uruguay, 105–10 with EU members, 30 exceptions, 108–10 modernization of, 46, 67–72 number of, 34, 34n bilateral trade agreements, 26–31, 45. See also specific agreement textile and apparel industry, 57t board of directors, 107 Border Measures for the Protection of Intellectual Property Rights Instructions (No. 770), 80 Boutros Ghali, Youssef, 55n Bush (George W.) administration intellectual property rights, 71 MEFTA initiative, 3n, 3–4, 13 Millennium Challenge Corporation, 83 Peruvian agreement, 54 business climate, 34–38, 43, 99

131 © Peterson Institute for International Economics | www.piie.com

Cairo metro system, 88 Cairo University speech (Obama), 6 call centres, 43, 66 Caribbean Basin Economic Recovery Act, 51n Caribbean Basin Trade and Partnership Act (CBTPA), 55–58, 57t CBP (US Bureau of Customs and Border Protection), 78 Center for International Earth Science Information Network (CIESIN), 84 Central American Free Trade Agreement– Dominican Republic (CAFTA-DR), 49, 54n, 58, 58n, 72 Central Delta QIZ, 18 Chicago Council on Global Affairs, 55 child labor, 55n Chile-US FTA, 54n China, 31 Clean Energy Fund, 95 climate change, 54, 94–95 Clinton, Hillary, 97n Clinton administration, 55n Common Market for Eastern and Southern Africa (COMESA), 13n, 31, 31n communications sector, 62–66, 64t–65t, 80, 100 comparative advantage, revealed, 49–50, 52t–53t, 100 compensation, 106 competitiveness boosting, 36–38, 46, 59, 100 indicators related to, 38, 38n, 39t, 100 construction sector, 61–62, 90–91 consumer subsidies, 41n, 41–42 Container Security Initiative (CSI), 73, 78 “control of corruption” category (MCC), 84–86, 85t copyrights, 79n, 80 corn exports (US), 26, 28t–29t corruption, 81t, 81–82, 84 corruption perceptions index (Transparency International), 43 customs efficiency, 46, 73–78, 76t, 99 Customs-Trade Partnership against Terrorism (C-TPAT), 78 Customs Valuation Agreement (WTO), 73, 77, 99 Damietta (port), 60, 60n Declaration on International Investment and Multinational Enterprises (OECD), 34, 34n democracy, 54

De Soto, Hernando, 90n developing countries, preferential trade programs for, 51, 55 development assistance, 82 diagonal cumulation, Euro-Mediterranean model of, 27, 30 dispute settlement, 71–72, 108 Doha Round, 94 economic assistance, 1–2, 10–11, 12f, 82, 98 economic development, 2–3, 97–98 “economic freedom” category (MCC), 84–86, 85t economic growth, 36, 37f, 38, 40 infrastructure and, 88n trade openness and, 46n economic indicators (MENA), 4t–5t economic partnership (US-Egypt), 1–2 bilateral mechanisms, 5, 98 options to enhance, 45–95 Strategic Economic Partnership, 6, 14, 82, 91, 95 timeline of key events, 123–30 trade initiatives, 10–23 economic profile (Egypt), 1–3, 4t–5t economic reforms, 3, 23, 26, 34, 100 success of, 36–38, 37f Economic Support Fund (ESF), 10 Economist Intelligence Unit, 36, 43 education, 42–43, 82 expansion of, 91–94 indicators related to, 84–86, 85t, 86–88, 92t Egypt Air, 61 Egypt-EU FTA, 27–30, 60 Egyptian Electrical Holding Company (EEHC), 62 Egypt-Turkey FTA, 30 Egypt-US FTA negotiations, 2, 13n, 13–14, 23, 45, 45n, 99 electricity sector, 62, 63t, 100 electricity subsidies, 41, 41n employment, 91–94, 100. See also workforce female, 40n, 92–94, 93t, 100 labor standards, 54n, 54–55, 72, 107 public-sector, 42n QIZ program and, 22 unemployment, 3, 40n, 40–41 in US, 67 1979 Enabling Clause, 51 energy sector, 62, 63t, 100 energy subsidies, 41, 41n, 42n Enterprise Surveys (World Bank), 73, 81, 91 environment, 54n, 54–55, 72, 94–95, 107

