Israel-Egypt Trade Soars on U.S. Deal

AP Centerpiece: Israel-Egypt Trade Soars, Thanks to United States Deal

CAIRO, Egypt (AP) -- When Washington first offered to introduce an element of interdependence between the Israeli and Egyptian economies, Cairo balked.

But a little over a year ago, Egypt did accept the deal and it has been impressed, not to say astounded, by the impact on its No. 1 manufacturing sector, the garment industry: thousands of jobs created, higher wages, and soaring exports to the United States.

Some of the initial aversion to closer ties with Israel remains, however. Israelis and Egyptians are not setting up joint ventures because of lingering distrust and political sentiment.

Many Egyptians still see Israel as "the enemy," says Cairo property developer Hesham Ashmawy. Many Israelis remember Azzam Azzam, an Israeli businessman who was freed in 2004 after spending eight years in an Egyptian prison for espionage -- a charge he and Israel denied.

Nevertheless, a door has opened between two countries that fought four wars between 1948 and 1973, and which have conducted very little business since their Camp David peace treaty in 1979.

Figures from the Israeli Export Institute show that trade between Egypt and Israel, dominated by goods for the garment sector, rose from $58 million in 2004 to $142 million in 2005.

Although the amounts are small -- Egypt's global exports are worth about $12 billion a year, Israel's are about $30 billion -- it's still a whopping 144 percent increase in only one year.

Wages in Egypt's textile and garment industry have risen 25 percent since December 2004, when Egypt, Israel and the United States signed the Qualified Industrial Zone agreement, according to Mohammed Kassim, the vice chairman of the Chamber of Textile Industries, and Magdy Tolba, the head of the Ready-made Garment Exporters Association.

Egyptian clothing exports to the United States in September 2005 were 85 percent higher than those in September 2004, Kassim said.

The QIZ agreement enabled Egyptian exports to enter the U.S. market tariff-free, as long as 11.7 percent of their production material -- textiles, dyes and packaging -- came from Israel, and they were made in specific industrial zones.

The accord has proved so popular that Egyptian workers and companies successfully pushed their government to expand the QIZ zones so that they now cover the whole of greater Cairo, the Suez Canal cities of Ismailiya and Suez, and four Nile Delta provinces.

Ironically, Egypt declined the QIZ in the late 1990s. But Egyptian manufacturers lobbied for a deal when they saw they were going to be out-competed in 2005 by cheaper clothes from China and India. They had also seen how much their Jordanian peers had benefited from a QIZ among Israel, Jordan and the United States that came into effect in 1998.

Tolba estimates at least 15,000 jobs have been created since the QIZ and 30,000 jobs will be created this year.

The new jobs and higher wages should not be vulnerable to flare-ups in Israeli-Palestinian violence, or change in the Israeli government, because the boom is driven ultimately by orders from the United States.

The trade is taking place against a political background that has been transformed since the death of Palestinian leader Yasser Arafat in November 2004.

Egypt returned an ambassador to Israel in March and in June, the two governments signed a $2.5 billion deal for Egypt to supply Israel with natural gas for 15 years.

"There is no question that the overall better political and security atmosphere in the region is very helpful in creating a better climate for business to flourish," said Dan Catarivas, the foreign trade director of the Israeli Manufacturers' Association.

What is not flourishing is Israeli investment in Egypt.

"The only query I get from Israeli businessmen is about supplying Israeli content -- the 11.7 percent," said the director of the QIZ unit in Egypt's Ministry of Foreign Trade and Industry, Ali Awny. "I haven't heard anything about investment."

However, Awny added, not much time has elapsed. Egypt's QIZ is only 12 months old; Jordan's is eight years old.

However, there are other differences. Egypt sees Israel as a regional rival and has been loath to strengthen relations while the Palestinian conflict continues. Jordan seeks to influence Israel by engagement and, for geographic and demographic reasons, its economy will always be closer to Israel's.

The upshot is that 12 years of peace between Jordan and Israel have produced 20 Israeli factories in the kingdom while 27 years of Egyptian-Israeli peace have seen the construction of only two sizable Israeli factories in Egypt.

"The word 'Israel' still shocks many people" in Egypt, said property developer Ashmawy, recalling the sentiment fermented during the wars. Civil servants tell businessmen to be careful in their dealings with Israel, he said.

Ashmawy said that after he hosted the current Israeli ambassador, Egyptian security officials questioned him.

He blamed the lack of Egyptian-Israeli ventures on both prejudice and practical difficulties, such as the long time it takes an Israeli to get a visa from the Egyptian Embassy.

The textile chamber's Kassim said the problem was not the government, but the effect of the Palestinian conflict on Egyptian business executives.

"People have passion toward the issue," he said, and its resolution would "take out a huge hurdle" in Egyptian-Israeli ties.

Israelis, too, have reservations. Catarivas recently received a call from a businessman who asked if it is safe to do business in Egypt.

"There is no question that Azzam Azzam is still something that people remember," he said.

Catarivas also pointed to the visa delays, the few flights between Tel Aviv and Cairo and fears that Israelis might be harassed in Egypt.

Yet the potential for joint ventures is huge. Israel has the technology and the marketing skills, and Egypt has the low-cost labor and top-quality cotton.

One Israeli who has broken through the barriers is Dov Lautman, the CEO of Delta Galil. His Cairo factory employs 5,000 people and is one of the biggest clothing manufacturers in the country.

Lautman built his factories in Egypt and Jordan in 1994-95 -- the heyday of the Oslo peace process. As all their production is exported to Europe or the United States, they were not affected by the subsequent fighting, he said.

But intefadeh does discourage investment. When Palestinians are dying in fighting with Israel, an Israeli owning a factory in an Arab state worries about whether his staff will turn up for work.

"You hesitate to invest because you're afraid. You're worried your people will go," Lautman said. "Stability between Israel and Palestine will make a tremendous growth in business between Israel and Jordan, and Israel and Egypt, no doubt."

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