132—REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS © Peterson Institute for International Economics | www.piie.com

indicators related to, 84–86, 85t Euro-Mediterranean free trade area, 27–30 European Free Trade Association (EFTA), 30 European Union (EU) Association Agreements, 27n Egypt’s trade relations with, 31, 32t–33t imports to Egypt from, 31, 33t intellectual property rights, 80 investment from, 30, 69–71, 70t services sector, 60 European Union (EU)–Egypt FTA, 27–30, 60 exceptions (BITs), 108–10 exports (Egypt), 31, 32t to US, 9, 10f, 11t, 21t, 24t–25t, 47, 47f expansion of, 46–58 under GSP program, 15, 16t–17t, 18f, 20, 47 under QIZ program, 18f, 18–23, 21t, 25t, 47, 55, 56t textile and apparel, 22, 22f, 47f, 47n, 47–49, 48t, 55–58, 56t, 57t exports (US), 9, 10f, 11t, 26, 28t–29t expropriation, 106 female employment, 40n, 92–94, 93t, 100 financial services, 107–108 fiscal deficit, 41 food exports (US), 26, 28t–29t food prices, 41, 41n food sector, revealed comparative advantage, 50, 52t–53t foreign direct investment (FDI), 2, 9, 11t. See also bilateral investment treaties climate for, 34–38 construction sector, 61–62 effect of BITs on, 111–15 encouragement of, 46, 100 from EU, 30, 69–71, 70t greenfield, 69, 70t inflows, 34, 35f services sector, 34, 46, 59 textile and apparel industry, 69 transportation sector, 60–61 from US, 34–36, 36f, 67, 68t, 98 foreign exchange earnings, 38, 40 foreign workforce, 67 Framework Convention on Climate Change (UN), 94 Freedom House index, 2, 84 free trade agreements (FTAs), 3–4, 13, 13n, 98. See also specific agreement investment provisions (See bilateral investment treaties)

US-Egypt negotiations, 2, 13n, 13–14, 23, 45, 45n, 99 freight costs, 77, 77n gas subsidies, 41, 41n Gates, Bill, 43 GATT Article XXIV, 51 GDP (gross domestic product), 36, 37f, 40 gender inequality, 43, 46, 91–94, 93t, 100 General Agreement on Trade in Services (GATS), 59–60 Generalized System of Preferences (GSP), 15n, 15–23 Egyptian imports under, 15, 16t–17t, 18f, 20, 47 Global Competitiveness Report 2009/2010 (World Economic Forum), 79, 81, 86, 88–90, 89t global customs initiative, 78 global economic crisis, 40, 41, 97, 98 globalization, 41n Global Retail Development Index (GRDI), 38 Global Services Location Index (A. T. Kearney), 38, 40t global warming, 54, 94–95 Gore, Al, 12 Greater Arab Free Trade Area (GAFTA), 30n, 30–31 Greater Cairo QIZ, 18 greenfield investment, 69, 70t greenhouse gas emissions, 94 ground transportation sector, 88–89, 89t, 100 Group of Fifteen (G-15), 55 H1-B visas, 67 healthcare services, 82 health indicators, 84–86, 85t, 86–88 24-Hour Advance Manifest Rule, 78 housing sector, 61–62, 90–91 human capital, 46, 82, 88 development of, 91–94, 100 human rights, 13n, 54 imports (Egypt), 31, 33t from US, 9, 10f, 11t, 26, 28t–29t imports (US from Egypt). See exports (Egypt) income inequality, 3, 40–41, 84, 88, 98 industrial sector employment in, 40n investment in, 34, 67, 68t industrial zones. See qualifying industrial zones

INDEX 133 © Peterson Institute for International Economics | www.piie.com

inflation, 41–42, 42f information and communications technologies (ICT) sector, 62–66, 64t–65t, 80, 100 infrastructure, 46, 62, 63t, 82, 86–91, 88t, 100 Intellectual Property Law (No. 82), 80 intellectual property rights, 46, 71, 78–80, 79f, 99, 105–106 International Centre for Settlement of Investment Disputes (ICSID), 71 International Convention on the Simplification and Harmonization of Customs Procedures, 73 International Finance Corporation (IFC), 84 International Fund for Agricultural Development (IFAD), 84 International Labor Organization (ILO), 54, 55 International Monetary Fund (IMF) Article IV consultations, 41 World Economic Outlook, 84 internet users, 64t–65t, 66 “investing in people” category (MCC), 84–86, 85t investment. See bilateral investment treaties; foreign direct investment Iraq war, 1, 2, 3 Israel economic aid to, 10–11, 12f Jordan QIZ program, 18–19, 19n peace talks, 6, 19b, 97n, 97–98 US investment in, 98 Israeli content, under QIZ program, 18, 18n, 19b, 20, 47, 49–50 Israel-US Free Trade Area Implementation Act, 18n, 19b Israel-US FTA, 13, 13n Istanbul Framework Protocol on the Liberalization of Services and the Right of Establishment, 30 Jordan, QIZ program, 18–20, 19n, 19b, 49, 58 Jordan-US FTA, 13, 13n, 19, 19b, 19n, 49, 54n, 58, 98 Kirk, Ron, 6, 14 Kyoto Convention, 73 Kyoto Protocol, 94 labor standards, 54n, 54–55, 72, 107. See also employment; workforce Land/Real Estate Law 15 (1963), 61 land transportation, 88–89, 89t, 100 least developed countries (LDCs), 51, 55

liquefied natural gas (LNG), 23, 31, 47, 47f literacy, 43, 93t Logistics Performance Index (LPI), 73, 74t–75t manufacturing sector employment in, 40n investment in, 34, 67, 68t maritime transportation, 60n, 60–61, 73–78, 100 market access, 15–23, 100 enhancement of, 26, 46–58 textile and apparel industry, 48t, 58 market reforms, 23–38 Mediterranean Arab Free Trade Area (MAFTA), 31 merchandise trade, 2, 9, 10f, 11t Mexico, 31 Middle East and North Africa (MENA). See also specific country communication technologies sector, 64t–65t, 66 Doing Business rankings, 38, 39t, 84 education, 91–92 Egypt’s profile in, 1–3, 4t–5t Egypt’s trade relations with, 13, 14t, 98 infrastructure indicators, 88–90, 89t intellectual property protection, 79, 79f QIZ program, 50–51 transparency indicators, 81, 81t US strategy towards, 1, 3–4, 51, 97–98 US TIFAs with, 12n–13n US trade and investment with, 9, 11t, 13, 14t, 98 Middle East Free Trade Area (MEFTA), 3n, 3–4, 13 Middle East peace process, 6, 19b, 97n, 97–98 military assistance, 1–2, 10, 98 military force, 2 Millennium Challenge Account (MCA), 82–86, 86n Millennium Challenge Corporation (MCC), 83–86, 85t, 87t, 94, 99–100 Millennium Development Goals, 43 mining sector investment in, 36, 67, 68t revealed comparative advantage, 50, 52t–53t Mitchell, George, 5, 14, 97 mobile telephony coverage, 64t–65t, 66 Morocco-US FTA, 13, 13n, 98 most favored nation (MFN), 51 bilateral investment treaty, 69–71, 106

134—REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS © Peterson Institute for International Economics | www.piie.com

tariff rate, 26, 29t Mubarak, Hosni, 12 Multi-Fiber Arrangement (MFA), 20, 20n Napolitano, Janet, 78n National Action Plan on Climate Change (Egypt), 94 National Climate Change Committee (Egypt), 94 National Telecom Regulatory Authority (NTRA), 66 national treatment, 69–71, 106 natural gas, 23, 47, 47f natural resource management indicator (MCC), 94 Nazif, Ahmed, 45n Neighborhood Policy Action Plan, 27 nongovernmental organizations, 82 North American Free Trade Agreement (NAFTA), 49, 54n, 69 Obama administration Cairo University speech, 6, 14 MENA strategy, 1, 4–5, 14, 97 Peruvian agreement, 54n–55n trade policy, 54–55 Oman-US FTA, 13, 98 Open Skies air service agreement, 61 Orascom Telecom, 62, 62n Organization for Economic Cooperation and Development (OECD), Declaration on International Investment and Multinational Enterprises, 34, 34n outsourcing centers, 42n, 42–43, 66 Overseas Private Investment Corporation (OPIC), 90, 95, 100 Oxford Business Group, 42, 90 peace process (Middle East), 6, 19b, 97n, 97–98 per capita income, 83 performance requirements, 106–107 Peru-US FTA, 54, 54n–55n petroleum sector investment in, 34, 35f, 67, 68t US imports from Egypt, 47, 47f Pfizer, 78n–79n pharmaceutical intellectual property rights, 71, 78n–80n, 80 Pharmaceutical Research and Manufacturers of America (PhRMA), 78n physical infrastructure, 46, 62, 63t, 82, 86–91, 88t, 100

political factors, 43, 51, 54 population density, 90 ports, 60n, 60–61, 99–100 infrastructure, 89t security, 73–78 Port Said, 60, 60n poverty, 3, 40–41, 84, 88, 98 power outages, 62, 63t preferential access for developing countries, 51, 55 to EU market, 27, 30 MENA-wide, 51 textile and apparel industry, 48t, 49, 55, 57t preferential trade agreements (PTAs), 112 Presidents’ Councils, 12 privatization, 34, 36, 82 professional services, 66–67 property rights, 90n, 90–91 intellectual, 46, 71, 78–80, 79f, 99, 105–106 public-sector employment, 42n public transportation, 88 qualifying industrial zones (QIZ), 15–23, 19b, 98 expansion of, 46–58, 99 imports (US from Egypt), 18f, 21t, 25t, 47, 55, 56t information dissemination about, 100 Israeli content, 18, 18n, 19b, 20, 47, 49–50 Jordan, 18–20, 19n, 19b, 49, 58 MENA-wide, 50–51 Rachid, Rachid Mohamed, 6, 14, 20, 23 regional integration, fostering of, 50–51 regional trade agreements, 26–31. See also specific agreement textile and apparel industry, 57t “regulatory quality” category (MCC), 84–86, 85t regulatory reforms, 82, 98 revealed comparative advantage (RCA), 49–50, 52t–53t, 100 roads, 88–89, 89t rules of origin, 30–31, 50–51 “ruling justly” category (MCC), 84–86, 85t sanitary and phytosanitary (SPS) provisions, 30 Seattle trade ministerial (1999), 55n security measures, 73–78 services sector employment in, 40n European Union, 27, 30, 60 investment in, 34, 46, 59

INDEX 135 © Peterson Institute for International Economics | www.piie.com

liberalization of, 46, 58–60, 59n, 100 share of GDP, 58 workforce, 59, 67, 67n services trade agreement, 58–67 shipping costs, 77, 77n social development, 2–3 social unrest, 41n, 42 software industry, 66, 80 soybean exports (US), 26, 28t–29t SPARTECA programs, 51 Special 301 Priority Watch List, 79n, 80, 80n Star Alliance, 61 Strategic Economic Partnership (US-Egypt), 6, 14, 82, 91, 95 Suez Canal, 60–61, 61n, 82 foreign exchange earnings from, 38, 40 Suez Canal Zone QIZ, 18 talent base, 42–43, 91, 92t tariffs, 26, 29t, 30 taxation, 108 technical barriers to trade (TBT), 30 “technological readiness” indicator (World Economic Forum), 90 Telecom Egypt, 66 telecommunications sector, 62–66, 64t–65t, 80, 100 telephone coverage, 64t–65t, 66 terrorist attacks (2001), 78 textile and apparel industry, 13n export clearance times, 77 GSP program, 15n, 47 imports (US from Egypt), 22, 22f, 47f, 47n, 47–49, 48t, 55–58, 56t, 57t investment in, 69 labor force, 48t, 49, 55n, 58, 92 Logistics Performance Index, 73, 74t–75t market access, 46, 48t, 58 preferential access, 48t, 49, 55, 57t QIZ program, 18–20, 21t revealed comparative advantage, 49–50, 52t–53t timeline of key events, 123–30 tourism industry foreign exchange earnings from, 38 infrastructure, 89–90, 100 investment in, 34 trade, as percent of GDP, 36, 37f Trade Act (1974), 15n Trade Act (2002), 78 trade agreements. See also free trade agreements; specific agreement Egypt’s network of, 26–31

trade and investment framework agreements (TIFAs), 3, 5, 12–13, 12n–13n trade capacity enhancement, 82–95 trade facilitation measures, 72–82, 99 trade initiatives (US-Egypt), 10–23 trade logistics chain, 46, 82, 99 trademarks, 79n, 80 trade openness, 36, 37f, 46n trade promotion authority (TPA), 2, 2n, 13–14 trade reforms, 23 trade relations (MENA), 13, 14t trade surplus (US-Egypt), 9, 10f trading partners (Egypt), 31, 32t–33t traffic fatalities, 88n training, 42–43, 82 transfers, 106 transparency, 46, 81t, 81–82, 107 Transparency International, 43, 84 transportation sector, 60–61, 73–78, 88–89, 89t, 100 Travel & Tourism Competitiveness Report 2007 (World Economic Forum), 88–89 TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights), 71, 80, 106 Turkey-Egypt FTA, 30 unemployment, 3, 40n, 40–41 UNESCO, 84 United Arab Emirates, 13 United Nations (UN) Framework Convention on Climate Change, 94 International Fund for Agricultural Development (IFAD), 84 World Tourism Organization, 89 United States (US) Bahrain FTA, 13, 13n, 54n, 98 Chile FTA, 54n Egypt FTA negotiations, 2, 13n, 13–14, 23, 45, 45n, 99 employment in, 67 GSP program (See Generalized System of Preferences) Israel FTA, 13, 13n Jordan FTA, 13, 13n, 19, 19n, 19b, 49, 54n, 58, 98 MENA policy, 1, 3–4, 51, 97–98 Morocco FTA, 13, 13n, 98 Oman FTA, 13, 98 Peru FTA, 54, 54n–55n

136—REENGAGING EGYPT: OPTIONS FOR US-EGYPT ECONOMIC RELATIONS © Peterson Institute for International Economics | www.piie.com

Priority Watch List, 79n, 80, 80n QIZ program (See qualifying industrial zones) security programs, 78 Uruguay BIT, 69, 71–72, 105–10 US Agency for International Development (USAID), 49, 78 US Bureau of Customs and Border Protection (CBP), 78 US-Egypt Business Council, 12 US-Egypt Partnership for Economic Growth and Development, 12 US-Egypt Plan for a Strategic Economic Partnership on Trade-Related and Investment Issues, 6, 14, 82, 91, 95 US-Egypt Strategic Economic Partnership, 6, 14, 82, 91, 95 US-Israel Free Trade Area Implementation Act, 18n, 19b US-Middle East Free Trade Area (MEFTA), 3n, 3–4, 13 US Overseas Private Investment Corporation (OPIC), 90, 95, 100 US Trade and Development Agency (USTDA), 78 USTR Trade Policy Agenda (2007), 78–79 Uruguay-US BIT, 69, 71–72, 105–10 water connection, 62, 64t–65t 1996 West Bank and Gaza Strip Free Trade Benefits Act, 18n, 19b wheat exports (US), 26, 26n, 28t–29t wheat prices, 41 wireless technology, 62 workers’ remittances, 40, 91 workforce, 43–44. See also employment foreign, 67 labor standards, 54n, 54–55, 72, 107 quality of, 91–94, 100

services sector, 59, 67, 67n textile and apparel industry, 48t, 49, 55n, 58, 92 World Bank, 91 Doing Business Report, 38, 39t, 84 Enterprise Surveys, 73, 81, 91 Logistics Performance Index (LPI), 73, 74t–75t World Development Indicators, 41 World Bank Institute (WBI), Worldwide Governance Indicators, 84 World Economic Forum Executive Opinion Survey, 43 Global Competitiveness Report 2009/2010, 79, 81, 86, 88–90, 89t Travel & Tourism Competitiveness Report 2007, 88–89 World Economic Outlook (IMF), 84 World Health Organization (WHO), 84 WorldPublicOpinion.org, 55n World Tourism Organization (UN), 89 World Trade Organization (WTO), 51 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), 71, 80, 106 Customs Valuation Agreement, 73, 77, 99 GMO case, 13n intellectual property rights, 78n–79n trade facilitation program, 77 Worldwide Governance Indicators (WBI), 84 Yale Center for Environmental Law and Policy (YCELP), 84 youth literacy, 43 youth unemployment, 40n, 40–41 Zoellick, Robert, 78n

INDEX 137 © Peterson Institute for International Economics | www.piie.com